International law in Venezuela: the PE

International law in Venezuela: the PE

Court cases dealing with the notion of PE are virtually non-existent in Venezuela. The only example the reporters are aware of where there was a very limited reference to the PE concept was the Geoservices case.8 The case related to a controversy regarding the qualification of certain technical assistance payments for purposes of the Venezuela-France tax treaty. SENIAT claimed that the payments received by Geoservices Anonyme from technical assistance services rendered to its Venezuelan affiliate Geoservices SA should qualify as royalties under article 12 of the Venezuela-France tax treaty. Geoservices SA contested SENIAT's claim on the grounds that absent a special inclusion of technical assistance payments within the royalties definition of the treaty the technical assistance fees should be considered as business profits under article 7 of the treaty not subject to tax in Venezuela in the absence of a PE in the country. The court decided the case in favor of the taxpayer and concluded that the technical assistance payments were not taxable in Venezuela under article 7 of the tax treaty since Geoservices Anonyme did not have a PE in the country.

Unfortunately, the court failed to support the conclusion that Geoservices Anonyme did not have a PE in Venezuela with a reasoned analysis. However, the case 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. Also, it should serve to ratify that SENIAT has the burden of proof to show that non-resident taxpayers have a PE in Venezuela.

Perhaps the most detailed analysis of the basic rule PE definition up to this date is contained under SENIAT private letter ruling no. DCR-5-8675-1350, dated 28 March 2001. The case dealt with the treatment of payments from an engineering, procurement and construction (EPC) contract between a Venezuelan partnership ( sociedad en comandita simple, which was the contractor) and a Venezuelan limited liability corporation (the client) (the Partnership ruling).

Although it does not expressly state so, the wording of the Partnership ruling is a clear indication that SENIAT followed the explanation of the OECD commentary, since the rationale is identical to paragraph 2 of the commentary on article 5, paragraph 1.

The partners of the Venezuelan partnership were a US resident corporation and a Venezuelan limited liability corporation. Under Venezuelan law, a partnership is subject to limited transparency rules under which taxable income is determined at the level of the partnership and thereafter the income is proportionately allocated between each partner on the basis of their participation. The matter under discussion was whether income allocated to the US partner was subject to tax in Venezuela under the USA-Venezuela tax treaty. SENIAT concluded that payments received by the US partner under the EPC contract constituted business profits under article 7 of the treaty. Consequently, the existence of a PE became the central point under analysis.

Upon analyzing all the distinctive elements of the PE definition, the Partnership ruling concluded that all the elements for a PE to arise were met since the activities of the partnership were carried out through material means, facilities and premises in a fixed geographical location, with a certain degree of permanence that was adequate to the activity being performed and with the possibility for the enterprise to avail itself of the elements necessary to properly perform its business activities.