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Since being elected President of Venezuela in November, 1998, Hugo Chávez has transformed Venezuela’s political configuration. The culmination of 1999, "the year of politics," was the adoption of the Constitution of the Fifth Venezuelan Republic by the Venezuelan people, in a plebiscite held December 15. The following report comments on the most significant topics and innovations of the new Constitution, published December 30, 1999 in the Official Gazette Nº 36,860 (the "Constitution"), and effective as of that date.

Title of the State: The name of the country has been changed to "República Bolivariana de Venezuela." Consequently, all registries, titles, authorizations, concessions and contracts must adopt this name when referring to Venezuela. Similarly, the currency must also adopt the name "República Bolivariana de Venezuela." Early in January 2000, a prominent member of the Constituent Assembly initiated the procedure to revise this name change by plebiscite.

Social Rights and Economic Rights: National adoption of children is preferred to international adoption, although international adoption has historically predominated. A controversial article protects the mother from the conception of the child, thereby arguably allowing for the legalization of abortion.

Although dual citizenship was expressly prohibited in the previous constitution, the new Constitution refers to that subject in vague terms. This has been interpreted by some as favourable towards dual citizenship.

Extradition of Venezuelan citizens to foreign countries is generally prohibited without reference to types of felonies.

The Constitution provides for the equality and equity of men and women in the employment relationship, and expressly includes certain labour principles such as prevalence of substance over form, and non-waivability of labour benefits. The employer may not provide terms of employment less favourable than those stipulated in the Constitution, but may provide better terms.

The work week is set at a maximum of 44 hours per week for day shifts, and a maximum of 35 hours per week for night shifts. Overtime may not be imposed against the employee’s will. Every individual has the right to social security, administered by the government on a non-profit basis. If salaries and seniority are not paid at the end of the labour relationship, they are subject to monetary correction that reflects inflation as established by the Supreme Court of Justice. Salaries are not seizable, except for family obligations. Salaries should also be adjusted annually taking into consideration an index of consumer products (cesta básica).1

The Organic Labour Law will be amended, so seniority will be paid according to final salary. Although this significantly favours employees, it may result in reduced hiring by employers. Claims for seniority benefits will have a limitation period of 10 years, as opposed to the current statute of limitations of one year. Additionally, an Organic Labour Procedures Law will be enacted and will guarantee an autonomous and specialized labour regulatory agency.

Economic freedom, protection of private property and prohibition of monopolies are maintained. However, protection of private property is strengthened, and rules for expropriation are stricter and oblige the government to provide timely fair payment to owners of expropriated lands, after a final court decision declaring the property to be a public utility and of social interest. The emphasis on timely fair payment is to avoid the effects of inflation. Economic felonies, such as illicit speculation and usury, shall be punished severely by the law. Consumers’ interests shall be defended, and the quality of services shall be guaranteed.

Indigenous Peoples: The recognition of the indigenous communities and territories is a fundamental change from the 1961 Constitution, which failed to establish any protection or rights. This has been a passionately contested issue, as some regard this recognition as creating states within a state and therefore, an attack on Venezuela’s internal unity. The Constitution recognizes the existence of indigenous communities; their social, political and economical organization, as well as their customs, languages, religions and habitat. The State guarantees common property rights in the ancestral lands required for the preservation of their lifestyle. These lands are not subject to sale, acquisition through adverse possession, attachment or transfer. This provision may affect economic activities, such as the exploitation of hydrocarbons in indigenous environments.

Environmental Rights: The Constitution creates an obligation to conduct an environmental study for all activities that may harm the environment. In all agreements or permits signed or granted by the State involving natural resources, a clause mandating the protection of the environment and its recovery in the event of damages is deemed included, even if not expressly established. It is likely that the Ministry of Environment will pass resolutions pertaining to additional permits or environmental studies to be obtained or performed by the investors.

Obligations of the State: The State is liable for damages suffered by individuals due to its acts, omissions and functions. Contracts of national interest (essentially those to which the State is a party) are to be approved by the . The exceptions to the congressional approval that existed under the 1961 Constitution (i.e. contracts of public interest needed for the normal development of the public administration or those permitted by law) are no longer applicable. In contracts of public interest, as in the 1961 Constitution, there would be an implied clause subjecting the contract to Venezuelan law, and any arising controversies to the jurisdiction of Venezuelan courts; however, some exceptions are available.

Divisions of Government]: The administration of the nation is divided into three levels of government: national, state and municipal. In turn, the national government is comprised of the legislative branch, the executive branch, the judiciary, the citizen branch, and the electoral branch. The citizen branch is new and effectively is what would be called an ombudsman in North America.

National Government: The legislative branch of the national government is represented by the National Assembly (formerly known as Congress). The Constitution eliminates the Senate and modifies the former bicameral division of Congress. Essentially, the National Assembly will have the same powers of the former Congress. The process for the enactment of laws however, has been significantly improved and reduced, as all bills will only be subject to two readings in the unicameral National Assembly. Additionally, referenda may be introduced to consult the people on draft laws and treaties, and possibly to recall public officials and representatives.

The presidential term has been increased to six years and the President is eligible for immediate re-election for one additional presidential term. The powers of the President have increased as the Constitution allows the National Assembly to authorize the President, through an enabling law, to legislate on any subject or area. Furthermore, the President has the power to dissolve the National Assembly if the latter decides, through a censure vote, on three occasions in the same constitutional period, to remove the Vice President appointed by the President. However, the National Assembly may not be dissolved during the last year of a constitutional period.

The Constitution creates the figure of the Vice President as the closest collaborator of the President in several matters, and as substitute in case of a temporary absence or when an indefinite absence occurs within the last two years of the constitutional period.

The national government may pass a series of laws to coordinate all national, state and municipal tax powers, and to limit or regulate state and municipal taxes. The national government may also create territorial taxes on rural property and on sales of real estate properties. These taxes will be collected and controlled by the municipalities.

Municipal Government: The figure of the mayor is expressly included in the Constitution, and his/her term of office is increased to four years. The powers of the municipalities are expanded so as to grant constitutional level to some tax powers already recognized under the Organic Municipal Regime Law. Double taxation between municipal and national authorities of hydrocarbon revenue is addressed by codifying the Supreme Court decision of August 17, 1999 exempting hydrocarbon exploitation from municipal taxation.

The Municipal Business Licence Tax is extended to include service activities along with the traditional commercial and industrial activities. However, the Constitution expressly states that power of the municipalities to levy the municipal Business Licence Tax is subject to the limitations established in the Constitution. The powers of the municipalities contained in the Constitution are independent and autonomous from the powers of the national or state governments.

Economic Regime: The Constitution establishes that economic activities are subject to certain free market and protectionist guidelines, such as free competition, efficiency and productivity considerations; and social justice and national economic sovereignty requirements. The State may reserve the rights to all industries, services and goods of public interest and strategic nature, by means of an organic law passed by the National Assembly. Historically, the State has reserved the rights to such industries as oil and gas, mining, electricity and telecommunications. Consequently, private investors may only perform reserved activities through concessions, permits, or authorizations granted by, or agreements entered into with, the State.

The Constitution maintains that the State will be the sole shareholder of Petróleos de Venezuela, S.A. (PDVSA), and PDVSA shares will not be sold or transferred to third parties. However, the possibility of sale of all or part of the shares owned by PDVSA in its subsidiaries, strategic associations, or companies is permitted. Such circumstances would present a unique opportunity for investors to participate in the Venezuelan oil industry. The reference in the Constitution to association agreements, recently upheld in the aforementioned Supreme Court decision, is an especially significant declaration in favour of the validity of these kinds of agreements under Venezuelan law.

Foreign investments are in principle treated equally to national investments; however, it is expressly established that foreign investors may not receive terms more favourable than national investors. Foreign investments are subject to certain specific cases of differentiated treatment that include:

(i) registration and notice requirements under Decisions Nº 291 and 292 of the Commission of Cartegena Agreement and their regulations under Decree Nº 2095;

(ii) national preference considerations under laws such as the Organic Law on Gas Hydrocarbons;

(iii) incentives applicable only to national investments under the Law for the Promotion and Protection of Investments; and

(iv) the use by the State of commercial policies to defend the economic activities of national companies under the Constitution.

We believe that international treaties for the promotion and protection of investments signed and ratified by Venezuela and foreign states will therefore play an important role in this context.

Taxation: The taxation system must promote fair distribution of the public burdens according to the economic status of the taxpayers, and should take into consideration the principle of progressiveness, the protection of the national economy, and the improvement of the standard of living of the people. This establishes the basis for verifying income tax rates and exemptions to the national income tax and value added tax.

The State may only collect taxes, levies, or contributions previously set and regulated by law. Similarly, taxpayers will only be entitled to claim those tax exemptions and benefits set and regulated by law. No tax shall have a confiscating effect or shall be payable through personal services. This principle has been included to some extent in the Law for the Promotion and Protection of Investments. Such provision could be used in the future by taxpayers to challenge aggressive tax rates imposed by municipalities for their Business Licence Tax.

The National Assembly is to substantially amend the Organic Tax Code before the end of the year 2000 so that:

(i) tax laws and rules will be interpreted in light of "substance-over-form;"

(ii) exceptions to the principle of non-retroactivity of law will be eliminated, and as a result, tax law changes more favourable to tax payers will be inapplicable to situations that occurred prior to the enactments of those laws;

(iii) the statute of limitations for actions concerning serious tax crimes will be eliminated, and consequently, perpetual responsibility for crimes and penalties will be created;

(iv) penalties against advisors, law firms, independent auditors and other professionals assisting in tax crimes will be included;

(v) penalties against tax evasion crimes will be significantly increased; and

(vi) penalties against tax crimes will be enforceable against the personal assets of directors and advisors taking part.

by Rubén Eduardo Luján and María Isabel Fleury García

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