PE and expatriates

PE in Venezuela

In general, there is consensus among tax practitioners, SENIAT and the tax courts that the OECD and UN commentaries are a useful instrument to interpret the scope and meaning of the PE definition.3 Several SENIAT advisory letter rulings have consistently referred to the OECD and UN commentaries when interpreting tax treaty provisions.4 Although such cases covered an analysis of other treaty provisions (article 7) with reference to the notion of the term business profits, a term not defined in the treaties or under Venezuelan legislation, the significance of the rulings is that they attach significant value to the OECD and UN commentaries for the elucidation of the meaning of treaties. In the reporters' opinion, these existing rulings ratify that such commentaries will probably be given significant weight when SENIAT analyzes the PE definition.

As will be further discussed in section 9 below, while the definition of PE contained under Venezuelan legislation has been clearly influenced by the definition contained in the OECD and UN models there are some important departures from these models. Although Venezuelan domestic legislation has made some important changes to the PE definition clearly intended to expand its scope, the structure of the definition suggests that the standard treaty PE clause was used as a reference for the drafting of the definition.

Although there are a relatively small number of SENIAT rulings on the matter and almost no court decisions dealing with the concept of PE, the analysis of the basic rule PE found under paragraph 1 of article 5 of both the OECD and UN models represents by far the most common case of examples dealing with the notion of PE.
In general and consistent with the OECD commentaries, SENIAT recognizes that the first step in determining whether a PE is deemed to exist is the analysis of whether the relevant taxpayer has a fixed place of business through which the business of an enterprise is wholly or partly carried on.

It is worth mentioning that in one of the existing advisory letter rulings available on the notion of PE, SENIAT adopted the position that the concept of fixed base should be assimilated to the concept of PE. The ruling referred to a technical services case of a German technical services company (the S A.G. case).6 The matter under discussion was the applicable provision dealing with such service payments under the Venezuela-Germany tax treaty. The ruling concluded that the service payments should be dealt with under the professional services provision (article 14) of the treaty and not by the business profits (article 7) provision. Nevertheless, in order to determine whether the German resident taxpayer was taxable in Venezuela under article 14, it specifically analyzed whether the taxpayer had a PE under article 5 of the treaty. SENIAT therefore assimilated the notion of PE with the notion of fixed base. This position would seem to indicate recognition by SENIAT of the 2000 amendment to the OECD model that suggested that there were no intended differences between the concepts of PE, as used in article 7, and fixed base, as used in article 14.7

Venezuela, Expatriates and FX

As is the case with other jurisdictions, the question of whether there is a PE in Venezuela is the most common question taxpayers, tax practitioners and SENIAT have to face when dealing with cross-border transactions.

The importance of the interpretation of the PE definition and the consequences stemming from it under the extensive network of tax treaties currently in place in Venezuela (26 tax treaties on income) is largely overshadowed by the lack of significant guidance or authority dealing with it from domestic sources and the fact that as a non-member of the OECD neither the model nor the commentaries are binding.
There is no statutory guidance available at the current time for interpreting the tax treaty concept of a PE under article 5 of the OECD and UN models, as it is not customary in Venezuela for Congress ( Asamblea Nacional) to "regulate" or condition the application of treaties beyond the provisions in the tax treaty itself, as approved by Congress.

On the other hand, there is limited or no access at all to preparatory works or agreements, arrangements or instruments exchanged between treaty negotiators in connection with the conclusion of tax treaties, or subsequent exchanges pertaining to the application of the tax treaties.

As such, sources of authority are mostly limited to case law and to guidance issued by SENIAT in advisory letter rulings or particular deficiency claims, neither of which has a stare decisis status and hence may change without the need for proper or in-depth justification.

It should be noted that advisory letter rulings are randomly made public by SENIAT and therefore, although the reporters have made an extensive effort to research all available guidance with respect to the notion of PE, it is possible that other relevant advisory letter rulings exist which have not been covered by this report.
When available, reference is made in this report to evidence in the Venezuelan context. Although there has been some modest evolution in the analysis of the definition by SENIAT, leaning towards the use of the OECD and UN model commentaries, when applicable, there is still a long way to go to obtain a clear understanding of the term under applicable tax treaties.

The report evidences the view of the reporters that to a reasonably large extent significant weight has and should continue to be given - absent domestic authority - to the OECD and UN model commentaries when interpreting the PE definition under Venezuelan tax treaties.

Venezuela Expatriates

This report evidences that there is limited guidance available in Venezuela to aid in the interpretation of the definition of the permanent establishment (PE) concept. There is no statutory guidance available as it is not customary in Venezuela for Congress to "regulate" or condition the application of treaties beyond the provisions in the tax treaty itself, as approved by Congress.
Sources of authority are mostly limited to case law and to guidance issued by the Venezuelan tax authority (SENIAT) in advisory letter rulings or particular deficiency claims, neither of which creates a stare decisis status and hence may change without the need for proper or in-depth justification. On some occasions, as this report will show, limited guidance can also be found in tax treaty protocols.
Court cases dealing with the notion of PE are virtually non-existent. The only exception worth mentioning is the Geoservices case1 which to some extent has language that could be interpreted as a ratification that under a standard PE definition the rendering of services per se should not create a PE for the taxpayer.
Unfortunately for taxpayers, Venezuelan law does not require advisory letter rulings to be made public, or for consistency between them, with respect to administrative case law. SENIAT consistently makes use of such discretionary power with the consequence that it is extremely difficult for tax practitioners and taxpayers to keep up to date with its position, a situation that is even more delicate when dealing with complex international tax cases, let alone when there is a tendency in Venezuelan tax treaty negotiation, evidenced more particularly in the last decade, to rely more heavily on the PE rule under the UN model, with the added complexities of some peculiar changes and adjustments dealing with the services PE, insurance PE and most notably the agency PE.
As the report will also show, because of the non-binding nature of private letter rulings, it is very common to find similar cases with contradictory opinions by SENIAT. Particularly disturbing is a recent ruling that changes the traditional interpretation that a subsidiary would not on its own result in a PE for its parent.2
Although there has been some modest evolution in the analysis of the definition by SENIAT there is still a long way to go before a clear and complete understanding of the term under applicable tax treaties emerges. In general, and consistent with the OECD and UN commentaries, SENIAT recognizes that the first step in determining whether a PE is deemed to exist is the analysis of whether the relevant taxpayer has a "fixed place of business through which the business of an enterprise is wholly or partly carried on" .
Nevertheless, there is still a lot to cover in understanding all the aspects associated with such basic definition and the ramifications resulting from its interplay with the other paragraphs completing the full scope of the definition contained under article 5 of both the OECD and UN models.
With a view to these circumstances, the report underlines the view of the reporters that to a reasonably large extent significant weight has and should continue to be given to the OECD and UN model commentaries when interpreting the PE definition under Venezuelan tax treaties.

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