One of the most challenging aspects of providing services abroad is negotiating that country’s tax laws. Doing business in Peru is no exception.
The good news. No income tax is payable by a foreign company providing services to a Peruvian company unless the service provided by the foreign company is considered a ’technical assistance service‘, in which case it shall be subject to Peruvian income tax laws.
The bad news … it is difficult to avoid falling into this provision.
What constitutes ’technical assistance‘? It is defined as: ’any independent service, whether provided from abroad or in the country, whereby the provider undertakes to use its skills, through the application of certain proceedings, arts or techniques, in order to provide specialized non-patentable knowledge, that may be necessary in the production, commercialisation, or service supply proceeding or any other activity performed by the user, which also comprises the training of people to apply such specialized knowledge’.
Additionally, Peruvian Income Tax Law states that besides the above description, ’technical assistance‘ comprises the following services:
1) Engineering services: The performance and supervision of the assembly, installation, starting-up of machines, equipment and production plants; calibration, inspection, repair and maintenance of machines, equipment; and performance of tests and assays, including quality control, feasibility studies and final engineering and architectural projects.
2) Research and Project Development: Preparation and performance of pilot programs, research and lab experiments and technical planning or programming of production units.
3) Financial counseling and consultancy: counseling on assessment of financial and banking entities and in the formulation of plans, programs and international promotion of sales thereof; counseling on the distribution, placement and sale of securities issued by financial entities.
If the foreign company is providing ‘technical assistance’ as detailed above, the Peruvian company must withhold in payment 30% of the income generated. This may in certain circumstances be reduced to 15%. To qualify for this reduced rate the foreign company must:
– file an affidavit stating the services to be provided and undertaking to report the income generated from these services in its accounts and
– commission a report from an international known audit company detailing the technical assistance provided.
The Chilean advantage. The ‘technical assistance’ caveat is broad and it is therefore hard to avoid triggering it. A Chilean company, however, by virtue of the double taxation agreement between Peru and Chile, is not required to pay Peruvian income tax, even if ‘technical assistance’ has been provided.
The only caveat is that the service is not carried out in Peru over a period (or periods) that in total exceeds 183 days within any given twelve month period. If this period is exceeded, a ‘permanent establishment’ will have been deemed to have been created and income tax will become payable.
The Harris Gomez Group, has over 19 years experience in South America and Australia, and is proud to continue to provide our clients with commercial, tax and legal advise from a local perspective. Our aim is to make your business in the region as seamless and straightforward as possible.