The main applicable taxes in Peru, regarding individuals, estates, trusts, foundations and similar structures, are the following: Income Tax, Value Added Tax, Real Estate Transfer Tax (Impuesto de Alcabala), and Real Estate Property Tax (Impuesto Predial) vehicle ownership tax (impuesto al patrimonio vehicular) and financial transaction tax (impuesto a las transacciones financieras). Peruvian Legislation does not contemplate any gift or generation-skipping transfer taxes.
Income Tax (IT)
Peruvian resident individuals and entities are subject to taxation in Peru on their worldwide income. In contrast, non-resident taxpayers are taxed in Peru on their Peruvian source income only.
Income deemed to be sourced in Peru is specifically defined in the Peruvian IT Law and its regulations; to this extent, different criteria have been adopted for specific types of income. The concept of foreign source income covers any type of income not deemed to be sourced in Peru.
As a general rule, trusts and foundations of private interest are not regulated under Peruvian law. As exception, IT law has regulations about such kind of vehicles in the context of Controlled Foreign Corporations (CFC) rules.
Moreover, Peruvian legislation recognises other vehicles, such as the Peruvian Trust (“Fideicomiso”) and Investment Funds.
Taxation of resident individuals
The taxation of income obtained by resident individuals is divided into different categories of income, depending on their source and type of income.
Peruvian source income
The main criteria adopted by the Peruvian IT law in order to assess if an element of income reaches the Peruvian source threshold are the following:
Nominal IT rate on income derived from capital is 6.25%. A 20% flat deduction is granted, which results in an effective rate of 5%. Specific rules come into play depending on the specific source of income, as follows:
Taxable capital gains are equal to the difference between the fair market value of the assets transferred and the tax basis.
Capital gains on the transfer of real estate property: IT must be paid in following month in which the transfer takes place.
Capital gains on the trade of securities (including equity and debt securities): IT must be paid on an annual basis. Additionally, monthly advanced payments are required as follows:
At the end of each fiscal year, the investor must file an annual tax return calculating the net gain resulting from the trades performed during such fiscal year. Advanced payments are credited against the resulting IT. Any negative balance must be paid directly by the investor. Positive balance may be credited against further payments or reimbursed.
Capital gain tax on trades performed within the Lima Stock Exchange is available (Refer to Section 4.1 Asset Protection).
Losses: Losses on the trade of securities may be offset against gains on other trades of securities. Such losses cannot be offset against other type of income. Losses obtained in a fiscal year cannot be carried forward. Losses on other transactions (such as derivatives or transfer of immovable property) cannot be offset against any element of income.
Expenses: Resident individuals are not allowed to deduct expenses other than the 20% flat deduction, mentioned above.
Both incomes obtained in independent and dependent labour relations is subject to taxation. The overall labour income obtained in each fiscal year is subject to the following progressive accumulative scale rate, which is based on amount of income obtained divided in Peruvian Tax Units (PTU) :
Deductions: Resident individuals are not allowed to deduct freely expenses for the calculation of the net labour income. Nevertheless, the following deductions are available:
Foreign Source Income
Foreign source income is added to the labour income obtained in each fiscal year and subject to taxation at the aforementioned progressive accumulative scale rate.
Foreign source income includes any element of income that does not reach the Peruvian source threshold, including foreign sourced dividends, interest, capital gains, and real estate income, among others.
Expenses: Peruvian resident individuals are allowed to deduct expenses for the calculation of foreign source net income.
Losses: Foreign source losses may be offset against other foreign source income. However, net losses derived from countries and territories deemed as tax havens cannot be offset. Foreign source losses cannot be offset against Peruvian source income or carried forward.
Latin-American integrated market (MILA) Regime: Capital gains derived from the trade of foreign securities through any of the Stock Exchanges of the countries that participate in the MILA Agreement – that is, Peru, Chile, Colombia and Mexico - are subject to a reduced tax rate of 6.25%.
In practice, as per such regime:
The above regime applies even if the securities traded have been issued by entities incorporated outside the MILA Market.
The calculation on the taxable income admits the deduction of both the tax basis of the securities and expenses incurred in the transaction (ie, brokers’ commissions, among others).
Business profits are subject to IT at the general rate of 29.5% over net income. Resident individuals may obtain business profits from the following sources:
Peruvian Trusts and Investment Funds are deemed as disregarded vehicles. Income obtained by such vehicles is deemed to be obtained directly by the holders of the equity securities issued by such vehicles. Hence, if such vehicles perform business activities, the resulting income will be taxed at the investors’ level at the general rate of 29.5%.
Typically, this is the case of Securitisation Trusts and Investment Funds that perform investments in real estate, factoring, leasing, among other activities. In the case of Administration trust, this must be further analysed on a case-by-case basis.
Specific instruments and tax benefits
Peruvian Real Estate Investments Trusts (REIT) and Real Estate Investment Funds (REIF) Regimes - Real estate rental income obtained by resident individuals through REIT and REIF is subject to a preferential 5% IT rate (instead of the general 29.5% IT applicable on business profits).
Peruvian Short Term Debt Instruments (Peruvian “Factura Negociable” – Negociable Invoices) - Income derived from the acquisition of invoices at a discounted value, and the further collection of such receivable, is subject to a preferential 5% IT rate (instead of the 29.5% ordinary IT rate). This reduced tax rate applies even if the investment is performed through a Peruvian Trust or an Investment Fund.
Peruvian Mutual Funds - Investments in Peruvian Mutual Funds are subject to the capital gains tax regime, instead of the pass-through regime applicable to Peruvian Trust and ordinary Investment Funds.
Gains obtained in Peruvian Mutual Funds shall only be taxable when the investments are redeemed by the holder. The gain obtained will be subject to IT at the rate of 5% (even if the underlying investments of the fund are located outside Peru). However, losses derived from the redemption of Mutual Funds quotes cannot be offset against any other type of income.
Lima Stock Exchange Temporary Capital Gain Exemption - Peruvian and foreign capital gains derived from the trade of securities within the Lima Stock Exchange (Bolsa de Valores de Lima) are tax exempt until December 31, 2019 (this provision may be extended) provided that the following requirements are met:
(a) The security must be traded within the Lima Stock Exchange.
(b) The security must fulfill a market presence conditions (“presencia bursátil”, which is a liquidity threshold established in the Peruvian tax regulations).
(c) In any given twelve-month period, the Client and his related parties must not transfer the securities representing 10% or more of the total equity of the issuer.
The exemption applies to capital gains derived from the transfer of both Peruvian and foreign securities, as long as the requirements mentioned above are fulfilled.
The requirement mentioned in (c) applies only in the case of shares or securities representing shares. Other securities, such as Exchange Traded Funds, FIRBI and FIBRA quotes, mutual funds, among others, are not subject to such requirement.
Controlled Foreign Corporations (CFC) rules: Peruvian CFC Rules have been in force since January 1, 2013, in order to prevent the deferral of IT on foreign passive income obtained through foreign entities.
A foreign entity (including companies, foundations, trusts, among other vehicles) shall be deemed controlled by a Peruvian resident when, at the end of the fiscal year, directly or indirectly (solely or together with any related party), holds more than 50% of the equity, benefits or voting rights of the non-domiciled entity.
In such cases, income obtained through foreign entities deemed as CFC will be taxable in the fiscal year in which they are obtained, even if no distribution is made.
Andean Community Regime: Capital gains, dividends and interests sourced in the countries that are part of the Andean Community – which includes Peru, Bolivia, Colombia and Ecuador – are subject to the provisions of the Andean Multilateral Taxation Regime (“Decisión 578 de la Comunidad Andina de Naciones”).
According to such Agreement, income obtained by the residents of the Andean Community is only taxable at source. Meanwhile, such income shall be considered tax exempt at the country of residence. As a result, income obtained by Peruvian residents derived from securities issued by entities incorporated in Colombia, Ecuador and Bolivia will be tax exempt in Peru. However, the income may be subject to taxation at source, according to the domestic provisions of these countries.
Double Taxation Treaties (DTT): Peru has signed DTT with Brazil, Canada, Chile, Switzerland, Mexico, Portugal and South Korea. Such DTT are based on the OECD Model Convention.
Taxation of non-resident individuals
Non-resident individuals are subject to the following IT regime:
Non-resident taxpayers are subject to taxation over gross income. Hence, no deduction of expenses is allowed, however, there are specific exceptions in which deductions are permitted. This is the case of independent labour income, where a 20% flat deduction is allowed; in such cases, although the nominal applicable rate is 30%, the application of the 20% flat deductions provides for an effective rate of 24%)
By the other hand, in the case of the transfer of goods and assets by non-resident taxpayers, the deduction of tax basis is allowed provided that such basis is previously certified by the Peruvian Tax Authority. In certain situations, tax basis is deductible even if no certification is obtained, such as the transfer of securities within the BVL.
Value Added Tax (VAT)
Among other transactions, Peruvian VAT levies the transfer and importation of goods, render of services, use rendered by non-resident providers, construction contracts and the first transfer of built real estate property. VAT is calculated over the transaction price, by applying the general 18% rate.
VAT does not levy investments or transactions performed by individuals, unless such individuals are engaged into business activities. In such cases, the general VAT regime would apply.
By exception, certain importations of goods made by individuals are subject to Peruvian VAT.
Real Estate Acquisition Tax (Impuesto de Alcabala)
Real Estate Acquisition Tax levies the acquisition of real estate property, whether there is a consideration for such transfer or not. Such tax is calculated by applying the general 3% rate over the acquisition price or the municipal value (“autovaluo”), whichever is higher. It should be noted that the first 10 PTU are exempt.
Real Estate Property Tax (Impuesto Predial)
Real Estate Property Tax is an annual tax that levies the value of urban and rural properties. The collection, administration and control of this tax correspond to the District Municipality where the property is located.
The tax is calculated by applying the following accumulative progressive scale to the tax basis:
Vehicle Ownership Tax (Impuesto al Patrimonio Vehicular)
Vehicle Ownership Tax is an annual tax that levies the ownership of cars and other vehicles. Such tax is due during three (03) years as of the following year in which the vehicle is first registered in the Peruvian Vehicle Public Registry.
Payable tax is calculated by applying the 1% rate over the original acquisition price of the vehicle; which cannot be lower than the value approved by the Ministry of Economy and Finance. The tax cannot be lower than 1.5% of the PTU as of January 1 of the year in which the tax is payable.
Financial Transaction Tax (Impuesto a las Transacciones Financieras)
Financial Transaction Tax (FTT) is generally imposed on debits and credits in Peruvian bank accounts. FTT is levied at the rate of 0.005%.
The right of property constitutes a constitutional guarantee, in the sense that the right of property is inviolable. In Peru, real estate is registered in the Real Estate Public Registry, where the characteristics, charges, encumbrances and the owner are detailed.
The Peruvian Civil Code presumes that every person has knowledge of the content of the inscriptions, which means that everything registered in the Peruvian Public Registry is opposable to third parties.
Also, the Civil Code provides for the acquisition of property, which implies that ownership of the property is acquired by prescription through continuous, peaceful and public ownership as of 10 years.
Common Reporting Standards (CRS)
On September 30, 2016 through Law No. 30506 the Congress delegated legislative powers to the Executive Branch to adapt national legislation to the international standards and recommendations issued by the OECD.
By Legislative Decree No. 1312, taxpayers belonging to multinational groups were obliged to present annually the Informative Affidavit of the country by Country Report (CbC Report) as of 2018 and regarding operations carried out in 2017.
Additionally, on October 25, 2017, Peru ratified the Multilateral Convention on Mutual Administrative Assistance in Tax Matters (MCMATM), which allows the exchange of financial and tax information with more than 100 member states that belong to the OECD Global Forum on Transparency and Exchange of Information.
Due to the aforementioned ratification, Peru has joined the list of countries that have undertaken a policy of international fiscal transparency and the fight against tax sham and avoidance.
In order for the automatic exchange to proceed, the jurisdictions had to sign the Multilateral Competent Authority Agreement on the Exchange of Country-by-country Reports (MCAA), Peru subscribed this Convention on November 9, 2018.
Finally, on July 2019, the Peruvian Tax Authority made the first automatic information exchange with 38 jurisdictions.
General anti-avoidance rule (GAAR)
On July 18th, 2012 the GAAR was incorporated as Rule XVI of the Preliminary Title in the Peruvian Tax Code.
The GAAR allows the SUNAT to consider the acts, situations, and economic activities performed, established, or desired by the taxpayers in order to determine the real nature of the taxable event. To this extent, Rule XVI establishes that when tax evasion is detected, SUNAT is entitled to collect the tax debt and fines; reduce the amount of balances due, or tax credits; or eliminate any tax advantage, without prejudice, to recover any amount that was wrongfully reimbursed.
Also, where there is no business purpose except to obtain a tax benefit, the SUNAT should challenge such transactions as artificial and apply the corresponding tax rules.
On July 12th, 2014, the Peruvian Congress promulgated Law No. 30230, by which the application of the second to fifth paragraphs of Rule XVI was suspended until its scope is established by Supreme Decree.
Finally, on May 7, 2019 came in force Supreme Decree No. 145-2019-EF “Parameters of substance and form for the application of the GAAR”. With these regulations the Peruvian GAAR becomes applicable and the Peruvian Tax Authority will be allowed to re-qualify “sham” transactions during tax audits. Currently, statute of limitations prevents to perform tax audits on fiscal year 2013 and previous years.
It is important to bear in mind that due to the process of application of the GAAR, even though the GAAR is now in force, SUNAT may not apply it before the members of the Review Committee are appointed.
The Peruvian Civil Code provides a forced heirship regime, explained in section 2.3 “Forced Heirship Laws”, which is mandatory and a matter of Public Order in Peru. Therefore, the Law does not allow individuals to enter agreements against such Law, when such Law does not specifically authorise to do so.
Nevertheless, Peruvian Administration Trusts (fideicomisos bancarios or fideicomisos en administración) and Life Insurance Policies are figures that are commonly used by high net-worth families in Peru.
Peruvian Administration Trusts (Fideicomisos Bancarios / Fideicomisos en Administración)
During the last decade, Peruvian Administration Trusts have become more frequently used for succession planning purposes. They provide an alternative to manage personal assets not only while the Settlor is still alive, but also when the Settlor has passed away. To this extent, Peruvian banking Law provides for a specific type of Peruvian Trust, so-called Testamentary Trust (Fideicomiso Testamentario), under which Settlor can represent his/her wishes and shall be followed by the trustee once the Settlor is deceased, provided that such wishes are not contrary to the forced heirship regime (as reflected under 'Testamentary Succession' of Section 2.3“Forced Heirship Laws”).
Additional Peruvian Administration Trusts are commonly used because of their tax benefits. According to Peruvian IT Law, the transfer of assets to a local trust by the Settlor will not generate a taxable event, as long as the trust is established as a trust with return of assets. Under this structure, the Settlor will only be subject to IT over the income derived from the investments made within the trust when such income is effectively distributed to the Settlor.
Therefore, a local revocable trust structure used by a Peruvian individual will generate a deferral on the payment of IT by the Settlor. When income is distributed by the Trust, the taxation of such income would be the same as if the income would have been obtained directly by the Settlor. This is due to the tax regime applicable to Peruvian Trusts, which are deemed as disregarded vehicles.
Life Insurance Policies
Individuals can contract with insurance companies, residents or non-residents in Peru.
Pursuant to Peruvian IT Law, as a general rule, Peruvian Policy Owners will be subject to IT on their global source income once they receive them, not before. So, the accumulation of profits within a structure is generally not levied unless such profits are distributed to the owner.
Therefore, the growth within the segregated accounts related to the policy contracted by the Peruvian resident will not generate a taxable event, unless distributions are made. So, the yield that is obtained during the course of the lifetime of the Policy Owner will not generate a taxable event, rather the IT will be deferred until a surrender or redemption is carried out.
Furthermore, upon the death of the insured, the beneficiaries of the policy will receive the death benefit, which according to the Peruvian IT Law, it is not subject to Peruvian IT, neither is it subject to any estate taxes. For Peruvian IT Law purposes, in the case of a Peruvian resident individual, an indemnity received from a life insurance policy does not qualify as taxable income.
The Peruvian succession regime shall be applicable only if the deceased individual originating the succession or Originator (ie, the Testator or a person who dies without a will) resided in Peru. Hence, according to the Peruvian Civil Code, successions will be treated according with the Law of the country of residence of the originator, regardless of the assets location.
However, the Peruvian Civil Code states that in case the Originator has resided and died outside of Peru, but has specific assets located in Peru that should be transferred to a foreign State by virtue of the succession; the Peruvian Law shall be applied.
Also, according to the Peruvian Civil Code, since death is legally considered as the end of an individual, all his assets and liabilities are transferred as such individual’s estate, which will become property of the successors.
Finally, from a tax perspective, succession planning for Peruvian individuals does not represent a challenge because inheritance income is not subject to Peruvian taxes. However, if the heirs are domiciled in a different jurisdiction, an analysis is required to understand if under the regulation of such jurisdiction, any inheritance tax consequences apply.
Regulation regarding succession is mandatory and a matter of Public Order in Peru. Therefore, the Law does not allow individuals to enter agreements against the Law, when the Law does not specifically authorise to do so.
Successions in Peru can be of two different types: testamentary; and intestate.
Since the testament represents the wishes of the Testator, the instructions contained therein must be followed. However, the Peruvian Civil Code establishes the following rules for the granting and distribution of the estate:
It establishes that the mandatory heirs are sons, daughters and direct descendants; parents and direct ascendants and the spouse or life partner. Accordingly, in case the Testator has descendants, all of them will inherit with the Testator's spouse in equal parts. The parents will only inherit in case no descendant exists, though in equal part to the spouse or life partner.
The estate is composed of the Provisions (Legítima), which is the part that cannot be disposed by the Testator in case he has mandatory heirs; and, the free disposal part, which varies in accordance of the mandatory heirs.
According to the Peruvian Civil Code and Peruvian Supreme Court Decision No. 68-1994, if a Testator has descendants or a spouse (mandatory heirs), then the Testator will be allowed to freely dispose only one third (1/3) of the total of the assets through his/her testament; the other two thirds (2/3) of the Testator estate shall be divided in equal parts between the mandatory heirs. In case the Testator only has parents, he/she will be allowed to freely dispose up to 50% of the total assets and the remaining 50% of the Testator estate shall be divided between the parents and the Testator spouse or life partner, if any. It is important to mention that the applicable portion for the spouse or life partner is independent to the applicable rights generated for the dissolution of the marriage/partnership.
If the spouses are married under the community of property regime, the spouse of the Testator will own 50% of the community or marital estate and the Testator may only dispose over the remaining 50% of the estate and as indicated in the prior paragraph.
We must point out that heirs are the successors who have the legal right to acquire the deceased’s estate. On the other hand, legatees are entitled only to a specific amount or assets indicated in the Testament; therefore, they can only be appointed by Testament. It is necessary that the legacy does not exceed the Provisions.
Finally, under a testamentary succession, the Testator may entrust one or more persons to execute the testament’s dispositions (an “Executor”). This Executor (Albacea) shall be appointed in the testament. People who have suffered underserving or disinheritance cannot act as Executor. The Executor shall be paid, unless the Testator established otherwise in testament. The maximum amount for its remuneration is 4% of the total amount of the deceased’s estate. The Executor shall present a memorandum to the successors regarding its activities under his position as Executor. Additionally, the successors may request the Court for the Executor’s removal, within the first ninety days following the disclosure of the will.
The Executor cannot delegate its duties to third parties unless justified reasons.
It is important to bear in mind that the Executor is not a representative of the estate, so he is not authorised to sue or defend the testament and its dispositions in court. In contrast, the succession is represented by the members who constitute it (the heirs).
Testamentary Succession could also take place by means of a Peruvian Testamentary Trust (Fideicomiso Testamentario), as mentioned under section 2.1 Cultural Considerations in Succession Planning.
Intestate succession occurs in the following scenarios:
In an intestate succession, a Court or a Public Notary shall declare the heirs. Afterwards, such declaration must be recorded in the Public Registry.
The Peruvian Civil Code establishes six orders of successors, where the first three are mandatory:
The successors under the first and third order will always inherit in equal parts; successors under the second order will only receive estate if there is no successor under the first order but always together with the spouse/life partner, if any, also in equal parts.
The successors under the fourth, fifth and sixth order will be only considered for inheritance purposes if there are no members under the first three orders in exclusive order.
The Executor figure does not exist under intestate successions. However, all of the successors are entitled to collectively act in representation of the estate, in cases where the estate is considered as an independent entity.
Tax treatment of the undivided succession
The undivided succession must obtain a Tax ID and pay directly its taxes until such time as the declaration of heirs is made (Intestate Succession) or the testament is registered in the Public Registry (Testamentary Succession), as applicable.
After any of these situations, each heir must pay the taxes regarding his part of the income of the estate.
Before getting married, the future spouses may choose among the community of property or separate estates regime.
Community of Property Regime: under this regime each spouse may have their own goods as well as common goods. According to Peruvian law, the following goods are considered personal property of each spouse:
All the goods that were not mentioned above are considered part of the community of property - even the ones acquired by the spouses from their work, industry or profession, the results of all their own goods, and the income from the copyright and patents.
Each spouse retains the administration of their own assets and for this reason they can dispose or burden them. In order to dispose the common assets or to burden them, the intervention of both spouses is necessary unless one of them grants powers to the other to represent them (this is not applicable when acquiring movable property or in specific cases established by law).
Separate Estates Regime: through this Regime, each spouse fully maintains the property, management and disposition of their present and future goods, as well as the results.
If the spouses do not choose a regime, it is presumed that they have opted for the community of property regime. We must point out that the Peruvian Civil Code allow spouses to change regimes during their marriage through a Public Deed.
Peruvian legislation does not recognise prenuptial and/or postnuptial agreements.
For IT purposes, income derived from assets affected by the community of property regime may be taxed in two different ways:
Inheritance, donations and, in general, free-of-payment transfers of assets between individuals are not taxable events.
However, the tax basis of the assets received by the beneficiaries is zero (0), unless the beneficiaries can support those tax basis that corresponded to such assets to the transferor. Specific documents are required by the Peruvian IT Law for these purposes, so-called “public instruments” (“instrumentos públicos”) or private documents with countersigned date (“instrumentos privados de fecha cierta”).
The above rules apply for: i) the transfer of securities performed as of January 1, 2013; and, ii) the transfer of real estate property as of August 1, 2012. Transfers of assets performed before such dates are subject to specific tax basis rules.
Bear in mind that such rules are relevant only regarding the transfer of securities and real estate property, because only the transfer of such type of assets may result in a taxable capital gain for individuals.
The only tax exempt mechanisms to transfer assets to younger generations is the inheritance in advance (anticipo de legítima) (tax implications are described in Section 2.5 Transfer of Property).
Inheritance in Advance (Anticipo de Legítima)
It is an act of liberality by which the testator transfers in life to his heirs the property, or part or all of his assets.
It should be specified that only the following heirs may participate in this transfer of assets: descendants (children and grandchildren), ascendants (parents and grandparents) and the spouse; and as long as such transfer is not contrary to the forced heirship regime.
Donations are voluntary acts by which an individual disposes of part of their assets and transfer them free of charge to a third party. For effectiveness purposes, it requires the concurrence of the following requirements:
Peru has no specific domestic provisions regarding the transfer of digital assets. Accordingly, in such cases, the general Peruvian tax provisions regarding intangible assets and capital gains will come into play.
As previously mentioned, Peruvian resident individuals are only subject to taxation on capital gains derived from the transfer of securities and real estate property. Hence, gains derived from the transfer of intangible assets, digital assets or cryptocurrency will not be deemed as taxable income for individuals.
By exception, if a resident individual performs investments with intangibles that are deemed as business activities, any income derived from such activities will be considered business profits subject to taxation at the rate of 29.5% over net income. This would have to be analysed on a case-by-case basis.
Trusts and foundations of private interest are not regulated under Peruvian law. However, Peruvian legislation recognises the existence of fiduciary property called “fideicomiso en administración” and investment funds.
Fideicomiso en administración
Peruvian trusts are regulated by the Peruvian Bank and Insurance Law and the Resolution 1010-99 issued by the Peruvian Bank and Insurance Superintendence. According to such Peruvian law and regulation, Trusts can be used for securitisation purposes, administration, guarantee, testamentary and others.
During the last decade, Trusts have been used for estate planning purposes, under which families and/or individuals set up trusts to consolidate, protect and preserve the family estate for the generations to come. Under this structure, the Settlor usually manages the assets while he/she is alive and provides for specific instructions related to the distribution of assets and legacy wishes to be followed by the trustee after the decease of the Settlor, which in any case, shall be in accordance with the Peruvian forced heirship regime (as reflected under the 'Testamentary Succession' of section 2.3 Forced Heirship Laws). Otherwise, such provisions will be null and void.
Peruvian Trusts also allow Settlor to incorporate a corporate governance for the compliance and execution of the trust provisions and offers an additional protection provided that:
According to Peruvian IT Law, the transfer of assets to a local trust by the Settlor will not generate a taxable event, as long as the trust is established as a trust with return of assets. Under this structure, the Settlor will only be subject to IT over the profits generated within the trust when these are effectively distributed to the Settlor.
For fiscal purposes, Investment Funds constitute neutral or transparent vehicles, hence they are not considered autonomous taxpayers of IT, but qualify only as management vehicles.
According to Peruvian IT Law, investment funds are pass-through vehicles and as such, the IT rules are applicable to the investors, taking into consideration the nature and condition of each investors.
In this sense, investment funds are not obliged to pay as taxpayers for the income they obtain. However, the IT Law and its Regulations contain specific provisions that regulate the opportunity in which the recognition of the income obtained through Investment Funds in the heads of the participants or investors must take place. These events give rise to what has been legislatively called as an "attribution" of income in favour of the participants, which results in the computation of the income attributed by the fund in favour of the participants or investors.
For IT purposes, foreign trusts are deemed as ordinary foreign entities (ie, non-resident company); therefore, CFC Rules may apply. In order for Peruvian CFC Rules to apply, the Peruvian taxpayer must own or control an offshore entity that is deemed as a Controlled Foreign Entities (CFE).
CFC Rules apply to domiciled individuals that conduct their investments abroad through a CFE, only concerning the obtained passive income including dividends, interest, and capital gains. The Peruvian IT Law has established a list of incomes that are to be considered ‘passive income’ that fall under the scope of the CFC Rules (such as dividends, interests, royalties, capital gains, leases, others).
Under the application of the Peruvian CFC Rules, individuals are compelled to pay Peruvian IT on their passive income, which is obtained through the CFE on an annual basis, notwithstanding if such income has been effectively distributed or paid to such Peruvian taxpayer.
However, these structures must be analysed case-by-case under the potential application of CFC Rules and General Anti-Avoidance Rules.
On the other hand, if foreign trusts invest directly in Peru, they are deemed as ordinary foreign entities. In other words, they are not transparent for IT purposes.
Fiduciary or Trustee Designation
As of January 1, 2017, Peruvian resident individuals appointed as trustees on foreign Trusts are obliged to file a tax return before the Peruvian Tax Authority. Information to be reported includes the data of the trustee, the trust, the beneficiaries, and the Settlor.
Also, any commissions or fees received by the Trustee will be considered taxable income, either Peruvian sourced labour income or foreign source income, depending on the place in which the fiduciary or trustee activities are physically performed.
Generally, the designation of Peruvian resident individual as beneficiary of a foreign Trust may trigger the application of Peruvian CFC rules, provided that the general requirements of such regime are met. To this extent, please refer to Section 6.1 Prevalence of Corporate Fiduciaries. By exception, the designation of a resident individual as beneficiary of an irrevocable trust will not trigger the application of Peruvian CFC rules, provided that the beneficiary has no actual control or disposal rights over the funds or income in the Trust.
Peru has no specific regulations regarding exercising control over irrevocable planning vehicles. In that sense, the settlor provisions must prevail.
From a tax perspective, irrevocable vehicles are not subject to Peruvian CFC Rules, as mentioned in section 6.1 Prevalence of Corporate Fiduciaries.
In Peru, the main legal instruments used for asset protection are:
From a tax perspective, succession planning for Peruvian individuals does not represent a challenge, because inheritance income is not subject to Peruvian taxes. However, the most popular strategy for succession planning used in Peru to transfer wealth and control from generation to generation is through the elaboration of a testament, under which – once fulfillment of the requirements mentioned in section 2.3 Forced Heirship Laws – the testator may indicate his/her wishes. Another alternative used by many families is the implementation of a family trust under which the settlor elaborates a wish list explaining how the estate shall be distributed.
Lately, family trusts have been more commonly used for family business succession planning to pass wealth and control from one generation to another. Under this structure, wealthy families and/or individuals set up trust and transfer their assets into said trusts to consolidate, protect and preserve the family business and estate. Usually, this type of trust incorporates in the trust document, and/or through a separate document called protocolo familiar, a specific corporate governance to manage the family business in order to avoid family conflict.
Transfer of partial interest into entities is not subject to specific tax rules. No adjustment provisions are applicable in such transfers.
Nevertheless, if the transfer is performed by means of a donation, inheritance in advance (anticipo de legítima) or inheritance, the tax basis rules explained in Section 2.5 Transfer of Property will come into play.
The Peruvian Civil Code establishes that mandatory heirs have a right to inherit at least two thirds of the estate to be divided between them. This portion of the estate is known as Provision (legítima).
For this reason, in Peru, most disputes on inheritance matters relate to claims from mandatory heirs that have been deprived from their right to inherit the corresponding Provision.
In many cases, the inheritance involves assets in several countries. This makes it more difficult to identify all assets and solve a dispute between the inheritors.
For this reason, it is usual for local lawyers to work alongside offices or law firms based in other countries for their expertise in foreign law, in order to increase the likelihood of obtaining a favourable result.
Mandatory heirs that have been deprived from their corresponding Provision can file a claim known as an inheritance petition (petición de herencia) in order to, individually or jointly with the other mandatory heirs, take possession of the assets.
Also, mandatory heirs can sue against other mandatory heirs, requesting the incorporation in the inheritance estate of assets that had been previously adjudicated to such other mandatory heirs in excess of their share in the Provision. This claim is known as colación.
In Peru, fiduciaries shall be duly authorized by the Superintendence of Banking, Insurance and AFP to operate, as well as:
Any company that aims to act as a fiduciary must also comply with the regulations established in the General Law and in the Regulations of Trusts, approved by Resolution No. 1010-99 (hereinafter, the "Regulations"). These companies must comply with minimum parameters of equity and assets, as well as limits on investment and indebtedness.
Currently, Peruvian legislation does not contemplate a provision that regulates the removal of the corporate veil. Nevertheless, court decisions would allow it in cases of abuse of right or fraud.
However, Legislative Decree No. 1372 regulates the obligation of legal entities to inform the identity of their final beneficiaries. The purpose of this Decree is to provide the competent authorities timely access to accurate and updated information regarding the final beneficiary, to strengthen the efforts against money laundering and financing of terrorism, and national and international tax evasion, assuring the compliance of obligations of mutual administrative assistance in tax matters.
We must point out that in the case of local trusts, Legislative Decree No. 1372 considers as final beneficiaries, the individuals that hold the status of settlor, trustee, group of beneficiaries and/or any other individual who, having the position of investor, exercises the final effective control of the assets or profits in the local trust.
Furthermore, under Peruvian law, every trust must have a fiduciary factor who is jointly and severally liable with the trustee or fiduciary company for the administration of the trust property. The aforementioned obligations may not be restricted nor diminished by limitations or exclusions through clauses inserted in the contracts for the implementation of the trust.
Currently, there are no conditions or requirements applicable to the investments made with the local trust assets. This will only be determined in the incorporation agreement of the local trust.
Currently, there are no regulations regarding the minimum standard of investments that can be made with a local trust assets; however, the application of portfolio theory is common since it provides risk diversification.
In Peru, citizenship may be obtained through three figures:
Citizenship by birth can be obtained by the unique fact of having been born in Peruvian territory.
Citizenship by exercise of the right of option can be obtained by virtue of the relationship that a foreign individual has with a Peruvian citizen (for example, father, mother, husband, wife, among others) and through their expression of will of becoming a Peruvian citizen.
To obtain the condition of citizen by exercising the right of option, the following requirements must be comply:
Finally, citizenship by naturalisation can be obtained - despite of not having any relationship with a Peruvian citizen - by the expression of will.
To obtain the condition of citizen through naturalisation, the following requirements must be comply:
As for the condition of domicile, this is obtained when a foreign individual resides or stays in the country more than 183 calendar days during any period of 12 months.
This condition can be lost in two scenarios:
Finally, the residency is a migratory quality, which authorises entry and residence in the territory of Peru. This migratory quality is extendable and allows multiple entries.
The residency migratory qualities can be:
permanent, which allows residence for an undefined period, after legally residing in Peru for 3 years.
In Peru, the only way to obtain citizenship in an expeditious manner is by exercising the right of option when the foreign individual has a Peruvian father and/or mother. This procedure must be carried out by the National Registry of Identification and Civil Status (RENIEC), and the deadline for the approval of the application is 20 working days.
To obtain the citizenship under the right of option, the following requirements are necessary:
Trusts may be created for adults with disabilities and minors. However according to the Civil Code, individuals over the age of eighteen have full legal capacity (including persons with disabilities). Also, the Civil Code establishes that minors over the age of sixteen and under the age of eighteen have restricted legal capacity and minors under the age of sixteen have no legal capacity.
The guardianship (tutela) and curatorship (curatela) are the institutions of custody and legal protection that exist in our jurisdiction. They fulfill the function of protecting the person and goods of minors who are not subject to a parental legal authority (patria potestad) or are declared with some type of incapacity.
Guardianship is the power over a free person conferred by law to protect those who, because of their age, cannot defend themselves. Its purpose is the custody of the person and his/her goods, or only of the property or of the person who, not being under parental legal authority, is incapable of governing himself/herself by being a minor or declared as incapacitated.
Curatorship is constituted over people who do not have the ability to make and communicate important decisions about their personal and financial affairs and may need the assistance of a legally appointed decision maker (curator) to help them exercise their rights.
The Peruvian Civil Code provides the possibility that if a minor is not under a parental legal authority (patria potestad), a legal guardian (tutor) shall be appointed to look after their person and goods.
The following persons are allowed to appoint a guardian to a minor in a testament or through a public deed:
In the absence of a tutor appointed in a testament or public deed, grandparents and other ascendants assume the legal guardianship (this does not apply to extramarital children if the judge does not confirm it), preferring:
On the other hand, in the absence of a legal guardian appointed in a testament or through a public deed, the family council shall appoint a dative tutor who will be a person that resides in the domicile of the minor. The family council will meet by a judge order or at the request of the relatives, the Public Ministry or any other person.
Also, in case of people who have restricted legal capacity, a judge will appoint curatorship through a judicial declaration of interdiction.
Peruvian legislation provides two types of pension funds for retired persons: the Private Pension System(PPS) and the National Pension System(NPS).
On one hand, the PPS is in charge of the AFPs (Pension Fund Administrators), which are private funds that allow each pensioner, once he has been retired, to choose between:
The main characteristics of this system are the following:
It is important to mention that PPS includes the following special types of retirement regimes:
On the other hand, there is the NPS, which is in charge of a Social Security Office (“Oficina de Normalización Previsional – ONP”), this system is characterized by being a public and common fund that only allows pensioners to obtain their pension for life if they meet the requirements. Among of its primary characteristics are the following:
According to this system, women at the age of 50 and men at the age of 55 can access an early retirement pension once they have had a minimum of 25 and 30 years of contributions, respectively.
Notwithstanding the above, NPS has structural problems due to the lack of contributions to cover the pensions on global basis; therefore, the amount of minimum legal pension is deemed not enough for an adequate standard of living.
Children born out of wedlock, regardless of the civil status of the parents, are called extramarital child. Their recognition is indicated in the registration of births, Public Deed, testament or it can even be judicially declared (in this case, the judgment produces the same effects of recognition). The extramarital child can claim alimony until the age of eighteen and are considered as forced heirs of their parents.
In the case of the adoption, the legislation indicates that the adopted child acquires the status of child of the adopter and ceases to belong to his consanguineous family (the adoption is irrevocable and cannot be done under any modality).
In Peru, there is no explicit regulatory framework that regulates surrogate motherhood. However, the General Health Law, Law No. 26842, indicates in article 7 a tacit prohibition in the following terms:
“Everyone has the right to resort to the treatment of their infertility, as well as to procreate through the use of assisted reproduction techniques, provided that the condition of genetic mother and pregnant mother rests with the same person. For the application of assisted reproduction techniques, the prior and written consent of the biological parents is required.”
In the same way, in Peru, there is no explicit regulatory framework regarding posthumously conceived children.
Peruvian legislation does not recognize same-sex marriage, as well as the possibility of adoption for same-sex couples.
In Peru, the IT Law encourages charitable giving by allowing to deduct from the IT basis the donated amount. This deduction is applicable both for individuals and entities.
We must point out that the IT Law establishes the following rules to deduct the given donations:
Foundations and non-profit entities are only used for charitable purposes. However, these entities must have the following purposes: beneficence, social welfare, education, culture, science, artistic, literary, sportive, political, guild and/or housing. The IT Law established that in order to be IT exempt, the funds of the aforementioned entities must be aimed to the specific purpose in the country and they should not be distributed directly or indirectly to the associates or related parties.
In 2014, the Peruvian government announced that one of its main aspirations for the following years was to become a member of the Organization for Economic Cooperation and Development (OECD) by 2021. This will be a great achievement as a country, given that Peru will commemorate its bicentenary in 2021.
Since then, Peru has been making major efforts to comply with the terms and conditions established by the OECD (ie, strict rules on tax evasion and tax evasion, corporate governance, protection of foreign investors, etc). The procedure is complex, however, to be admitted as a member of an organisation that brings together the largest number of developed countries would be, as mentioned before, a big win for the country.
To reach this goal during December 2014, Peru and the OECD launched the 'Peru OECD Country Programme', which involved issues such as policy reviews, participation in committees and adherence to selected OECD legal instruments. As a result, Peru has become a member of 47 committees and working groups of the OECD. It is worth mentioning that the 'OECD Country Programme' is specially designed to strengthen the country’s public policies and was built around four key areas that needed to improve (transparency, productivity and human capital, public governance and economic growth).
Finally, it is worth mentioning that during 2018 the Peruvian government established the parameters for the automatic exchange of financial information. According to these parameters, in 2020, Peruvian financial institutions must inform the Peruvian Tax Authority about new and pre-existing bank accounts of non-domiciled individuals whose closing balance at 31/12/2018 exceeds USD1 million (high-value accounts).
In addition, it has been established that during 2021, Peruvian financial institutions should also report the bank accounts of non-domiciled individuals whose closing balance at 31 December 2018 does not exceed USD1 million (low-value accounts).
Multilateral Convention on Mutual Administrative Assistance in Tax Matters
The Multilateral Convention on Mutual Administrative Assistance in Tax Matters (the Convention) is a multilateral instrument developed by the OECD and the Council of Europe. The Convention is available for all forms of tax co-operation, to fight against tax evasion and tax avoidance, and it facilitates international co-operation for a better management of local tax legislation. This co-operation will be applied to the fiscal assistance of the signatory countries, will include exchange of information, administrative assistance in tax collection and notification and transfer of documents.
Peru adopted the Convention on August 2018, and it came into force on September 2018. As a result, the Peruvian government has enacted some rules to align the domestic regulations to the Convention.
Under this scenario, the Peruvian Tax Authority (SUNAT) will be authorised to exchange information and execute simultaneous audits in the country or in other jurisdictions. This is a very important milestone for Peru; due to the exchange of information on tax matters between tax administrations, it has become the appropriate instrument to fulfil the authority's purpose of fighting against tax fraud and control tax evasion.
Furthermore, the Convention serves as the legal basis for signatory countries to enact a Multilateral Competent Authority Agreement (MCAA). This agreement provides a standardised mechanism that will facilitate the automatic exchange of information in accordance with the Standard for Automatic Exchange of Financial Information in Tax Matters. It also avoids the need for several bilateral agreements to be concluded and is the basis for the Common Reporting Standard.
Regarding tax matters, the Peruvian government, among others, has accessioned to the Multilateral Convention on Mutual Administrative Assistance in Tax Matters, has carried out a Tax Amnesty and has implemented Beneficial Owner Regulations. Additionally, in 2016 the Peruvian government included several provisions in the Tax Code in order to be capable of exchanging information with other countries. Likewise, since 2018 it has applied specific guidelines for the exchange of financial information and issued special provisions for the bank secrecy lifting and tax reserve in order to comply with the international standards for the exchange of information.
During November 2016, the Peruvian government approved the Tax Amnesty Law, which entered into force in January 2017. This law established a temporary regime that allowed individuals (domiciled taxpayers) to declare income generated up to December 2015 that has not already been reported. Being eligible to the regime permitted the payment of special reduced tax rates but no moratorium interest or tax penalties.
Under this temporary regime, that took place during the fiscal year 2017, taxpayers could declare their undeclared income, applying a tax rate of 10% or 7% if they repatriated and invested that income in the country. It is worth mentioning that the regular income tax rate that should be applied for undeclared income is 30% plus the corresponding moratorium interest and tax penalties.
According to the information published by the Peruvian Tax Authority, 7766 people used this tax benefit, they declared USD3,840 million and repatriated USD1,075 million.
The main objective of the Tax Amnesty Law, besides complying with the OECD standards, was to create a database of the individuals who receive, hold or generate foreign income, which is the type of income in which the most tax evasion situations among individual taxpayers originate and it is the most difficult type of income to audit.
SUNAT expects that the individuals who are in that database will submit their tax statements, annually and monthly, in accordance with the type of income obtained and with what was declared in the Tax Amnesty.
In 2012, the Financial Action Task Force (FATF) issued the FATF Recommendations which are recognised as the global anti-money laundering and counter-terrorist financing standard. Among these recommendations are the 'beneficial owner' guidelines.
On 8 January 2019, Peru’s Minister of Economics issued Supreme Decree 003-2019-EF, which includes regulations on the disclosure of the ultimate beneficial ownership of entities, which was introduced by means of Legislative Decree 1372 (2018). The Supreme Decree 003-2019-EF went into effect on 9 January 2019. These regulations follow “FATF Recommendations” about beneficial owners.
For the first time, Peru requires entities to report and identify individuals who are their ultimate beneficial owners to the Peruvian Tax Authority. This obligation also includes funds, investment funds, trusts, foreign trusts with a Peruvian administrator, joint ventures, etc. An individual is deemed as a beneficial owner if he or she holds a minimum of 10% of the capital of an entity.
Supreme Decree 003-2019-EF regulates in detail the general rules established by Legislative Decree 1372. The principal aspects of the Regulations are the following:
(i) Peruvian entities duly incorporated in Peru;
(ii) Non-Peruvian entities, provided one of the following requirements is met:
a) the foreign entity has a branch or permanent establishment in Peru;
b) the foreign fund or foreign trust is managed by a Peruvian administrator, either an entity or an individual.
c) in the case of consortiums, if any the parties is a Peruvian resident.
On 13 September 2018, Peru’s President enacted Legislative Decree 1422, which establishes provisions with regard to the Peruvian General Anti-Avoidance Rule (GAAR) for tax purposes. Peruvian GAAR was enacted on 19 July 2012, but was suspended until the regulations are issued through a Supreme Decree.
Legislative Decree 1422 establishes, among others, that (i) the GAAR will apply for tax audits reviewing facts, acts and situations from 19 July 2012 and thereafter; (ii) legal representatives will be jointly liable for the tax debt when the GAAR is applied, provided those legal representatives have collaborated with the design or implementation of the acts challenged by the Peruvian Tax Authority using the GAAR; (iii) boards of directors (for entities having a board of directors) will be responsible for approving the entity’s tax planning and cannot delegate this obligation; (iv) the board of directors must evaluate the tax planning implemented up to 14 September 2018, in order to ratify or modify the plan (the period for ratifying or modifying the tax plan will end on 29 March 2019) and (v) the Peruvian Tax Authority, to apply the GAAR in tax audits, must follow a special procedure that requires the auditor to send the case to the Revision Committee, which will notify the taxpayer of a hearing.
On 6 May 2019, Peru’s Minister of Economics issued Supreme Decree 145-2019-EF, which contains the regulations for the GAAR for tax purposes. Supreme Decree 145-2019-EF went into effect on 7 May 2019. In other words, with the issuance of Supreme Decree 145-2019-EF, the suspension has been lifted.
We should emphasise that the Peruvian government is not trying to restrict companies or individuals on implementing structures or carry out certain actions to achieve tax efficiency, as long as these structures or actions are conducted in accordance with market economy. This means that these structures or actions should have other purposes besides tax saving and also should have economic substance and comply with local legislation.
Foreign Account Tax Compliance Act (FATCA)
Since the creation of the FATCA, the US government has reached bilateral Intergovernmental Agreements (IGA) with over 100 countries. Peru have Model 1 agreement in substance, this is, no formal declaration has been signed yet. Under Model 1, Peruvian financial institutions must report information about US Persons' accounts to the Peruvian Tax Authority, which in turn will provide the information to the Internal Revenue Services – IRS (US tax authority).
Even though the Peruvian government has not signed the IGA, to be aligned with FATCA, the Peruvian financial institutions categorise their clients as US Persons and Non-US Persons according to the standards established by the FATCA regulations.
Tax havens and preferential tax regimes
On 24 August 2018, the definition of tax havens and preferential tax regimes for Peruvian tax purposes were amended by means of Legislative Decree 1381. Then, on 30 December 2018, Peru’s Minister of Economics issued Supreme Decree 340-2018-EF, which contains regulations that include Peru’s blacklist of countries and jurisdictions that are considered tax havens or non-co-operative jurisdictions, as well as conditions for being added to or removed from the list. The regulations also include the requirements for a country or jurisdiction to be considered a preferential tax regime for Peruvian tax purposes. The Supreme Decree went into effect on 1 January 2019.
The following countries or jurisdictions are included on Peru’s blacklist: Andorra, Anguilla, Antigua and Barbuda, Aruba, Bahamas, Bahrain, Barbados, Belize, Bermuda, British Virgin Islands, Cayman Islands, Cook Islands, Curaçao, Cyprus, Dominica, Grenada, Gibraltar, Guam, Guernsey, Hong Kong, Isle of Man, Jersey, Labuan, Liberia, Liechtenstein, Maldives, Marshall Islands, Monaco, Montserrat, Nauru, Niue, Panama, Saint Kitts and Nevis, Saint Lucia, Saint Vincent and the Grenadines, Samoa, Samoan Americans, Seychelles, Saint Maarten, Tonga, Trinidad and Tobago, Turks and Caicos Islands, Vanuatu and the Virgin Islands of the United States.
Bear in mind that, at the moment, Peruvian individuals are not obliged to report or inform the transactions carried out with entities located in such jurisdictions.
Under this scenario and considering the globalisation of the economy and where there is no more 'secret information', individuals and their families must rethink their patrimonial structure. This, combined with the complexity and onerousness of taxation will lead to 'tailor-made' structures that combined tax efficiency and fulfil of each individual requirement.
Nowadays, all these are the major challenges for the tax advisers who should help individuals in the management and maintenance of their wealth, not with sophisticated structures but with ones that comply with their personal purpose (administration, maintenance and succession) and that are efficient from a tax point of view.