This record is a partial extract of the original cable. The full text of the original cable is not available.

UNCLAS  CARACAS 000790 
 
SIPDIS 
 
 
STATE FOR EB/IFD/OIA 
STATE PLEASE PASS TO USTR 
TREASURY FOR OASIA-GIANLUCA SIGNORELLI 
HQ USSOUTHCOM FOR POLAD 
 
E.O. 12958: N/A 
TAGS: ECON KTDB ETRD PGOV VE OPIC USTR
SUBJECT: 2005 INVESTMENT CLIMATE STATEMENT FOR VENEZUELA 
 
REF: 04 STATE 250356 
 
¶1. (U) Per Reftel, the 2005 Investment Climate Statement for 
Venezuela is presented below. 
 
¶2. (U) 
2005 Investment Climate Statement for Venezuela 
 
Contents 
¶A.    Openness to Foreign Investment 
 
A.1   The New Constitution 
A.2   Legal Framework: Decree 2095 
A.3   Limitations under Decree 2095 
A.4   Areas Covered by Special Laws 
A.5   Hydrocarbons 
A.6   Natural gas 
A.7   Electric Power 
A.8   Domestic Retail Fuels Market 
A.9   Mining 
A.10  Telecommunications 
A.11  Banking 
A.12  Insurance 
A.13  Privatization 
A.14  Capital Outflow Policy 
 
¶B.    Conversion and Transfer Policies 
 
¶C.    Expropriation and Compensation 
 
¶D.    Dispute Settlement 
 
¶E.    Investment Incentives and Performance Requirements 
 
E.1   Investment Incentives 
E.2   Performance Requirements 
 
¶F.    Right to Private Ownership and Establishment 
 
¶G.    Protection of Property Rights 
 
G.1   Real Property Rights 
G.2   Intellectual Property Rights 
G.3   Patents and Trademarks 
G.4   Copyrights 
 
¶H.    Transparency of the Regulatory System 
 
H.1   Legal Environment 
H.2   Tax Treatment of Foreign-Owned Firms 
 
¶I.    Efficient Capital Markets and Portfolio Investment 
 
I.1   Capital Markets 
I.2   Credit Markets 
 
¶J.    Political Violence 
 
¶K.    Corruption 
 
¶L.    Bilateral Investment Agreements 
 
¶M.    OPIC and Other Investment Insurance Programs 
 
¶N.    Labor 
 
¶O.    Foreign Trade Zones/Free Ports 
 
¶P.    Foreign Direct Investment 
 
Statement 
 
--------------------------------- 
¶A. Openness to Foreign Investment 
--------------------------------- 
 
Venezuela officially encourages foreign investment and 
provides equal treatment to local and foreign companies 
 
though the overall environment is in fact considerably less 
welcoming.  Capital repatriation is allowed (subject to 
exchange control restrictions described below) and there are 
few formal restrictions on investments except for several 
sectors that are reserved to the State or Venezuelan 
nationals such as oil production, and hydropower generation 
(with some exceptions). 
 
Venezuela's economic performance had been negative for 
several consecutive years until 2004 when the economy showed 
sharp growth, though admittedly from a much lower base.  GDP 
in 2004 expanded by 17.2 percent.  Considering, however, that 
real GDP decreased by 7.6 percent in 2003 and by 8.9 percent 
in 2002, a large percentage of the strong expansion can be 
attributed more to the lower starting point rather than to 
organic growth.  Inflation for 2004 was 19.2 percent and is 
expected to reach 15 percent in 2005.  A strong recovery in 
global oil prices, increased tax revenue collections, and a 
strong overall economic recovery have been positive 
developments. 
 
Statements by President Hugo Chavez and other Venezuelan 
officials about the need to adopt a new non-capitalist 
economic model (what President Chavez calls "Socialism of the 
21st Century"), the takeover by individuals of some rural 
lands and an aggressive adoption of a "land reform" program 
at the state and national levels, the passage of legislation 
which has expanded the Supreme Court, with the subsequent 
appointment of judges on what observers consider a political 
basis rather than merit, and a sudden shift in petroleum 
royalty policies have been negative developments. The 
Venezuelan government has also sought to promote an 
increasing state presence in areas of the economy previously 
left to private enterprise.  The most prominent is its 
"Mercal" chain of food stores aimed at low income 
Venezuelans, which is supplied by state purchases of 
commodities.  Other areas that the Venezuelan state is 
reentering include civil aviation, telecommunications, cement 
production, paper manufacturing, and sugar refining. 
 
In early 2003, President Chavez created an Exchange 
Administration Board (CADIVI) to regulate the purchase and 
sale of foreign currency.  At first, CADIVI was unable to 
process foreign currency requests efficiently and was only 
supplying currency to about 15-20 percent of approved 
authorizations.  Over time, the system has improved, and the 
supply of foreign currency reached a level of approximately 
$15 billion in 2004, or 55 percent of approved 
authorizations.  A number of goods have also been added to 
the list of imports eligible for foreign exchange including 
intangibles such as services and the repatriation of capital, 
which totaled $1.5 billion at the end of the third quarter. 
There continue to be delays with pre-inspection companies 
thereby increasing storage costs.  Although the number of 
approvals has increased sharply, the backlog in liquidations 
puts significant constraints on imports which accounted for 
68.5 percent of requests, followed by private foreign debt 
with 12.5 percent and foreign investments with 8.6 percent. 
Exchange control authorities have repeatedly said that the 
exchange control system will be eased but will remain a 
permanent long-term mechanism.  As of now, the system remains 
highly discretionary and subject to sudden changes in its 
application. 
 
In terms of direct foreign investment, a number of projects 
are under development or in pre-engineering stages, mainly in 
oil and gas or large infrastructure projects.  The former are 
governed by either the Hydrocarbons or Gaseous Hydrocarbons 
laws (see section A5).  These involve varying kinds of 
contractual relationships with state oil corporation 
Petrleos de Venezuela (PDVSA).  As regards the latter, the 
preferred venture scheme has become sovereign deals or 
contracts between state corporations.  Power, several road 
and railroad projects and the expansion of some production 
facilities for basic industry seem to be the main areas where 
there are projects in the pipeline. However, most of these 
projects have very little if any private participation at all. 
 
-- A.1 The 1999 Constitution 
 
The Venezuelan Constitution of 1999 treats private capital 
 
investment as a means of promoting the development of the 
national economy.  Article No. 299 of the Constitution 
recognizes private enterprise as a factor for creating 
sources of employment and local added value, as well as 
raising the standard of living of the population, within a 
framework of free competition.  The Constitution reserves 
certain strategic sectors for the State such as oil activity 
and hydropower generation. 
 
Article 301 of the Constitution adopts international 
standards for the treatment of private capital, with equal 
treatment of local and foreign capital.  As well, as a member 
of the Andean Community, Venezuela has accepted the 
application of the Andean Decisions, although examples can be 
found of non-compliance. 
 
-- A.2 Legal Framework: Decree 2095 
 
Decree 2095 (1992) establishes the legal framework for 
foreign investment in Venezuela.  This Decree implemented 
Andean Pact Decisions 291 and 292 and significantly expanded 
foreign investment opportunities in Venezuela by lifting most 
restrictions on foreign participation in the economy.  Most 
sectors of Venezuela's economy, except those specifically 
noted, are open to foreign participation.  Article 13 of the 
Decree explicitly guarantees that foreign investors will have 
the same rights and obligations as national investors "except 
as provided for in special laws and limitations contained in 
this Decree." 
 
Under Decree 2095, foreign investors need only register with 
the Superintendent of Foreign Investment (SIEX) within 60 
days of the date a new investment is made. (The exception to 
this general rule is the Security and Defense Law, which 
provides that foreigners cannot own property in certain 
border regions or near military installations and basic 
industries without written authorization of the President 
through the Ministry of Defense.) Foreign companies may 
generally open offices in Venezuela without prior 
authorization from SIEX as long as they do not engage in 
certain sales or business activities that would require 
registration.  No prior authorization is required for 
technical assistance, transfer of technology, or 
trademark-use agreements, provided they are not contrary to 
existing legal provisions.  Shares of foreign companies may 
be sold publicly. 
 
Decree 2095 also guarantees foreign investors the right to 
repatriate 100 percent of profits and capital, including 
proceeds from the sale of shares or liquidation of the 
company, and allows for unrestricted reinvestment of profits. 
 Foreign exchange is, however, still subject to government 
exchange controls. 
 
Joint ventures and wholly owned subsidiaries of foreign 
companies are treated in the same way as Venezuelan firms. 
Only registration of the venture with SIEX is required. 
Decree 2095 imposes no limits on the amount of dividends, 
reinvestment, or repatriation.  (The foreign exchange regime, 
however, has significantly affected such transfers.) 
 
-- A.3 Limitations under Decree 2095 
 
Decree 2095 reserves three areas of economic activity to 
"national companies": television, newspapers, and 
professional services that are regulated by national laws.  A 
"national company" (as defined in Article 1 of Andean Pact 
Decision 291) is a company in which Venezuelan nationals hold 
more than 80 percent of the equity.  Foreign capital is 
therefore restricted to a maximum of 19.9 percent in 
enterprises engaged in radio, television, Spanish-language 
newspapers, and professional services subject to licensing 
legislation (e.g., law, architecture, engineering, medicine, 
veterinary medicine, dentistry, economics, public accounting, 
psychology, pharmacy, and management).  Foreign professionals 
are free to work in Venezuela without restriction, but must 
first revalidate their title at a Venezuelan university. 
This is not required for consulting services under contract 
for a specific project.  The Investment Promotion and 
Protection Law of October 1999 maintained these exceptions 
and reserved sectors. 
 
-- A.4 Areas Covered by Special Laws 
 
The sectors that are regulated by "special laws" that 
supplement the Constitution include hydrocarbons, natural 
gas, iron ore, mining, telecommunications, broadcasting, 
banking, mortgages, and insurance. 
 
-- A.5 Hydrocarbons 
 
Venezuela's vast reserves make oil and gas is leading sector 
in terms of attracting foreign investment.  However, foreign 
investment is restricted in the petroleum sector.  The 2001 
Hydrocarbons Law reserves exploration and production, as well 
as "gathering" and initial transportation and storage of 
hydrocarbons to the state.    Under this regime, primary 
activities must be carried out directly by the state, by a 
100 percent state-owned company such as Petroleos de 
Venezuela (PDVSA), or by a joint venture company with more 
than 50 percent of the shares held by the state.   The 2001 
law does, however, leave new refining ventures open to 
private investment as well as commercialization activities, 
under a license and permit regime. 
 
The Hydrocarbons Law mandated an increase in royalty payments 
from 16.67 percent to 30 percent, with the possibility of a 
reduction to 20 percent for heavy crude projects.  It also 
stipulated that any arbitration proceedings would henceforth 
be in domestic not international venues.  No projects have 
yet been negotiated under this law. 
 
The Hydrocarbons Law did not specifically grandfather 
contracts executed under earlier legislation:  i.e., the 33 
operating service contracts awarded for "marginal" or 
inactive oilfields in three rounds in the 1990's; the 
exploration and production profit-sharing agreements awarded 
in 1996; and the four so-called "Strategic Associations," 
joint ventures formed in the 1990's to extract and upgrade 
Venezuela's extra heavy oil.   The Venezuelan Government 
argued in 2001 that no such provision was necessary because 
retroactive application of legislative provisions is 
forbidden by constitutional mandate.  In October 2004, the 
Government unilaterally eliminated a nine-year royalty 
holiday ceded to the Strategic Associations, arguing that 
this was allowable under earlier hydrocarbons legislation. 
 
The oil sector suffered two years of negative growth in 2002 
and 2003 with a 14.2 percent contraction in 2002 and 2.1 
percent in 2003   The sharp decrease was due to a two-month 
national strike from December 2003-February 2003 that brought 
production to a complete halt.  In an effort to restart 
operations in the oil industry, the Chavez Government 
dismissed over 18,000 striking employees, many in management 
positions, of which only a small percentage have been 
rehired.  However, oil GDP increased by 18.6 percent by the 
third quarter of 2004 in comparison with the same period in 
¶2003. 
 
The Chavez administration has played a price hawk role in 
OPEC.   It has also begun promoting the regional development 
and integration of state energy companies under the name of 
"Petroamerica."   Petroamerica would be divided into Petrosur 
comprising the Southern Cone, Petrocaribe comprising the 
Caribbean nations and Petroandina comprising the Andean 
nations.  The stated purpose of the strategy is to gain 
strength in international markets by eliminating trade 
barriers, increasing the refining infrastructure and reducing 
costs. 
 
--A.6 Natural gas 
 
Venezuela has vast untapped natural gas reserves, estimated 
as the eighth largest in the world, and is promoting greater 
use of natural gas domestically as a clean and more 
cost-efficient energy source.  Venezuela would like to take 
advantage of its reserves and geographic location to export 
natural gas to regional markets including the U.S. 
The 1999 Gaseous Hydrocarbons Law offers more liberal terms 
than are available to petroleum investors, and Venezuela's 
government has sought foreign investment to develop offshore 
natural gas deposits near the Orinoco delta. 
 
 
The 1999 Gaseous Hydrocarbons Law opened the entire natural 
gas sector to private investment, both domestic and foreign. 
The law created a licensing system for exploration and 
production of Venezuela's non-associated natural gas reserves 
regulated by the Ministry of Energy and Mines.  Natural gas 
that is produced in association with crude oil production 
remains subject to the Hydrocarbons Law.  The state retains 
ownership of all natural gas "in situ", but PDVSA involvement 
is not required for gas development projects.  Complete 
vertical integration of the gas business from wellhead to 
consumer is prohibited. 
 
In 2001, Venezuela held its first commercial auction of 
concessions for natural gas not associated with petroleum 
production and successfully awarded six of eleven onshore 
areas it offered to bidders.   In 2003 and 2003, the 
government licensed three exploration and development blocks 
in the "Deltana Platform," located in waters contiguous to 
Venezuela's boundary with Trinidad and Tobago.   Talks 
continue over the development of the Mariscal Sucre offshore 
natural gas project, which would involve the development of 
an LNG facility in Guiria in the Paria Peninsula.  Venezuela 
also recently signed an agreement with Colombia that 
envisions the construction of a natural gas pipeline, which 
initially would bring Colombian gas to Venezuela but which 
could later be expanded to send Venezuelan gas to Central 
America.   Finally, more private investor interest is 
anticipated for future gas rounds as Venezuela focuses on 
export oriented natural gas projects and promising off-shore 
exploration areas. 
 
--A.7 Electric power 
 
Electric power production requires intensive investments in 
all stages - generation, transmission, and distribution.  In 
Venezuela, the area that is most in need of investment is 
generation since approximately 70 percent of country's 
generation capacity is concentrated in hydro stations located 
in a single river basin.  A drought during 2000, 2001, and 
2002 raised serious concerns and highlighted the need to 
increase and balance generation to mitigate the consequences 
of droughts and grid deficiencies.  Investments in hydropower 
generation continue however, with the incorporation of 
Caruachi, a 2,280 MW dam, and plans to build Tocoma, which 
will supply an additional 2,160 MW to the system. 
 
Although approximately 98 percent of the national territory 
receives electric service, transmission is an area that also 
requires intensive capital investments.  Venezuela's 
transmission assets were developed between the 1960's and 
80's.  While maintenance has generally been adequate, 
population growth has outpaced upgrades creating transmission 
bottlenecks particularly in the central region of the country. 
 
A legal framework has also been crafted to regulate the 
sector.  Its implementation, however, has been stalled mainly 
over concerns about the ability of CADAFE (the national power 
utility) to un-bundle activities and honor contracts.  CADAFE 
is involved in generation, transmission, and distribution of 
electricity and is often accused of having serious management 
issues and very high non-technical (commercial) losses. 
 
-- A.8 Mining 
 
The mining law of 1999 consolidates the provisions of the 
1945 mining law with subsequent mining decrees and encourages 
greater private sector participation in mining activities. 
The mining law created the National Institute for Geology and 
Mining (INGEOMIN), which serves as a national information 
center to gather and disseminate technical and scientific 
data for the mining industry.  The law established an 
inter-ministerial commission to coordinate the mining 
sector's development between the Ministries of Energy and 
Mines (now the Ministry of Heavy Industry and Mining), 
Environment, Defense, Finance, and Planning.  It also called 
for a "one-stop shopping" to be created within that 
commission to expedite concession authorization procedures. 
 
The 1999 law maintained the basic concession terms of the 
1945 law.  Venezuela's concessions remain mineral-specific, 
 
and have a maximum 20-year authorization, which can be 
extended for an additional 20 years.  The law lengthened 
slightly the exploration period from 3 years to 4 years, and 
the development period from 4 to 7 years. 
 
The mining law also changed the mining sector's tax 
structure.  The 1945 mining law required a small one-time 
exploration tax: a surface tax of 40 centavos per hectare for 
alluvial deposits and one Bolivar per hectare on veins and 
strata deposits and a layered royalty rate.  The surface tax 
could not be adjusted for inflation because a fixed amount 
was written into the 1945 law and over time has become 
negligible. 
 
The legalization of small and medium size mining operations 
has been viewed as a positive step toward the modernization 
of the sector and as a way to enforce environmental standards 
often violated by illegal small miners.  The law, 
nevertheless, has been criticized for its high and variable 
royalties.  A critical issue is a provision of Title VII that 
allows an exploitation tax of anywhere between 1 percent and 
3 percent. 
 
Individual mining firms have faced significant problems, and 
government officials have made comments suggesting that a 
generalized review of existing mining contracts may take 
place. 
 
-- A.9 Telecommunications 
 
President Chavez signed the Telecommunications Organic Law in 
2000, replacing the antiquated 1940's era law and setting the 
stage for significant levels of new investment in the sector. 
 The new law, coupled with a national telecommunications plan 
developed by the national telecommunications commission 
(CONATEL), and the November 2000 expiration of the monopoly 
held by CANTV on basic telephony, created a favorable climate 
for telecommunications investors. 
 
Between 2000 and 2003, Venezuela received over US$3 billion 
in investments in the telecommunications sector.  Figures for 
2004 have not been released but are estimated to be near the 
levels of 2003, which stood at 237 million and were the 
lowest they have been since the opening of the sector to 
private investment. 
 
Venezuela has one of the leading wireless telephony markets 
in the region.  Three major companies share the market: CANTV 
(originally state-owned, now largely privatized and 28% owned 
by Verizon); Telcel, (recently sold by Bellsouth to 
Telefonica of Spain); and Digitel (formerly a subsidiary of 
Italy's TIM group but being acquired by CANTV).  Higher 
investment levels are expected in 2005 to reflect these 
acquisitions, estimated at US$1.3 billion for Telcel and 
US$450 million for Digitel. 
 
EDELCA, a national utility involved in power generation and 
transmission and subsidiary of state-owned industrial giant, 
Corporacion Venezolana de Guayana (CVG), has formed a 
telecommunications company, CVG Telecom, using its existing 
fiber-optic capabilities and rights of way.  According to the 
government, EDELCA's fiber optic capacity covers 
approximately 70 percent of its grid and is interconnected to 
those of Colombia and Brazil.  This company, it is suggested, 
would eventually compete with Venezuela's privately owned 
telecommunications providers. 
 
-- A.10 Banking 
 
A 1994 Banking Law (Gazette No. 4641 of 1993) opened 
Venezuela's banking and financial services sectors to 100 
percent foreign ownership.  Foreign banks may enter the 
Venezuelan market in one of three ways: acquisition of shares 
of existing commercial banks or other financial institutions; 
creation of a new bank or other financial institution 
wholly-owned by foreign banks or investors; establishment of 
a branch of a foreign bank or financial institution.  In 
2001, President Chavez passed a new Banking Law as part of 
the package of enabling laws.  This law regulates all banks 
with the exception of four state-owned banks. 
 
Applications for entry into the banking sector are submitted 
to the Bank Superintendency, which must seek an opinion from 
the Central Bank before granting authorization.  The 
government can take into account "economic and financial 
conditions, general and local" (Article 11 of the Banking 
Law) and insist on reciprocity (Article 106 of the Banking 
Law) when deciding on an application for entry, but it has 
generally not used those powers. 
 
Total bank assets increased from US$ 23 billion at the end of 
2003 to US$ 25.7 billion in October 2004.  Since late 1996, 
seventeen banks have received authorization to become 
universal banks.  Citibank is currently the only U.S. bank 
operating branches in Venezuela. 
 
In 2001 a Merger Law was passed, aimed at strengthening the 
financial sector by allowing stronger banks to acquire weaker 
institutions.  Since the law was passed, 13 mergers have 
occurred reducing the number of small banks by twenty.  By 
November 2004, the Venezuelan financial system consisted of 
17 universal banks; 15 commercial banks; 2 development banks, 
5 investment banks; 2 mortgage banks; 1 leasing company; 3 
savings and loan associations; 2 money market funds; 4 
special law-regulated banks. Of the 51 financial institutions 
43 are private and 8 are national entities. 
 
The banking system is increasingly required to direct credit 
to borrowers in accordance with government requirements such 
as the imposition of a minimum amount of lending to be made 
to small businesses  and farmers and a cap on mortgage 
interest rates. 
 
-- A.11 Insurance 
 
Venezuela's Insurance and reinsurance sector was opened to 
100 percent foreign ownership in 1994.  A subsequent decree 
passed on November 2001 (Official Gazette No. 5.553) 
establishes rules for contracts as the basis for insurance 
activity, detailing rights and obligations to guarantee 
equilibrium and protect customers. Foreign investors may 
acquire shares of an existing insurance or reinsurance 
company or create an entirely new company.  Applications for 
entry into the sector are submitted to the Insurance 
Superintendency for authorization.  Foreign insurance 
companies are prohibited from offering insurance contracts 
fulfilled outside of Venezuela, unless the premiums become 
part of the net worth of an insurance company operating 
within Venezuela. 
 
-- A.12 Privatization 
 
The GOV has a Privatization Law (Gazette No. 5199 of 1997), 
which allows for the privatization of public assets.  A 
number of assets were bundled and earmarked for privatization 
in the early and mid 90s.  From 1990-1998 FIV, the Investment 
Fund of Venezuela, the entity in charge of selling the assets 
and later renamed the Economic and Social Development Bank 
(BANDES), privatized over 40 entities and generated cash 
receipts of nearly $4.8 billion.  Foreign investors purchased 
stakes in the telecommunications, electricity, steel, sugar 
refining, tourism, dairy, cement and aviation sectors. 
 
The Chavez Administration has shifted its policy away from 
selling a large portfolio of assets toward forming strategic 
alliances, particularly in the form of contracts with 
state-owned enterprises of other countries.  Participation in 
strategic associations regarding state owned entities is 
coordinated and administered by BANDES.  Although it has not 
rolled back any privatizations, the Government of Venezuela 
has created new state enterprises in aviation and 
telecommunication--areas from which the state had previously 
exited. 
 
----------------------------------- 
¶B. Conversion and Transfer Policies 
----------------------------------- 
 
Foreign investors in capital markets and foreign direct 
investment projects are guaranteed the right to repatriate 
dividends and capital under the Constitution.  However, the 
Law Governing the Foreign Exchange System (Gazette No. 4897 
 
of 1995) permits the executive branch to intervene in the 
foreign exchange market "when national interests so dictate." 
 After a steep decline in the value of the national currency 
(the Bolivar) following a two-month general strike that 
brought oil production to a near standstill, the Central Bank 
of Venezuela halted trade in Bolivars on January 22, 2003. 
President Chavez announced the creation of an Exchange 
Administration Board (CADIVI) on February 5, 2003 to regulate 
the purchase and sale of foreign currency.  During much of 
2003, CADIVI was unable to process requests for authorization 
of foreign exchange in an efficient and timely manner and 
only supplied $3.6 billion or approximately two months worth 
of transactions.  There has been significant improvement over 
time.  The supply of foreign currency reached a level of 
approximately $15 billion in 2004, or 55 percent of approved 
authorizations. 
 
A new CADIVI resolution allows importers to ship products 
without pre-approval by the government.  There continue to be 
delays with pre-inspection companies, which increases storage 
costs.  Although the number of currency certificate approvals 
has increased sharply, operating with a 50 percent backlog in 
liquidations puts significant constraints on imports which 
accounted for 68.5 percent of requests, followed by private 
foreign debt with 12.5 percent and foreign investments with 
8.6 percent.  Exchange control authorities have repeatedly 
said that the exchange control system will be eased but will 
remain a permanent long-term mechanism.  Nonetheless, the 
quasi-legal parallel market remains an important source of 
foreign exchange. 
 
A number of goods have also been added to the list of imports 
eligible for foreign exchange including intangibles such as 
services and the repatriation of capital, which totaled $1.5 
billion at the end of the third quarter.  Decree 2095 
guarantees foreign investors the right to repatriate 100 
percent of profits and capital, including proceeds from the 
sale of shares or liquidation of the company, and allows for 
unrestricted reinvestment of profits.  Legislation is pending 
in the National Assembly that would impose criminal penalties 
for financial transactions made outside of CADIVI's channels. 
 This is a subject of significant concern within the business 
community given the discretionary and irregular nature of 
CADIVI approvals. 
 
--------------------------------- 
¶C. Expropriation and Compensation 
--------------------------------- 
 
There have been several cases which raise significant issues 
of expropriation and/or serious impairment of the value of 
foreign investments in the Venezuelan state.  One case 
relates to INTESA, a joint venture formed between Science 
Applications International Corporation (SAIC), a U.S. 
company, and Venezuela's national oil corporation PDVSA, to 
provide information technology services to PDVSA.   PDVSA 
provided INTESA with a five-year service contract that it 
decided not to renew in 2002.   INTESA continued to provide 
services under a provisional agreement while the parties 
discussed termination of the joint venture.  The national 
strike then intervened in December 2002.   The national 
government took over INTESA claiming the firm had not allowed 
non-striking PDVSA personnel to restart operations by denying 
access to key control systems.   SAIC 's interest had been 
insured by the Overseas Private Investment Corporation (OPIC) 
which determined in July 2004 that an expropriation had 
occurred.   It paid compensation to SAIC and has in turn 
sought repayment from PDVSA. 
 
Another case is related to a joint venture between Williams, 
a U.S. corporation, and Canada's Enbridge Corporation to 
operate an oil-loading terminal in Venezuela's Jose 
Industrial Complex.   Venezuelan authorities seized control 
of the facility in December 2002 during the national strike, 
claiming that the terminal was of strategic importance and 
that the company, which had declared force majeure, had 
joined the strike.  PDVSA subsequently refused to negotiate 
compensation for the termination of the contract.  The matter 
is currently before an international arbitration panel and a 
ruling is expected shortly. 
 
President Chavez has recently issued a controversial decree 
aimed at expropriating idle land for agricultural purposes as 
part of the agrarian reform spelled out in a 2001 law.  The 
decree sets up a commission to inspect farmland and decide 
whether or not to expropriate the land holdings based on a 
finding that the land is not being put to adequate use or 
that the owner is unable to show legal title to the land.  If 
ownership can be proved, compensation is to be provided. 
However, land titles in Venezuela are not always clearly 
documented, and there are serious concerns regarding the 
process and the amount of discretion granted to the 
investigating authorities.  In March 2005, the Venezuelan 
Government nationalized nearly half of the 13,000 hectare 
British-owned El-Charcote cattle ranch in the central 
Venezuelan state of Cojedes. 
 
A 1998 land census found that 60 percent of all Venezuelan 
farmland was owned by less than 1 percent of the population. 
The census also noted that over 80 percent of the farmland 
redistributed during a 1960 land reform had returned to large 
landowners.  More than 80 percent of Venezuela's population 
lives in rural areas. 
 
--------------------- 
¶D. Dispute Settlement 
--------------------- 
 
Venezuela's legal system is accessible to foreign entities 
seeking to resolve investment disputes.  While the legal 
system is often slow, inefficient, and has been accused of 
corruption and politicization, foreign entities have not 
generally been discriminated against in legal proceedings. 
While not common, Venezuelan law allows the filing of 
criminal charges in some commercial disputes. 
 
Decree 2095 allows for the arbitration of disputes as 
"provided by domestic law." The Commercial Arbitration Law 
(Gazette No. 36,430 of 1998) eliminated the previous 
requirement for judicial approval of arbitration. 
Arbitration agreements involving national or international 
firms can be automatically binding. 
 
The Commercial Arbitration Law also allows state enterprises 
to subject themselves to arbitration in contracts with 
private commercial entities, but requires that they first 
obtain the approval of the "competent statutory body," as 
well as the "written authorization" of the responsible 
minister.    In the case of PDVSA, for example, the Ministry 
of Energy and Mines issued a blanket written authorization in 
1998  which allows the company to enter into such arbitration 
agreements, as it deems convenient or necessary.  However, 
the 2001 Hydrocarbons Law prohibits PDVSA from entering into 
agreements providing for international arbitration. 
 
--------------------------------------------- -------- 
¶E. Investment Incentives and Performance Requirements 
--------------------------------------------- -------- 
 
-- E.1 Investment Incentives 
 
Investment incentives take the form of tax credits, income 
and wholesale tax exemptions, exemption from customs duties, 
and some tax rebates for selected sectors in the economy. 
Incentives to encourage production for the export market are 
available to both domestic and foreign companies. 
 
Article 45 of the Value-Added Tax Law (Gazette No. 5341 of 
1999) gives the tax agency, SENIAT, the authority to grant 
investors exemption from VAT levies if they are engaged in 
new industrial projects in the pre-operative stages of 
development.  The exemption can last up to five years or 
until the pre-operating period terminates, with the 
possibility of extensions. 
 
Exporters may make use of special customs procedures aimed 
principally at raising the competitiveness of non-traditional 
exports by the suspension or refund of duties on imports that 
local producers incorporate into their export production. 
Mechanisms include temporary admission for inward processing, 
drawback, and replenishment of inventories, in-bond 
warehousing, and refund of the wholesale tax.  The drawback 
 
mechanism has been accused of being lengthy, and bureaucratic. 
 
Decree 1217 (Gazette No. 35,907 of 1996) updated the norms 
for debt-for-equity swaps to provide incentives for new 
direct foreign investment entities and reduce Venezuela's 
external debt stock.  The decree expanded the use of this 
instrument for a wide range of sectors: agriculture; 
industrial production or high technology services; 
petrochemical, coal, processed wood, wood pulp and its 
byproducts production; production and acquisition of capital 
goods and services; tourism; and construction of houses, 
medical facilities, or other structures related to social 
welfare interests. 
 
-- E.2 Performance Requirements 
 
In any enterprise with more than 10 workers, foreign 
employees are restricted to 10 percent of the work force, and 
Venezuelan law limits foreign employee salaries to 20 percent 
of the payroll.  The state oil company, PDVSA, seeks to 
maximize local content and hiring in its negotiations with 
foreign hydrocarbon investors. 
 
--------------------------------------------- -- 
¶F. Right to Private Ownership and Establishment 
--------------------------------------------- -- 
 
There are no legal limits on foreign ownership, except as 
noted in Decree 2095 and in "special laws" (see above). 
 
-------------------------------- 
¶G. Protection of Property Rights 
-------------------------------- 
 
-- G.1 Real Property Rights 
 
Foreign investors may pursue property claims through 
Venezuela's legal system.  While the legal system's 
procedures are lengthy, judgments are uneven, and allegations 
of corruption and politicization are common, there is little 
evidence that the legal system discriminates against foreign 
investors. 
 
-- G.2 Intellectual Property Rights 
 
Venezuela is a member of the World Intellectual Property 
Organization (WIPO).  It is also a signatory to the Berne 
Convention for the Protection of Literary and Artistic Works, 
the Geneva Phonograms Convention, the Universal Copyright 
Convention, and the Paris Convention for the Protection of 
Industrial Property.  Through Andean Community Decision 486, 
Venezuela has ratified the provisions of the WTO Agreement on 
Trade-Related Aspects of Intellectual Property Rights 
(TRIPS). 
 
The Venezuelan Industrial Property Office (SAPI) leaves much 
room for improvement, and its actions and occasional publicly 
stated antagonism towards IPR often draw criticism from IPR 
advocates and rights holders. Protection of IPR is also 
hindered by the lack of adequate resources for the Venezuelan 
copyright and trademark enforcement police (COMANPI) and for 
the special IPR prosecutor's office.  Venezuela's tax agency 
SENIAT is promoting several measures to fight piracy in an 
effort to reduce tax evasion, including a new anti-piracy law 
and the introduction of a tax on street vendors.  According 
to industry representatives, SENIAT seems to be a promising 
enforcement entity due to its better technical and financial 
capabilities. 
 
Unfortunately, pirated software, music and movies remain 
readily available throughout the country.  In the 2003 Annual 
Review, Venezuela remained on USTR's Special 301 "Watch List." 
 
-- G.3 Patents and Trademarks 
 
Venezuela provides the legal framework for patent and 
trademark protection through Andean Community Decision 486 
and the 1955 National Industrial Property Law.  Andean 
Community Decision 486 takes major steps towards bringing 
Venezuela into WTO TRIPS compliance.  However, without 
corresponding local laws, Venezuela is not completely TRIPS 
 
compliant.  Andean Community Decision 345 covers patent 
protection for plant varieties. 
 
U.S. companies remain concerned about the impact of the 
Andean Tribunal's 2002 interpretation of Articles 14 and 21 
of Decision 486, which do not allow for the patenting of 
"second-use" products.  Under pressure from the Andean 
Community and in line with some changes in leadership at 
SAPI, Venezuela has revoked previously issued patents.  No 
patents were awarded in 2004 to imported pharmaceutical 
products.  Since 2002, Venezuela's food and drug regulatory 
agency (INH) began approving the commercialization of new 
drugs which were the bioequivalents of already patented 
drugs, thereby denying the patent-holding companies 
protection of their test data.  In effect, the government now 
allows the test data of patented drugs or those for which 
patents have been requested, most of which required lengthy 
and expensive development, to be used by others seeking 
approval for their own unlicensed versions of the same 
products. 
 
-- G.4 Copyrights 
 
Andean Pact Decision 351 and Venezuela's 1993 Copyright Law 
provide the legal framework for the protection of copyrights. 
 The 1993 Copyright Law is modern and comprehensive and 
extends copyright protection to all creative works, including 
computer software.  A National Copyright Office was 
established in October 1995 and given responsibility for 
registering copyrights, as well as for controlling, 
overseeing and ensuring compliance with the rights of authors 
and other copyright holders.  Industry experts are concerned 
about a proposed new copyright law proposal, which would 
require the mandatory registry of works, reduce protection 
terms, hamper distribution agreements and increase royalties. 
 
The Venezuelan copyright and trademark enforcement branch of 
the police (COMANPI) continues to provide copyright 
enforcement support with a small staff of permanent 
investigators.  A lack of personnel, coupled with a very 
limited budget and inadequate storage facilities for seized 
goods, has forced COMANPI to work with the National Guard and 
private industry to improve enforcement of copyrighted 
material.  COMANPI can only act based on a complaint by a 
copyright holder; it cannot carry out an arrest or seizure on 
its own initiative, which leads to weaker enforcement. 
 
Venezuela does not automatically recognize foreign patents, 
trademarks or logotypes, so foreign investors must be sure to 
register patents and trademarks appropriately and in as many 
categories as are applicable.  It is advisable not to have 
agents or distributors do this in their name because the 
agent can then claim that he/she is the registered owner of 
the trademark in question. 
 
---------------------------------------- 
¶H. Transparency of the Regulatory System 
---------------------------------------- 
 
-- H.1 Legal Environment 
 
The Government of Venezuela adopted three laws in the early 
1990's to promote free market competition and prevent unfair 
trade practices: an Anti-Trust Law (Gazette No. 34,880 of 
1992), an Antidumping Decree (Gazette No. 4,441 of 1992), and 
a Consumer Protection Law (Gazette No. 37.390 of 2004). 
 
Venezuela also passed a government procurement law that came 
into effect in 2001.  The law supposedly increases 
transparency in the competitive bidding process for contracts 
offered by the central government, national universities, and 
autonomous state and municipal institutions.  Despite this 
legal framework, there is little transparency in Venezuela 
and many contracts are awarded without open competition. 
 
-- H.2 Tax Treatment of Foreign-Owned Firms 
 
All companies and individuals are required to register with 
the national tax authority (SENIAT).  Income received from 
any economic activity carried out in Venezuela is subject to 
taxation. 
 
There are several different corporate tax regimes to which 
foreign investors could be subject, depending upon the type 
of economic activity in which they are engaged. Except for 
the petroleum sector, the current Venezuelan income tax law 
does not differentiate between foreign-owned and 
Venezuelan-owned firms. The income tax rate is progressive 
based on income, ranging from 6 percent to 34 percent. 
Companies involved in hydrocarbon and related activities pay 
50 percent, except associations formed under the Hydrocarbons 
Law, which receive a different treatment.  Companies involved 
in mining pay 60 percent.  The Business Assets Law imposes a 
one percent tax on business assets (Gazette No. 4654 of 
1993). The assets tax is assessed on the gross value of 
assets (with no deduction for liabilities) after adjustments 
for depreciation and inflation 
 
Venezuela has international double taxation agreements in the 
areas of air and sea transport with several countries, 
including the Unites States.  A US/Venezuelan treaty to avoid 
double taxation went into effect on January of 2001. 
 
SENIAT is undertaking a very aggressive tax collection 
program called "The Zero Evasion Plan" which has boosted 
fiscal revenues in 2004.  Highly publicized raids have taken 
place and businesses, including multinational firms, have 
been temporarily closed administratively.  Firms subject to 
these measures complain that these closures have been imposed 
for minor paperwork violations as opposed to actual tax 
evasion. 
 
In 1999, the government replaced the wholesale tax (ICVSM) 
with a value-added tax (IVA).  The value-added tax rate is 
currently 15 percent. 
 
A Bank Debit Tax (BDT) was also implemented last year levying 
all bank transactions. Since its implementation rates have 
varied increasing from 0.75 percent to 1 percent at the end 
of 2002, and then decreasing again to 0.5 in 2004 where it 
currently stands. 
 
--------------------------------------------- -------- 
¶I. Efficient Capital Markets and Portfolio Investment 
--------------------------------------------- -------- 
 
-- I.1 Capital Markets 
 
Access to the Venezuelan secondary capital market is 
relatively easy, and U.S. firms essentially enjoy treatment 
equal to that of domestic firms.  Foreign companies may issue 
common and preferred stocks, bonds, and other securities in 
Venezuelan capital markets.  Foreign investors may also buy 
shares directly in Venezuelan companies or on the stock 
exchange. 
 
The Caracas Stock Exchange (CSE) is a privately owned 
corporation in operation since 1947.  Trading on Venezuelan 
stock exchanges is thin and highly concentrated.  The 
Venezuelan Futures and Options Clearinghouse (CACOFV), the 
first market of its kind in the country, started operations 
in Caracas in September 1997.  Membership in local capital 
markets is open to both individuals and legal entities. 
 
A Capital Markets Law came into effect in September 1998 
(Gazette No. 36,565 of 1998).  It gives autonomy to the 
National Securities Commission (CNV) and provides regulations 
for intermediaries, establishes new conditions for public 
offerings, enhances the transparency of brokerage operations, 
and makes regulations more flexible for small firms that wish 
to issue stocks. 
 
The Congress passed the Collective Investment Companies Law 
(Gazette No. 36,027 of 1996) to foster the development of 
Venezuela's capital market through the creation of collective 
investment companies.  The law, which is designed to make 
capital market investments more attractive for small and 
medium investors, opened the door to the establishment of 
mutual funds, collective investment venture capital 
companies, and collective real estate investment companies. 
CNV issued capital requirements for collective investment 
companies in 1998 (Gazette No. 36,027 of 1998).  Despite the 
 
relatively advanced legal regime, Venezuela's capital markets 
have shrunk in size over the last decade, a reflection of 
economic stagnation. 
 
-- I.2 Credit Markets 
 
The Venezuelan financial system recovered strongly from a 
crisis in the mid 90's that caused the failure of a number of 
institutions.  Banks tend to register higher profits than 
those in other countries in the region.  Much of this is 
attributable to exchange controls which limit the ability of 
the owners of capital to transfer it outside of the country. 
The purchase of several troubled banks by large foreign banks 
also injected much needed capital, technology, and 
competition into the sector.  Foreign banks have also taken a 
minoity interest in several other local banks. 
Conseuently, foreign banks now control approximately 40 
percent of all banking sector assets.  Venezuelan banks have 
become increasingly dependent on the public sector as a 
borrower.  It is currently estimated that approximately 50 
percent of banks' investment portfolios is made up of 
government debt. 
 
Financing is available from a variety of sources and does not 
discriminate against foreign investors seeking access to 
credit.  Banks cannot lend more than 10 percent of their 
assets to any one borrower. 
 
A major concern for the financial system is the recent 
agricultural and housing mortgage legislation, which forces 
banks to lend a percentage of their portfolio at preferential 
rates fixed by the local authorities. The percentage of the 
portfolio to be dedicated to agricultural loans is currently 
fixed at 16 percent.  The percentage for mortgages has not 
yet been established it is expected to be around 15 percent. 
These loans are of concern because the mandated rates are 
well below market rates and below the fairly high Venezuelan 
inflation rate (19.2 percent in 2004). 
 
--------------------- 
¶J. Political Violence 
--------------------- 
 
No major incidents were confirmed against foreign-owned or 
operated companies, projects, or installations in Venezuela 
in 2004. 
 
------------- 
¶K. Corruption 
------------- 
 
Corruption is a serious problem in Venezuela.  Venezuela has 
a regulatory system to prevent and prosecute corruption and 
accepting a bribe is a criminal act.  Penalties include fines 
and/or prison sentences.  Historically, the country has 
lacked an effective judicial system to provide judicial 
security for either foreign or national residents.  The new 
constitution also gives the central government enhanced 
powers to investigate cases of corruption and oversee the use 
of government funds. 
 
Government tenders are the most vulnerable to corruption 
because the tender process frequently lacks transparency. 
Critics have also targeted the current regime of government 
price and exchange controls as a source of corruption. 
 
---------------------------------- 
¶L. Bilateral Investment Agreements 
---------------------------------- 
 
Venezuela currently has bilateral investment agreements in 
force for the promotion and protection of investment with the 
following countries: Argentina, Barbados, Canada, Chile, 
Costa Rica, Cuba, the Czech Republic, Denmark, Ecuador, 
Germany, Lithuania, Netherlands, Paraguay, Peru, Portugal, 
Spain, Sweden, Switzerland, the United Kingdom and Uruguay. 
France and Belgium have signed agreements that are still 
awaiting legislative approval.  No agreement exists with the 
United States. 
 
--------------------------------------------- -- 
 
¶M. OPIC and Other Investment Insurance Programs 
--------------------------------------------- -- 
 
OPIC currently has significant exposure in Venezuela, as does 
the Export-Import Bank.  Please refer to the section on 
Expropriations and Compensation for information on  OPIC.  In 
April 2003 Ex-Im Bank formally placed Venezuela "off cover" 
for new lending where it currently remains. 
 
-------- 
¶N. Labor 
-------- 
 
Venezuela's total labor force (defined as all persons 15 
years of age and older who are working or looking for work) 
was 12.2 million at the end of December 2004. According to 
the National Institute of Statistics (INE), 1.8 million, or 
15.5 percent, were unemployed.  Persons are considered as 
employed if they work at least 1 hour per week. Of the 10 
million employed workers, approximately 47 percent work in 
the informal sector (i.e. as street vendors, domestics, small 
entrepreneurs, etc.). The government employs about 1.4 
million of those who work in the formal sector. 
 
The major labor organization in Venezuela is the 
Confederation of Venezuelan Workers (CTV), which represents 
most of the unionized workers in Venezuela. The CTV claims a 
membership of 3 million, although its actual membership is 
probably closer to one million. The CTV is especially strong 
in the public sector.  A second union confederation the 
National Workers Union (UNT) has been formed and enjoys 
support from the Venezuelan government. 
 
President Caldera signed landmark legislation in June 1997 
(Gazette No. 5152 of 1997) to reform the outdated and 
unworkable severance pay system in the Organic Labor Law. The 
legislation was based on a framework agreement negotiated 
among representatives from the government, private business, 
and organized labor. Under the previous severance pay system, 
departing employees received one month's salary (two months 
if they left involuntarily) for each year worked based on 
their current pay. The 1997 system did away with 
"retroactivity" (i.e. basing the entire benefit on current 
salary) and requires employers to calculate their severance 
pay obligations annually and to make monthly deposits into a 
pension fund, an employer account, or an outside trust 
account. 
 
The 1997 Organic Labor Law also provides that the minimum 
wage will be reviewed at least once a year and may be 
adjusted based on considerations such as the "food basket." A 
minimum wage of Bs. 321,235 ($139) per month for urban 
workers and Bs. 289,111 ($125) per month for agricultural 
workers took effect in August 2004. 
 
The Organic Law Pertaining to the Integral Social Security 
System (Gazette No. 5199 of 1997) provides the general 
framework for the social security structure. Congress passed 
a social security reform in 1998, but the system remained 
under review by the Chavez government, until 2002, when the 
National Assembly passed the Social Security System Organic 
Law (Gazette No. 37600). However, the full application of 
this law that covers everybody that contributes or not with 
the expenses, will depend on the fiscal reforms. 
 
The Organic Labor Law places quantitative and total wage cost 
restrictions on the employment decisions made by foreign 
investors. Article 27 of the Labor Law requires that the 
number of foreigners hired by an investor not exceed 10 
percent of a company's employees, while salaries paid to 
foreigners may not exceed 20 percent of the total company 
payroll. Article 28 allows for temporary exceptions to 
Article 27 and outlines the requirements for hiring technical 
expertise when equivalent Venezuelan personnel is not 
available. Article 20 of the law requires that industrial 
relations managers, personnel managers, captains of ships and 
airplanes, and foremen be Venezuelan. Article 19 requires 
that all orders and instructions to workers be given in 
Spanish. 
 
The Venezuelan government has imposed a freeze--renewed every 
 
six months--on layoffs.  Thus, reductions-in-force require 
the negotiation of severance packages in exchange for 
voluntary resignation. 
 
--------------------------------- 
¶O. Foreign Trade Zones/Free Ports 
--------------------------------- 
 
The Free-Trade Zone Law (Gazette No. 34,772 of 1991) provides 
for free trade zones/free ports. The two existing free trade 
zones are located in the Paraguana Peninsula on Venezuela's 
northwest coast (industrial) and Margarita Island 
(commercial). Under the law, any investor in the Paraguana 
industrial free zone can receive a 10-year exemption from 
income taxes on all profits earned from goods produced for 
export. The government may extend such benefits for an 
additional 10 years. Few investors have taken advantage of 
the tax breaks in Paraguana due to infrastructure problems in 
the region. Both the Paraguana and Nueva Esparta (Margarita 
Island) zones provide exemptions from most import and export 
duties and offer foreign-owned firms the same investment 
opportunities as host country firms. Venezuela has three free 
ports that also enjoy exemptions from most tariff duties: 
Margarita Island, Maracaibo and, the most recent addition to 
this list established in May 1999, Santa Elena de Uairen in 
the state of Bolivar. 
 
---------------------------- 
¶P. Foreign Direct Investment 
---------------------------- 
 
Embassy estimates the total stock Foreign Direct Investment 
(FDI) in Venezuela stood at 21 billion in 2004. The United 
States was the single largest foreign direct investor in 
Venezuela, representing approximately 53 percent, followed by 
the Cayman Islands with 17 percent, the Netherlands with 7.5 
percent and Spain with 5 percent.  The percentage represented 
by the Cayman Islands is thought to include Chinese 
investments. 
 
The stock of U.S. foreign direct investment (FDI) in 
Venezuela in 2003 was $10.8 billion according to U.S. 
Department of Commerce statistics.  U.S. FDI in Venezuela is 
concentrated largely in the petroleum, telecommunications, 
manufacturing and finance sectors. 
 
The estimated U.S. trade deficit with Venezuela for 2004 is 
projected at $19.5 billion, an increase of $5.2 billion from 
the trade deficit of $14.3 billion in 2003.  U.S. goods 
exports to Venezuela were approximately $4.5 billion, up $1.8 
billion from 2003.  U.S. imports from Venezuela are estimated 
at about $24 billion in 2004, an increase of $7 billion from 
the level of imports in 2003. The large increase in imports 
is related primarily to the increase the price of petroleum, 
which represents the vast majority of U.S. imports. 
 
Brownfield 
 
 
NNNN 
      2005CARACA00790 - UNCLASSIFIED