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Venezuela
  

The Venezuela-China Tax Treaty Enters Into Force

May 11, 2016

I. Introduction

The Convention between the Government of the Bolivarian Republic of Venezuela and the Government of the People's Republic of China for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income and on Capital published in Official Gazette No. 38,089, dated December 17, 2005 (the ?Convention?) entered into force on December 23, 2004.

The Convention had been signed on April 17, 2001 but had been awaiting approval by Venezuela?s National Assembly and the exchange of diplomatic notes between the Venezuelan and Chinese Foreign Offices. Such formalities were completed on December 23, 2004 and, therefore, the Convention will have effect, in respect of taxes levied by withholding, on amounts paid or credited to non-residents on or after January 1, 2005; and in respect of other taxes, for tax years beginning on or after January 1, 2005.

In general, the Convention follows the OECD Model with a few items adopted from the U.N. Model.

II. Business Profits and Independent Personal Services:

The Convention establishes limits on the taxing powers of China and Venezuela over various categories of income. In this connection, the Convention maintains a distinction between business profits (Article 7) and independent personal services (Article 14), despite the fact that the update to the OECD Model eliminated Article 14, which distinguished between a permanent establishment (?P.E.?) and a fixed base.

The general rule is that non-domiciled entities and foreign residents may only be taxed on their business profits and independent personal services income, if obtained though a P.E. or fixed base in Venezuela. In such case, profits of such P.E.s and fixed bases must be determined exclusively on the basis of income attributable to its actual activities.

There are important features from the U.N. Model Convention such as:

- A P.E. is deemed to exist if a project lasts for more than 9 months (as opposed to the usual 12 months).

- The project P.E. definition has been expanded to include assembly and installation projects, as well as related supervisory activities.

- Income from independent professional services may be taxed in Venezuela if the non-resident individual is present in the country for a period or periods exceeding in the aggregate 183 days within any twelve-month period, even when such individual does not have a fixed base in Venezuela.

- The Convention restricts the deduction of amounts paid (otherwise than towards reimbursement of actual expenses) from the P.E. to its head-office (or any of its other offices) and vice versa, by way of royalties, fees or other similar payments in return for the use of patents or other rights, or by way of commission, for specific services performed or for management, or, except in the case of a banking enterprise, by way of interest on moneys lent to the P.E.

III. Expatriate Personnel:

One issue of Venezuelan individual income tax is that persons spending more than 183 days in the country are considered tax residents and are taxable on their worldwide income.

However, nationals of countries that have signed a double tax treaty with Venezuela may be considered exclusively tax residents of their country of origin, even after their stay in Venezuela exceeds 183 days. This is particularly important for international assignees who are either exempt from Venezuelan tax, or taxable only on compensation for services performed in the country.

IV. Applicable Rates on other Relevant Payments:

The Convention establishes the following maximum tax rates on payments from the State of source:

(a) Dividends

- 5% of the gross dividend amounts when the beneficial owner is a company that owns at least 10% of the share capital of the company paying the dividend;

- 10% of gross dividends, in all other cases; and

There is no specific rule dealing with the applicability of the Venezuelan branch-profits tax. Thus it can be argued that Venezuela is restricted from applying this tax on remittances from domiciled branches of Chinese companies and other P.E.s.

(b) Interest

- 5% of gross interest payments paid to foreign banks;

- 10% of gross interest payments in all other cases;

- Interest is exempt when paid to the Government of the other Contracting State. In the case of China, the term Government includes:

(i) the People's Bank of China;

(ii) the China Development Bank;

(iii) the Export and Import Bank of China;

(iv) the Agriculture Development Bank of China;

(v) any other similar institution wholly owned by the Government of China agreed by the competent authorities.

In case of Venezuela, the term Government includes:

(i) the Central Bank of Venezuela; and

(ii) any other similar institution wholly owned by the Government of Venezuela agreed by the competent authorities.

(c) Royalties

- 10% of gross amount of royalties paid, in all cases.

The definition of royalties includes payments for the use or the right to use, industrial, commercial, or scientific equipment, despite the fact that these types of payments were removed from the definition of royalties set forth in the OECD Model Convention.

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