Venezuela International Tax and Law

Foreign enterprise's business

The Partnership ruling16 mentioned above also establishes some important guidelines with respect to when the business of a given enterprise may be said to be carried on through a place of business of another enterprise. This criterion would be particularly useful to understand SENIAT's position in the case of the various forms of partnerships available under Venezuelan law, although its application should be determined on a case-by-case basis based on the specific facts and circumstances.
As previously discussed, 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 partners of a 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 among 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.

The ruling concluded that the US partner to the partnership should be deemed to have a Venezuelan PE on the basis of the following arguments:• Although the partnership has a legal personality of its own, this legal entity is not recognized as a beneficiary of the USA-Venezuela treaty by either state since the taxpayers will be the partners of the partnership. Thus, the conditions for the applicability of the treaty benefits must be determined at the level of each partner.

Based on the flow-through treatment of the partnership, the business activities of the legal entity should be considered as directly performed by the partners and, therefore, the fixed place of business through which the partnership carries on its business activities qualifies as a PE of the US partner.

Although the criteria shed some light as to what will be SENIAT's position in the complex case of partnerships, the reporters need to highlight that the criteria will not necessarily apply in the case of joint ventures or consortium arrangements, where activities can be deemed as performed separately by each member. Such complex cases should be analyzed on a case-by-case basis based on the specific facts and circumstances.

Another useful guideline with respect to SENIAT's position on the relation between the place and the enterprise's business can be extracted from advisory letter ruling no. DCR-5-597 dated 8 July 1998. The case concerned the taxation of payments for the lease of an offshore drilling platform under the UK- Venezuela tax treaty. SENIAT considered that lease payments constituted business profits under article 7 of the treaty. Upon analyzing the facts of the case, SENIAT concluded that this lessor did not have a fixed place of business in Venezuela by virtue of the lease of the drilling platform. This conclusion seems to be in line with the guidance contained under paragraph 8 of the OECD commentary on article 5 in the sense that a mere leasing of industrial, commercial or scientific equipment cannot be considered as meeting the requirement that the business of the enterprise is wholly or partly carried on through the fixed place of business.