VENEZUELA -- INVESTMENT CLIMATE STATEMENT (PART

UNCLAS SECTION 01 OF 06 CARACAS 000174

SIPDIS

SIPDIS

STATE FOR EB/IDFD/OIA, WHA/AND
STATE PASS TO USTR
COMMERCE FOR 4431/MAC/WH/MCAMERON
TREASURY FOR KLINGENSMITH AND NGRANT

E.O. 12958: N/A
TAGS: ECON EINV EFIN KTDB STR OPIC VE
SUBJECT: VENEZUELA -- INVESTMENT CLIMATE STATEMENT (PART
2/2)

REF: 06 SECSTATE 178303

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A.7. Protection of Property Rights
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A.7.1. Real Property Rights
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Foreign investors may pursue property claims through
Venezuela's legal system. While the legal system's
procedures are lengthy, judgments are uneven, allegations of
corruption common, and the system itself is overtly
politicized, there is little evidence that the legal system
discriminates against foreign investors.

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A.7.2. Intellectual Property Rights
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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. Venezuela implements its obligations
under the WTO Agreement on Trade-Related Aspects of
Intellectual Property Rights (TRIPS) through Andean Community
Decision 486. Despite Venezuela's withdrawal from CAN in
2006, pact norms are reported to continue to be in place.

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. IPR protection is also
hindered by the lack of adequate resources for the Venezuelan
copyrigh4lA~pQQsion, including an 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 2006 Annual
Review, Venezuela remained on USTR's Special 301 "Priority
Watch List." The Anti-contraband Law (December 2, 2005,
Official Gazette 38,327) creates a framework for contraband
in Venezuelan customs which did not previously exist in
Venezuela and a new Intellectual Property Rights regulation
looks to enforce IPR violations in Venezuelan customs.

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A.7.3. Patents and Trademarks
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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 will continue to monitor 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 (e.g. new uses of previously known or
patented products). Under pressure from the Andean Community
and in line with some changes in leadership at SAPI,
Venezuela has revoked previously issued patents. Very few
patents for new pharmaceuticals were awarded in 2004 and none
were issued in 2005 or 2006. Since 2002, Venezuela's food
and drug regulatory agency (INH) began approving the
commercialization of new drugs, which were the bioequivalent
of innovative drugs that previously received INH marketing
approval, thereby denying the innovative drug companies
protection against unfair competition of their test data as
required by TRIPS. In effect, the government now allows

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unfair reliance on the test data, which required lengthy and
expensive development, to be used by others seeking marketing
approval for the same products.

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A.7.4 Copyrights
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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.

The National Assembly has also been considering a Copyrights
bill for some time. The bill, which was proposed by
Venezuela's IPR regulator SAPI, has been very controversial
and raised serious concerns in the private sector. Among
other things, the bill calls for the local registration of
all works, certification by a government-appointed commission
to approve the copyright, a significant raise of royalty
rates, and a provision to expropriate works if in "national
interest". The new Film Law before the National Assembly is
equally worrisome to the private sector, as it mandates
obligatory screening of national films, higher taxation on
the sector, and it requires domestic production of film
equipment and copies.

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A.8. Transparency of Regulatory System
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A.8.1. Legal Environment
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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. 4898 of 1995).

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, if not the vast majority, are awarded
without open competition.

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A.8.2. Tax Treatment of Foreign-Owned Firms
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All companies and individuals are required to register with
the national tax authority (SENIAT). Income received from

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any economic activity carried out in Venezuela is subject to
taxation.

Foreign companies receive equal treatment as national
companies and are subject to the corporate tax regime. 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
significantly boosted fiscal revenues. 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 14 percent.

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A.9. Efficient Capital Markets and Portfolio Investment
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A.9.1. Capital Markets
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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). The Caracas
Stock Exchange (CSE) index closed above 50,000 in 2006,
increasing over 155 percent from the end of the previous
year. GDP growth, coupled with negative real interest rates
for deposits and CDs and a lack of alternative investment
opportunities largely fueled to this increase.

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A.9.2. Credit Markets
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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 in recent years 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 minority interest in several other local
banks. Consequently, foreign banks now control approximately
32 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 32
percent of banks' total assets 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 legal
requirement that forces banks to lend a percentage of their
portfolio to specific economic sectors at preferential rates
fixed by the local authorities. Thirty-one percent of
commercial bank lending is directed by law to housing,
agriculture, micro-business, and tourism. These loans are of
concern because the mandated rates are well below market
rates and below the fairly high Venezuelan inflation rate (17
percent in 2006).

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A.10. Political Violence
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No major incidents were confirmed against foreign-owned or
operated companies, projects, or installations in Venezuela
in 2006.

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A.11.a. Corruption
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Corruption is a very serious problem in Venezuela and appears
to be worsening. According to Transparency International's
Corruption Perceptions Index, Venezuela is the second most
corrupt country in Latin America and one of the most corrupt
in the world. 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 problem persists today, and is
exacerbated by the overt politicization of the judicial
system. The 1999 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.

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A.11.b. Bilateral Investment Agreements
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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.

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A.11.c. OPIC and Other Investment Insurance Programs
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OPIC currently has significant exposure in Venezuela, as does
the Export-Import Bank. However, OPIC is statutorily
obligated to suspend operations in Venezuela due to
VenezuelaQ,s failure to achieve certification under the
anti-narcotics trafficking laws. Also, the expropriations
claim by SAIC to OPIC remains outstanding. 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.

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A.11.d. Labor
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Venezuela's total labor force (all persons 15 years of age
and older who are working or looking for work) was 12.5
million at the end of October 2006. According to the
National Institute of Statistics (INE),1.1 million, or 8.9
percent, were unemployed. Persons are considered as employed
if they work at least 1 hour per week and INE does not count
as unemployed the hundreds of thousands of Venezuelans
enrolled in government social programs. Of the 11.3 million
employed workers, approximately 45 percent work in the
informal sector (as street vendors, domestics, small
entrepreneurs, etc.). The government employs about 1.8
million of those working in the formal sector.

The major labor organizations in Venezuela are the
independent Confederation of Venezuelan Workers (CTV) and the
National Workers Union (UNT). The CTV was founded in 1936
and dominated the trade union movement in Venezuela prior to
the election of President Chavez. The UNT enjoys support
from the Venezuelan government and has been growing since its
inception in 2003.

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. A reform in 2005 limited these payments to the
equivalent of 60 percent of their annual salary.

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. 512,325 (USD $238) per month took
effect in September 2006.

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 are 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

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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.

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A.11.e. Foreign-Trade Zones/Free Ports
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The Free-Trade Zone Law (Gazette No. 34,772 of 1991) provides
for free trade zones/free ports. The three existing free
trade zones are located in the Paraguana Peninsula on
Venezuela's northwest coast, Atuja in the State of Zulia and
Merida (but only for cultural, scientific, and technological
goods). These zones provide exemptions from most import and
export duties and offer foreign-owned firms the same
investment opportunities as host country firms. The
Paraguana and Atuja zones provide additional exemption of
local services such as water and electricity. Venezuela has
two free ports that also enjoy exemptions from most tariff
duties: Margarita Island (Nueva Esparta) and Santa Elena de
Uairen in the state of Bolivar.

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A.11.f. Foreign Direct Investment Statistics
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The stock of U.S. foreign direct investment (FDI) in
Venezuela in 2005 was USD $9.6 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 2006 is
projected at USD $30.3 billion, an increase of USD $2.7
billion from the trade deficit of USD $27.6 billion in 2005.
In 2006, U.S. goods exports to Venezuela were approximately
USD $8.5 billion, up USD $2.1 billion from 2005. U.S.
imports from Venezuela are estimated at about USD $39 billion
in 2006, an increase of USD $5 billion from the level of
imports in 2005. The large increase in imports is related
primarily to the increase in the price of petroleum, which
represents the vast majority of U.S. imports from Venezuela.

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Contacts and Web Resources
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Andrew N. Bowen, Economic Counselor
U.S. Embassy, Caracas
Unit 4956
APO AA 34037
Tel: 58 212 907 8412
Fax: 58 212 907 8033
Email: BowenAN@state.gov

Darnall Steuart
Deputy Director Venezuela Desk
Office of Andean Affairs
U.S. Department of State
Tel: 202 647 4216
Fax: 202 647 2628
Email: McIsaacKJ@state.gov

Venezuela's Superintendent of Foreign Investment (SIEX):
www.siex.gov.ve.
Venezuela's Intellectual Property Rights Office (SAPI):
www.sapi.gov.ve

BROWNFIELD