Guide to doing business in Peru

June, 2020

Ways to invest in Peru

A) The most common types of vehicles for investing in Peru are the sociedad anónima (S.A.), or public limited company, and the sociedad anónima cerrada (S.A.C.), or closely-held corporation.[1]

[1] The Peruvian Companies Law (“LGS”) also provides for another type of company, the “sociedad anónima abierta” (publicly-held corporation).

Main characteristics of S.A.s include:

Capital: No minimum capital is required for incorporation, except for in the case of companies in certain industries, such as banking and insurance.
Number of shareholders: At least two shareholders of any nationality or residency (except for public broadcasting service and domestic aviation companies).
Managing body: A board of directors (minimum of three directors) and a general manager must be appointed.
Share transfers: No restrictions on the transfer of shares by owners through private contracts. However, share transfer restrictions may be established in the bylaws or through shareholders' agreements.
Average time for incorporation: approximately 2 weeks

Main characteristics of S.A.C.s include:

Capital: No minimum capital is required for incorporation, except for in the case of companies in certain industries, such as banking and insurance.
Number of shareholders: Minimum of two and maximum of 20 shareholders of any nationality or residence (with the aforementioned exceptions).
Managing body: Shareholders may decide whether or not to appoint a board of directors. If they do not appoint one, the general manager will be the company’s main managing body.
Share transfers: As a general rule, shareholders have a right of first refusal in the event any shareholder offers to sell its shares to third parties or to any other shareholder. However, the bylaws may eliminate this right of first refusal and establish other restrictions on the transfer of shares.
Average time for incorporation: approximately 2 weeks

The liability of shareholders in both types of companies is limited to their capital contributions.

A fourth type of company is the “sociedad comercial de responsabilidad limitada” or limited liability company, which in practice offers less flexibility.

B) Branches: Foreign companies may establish branch offices in Peru, registering a public deed of incorporation with the public registry. Branch offices do not have an independent legal status from their parent companies, but do have permanent legal representation and management within Peru.

Procedural formalities for incorporating a company

There is no minimum start-up capital. However, since the start-up capital must be deposited in a Peruvian bank, an amount sufficient to open a bank account should be contributed (approximately US$500.00). All shares must be fully subscribed and paid in at least 25% each.
Nonresidents acting as founding shareholders should grant powers of attorney (legalized with an apostille), so their representative can sign, on their behalf, all documentation required for setting up the company.
A public deed of incorporation, containing the company’s bylaws, should be registered at the Public Registry.
Companies may apply for a tax ID number from the Peruvian tax authorities either before or after it is entered at the Public Registry.

Tax issues

Corporate Income Tax (“CIT”)

Nature: Direct tax levied on: (i) worldwide net income obtained by Peruvian resident companies; (ii) Peruvian-source net income obtained by branches, agencies and permanent establishments of nonresident companies incorporated in Peru; and (iii) Peruvian-source gross income generated by nonresident companies.

Tax residence: The following entities, among others, are considered to be resident in Peru for CIT purposes: (i) companies and other legal entities duly incorporated in Peru; and (ii) branch offices, agencies, and permanent establishments[2] set up in Peru of a nonresident company or sole proprietorship, or entity of any kind incorporated abroad.

[2] For CIT purposes, a permanent establishment of a foreign company shall be considered, among others, any fixed place of business or the presence of a representative with sufficient powers to conclude contracts on behalf of the company in Peru. Moreover, the concept of permanent establishment shall be deemed to include: (i) a building site or construction, assembly or installation project and related monitoring activities lasting over 183 days in any twelve month period; and (ii) the rendering of services within Peruvian territory, for the same project of for connected projects, for a period (or accumulated periods) exceeding in the aggregate 183 days in any 12 month period.

Tax base: Accounting profit for the year, adjusted considering specific deductibility and exemption rules set forth in tax legislation.

Tax rate: Resident companies are subject to a rate of 29.5% on taxable net income, and to an additional 5% tax rate on any amount or payment deemed to be an indirect distribution of taxable income.

Nonresident companies are subject to tax at a rate of 30% of their gross Peruvian-source income, with a few exceptions in specific cases established in the Peruvian Income Tax Law.

Dividends: Nonresidents (either legal entities or individuals) and resident individuals are subject to a 5% tax rate on dividends and other types of profit distribution mechanisms. Resident companies are exempt from such tax.

Companies distributing the payments must perform the corresponding tax withholding at the aforementioned rate.

In the case of branch offices, agencies and other permanent establishments of a nonresident company, sole proprietorship, or entity of any kind incorporated abroad, profit distributions are deemed to occur on the last day of CIT voluntary filing period. According to Peruvian Income Tax Law, the amount of the profit distribution equals to the income available for the nonresident owner.

Additionally, resident legal entities which obtain dividends or profits from nonresident companies may deduct: (i) the tax withheld by virtue of the distribution of dividends or profits made by a first or second tier company (direct credit); and (ii) the income tax paid by the first or second tier nonresident company, for the performance of its business, proportionally to the dividends or profits distributed (indirect credit).

Other withholding taxes: Peruvian resident companies are also required to apply the corresponding withholding tax on the income they pay to nonresidents, using, among others, the following rates:

Interest on non-related party loans: 4.99%
Royalties: 30%
Technical assistance: 15%
Digital services: 30%
Other income: 30%

Net operating losses: Peruvian companies are entitled to offset their corporate losses accumulated in a fiscal year, applying one of the following systems:

System A: Offset against net income obtained within the following four (4) fiscal years.

Exceptionally due to the Pandemic, corporate net losses registered in fiscal year 2020 may offset against the corporate net income obtained during the following five (5) fiscal years, calculated as from fiscal year 2021.

System B: Offset against fifty percent (50%) of the net income obtained in the following fiscal years (no time limit).

Special depreciation regime due to Pandemic: An exceptional and temporary depreciation regime will be applicable from fiscal year 2021 onwards. By virtue thereof, higher depreciation rates have been provided for buildings and constructions, as well as for other fixed assets (such as data processing equipment, machinery and transport vehicles).

Transfer pricing rules: Following OECD criteria, transactions (i) between related parties; (ii) entered into with parties resident in tax havens or non-cooperative jurisdictions; or (iii) concluded with parties whose income or revenues benefit from a preferential tax regime, are subject to Transfer Pricing rules. Any undervaluation or overvaluation of such transactions will be adjusted by the Peruvian tax authorities, provided that the transaction generates taxable income in Peru. Formal obligations are applicable to these transactions; for instance, filing certain informative forms, i.e. “Local File”[3], “Master File”[4], and “Country by Country reporting” [5].

Moreover, for intra-group services payments to be deductible, entities must comply with the “benefit test”[6] and provide the information and/or supporting documentation requested by tax authorities.

[3] Applicable to taxpayers with revenues over US$ 3 Million approx. in the tax year.

[4] Applicable to taxpayers that are members of a Multinational Enterprise (“MNE”) with revenues over US$ 26 Million approx. in the tax year.

[5] Applicable to taxpayers that are members of a MNE.

[6] The “benefit test” is fulfilled where the services rendered have provided benefits to the recipient.

Main anti-avoidance rules:

General Anti-Avoidance Rule (GAAR) applicable within the framework of audits that review facts, acts and situations, carried out by taxpayers from 19 July 2012 onwards, in order to disregard the tax advantages obtained through evasive acts.[7]

[7] The Tax Administration has recently published a list of assumptions that could potentially involve the application of the GAAR. Among them are the following: (i) the deduction of royalties for assignment in use of trademarks; (ii) the alienation of a Peruvian entity through an autonomous patrimony; and (iii) the re-domiciliation of a company to make use of some agreement to avoid double taxation (DTT).

International tax transparency rules, applicable to resident taxpayers with respect to passive income obtained by controlled foreign corporations (CFC)
Thin capitalization rules: on any loans ((regardless of whether the creditor is a related party or not), interest exceeding the 3:1 debt-to -equity ratio is not deductible[8].

[8] The said limitation shall not be applicable to: (i) companies in the Peruvian financial and insurance system, as well as factoring companies; (ii) taxpayers with net income in the fiscal year less or equal to US$ 3.2 Million approx.(iii) projects conducted by Public-Private Partnerships.

In this regard, with effect from 1 January of 2021, the limit on the deduction of interests will be of 30% of EBITDA of the previous fiscal year.

An indirect sale of Peruvian shares subject to Corporate Income Tax shall occur if (i) the market value of the Peruvian shares in the 12 months preceding the sale, is equivalent or exceeds the 50% of the market value of the shares issued by the foreign company owner of the disposed shares; (ii) the transferor or any related party (whether in a single operation or through several transactions, simultaneous or subsequent) transfer shares, in any twelve month period, representing 10% or more of the share capital of the foreign company owner of the disposed shares.

[9] An individual shall be deemed a final beneficiary when, in an effective and final manner (i) owns, directly or indirectly, at least, 10% of the share capital of a Peruvian legal entity; or (ii) without being an owner, holds, directly or indirectly, powers to designate or remove the majority of members of the Board of Directors, as well as decision-making powers within the business activity of a legal person or entity.

Obligation of legal persons and/or legal entities to inform about the identity of their final beneficiaries, as well as implementing specific mechanisms to obtain and maintain updated information on such subjects[9].

Formal obligations: Among other things, resident taxpayers are required to: (i) file their annual CIT return within the first three months of the following fiscal year; (ii) make monthly prepayments against their CIT annual liability; (iii) inform the Peruvian tax authorities of any mergers or other forms of corporate restructuring; and (iv) report to the tax authorities any transfer, issuance or cancellation of shares.

Personal Income Tax (PIT)

Nature: Direct tax levied on worldwide income obtained by individuals considered resident in Peru.

Tax residence: The following individuals are considered resident in Peru for income tax purposes: (i) Peruvian nationals domiciled in the country; and (ii) foreign individuals that have stayed in the country for more than 183 calendar days within any twelve (12) month period with effect from 1 January of the following tax year.

Tax rate: In general, the Peruvian Income Tax Law classifies income obtained by individuals into two main categories: (i) Peruvian-source passive income; and (ii) employment income.

In the case of resident individuals, Peruvian-source passive income is taxed at an effective rate of 5%, while employment income is subject to a progressive tax ranging from 8% to 30% on net income (some deductions are applicable).

On the other hand, in the case of nonresident individuals, passive and employment income is generally taxed at a rate of 30%.[10]

[10] Except for specific cases established in the PITL such as capital gains arising from the sale of real estate property, among others, where the applicable tax rate is 5%.

Tax treaties

Peru has entered into bilateral tax treaties, currently in force, with Brazil, Canada, Chile, Mexico, Portugal, South Korea and Switzerland[11].

[11] In addition, on 18 November 2019, Peru and Japan signed an agreement to avoid double taxation, whose entry into force is still pending.

Moreover, Peru is a member of the Andean Community (also comprising Bolivia, Colombia and Ecuador), which has a multilateral tax treaty among its members (i.e., Decision 578).

Also, Peru has recently executed a tax treaty with Japan; however, it has not yet entered into force.

Value Added Tax (VAT)

Nature: VAT is an indirect tax levied on: (i) sales of movable goods within the country; (ii) the provision or use of services in the country; (iii) construction agreements; (iv) first sales of real estate by construction companies; and (v) imports of goods.

VAT paid on the acquisition of goods and services (i.e., input VAT) can be deducted by Peruvian resident companies from VAT charged on their sales of finished products or services (i.e., output VAT). VAT must be declared on a monthly basis.

Exports of goods and of services that comply with the legal requirements are not subject to VAT.

Tax rate: 18%[12]

VAT early recovery regimes: Peruvian legislation provides for several regimes that allow for the refund of VAT arising, for instance, from the acquisition of goods and services, or the execution of construction agreements of certain pre- operative projects.

[12] This tax rate is the aggregate of: (i) a 16% corresponding to VAT and (ii) a 2% corresponding to the Municipal Tax

Formal obligations: Formal obligations regarding VAT include: (i) filing monthly VAT returns; and (ii) performing all withholdings and collections in accordance with the terms and conditions established by the Peruvian tax authorities[13].

[13] This formal obligation is only applicable to the companies designated by the Peruvian tax administration as withholding or collecting agents.

Excise tax

Nature: Indirect tax levied on sales of specific goods (e.g. cigarettes, fuel, liquor, casino games, slot machines). Excise tax is also applicable to casino games and slot machines.

Tax rate: Rates vary, depending on the type of goods or the nature of the services rendered.

Other taxes

Temporary tax on net assets: Levied on the value of net assets of resident entities. It is charged at the rate of 0.4% on the net value of assets exceeding the amount of S/. 1,000,000.00 as of 31 December of the year before the TTNA payment.

Moreover, the amount paid as TTNA may be refunded or used as credit against the taxpayer’s CIT liability.

Property tax: Levied on real estate owned by a taxpayer in a specific local district. The applicable tax rates range from 0.2% to 1.0% of the land value.

Property transfer tax: Levied on acquisitions of rural or urban real estate, whether in return for a consideration or free of charge. It is charged at the rate of 3% on the higher of the transfer price or the registered property value.

Financial transactions tax: Applies to all credits and debits on bank accounts in the Peruvian Financial System. The tax rate is 0.005% of the transaction amount.

Main investment promotion tax regimes

Investment in the Amazon region (corporate income tax at a rate of 5% and 10% or even exemption, depending on the industry or activity; VAT exemption in some cases).
Agriculture and agribusiness (corporate income tax at 15%)
Investment in highland areas (corporate income tax and VAT on imports exempt)
Development and frontier zones (“special development zones”) (corporate income tax and VAT exempt).

Mandatory contributions and withholdings

Health Social Security (EsSalud): Employers pay healthcare contributions (EsSalud) at 9% of the employee’s monthly salary.

Pension systems: Employees can choose between private or public pension systems. The employee’s mandatory pension contribution is approximately between 10% and 13% of his or her monthly salary.

Labor and employment matters

Regulation: Employment terms and conditions are directly agreed between employees and employers. Collective agreements are only applicable for certain activities (e.g., civil construction, textile and mining activities.

Types of contracts:

Indefinite-term
Fixed-term (under specific temporary circumstances).
Part-time (less than 4 hours per day).
Training programs: University or graduate students can be recruited through training programs.

Minimum wage: Employees are entitled to receive a minimum monthly salary (S/930.00 or US$ 275.00) if they work at least four hours per day.

Working hours: execution of services is subject to maximum hourly limitation of 8 hours per day or 48 hours a week.

Vacation: Employees are entitled to 30 days of vacation leave after they have accrued one year of service.

Time of service compensation (“CTS”): Employees are entitled to receive 1.16 monthly salaries for each year of services as CTS. This benefit is deposited into a bank account owned by the employee and it is accrued from the first month of employment. CTS’s bank account disposal is restricted until employee is terminated from employment.

Profit share regime: Companies with more than 20 employees performing activities that generate third category income (income from commerce, industry and other activities set forth by law), are obliged to distribute among their employees percentage of their yearly profits before tax payments. The percentage to be distributed varies according to the business purpose of the employer (between 5% and 10%).

Health Care Public Security – EsSalud: Employers are obliged to pay a contribution (EsSalud) equivalent to 9% of the monthly salary of the employee. EsSalud contribution is totally assumed by the employer and provides public medical assistance to employees.

Pension fund: Employers withhold – approximately – 13% of the monthly salary of the employee in order to cover pension fund mandatory payments. Pension fund payments.

Foreign employees: Employers are allowed to hire foreign employees under the following limitations: (i) foreigner employees should not exceed from 20% of total number of employees; and (ii) foreigner employees should not receive more than 30% of the total monthly payroll. Certain foreigners (from Spain, Argentina, Colombia, Chile, Paraguay Uruguay, Brazil, Ecuador and Bolivia) are excluded from such limitations. Foreigner employees must apply for resident status (e.g., work visa or temporary assignment visa) and enter into an employment agreement with the Peruvian employer prior to initiating activities.