MEMBER FIRM OF BAKER & MCKENZIE INTERNATIONAL. Doing Business in Peru

Transcription

1 MEMBER FIRM OF BAKER & MCKENZIE INTERNATIONAL Doing Business in Peru 2014

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3 Doing Business in Peru 2014

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5 Table of Contents Government House, La Libertad Photograph: Luis Yupanqui I PromPerú Introduction... 1 Economic Scenario... 3 The Role of the State... 7 Promotion of Private Investment... 9 Company Structures for Economic Activities Tax Regime Labor and Immigration Standards Intellectual Property Protection Protection of Free and Fair Competition International Trade Sectors Main Foreign Companies Present in Peru Frequently Asked Questions Contacts

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7 Introduction Villena bridge, Lima Photograph: Janine Costa I PromPerú Ismael Noya de la Piedra Managing Partner More than 20 years ago Peru bet on an open economy that promotes local and foreign investment as the fundamental way to achieve economic growth. As a result, nowadays Peru is a country with a favorable investment climate and a suitable legal framework to invest and conduct economic activities, which has translated into a stable economic environment and sustainable growth in the past years. While Peru s legal framework has helped in providing stability which has contributed to the country s success, it is undeniable that doing business in Peru has become more sophisticated, and our legislation has had to rise to the challenge. Peruvian companies have grown locally and in recent years have increasingly gained access to regional and international markets. Business relationships with Peru have rapidly evolved, as evidenced by the ever increasing presence of Asia-Pacific countries in Peru. Being fully aware of foreign investors needs, understanding their businesses and acknowledging that grasping Peru s legal framework is a challenge, Estudio Echecopar is pleased to introduce its Peruvian Business Legal Guide 2014 to the community at large. Estudio Echecopar member firm of Baker & Mckenzie International 1

8 Through this publication, we are pleased to offer a simple but a comprehensive guide of investor hot topics, such as the role of the government, the promotion of private investment, the different types of companies, our tax framework, employment and immigration laws, intellectual property, competition laws, international trade and industry regulations, among other significant topics that are relevant to carrying out business in Peru. Our lawyers, who are experts in each of those areas, have collaborated in the preparation of this guide by offering their deep knowledge and experience, so that potential investors may take full advantage of the business opportunities that Peru has to offer. Estudio Echecopar, a member firm of Baker & McKenzie International, with a presence in the local market for more than 60 years, invites you to take a look at our Peruvian Business Legal Guide We are sure it will be helpful to you and your company as you evaluate business opportunities in Peru. Peru is growing. We invite you to do business in our country. We look forward to assisting you. 2 Estudio Echecopar member firm of Baker & Mckenzie International

9 Economic Scenario Miraflores coast, Lima Photograph: Carlos Ibarra I PromPerú

10 In the past few years, Peru has experienced significant and continuous economic development, becoming one of the fastest growing countries in the world, while still maintaining low inflation levels. Peru s success story is largely due to sound economic policies implemented by democratic governments, sustained productivity, private investments as the growth engine, and Peru s integration into the global trading system. All these factors have contributed to reducing poverty while strengthening the middle class, making the country one of the most attractive places to invest in Latin America. The macroeconomic development of Peru during the last decade has been exceptional. From 2003 to 2013, Peru s real Gross Domestic Product (GDP) increased at an annual average rate of 6.6 % (the highest rate in Latin America) and, according to the International Monetary Fund, it achieved the highest investment ratio (total investment relative to GDP) in the region, which increased from 17.8% in 2003 to 27.8% in Similarly, economic growth levels are expected to remain at 6% for the next few years and inflation in 2014 is expected to be the lowest in Latin America at 2.5%. Despite the positive economic results achieved so far, there are certain external risk factors, such as the following, that may have a negative impact on private investment in Peru: the worsening of the European economic crisis; a continued slowdown in China s economy; the slow economic growth recovery in the United States; and the decline in prices of raw materials, which represent approximately 60% of Peru s total exports. In addition, the global economic slowdown is adversely affecting economic development in Latin America, including Peru, which is directly affected by price fluctuations in metals. In 2012 and 2013, 4 Estudio Echecopar member firm of Baker & Mckenzie International

11 Economic Scenario commodity prices have experienced sharp downward corrections in short amounts of time, affecting exports and, as a result, tax collection by the Peruvian central government. Peru, however, has sound economic fundamentals to cope with external risk factors, including (i) a high level of international net reserves which amount to USD 67 billion representing approximately 20 months worth of imports, (ii) low public debt which only represent 20% of the country s GDP, and (iii) one of the highest sovereign ratings in the region, as reported by Standard & Poor s, Moody s and Fitch, all of which contribute towards fostering an environment for continuous growth and low financing costs for companies. As mentioned, Peru is expected to grow at an annual average rate of about 6.0% during the next three to four years with a great potential to diversify its export offer, including metals, wood, paper, agricultural products, fishmeal and general services, as well as in country tourism. Moreover, there are several important public and private investment projects that are ongoing and have both short and medium term maturities in sectors ranging from mining to hydrocarbons, electricity and infrastructure, which are crucial to boost economic growth. Currently, the Peruvian government has clear strategies in place to encourage investment, the engine for growth, and will execute such strategies by simplifying procedural steps and making investments a national priority. In executing these strategies, the government is striving to: 1. Optimize and develop adequate regulatory environments by passing rules and regulations that harmonize regulatory frameworks, simplify administrative proceedings, reduce time frames and by developing criteria that standardize and define capacities. Estudio Echecopar member firm of Baker & Mckenzie International 5

12 2. Develop competences to unblock factors that inhibit the execution of investment plans through proper management and monitoring systems. Below are some examples of changes or reforms that have already been implemented to improve the climate for investments: (a) a tax reform to improve tax collection from 15.5% of GDP in 2011 to 18% of GDP in 2016; (b) a private pension system reform to increase the rate of return of funds, improve coverage, competition and quality of service in order to reduce rates and increase pension payments; (c) a capital markets reform to increase the pool of eligible investors; (d) a salary increase for teachers, the armed forces, the police and other public forces in order to improve national education levels and ensure domestic safety; and (e) the promotion of public private associations to accelerate investments in infrastructure. Finally, all the strategies and reforms promoted by the government are aimed at encouraging investments which, as mentioned, ignites economic growth. It is expected that these actions will enable the country to continue developing in the upcoming years. 6 Estudio Echecopar member firm of Baker & Mckenzie International

13 The Role of the State Lima Cathedral, Lima Photograph: Mylene D Auriol I PromPerú

14 According to the Peruvian Constitution the state can perform business activities only in a subsidiary manner and when authorized by law, for reasons of public interest or national need. The state has the mission of supervising and favoring free competition and repressing any conduct that restricts it. In addition, it must also fight against any practice that limits it and against the abuse of dominant positions or monopolies. No law or agreement may authorize or establish monopolies. Since the economic reform of 1991 all forms of reserving of economic activities for the state were eliminated and banned. These reserves only hold for reasons of public interest or national security and must be approved by the Congress. Equal conditions for public and private activity were established. 8 Estudio Echecopar member firm of Baker & Mckenzie International

15 Promotion of Private Investment Sillustani Chullpas, Puno Photograph: Fernando López I PromPerú

16 General Investment Guarantees The Peruvian constitutional and legal framework opens the economy to private investment, which is practiced in the context of a social market economy. It also promotes competition and ensures foreign investment in any type of company. It provides that prices are governed by the law of supply and demand, indicating that the only prices that are administratively regulated are tariffs for public services in accordance with what may be established by an Act of Congress. It also recognizes the freedom of trade and industry and of exports and imports. Since the early 1990s, investment guarantees were introduced such as the right to freedom of ownership and disposition of foreign currency, and repatriation of capital and dividends to all natural and legal persons, both national and foreign. It is also guaranteed that there shall be no discrimination or differential treatment in foreign exchange, prices, customs tariffs or duties among investors based on sectors or types of activity or geographic location, nor between natural or legal persons, domestic or foreign. Peruvian government established also a framework for the promotion of private investment in state-run companies. In line with the constitutional dictate by which the State may only carry out business activity in a subsidiary manner, a privatization process was set in motion, whereby a number of companies were transferred to the private sector of the economy. As a consequence, all telecommunication, banking and industrial companies with the state as main stakeholder were transferred to private ownership. In addition, there is a legal stability regime for rights as an investor and in fiscal and labor matters. 10 Estudio Echecopar member firm of Baker & Mckenzie International

17 Promotion of Private Investment Guarantees for Foreign Investment Article 63 of the 1993 Constitution stipulates that foreign investors have the same rights as domestic investors. Investors are guaranteed the right to freely transfer abroad, in freely converted currency and without any authorization whatsoever, the whole of their capital, dividends, profits, royalties and consideration for the use and transfer of technologies and elements of industrial property. Where appropriate to convert national currency to foreign currency, they shall be entitled to the most favorable exchange rate. Investor rights can be stabilized by legal stability agreements meeting the requirements established by law. No authorization is required for foreign investments. The only restriction on foreigners allowed by the Constitution is that they cannot acquire or possess, within 50 kilometers of the border, mines, lands, forests, water, fuels and energy sources, unless an exception is declared by Supreme Decree based on a public necessity or national interest. Nevertheless in case of concessions for economic activities the exception can be granted by Supreme Resolution. Likewise, the General Law of Hydrocarbons considers the exploration and exploitation of hydrocarbons to be of public necessity and national interest; therefore, these activities are exempt from the above mentioned restriction. Public Private Partnerships Regulation of Public Private Partnerships promotes private investment in infrastructure and utilities. Promotion of projects is usually performed through by special committees working inside the various ministries or, for national scope projects, through PROINVERSION (Private Investment Promotion Agency - Peru) ( Estudio Echecopar member firm of Baker & Mckenzie International 11

18 The regulatory framework seeks to protect private investment at the all three levels of government levels, namely i.e., central, regional and local governments. Some of the most remarkable concessions granted under this legal regulation are the concession for the construction and operation of the Transmantaro national electrical interconnection line, the concession of the telecommunications PCS Band, operation of the Lima International Airport Jorge Chávez, concession of the Trans-oceanic Highway as well as the concessions of the Callao Seaport. The regulatory framework also includes the possibility for investors to take the initiative and propose to the state public private partnerships. If the state considers that the proposals are of its interest Projects may be awarded directly to a bidder if no other investors show interest. However, if other investors show interest then a public tender process is initiated with the winning bid entitled to reimbursement of expenses. Important concessions have also materialized as a consequence of private initiatives. Most significant examples are the concession for the execution of the Taboada wastewater treatment plant by PROINVERSION and especially the concession granted to a private company for the construction and operation of an express way for the city of Lima under the name Linea Amarilla (Yellow Line) which was granted by the Municipality of Lima and the minerals terminal at Callao Seaport. Legal Stability Agreements PROINVERSION enters into legal stability agreements with investors on behalf of the Peruvian state. The legal stability agreements have the rank and force of law and stabilize the granted rights for 10 years from their subscription dates. 12 Estudio Echecopar member firm of Baker & Mckenzie International

19 Promotion of Private Investment Among the rights that are stabilized are the following: Income tax The right to remit abroad the total capital and dividends of the company Most favorable exchange rate Employment regime Export-oriented regimes, such as temporary admission, duty-free zones, etc. In order to be eligible for a legal stability contract, a minimum investment of US$ 5 million is required in all sectors except for the mining and hydrocarbons sectors, which require a minimum investment of US $10 million. Legal stability expires if the investment is not made within the prescribed period, which cannot exceed two years from the signing of the agreement. It also expires if the investment is not registered on time or the agreement is transferred without the consent of PROINVERSION. Municipalities may enter into municipal tax stability agreements. Estudio Echecopar member firm of Baker & Mckenzie International 13

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21 Company Structures for Economic Activities Arequipa Cathedral, Arequipa Photograph: Renzo Tasso I PromPerú

22 Types of Company The General Law for the Growth of Private Investment, approved by Legislative Decree 757 in November 1991, recognizes the investors freedom to incorporate as they choose, in order to conduct economic activities. The law may establish the obligation to adopt a certain type of legal entity when related to the financial sector. Only for activities related to the banking system may the law establish the obligation to adopt a certain form of company. The legal framework fully recognizes the existence and capacity of foreign enterprises to exercise in Peru, all actions and rights, be it on a habitual basis or not, that may correspond to them. In order for them to exercise all acts included in their corporate purpose on a habitual basis, they shall adhere to Peruvian law. This supposes that they must at least be recorded in the Public Registry indicating a domicile and a registered representative. The representative can be Peruvian or any foreign citizen but is required to have formal residence in Peru. Some sectors may require local incorporation or opening a branch in Peru. The General Corporations Law covers the different types of enterprises investors may use to carry out their business in Peru. The three legal entities most commonly used by investors are corporations, limited liability Company, and the branch. The shareholders or stockholders of any kind of company can enter into shareholders agreements that may involve third parties, with the purpose of regulating its Rights and obligations in the company, to establish investment commitments, minimum periods of permanence in the company, voting pool agreements, etc. 16 Estudio Echecopar member firm of Baker & Mckenzie International

23 Company Structures for Economic Activities There are two main legal options for the incorporation of a company under Peruvian Corporate Law: (i) Corporations ( Sociedades Anónimas - S.A. ); and (ii) Limited Liability Companies ( Sociedades Comerciales de Responsabilidad Limitada S.R.L. ). In turn, corporations can be regular corporations ( Sociedad Anónima S.A. ), Closely Held Corporations ( Sociedad Anónima Cerrada S.A.C. ) or Public Corporations ( Sociedad Anónima Abierta S.A.A. ). Also, investors may develop their business through the establishment of a branch. A branch of a foreign company in Peru is a secondary establishment where said foreign company performs certain activities within its purpose. A branch office is not an entity different from the parent company. The branch office is administratively autonomous from its parent company and is economically limited by the capital provided to it. Notwithstanding, it should be noted that the parent company is liable for any obligation assumed by the branch office. Corporations The classic corporation is the most widely used form of running a business in Peru. It is eminently capitalist, offers limited liability, and it is structured to allow the separation of management from ownership. The transfer of the shares is free, unless the shareholders agree otherwise. A minimum of two shareholders, whether if there are a natural individuals or a legal entity/entities, is required to incorporate a company. The share capital shall be divided into transferable titles known as shares. Regarding the capital stock of the corporation, the law does not establish a minimum amount of capital. Nevertheless, some industries for example the banking system establish some minimum Estudio Echecopar member firm of Baker & Mckenzie International 17

24 requirements. The initial contribution for incorporation must be deposited in a local bank. General Shareholder s Meetings, Board of Directors and General Management are the parties involved in corporate governance. Bylaws must be contained in a public deed recorded in the Public Registry. Furthermore, Peruvian Law stipulates that the rules for a classic corporation also apply to close Corporations and Public Companies. Closely Held Corporations Close corporations resemble limited liability companies (see 4.5). They require a minimum of two and a maximum of twenty shareholders. It establishes certain limitations regarding the transfer of its shares, such as Right of First Refusal (unless otherwise agreed), and even in some cases the corporation s consent (which should be agreed upon in the by - laws). Shares cannot be listed on a Stock Exchange. These types of companies may or may not have a Board of Directors, depending upon the provisions set forth in the by-laws. Similarly, this form of corporation allows virtual Shareholders Meetings. It is an ideal corporate structure for small businesses or those with a small number of shareholders. Public Corporations A company is deemed as public when it complies with at least one of the following conditions: The company has made a Public Offering of shares or convertible bonds; 18 Estudio Echecopar member firm of Baker & Mckenzie International

25 Company Structures for Economic Activities The company has over seven hundred and fifty (750) shareholders; Over thirty five percent (35%) of the company s share capital is owned by one hundred seventy five (175) or more shareholders not taking into account those shareholders whose individual holding is less than two per thousand (0.002%) or exceeds five percent (5%) of the company s share capital; Incorporates as such, All the voting shareholders unanimously approve the adaptation to said system. A public company must list all its shares on the Stock Exchange. Moreover, it is subject to regulation by the Business and Securities National Supervisory Superintendence (SMV). Limited Liability Companies Incorporation as a limited liability company requires a minimum of two and a maximum of twenty partners. Limited liability Companies neither issue shares (the capital is represented by quotas) nor have a Board of Directors. The procedures for incorporating are the same as for a classic corporation. The Right of First Refusal is mandatory for this type of company. Branches Establishing a branch in Peru is similar to incorporating. It requires formalizing through the execution of a public deed in Peru, which must at least contain a Certificate of Good Standing for the parent company; copy of the by-laws of the parent company; corporate resolution indicating the following: share capital that the parent company allocates for the branch operation; the object of the branch, business and operations to be conducted; statement saying that such activities are included in the object of the parent company; domicile of Estudio Echecopar member firm of Baker & Mckenzie International 19

26 the branch in Peru; appointment of at least one legal representative in the country; powers granted to the legal representative; its adherence to Peruvian laws for the purpose of holding the parent company liable for the branch operations in Peru. The Peruvian Consul nearest to the headquarters jurisdictional location must legalize these documents. The Ministry of Foreign Affairs in Lima, Peru, must certify the Consul s signature. Companies reorganization process Regarding the process of mergers and acquisitions, according the Peruvian law, there is a variety of legal procedures for a company s reorganization. These mechanisms are applicable to all corporations and also legal entities regulated by the Peruvian law. The following are the principal mechanisms in order to reorganize a company: Mergers (it can be done to combine two ore more companies in order to incorporate a new independent company or the other form is that one company swallows the entire business of the other company and this target company ceases to exist), The simple reorganization (it consists in the segregation of assets, debts and assets, and/or business lines in order to transfer them to a subsidiary company.), The spin off (is the segregation of assets, debts and assets, and/or business lines in order to transfer them to another company. The new company will have the same share ownership of the original company.) and The transformation (the transformation of one company into another form or type of company or even into another kind of legal entity). 20 Estudio Echecopar member firm of Baker & Mckenzie International

27 Company Structures for Economic Activities Powers To enhance their performance, the different corporate structures and business combinations recognized by the Peruvian legal system require an efficient power structure. As governing bodies, the Board of Directors and the General Management are recognized by the General Corporate Law with sufficient powers of representation and management prerogatives to achieve its corporate purpose. Nevertheless, market requirements frequently demand the registration of specific power structures. Powers become an essential factor for foreign corporations present in the Peruvian market through branches and subsidiaries. They are equally important for corporations established abroad which lack of legal representation in Peruvian territory. Any proper attempt to start business activities will demand the creation of a power structure. To validly appoint an attorney-infact from abroad, the Peruvian legal system demands a precise legalization sequence before relevant authorities, such as the Ministry of Foreign Relations, Consulates, Chambers of Commerce, and others. Alternatively, all documents duly apostilled will be valid in Peru. Associative Agreements Associative Agreements are those that create and rule participation and integration relationships for a certain business activity of common interest to the participants. The associative contract does not constitute a legal entity. It must be established in writing and it need not be recorded in the Public Registry. Associative Contracts may be: Association in Participation (Contratos de Asociación en Participación) and Consortium Agreements (Contratos de Consorcio). In an Association in Participation the managing partner grants the contributing partners, a participating Estudio Echecopar member firm of Baker & Mckenzie International 21

28 interest in the earnings or profits of one or more businesses or companies belonging to the managing partner in exchange for a specified contribution. In a Consortium, two or more parties form the partnership have an active and direct participation in a specified business or company, for the purpose of obtaining an economic profit. Joint Venture Even though Joint Ventures are not contemplated in the domestic regulation, these contractual forms have widely spread within the main domestic economic sectors. A Joint Venture generates a legally binding relationship between two or more natural individuals or legal entities willing to develop a certain economic activity for a specific period of time. Unlike other partnership agreements, this form may generate an independent legal entity. Without an exact and final definition, a Joint Venture is a very versatile legal form, which may be adapted to a variety of situations. 22 Estudio Echecopar member firm of Baker & Mckenzie International

29 Tax Regime San Pedro Church Interior Photograph: Beatrice Velarde I PromPerú

30 General Standards The Framework Law on Private Activity Growth approved by Legislative Decree 757, in November 1991, develops the constitutional principles of legality and publicity in tax matters. In particular, it sets limits on the capacity of regional and local governments to create, modify or delete taxes. International Agreements Peru has signed double tax treaties currently in force with Chile, Canada, Brazil, and the member countries of the Andean Community. Peru has also signed double tax treaties with Korea, Portugal, Switzerland, and Mexico. Only the double tax treaty signed with Mexico has been ratified by the Peruvian Government. However, all of the aforementioned treaties are currently not applicable. It is expected that they will enter into force commencing January 1, Peru has signed a double tax treaty with Spain, which is nos expected to be approved by Peruvian Congress--and thus enter into force--in the near future. Single Registry of Taxpayers - RUC Any subsidiary or branch incorporated or established in the country must obtain its Single Registry of Taxpayer (Registro Unico de Contribuyentes - RUC) number. However, though from the point of view of company law there are no restrictions to the general manager being a foreign individual, the Tax Administration requires that the general manager of a Peruvian company be a Peruvian citizen, or a foreign citizen but with an immigration card. This requirement is intended that such person may be registered as the legal representative of the company in the Single Registry of Taxpayers. 24 Estudio Echecopar member firm of Baker & Mckenzie International

31 Tax Regime Income Tax Companies constituted in Peru are subject to income tax, both in terms of their income from domestic as well as foreign sources. The fiscal year ends on 31 December. There are no exceptions. The tax return is normally presented towards 31 March of each year. It is expected that monthly payments will be made on account of estimated annual tax. Until 2004, the inflation adjustment of accounting for tax purposes was mandatory, except for companies that were allowed to keep records in foreign currency. Currently, that adjustment regimen is suspended. Expenses incurred to generate income or maintain their source in terms of productivity are deductible for purposes of income tax. All expenses, except for some special cases (for example, interest on loans) arising from transactions directly or indirectly carried out with residents in tax havens are not deductible for tax purposes. Depending on the system chosen by the taxpayer, losses can be carried forward for up to four consecutive years, from the next year in which they are incurred, or until the aforementioned losses are offset completely, in which case the amount of the annual offset is limited to 50 percent of the net taxable income of each year in which the loss is carried forward. For purposes of the Income Tax Law, capital gains is that which comes from the sale of goods that are not intended to be marketed within the scope of a line of business of the company. From 1 January 2010, any capital gain from the sale of securities will be subject to income tax, provided that, for non-domiciled investors, securities (stocks, bonds, etc.) are issued by a company domiciled in the country. The rate applicable to such investors will be of 5 percent Estudio Echecopar member firm of Baker & Mckenzie International 25

32 or 30 percent, depending on whether the sale is made within or outside the Lima Stock Exchange, respectively. If the seller is domiciled, the rate will be 5 percent or 30 percent depending on whether the sale is made by a natural person or a company, respectively. Also, consideration must be given to the fact that any capital gain derived by a domiciled person from the sale of securities issued by a non-domiciled company, is taxed at the rates of 15 percent, 21 percent and 30 percent, if the seller is a natural person, and 30 percent in the case of a company. However, if the securities issued by a nondomiciled company are registered in the Public Registry of Securities of Peru and their sale is made: (i) through a centralized negotiation mechanism of the country; or (ii) foreign trading mechanisms and provided there is a signed integration agreement with these entities (currently, there are agreements with Chile and Colombia), the applicable rate will be 5 percent. It is worth noting that earnings obtained by the indirect sale of shares representing the capital of a company domiciled in the country is considered Peruvian source income. There is an indirect sale when shares are sold representing the capital of a foreign company in the country which in turn owns - directly or through one or more companies - shares representing the capital of companies in the country, provided than in any of the 12 months preceding the sale, the market value of the shares of the foreign company in the country, of which the non-domiciled company is the owner directly or through one or more companies, is equivalent to 50 percent or more of the market value of all shares representing the capital of the non-domiciled company. It also provided that the indirect sale regime requires that the shares transferred represent, in any period of twelve months, at least 10 percent of the capital of the non-domiciled legal person. Otherwise, the regime does not apply. The cost basis to be deducted in determining taxable profit will be determined by the market value of 26 Estudio Echecopar member firm of Baker & Mckenzie International

33 Tax Regime the shares sold. The market value, in the case of the sale of listed shares, will be the stock exchange price. If the company does not trade on the stock exchange, the market value is the value of the transaction, which may not be less than net asset value of the shares sold. The net asset value will be calculated on the basis of the latest balance sheet of the issuing company issued prior to the date of the sale. The applicable tax rate in this case is 30 percent. Likewise, interest earned by a company on its bank deposits, are taxed at an income tax rate of 30 percent. It should be noted that the interest earned by natural persons, whether domiciled or not, remain exempt from tax until 31 December The tax depreciation rate is 5 percent for buildings and constructions; for the following assets, the following maximum rates apply: 20 percent for vehicles, 25 percent for livestock, 20 percent for machinery and equipment used in mining, oil and industrial construction, 25 percent for hardware and 10 percent for other fixed assets. The tax rate for companies domiciled in Peru is 30 percent. Dividends are taxed at the rate of 4.1 percent provided they are paid to natural persons, whether domiciled or not, or to non-domiciled legal persons. Royalties paid abroad are subject to a rate of 30 percent as a fixed tax to be withheld by the local payer. Interests paid abroad are subject to a withholding at a fixed 4.99 percent if the debt to which they relate and corresponding interests meet certain conditions. Otherwise, the rate is 30 percent. In the case of loans from related companies, the withholding rate applicable to the interest is 30 percent. Payments abroad for technical assistance services are subject to a withholding of 15 percent if certain requirements are met; otherwise, the rate is 30 percent. Estudio Echecopar member firm of Baker & Mckenzie International 27

34 Branches are only taxed on their Peruvian income, while affiliates or subsidiaries are taxed on their worldwide income. All types of companies are subject to the same taxation. Local companies that hold foreign investment may subscribe tax and legal stability agreements. The reinvestment of profits qualifies as foreign investment for this purpose. The tax stability regime is limited to income tax, including the rate in effect at the time of conclusion of such agreements, except in the case of certain economic sectors such as mining, and oil and gas activity in which the stability extends to other taxes. On the other hand, it is important to mention that Law No declared investment and development in agriculture to be of priority interest, and tax benefits were made available for certain activities. Thus, all natural or legal persons who develop crops and/or breeding activities, except for the forest industry, fall within the scope of this law. In addition, also included in the scope of this law are natural or legal persons conducting agro-industrial activity (production, processing and preserving of meat and meat products, processing and preserving of fruits and vegetables, and sugar processing), provided they mainly use agricultural products outside the province of Lima and the constitutional province of Callao. Note that the agribusiness activities related to wheat, snuff, oilseeds, oils and beer, are not included in this law. Persons covered in the preceding paragraphs will enjoy a 15 percent rate on income for purposes of income tax. Also, natural or legal persons covered may depreciate, at an annual rate of 20 percent, the amount invested in hydraulic infrastructure and irrigation works during the term of the law. 28 Estudio Echecopar member firm of Baker & Mckenzie International

35 Tax Regime In order that the natural or legal persons may enjoy the benefits, they must be current in the payment of their tax obligations with SUNAT. It is understood that the beneficiary is not up to date when it fails to pay any taxes to which it is subject, including payments on account of IT, for three monthly periods, consecutive or alternated, during the same fiscal period. The tax benefits referred to above will be in force until December 31st, In addition, Law N establishes a regime to promote investment in the Amazon, including tax benefits that shall depend on the activity performed and the geographical location of the potential beneficiary. For purposes of the aforementioned regime, the Amazon is comprised of the following Departments: Loreto, Madre de Dios, Ucayali, Amazonas and San Martín, as well as some provinces of the Departments of Cajamarca, Huánuco, Junín, Pasco and some districts of the Departments of Ayacucho, Cusco, Puno, La Libertad, Huancavelica and Piura. To qualify for the tax benefits of this regime, the potential beneficiary shall have its tax address, fixed assets and registration as legal person in the Amazon. Likewise, potential beneficiaries must be engaged in the following economic activities: livestock, agriculture, aquaculture, fishing, tourism, forest extraction, manufacturing activities related to the processing, transformation and trading of primary products arrived from the abovementioned activities, and forest transformation or trade. The activities listed in the preceding paragraph shall enjoy an exemption or a reduced tax rate of 5 percent or 10 percent, depending on their geographic location, for purposes of income tax. Taxpayers in the Amazon that develops agricultural activities and/or transformation or processing of products that qualify as native culture and/or alternative in such field, will be exempted from the income tax. Likewise, income tax monthly advanced payments may be determined Estudio Echecopar member firm of Baker & Mckenzie International 29

36 by applying a 0.4 percent or 0.7 percent to the monthly net income, depending on whether they are subject to the 5 percent or 10 percent income tax rate, respectively. Such tax benefits shall be applied up to December 31st, Value-Added Tax The Value-Added Tax rate (General Sales Tax - VAT) is 18 percent and applies to the following activities: Sales of chattel in Peru Services provided or used in Peru Construction contracts First sale of real estate by the builder Importation of goods The VAT paid on the purchase of goods or services may be used as tax credit against the VAT that derives from transactions performed by the company. Exporters can request a refund of VAT paid on the purchase of goods and services. They can also use the refund as a credit against the VAT levied on its operations or, failing that, against payment of income tax. If there were any balance that cannot be used, it can be transferred to third parties. Companies that have not yet begun their productive activities and that import or purchase capital goods for the production of goods and services for export, or which are subject to the VAT, are eligible for the so-called Advanced Recovery of VAT Regime. This regime consists of applying to the tax authorities for a refund of the tax credit 30 Estudio Echecopar member firm of Baker & Mckenzie International

37 Tax Regime stemming from the VAT paid on purchases of goods and services, and imports. Natural or legal persons in the agricultural sector who are in the preproductive stage of their investments may recover in advance the VAT paid through the purchases of capital assets, supplies, services and construction contracts, according to the amounts, terms, coverage, conditions and procedures established in the regulations. The preproductive stage of investments may, in no case, exceed five years according to what the Regulations of the Law on the Promotion of the Agricultural Sector may stipulate. On their part, the subjects registered in the Amazon will enjoy the exemption of the VAT for the sale of goods that are consumed in the same zone, for the rendering of services in the zone and for construction contracts or first sale of real property performed by the builders of said property in the zone. Selective Consumption Tax - ISC The following activities are taxed with Selective Consumption Tax (Impuesto Selectivo al Consumo - ISC): Sales in the country at the producer level of certain goods included in a list, which include fuel, beer, liquor and cigarettes The importation of the products mentioned above Betting and gambling, such as sweepstakes and raffles In the case of soft drinks, alcoholic beverages, certain vehicles, cigarettes, and others, and activities related to gambling and betting, the tax is determined by applying a certain percentage, which varies depending on the specific goods. Estudio Echecopar member firm of Baker & Mckenzie International 31

38 Likewise, the tax may also be calculated by means of the ad valorem system, by applying the tax based on the retail price, as is done, for example, in the case of beer. Financial Transactions Tax The Financial Transactions Tax (Impuesto a la Transacciones Financieras - ITF) is a temporary tax levied on certain financial transactions outlined in the Law that created this tax. The referred Law provides that all obligations in excess of PEN 3,500 or USD 1,000 must be paid using the so-called Means of Payment. The Law considers the following Means of Payment : i) bank account deposits; ii) drafts and wire transfers; iii) payment orders; iv) debit and credit cards issued in Peru; v) credit cards issued abroad by foreign companies whose object is the issuing and managing of credit cards, as well as by foreign banking or financial entities, provided that payments are channeled through Peruvian financial institutions or banks; vi) checks bearing the non negotiable clause or equivalent; and vii) others to be approved by Supreme Decree. With regard to the tax effects on Income Tax, the Law provides that payments made without using the specified Means of Payment, when the law thus requires it, will not allow deducting expenses, costs or applying credits for purposes of determining the taxable income. This tax must be withheld and paid by the financial institutions and other companies specified by law that may intervene in the financial transaction. The ITF is deductible for purposes of Income Tax. The ITF is applicable regardless of the amount of the transaction, when it is done using one of the Means of Payment, even if it had not been required by law (when the amount involved is less than PEN 3,500 or USD 1,000). 32 Estudio Echecopar member firm of Baker & Mckenzie International

39 Tax Regime Credits or debits to the accounts of governments, diplomatic and consular missions, and international agencies and organizations accredited in Peru. As of 1 April 2011, the tax rate is percent, which is applied to the amount of the financial transaction in local or foreign currency, without any deduction. Temporary Tax on Net Assets (ITAN) Temporary Tax on Net Assets (Impuesto Temporal a los Activos Netos - ITAN) is levied on the assets of persons generating taxable income of the third category (usually companies) in accordance with the provisions of the law on income tax. The tax rate is 0.4 percent and is applied to the value of company assets in excess of one million soles. The tax actually paid can be used as a credit against payments on account or payments for the regularization of income tax. Most relevant Municipal Taxes Property Tax: This tax is levied on the ownership of a property by a natural or legal person in a given district. The rate varies between 0.2 percent and 1 percent depending on the value. The tax must be paid annually. Alcabala Excise Tax: This tax applies to the free or compensated transfer of land property. The rate is 3 percent and is applied to the value of the property agreed by the parties or the self-appraisal value determined by the district municipality where the property is located, whichever is greater. The tax must be paid by the buyer. Estudio Echecopar member firm of Baker & Mckenzie International 33

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41 Labor and Immigration Standards Lighthouse Park, Lima Photograph: Talía Barreda I PromPerú

42 Employment Contracts General Characteristics of contracts In the rendering of personal, subordinated and remunerated services it is presumed the existence of an indefinite term labor contract. The only precondition for hiring local personnel is that the employee be of the age of majority (i.e. 18 years). Minors between 15 and 18 years must have parental permission and the approval of the Ministry of Labor ( Local personnel is usually hired for an indefinite period. In this case it is not mandatory to enter into a written labor contract. In case of part time, fixed term or foreign employees it is mandatory to put the agreements down in writing. Take into consideration that fixed term employment agreements are allowed but only in cases provided by law and they shall also be filed to the Labor Authority for registration purposes. Part-time Employment Contracts Part-time employees are those who in average work less than four hours daily. Part-time employees may work 24 hours a week if the employer establishes a 6 working days week. If the working week has 5 days then the maximum working hours a week shall be less than 20 hours. Part-time employment agreements must be executed in writing and be submitted before the Labor Authority. Part-time employees are entitled to mandatory labor benefits that not require rendering services for more than four hours daily for their perception (i.e. Vacations -only 6 working days-, legal bonuses, life insurance policy, family allowance, and profit sharing (when applicable). 36 Estudio Echecopar member firm of Baker & Mckenzie International

43 Labor and Immigration Standards Fixed Term Employment Contracts Fixed term employment contracts are allowed but only in cases provided by law. They shall also be filed to the Labor Authority for registration purposes. Peruvian legal system has established 9 modalities of fixed term employment contracts, divided in 3 groups: (a) Temporary nature contracts: (i) For beginning of a new corporate activity: it is the agreement between the employer and employee in case of the beginning of a new activity. It must be understood for new activity, the beginning of the productive activity of a company, the installation or opening of new establishments or markets, as well as the beginning of new activities or the increase of the already existing activities within the same company. Its maximum duration is 3 years, being possible to execute said contracts for minor periods but without exceeding the mentioned term. (ii) For markets needs: it is the agreement executed for the coverage of temporary and unforeseeable increases of the production, originated by substantial variations of the market. Its maximum duration is 5 years counting the initial contract and its extensions. (iii) Corporate reconversion: it is a modality that shall be used for the accomplishment of labors derived from the replacement, extension or modification of the ordinary or complementary activities of the company. Its maximum duration is 2 years, being possible to execute said contracts for minor periods but without exceeding the mentioned term. Estudio Echecopar member firm of Baker & Mckenzie International 37

44 (b) Accidental contracts: (i) Occasional: it is executed for contracting services derived from transitory needs different than the ordinary needs of the company (we understand, complementary). Its maximum duration is 6 months per year. (ii) Replacement: it is a contract for the replacement of an employee subject to an indefinite term employment agreement, whose relationship is suspended. According to law its duration depends on the term of suspension of the replaced employee. (iii) Emergency: it is a contract used in case personnel is needed due to situations generated by superior force or irresistible force, which are inevitable, unforeseeable and irresistible (force of majeure). According to law, its duration is the one that is necessary to cover the emergency. (c) Specific work or specific service contracts: (i) For certain work or specific service: this modality refers to the contract for performing a transitory and specific work or service. According to law, its duration will be the one that turns out to be necessary to complete the work or service. (ii) Intermittent service: it is the contract executed to perform permanent but discontinuous labors in the work center. Employees may have a preferential right to be re-contracted in the future; this possibility can be established in the original contract, which will operate automatically. Its duration is related to the discontinuous labor. (iii) Seasonal contract: it is a contract that may be used for the coverage of seasonal activities. Its duration depends on the duration of the season. 38 Estudio Echecopar member firm of Baker & Mckenzie International

45 Labor and Immigration Standards Peruvian legal system allows having different and continuous fixed term contracts with the same employee, under different modalities, depending on the needs of the employer. The only requirement is that they do not overcome the maximum duration of 5 years, except in the cases in which the law provides a shorter maximum term. There are certain situations provided by law which may lead to consider fixed-term employees as indefinite term personnel (fixed term contracts distortion). There is no limit to the number of employees who can be contracted through fixed term contracts; provided their contracts are supported by the cases provided by law. In addition a permanent employee who is terminated cannot be contracted through a fixed term contract, except of the case of one year passes since the termination. Trial Period Peruvian labor regulation establishes a 3-month trial period for regular personnel. In case of trust and management employees, it can be extended, if agreed, to 6 and 12 months, respectively. Quota of disabled employees Pursuant to Law N 29973, private companies with more than 50 employees must maintain a ratio of not less than 3% of disabled employees in its payroll. Working Hours The maximum is an 8-hour work day or a 48-hour work week. Overtime is calculated based on the hourly rate. The first two hours of overtime are paid at 1,25 times the employee s regular hourly pay. All Estudio Echecopar member firm of Baker & Mckenzie International 39