Tax in Cross-Border Deals

Last verified on Tuesday 21st November 2017

Peru

RocĂ­o Liu
Miranda & Amado Abogados
  1. 1.

    In your jurisdiction, can the acquisition of a domestic target limit the target’s use of existing tax attributes, such as net operating loss carry forwards or tax credits? Are there strategies or structures to preserve such attributes?

  2. If a domestic target is acquired through a stock acquisition, net operating losses (NOLs), carry-forwards, tax credits, depreciation or amortisation expenses and any other existing tax attributes will continue to be available to the domestic target. Therefore, a change in control of the domestic target does not affect any of its tax attributes.

    NOLs cannot be sold or transferred through mergers, spin-offs or any other corporate reorganisations, and could only be used by the entity that originally generated the losses. If the acquirer entity in a corporate reorganisation has NOLs, they survive the reorganisation up to the amount of the entity’s fixed assets’ non-revalued value as of the date before the reorganisation took place. Other tax attributes are, in principle, deemed to be transferred through corporate reorganisations. 

  3. 2.

    When companies that are resident in your jurisdiction are sold to foreign investors, is it more common to sell stock or assets?

  4. In Peru, the most common inbound transaction is the disposal of stock issued by the target company, with a previous corporate reorganisation of the target company, such as a spin-off, if the sellers want to preserve part of the company’s business assets. Transfers of a local company’s assets through mergers, spin-offs or any other corporate reorganisations of domiciled companies are tax-neutral, provided certain requirements are met, but especially in case of spin-offs there is no neutral tax treatment if the majority of the shares resulting from the spin-off are sold or amortised immediately after such spin-off comes into effect (see question 24).

    The disposal of business assets is used wherever the seller has NOLs that will offset any capital gains caused by the sale of assets. However, as opposed to sales of stock, sales of certain assets can be subject to Peruvian value added tax (VAT) and taxes on real estate transfers.

  5. 3.

    Are there particular structures that generate a step-up in the tax basis of assets in a tax-efficient manner?

  6. It is possible to get a tax step-up basis in the business assets in the event of sales or onerous transfers, but capital gains arising therefrom shall be computed as income subject to tax unless the transferor has NOLs that can be offset against such gains.

    Moreover, in a corporate reorganisation (a merger, spin-off or other dis­positions defined as such by Peruvian corporate law), the acquirer or transferor may revalue their assets based on a third-party appraisal, up to their fair market value before the reorganisation, hence recognising the revaluation surplus as realised gains for tax purposes. This revaluation linked to a reorganisation process will have tax effects and allow the acquirer to take depreciation on the step-up basis resulting from the revaluation of its own assets or of the assets transferred thereto. However, as of 1 January 2013, the revaluation surplus elected to be computed as taxable income cannot be offset against NOLs of any of the participants in the reorganisation process. Therefore, if the transferor of assets has NOLs, it is preferable to sell the assets in order to offset such NOLs, instead of entering into a corporate reorganisation with a revaluation of assets for tax purposes.

    It should be noted that the purchase price of intangible assets with a time-limited useful life either by law or by its own nature (ie, patents, industrial designs, utility models, copyrights, software, start-up rights, etc) can be amortised in a sole fiscal year or on a straight-line basis of up to 10 years at the option of the taxpayer. However, the purchase price of intangible assets with unlimited life (ie, trademarks or goodwill) cannot be deducted or amortised for tax purposes. The consideration paid over the reason­able value of the acquired assets shall be considered as an intangible with unlimited life and, as such, cannot be amortised for tax purposes.

  7. 4.

    Are there structuring opportunities that would enable a foreign acquirer to provide equity consideration to the shareholders of a domestic target in a tax-deferred manner? Are the rules similar if both the acquirer and the target are domestic?

  8. There is no tax benefit or deferral to the transferor if the foreign acquirer issues stock or equity to the domestic entity’s shareholders as a consideration of the acquired stock rather than cash. Capital gains arising from the disposal of stock are deemed to be realised at the time the transfer took place if the income shall be computed on an accrual basis or at the time the price is paid if the income shall be computed on a cash basis for income tax purposes, and cannot be deferred irrespective of whether the consideration payable or paid is cash or equity.

  9. 5.

    Can management generally roll over its equity in an acquisition in a tax-deferred manner? Are there certain circumstances where a tax-deferred rollover is difficult or impossible?

  10. There are no rollover provisions in Peruvian tax law nor any current technique to defer or avoid capital gains taxes on the disposal of business assets through the acquisition of new ones.

  11. 6.

    Which holding company structures are typically used by foreign investors to acquire domestic targets in your jurisdiction?

  12. There are some advantages and disadvantages both in the event of an acquisition company established in Peru or established abroad, depending on the structure used for the acquisition (ie, through the purchase of stock or business assets and liabilities of the target company), and the objectives and future plans of the acquirer.

    In general terms, if a foreign company acquires stock, dividends distributed by the target company will be subject to a 5 per cent withholding tax rate as of 2017 (6.8 per cent if the profits were originated in fiscal years 2015 and 2016, and 4.1 per cent if they were originated until 2014). In turn, if the holding company is established in Peru, a deferral on dividends taxation is permitted until the dividend distribution to the foreign shareholder is agreed by the Peruvian holding company, since Peruvian law neither subject to tax dividends distributed by Peruvian corporations to domiciled corporate shareholders nor deems such dividends as taxable income for the domiciled corporate shareholders.

    A disadvantage, however, of a local holding entity structure, is that since intra-corporate dividends distributed among domiciled corporate shareholders are not taxed in Peru, a Peruvian holding company (with no income other than dividends from the domestic target) is not entitled to deduct expenses for its own corporate tax purposes unless it obtains taxable income or gains in addition to the intra-corporate dividends.

    If the acquirer sells the acquired stock and the stock’s fair market value has appreciated by the time the sale takes place, it is preferable to acquire stock issued by the domestic target through a special purpose vehicle (SPV) established abroad (two-tier structure), which would allow the future selling of the SPV’s stock instead of the Peruvian stock, avoiding the impact of 30 per cent capital gains tax applicable to the direct transfer of the Peruvian stock, unless such transfer qualifies as an indirect transfer of Peruvian shares that is subject to tax as well (see question 30).

    However, if the domestic target is a company with stock publicly traded on the Lima Stock Exchange, it is more convenient to have the investment directly owned by foreign shareholders in order to reduce the tax impact of a potential future sale of stock on the Lima Stock Exchange, since the capital gains from the transfer of such stock by foreign shareholders will be levied at a reduced tax rate of 5 per cent (or may be temporarily tax exempt from 1 January 2016 to 31 December 2019, as mentioned in question 12), while the capital gains from the same transfer made by a Peruvian holding shall be subject to a tax rate of 29.5 per cent (unless the same exemption referred to in question 12 applies) and the distribution of such gains as dividends from the Peruvian holding to foreign shareholders will be subject to a 5 per cent withholding rate, totalling an overall tax burden of 33.03 per cent on the capital gains. 

    Assuming that business assets continue to be used by the acquiring company, in the case of acquisition of the assets of domestic target, it is preferable to acquire them by a company established in Peru, since companies domiciled in Peru pay taxes over their net taxable income, unlike non-domiciled companies with Peruvian-sourced income and no permanent establishment therein, which are taxed in most cases on gross income with very limited deductions.

    On the other hand, given that the transfer of business assets may be taxed with VAT, it is preferable to acquire the assets through a company established in Peru, which is entitled to offset as a fiscal credit the VAT charged thereto in local acquisitions against the VAT debits arising from its future sales or provision of services that are subject to VAT.

    It is important to mention that Peru does not tax the indirect transfer of Peruvian real estate (ie, the transfer of stock issued by a real estate foreign holding company). For this reason, should the domestic target be a real estate asset, from the perspective of the potential capital gains tax on a future sale, it can be more convenient to acquire it by a foreign legal entity, which will allow to sale the foreign holding stock exempt from the capital gains tax (unless it qualifies as an indirect transfer of Peruvian stock subject to this tax) and Alcabala tax (see question 8), rather than carry out a sale of the Peruvian real estate that will be subject to both taxes (the capital gains tax applicable with a rate of 29.5 per cent for corporate transferors and the Alcabala tax applicable to any acquirer).

  13. 7.

    What types of tax benefits typically arise in connection with transactions in your jurisdiction? Do the parties typically address allocation of such benefits in the transaction documents?

  14. There are no tax benefits arising from a transaction itself. However, if the domestic target has tax benefits, the parties will probably address the allocation of such benefits and any tax contingencies in the transaction documents.

  15. 8.

    Do real estate transactions (or transactions involving real estate holding companies) create special tax issues in your jurisdiction?

  16. There is a tax on the transfer of real estate property (Alcabala tax) at a rate of 3 per cent, levied on the greater of the actual transfer value, or the official value for municipal real estate tax purposes. Approximately the first US$12,500 of taxable value are exempt. If the transfer is subject to VAT (see question 13), Alcabala tax is levied only on the land value determined through the official value for municipal real estate tax purposes. The acquirer is responsible for payment of the Alcabala tax.

    It is important to note that there is no exemption from this tax in case of real estate transfers made as a consequence or within corporate reorganisation processes.

    There is no a specific transaction tax levied on the transfer of real estate holding companies other than the capital gains tax (see question 12 with respect to this tax and the temporary exemption for transfers on the Lima Stock Exchange). Capital gains from transfers of real estate properties by domiciled individuals are subject to a 5 per cent tax, but if the transferor habitually carries on sales of real estate and/or has acquired the real estate property to make a profit by selling it, such tax rate increases to 29.5 per cent of the capital gains. The same 5 per cent tax applies if the transferor is a non-domiciled individual. Transfer of real estate is subject to a 29.5 or 30 per cent capital gains tax if the transferor is respectively a Peruvian or a foreign corporation.

    Tax incentives have been recently approved to promote the development of investment funds or securitisation trusts that make investments in real estate for renting (such as REITs in the United States or FIBRAs in Mexico), provided that certain requirements are met. The incentives allow the investors to defer the recognition of capital gains tax derived from their contribution of real estate to such funds or trust, until the opportunity in which the fund or trust transfers its securities or transfer the real estate property to a third party. In the case of  funds, the incentives also allow  the acquirer of the real estate to defer payment of the tax on real estate transfers until any of the referred events occur (ie, the investors transfer their securities or the fund transfers the real estate property to a third party. For tax purposes, the placement price of the securities is deemed to be their fair market value.

    Likewise, individuals that invest in such specific funds or trusts will be subject to a reduced withholding tax of 5 per cent, instead of the corporate tax rate of 29.5 or 30 per cent. This tax rate shall be calculated on the income or gains derived from the funds or trusts.

    Finally, transfers of securities issued by the referred funds or trusts are exempt from the capital gains tax provided that the transfer is made on the Lima Stock Exchange and the securities have market liquidity thereon.

  17. 9.

    Are there other categories of transactions (involving other types of assets or specific types of entities) that raise distinctive tax issues (for example, in the United States, transactions involving real estate investment companies and regulated investment companies)?

  18. There are no taxes on other categories of transactions, neither a tax on transactions involving real estate investment companies nor one on transactions regarding regulated investment companies.

  19. 10.

    Does your jurisdiction impose any distinctive taxes (eg, non-income taxes) that need to be specifically addressed when structuring and documenting cross-border deals?

  20. A tax of 0.005 per cent is levied on financial transactions (ITF) (ie, on each debit or credit performed in Peruvian bank accounts). Peruvian law also states that payments in cash not using a bank account are not recognised for tax purposes as, for example, expenses, costs, fiscal credits, tax recovery, and so on. Therefore, the purchase price of stock or assets shall be paid through a Peruvian bank account in order to be recognised as tax cost basis for eventual future transfers subject to tax, and in such a case the credit (deposit) and the debit (withdrawal) from this bank account will be subject to an overall ITF tax burden of 0.01 per cent for the account holder.

  21. 11.

    Do withholding taxes apply to transactions either from or into your jurisdiction?

  22. Withholding taxes apply to different transactions, especially when non-domiciled taxpayers obtain Peruvian sourced-income. The payer of the income is obliged to withhold the tax if it is a domiciled entity or individual. It should be noted that domiciled acquirers of securities issued by Peruvian companies when the transfer is performed by a non-domiciled taxpayer on the Lima Stock Exchange are not obliged to withhold the Peruvian income tax. Instead, CAVALI, which is the responsible for the registration, transfer, clearing and settlement of securities conducted at the Lima Stock Exchange, has been appointed as the withholding agent of the capital gains tax. Other income tax liabilities of non-domiciled taxpayers shall be paid directly by themselves when no withholding agent exists. However, transfer of stock and other securities on the Lima Stock Exchange may be temporarily exempt from capital gains tax (see question 12).

  23. 12.

    If withholding taxes apply to a transaction,what are the rates? Can they be reduced by treaty or are there structuring techniques or certification processes to avoid or mitigate the tax cost?

  24. Peruvian sourced-income paid to non-domiciled taxpayers are subject to a withholding tax with the following rates:

     

    Non-domiciled

    Peruvian sourced-income

    Rate

    Individuals

    Dividends

    5%

     

    Capital gains from sale of securities on the Lima Stock Exchange

    5% (exemption may apply)  

     

    Interest

    4.99% if certain requirements are met, otherwise 30%

     

    Other passive income (except for royalties)

    5%

     

    Income of artists, interpreters and performers for live spectacles

    15%

     

    Other income (including royalties, capital gains from sale of real estate and capital gains from sale of securities over the counter)

    30%

    Companies

    Dividends

    5%

     

    Capital gains from sale of securities on the Lima Stock Exchange

    5% (exemption may apply)  

     

    Technical assistance services and income of artists, interpreters and performers for live shows

    15%

     

    Rental of ships or aircrafts

    10%

     

    Interest

    4.99% if certain requirements are met, otherwise 30%

     

    Other income (including royalties, digital services and capital gains from sale of securities over the counter)

    30%

    Certain tax rates can be reduced according to what is agreed in double tax treaties (see question 25). 

    Likewise, it should be noticed that from 1 January 2016 through 31 December 2018, any capital gains derived from the transfer of stock and other securities on the Lima Stock Exchange (such as ADRs, GDRs, participation in real estate’ funds or trusts, among others) will not be subject to tax if the stock meets the liquidity threshold to be established by the regulations and the seller, individually considered or together with its related parties, do not transfer more than 10 per cent of the total stock issued by the target company in any 12-month period. In case of securities other than stock, different requirements may be applicable. 

    With respect to the tax on dividends, it currently ascends to 5 per cent. However, dividends resulting from income generated in previous years are subject to different tax rates: 6.8 per cent for profits generated in fiscal years 2015 and 2016, and 4.1 per cent if they were generated in previous fiscal years. 

  25. 13.

    Are VAT or transfer taxes significant? If so, in which types of transactions?

  26. VAT is levied at a rate of 18 per cent on the transfer value of local moveable goods or rights over moveable goods, intellectual property rights, goodwill and similar rights. VAT is also levied on the building value from the original transfer of real estate built by a construction entity (building value is deemed to be 50 per cent of the transfer value). Sellers or services providers are considered to be taxpayers, but VAT may be charged to the purchaser or user, who is entitled to offset such VAT as a tax credit against the VAT debits levied on the purchaser’s sales and services, to the extent that the purchaser is a habitual entity subject to VAT. This tax also applies to services rendered or used in Peru and on importations of goods.

  27. 14.

    Are there strategies to mitigate VAT or transfer taxes? What party typically bears the costs of VAT and transfer taxes?

  28. Transfers on corporate reorganisation processes are exempt from VAT. The party that typically bears the costs of VAT is the acquirer, user of services or importer. Additionally, in the context of a corporate reorganisation process, it is also possible to transfer the balance of VAT fiscal credits.

  29. 15.

    What is the statute of limitations for tax claims in your jurisdiction?

  30. The ordinary statute of limitations is four years. This period is extended to six years if the taxpayer has not filed its tax return, and to 10 years if the withholding agent has withheld the tax but fails to make the payment to the Peruvian Tax Administration. These periods are computed starting on 1 January of the following year on which the payment of the taxes should have been made (ie, the statute of limitations for the VAT liability of May 2013 that should be paid within June 2013, started as of 1 January 2014 and will elapse in January 2018 provided that the taxpayer has filed the respective tax return, while income tax liability corresponding to the fiscal year 2013 that should be paid until March 2014, started as of 1 January 2015 and will elapse in January 2019, provided that the taxpayer has filed its corresponding tax return). As a result, the ordinary effective statute of limitations is more than four years in the case of monthly tax liabilities and five years in case of annual taxes, unless such terms are temporarily suspended or interrupted. As a general rule, its computation is interrupted by any action of the Peruvian Tax Administration intended to determine or collect a tax debt, or if the taxpayer recognises in any manner the existence of the tax debt, while the suspension occurs during any proceeding of claim or appeal. As from the interruption, an overall new term should be computed. In case of suspension, once the suspension ceases the term previously accumulated reinitiates its computation.

  31. 16.

    In your jurisdiction, can a target be liable for taxes of other members of the consolidated group of which it was a member prior to an acquisition? Is the tax authority likely to assert such a liability against a target?

  32. Acquirers of the assets are jointly and severally liable for taxes liabilities of the transferor pre-existing to the transfer, up to the amount of the transferred assets. The responsibility ceases after two years if the transfer is notified to the Peruvian Tax Administration. Otherwise, it will cease after the statute of limitations elapses. Therefore, the domestic target can be liable for taxes of other members of the consolidated group from which it was transferred up to the amount of the assets that the domestic target hase acquired therefrom. However, the tax authority is not likely to assert this liability to the acquirer that is not a related-party to the seller unless the transaction has been performed to conceal assets of the transferor with the aim to avoid the payment of its tax liabilities.

    The domestic target can also be jointly and severally liable for taxes arising for non-domiciled taxpayers from the direct or indirect transfer of shares issued by the domestic target, provided that such non-domiciled transferor has been a related party thereto in any part of the 12-month period prior to the transfer of shares, unless the acquirer in the indirect transfer of Peruvian shares is domiciled in Peru and is obliged to withhold the capital gains tax, and even if CAVALI has participated as the withholding agent. The non-domiciled transferor and the domestic target are deemed to be related parties if in any part of the 12-month period prior to the transfer of shares, the first holds, directly or indirectly, more than 10 per cent of equity of the latter; or if more than 10 per cent of the domestic target and the non-domiciled transferor belong to common partners; or if they have one or more common directors, managers or administrators who have decision-making powers in the financial, operative or commercial decisions adopted by them; or if both parties are obliged to have consolidated financial statements, among other cases. The tax authority is likely to assert this liability to the target company that has issued the shares subject to transfer.

  33. 17.

    Is there a typical approach to pre-closing tax indemnification in your jurisdiction?

  34. There is no typical approach. The parties are free to agree any kind of tax representations, tax covenants and tax indemnification clauses. These clauses have effects between the parties exclusively and cannot be alleged before the Peruvian Tax Administration to transfer or shift from one party the tax liabilities that, according to the law, correspond to the other party.

  35. 18.

    Are indemnification payments under a purchase agreement taxable to the recipient? Is an indemnity obligation in your jurisdiction typically grossed up for taxes?

  36. If the indemnification is due exclusively for emerging damages, it will not be considered as taxable income. On the contrary, indemnification for loss profits will be considered as taxable income. If the recipient of the indemnification is a non-domiciled entity, for the indemnification to be subject to tax, it must qualifiy as Peruvian-sourced income. Indemnification payments received by a business for damages or losses suffered in its assets are tax exempt up to the amount equal to their tax cost basis, but losses of such tax cost basis are not deductible in turn. Any excess of the indemnification payments over the tax cost basis of the damaged assets is taxable at the corporate rate of 29.5 per cent, unless such excess is destined to the acquisition of new assets to replace those damaged or lost, provided the acquisition is agreed and the new assets come into operation within six or 18 months following payment of the indemnification, respectively.

  37. 19.

    Under what circumstances would an investor in a target in your jurisdiction have a tax filing obligation in your jurisdiction solely as a result of its equity interest in the target company?

  38. An investor in a domestic target has no tax filing obligations in Peru solely as a result of its equity interest. The tax on dividends distributed by the domestic target shall be withheld and paid by the domestic target, then the investor is not required to make filings before the Peruvian tax authorities.

  39. 20.

    In your jurisdiction, are there techniques to efficiently push debt down into subsidiaries in jurisdictions with high tax rates?

  40. A Peruvian company acquiring business assets, and which borrows to fund their purchase price, is entitled to deduct interest expenses for tax purposes; although, thin capitalisation rules limit the deduction of interest charged by related parties, either through local or foreign financing. The limitation is determined, on an overall basis, for interest exceeding the 3:1 debt-to-equity ratio of the debtor computed at the end of the previous fiscal year.

    With respect to the financial charges, incurred by a Peruvian company acquiring shares, which borrows to fund the purchase price of such shares, the Peruvian Tax Administration (SUNAT) has been rejecting the deduction, arguing that shares issued by a domiciled entity do not generate taxable income to the acquirer, since intra-corporate dividends distributed between domiciled entities are not taxed. The Peruvian Tax Court considers (even though not as binding precedents) that there can be business reasons to acquire shares other than to simply obtain dividends (for example, with the aim of controlling a channel of distribution, to secure the provision of inputs that the target controls or distributes, to obtain certain exclusive rights of the target, to control key assets of the target, among other grounds). In such cases, it has been argued that if those reasons are connected to the generation of taxable income, interest expenses arising from funds borrowed to purchase shares may be deducted for tax purposes by the Peruvian company that is the debtor.

    There is a 30 per cent withholding tax on interest payments to foreign lenders related to the borrower and from back-to-back schemes (instead of a reduced 4.99 per cent withholding tax applicable under certain conditions (see question 12)).

    There are no rules allowing debt pushdown under Peruvian tax laws. However, based on the above-mentioned grounds of the Fiscal Court, it shall be considered that it is possible to make a debt push-down pursued through mergers into or with the domestic target acquired.

  41. 21.

    Describe any limitations, such as earnings stripping or royalty stripping rules, that limit the ability to effectively shift taxable income when structuring M&A deals.

  42. There are no royalties stripping rules limiting the ability to deduct payment of royalties for income tax purposes. However, there are transfer pricing rules (see question 22) and a general anti-avoidance tax rule (GAR). The application of the latter, however, is temporarily suspended until the respective regulations are approved by the Executive Branch. There are earning stripping rules that limit the deduction of interest charged by related parties, either through local or foreign financing, with respect to the debt with related parties that, on an overall basis, exceeds the 3:1 debt-to-equity ratio (see question 20), considering the equity computed at the end of the previous fiscal year, or the initial equity in case of companies incorporated during the same fiscal year.

  43. 22.

    Is there transfer pricing legislation in your jurisdiction that could apply to transactions among a target and its subsidiaries or affiliates? If so, how restrictive is it?

  44. In the case of sales and other property transfers, as well as in the rendering of services, notwithstanding the economic consideration agreed upon between the parties, the transaction shall always be deemed as made at its corresponding fair market value. If the value determined by the parties differs from the fair market value – if it is under or overvalued – then the Tax Administration may adjust the price of such transaction for tax purposes.

    Furthermore, prices agreed in transactions between related parties or with entities domiciled in tax haven countries or territories must be those that would have been set in transactions between independent parties under equal or similar conditions (arm’s-length principle). Under these rules, taxpayers must submit to the Peruvian Tax Administration an annual local file as well as a master file and a country-by-country report, when applicable. 

  45. 23.

    Does your jurisdiction have anti-deferral regimes that apply to operations and income of subsidiaries (for example, a controlled foreign corporation regime, whereby a parent entity would be required to take into income undistributed income earned by a subsidiary)? Do these regimes affect cross-border planning?

  46. The Peruvian Income Tax Law has been amended to introduce a new regime of international fiscal transparency or controlled foreign entities (CFE), starting 1 January 2013. Pursuant to this regime, a Peruvian resident taxpayer subject to Peruvian income tax on his, her or its worldwide income will be taxed directly on the passive net incomes obtained since that date by a CFE – owned by resident taxpayers – according to its participation thereon, even if such entity does not distribute or remit them to its owners or shareholders.

  47. 24.

    Are there exit strategies, besides stock or asset sales, that are used in your jurisdiction to achieve tax benefits?

  48. Corporate reorganisations followed by transfers of the domestic target stock or capital reductions are exit strategies that may allow certain tax benefits.

    With respect to corporate reorganisations, Peruvian tax laws allow that neither income tax nor VAT liabilities are derived from the transfer of assets within corporate reorganisations. However, it is worth mentioning that as of 1 January 2013, in case of spin-offs if more than 50 per cent on either capital or voting rights of the shares issued by the recipient company in exchange of the assets and liabilities received through the spin-off are transferred or cancelled, inclusively for another reorganisation, and such transfer or cancellation is made before the end of the fiscal year following that on which the reorganisation came into effect, then the transfer of assets through the reorganisation shall be deemed a tax event (generating taxable capital gains for the difference between the fair market value of the assets and their tax cost basis). That is, such transfer of shares in the relevant period mentioned above will trigger a capital gains tax on the transfer of the assets through the spin-off (ie, no tax-neutral regime applies), irrespective of the tax arising from the transfer of the shares itself. In such a case, the recipient company is considered the taxpayer and the shareholders that transfer their stock are jointly and severally responsible for such tax.

    Furthermore, when the sale of shares issued as a result of the spin-off does trigger the tax event for the transfer of the assets through the spin-off, it should be noted that there is no provision allowing the step-up of the shares’ tax cost basis as a consequence of the income tax payable by the acquirer of the assets.

    As it may be seen, these provisions intend to avoid or diminish the use of corporate reorganisations to reach tax benefits or tax burdens reductions in scenarios of sale of a domestic target company or assets.

  49. 25.

    Discuss your tax treaty network and how that facilitates or impacts tax structuring for cross-border deals. Are any treaties being negotiated or renegotiated? Are any major changes in the structure of your treaties expected? 

  50. Peru has entered into double tax treaties (DTTs) with Chile, Canada and Brazil, currently in force, and has executed a DTT with Spain that is not in force yet (this DTT is still pending of approval by the Peruvian Congress). More recently, Peru entered into a DTT with Mexico, Switzerland, Portugal and Korea, which came into force on 1 January 2015. Peru is also a member of the Andean Community and, as such, the rules to avoid double or multiple taxation within the Andean Community established in Decision 578 are applicable.

    Such DTT and Andean Community regime facilitates tax structuring for cross-border deals, especially with Chile, Canada and Colombia. However, given the limited number of DTT currently in force (seven DTTs and the Andean Community regime) the impact is restricted. Moreover, it is necessary to extend the network of DTTs and to complete the approval process in the Peruvian Congress of those DTTs already executed but not yet in force, especially with certain jurisdictions where major investors in Peru are residents, such as Spain. As per public information, Peru is negotiating the execution of DTT with France, Sweden, Italy and the United Kingdom.

    Considering the active participation of the Peruvian government in the meetings and studies to elaborate the final report of specific actions to avoid BEPS, and though Peru is not a member of the OECD, future amendments to the domestic rules and to the structure of treaties are expected to be introduced within the mid-term. In October 2017, Peru has signed the Convention on Mutual Administrative Assistance on Tax matters of the OECD, which is expected to enter into force on 1 January 2019, following its ratification by the Peruvian Congress, and which will allow Peru to participate in the automatic exchange of financial information with more than one hundred signatory countries of the said Convention.

  51. 26.

    Does your jurisdiction identify certain jurisdictions as tax havens and subject them to adverse tax consequences when they are involved in M&A transactions? Give details.

  52. Peruvian income tax regulations establish a list of no-tax or low-tax jurisdictions (tax havens). Moreover, it can be qualified as such any territory or country wherein the income tax effective rate is zero per cent or less than the 50 per cent of the Peruvian income tax rate that would apply on income of the same nature and that, additionally, meets any of the following criteria:

    • lack of effective exchange of information;
    • establishing a special tax regime exclusively available for non-residents;
    • having an impediment for non-residents to operate in the domestic country or territory; or
    • when the country or territory promotes itself as a tax haven jurisdiction through which non-residents can avoid the tax burdens in their residence country or territory.

    As a general adverse tax consequence, expenses and capital losses derived from transactions entered into with residents or permanent establishments of tax havens or any other subject that receives income, earnings or profits through a tax haven are not deductible for income tax purposes, except for those arising from the following transactions:

    • foreign credits;
    • insurance and reinsurance activities;
    • international transportation; and
    • tolls to cross the Panama Channel.

    ​Furthermore, losses derived from financial derivative instruments executed with tax-havens residents are not deductible for tax purposes.

    Likewise, taxpayers that enter into transactions with tax havens residents shall be obliged to file the annual transfer pricing affidavit including information of such transactions and to submit a transfer pricing technical study to the Peruvian authority in order to support the prices agreed on those transactions with such transfer pricing technical study.

  53. 27.

    Describe any material state, provincial or local taxes that may arise in an M&A deal involving a target, a buyer or a seller located in your jurisdiction.

  54. As mentioned before, there is a neutral tax regime for corporate reorganisations for both income tax and VAT purposes, but transfers of real estate, even though within corporate reorganisations processes, are levied with the Alcabala tax, which constitutes a restriction or tax over cost for deals involving reorganisations of domestic targets that have important real estate assets.

  55. 28.

    Are there any proposed laws or regulations that could significantly change how transactions are structured in your jurisdiction?

  56. The most important would be the amendments that the Peruvian Government is pursuing to implement most important OECD’s BEPs actions.

    Peru is not a member but there is a Country Programme launched by the OECD in order to help Peru to become a member thereof. Peru has been participating in Regional Meetings that address the introduction of the BEPs Action Plan in Latin American and Caribbean countries. In these meetings, Peru has identified as priority areas for BEPS: Limiting base erosion via interest deductions and other financial payments (Action 4); Risks in transfer pricing matters and re-characterisation of income (Actions 8 to 10); Tax challenges of the digital economy (Action 1); transfer pricing value in transactions with commodities (Action 10); and the transfer pricing documentation and reporting implementation package (Action 13).

    It is expected that Peru will implement future recommendations on BEPS resulting from the OECD and G20’s initiative, since Peruvian laws already establish rules that control or avoid base erosion through thin capitalisation, controlled foreign corporations, indirect transfer of shares and a GAAR – though the application of the latter is still suspended. One issue where amendments can be expected is the definition of Permanent Establishments (PE) to prevent the artificial avoidance of PE status, considering that the Peruvian definition of PE is essentially the same as it was 30 years ago. It is also expected that certain amendments will be made in the Peruvian regulations to allow the Tax Administration to identify the beneficial owner of assets.   

    In December 2016, the Peruvian government introduced certain amendments in connection to the transfer pricing documentation, lack of “comparables” to determine transfer pricing values, safe harbours, tax incentives and commodities. 

  57. 29.

    What are the corporate tax rates applicable in your jurisdiction on ordinary income and capital gains? Are there any other categories of income subject to preferential rates that are relevant in M&A deals in your jurisdiction?

  58. The general corporate tax rate is 29.5 per cent, applicable to both income and capital gains obtained by domestic subsidiaries. There are no preferential rates for domestic subsidiaries since any income thereof is considered as business income and subject to the same general tax rate, except for certain corporate tax reductions in case of special regimes, such as those for taxpayers domiciled in the Amazon or for subjects who carry out agro-industrial activities.

    Domestic subsidiaries are also obliged to share profits with their employees. The employees’ profits share is determined with a rate of 5 per cent, 8 per cent or 10 per cent (depending on the subsidiaries' economic activities) on the company’s annual income before taxes. The profits sharing duly paid to the employees is deductible for corporate tax purposes. The profit sharing is not mandatory for companies that have an average of 20 or fewer employees during the fiscal year. The employer company may agree to pay additional or voluntary profit sharing to its employees, in which case the amount paid is also deductible for corporate tax purposes.

    For tax rates applicable to Peruvian sourced-income obtained by non-domiciled taxpayers see question 12.

  59. 30.

    Does your jurisdiction impose any taxes as a result of the indirect transfer of a company organised in your jurisdiction? 

  60. Capital gains arising from the transfer of shares (or quotas) issued by a foreign parent entity, which implies an indirect transfer of Peruvian shares, are deemed to be Peruvian source income and subject to capital gains tax irrespective of the domicile of the transferor, provided that the following two requirements are concurrently met:

    • the fair market value of the stock issued by the domestic subsidiary, whether it is owned directly or indirectly by the foreign parent entity, is equal to 50 per cent or more of the fair market value of the stock issued by the foreign parent entity in any moment during the 12-month period prior to the transfer; and
    • in any 12-month period, 10 per cent or more of the shares issued by the foreign parent entity are transferred.

    If both conditions are met, the taxable basis will compute the transfers made within such 12-month period.

    If the foreign parent entity whose shares are transferred is resident in a tax haven, there is a presumption that the first requisite mentioned above is met, unless the transferor can give evidence on the contrary. For the purpose of determining the fair market value of the stock issued by the foreign parent entity, it will be the higher stock exchange price, whether at the opening or closing, within the 12-month period prior to the transfer, if applicable, or the net patrimony value of the shares calculated on the basis of the last audited annual balance sheet of the issuing company prior to the transfer. In the absence of such audited balance sheet, the fair market value will be that determined by an independent appraisal at the closing of the fiscal year prior to the transfer of shares.

    As regards the second requirement, currently there are no detailed rules establishing how the 10 per cent threshold shall be computed.

    If both requirements are met, the taxable basis shall consider all the transfers of shares performed within the 12-month period prior to the transfer.

    In April 2015, an amendment was enacted to oblige an indirect transferor of Peruvian stock to obtain a certification before SUNAT in order to deduct the tax cost basis for the determination of taxable capital gains. Through this amendment, SUNAT can now be immediately notified of the indirect transfer of Peruvian stock and the trigger of the capital gains tax applicable thereto.

    Furthermore, Peruvian companies that are indirectly transferred are jointly and severally liable with the transferor for any unpaid taxes, if during any of the 12 months prior to the indirect transfer, they were deemed related parties. Among other cases, parties are deemed related for these purposes when the non-resident transferor owns more than 10 per cent of the capital of the Peruvian company, directly or indirectly. As a result, SUNAT can collect the transferor’s unpaid taxes from the Peruvian company.

    In order to determine the capital gains arising from an indirect transfer of Peruvian shares, the tax cost basis of the foreign shares subject to transfer shall be deducted from the transfer price thereof. The tax cost basis of such shares will be the greater of the cost incurred for the acquisition of the shares and their fair market value determined at 15 February 2011 (which is the date from which the Peruvian law has included the capital gains derived from indirect transfers of Peruvian shares as taxable domestic sourced income).

    It is also deemed to be an indirect transfer of Peruvian shares when a non-domiciled entity that directly or indirectly has shares or participations in a Peruvian subsidiary, issues new shares or participation quotas as a consequence of a capital increase because of new contributions, capitalisations of accounts payable or reorganisations, and such new shares or quotas are placed at a value that is less than their fair market value, provided that in any moment during the 12-month period prior to the new issuance, the fair market value of the stock issued by the Peruvian subsidiary, whether it is owned directly or indirectly by the foreign parent entity, is equal to 50 per cent or more of the fair market value of the total stock issued by the foreign parent entity before the new shares or quotas have been issued.

    Indirect transfers of Peruvian shares by non-resident entities or individuals are subject to capital gains tax at a rate of 30 per cent, or the reduced rate of 5 per cent if the transfer is performed on the Lima Stock Exchange (an exemption will apply for certain transfers of stock and other securities on this market until 31 December 2019, see question 12).

  61. 31.

    Are there significant tax issues relating to foreign currency matters in transactions in your jurisdiction involving buyers or sellers resident in other jurisdictions?

  62. Peru does not establish any foreign exchange controls and there are no restrictions on foreign currency transactions.

    As a general rule, taxpayers shall record their transactions and operations in the accounting books in local currency. Therefore, the foreign exchange gains or losses arising from assets, liabilities or payments in foreign currency, as well as from the acquisition of foreign currency, shall be computed in order to determine their taxable base.

    However, certain domestic subsidiaries can keep accounting books in US dollars provided that they enter into certain type of agreements with the Peruvian government authorising them to record their transactions in US dollars, and receive direct investment in foreign currency. In such a case, the exchange gains or losses arising from assets, liabilities or payments made in local currency by the domestic subsidiaries, as well as from their acquisition of local currency, shall be computed in order to determine their taxable base.

  63. 32.

    Discuss and describe any other relevant tax issues in cross-border M&A transactions in your jurisdiction that are not covered in the prior questions.

  64. It is worth mentioning that local and foreign investors, as well as domestic subsidiaries that receive eligible investments therefrom (recipient companies), may enter into legal stability agreements (LSA) with the Peruvian government by which the income tax regime, foreign exchange and no discrimination regulations (among other guarantees) in force at the time the LSA is executed remain valid and in full force for a term of up to 10 years (or during the term of the concession in the case of concessions granted by the Peruvian government to private parties for the construction of public infrastructure or rendering of public services, which in no case shall exceed 60 years). Under such guarantee, any future amendments of such regulations cannot be applied to the investors or recipient companies, correspondently, during the maturity of their respective LSA, whether such amendments are favourable or adverse to their interests, except if the investors or recipient companies voluntarily relinquish the LSA protection as they are entitled to.

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Questions

  1. 1.

    In your jurisdiction, can the acquisition of a domestic target limit the target’s use of existing tax attributes, such as net operating loss carry forwards or tax credits? Are there strategies or structures to preserve such attributes?


  2. 2.

    When companies that are resident in your jurisdiction are sold to foreign investors, is it more common to sell stock or assets?


  3. 3.

    Are there particular structures that generate a step-up in the tax basis of assets in a tax-efficient manner?


  4. 4.

    Are there structuring opportunities that would enable a foreign acquirer to provide equity consideration to the shareholders of a domestic target in a tax-deferred manner? Are the rules similar if both the acquirer and the target are domestic?


  5. 5.

    Can management generally roll over its equity in an acquisition in a tax-deferred manner? Are there certain circumstances where a tax-deferred rollover is difficult or impossible?


  6. 6.

    Which holding company structures are typically used by foreign investors to acquire domestic targets in your jurisdiction?


  7. 7.

    What types of tax benefits typically arise in connection with transactions in your jurisdiction? Do the parties typically address allocation of such benefits in the transaction documents?


  8. 8.

    Do real estate transactions (or transactions involving real estate holding companies) create special tax issues in your jurisdiction?


  9. 9.

    Are there other categories of transactions (involving other types of assets or specific types of entities) that raise distinctive tax issues (for example, in the United States, transactions involving real estate investment companies and regulated investment companies)?


  10. 10.

    Does your jurisdiction impose any distinctive taxes (eg, non-income taxes) that need to be specifically addressed when structuring and documenting cross-border deals?


  11. 11.

    Do withholding taxes apply to transactions either from or into your jurisdiction?


  12. 12.

    If withholding taxes apply to a transaction,what are the rates? Can they be reduced by treaty or are there structuring techniques or certification processes to avoid or mitigate the tax cost?


  13. 13.

    Are VAT or transfer taxes significant? If so, in which types of transactions?


  14. 14.

    Are there strategies to mitigate VAT or transfer taxes? What party typically bears the costs of VAT and transfer taxes?


  15. 15.

    What is the statute of limitations for tax claims in your jurisdiction?


  16. 16.

    In your jurisdiction, can a target be liable for taxes of other members of the consolidated group of which it was a member prior to an acquisition? Is the tax authority likely to assert such a liability against a target?


  17. 17.

    Is there a typical approach to pre-closing tax indemnification in your jurisdiction?


  18. 18.

    Are indemnification payments under a purchase agreement taxable to the recipient? Is an indemnity obligation in your jurisdiction typically grossed up for taxes?


  19. 19.

    Under what circumstances would an investor in a target in your jurisdiction have a tax filing obligation in your jurisdiction solely as a result of its equity interest in the target company?


  20. 20.

    In your jurisdiction, are there techniques to efficiently push debt down into subsidiaries in jurisdictions with high tax rates?


  21. 21.

    Describe any limitations, such as earnings stripping or royalty stripping rules, that limit the ability to effectively shift taxable income when structuring M&A deals.

  22. 22.

    Is there transfer pricing legislation in your jurisdiction that could apply to transactions among a target and its subsidiaries or affiliates? If so, how restrictive is it?


  23. 23.

    Does your jurisdiction have anti-deferral regimes that apply to operations and income of subsidiaries (for example, a controlled foreign corporation regime, whereby a parent entity would be required to take into income undistributed income earned by a subsidiary)? Do these regimes affect cross-border planning?


  24. 24.

    Are there exit strategies, besides stock or asset sales, that are used in your jurisdiction to achieve tax benefits?


  25. 25.

    Discuss your tax treaty network and how that facilitates or impacts tax structuring for cross-border deals. Are any treaties being negotiated or renegotiated? Are any major changes in the structure of your treaties expected? 


  26. 26.

    Does your jurisdiction identify certain jurisdictions as tax havens and subject them to adverse tax consequences when they are involved in M&A transactions? Give details.


  27. 27.

    Describe any material state, provincial or local taxes that may arise in an M&A deal involving a target, a buyer or a seller located in your jurisdiction.


  28. 28.

    Are there any proposed laws or regulations that could significantly change how transactions are structured in your jurisdiction?


  29. 29.

    What are the corporate tax rates applicable in your jurisdiction on ordinary income and capital gains? Are there any other categories of income subject to preferential rates that are relevant in M&A deals in your jurisdiction?


  30. 30.

    Does your jurisdiction impose any taxes as a result of the indirect transfer of a company organised in your jurisdiction? 


  31. 31.

    Are there significant tax issues relating to foreign currency matters in transactions in your jurisdiction involving buyers or sellers resident in other jurisdictions?


  32. 32.

    Discuss and describe any other relevant tax issues in cross-border M&A transactions in your jurisdiction that are not covered in the prior questions.


Other chapters in Tax in Cross-Border Deals