Peru's tax framework moves towards international standards

A raft of ongoing tax reforms is expected to focus largely on expanding the country’s tax base and curtailing tax evasion. There are five different types of corporations typically used by investors for the development of business activities in Peru that are regulated by the General Corporate Law (GCL).

These structures include joint stock companies, closely held corporations, publicly held corporations, limited liability companies and branches. The specific requirements of each of these models is outlined below.

Joint Stock Company: A minimum of two shareholders is required for this structure. Non-domiciled shareholders must elect a representative in Peru to sign off on the by-laws. There is no minimum capital required by law; however, it is the customary practice of financial institutions to request a minimum amount of PEN1000 ($308) as seed capital. Capital contributions can be made in national or foreign currency, and must be deposited in a local bank account. The liability of the shareholders is limited to the par value of the shares they hold. Shareholders’ meeting, board of directors and general management are the responsible institutions for the company’s management. The transfer of shares is free.

Closely Held Corporation: A minimum of two shareholders and a maximum of 20 is required for this corporate form. The liability of the shareholders is limited to the par value of the shares they hold. Shareholders’ meeting and general management are responsible for the company’s management (a board of directors is optional). Shares cannot be listed on the stock exchange. Shareholders have pre-emptive rights in the event that a transfer of shares to a third party is proposed; however, this right may be eliminated in the by-laws.

Publicly Held Corporation: This corporate type is generally used by companies with a large number of shareholders (more than 750), or for which an initial public offering of shares has been made, or those with convertible bonds, or in which more than 35% of the capital stock belongs to 175 or more shareholders. The company’s shares must be registered in the Public Registry of the Stock Exchange (Registro Público del Mercado de Valores, RPMV). The liability of the shareholders is limited to the par value of the shares they hold. Shareholders’ meeting, board of directors and general management are the bodies responsible for the company’s management. Publicly held corporations are supervised by the Stock Exchange Superintendence (Superintendencia del Mercado de Valores, SMV). Any restriction or limitation on the transfer of shares is prohibited.

Limited Liability Company: A minimum of two and a maximum of 20 partners is required. This type of company does not issue shares. The capital is divided into ownership interests or equal parts (“participations”), which are cumulative and indivisible. At the time of the incorporation, no less than 25% of each participation should be paid. The liability of the investors is limited to the par value of the participations they hold. Partners’ meeting and general management are responsible for the company’s management. The transfer of participations to third parties is subject to approval by the existing partners (pre-emption right is mandatory), must be formalised in public deed and be registered in the Public Registries of Companies.

Branch: The agreement to establish a branch on behalf of a foreign parent company must be legalised by the Peruvian consulate and certified by the Ministry of Foreign Affairs in Peru, if applicable, or failing that, be apostilled in the country of origin, before being issued to public deed and registered in the Public Registries. A certificate of good standing from the parent company is also required.

In accordance with the GCL, branches of foreign companies may be recharacterised into a legally incorporated company in Peru under any of the other corporate entity types regulated by the above-mentioned law.

Starting a Business

After selecting the legal form of the company the founding minutes are prepared. These must include detailed information of the company, including: founding shareholders or partners, the corporate purpose, by-laws and appointment of directors, among other items. It must be signed by a lawyer. The document is then presented before a notary public, who will submit it to public deed and prepare the forms for the registration of the company in the Public Registries.

A taxpayer registration number must be obtained from the National Superintendency of Customs and Tax Administration (Superintendencia Nacional de Aduanas y de Administración Tributaria, SUNAT). Likewise, a cheque account must be opened under the company’s name at a local bank. The GCL mandates that financial statements be prepared and presented in accordance with the legal provisions and accounting principles generally accepted in the country.

Companies in the financial sector are overseen by the Superintendency of Banking and Insurance (Superintendencia de Banca y Seguros, SBS), which establishes the specific requirements for that sector.

Certain businesses must prepare their financial statements in full compliance with the International Financial Reporting Standards issued by the International Financial Reporting Standards Board. This applies to companies with securities registered in the RPMV as well as to firms registered in the RPMV, which include:

• Brokerage agents;

• Companies managing mutual funds;

• Companies managing investment funds;

• Securitisation companies;

• Risk rating companies;

• Price vendors and other entities authorised by the SMV; and

• Companies managing collective funds and investment funds. Companies supervised by the SBS must prepare their financial statements observing the provisions determined by the SBS.

Corporate Income Tax

Companies incorporated in Peru are subject to income tax for their worldwide income. Non-domiciled corporations, their branches, agencies or permanent establishments are only taxed on their Peruvian-source income. The tax rate is 29.5% and it is applied to net income. Dividends received from other domiciled legal entities are exempt. Dividends received from non-domiciled entities are taxed at the rate of 29.5%.

Income Tax Repayments

Domiciled companies are obliged to make tax prepayments on income tax. The amount is determined by the sum that is greater when comparing the monthly instalments resulting from the application of the percentage or coefficent methods. The percentage method applies 1.5% to the total net income for the month. The coefficient method is calculated by dividing the tax from the previous fiscal year by the total net income for the same year and multiplying it by the factor of 1.0536 (this factor is only applicable for 2017 and January and February 2018). The resulting coefficient will be applied to the net income of the month. For the months of January and February, the coefficient is determined based on the calculated tax and net income of the fiscal year prior to the previous one.

It is possible to request the suspension of the obligation of making prepayments under certain circumstances. If the prepayments exceed the annual tax the excess can be carried forwards as a credit against future prepayments and even against the annual income tax of the following years – until exhausted – or a refund can be requested.

Deductions

In order to determine the net taxable income it is permitted to apply the deduction of expenses incurred in generation of income or maintenance of the source. In general, subject to certain requirements and conditions, deductions are allowed for:

• Interest;

• Insurance;

• Extraordinary (non-recurring) losses;

• Depreciation and pre-operating expenses;

• Authorised reserves;

• Write-offs and bad debt provisions; and

• Social benefits provisions, retirement pensions, bonuses and gratifications for employees, among others. Interest paid by domiciled taxpayers to related parties is not deductible in the portion that exceeds the result of applying a coefficient (i.e., the debt to equity ratio) of 3 to 1, at the close of the immediate preceding fiscal year.

Expenses incurred abroad are deductible provided that they be necessary for the generation of taxable income and have been accredited with the respective payment vouchers issued abroad. Expenses which are not accepted as deductions include, among others, personal expenses, assumed income tax (except in the case of interest), tax and administrative fines, donations, expenses without proof of payment, and reserves or provisions not permitted by law.

Capital Gains

Capital gains resulting from the disposal of certain securities are exempt from income tax as long as they comply with certain requirements. This exemption will be in force until 2019 according to Law 30341 and Legislative Decree 1262.

Common stock, investment shares and convertible bonds are exempt if they meet the following conditions:

• Disposed of through the Lima Stock Exchange (Bolsa de Valores de Lima, BVL);

• In any given 12-month period the taxpayer and its related parties must not transfer more than 10% of the total securities issued by the company whose securities are sold; and

• Securities must have a stock market presence. Exchange traded fund units (the underlying assets of which are shares and/or debt), debt securities, participation certificates in mutual investments funds, among others, are exempt provided they meet the first and third requirements listed above. Negotiable invoices must be disposed of through the BVL to be exempted.

Debt securities, participation certificates in mutual investments funds, participation certificates in real estate investment trust, participation certificates in securitisation trusts for the investment in income of real estate and negotiable invoices must be disposed of through the BVL to be exempted.

Income Tax Withholding

In the case of Peruvian-source income obtained by non-domiciled entities, the income tax withholding must be applied by Peruvian companies depending on the type of income.

For dividends and other forms of profit distribution, as well as the remittance of profits from the branch, the rates vary according to year. The withholding tax rates are as follows:

• 4.1% up to December 31, 2014;

• 6.8% in 2015 and 2016; and

• 5% from 2017 onwards. Capital gains on disposal of transferable securities through the BVL are subject to a 5% rate except when qualifying for the exemption contained in Law 30341 – modified by Legislative Decree 1262. This category includes:

• Disposal or redemption of shares, bonds or other securities issued by companies incorporated in Peru; and

• Indirect disposal of shares of Peruvian companies. Capital gains on disposal of transferable securities aside from the BVL is taxed at a rate of 30%.

This category includes:

• Disposal or redemption of shares, bonds or any other securities issued by companies incorporated in Peru; and

• Indirect disposal of shares of Peruvian companies. Other types of income are subject to withholding tax as outlined below:

• 4.99% for interest, if certain requirements are met;

• 30% for interest paid to related companies abroad;

• 15% for technical assistance services economically used in Peru;

• 30% for digital services economically used in Peru;

• 30% for royalties; and

• 30% for other income resulting from business activities carried out in Peruvian territory. Income that is derived from activities performed partially in Peru and partially abroad by non-domiciled entities, including that obtained by their branches or permanent establishments, is subject to the following effective income tax rates:

• 0.3% on air transport, unless reciprocal exoneration applies;

• 0.6% on chartering or maritime transport, unless reciprocal exoneration applies;

• 2.1% on insurance;

• 8% on vessel lease, with a withholding rate of 10%;

• 6% on aircraft lease, with a withholding rate of 10%;

• 1.5% on telecommunications services;

• 3% on international news agencies;

• 6% on cinema films distribution;

• 4.5% on supply of transport containers;

• 24% on demurrage of transport containers; and

• 6% on television broadcasting rights assignment.

Tax Havens

Companies domiciled in the country cannot deduct, for effects of determining their income tax, the expenses derived from transactions performed with individuals or entities residing in countries or territories with low or no taxation (tax havens), nor shall they have the right to offset losses incurred by these transactions with foreign-source income, except in the case of transactions involving:

• Loans;

• Insurance and reinsurance;

• Assignment for use of vessels or aircraft;

• Transport performed from abroad to the country and vice-versa; and

• Fee for transit through the Panama Canal, as long as they are agreed at market value. As of January 2019 countries that belong to the OECD shall not be considered tax havens for income tax purposes. Derivative financial instruments entered into with taxpayers domiciled in tax havens shall be considered speculative, in which case losses may only be offset with profits of the same kind.

Transfer Pricing

Transfer pricing rules are based on the arm’s length principle, as interpreted by the OECD, and must be considered exclusively for income tax purposes. In Peru these rules are applied to transactions between related parties and to transactions with companies domiciled in tax havens. Nevertheless, the value agreed by the parties involved must only be adjusted when they generate a tax collection detriment. The value of transactions subject to transfer pricing rules shall be determined in accordance with any of the internationally accepted methods, for which purpose the one found to best reflect the current economic reality of the operation shall be considered.

However, there are certain parameters to be considered in order to accurately determine the market value in the specific case of export or import operations of goods with a known price in the international market, the local market or the market of destination, including those of derivative financial instruments, or with prices that are fixed by reference to the prices of these markets.

Likewise, for deducting the consideration of services as cost or expense, the domiciled company must comply with the benefit test (demonstrate that the service has provided economic or commercial value, improving or maintaining its commercial position) and provide the documentation that proves the effective provision of the service, the actual need for the service, costs or expenses incurred by the service provider, and the allocation criteria, among others.

It is possible to enter into advance transfer pricing agreements with SUNAT, which may be unilateral or bilateral. Domiciled companies subject to the scope of transfer pricing rules, whose revenues accrued during the fiscal year exceed approximately $2.8m must submit the local file affidavit annually. Taxpayers who are part of an economical group whose income accrued in the fiscal year exceeds approximately $24.5m must submit the master file informative affidavit annually, containing, among other things, the organisational structure, the description of the business or businesses and the transfer pricing policies regarding intangibles, group financing and their fiscal-financial position. Likewise, taxpayers who are part of a multinational group must submit an annual country-by-country report, an informative affidavit containing, among other details, information related to the global distribution of income, taxes paid and business activities of each of the entities belonging to the multinational group that carry out their activity in a particular country or territory.

Means of Payment

Any payment that exceeds the amount of PEN3500 ($1080) must be made through any of the so-called means of payment, which include bank deposits, money orders, money transfers, payment orders, debit or credit cards issued in the country, and non-negotiable cheques. Not using these means of payment results in failure to recognise the cost or the expense related to that payment for income tax purposes. In addition, the value-added tax (VAT) paid in such transaction may not be used as a tax credit.

International Tax Transparency

Starting on January 1, 2013, the International Tax Transparency Regime was incorporated, applicable to taxpayers domiciled in Peru who are owners of controlled non-domiciled entities regarding their passive income, provided that they are subject to income tax in Peru for their foreign-source income.

This system includes the passive income obtained through controlled non-domiciled entities in the taxable income of the individuals and companies domiciled in Peru, even when there is no effective distribution of the dividends related to such passive income. The law established the following requirements that a foreign company must comply with to be qualified as a controlled non-domiciled entity:

• To have a different legal identity from those of the persons that integrate it;

• To be incorporated, established, resident or domiciled in: (i) a tax haven or (ii) in a country or territory in which the passive income is not subject to income tax or it is less than 75% of the income tax applied in Peru; and

• To be owned by an individual domiciled in Peru, which occurs when the taxpayer holds either directly or indirectly an equity – individually or jointly with its related parties domiciled in the country – in more than 50% of the capital, results or voting rights of that entity. It has been established, for the application of the regime, a restrictive list of concepts that qualify as passive incomes (for example, dividends, interest, royalties, capital gains coming from the alienation of real estate property and securities) and a list of excluded concepts. Likewise, it has been established that if the income that qualifies as passive income is equal to or exceeds 80% of the total income of the controlled non-domiciled entity, its total income will be deemed to be passive income.

Legal Stability Agreements

The state investment promotion agency ProInversión on behalf of the Peruvian state, can enter into legal stability agreements guaranteeing foreign investors that they will enjoy the stability of the legal and tax system applicable to the investors and companies receiving these investments. For that purpose, contributions to the capital of an established company or a company to be established in Peru for an amount not less than $10m in the mining and hydrocarbons sector or $5m in any other sector are required. This investment can be made within a maximum two-year period. The term of the legal stability agreement is 10 years, except for those who have entered into a concession contract for the construction and use of public infrastructure works and/or the provision of public services, in which case the concession deadline applies instead.

Double Taxation Treaties

Currently, to avoid double taxation, Peru has signed and ratified treaties with the following countries:

• Brazil;

• Canada;

• Chile;

• Mexico;

• Portugal;

• South Korea; and

• Switzerland. Peru is also part of the Andean Community, along with Colombia, Ecuador and Bolivia. In this regard, Decision No. 578 is applicable for avoiding the double taxation between those countries, by prioritising the taxation at the source, using the exemption method.

VAT Regulation

VAT is levied on the sale of goods in the country, the provision and use of services and the importation of goods, with an 18% rate (including 2% for municipal promotion tax). Corporate reorganisations are not subject to this tax.

The export of goods is not taxable. In the case that the transfer of ownership occurs in the country, the goods must be subject to a Customs process for definitive export, within the deadlines established by the regulation, for not taxing the sale with VAT. If the established terms expire without the goods having been shipped it will be assumed that the operation was performed in national territory, and it shall be levied with VAT, unless it qualifies as an exempt operation.

The export of services is not taxable with VAT. Operations considered to be export of services must comply with the following requirements:

• They correspond to an onerous transaction;

• The exporter is domiciled;

• The user is non-domiciled; and

• The use or exploitation of the services by the non-domiciled party occurs abroad. In addition, exporters must be registered in the registry of service exporters administered by SUNAT.

Note that the VAT Law uses the debit/credit system, under which the VAT that is paid on sales is offset against the VAT paid on purchases. The VAT not applied as credit in a particular month may be carried forwards to the following months until it is used up. This credit is not subject to prescription or to expiration terms.

The VAT paid on purchases related to the export of goods and/or services shall entitle a balance in favour of the exporter. This may be offset against the VAT paid on local sales, if any. If there is a remaining amount, it may be offset against income tax or against other public Treasury tax debts. If there is a remaining amount, a refund can be requested. The compensation and/or refund is subject to a limit.

VAT Recovery Regimes

Individuals or legal entities who perform investments in any sector of the economy, who generate third-category income and who have a project in a preoperative phase of two or more years, may benefit from the VAT Early Recovery Special Regime and request the return of the VAT levied on the local imports and/or acquisitions of new capital goods, new intermediate goods, construction services and contracts used directly in the execution of the corresponding project.

For this purpose, it is necessary to have an investment agreement signed with ProInversión and the corresponding sector related to the activity of the project, which will also issue a ministerial resolution qualifying the applicant as beneficiary of the regime. The minimum amount of the contract investment commitment is $5m, except for investments to be made in the agricultural sector, which is exempt from this requirement.

Moreover, there is a VAT definitive return regime, which consists in returning the VAT transferred or paid for the acquisition of certain goods and services directly related to the development of exploration activities during the exploration phase. This regime can be applied by:

• Individuals or legal entities who are holders of mining concessions; and

• Investors who have signed license or services contracts under the Hydrocarbons Law. For these purposes, in both cases the beneficiary must be in the exploration phase. In addition, in the case of holders of mining concessions, an exploration investment programme must be signed, involving a minimum investment amount of $500,000.

Excise Tax

Excise tax is a tax to the consumption of specific goods, such as fuels, cigarettes, beer, liquors, carbonated drinks, gambling and bets, among others. It is applied under three systems:

• Specific, involving a fixed amount in new soles per unit of measurement;

• At value, based on a percentage of the sale price; and

• Retail price, based on a percentage of the price suggested to the public. Goods subject to excise tax and applicable rates have been recently modified, specifically regarding sodas, alcoholic beverages, cigarettes, fuels and vehicles.

Temporary Net Assets Tax

The Temporary Net Assets Tax (ITAN) is equivalent to 0.4% of the total value of net assets that exceed PEN1m ($308,000) determined at December 31 of the previous year. Companies in the pre-operational stage are excluded. ITAN is a credit against income tax, and a refund may be requested if it has not been fully offset by the close of the fiscal year. However, to avoid double taxation issues, subsidiaries and branches of foreign companies may choose to use the amount effectively paid for income tax prepayments corresponding to the month of March and the followings of each year to offset the ITAN. In this way, foreign companies can claim as a foreign credit in their country of origin the income tax paid in Peru, instead of a tax levied on their assets.

Tax on Financial Transactions

The tax on financial transactions is levied at a rate of 0.005% and applies to deposits and withdrawals in accounts of financial institutions in Peru.

Customs Tax

The import of goods is subject to the payment of Customs duties, of which current ad valorem rates are set at 0%, 6% and 11%. Likewise, VAT of 18% is applied in the import of goods. In addition, depending of the merchandise type, its importation could also be subject to the payment of the following:

• Excise tax;

• Anti-dumping duties; or

• Countervailing duties, among others. In the case of the import of goods subject to the payment of anti-dumping and countervailing duties, it should be noted that the former is applied to some imported goods when the price discrimination could harm or threaten to harm a branch of national production. However, countervailing duties are applied when the imported goods are subsidised in the country of origin, and at the time of importation it could harm or threaten to harm a branch of national production. The application of taxes and Customs duties is as follows:

• Customs duties include rates of 0%, 6% and 11%, based on cost, insurance and freight value;

• The rate of Customs duties applied depends on the type of imported good;

• Capital goods are generally subject to a zero rate;

• VAT is set at 18%, based on cost, insurance and freight, and Customs duties;

• VAT could be used as a tax credit by the importer; and

• Certain assets are additionally subject to the selective consumption tax.

Drawback Regime

The drawback regime allows producer-exporter companies to totally or partially recover the Customs duties paid on the import of specific categories of goods provided the cost, insurance and freight import value does not exceed 50% of the free on board value of the exported product, and that all the established requirements are met in order to be eligible for this benefit. The goods to which this regime applies are:

• Raw materials;

• Inputs;

• Intermediate products; and

• Parts and pieces incorporated or used in the production of goods to be exported. The applicable drawback rate is equivalent to 4% of the free on board value of the exported product; however, from 2019 the rate will be 3%.

Commercial Treaties

Peru is currently a member of several regional and international trade blocs, including:

• The World Trade Organisation;

• The Andean Community;

• The Southern Common Market, also known as Mercosur;

• The Asia-Pacific Economic Cooperation; and

• The Pacific Alliance. Likewise, Peru has free trade agreements currently in force with: Canada, China, Chile, Costa Rica, Cuba, the EU, the European Free Trade Association, Honduras, Japan, Mexico, Panama, Singapore, South Korea, Thailand, the US and Venezuela.

Personal Taxation

Peruvian citizens domiciled in Peru are subject to taxation on their worldwide income. On the contrary, individuals not domiciled in Peru are only taxed in this country on their Peruvian source income. Foreigners residing or staying in Peru for more than 183 days within any given 12-month period will have the status of individuals domiciled in the country from January 1 of the following fiscal year in which the duration of stay expires.

In the case of individuals domiciled in Peru, income tax for the fourth and fifth categories, which are originated by the incomes from a personal work source (independent and dependent, respectively), as well as from a foreign-source income, is computed at a progressive cumulative rate, as follows:

• 8% up to five indexed tax units of account ( unidades impositivas tributaries, UITs); one UIT is equivalent to $1227;

• 14% on five-20 UITs;

• 17% on 20-35 UITs;

• 20% on 35-45 UITs; and

• 30% on anything over 45 UITs. For wages, salaries and other remuneration gained from performing dependent or independent work, the non-taxable minimum is seven UITs ($8500). The amounts paid for certain services (real estate rental, doctors, lawyers, architects, etc) may be deducted as an expense, up to three UITs ($3600), provided certain requirements are met. Lastly, a deduction of 20% on the independent labour income is permitted.

Capital Income

For its part, the income obtained by domiciled individuals from the lease, sublease and assignment of assets (first category income), as well as other capital incomes (second category income), are subject to an effective rate of 5% of gross income.

Dividends distributed by companies incorporated or established in Peru, received by individuals, are subject to the following rates:

• 4.1% on accrued results as of December 31, 2014;

• 6.8% on results generated in 2015 and 2016; and

• 5% on results generated from 2017 onwards.