On November 21, 2013, Venezuela’s president, Nicolás Maduro, sought and obtained an expansion of Executive power allowing for control of the Venezuelan economy by decree. As a result, two groundbreaking new laws have been passed. The first, the Ley Para el Control de los Costos, Precios, y Ganancias y Protección de la Familia Venezolana (or Law for the Control of Costs, Prices, and Profits and Protection of the Venezuelan Family), caps profits for businesses across broad sectors of Venezuela’s economy. Although the manner in which Venezuela’s newly created regulation will be implemented is as of yet uncertain, Mr. Maduro has publicly stated that he intends to cap business profit margins at between 15 percent and 30 percent. The greatest impact of a profit cap may be felt by capital intensive/high-risk sectors such as technology, pharmaceuticals, and energy.
Venezuela's second major reform concerns trade and liquidity flows, and specifically U.S. dollar sales. Pursuant to the new law, two new supervisory bodies have been created: the Centro Nacional de Comercio Exterior (or National Center for Foreign Trade) and the Corporación Nacional del Comercio Exterior (or National Corporation of Foreign Trade). Generally, currency exchanges are highly regulated in Venezuela. In 2010, the private swap market was made illegal. Moreover, the existing state-operated swap market caps transactions at US$50,000 per day (with the implied exchange rate not reflecting the market rate). Although Venezuela may ease restrictions or allow the bolivar to devalue, it seems likely that dollar sales will continue to be regulated for the foreseeable future.
In the face of challenging economic times, tighter regulations on profits, currency exchanges, and imports may be likely. Depending on the industry involved, foreign companies seeking to invest in Venezuela must take these new regulatory measures into account.
Client Alert 2014-006