Written by Alonso Aquino – Associate, Peru
Peru remains a key destination for foreign investment in Latin America, driven by its robust natural resources and export sectors. However, while structuring investments is crucial, an equally important consideration is the strategy for repatriating funds generated from these ventures. Additionally, businesses must stay informed about evolving interpretations by Peruvian tax authorities, particularly concerning common tax planning mechanisms such as the indirect transfer of shares.
This article explores Peru’s Income Tax General Rules applicable to foreign investors, focusing on the taxation of indirect share transfers. We examine the conditions that trigger tax liability, the role of Double Taxation Agreements (DTAs), and a notable shift in interpretation under the Chile-Peru DTA. Finally, we highlight why staying updated on tax authority criteria is essential for effective tax planning in Peru’s dynamic investment landscape.
Key context – Income Tax General Rules applicable to Foreigners
Generally, the applicable income tax is determined by the taxpayer’s residence and the source of income. Therefore, foreigners not residing in Peru only pay taxes for results obtained from Peruvian sources. Since 2011, to adapt to the corporate structures set forth by tax planning schemes the government had to include as a Peruvian source the capital gains for indirect transfer of shares.
The statute sets forth that a capital gain for indirect transfer of shares occurs when shares of a non-residing legal entity that, in turn, owns -directly or indirectly- shares of one or more residing legal entities are transferred, provided that:
- In any of the 12 months prior to the transference, the market value of the shares of the residing legal entity is equivalent to 50% or more of the market value of all the shares of the non-residing legal entity; and
- In any 12-month period, the transferor and its related parties transfer by means of one or more simultaneous or successive transactions, shares representing 10% or more of the capital of the non-residing legal entity.
On the other hand, it can also occur when the total amount of the residing legal entity’s shares transferred in any 12-month period is equal to or greater than 40,000 Peruvian Tax Units (UITs).
The Double Taxation Agreement (DTA) Factor
Considering the scope and conditions that trigger the Peruvian income tax payment for indirect transfer of shares, it is essential to be aware of countries within the region that have entered into DTAs with Peru.
A DTA is an agreement between two or more Contracting States to avoid or mitigate double taxation. Through such an instrument Contracting States decide the conditions which trigger their tax authorities and internal statutes in relation to a specific taxpayer’s act. The majority of Peru’s DTA in effect has been based in the Organisation for Economic Co-operation and Development’s (OECD) Model.
The OECD Model (last updated on 2017) does not contemplate a specific rule for the indirect transfer of shares. The most similar rule applies to capital gains generated by the transfer of shares of a legal entity whose value derives 50% or more of the market value, directly or indirectly, from real estate (Article 13.4 of the OECD Model, 2017 version5).
Currently Peru has entered DTAs with the Andean Community members (Bolivia, Colombia and Ecuador), Chile, Brazil and Mexico.
Change of Criteria Case Study: Chile-Peru DTA
Chile and Peru entered a DTA based on the OECD Model of 2004. Its Rule 13 contemplated capital gains and set forth 2 scenarios comparable to the indirect transfer of shares:
- Capital gains acquired by a resident of a Contracting State from the transfer of securities or other rights representing the capital of a company or any other type of financial instrument situated in the other Contracting State may be taxed in that other Contracting State.
- Capital gains acquired from the transfer of any property other than those mentioned in the preceding paragraphs may be taxed only in the Contracting State in which the transferor is resident.
For the longest time the consensus within the market was that the capital gain, acquired by a transferor residing in Chile for indirectly transfer the shares of a legal entity residing in Peru, would be subject to the Chilean tax authority and internal statutes.
As Rule 13 does not expressly cover an indirect transfer of shares scenario, it was considered within the precept referring to all other scenarios not regulated within other precepts of the Rule. This criterion was expressed by the Peruvian tax authority in 2021.
Nevertheless, such criterion was changed during 2023 and the Peruvian tax authority considered that instead of Rule 13 the indirect transfer of shares should be subject to the dispositions of Rule 21 of the DTA. Rule 21 applies to any type of income not regulated in any of the other Rules of the instrument and states that income acquired by a resident of a Contracting State by resources of the other Contracting State can be subject to the tax authority and internal statutes of this second state. Such criterion was based on the negotiation practices and strategies used on subsequent DTAs.
Although the reports issued by the Peruvian tax authority are not legally binding and are mostly used as a source of interpretation, the market’s consensus still have mixed feelings regarding the change in criterion. Nevertheless, we advise that any change on the authorities’ criterion be considered for future or current tax planning schemes implementation, especially considering anti-elusive mechanism as the indirect transfer of shares regulation.
Conclusion
Peru’s evolving tax landscape, particularly regarding the indirect transfer of shares, underscores the need for foreign investors to stay vigilant. While the Peruvian tax authority’s shifting interpretations—such as the recent change in applying the Chile-Peru DTA—are not legally binding, they signal a trend toward stricter scrutiny of cross-border transactions.
As Peru remains a prime destination for foreign investment, businesses must proactively assess their tax structures, leveraging Double Taxation Agreements where possible while anticipating regulatory adjustments. By aligning tax planning with the latest authority criteria, investors can mitigate risks and ensure compliance in this dynamic market.
Harris Gomez Group METS Lawyers ® opened its doors in 1997 as an Australian legal and commercial firm. In 2001, we expanded our practice to the international market with the establishment of our office in Santiago, Chile. This international expansion meant that as an English speaking law firm we could provide an essential bridge for Australian companies with interests and activities in Latin America, and to provide legal advice in Chile, Peru and the rest of Latin America. In opening this office, HGG became the first Australian law firm with an office in Latin America.
As Legal and Commercial Advisors, we partner with innovative businesses in resources, technology and sustainability by providing strategy, legal and corporate services. Our goal is to see innovative businesses establish and thrive in Latin America and Australia. We are proud members of Austmine and the Australia Latin American Business Council.
Disclaimer: This article is for general informational purposes only and does not constitute legal advice. It does not create a solicitor-client relationship, and readers should seek independent legal advice for their specific circumstances. Harris Gomez Group accepts no liability for reliance on this content.