Introduction
The current geopolitical environment in Venezuela is continuing to evolve. While the legal and business environment has improved, businesses operating or looking to operate there are still continuing to analyze risks. At the same time, tangible steps are being taken to better position Venezuelan industries for foreign investment, including a recent partial reform of Venezuela’s Organic Hydrocarbons Law.
On the US front, sanctions remain in place against the Venezuelan government and Specially Designated Nationals (SDNs), such as PdVSA, but a flurry of general licenses issued by the Office of Foreign Assets Control (OFAC) in recent weeks are allowing energy sector businesses to cautiously explore potential opportunities.
Further direction on proposed reforms in Venezuela and additional guidance from OFAC in the US will undoubtedly reveal a clearer path forward, but at present, businesses operating, or looking to operate in, Venezuela should take care to understand:
- What’s changed – and what hasn’t
- The latest guidance for businesses planning to return to Venezuela
- US sanctions considerations
- Investment considerations and strategies
Below are some takeaways from our recent discussion covering these key considerations.
What’s changed – and what hasn’t
Following the events on January 3, Venezuela has entered a period of managed transition in coordination with the US government.
While the institutional framework of Venezuela remains relatively unchanged, a number of reforms are underway with the goal of opening Venezuela up to foreign investment. To date, the most significant development has been the partial reform of Venezuela’s Organic Hydrocarbons Law.
This reform likely signals a broader direction of travel for other sector reforms.
It allows for:
- Full private foreign participation in upstream oil activities, such as exploration and production, for the first time since 1975.
- Minority shareholders participating in a JV with PdVSA to have technical control of operations, including selling and transporting oil outside of Venezuela.
- Arbitration and other alternative dispute resolution mechanisms.
- Mandatory contract provisions purporting to maintain the contract’s initial economic balance.
- A flexible, less burdensome system of tax, contributions and royalty system aimed at motivating private sector investors to participate.
Read our special report on the partial reform of the Organic Hydrocarbons Law to learn more.
With respect to gas, the Organic Law on Gaseous Hydrocarbons of 2001 (the “Gas Law”) remains in effect, similarly allowing for complete participation and operational control by licensed foreign companies.
A sweep of additional reforms is simultaneously underway. The National Assembly of Venezuela has so far announced reforms of 29 laws that cover a range of critical areas for investors, including:
- Infrastructure projects, including Venezuela’s electricity system. Rebuilding Venezuela’s electric grid is key to sustaining increased oil production.
- Mining and minerals (gold, iron and aluminum)
- Labor legislation reform
- The acceleration of administrative procedures
Aside from oil, gas, minerals and electricity, other potential areas of interest for investors include, without limitation, real estate and tourism. In general, the more Venezuela’s economy recovers, the more appealing it would become for investors in the different sectors of the economy to enter, re-enter or expand.
Guidance for businesses planning to return to Venezuela
Companies seeking to set up operations in Venezuela should be thinking about a number of options and considerations:
1. Consider corporate vehicle options — and potential exposures
Venezuela law allows foreign investors to incorporate corporate vehicles from a variety of options before the Commercial Registry. Subsidiaries are oftentimes the preferred vehicles because they isolate shareholders from liability for Venezuelan operations to the amount of their investment.
For example, shareholders can be held jointly and severally liable for payment of a subsidiary’s labor obligations. While this is debatable, so far certain rulings from Venezuela’s Supreme Court have applied this joint and several liability irrespective of the subsidiary’s circumstances.
Companies should therefore analyze their specific objectives to determine the best corporate vehicle and understand any potential liabilities and risks that might subsequently arise.
2. Adhere to relevant visa requirements
Foreign visitors planning to visit Venezuela for short periods of time in order to explore business opportunities should obtain a transient business visa. A labor visa might also be necessary, particularly for those entering to work as employees on a habitual and permanent basis. Most commercial registrars are also requiring these visas for foreign individuals seeking to register with local boards or administrative bodies.
3. Prepare for legislative action that might impact registration requirements
Venezuela’s law on foreign productive investment provides that foreign investments in excess of €800,000 must be registered. In practice, however, this registration requirement is not in effect because the governing body is currently non-operative. This will likely be the subject of legislative action in the future so businesses should pay attention to updates in this space.
4. Structure investments to optimize applicable treaty benefits
Venezuela has a number of double taxation treaties and bilateral investment protection treaties in place (including with Barbados, Belgium, Switzerland, Canada, Portugal, Spain, Sweden and the UK). There is a double taxation treaty in effect between the United States and Venezuela. Potential benefits include improved withholding rates when remitting dividends abroad and, for countries having an investment protection treaty in place with Venezuela, stronger investment protections.
Beyond these key considerations, companies should also understand and adhere to specific sector requirements and mandatory registration requirements, including taxpayer registration, payroll and social contributions and more.
US sanctions considerations
OFAC has issued a suite of new general licenses over the last few weeks that focus on the energy sector, authorizing a broad range of activities related to the exploration, development and production of oil and gas as well as the sale, export and transport of oil. To date, there has been no broader relaxation of existing sanctions against the government of Venezuela nor any removal of SDN designations, including for PdVSA, or relaxation of export controls (which could apply to equipment sent to Venezuela).
The new OFAC general licenses:
- Do not allow US companies to start operating under new JVs or entities in Venezuela to explore or produce oil or gas.
- Do allow for contingent contracts for new investments, e.g., contracts that are conditional on obtaining OFAC licenses before performing, as well as negotiations and assessments.
- Contain similar terms around reporting requirements, governing laws, dispute resolution clauses, payment terms and payments.
- Cover restrictions on parties connected to Iran, Russia, China, etc.
OFAC’s recently issued general licenses at a glance
| General License | Primary Focus | Authorizes | Key Conditions and restrictions |
| General License No. 46A | Downstream oil activities | Authorizes established US entities to participate in the lifting and trading of Venezuelan crude oil and certain petroleum products (but not gas). Oil may be sold outside of the US. | Contracts between US companies and the Venezuelan government or PdVSA must be governed by US law and have a US dispute resolution mechanism Commercially reasonable payments only (e.g., no digital currencies or gold) Certain payments made to the Venezuelan government or PdVSA must be deposited into the Foreign Government Deposit Funds accounts (does not include government taxes, permits or fees) Specific reporting requirements to the state and energy departments Country-specific restrictions, including Russia, China and embargoed countries Does not permit investment in Venezuelan projects |
| General License No. 47 | Ancillary to General License 46A (narrow scope) | Authorizes the export of US-origin diluents, agents used to reduce viscosity of Venezuelan crude oil so that it can be transported and refined. This has also prompted an amendment to a long-standing general license, General License 30B, which previously had an exclusion for diluents. | Same reporting and compliance conditions as General License No. 46A |
| General License No. 48 | Upstream oil and gas activities | Authorizes parties to provide goods, technology or software services in oil or gas exploration or production in Venezuela. | Overall, similar to restrictions and conditions of General License No. 46A, particularly around governing laws, dispute resolution mechanisms, payment restrictions, country restrictions and reporting requirements Does not authorize any new JVs or entities organized under Venezuelan law Applicable export controls still apply to dual use items |
| General License No. 49 | Contingent contracts | The negotiating and signing of contracts related to new investment in Venezuela – but not performing them – as well as initial assessments, including commercial, legal, technical, safety and environmental diligence assessments. | Performance is conditional and cannot proceed without obtaining an OFAC license Similar country-specific restrictions, particular around Russia and China |
| General License 50A | Operations of specifically named oil majors | Significant overlap with General License No. 48 but applies to six named oil majors with operations on the ground in Venezuela. Companies identified in General License No. 50A do not have to go to OFAC for new authorizations to form new joint ventures and new entities. | Relevant to vendors and suppliers, given the broad language in General License No. 50A Restrictions and reporting requirements are virtually identical to General License No. 48 so eligible companies can choose which one they rely on. |
Questions remain around the scope of some of these licenses, and more guidance from OFAC is awaited. While OFAC’s focus will likely remain on the energy sector for the near future, emerging interest by US companies to engage with projects in sectors such as infrastructure, the electricity grid, mining and petrochemicals could potentially encourage a broader focus.
For an in-depth look at recent OFAC-issued general licenses in response to developments in Venezuela, visit our Global Sanctions and Export Control blog.
Investment considerations and strategies for companies
Proactive transaction strategies
When doing deals with countries where political and sanctions and legal landscapes are in flux, organizations can embed resilience and flexibility into their transactions by:
1. Focusing on what is permitted, rather than what is commercially optimal.
While structuring deals with a view to maximizing returns and minimizing risk, identify what options might be prohibited or face significant hurdles, to avoid inefficiencies and delays.
2. Structuring for flexibility, not control.
To better prepare for unexpected changes, such as sanctions or new laws, companies should consider structures other than outright acquisitions (such as taking minority stakes with sufficient governance rights and exit rights). Companies should also structure their transaction economics in a manner that accounts for the risk of change, for example, via earn-out mechanisms in which the buyer only pays the full price if the asset performs as intended.
3. Ensuring transaction terms are robust.
Build in flexibility to pivot if the law or sanctions regime changes. This includes having the right to terminate the transaction prior to closing if the counterparty becomes subject to sanctions, if the transaction structure itself becomes illegal or if the government imposes restrictions on the transaction that are too burdensome or too expensive.
Standard closing conditions, termination rights and efforts covenants might not be enough – companies need to ensure robust and specific protections.
Corporate vehicles
For companies considering acquisitions in Venezuela specifically, there are a number of corporate vehicles based on Venezuelan commercial law, including limited liability partnerships and limited liability companies, as well as subsidiaries.
The most frequently used corporate vehicle for economic activities is a Sociedad Anónima, a Venezuelan corporation, because of its inherent flexibility:
- It allows companies to create their own architecture and corporate governance rules
- It has no specific limitations on capital (though specific sector requirements might apply)
- The acquisition or sale of shares is relatively straightforward
In Venezuela, no central authority oversees the general commercial activities of companies (though there is, in some cases, sector-specific oversight such as for the finance or insurance sectors). Companies must register with the Commercial Registry.
Remittances
Another key challenge for countries seeking to invest in Venezuela is the repatriation of funds. No exchange control is currently in force and Venezuelan companies can remit funds abroad, but there are certain barriers, including overcompliance from international banks that might block payments in light of US sanctions.
However, potential relaxation of sanctions in the future could alleviate this challenge. Another factor that might help is that oil sales will inject liquidity into the Venezuelan exchange market.
Conclusion
While more changes and challenges are undoubtedly ahead, we are seeing renewed interest in Venezuela in light of these recent developments. Our US and Venezuela-based teams are assisting numerous clients in the energy sector and beyond as they assess the landscape and decide on next steps. Please reach out to us with any questions.
