In the past few years, Peru has made several economic developments placing it at the top of the list of countries with rapid growth on a global level. The Peruvian economy is open to private investment, which is practiced in the context of a social market economy. It also promotes competition and ensures foreign investment in all industries.

The principal taxes levied on entity activities include income tax, value-added tax (VAT), financial transaction tax, municipal taxes and the net assets temporary tax (ITAN, in its Spanish acronym).

In this chapter

• Legal system
• Taxation authorities
• Business vehicles
• Financing a corporate subsidiary
• Income tax
• Cross-border payments
• Mining tax
• Temporary tax on net assets (ITAN)
• Financial transactional tax (ITF)
• Indirect taxes
• Other matters
• Payroll taxes
• Municipal taxes

Legal system

All the provinces of Peru operate under a common legal system. While the ability to make laws is the exclusive domain of the government, the rules that determinate the application of these laws are within the scope of other authorities.

Taxation authorities

The tax system in Peru is administered by the Peruvian National Superintendence of Customs and Tax Administration (SUNAT).

Business vehicles

A non-resident may either establish a Peruvian vehicle to carry on business in Peru or operate directly through a foreign entity. Peru business vehicles are corporations (limited liability or unlimited liability), branches/subsidiaries and associative agreements.

Corporations

Peruvian corporations are governed by the General Law of Companies (LGS in its Spanish acronym). Under the LGS, a corporation must have at least two shareholders, which may be individuals or legal entities, otherwise, it will not be in good standing. Peruvian corporations must have a board of directors, except for corporations that are closely held, which may choose to not have one. The LGS requires a minimum of three directors who must be individuals. There are no nationality or residency requirements for directors. In the Peruvian legislation, individual limited liability companies (EIRL) also exist. These types of corporations must be created by a single person (unipersonal will).The owner is the highest governing body of the company, is in charge of the company’s assets and determines the company’s activities.

Branches

A branch is considered part of its parent entity, without separate legal personhood. However, it is a separate taxpayer for tax purposes only. It shall have permanent legal representation and management autonomy with respect to the scope of its activities that the main corporate entity appoints to it, according to the powers given to its representatives.

Associative agreements

Participation Account Agreement

A participation account agreement creates and regulates the participation and integration of specific businesses in the common interest of the intervening parties: there is a managing partner, who is solely responsible for carrying out the business and shares the results with the silent partners, in exchange for their contributions (in cash or kind).

This type of agreement does not create a separate legal entity from its members. It must be executed in writing and it is not subject to recording.

Consortium or joint venture

Unlike the above, in a consortium or joint venture agreement two or more parties associate to actively participate in the business. Each party maintains its independence and its own responsibilities.

For tax purposes, a consortium or joint venture is considered a separate taxable entity when independent accounting records are kept, which is optional when the agreement is for less than 3 years, and mandatory when the agreement exceeds such a term.

Foreign corporation

A foreign corporation that carries on business in Peru is subject to tax on its Peruvian source income. Peruvian income tax law deems certain activities conducted by a non-resident as constituting the conduct of business in Peru, and therefore subject to income tax.

Where the foreign corporation is resident in a country with which Peru has a double-taxation treaty pursuant to which the corporation may claim treaty benefits, the corporation will generally be exempt from Peruvian taxation on its business profits, except to the extent that the profits were earned through a permanent establishment situated in Peru.

A corporation that operates through a Peruvian permanent establishment (such as a branch) will be subject to Peruvian income tax for such income.

Financing a corporate subsidiary

Equity financing

Investments in subsidiaries incorporated in Peru are not afforded special treatment. The contribution is added to the stated capital or contributed surplus, depending on whether more shares were issued or not. The capital reduction up to this extent will not be subject to withholding taxes (unless the anti-avoidance rule that regulates the capital reduction as a distribution of dividends is applicable).

Debt financing

In general terms, interest on loans are deductible expenses, provided they are related to the acquisition of goods or services incurred in order to obtain or produce taxable income or to maintain its source.

Withholding tax implications

Interest paid to non-residents is generally subject to with¬holding tax at a rate of 30%. However, for interest paid to unrelated foreign lenders the rate is reduced to 4.99% if (i) the proceeds of the loan are brought into the country in foreign currency and its fully accredited, (ii) the interest rate does not exceed Libor plus 7 points, and (iii) there is no economic relationship between lender and borrower.

Thin capitalization

If a Peruvian corporation is to be financed with debt, it is subject to the rules that restrict the deductibility of interest payments. These rules limit the amount of net interest expense that a corporation may deduct in computing its taxable income to no more than 30% of its “tax EBITDA.” Tax EBITDA is the corporation’s taxable income after carrying forward losses, plus interest, depreciation and amortization.

Stamp tax

Peru does not impose a stamp tax in respect of debt or equity financing.

Income tax

Corporate income tax (CIT)

Companies incorporated in Peru are considered resident in Peru for tax purposes and they are subject to a CIT rate of 29.5% on their worldwide net income. Branches, agencies and permanent establishments (PE) of non-resident companies or entities incorporated in Peru are subject to income tax on their Peruvian-source income, while subsidiaries are subject to income tax on their global-source income.

To calculate the taxable basis, domiciled companies are entitled to deduct expenses, to the extent that they are necessary to produce income or to maintain its source. Additionally, there are certain limits and/or caps on the deduction of certain expenses, such as finance costs (thin capitalization rules apply), provisions for bad debts, salaries and travel expenses, among others.

Dividends and any other type of profit distribution are subject to a 5% withholding tax as of 2017. The prior year rates (4.1% or 6.8%) shall be applied on retained earnings, depending on the fiscal year in which the profits were generated.

Branch tax

There is a 5% tax levied on the after-tax profits earned by a branch of a non-resident corporation. The branch tax is roughly equivalent to the withholding tax that would apply on dividends paid by a Peruvian subsidiary to a foreign parent.

Withholding income tax

Non-domiciled companies are subject to a withholding income tax (WIT) in Peru on Peruvian-source income, on a gross basis.

The tax rates for non-domiciled entities are as follows:

Multilateral Instrument

In 2018, Peru signed the Multilateral Agreement (MLI), but ratification is still pending.

The ratification of the MLI will protect Peru's tax base by introducing a general anti-abuse rule and incorporating more adequate dispute resolution mechanisms within the framework of the tax agreements signed by Peru. This agreement also helps consolidate existing tax conventions and helps take a step toward international tax cooperation. Peru has issued 29 legislative decrees that implement Organisation for Economic Cooperation and Development (OECD) recommendations and other policy standards in areas such as the environment, waste management, transparency and information exchange on tax matters, regulatory policy, cross-border bribery, integrity and development, rural and urban. This means that Peru welcomes the opportunity to discuss its main public policy challenges in a multilateral context and to learn from the experiences of OECD member countries facing similar challenges.

Tax treaties

For the purpose of avoiding double taxation on income tax, Peru has entered into treaties with Brazil, Canada, Chile, Korea, Mexico, Portugal and Switzerland under the OECD model.

Recently, Peru entered into a tax treaty with Japan, which became effective January 1, 2022.

Peru, as a member of the Andean Community, which includes Bolivia, Colombia and Ecuador, is subject to a double-taxation standard based in source income and not on the OECD model.

Cross-border payments

Transfer pricing

In general terms, the CIT establishes that, for tax purposes, all transactions must be carried out at market value.

Moreover, transactions entered into between related parties or with residents in low-tax jurisdictions are subject to transfer pricing rules, which mandate that they should be carried out at market value, defined as the value that would have been agreed upon between independent parties in comparable transactions under the same or similar conditions. If these rules are not observed, the Tax Authorities may adjust the prices agreed by the participating parties.

It is important to mention that transfer pricing rules apply when the value agreed between related parties results in a lower tax determination.

In the case of intercompany services, the value of such services must fulfill the benefit test. This test is considered fulfilled when the service in question provides economic or commercial value to the recipient (improving or maintaining its commercial position), which would occur if independent parties had satisfied the need for the service, executing it by themselves or through a third party.

Mining tax

As of October 1, 2011, the mining royalty was modified and two new mining taxes came into effect: the Special Mining Tax (IEM) and the Special Mining Contribution (GEM).

The mining royalty includes metallic and non-metallic mineral resources, while the IEM and the GEM only include metallic mineral resources. The GEM is only applicable to mining companies that have valid tax stability agreements. These companies will voluntarily sign contracts with the Peruvian government for the payment of said charge, which must be determined by each stability agreement that they maintain.

The payment obligation of the mining royalty, IEM and GEM falls due at the closing of each quarter (January–March, April–June, July–September and October–December). The basis of calculation is the operating profit or sales revenue for the quarter.

Operating profit is obtained by taking the revenue generated from the sales of mineral resources each quarter, then deducting the sales cost and the operating expenses (including selling expenses and administrative expenses) incurred in order to be able to generate said revenue. All of these expenses and costs must be at market value.

Within the last 12 business days of the second month following the generation of the obligation, mining companies must present a quarterly declaration (January–March, April–June, July–September and October–December) and make payment of the corresponding mining royalty, IEM and GEM. This declaration must determine the basis for calculating the mentioned contributions.

The amounts effectively paid for mining royalty, IEM and GEM will be considered as an expense for income tax purposes in the period in which they were paid.

They are calculated as follows:

Temporary tax on net assets (ITAN)

Companies that are subject to corporate income tax are obligated to pay the temporary tax on net assets.

This taxed is levied on the net asset value contained in the balance sheet as of December 31 of the previous period to which the payment corresponds, deducting the depreciations and amortizations permitted by law. A company is subject to the ITAN the year after it starts its activities.

The amount paid for the ITAN is a credit that will be offset against the advanced income tax payment or the annual income tax regularization payment. Any remaining balance can be reimbursed by the Tax Administration.

Financial transactional tax (ITF)

Obligations paid through cash payments of amounts greater than S/ 2,000 or USD 500 must be made through bank accounts or deposits, bank transfers, payment orders, credit cards or non-negotiable checks, among other means of payment provided by the entities of the Peruvian financial system.

Any obligation that is not carried out using these methods prevents the deduction of the expense or the recognition of the cost for tax purposes, and prevents the recognition of tax credits (e.g., VAT).

Additionally, the ITF is applied to all debits and/or credits in bank accounts maintained by the taxpayers. The applicable tax rate is 0.005%. Certain operations are exempt from ITF, such as the operations between accounts of the same accountholder; credits or debits in bank accounts opened at the request of the employer exclusively to be able to deposit the salaries of its employees; and credits or debits in bank accounts of severance payments.

The ITF is deductible as an expense for income tax purposes.

Indirect taxes

Valued-added tax (VAT)

1. Sale of real property within Peru
2. Services provided within Peru
3. Import of services (services economically used within Peru)
4. Import of goods
5. Construction contracts
6. The first sale of a real property made by the constructor.

The VAT law follows a debit/credit system by which the VAT paid on the purchase of goods and services can be used as a credit against the VAT originated by future taxed operations. Any VAT credit that is not used within a determined month can be carried forward (at historical values) to be used against the VAT of future operations. It must be taken into account that the return of VAT in cash is only available for exporters and some entities in the pre-operating stage, as long as certain conditions are met.

Early recovery of VAT: To promote investment in the mining industry, a VAT recovery regime has been established for the holders of mining concessions that have not begun operations and are in the exploration stage. In addition to this regime exclusively applicable to the mining industry, there is a regime of early recovery of the VAT applicable to any industry (including the mining industry) for companies in the pre-operating stage (for example, in the construction stage). Finally, the VAT credit related to exports may be recovered by the exporter, since those sales are not levied with VAT to offset such credit.

Other matters

Stability agreements

Investors can sign stability agreements with the Peruvian government, whether under the special regime or under sectorial regimes (e.g., mining and oil), in order to guarantee the following rights for a 10-year period:

1. Stability of the current income tax regime at the time of signing the agreement, with regard to dividends and profit-sharing
2. Stability of the monetary policy of the Peruvian government, according to which there is an absence of exchange controls; foreign currency can be acquired or sold freely at any type of exchange rate offered by the market; and funds (remittances) can be sent abroad without requiring prior authorization
3. The right of non-discrimination between foreign and local investors.

International tax reform

On October 8, 2021, Peru, along with 135 other countries, committed to a two-pillar plan for international corporate tax reform that supports the OECD Inclusive Framework’s “Tax Challenges Arising from Digitalisation of the Economy” project.

Although some regulatory modifications have been implemented so that Peru aligns with the OECD standards, to date, there are no proposals in relation to Pillar One or Pillar Two.

Payroll taxes

Remuneration paid to employees is subject to statutory social contributions and payroll taxes. To determinate the payroll taxes, a first deduction of 7 tax units is made on the employee’s income; subsequently, the following annual progressive rate is applied:

1. 8% for the first 5 tax units of net income
2. 14% of net income for amounts from 5 tax units to 20 tax units
3. 17% of net income for amounts from 20 tax units to 35 tax units
4. 20% of net income for amounts from 35 tax units to 45 tax units
5. Any excess at 30% of net income.

Municipal taxes

1. Property tax: This tax is levied on the ownership of property by a natural or legal person in a given district. The rate varies between 0.2% and 1% depending on the value of the property determined by municipal tax authorities. The tax must be paid annually.
2. Alcabala tax: This tax applies to the gratuitous or onerous transfer of land property. The rate is 3% and is applied to the value of the property agreed by the parties or the self-appraisal value determined by the district municipality where the property is located, whichever is greater. The tax must be paid by the buyer.
3. Automotive tax: This tax is generally applicable to automobiles owned by individuals and companies, and levies an annual 1% of the original purchase price of automobiles no older than 3 years.
4. Other municipal taxes: Includes public cleaning service fees, local public security services fees and local park maintenance services fees. Local governments or municipalities are authorized to create, amend or annul certain local taxes related to the services they provide to the public.