VENEZUELA: An Introduction

Labour & Employment, a Venezuelan Overview 

Venezuela’s outlook for 2024 seems and has been through this first semester to be much better than for previous 2023, a year in which the economic growth that had been reported in 2021 and 2022, slowed its pace. Despite the previous, 2023 saw GDP growth of 26.7%, according to the United Nations Development Program, particularly thanks to an increase in oil activity of 9.4%. and it is estimated that it will grow between 4% by the end of 2024 according to the International Monetary Fund (one of the highest growth forecasts in Latin America) and for 2025 it still hols a growth forecast of 3%.

The global impact of the war in Ukraine and the current conflict in the Middle East, continuous to put pressure on Western countries to have reliable and easily available sources of oil & gas and Venezuela has been identified once again as a leading option to fill that market. A fact that, in part, highlights the importance that Venezuela still holds in the oil industry, was the issuance by the United States’ Department of Treasury, through OFAC, of the General License 44 in November 2023, which allowed for six months for both US persons and non-US persons in oil industry activities with the Venezuelan government and its state-owned oil company PDVSA, for six months. Although this General License was revoked by number 44A, which reinstated the general prohibition on the oil industry, it provided a pathway for activities by US persons and non-US persons to continue through the system of specific and individual licenses to be issued by OFAC on a case-by-case basis. The opening towards Colombia has been followed by enhanced relations with Brazil and other countries in the Americas. There also seems to be a trend in the international community regarding the lift of sanctions which may open new opportunities for investment, not only in oil & gas but also in other areas, such as agroindustry, construction, infrastructure, or electricity. To do so, however, it is necessary to make efforts to improve the legal stability of the country especially considering that 2024 is an election year and several countries and intergovernmental organizations have been expressing in the past months their stances on the relevance and necessity of the election to be fair, free, and democratic

From a domestic perspective, some of the main features of the legal framework are as follows:

Economics and Taxes

Venezuela’s Tax System includes:

(i) National taxes as the Income Tax (territorial and worldwide basis and tariff up to 35% on net income), VAT (16%), Large Net worth Tax (0.25% on net assets) and Large Financial Transactions Tax (2% or 3-% on transaction value),

(ii) Local or municipal taxes, as Economic Activities Tax (IAE for its acronym in Spanish) and Real State local taxes; and,

(iii) Several special tax contributions (pensions, social, sports, technology, and sciences, among others).

Venezuela has an interesting Double Taxation Treaty net, and we have DTA with more than 35 countries including: Germany, Spain, Switzerland, USA, Italy, Portugal, amongst other countries, which is important to keep in mind when promoting foreign investment.

The legislative agenda for 2024 includes the debate and approval of the following laws:

(i) Promotion of Non-Oil Exports Act;

(ii) Habitat and Housing Benefit Scheme Amendment Act (already passed by Congress and signed into Law by the President); and,

(ii) E-commerce Act.

In May 2024, the Venezuelan Congress (Asamblea Nacional in Spanish) approved the Special Tax for the Protection of Pensions Act, and created a new monthly tax applicable to private entities that carry out economic activities and have a payroll. With this new monthly tax, private entities have to pay an amount equal to 9% of the monthly amount they spend on payroll (including bonuses).

In addition, for the last two years, there have been benefits for the importation of a long list of products, and recently an exemption for the importation of hydrocarbons has been granted in favor of both public and private entities.

Labour 

Venezuelan labour legislation is protectionist towards employees, so the main challenge for employers is to design improved remuneration schemes to minimise labour risks and ensure the continuity of their operations and the retention of their staff.

An informal process of dollarisation has increased the use of foreign currency systems for employee remuneration, the impact of which needs to be carefully measured.

Corporate and Merger & Acquisitions 

Since 2020, some changes in public policy have had a positive impact on the business environment, contributing to certain recovery signals in the economy. For example, there have been changes relating to the lifting of the exchange control regime, a flexibilisation of price control regulations, the possible minimisation of the sanctions regime imposed by OFAC, among others. Investors and entrepreneurs in areas such as hospitality, food, telecom, tech, commerce among others, have seen their market opportunities improved.

Banking and Finance 

The Venezuelan banking sector has seen an improvement since the legal reserve was reduced from 85% to 73% in 2022, and it is currently at this percentage. Monetary liquidity in Venezuela reached 89.008 billion bolivars at the end of March 2024, and an increase of 14.6% with respect to the previous month, despite the dollar and inflation remaining under control. So far, in 2024, monetary liquidity has risen 27.11%, a modest variation if compared to the 49.27% increase reported by the circulating currency in the first quarter of 2023... Commentators have linked this improvement to the authorization of banks to grant legal tender loans using the proceeds of foreign currency transactions. It is interesting to note that private banks, in particular, have rapidly stepped up their efforts to modernize their product offerings to the public, with foreign currency bank accounts now almost a standard feature, as well as international debit and credit cards for users, which have begun to regain traction among the Venezuelan population, after these products were almost suspended in recent years, especially before the pandemic.

Arbitration 

Arbitration has consolidated its position as a reliable and trustworthy alternative to dispute resolution, given the current position of general litigation in the country and over the last few decades.

From a local perspective, Venezuelan-based ADR centers such as the Conciliation and Arbitration Business Center (CEDCA for its acronym in Spanish), which is affiliated with the Venezuelan-American Chamber of Commerce and Industry (VenAmCham); as well as the Arbitration Center of the Chamber of Caracas (CACC for its acronym in Spanish), have built their reputation as the two most prestigious and reliable ADR centers, attracting the attention of cases mostly related to commercial arbitration. At the international level, Venezuela has continued to be involved in international arbitration, specifically in investment arbitration. Despite the fact that Venezuela denounced the ICSID Convention in 2012, investors have found alternative ways to effectively raise their claims and have them addressed. Also, for commercial arbitration, the International Chamber of Commerce (ICC) has been very active in hearing cases regarding Venezuela.

Oil & Gas 

Venezuela's oil production increased by 14.9% in 2023, with exports rocketing with a 60.46 % increase in 2022. Oil revenues in 2023 amounted to USD 6.23 billion, this being its main source of foreign currency for the country. The highest month of 2023 in terms of oil production was August with 820,000 barrels per day. The reactivation of U.S. company Chevron's operations in the country, after obtaining a license granted by OFAC in November 2022, has been identified as a key factor in increasing production in 2023 alongside the now expired General Licence 44 issued by OFAC as mentioned previously, during which time all previously banned operations in the Oil industry with Venezuela and PDVSA, were permit. However, this General Licence expired on April 17, 2024. Although the authorisations given by former General Licence 44 are no longer in force, several multinational oil companies such as Repsol and Maurel&Prom, have reported that they have entered into agreements for conducting oil related activities in Venezuela based on specific and individual licences granted by OFAC, which goes accordingly to what OFAC established in the “Frequently Asked Questions Related to the Suspension of Certain U.S. Sanctions with Respect to Venezuela on October 18, 2023” press release of April 17th, 2024 issued by OFAC, when stating that persons seeking to engage in transactions and activities previously authorised by General Licence 44, OFAC would consider specific licence requests on a case-by-case basis. Moreover, considering recent events in the complex geopolitical scene, the OFAC seems to be taking a lighter approach on Venezuela's Sanctions, and so is the international community, allowing Venezuela's market to grow substantially. Recently, some companies participating in joint ventures operating in the Venezuela's oil & gas scene have been selling their shares, creating a chance for new foreign investment.

Compliance 

In terms of Compliance, in recent years, especially since 2021, the regulatory bodies of the banking sector, insurance, securities market, tourism, virtual assets or crypto-assets, among other sectors of the national economy, have issued a set of legal regulations by which obligated parties are required to design, develop and implement a Comprehensive Risk Management System ("SIAR") for money laundering, crypto-assets and money laundering. In addition, it has been issued a set of legal regulations requiring the regulated entities to design, develop and implement a SIAR for Money Laundering, Financing of Terrorism and Financing the Proliferation of Weapons of Mass Destruction (LC/FT/FPDADM). To this end, these regulations provide, within the framework of the SIAR, for the implementation by regulated entities of a Compliance Program to mitigate, control and prevent ML/TF/TFDDM risks. It should also be noted that., on April 28, 2023, it was enacted the Organic Act of Expired Ownership, a law that incorporates for the first time in the Venezuelan legal system the figure of "expired ownership", aimed at prosecuting the “illegitimate ownership” of assets linked to criminal activities.

Environmental Law, Sustainability, and Energy Transition 

In the field of sustainability, in recent years, especially since 2021, organizations have recognized sustainability as both a fundamental and strategic of their business. Although progress in this area by organizations has not been significant, the Standing Committee on Sustainability Standards of the Association of Public Accountants of the Bolivarian Republic of Venezuela (FCCPV for its acronym in Spanish) presented a proposal for a Framework Agreement for the Issuance and Application of Sustainability Disclosure Standards (VEN-NS 0, version 0), which was approved by the Extended National Board of Directors (DNA for its acronym in Spanish) on April 19 and 2023. Its purpose is to regulate the process of issuing the compliance framework that Venezuelan entities, not subject to the control of a regulatory body, must use to disclose information on sustainability.

In terms of the energy transition, although the implementation of an appropriate legal framework that would add a greater amount of electricity produced by renewable energies such as solar and wind, and even green hydrogen, is still behind, important progress has been made. As of 2024, the Venezuelan National Assembly is debating the implementation of a legislation (Ley de Energías Renovables y Alternativas or Renewable and Alternative Energy Act) to adopt tax incentives to accelerate the energy transition in industries and businesses. Other issues under discussion include the establishment of tariffs for the importation of renewable energy technologies and the regulation of the connection to the central electricity grid for those who are interested in selling surplus electricity generated through sources such as solar or wind. If approved, this legislative project could be a boost, and even a roadmap, for the adoption of green technologies in Venezuela. Additionally, the President of the Permanent Commission of Energy and Petroleum of the National Assembly informed the launching of the national public consultation of a Green Hydrogen Act.