By Andrés Jagemberg

Among the different Commissions that constantly study possible modifications to the Venezuelan legal system, especially in the subject of tax and customs, and considering the permanent movement of regional integration taking place in the country, there is a need to make explicit and adjust more precisely all aspects related to the royalties derived from technology transfer contracts or the use of trademarks, since sometimes there are doubts about the fiscal/tax scope of some provisions that may be interpreted differently.

The Venezuelan Income Tax Law defines the royalty as “… the amount paid for the use or enjoyment of patents, trademarks, copyrights, procedures or rights of exploration or exploitation of natural resources, set in relation to a production, exploration, exploitation or sale unit, whatever its name/definition in the contract ”

So, we can say that the royalty is the consideration for giving or allowing, through a contract, the use or enjoyment of an asset, which does not involve disposing of the property. The right to use an asset temporarily without transferring the property.

In Venezuela, however, the assignment or royalty contract may or may not be taxable with the value added tax.

The contract and the tax have different legal nature, because we know that while in the contract there is an agreement between two or more people, either to constitute, regulate, modify or terminate a legal relationship, the tax is an act of force of law imposed on taxpayers.

Article 16 of the Law on Value Added Tax states the following: “The following activities shall not be subject to the tax provided in this law:” (2) “The sales of incorporeal, intangible assets…” so we can say that, in principle, royalties are not subject to VAT.

However, Article 22 of the Regulations to the Value Added Tax Act of 1999, states as follows: “…the provision of services from abroad, carried out inter alia through the following contracts: royalty or assignment contracts, by virtue of which the right to use or commercially exploit trademarks, invention or manufacturing patents, trade names, etc. is acquired, shall be also a taxable event.”

By citing the two previous provisions, we can deduce that in principle, royalties are not taxed by the value added tax, since the assets giving rise to the royalties are intangible.

However, the situation changes when it comes to royalties that result from service provision from abroad, since it would not be exempt from the value-added tax. This is based on the jurisprudence of the Supreme Court of Justice, which found that “[w]hen it comes to the provision of services from abroad, carried out through a royalty or assignment agreement, through which the right to use trademarks arises, this activity is taxed with VAT.” (Political Administrative Chamber, case Walt Disney Company Venezuela, S.A. against the National Treasury, date 11-11-2008.)

Therefore, considering the approach by the Regulations of the Law on Value Added Tax of 1999, in addition to the aforementioned ruling, it is advisable to tax royalty contracts entered into for the provision of services coming from abroad, and thus avoid the imposition of a penalty on the assignee at the time of a possible audit by the Tax Administratio