US Sanctions Crack Open Door for Energy Investment in Venezuela

Venezuela is open for business, at least for now. A convergence of new US sanctions authorizations and sweeping Venezuelan hydrocarbon overhaul has created a narrow window for multinational investors to enter one of the world’s most resource-rich—though legally complex—energy markets.

For multinationals weighing whether to act, the question is no longer whether the door is open. It’s whether they can navigate what lies behind it.

Investment Opportunity

Venezuela holds the world’s largest proven oil reserves, yet decades of sanctions, mismanagement, and political instability have left its production infrastructure severely underdeveloped. That is now changing, at least at the policy level.

Earlier this year, the Venezuelan government enacted the Hydrocarbons Law amendment (Ley de Reforma de la Ley Orgánica de Hidrocarburos) opening oil and gas concessions to greater foreign participation and restructuring the country’s royalty and tax framework.

In general, the Hydrocarbons Law amendment permits non-Venezuelan oil and gas multinationals to assume greater control over oil and gas concessions in the country. Chapter VI governs royalties (up to 30% payable in cash or in kind at the option of the government) and production taxes (replacing several excise and severance taxes with a 15% gross income levy).

Venezuela also imposes a 50% national income tax on oil and gas net taxable income, which remains unchanged. Various provisions in the law amendment leave substantial discretion to the Venezuelan administration to determine royalty and tax rates, depending on economic circumstances.

The Office of Foreign Assets Control, or OFAC, has issued General License No. 52 under the Venezuelan Sanctions Regulations. This permits established US companies in existence on or before Jan., 29, 2025, to enter into joint ventures in the oil and gas industry with Petróleos de Venezuela, S.A.—the state-owned oil and gas company of Venezuela—or any of their 50% or greater owned affiliates, provided that any monetary payments (excluding local taxes, permits and fees) are made into the foreign government deposit fund established by the Treasury Department for Venezuelans.

Oil and Gas Industry

It’s still prohibited to pay taxes and royalties to Petróleos de Venezuela, S.A. or to the government of Venezuela without a waiver or special license granted by the US government. Multinationals looking to invest in Venezuela would have to negotiate two agreements before making any final investment decision on an oil and gas concession.

First, the multinational would have to negotiate a royalty rate, gross tax rate, and income tax rate agreement with Petróleos de Venezuela, S.A. for payment of royalties and taxes by the empresa mixta, or joint venture company, including the rate of withholding taxes applicable to payments abroad. It may be possible to negotiate the 50% income tax rate down to 34%, the rate applicable in general to corporations.

Second, the multinational would have to negotiate a waiver or special license with the Treasury Department to allow the joint venture to make any royalty and tax payments (other than for local taxes, permits and fees) directly to the Venezuelan government. For US multinationals, taxpayers still have to navigate the foreign tax credit limitations set out in Sections 901(f) and 907 of the Internal Revenue Code of 1986, as amended, to ensure credit against US tax on worldwide oil and gas income.

Other Tax Issues

Beyond the oil and gas sector, US and non-US multinationals investing in Venezuela face certain limitations and hurdles caused by Venezuelan tax legislation. Venezuela taxes both resident and nonresident entities on income derived from Venezuelan sources.

• For nonresidents, including US investors, the general withholding tax rate is 34% on most types of income, such as business profits, interest, royalties, and capital gains. However, dividends paid out of profits that already have been subject to Venezuelan corporate income tax are generally exempt from further withholding.
• For capital gains, a 1% final withholding tax applies to sales of shares on the Venezuelan stock exchange; otherwise, the 34% rate applies.

These high withholding rates can impact the after-tax return on investment and may lead to excess foreign tax credits that aren’t fully available to investors.

The US-Venezuela Income Tax Treaty, effective since Jan. 1, 2000, provides some tax relief for US multinationals investing in Venezuela. The treaty provides for reduced tax withholding rates on certain types of income including dividends, interest, and royalties.

• Dividends are subject to a 5% withholding rate for direct investments (greater than 10% ownership), or 15% otherwise.
• Interest payments are subject to a 10% rate generally that may be reduced to 4.9% for financial institutions with exemptions for some government-related loans.
• Royalties are subject to a 5% withholding rate for industrial, commercial, or scientific equipment and 10% for other royalties.

These reduced rates can significantly lower the effective tax burden on cross-border payments, provided the recipient qualifies under the treaty’s limitation on benefits article.

In general, US investors are allowed a foreign tax credit for income taxes paid to Venezuela. However, the credit is generally limited to the amount of US tax attributable to the foreign-source income, calculated separately for different categories of income (such as general, passive, and oil and gas income). The treaty’s relief is thus subject to the same foreign tax credit limitations.

Additionally, Venezuela requires taxes to be paid in local currency, and exchange controls can complicate the repatriation of profits and tax compliance.

Going Forward

The US government’s policy is to deal with the administration of Delcy Rodriguez. Her administration may be willing to offer a more competitive royalty rate and tax rates, depending on the drilling project’s location and whether the investor is reworking a brownfield site or exploring a greenfield and taking risks to open new fields.

OFAC’s General Licenses 56 and 57, released in April, will allow greater financial flows between the two countries.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law, Bloomberg Tax, and Bloomberg Government, or its owners.

Author Information

Mauricio Rivero is a partner at Nelson Mullins in Miami specializing in international tax planning, business succession planning, US tax compliance, and tax controversy work.

Jim Reardon is a partner and co-practice leader of the Venezuela group at Nelson Mullins in Houston, advising foreign corporations that invest or conduct business in the US .

Henry “Buzz” Burwell is a partner and co-practice leader of the Venezuela group at Nelson Mullins in Greenville, S.C.

John Haley of Nelson Mullins in Miami contributed to this piece.

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