PERU Trends and Developments Contributed by: Camilo Maruy, Maite Colmenter, Roberto Polo and Llanet Gaslac, Rebaza, Alcázar & De Las Casas
The International Tax Transparency Regime: Challenges and Issues More Than Ten Years After its Entry into Force Introduction The International Tax Transparency Regime (the “CFC Rules”) originated in the United States in 1962 with the regulation of Controlled Foreign Corporations (CFCs). Countries such as Canada, Japan, and South Africa adopted similar rules, and in 1998, the OECD recom - mended their worldwide implementation. This regime emerged in response to the practice of establishing entities in favourable tax jurisdictions to hold foreign investments, thereby allowing taxpayers to defer tax payments until profits were distributed. To counter this, it was established that shareholders of foreign entities would be taxed on passive income earned, even if such income was not distributed. The OECD and the G-20 promoted the BEPS Action Plan, with Action 3 specifically recommending effec - tive controlled foreign company rules. Peru adopted the CFC Rules in 2013 through Legislative Decree No 1120, requiring resident taxpayers to pay taxes on passive income earned by controlled foreign entities, regardless of whether such income was distributed (the “Regulation”). The aim of the Regulation is to prevent base erosion and the deferral of income tax. Additionally, a first-in, first-out (FIFO) rule applies, under which dividends are deemed to be distributed first from profits generated up to 2012, which are taxed upon receipt. The CFC Rules have achieved their objective of pre - venting income tax deferral. However, challenges and complexities in its application remain, which will be analysed below. The CFC Rules in Peru Before addressing the core topics of this article, it is important to review the main features of the CFC Rules. • Scope of application: it applies to Peruvian tax residents (individuals or legal entities) who own non-domiciled controlled entities (NDCEs) and are taxed on foreign-source income. It does not apply
to those who are only subject to tax on Peruvian- source income, such as branches of foreign com - panies. • NDCEs are non-domiciled entities that: (a) have legal personality separate from their shareholders; (b) are incorporated or domiciled in non-co-opera - tive or low-tax jurisdictions; and (c) are owned, directly or indirectly, by Peruvian- resident taxpayers holding more than 50% ownership. • Related parties: individuals or entities are consid - ered related when there is a family relationship, significant shareholding, common management, consolidated financial statements, or other situa - tions detailed in the regulations of the Income Tax Law (LIR). • Passive income: includes dividends, interest, royal - ties, capital gains, rental income, and other similar types of income. If passive income exceeds 80% of the NDCE’s total income, all of its income is deemed passive. • Non-attributable passive income: passive income is not attributed if it is from a Peruvian source, has already been taxed in another country at a rate exceeding 75% of the Peruvian income tax, or does not surpass certain thresholds (5 Tax Units or 20% of total income). • Foreign tax credit: taxpayers may deduct taxes paid abroad, subject to the limits set out in Article 88 of the LIR. • Dividends: dividends are not taxable if they were previously attributed as passive income. They are allocated in proportion to the share of passive income relative to total net income. • Attribution of income: income is attributed to Peruvian-resident owners who hold more than 50% of the NDCE’s results. The attribution is based exclusively on the share in results, not on capital ownership or voting rights. The term “share in results” is not expressly defined, but it is interpreted as the right to use or benefit from the profits generated by the NDCE.
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