International law, related companies and Venezuela

PE definition in the case of related companies in Venezuela

There is little guidance in Venezuela regarding the application of the PE definition in the case of related companies. There is no case law or publicly available administrative authority dealing with this.

At the same time, the definition under article 7, third paragraph of the Income Tax Law (the only statutory provision dealing with the definition of PE) does not cover, explain or complement a provision such as that under paragraph 7 of article 5 OECD model.

In any case, in the S A.G. ruling referred to in section 2 above, while reviewing the taxation of technical assistance services by a German company to a Venezuelan resident taxpayer, SENIAT distinguished when a foreign person decides to set up a branch for carrying on some activities in the other contracting state vis-à-vis when it decides to set up a subsidiary. SENIAT underlined that while the branch was part of the same entity from an economic and legal viewpoint a subsidiary was a different person and hence its presence in Venezuela would not on its own result in a PE for the German company.

While the ruling lacks any reference to article 5, paragraph 7 of the Germany -Venezuela tax treaty, it clearly deals with the same basic issue. A similar criterion is implied in a more recent ruling related to an EPC contract by a Venezuelan client with a foreign parent (engineering and overseas procurement) and a local subsidiary (local procurement and construction), under the tax treaty between Venezuela and China (advisory letter ruling no. DCR-S-35773-6545, referred to in section 6 above).

More recently, in a ruling which is rather more than a guideline seems to have been issued to misguide, SENIAT expressed as a rationale for a deficiency and penalty assessment to a taxpayer that the fact that a wholly owned subsidiary was engaged in business in Venezuela through a branch was enough to give rise to a PE to its parent company on services rendered from overseas to the branch.28

The case involved an overseas company (subsidiary T-Venezuela, a French company) with a branch actively engaged in business and hence a PE in Venezuela, which purportedly did not comply with withholding on payments on technical assistance services for services performed overseas by its parent company (T-Parent, also a French company) in favor of the Venezuelan branch.29

In this controversial ruling SENIAT incorrectly concluded, in the view of the reporters, that a PE arose for T-Parent in Venezuela in connection with income from technical assistance services to T-Venezuela's branch since: "...T-Venezuela has a PE in Venezuela ... in this case T-Venezuela branch, with the same name as its home office in France [and] received technical assistance services from T-France, also a French resident taxpayer and owner of the hundred percent of the former stock. We are dealing with an indirect relation between parent and subsidiary as there is identity in their equity and the decision making affecting both companies ultimately lies in T-France, which affects decision making by T-Venezuela, the latter being the entity ultimately reporting income or losses from its activity [in Venezuela]. Hence, it is clear to this Authority that income obtained by T-Venezuela and T-France is intertwined in as much as the equity of the latter is ultimately affected by the activities carried out by the former. In such a scenario, the portion of activities taking place within Venezuela [SENIAT refers to the activities of T-Venezuela] must be attributed on its origin to T-France results, due to the facts and on the basis of the provision partially cited [Article 5, numbers 1 and 2 of the tax treaty between Venezuela and France] in a PE of T-France in Venezuela ..."