The Inward

Appendix 1

Investment and
ABOUT THE AUTHORS
International
Taxation Review
Fifth Edition

Editor
Tim Sanders

Law Business Research

733
 The Inward Investment and
International Taxation Review

The Inward Investment and International Taxation Review

Reproduced with permission from Law Business Research Ltd.

This article was first published in The Inward Investment and International Taxation
Review - Edition 5
(published in January 2015 – editor Tim Sanders).

For further information please email

Nick.Barette@lbresearch.com
 The Inward
Investment and
International
Taxation Review

Fifth Edition

Editor
Tim Sanders

Law Business Research Ltd

 ACKNOWLEDGEMENTS

The publisher acknowledges and thanks the following law firms for their learned
assistance throughout the preparation of this book:

ABOU JAOUDE & ASSOCIATES LAW FIRM

ǼLEX

AFRIDI & ANGELL

A&L GOODBODY

BAKER & MCKENZIE

BIRIŞ GORAN SPARL

BLP

BRATSCHI WIEDERKEHR & BUOB LTD

CASTRÉN & SNELLMAN ATTORNEYS LTD

CHIOMENTI STUDIO LEGALE

DAVID GRISCTI & ASSOCIATES

D’EMPAIRE REYNA ABOGADOS

DUANE MORRIS

ENSAFRICA

GALAZ, YAMAZAKI, RUIZ URQUIZA, SC (DELOITTE MÉXICO)

GORRISSEN FEDERSPIEL

GRAU ABOGADOS

GREENWOODS & HERBERT SMITH FREEHILLS

i
 Acknowledgements

GRETTE DA

HERZOG FOX & NEEMAN

KPMG LAW LLP

LEE & KO

LOYENS & LOEFF

MKONO & CO ADVOCATES

MOCHTAR KARUWIN KOMAR

MOTIEKA & AUDZEVIČIUS

NISHIMURA & ASAHI

NISHITH DESAI ASSOCIATES

PEPELIAEV GROUP

POTAMITISVEKRIS

QUEVEDO & PONCE

RÖDL & PARTNER

SIGUION REYNA, MONTECILLO AND ONGSIAKO LAW FIRM

SKADDEN, ARPS, SLATE, MEAGHER & FLOM LLP

SKATTEANALYS ADVOKATBYRÅ

SOŁTYSIŃSKI KAWECKI & SZLĘZAK

SRS ADVOGADOS

URÍA MENÉNDEZ

VEIRANO ADVOGADOS

ii
 CONTENTS

Editor’s Preface ���������������������������������������������������������������������������������������������������ix

Tim Sanders

Chapter 1 BASE EROSION AND PROFIT SHIFTING����������������������������1

Jennifer Wheater

Chapter 2 AUSTRALIA�������������������������������������������������������������������������������8
Adrian O’Shannessy and Tony Frost

Chapter 3 BELGIUM��������������������������������������������������������������������������������23
Christian Chéruy and Marc Dhaene

Chapter 4 BRAZIL������������������������������������������������������������������������������������44
Silvania Tognetti

Chapter 5 CANADA����������������������������������������������������������������������������������58
KA Siobhan Monaghan

Chapter 6 CHINA�������������������������������������������������������������������������������������72
Jon Eichelberger

Chapter 7 COSTA RICA���������������������������������������������������������������������������88

Vittoria Di Gioacchino

Chapter 8 DENMARK������������������������������������������������������������������������������99
Jakob Skaadstrup Andersen

Chapter 9 ECUADOR�����������������������������������������������������������������������������113
Alejandro Ponce Martínez

Chapter 10 FINLAND������������������������������������������������������������������������������126
Sanna Linna-Aro, Kirsi Sävelkoski and Anne Vanhala

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 Contents

Chapter 11 FRANCE���������������������������������������������������������������������������������140
Philippe Derouin

Chapter 12 GERMANY�����������������������������������������������������������������������������166
Hans R Weggenmann

Chapter 13 GREECE���������������������������������������������������������������������������������178
Aspasia Malliou, Dimitris Gialouris and Ifigeneia Efthimiou

Chapter 14 INDIA�������������������������������������������������������������������������������������190
Nandini Pathak and TP Janani

Chapter 15 INDONESIA��������������������������������������������������������������������������213
Mulyana, Sandi Adila, and Sumanti Disca Ferli

Chapter 16 IRELAND�������������������������������������������������������������������������������229
Peter Maher

Chapter 17 ISRAEL�����������������������������������������������������������������������������������250
Meir Linzen

Chapter 18 ITALY��������������������������������������������������������������������������������������267
Paolo Giacometti and Giuseppe Andrea Giannantonio

Chapter 19 JAPAN�������������������������������������������������������������������������������������284
Michito Kitamura and Tsuyoshi Ito

Chapter 20 KOREA�����������������������������������������������������������������������������������299
Young Uk Park and John Kwak

Chapter 21 LEBANON�����������������������������������������������������������������������������313
Souraya Machnouk, Hachem El Housseini, and Ziad Maatouk

Chapter 22 LITHUANIA��������������������������������������������������������������������������326
Mantas Juozaitis and Edvinas Lenkauskas

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 Contents

Chapter 23 LUXEMBOURG��������������������������������������������������������������������341
Pieter Stalman and Chiara Bardini

Chapter 24 MALTA�����������������������������������������������������������������������������������359
David Griscti

Chapter 25 MEXICO��������������������������������������������������������������������������������375
Eduardo Barrón and Carl E Koller Lucio

Chapter 26 NETHERLANDS�������������������������������������������������������������������398
Marc Klerks, Renée van der Maat and Louis Lutz

Chapter 27 NIGERIA��������������������������������������������������������������������������������414
Theophilus I Emuwa and Chinyerugo Ugoji

Chapter 28 NORWAY�������������������������������������������������������������������������������425
Thomas E Alnæs and Elisabeth Hansen

Chapter 29 PERU��������������������������������������������������������������������������������������439
César Castro Salinas and Rodrigo Flores Benavides

Chapter 30 PHILIPPINES�������������������������������������������������������������������������455
Ferdinand M Hidalgo

Chapter 31 POLAND��������������������������������������������������������������������������������465
Jarosław Bieroński

Chapter 32 PORTUGAL���������������������������������������������������������������������������493
Paula Rosado Pereira and José Pedroso de Melo

Chapter 33 ROMANIA�����������������������������������������������������������������������������508
Gabriel Biriş and Ruxandra Jianu

Chapter 34 RUSSIA�����������������������������������������������������������������������������������526
Andrey Tereschenko

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 Contents

Chapter 35 SOUTH AFRICA�������������������������������������������������������������������536

Peter Dachs, Bernard du Plessis and Magda Snyckers

Chapter 36 SPAIN�������������������������������������������������������������������������������������559
Miguel Bastida Peydro and Laura Eguaras Córdoba

Chapter 37 SWEDEN�������������������������������������������������������������������������������573
Lennart Larsson

Chapter 38 SWITZERLAND��������������������������������������������������������������������586
Michael A Barrot

Chapter 39 TAIWAN���������������������������������������������������������������������������������601
Michael Wong and Dennis Lee

Chapter 40 TANZANIA����������������������������������������������������������������������������611
Nimrod E Mkono and Ofotsu A Tetteh-Kujorjie

Chapter 41 THAILAND���������������������������������������������������������������������������625
Panya Sittisakonsin and Sirirasi Gobpradit

Chapter 42 UNITED ARAB EMIRATES�������������������������������������������������639

Gregory J Mayew and Silvia A Pretorius

Chapter 43 UNITED KINGDOM�����������������������������������������������������������655

Tim Sanders

Chapter 44 UNITED STATES������������������������������������������������������������������679

Hal Hicks, Moshe Spinowitz and Robert C Stevenson

Chapter 45 VENEZUELA�������������������������������������������������������������������������704
Alberto Benshimol and Humberto Romero-Muci

Chapter 46 VIETNAM������������������������������������������������������������������������������718
Fred Burke and Nguyen Thanh Vinh

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 Contents

Appendix 1 ABOUT THE AUTHORS�����������������������������������������������������733

Appendix 2 CONTRIBUTING LAW FIRMS’ CONTACT DETAILS�����759

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 EDITOR’S PREFACE

Cross-border corporate structures and transactions are under ever closer scrutiny.
While a global economy requires the free movement of capital, goods and services and
legitimate cross-border financing and business acquisitions, governments are increasingly
concerned by the potential this activity creates for artificial erosion of their tax base and
are taking action to protect it. In response to this trend, the current edition has a chapter
dedicated to ‘BEPS’: the OECD Action Plan on Base Erosion and Profit Sharing.
Recent, tangible examples of governments acting to protect their tax base
include Notice 2014-52 issued by the US Treasury on 22 September, in response to US
corporates relocating their headquarters to non-US jurisdictions. The Notice describes
regulations that the US government intends to issue to curtail tax benefits of US
corporate inversions where the transaction closes on or after the issue date of the Notice,
with no grandfathering for signed but yet to be completed transactions. The Notice also
indicated that the US Treasury is reviewing its tax treaty policy and the extent to which
it is appropriate for inverted groups to obtain treaty benefits. A further example is the
UK government’s plan to publish a consultation document on new measures to prevent
multinational companies exploiting differences between countries’ tax rules through the
use of ‘hybrid mismatch’ arrangements, the focus of action 2 of the OECD’s BEPS
action plan on international corporate tax avoidance. In the UK Autumn Statement
draft legislation was put forward to introduce a new UK tax called diverted profit tax at
25 per cent on profits deemed to have been diverted from the UK (1) through entities,
including UK corporate taxpayers, or by means of transactions that deliver effective tax
mismatch outcomes without sufficient underlying economic substance or (2) as a result
of planning designed to avoid trading in the UK through a UK permanent establishment.
These are not isolated examples.
The concern is that legitimate cross-border commercial activity will become
caught up in attempts to curtail what governments regard to be artificial and unacceptable
activity. At the extremes the distinction between what is genuine commercial activity and
artificial manipulation is clear but there is a middle ground where legitimate commercial
transactions and activity also generate tax benefits and how this area will be caught up

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 Editor’s Preface

in the drive to tackle perceived cross-border abuse is an area to watch. Whatever the
obstacles, companies will continue to trade in the global economy, across borders and as
governments increasingly target such activity there will be a pressing need for the adviser
to consider the potential impact these initiatives could have on their clients’ tax affairs.
The aim of this book is to provide a starting point for readers, and to assist
businesses and advisers, each chapter providing topical and current insights from leading
experts on the tax issues and opportunities in their respective jurisdictions with a chapter
on the overarching potential impact of BEPS. While specific tax advice is always essential,
it is also necessary to have a broad understanding of the nature of the potential issues and
advantages that lie ahead; this book provides a guide to these.
I should like to thank the contributors to this book for their time and efforts, and
above all for their expertise. I would also like to thank the publisher and the team for
their support and patience. I hope that you find the work useful, and any comments or
suggestions for improvement that can be incorporated into any future editions will be
gratefully received.
The views expressed in this book are those of the authors and not of their firms,
the editor or the publishers. Every endeavour has been made to ensure that what you
read is the latest intelligence.

Tim Sanders
Skadden, Arps, Slate, Meagher & Flom LLP
London
January 2015

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 Chapter 29

PERU
César Castro Salinas and Rodrigo Flores Benavides1

I INTRODUCTION

Since 1992, Peru has experienced sustained and steady economic growth, mainly
fuelled by the implementation of a social market economy model that recognised the
importance of promoting the creation of wealth and guaranteeing the freedom of private
enterprise, commerce and industry. The participation of governmental and public
entities in business activities has diminished progressively, to the extent that it can now
be considered subsidiary and reserved for exceptional cases of overriding public interest,
leaving the matter in the hands of private companies.
In this scenario, foreign investment has played an essential role. Indeed, in
the 1990s, the Peruvian government established an attractive constitutional and legal
framework that, complemented by its strong macroeconomic performance and stable
policies, has encouraged foreign business presence to increase every year in Peru.
Among other factors, the achievement of this important economic growth has
been possible due to the following guarantees granted to foreign investors:
a equal treatment to national and foreign investment;
b free production of goods and services and foreign trade;
c no limitations or restrictions on the possession and disposition of foreign currency
and remittance of funds abroad;
d free market, and prohibition of monopolistic practices and abuse of dominant
position; and
e the ability to execute legal and tax stability agreements with the government.

1 César Castro Salinas is a partner and Rodrigo Flores Benavides is a senior associate of Grau
Abogados.

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 Peru

In addition, Peru has executed over 30 bilateral investment treaties establishing the terms
and conditions for the protection of private investment. In several cases, such treaties have
been subsumed under other commercial agreements with wider scope (such as free trade
agreements), which contain specific chapters related to the promotion and protection of
private investment. Peru has executed free trade agreements with Canada, Chile, China,
Costa Rica, the EFTA countries (Iceland, Liechtenstein, Norway and Switzerland), the
EU, Guatemala, Korea, Japan, Mexico, Panama, Singapore, Thailand and the United
States, and recently with Venezuela.
Peru is a signatory to the Convention on the Settlement of Investment Disputes
(ICSID) between States and Nationals of Other States. Its membership was approved
by Congress, and entered into force in 1993. Peru is also a member of the Convention
for the Multilateral Investment Guarantee Agency (MIGA), which grants insurance
against political non-commercial risks. The New York Convention on the Recognition
and Enforcement of Foreign Arbitral Awards has been, since 1988, enforceable in Peru.

II COMMON FORMS OF BUSINESS ORGANISATION AND THEIR

TAX TREATMENT

The most commonly used business entity in Peru is the corporation. Depending on the
number of shareholders, the existence of restrictions on the transfer of shares and some
other factors treated in more detail in the following paragraphs, corporations may adopt
two additional sub-types: close corporation and public corporation.
Other entrepreneurial forms to set up a business presence in the country are the
limited liability company and – mostly in the specific case of foreign investors – the
branch.
As a general rule, all business entities established in Peru are subject to taxation on
their net income (i.e., they are taxed only for the difference between the revenues derived
from their economic activities and the expenses incurred for such purpose).

i Corporate
Businesses generally adopt a corporate form (corporation, limited liability company or
branch). The most relevant characteristics and key differences of these types of entities
are as follows.

Corporations
A corporation is created with the contributions of at least two shareholders (either local
or foreign individuals, or legal entities) to perform certain economic activities with the
aim of obtaining profits in return. There is no maximum number of shareholders.
The liability of the shareholders with third parties is limited to the amount of their
respective equity contributions (capital). The funds initially invested must be deposited
in a local banking account.
The articles of incorporation and by-laws of the corporation must be converted
into a public deed with a notary and then registered with the Public Registry, which gives
place to the legal ‘birth’ of the corporation.

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The bodies of the corporation are:

a the general shareholders’ meeting (maximum body formed by the owners of the
company, which decides by majority on the relevant matters thereof );
b the board of directors (body in charge of designing the economic policies of the
company, submitting for the consideration of the shareholders’ meeting annual
reports and balance sheets, and profits distribution); and
c general management, represented by a chief executive officer (in charge of executing
the economic strategies and ordinary business activities of the company).

Close corporations
Unlike the regular corporation, in close corporations the maximum number of
shareholders is 20 and the transfer of shares may be subject to some limits and restrictions,
if agreed upon by the shareholders.
Likewise, the existence of a board of directors in this type of corporation is
optional.

Public corporations
Public corporations must be registered with the Stock Market Superintendency (SMV)
and their shares must be listed on the Stock Exchange Market.
Due to its public nature, transfer of shares is completely free in this type of
corporation.

Limited liability companies

The setting up, steps and liability parameters of limited liability companies (LLCs) are
the same as those for corporations. Likewise, with regards to the number of shares and
managing bodies, LLCs resemble close corporations without a board of directors.
Unlike all other types of corporations, LLCs do not issue shares in favour of their
partners, but ‘participation’ titles. Transfer of such titles is subject to first refusal rights of
the existing partners and must be formalised through a public deed and registered with
the Public Registry (which is not required by corporations).

Branches
Companies, whether established in Peru or abroad, may freely organise branches in the
country following similar procedures to those required for the creation of corporations.
The formal document containing the agreement of the parent company for the creation
of the branch, describing the latter’s line of business, capital assigned and appointment
of legal representatives with detail of its powers, among others, must be converted
into a public deed and subsequently registered with the Public Registry. In addition, a
certificate that proves the existence of the parent company (certificate of good standing)
must be provided.
From a legal standpoint, branches do not have a status independent of their
parent companies, but rather constitute an ‘extension’ to them. Nevertheless, branches
represent parent companies with autonomy on management matters, within the scope
of the activities duly assigned by them, and are considered as independent local taxpayers
from a tax standpoint.

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 Peru

ii Non-corporate
Even though the predominant way of doing business in the country is through corporate
entities, there are some non-corporate forms used in particular cases, such as consortium
agreements and joint ventures.
These associative agreements (partnerships) are regularly used when two or more
companies or individuals, not wishing to create a new legal entity, are interested in
participating in a specific business activity or work (usually subject to a fixed term),
for the purposes of which each of the participants is prepared to contribute determined
‘specialised’ resources of their own for the benefit of the common interest (funds, services,
immoveable property, know-how, workforce, client portfolios, etc.).
With respect to the applicable tax provisions, partnerships must keep accounting
records that are independent of those of the partners (unless otherwise authorised by
the tax administration), so that they are treated as separate taxpayers. Due to this legal
fiction, partnerships are taxed on the difference between the revenues generated by the
specific activities or works conducted and the expenses incurred in the development of
those activities.
In those cases where the partnerships do not keep independent accounting records,
they will be treated as transparent entities, meaning that revenues and expenses will be
attributed to the contracting parties, in proportion to their respective participation in
the business.

III DIRECT TAXATION OF BUSINESSES

i Tax on profits
Regardless of the individuals’ nationality, the companies’ place of incorporation and the
location of the productive source, resident entities are subject to income tax on their
worldwide income, while non-resident entities and their branches, agencies and permanent
establishments (PEs) are only taxed in respect of their domestic-sourced income.
Income subject to taxation is that obtained from capital, work, and from the joint
application of both factors (i.e., enterprises); capital gains; other profits derived from
third parties’ operations; and some specific imputed income. In order to assess the taxable
profits, taxpayers are entitled to deduct all expenses required for the generation of income
or maintenance of its source, as well as those related to the generation of capital gains,
provided that they are not specifically forbidden by law. In other words, tax legislation
has adopted a broad criterion for the deduction of expenses. Therefore, it is acceptable to
deduct, inter alia, interest derived from debts contracted to acquire goods or services related
to the generation of taxable income or the maintenance of the productive source; insurance
premiums covering risks over transactions, services and goods related to the production
of taxable income; write-offs for bad debts and equitable provisions for the same purpose;
awards, bonuses, compensations and, in general, payroll payments agreed for staff; royalties;
and travel expenses incurred in connection with the business activities.
Likewise, depreciation of fixed assets and amortisation of finite intangible
property, when related to the generation of taxable income, are also deductible. With
respect to depreciation of assets, tax law has adopted the straight-line method, with
maximum annual rates. For the depreciation to be accepted, it has to be recorded on the

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 Peru

accounting books of the company, and the corresponding assets have to be related to the
generation of income or maintenance of its source.
On the other hand, tax law contains a list of non-deductible expenses, such as
personal and living expenses of the taxpayer and his or her relatives; fines, surcharges
and interest applied by governmental entities; donations not complying with legal
requirements; expenses not supported with proper formal documentation and expenses
incurred with entities domiciled or established in tax havens.
The starting point for determining taxable income is the profit and loss statement
derived from accounting recorded in companies’ books, which are adjusted in accordance
with the previously mentioned rules on deductible and non-deductible expenses. Taxable
profits and deductible expenses are computed on an accrual basis (a cash flow or receipt
of funds is not necessary).

Capital and income

In general terms, both income and capital gains obtained by resident entities are taxed
in the same manner.

Losses
Tax losses may be relieved by carrying them forward and applying them to the income
obtained in subsequent fiscal years. There are two possible carry-forward systems that
companies may choose between:
a system A allows losses to be carried forward for up to four years, as from the year
following on from the generation of the losses; and
b system B allows losses to be carried forward indefinitely, but only up to 50 per
cent of the taxable income each year.

Any changes in the ownership of the company (i.e., at shareholders level) do not affect
the loss tax relief. Companies are not allowed to carry-back their losses.

Rates
The general income tax annual rate for resident entities is 30 per cent.2,3 In addition,
resident entities are obliged to make advance payments on a monthly basis by applying a
coefficient over the accrued taxable income of the month.4 Advance payments are to be
offset against the annual income tax obligation.
Companies involved in certain economic sectors may be subject to special or
reduced income tax rates (i.e., companies involved in agriculture, animal husbandry and
similar activities are entitled to a 15 per cent rate).

2 See Section X, infra.

3 Workers’ profit sharing is applicable on the same basis in companies with more than
20 employees. The rate varies according to the economic sector (mining, retail and wholesale
trade, 8 per cent; fishing, industry and telecommunications, 10 per cent; other activities,
5 per cent). It is deductible from taxable income.
4 A minimum prepayment of 1.5 per cent is applicable, subject to certain exceptions.

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 Peru

Companies entering into tax stability agreements for mining or oil and gas
projects are subject to an additional two percentage points.

Administration
Peruvian-resident legal entities must file tax returns and pay taxes both on a monthly and
annual basis.
The most important tax authority is the National Superintendence of Tax
Administration (SUNAT), which is in charge of the administration and collection of
all taxes assigned as public resources of the national government (taxes on income, sales,
assets and financial transactions, as well as customs duties), public pensions and health
security system contributions.
In addition, each of the approximately 1,800 municipalities in Peru is considered
as a separate tax authority with respect to municipal taxes (mainly taxes on the ownership
and transfer of immoveable property, real estate and payment of municipal public services).
Tax authorities have discretionary faculties in order to exercise their auditing
duties, which are not conducted on a routine cycle but rather on a variable basis. Larger
businesses are usually audited every year, while medium and small businesses may be
audited on a biannual or lower frequency rate.
Should uncertainty exist as to the correct tax interpretation of a legal tax provision,
SUNAT may issue a formal opinion providing proper guidance. Such opinions are
mandatory for the employees of the tax administration.
If, however, the tax authorities try to collect taxes based on a criterion not shared by
the taxpayer, the latter may file an administrative claim challenging the tax administration
resolution. If said tax administration upholds its criterion, the claimant taxpayer may appeal
the decision to the Tax Court, which constitutes the final administrative level for challenging
tax resolutions. Further, the Tax Court’s resolutions may be contested in the judiciary.

Tax grouping
Peruvian tax law does not contain any provision for consolidated taxation (‘group of
companies’ doctrine). Indeed, as a general rule, all assets, losses, dividends, interest, etc.,
may not move within a tax group, but should remain within the particular company that
originated them. In the case of reorganisation processes (such as mergers and spin-offs),
however, it is possible to move tax credits and rights (but not deductible losses) from one
company to another, subject to some specific requirements and restrictions.

ii Other relevant taxes

In addition to income tax, the following taxes should be taken into account when
performing business activities in Peru.

Value added tax

An 18 per cent VAT rate is generally imposed on the following transactions: sale of
goods, rendering and use of services, construction contracts, the first sale of real property
(except land) made by builders and the import of goods.
As occurs with many indirect tax systems, in order to determine the tax payable
by the company performing the above-mentioned transactions, the VAT paid in the

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company’s acquisitions is accepted as a tax credit. Exporters can recover VAT paid in
acquisitions for up to 18 per cent of exports’ free on board (FOB) value.
Companies that have not commenced productive operations with a pre-
production stage equal to or longer than two years may resort to a special system to
obtain the advanced recovery of the VAT levied on certain acquisitions, provided that
they execute an investment agreement with the Peruvian state.

Payroll taxes
Companies must pay 9 per cent upon wages and salaries for Peru’s health and social
security system.
An approximate 13 per cent withholding on wages and salaries paid to employees
is mandatory for the private pension fund (AFP).
A special retirement fund for mining and metallurgical workers shall be financed
by 0.5 per cent of the mining companies’ annual net income before income tax, and 0.5
per cent of the workers’ gross monthly salary.
All wages, salaries, remunerations, bonuses, awards and, in general, compensations
received by employees are subject to taxation with a progressive scale of 15 per cent, 21
per cent and 30 per cent for resident employees,5 and with a flat 30 per cent rate for
non-resident employees.

Temporary tax on net assets

This tax is levied at a 0.4 per cent rate on the value of companies’ assets exceeding
the approximate amount of US$340,000. Temporary tax on net assets that has been
effectively paid can be offset against income tax obligations for that fiscal year or be
reimbursed, at the taxpayer’s option.

Tax on financial transactions

A 0.005 per cent tax on financial transactions is imposed on credits and debits in local
banking accounts.

Custom duties
In addition to VAT, the import of goods is subject to the payment of customs duties,
which may vary from zero per cent up to 11 per cent, depending on the nature of the
imported goods.

IV TAX RESIDENCE AND FISCAL DOMICILE

i Corporate residence
Whether owned by local or foreign investors, entities incorporated in Peru are resident
for tax purposes.
Without prejudice to the comments below regarding branches and PEs, a non-
locally incorporated entity may not be considered itself a tax resident unless it agrees to

5 See Section X, infra.

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transfer its legal domicile to the country and be registered as a local company with the
Public Registry.

ii Branch or permanent establishment

A non-locally incorporated entity can have a fiscal presence in the country through a
formal branch or agency, as explained in Section III, supra, as well as through PEs.
According to the Income Tax Law and its regulations, a PE is deemed to exist in
any of the following cases:
a a fixed place of business where a foreign entity develops activities, such as
administrative offices, factories, workshops, places where natural resources are
extracted, and any fixed or mobile facilities used for the exploration or exploitation
of natural resources;
b an individual acting in the country on behalf of a non-locally incorporated entity,
provided that such individual regularly exercises powers of attorney to execute
contracts on behalf thereof; or
c an individual acting on behalf of a foreign entity customarily keeping goods or
merchandise destined to be negotiated in the country on behalf thereof.

Branches, agencies and PEs are subject to taxation in respect of their Peruvian-source
income only.
Double taxation treaties entered into by Peru do not provide for special protection
with respect to the generation of PEs. Nonetheless, such agreements allow income
arising from certain activities to be subject to reduced tax rates or even exempted from
taxation that otherwise would have been levied due to the generation of a PE pursuant
to domestic law.

V TAX INCENTIVES, SPECIAL REGIMES AND RELIEF THAT MAY

ENCOURAGE INWARD INVESTMENT

There are special tax regimes for certain activities (public infrastructure and services
concessions, electricity, geothermal energy, hydrocarbons, mining, tourism, agriculture,
agribusiness, water farming, education), or for certain locations (jungle, Andes highlands
and duty-free zones). Given that local and foreign investors, and the companies in which
they invest, enjoy equal treatment,6 there are no special tax regimes for entities’ operations
outside their home jurisdiction or shareholders resident outside of such jurisdictions.

i Holding company regimes

There are no special holding company regimes, such as participation exemptions,
withholding exemptions, or exemptions for receipt of non-local dividends or income.

6 There are a few exceptions established by the Constitution and special laws.

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ii IP regimes
There are no special IP tax regimes, and no draft legislation for such a purpose is in the
pipeline.

iii State aid

State aid is available in the form of the tax special regimes covering the sectors referred
to above. Nevertheless, a sort of state aid is being applied with the drawback of tariffs
paid on the import of goods by exporters. It is 5 per cent of the export FOB value as
long as the production cost does not exceed 50 per cent of the FOB value. Counterparty
countries in free trade agreements executed with Peru are requesting its elimination.

iv General
Tax stability agreements
Although the tax regime has been relatively stable for the past years, since tax simplification
enacted in 1992 reduced the number of taxes from more than 40 to seven, tax stability
agreements with the state have continued to be available to investors and recipient
companies, and have played a key role in attracting investment to Peru, in particular
in the mining and oil and gas sectors, where operations entail large investments in
exploration, or huge investments for the development of a project and its long-term
operation. A second type of tax stability agreement is available for the mining and oil and
gas sectors, providing for a broader scope of stability and longer terms than the stability
provided in the ordinary stability agreements for all sectors.
Pursuant to the Peruvian Constitution, tax stability agreements are deemed
contract law, and cannot be amended unilaterally, not even by a law passed by Congress.

Juridical stability agreements

Juridical stability agreements (JSAs) with the state are available for foreign or local
investors in any economic activity, and for companies receiving investment from a
foreign or local investor entering into a JSA, with the following characteristics:
a minimum investment committed for the next two years – US$5 million (mining
and hydrocarbon activities US$10 million);
b term of the stability agreement – 10 years from the date of its execution;7 and
c tax regime stabilised:
• for foreign investors, dividend tax regime;8 and
• for local companies receiving investment, corporate income tax regime.9

7 In the case of investment in companies to operate a public infrastructure or service concession

the term is the concession’s life (usually 30 years).
8 This also ‘freezes’ for the investor the regime that guarantees the investor’s right to free access
to foreign currency, the right to use the most favourable exchange rate available, the right to
repatriate capital and to remit profits abroad, and the right to non-discrimination in legal
matters.
9 This also maintains for the investor the hiring regime for workers and export incentives.

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As the stability of this type of agreement is referred to an investment amount, successive

agreements with the same investor can be executed and be effective simultaneously. As
the stability for local companies receiving the investment is referred to the profits of the
company, regardless of its source of investment, it may only execute one JSA at a time.

Mining stability agreements

Mining stability agreements (MSAs) are available for mining projects. They comprise
not only the whole tax regime for the project, but also foreign exchange and trade
regulations. Companies that invest in a new mining project may enter into a contract
with the state that would guarantee stability of the tax laws in force at the time the
contract is executed, and for a term of 15 years, provided that they invest at least US$500
million to either develop a mining project of not less than 15,000 tonnes per day; or
expand an existing operation to reach a minimum processing capacity of 20,000 tonnes
per day. Alternatively, mining companies may conclude a 12-year stability agreement
provided that they invest at least US$100 million to either develop a mining project of
not less than 5,000 tonnes per day; or expand an existing operation to reach a minimum
processing capacity of 5,000 tonnes per day.
The stability term starts in the year when the committed investment in developing
the mine is completed and exploitation begins, or at the request of the mining company
as from the following year.10
Through an MSA, the state guarantees that the mining project will be subject
solely to the tax regime in force on the date of execution of the MSA, including
income tax rates, the calculation method to determine the taxable income, tax refund
mechanisms, customs duties, municipal taxes, water licences and good standing fees.
The mining company is subject to the tax regime in force on the date of execution of the
MSA and will not be subject to any other tax created thereafter. Moreover, it will not
be subject to any further changes to the regime governing the calculation and payment
method of taxes.11
An additional two percentage points in the regular income tax rate are also
applicable to profits from mining projects with an MSA.
Legal mining royalties and the special tax on mining are also subject to the stability
agreement. An MSA grants the mining company the right to keep its accounting records

10 Alternatively, at the request of the mining company, the stability period may be advanced and
commence prior to completion of the required investments, for a term of up to eight years.
11 The following are other guarantees granted under an MSA: free availability of export-related
foreign currency, both in the country and abroad; non-discrimination as to the exchange
rate used to convert the FOB value of exports or local sales (or both) into local currency, it
being understood that the most favourable exchange rate is to be granted for foreign trade
operations; free sale of its mineral products; stability with respect to special regimes, in
the event they are granted, for tax refunds and temporary imports, among others; and the
guarantees granted under the MSA cannot be unilaterally changed by one of the parties.

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(and capital) in foreign currency and the right to apply a total annual overall depreciation
rate of up to 20 per cent on fixed assets.12

Oil and gas stability agreements

The licence contract to be entered into with the state for the purpose of oil and gas
activities guarantees that the tax regime in force at the time the licence contract is entered
into will remain unchanged during the lifetime of the licence contract, with the following
terms:
a the contractor is subject to the regular tax regime of Peru, including the ordinary
income tax regime and specific regulations set out in the Organic Law for
Hydrocarbons, in force on the execution date;
b no taxes established after execution of the licence contract, nor any changes that
may be introduced at the source that generates the tax obligation, or in the amount
of the tax, or in the exemptions, benefits, incentives and exclusions, shall apply,
with the exception of VAT, excise taxes and any other tax on consumption, as well
as the special regime applicable to exports and exemption regarding imports;
c in the case of exemptions and other tax benefits, the tax stability shall be subject
to the terms and conditions established by the legal provision that grants the said
benefits; and
d the tax system that the contractors enjoy shall also apply to whoever, subsequent
to the execution of a contract, assumes the contractor’s condition according to
law.

An additional two percentage points in the ordinary 30 per cent income tax rate are also
applicable to profits from activities of the licence contract.

VI WITHHOLDING AND TAXATION OF NON-LOCAL SOURCE

INCOME STREAMS

i Withholding outward-bound payments (domestic law)

Dividends and other forms of profits distributed by local companies in favour of non-
resident individuals or entities are subject to a 4.1 per cent income tax withholding.13
The tax is due at the time the distribution is agreed to by the general shareholders’
meeting or when the distribution is effectively performed, whichever occurs first.
The reimbursement to a shareholder following a capital reduction, up to the
amount of non-distributed profits, revaluation surplus, reserves or additional capital, at
the time of the capital reduction, is deemed to be taxable dividend.
On the other hand, branches are subject to a 4.1 per cent dividend tax14 at the
time their annual income tax return is due. The tax is calculated on the outstanding profit
(after corporate income tax) available for distribution in favour of the foreign entity.

12 Except depreciation of constructions, the rate for which is 5 per cent.

13 See Section X, infra.
14 Idem.

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Likewise, interest is subject to income tax withholding if the capital is invested or

economically used within the country, or if the payer is a resident entity. The applicable
tax rate is 4.99 per cent if certain conditions are met;15 otherwise, the withholding tax
rate is 30 per cent.
Technical assistance services economically used within the country may also be
subject to a special 15 per cent withholding income tax, for the purposes of which certain
formalities must be fulfilled.16
Finally, royalties are subject to a 30 per cent withholding income tax whenever
the rights in respect of which they are paid are economically used within the country or
if the payer is a resident entity.

ii Domestic law exclusions or exemptions from withholding on outward-bound

payments
Currently, domestic law exemptions from withholding on outward-bound payments
are reduced to very specific cases, such as interest from promotion credits granted by
international organisations or foreign government institutions, or royalties for technical,
economic, financial and any other consulting provided from abroad by state entities or
international organisations.

iii Double taxation treaties

At present, the double taxation treaty network of Peru comprises Brazil, Canada, Chile,
Korea, Mexico, Portugal and Switzerland. These treaties are largely based on the OCED
Model Tax Convention. Likewise, Bolivia, Colombia, Ecuador and Peru, as members of
the Andean Community, are subject to a common regime to prevent double taxation.
OECD-type treaties concluded by Peru establish maximum tax rates for dividends,
interest and royalties in the residence state of the payer or where such items of income
arise.
In turn, the Andean Community treaty establishes that royalties, interest and
dividends are exclusively taxed in the state where the intangible property is used,
the payment is attributed and recorded, and the distributing company is domiciled,
respectively.

iv Taxation on receipt
Dividends and income flows received from abroad increase the taxable income of local
companies, but if such flows were taxed in their country of origin, a credit is given in
order to reduce the local tax charge applicable to them. This credit proceeds provided

15 Conditions: in the case of cash loans, the remittance of funds to Peru is duly documented; the
loan is subject to an annual interest rate not greater than the Libor rate plus seven points; the
lender and the local borrower are not regarded as related parties; and the transaction is not
considered as a related parties ‘shamed transaction’ (e.g., back-to-back).
16 If the fees amounted to more than approximately US$180,000, a certification from a local
or international audit firm stating that the technical assistance was effectively rendered is
required.

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that foreign taxes do not exceed the amount resulting from the application of the ‘average
rate’ of the taxpayer to the income obtained abroad, or the amount of tax actually paid
abroad.

VII TAXATION OF FUNDING STRUCTURES

The most common ways for local entities to be funded is by means of capital contributions
or through loans.

i Thin capitalisation
A maximum debt-to-equity ratio of 3:1 is in force regarding loans granted by related
companies. Interest corresponding to the portion of the loan exceeding this ratio is not
deductible.

ii Deduction of finance costs

Interest from debts and expenses originated by the contracting, renewal or payment
thereof may be deducted, provided they have been contracted to acquire goods or services
related to the generation of taxed income or the maintenance of the source.
It should be noted that interest can be deducted as to the portion that exceeds the
amount of income obtained from exempt interest.

iii Restrictions on payments

The main restriction on dividend payments arises from corporate legislation, pursuant to
which they may only be paid due to the existence of profits or freely disposable reserves,
provided that the net equity of the company is not lower than the paid-in capital.

iv Return of capital
In general terms, equity capital can be repaid to shareholders by a reduction of capital
without limitations. Should the repayment be performed in favour of local individuals,
or non-resident entities or individuals, a 4.1 per cent dividend tax17 would apply on the
difference between the nominal value of the shares and the amounts effectively received
by them.18

17 See Section X, infra.

18 See also above, tax treatment to the reimbursement to a shareholder following a capital
reduction, up to the amount of non-distributed profits, revaluation surplus, reserves or
additional capital.

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VIII ACQUISITION STRUCTURES, RESTRUCTURING AND EXIT

CHARGES

i Acquisition
Non-local companies acquiring local businesses generally structure the transaction
through an acquisition of shares or capital contributions. Usually they use a non-local
entity for the acquisition. If the acquirer of the shares is a local subsidiary, financial
expenses related to such acquisition would, in principle, be considered not deductible.19
Thin capitalisation rules as described above are applicable. Withholding tax on the
consideration for non-resident sellers (if there is a capital gain) is applicable only at
payment and proportionally to it.
Since 2011, the legal concept of Peruvian-source income has been expanded to
levy capital gains from ‘indirect alienation’ of Peruvian-issued shares by non-resident
companies, deeming such to be the alienation of shares issued by a non-resident
company, or capital increase or capital reduction carried out by a non-resident, when
the main value of such non-resident company is made up by the value of its shares in
Peruvian companies.

ii Reorganisation
Under the Income Tax Law, corporate reorganisations, including mergers, demergers,
spin-offs and simple reorganisations enjoy a special regime when all the parties involved
in the reorganisation are companies established in Peru. They can elect to reorganise
themselves by transferring assets and liabilities at book value, without attracting taxes
due to the application of the fair market value rules. It is a tax deferral system through
an exemption of fair market value rules. As from 2013, transfers of shares or capital
reductions within the taxable year, following reorganisations by way of spin-offs or
simple reorganisations, have negative tax consequences.
For tax purposes, a company’s losses cannot be transferred to another company
within the framework of a corporate reorganisation. Restrictions are applied to the use of
its own losses. As from 2013, taxable surplus derived from a revaluation carried out prior
to a reorganisation cannot be offset with carried losses.
Transfer of assets in a corporate reorganisation is VAT-free, and parties involved
can agree the amount of VAT credit that can be assigned to each of them.
This same treatment is applicable to branches of foreign companies. Specifically,
assets (and liabilities) of the branch transferred within the framework of a corporate
reorganisation may be made, for tax purposes, at their book value and not at their fair
market value.
Shares exchanged as a result of corporate reorganisation are, in principle, not
taxed. Through corporate reorganisation it is easy to consolidate an acquired business.
There are no restrictions if merging with a non-local entity, but the special tax treatment

19 An exception to such criteria was declared in Tax Court Ruling No. 4757-2-2005, which took
into account the synergies that benefited the acquirer.

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provided to corporate reorganisations is not applicable if any involved parties are not
local.
Reorganisations involving local companies and non-resident companies are not
addressed in the tax legislation.

iii Exit
Although authorised in the corporate legislation, the tax effects of relocation of companies
to or from Peru are not specifically considered in the tax legislation and there are no
rulings to this extent. Currently, there are no exit taxes applicable in Peru, and no tax
penalties incurred in relocating businesses.

IX ANTI-AVOIDANCE AND OTHER RELEVANT LEGISLATION

i General anti-avoidance
The Tax Code provides for a new rule that grants to the tax administration a broadened
scope for applying the substance-over-form criteria in assessing the true nature of a
taxable event. The application of this rule has been suspended until the approval of
regulations that clarify the parameters comprised within such scope.
Tax legislation expressly states that all expenses, including capital losses, performed
in favour of entities domiciled or established in tax havens are not deductible.

ii Controlled foreign corporations

As from 2013, foreign source passive income (dividends, interests, royalties) and capital
gains obtained by a controlled foreign corporation (CFC)20 may be attributed to such
Peruvian resident in the corresponding proportion.

iii Transfer pricing

Transfer pricing rules, with the adoption of the arm’s-length principle as interpreted by
the OECD, have formed part of the local tax system for approximately the past 10 years.
The main purpose of these rules is to ensure that the prices agreed upon between
related parties are similar to those that would have been agreed among non-related
parties, with respect to comparable transactions under similar circumstances. In other
words, transfer pricing rules dictate that all transactions are carried out at fair market
value.

iv Tax clearances and rulings

Economic, labour and professional entities, as well as the entities of the national public
sector, may make any inquiries they may deem convenient regarding the meaning and
scope of the tax rules. Interpretation criteria provided by the tax administration are

20 A corporation located in a low or zero-tax jurisdiction in which a Peruvian resident owns

more than 50 per cent.

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mandatory for the tax administration; however, if such criteria are considered incorrect
by taxpayers, they may follow the procedures explained in Section III.i, supra.

X YEAR IN REVIEW

During 2014, certain laws establishing tax measures and simplifying procedures to
promote investment and economic growth were passed.
An income tax accelerated depreciation system for buildings and constructions
has been approved. It has also been clarified that no VAT is payable on the use of services
provided by non-residents, whenever the compensation for such services is part of the
customs value of taxable imported goods, and vice versa. This measure helps to avoid a
practical issue that led to double VAT payments in the past, for instance, in the case of
EPC contracts with foreign providers involving both the provision of services and import
of goods.
In addition, several amendments to the Tax Code have been introduced. Regarding
the temporary tax on net assets, certain situations where it is not applicable have been
clarified.
A tax holiday was approved to extinguish or reduce interest on outstanding
tax debts incurred up until December 2005. Application of high interest rates would
be suspended during the administrative appeal phase (Tax Court) after a maximum
resolution term has elapsed (12 months since receipt of the file by Tax Court), without
a final decision.
At the time of writing, a bill of law comprising, among other measures, the
following three issues, was being passed in the Peruvian Congress:
a A progressive decrease of corporate income tax rate to 28 per cent (years 2015 and
2016), 27 per cent (years 2017 and 2018) and 26 per cent (as from 2019).
b A progressive increase of dividend tax rate to 6.8 per cent (years 2015 and 2016),
8 per cent (years 2017 and 2018) and 9.3 per cent (as from 2019).
c A reduction of tax rates in the progressive scale and brackets applicable to resident
employees, as from 2015.

Treaties to avoid double taxation with Korea, Mexico, Switzerland and Portugal
are applicable as from 2015. Negotiations with Italy, Japan, the Netherlands, Qatar,
Singapore, Thailand, the United Arab Emirates and the United Kingdom are currently
in progress.

XI OUTLOOK AND CONCLUSIONS

While tax authorities have strengthened their audit functions with the continuing focus
of increasing tax revenues, some steps have been taken in order to promote investment,
mainly the approval of new legislation for such objective. However, it seems that certain
important aspects have not been considered in the legal reforms, and hence the changes
might not be sufficient to attract the required level of investment. It is expected that
additional legislation will continue to be passed in line with the efforts made thus far.

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 Appendix 1

ABOUT THE AUTHORS

CÉSAR CASTRO SALINAS

Grau Abogados
César Castro Salinas graduated in law from the Pontificia Universidad Católica del Perú
in 1977. He joined the firm in 1984 and became partner in 1989. He has led the private
investment and taxation area since 1994.
He has developed an extensive practice on tax aspects of foreign investment as
well as tax stability agreements with the state. His expertise was enhanced as tax adviser
to the Minister of Economy and Finance in 1992, the year in which major changes were
introduced to the entire Peruvian tax regime. Between 1996 and 1999 he was heavily
involved in the design and proposal for the tax and legal framework required for ‘mega-
projects’ in hydrocarbons and mining, as well as drafting the required regulations in
order to make the financing for these projects feasible. Currently, he is actively involved
in structuring tax-efficient foreign investment schemes.
He has published articles in specialised magazines regarding tax issues and
investment in natural resources, and has been invited to give lectures on the tax
framework and investment, mining closure programmes and tax, and treaties to avoid
double taxation at the Canadian Chamber of Commerce, the British Chamber of
Commerce, the Rocky Mountain Mineral Law Foundation and the Peruvian Tax Law
Institute, among others.
Mr Castro was a member of the Tax Committee of the Lima Bar Association in
2002 to 2003, and a board member of the Peruvian Tax Law Institute between 1999
and 2002.

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 About the Authors

RODRIGO FLORES BENAVIDES

Grau Abogados
Rodrigo Flores Benavides is a senior associate with the tax practice group of Grau
Abogados. He graduated in 2005 from the Pontificia Universidad Católica del Peru Law
Faculty.
Mr Flores’ experience encompasses tax advisory work for domestic and foreign
companies in consultancy, supervision processes and tax proceedings with different tax
agencies, as well as providing legal advice on tax planning and international taxation.
Before joining Grau Abogados, he was an attorney in the tax area at Ernst & Young Peru
and a tax analyst at IBM Peru.
Mr Flores was admitted to the Lima Bar Association in 2008 and to the Peruvian
Tax Law Institute in 2012. In 2013, he received an Adv LLM degree in international
tax law from the International Tax Center of the University of Leiden, the Netherlands,
where he was a teaching assistant on the tax treaties course during the 2013/2014
academic year.

GRAU ABOGADOS
Av. Santa María 110
Miraflores
Lima 18
Peru
Tel: +51 1 513 9430
Fax: +51 1 513 9435
mgrau@estudiograu.com
ccastro@estudiograu.com
rflores@estudiograu.com
www.estudiograu.com

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