How Living in Venezuela Affects U.S. Expats (When it comes to Taxes)

Situated on the northern coast of South America, Venezuela is considered a country with extremely high biodiversity, with habitats ranging from the Andes mountains in the west to the Amazon Basin rainforest in the south, extensive llanos plains and Caribbean coast in the center, and the Orinoco River Delta to the east. Venezuela is a country of vast potential.

If you are planning to become a U.S. expat in Venezuela, or have been one for a while, it’s important to know the tax laws of the country and the potential impact on your U.S. tax return. Expat taxes can get complicated. Fortunately, we have outlined the key points below.

Photo by: Jose ILIDIO Spinola

How Living in Venezuela Impacts U.S. Taxes

As a U.S. citizen or permanent resident (Greencard), you are required to file U.S. taxes even if you live in Venezuela. Plus, if you have assets in foreign financial accounts (e.g., foreign banks), there are informational reports you may be required to file. For example, U.S. Expats Living in Venezuela with $10,000 or more in foreign banks must file the FBAR (now known as FinCen 114).

Fortunately, the U.S. government provides various forms of tax relief that can lower or eliminate U.S. tax obligations

• The Foreign Earned Income Exclusion – It allows you to exclude a certain amount of income earned outside the U.S.
• The Foreign Housing Exclusion/Deduction – This one relates to additional income that can be excluded for household-related expenses tied to living abroad.
• The Foreign Tax Credit – It allows you to offset foreign taxes paid against U.S. tax obligations.

In most cases, the foreign earned income exclusion is preferable to the foreign tax credit if you live in a country with a lower tax rate than the U.S. (assuming your income is not above the applicable threshold). However, it’s a good idea to speak with an expat tax specialist to discuss the best application of these tax reliefs.

Taxation in Venezuela

Let’s start by understanding who is required to pay taxes in Venezuela. Residents are taxed on worldwide income, while non-residents are taxed only on Venezuelan-source income. Foreigners who spend over 183 days in the country during the current or previous year are considered residents for tax purposes.

The tax rates in Venezuela are progressive:

• Employment income for residents – Progressive from 6% to 34%
• Employment income for non-residents – Flat rate of 34%
• Interest income – Interest issued by Venezuelan banks are tax-exempt
• Capital gains – Same as employment income.

Venezuela and the U.S. have an income tax treaty in-place. International tax treaties clarify tax jurisdiction. These treaties can provide U.S. citizens and residents with reductions in foreign income taxes. However, a reduction in U.S. taxes is generally not available under these treaties as a result of “tax saving” clauses that allow the U.S. government to impose taxes on U.S. expats as if there were no treaty.

Venezuela and the U.S. do not have a social security tax agreement in-place. Therefore, certain U.S. expats will be required to pay into both social security programs.

FATCA and Venezuela

The U.S. government is increasingly interested in knowing about the foreign assets held by its citizens and residents. As a result, it has been busy inking deals with other countries whereby foreign financial institutions (FFIs) will be required to:

• Identify accounts of U.S. persons;
• Report certain information to the IRS regarding those accounts;
• Withhold a 30% tax on certain payments to non-participating FFIs and account holders unwilling to provide the required information

As of the publication of this article, roughly 80 countries have either signed intergovernmental agreements with the United States or are in discussions. Venezuela and the U.S. do not yet have a FATCA agreement in-place. However, you should be aware of the implications given that the IRS intends to expand FATCA’s reach in the upcoming years.

If you have any questions regarding your U.S. expat taxes, contact us today. We are here to help.