PERU Trends and Developments Contributed by: Camilo Maruy, Maite Colmenter, Roberto Polo and Llanet Gaslac, Rebaza, Alcázar & De Las Casas
Challenges, case studies and issues Violation of the principle of legality
Calculation of the 75% threshold To qualify as an NDCE, an entity must be located in a jurisdiction where passive income is either untaxed or taxed at a rate equal to or lower than 75% of the Peruvian income tax rate. The Regulation indicates that one must compare the amount of tax paid by ‒ or payable by ‒ the non-domiciled entity in the country where it is incorporated, established, or considered a resident, with the amount of tax that would have been payable in Peru, excluding withholding on dividends. This can result in an excessive combined tax burden (up to 50.65%), which can negatively affect reinvest - ment. That said, the authors believe this aspect relat - ed to the application of foreign tax credits should be corrected, as the CFC Rules must not only prevent base erosion and discourage the relocation of capital to low- or no-tax jurisdictions but also avoid double taxation scenarios. It is recommended that taxpayers be allowed to apply foreign withholding tax credits even if the tax is paid after the filing of the tax return, in order to prevent double taxation. Who should be considered the taxpayer in a revocable trust when both the settlor and the beneficiary are tax residents in the country? Assuming that trusts may qualify as NDCEs, a ques - tion arises as to who should be taxed: the settlor or the beneficiary. Position in favour of the beneficiary It is argued that the beneficiary, as the person entitled to the benefits of the trust, should be the one subject to taxation. This view relies on the rule stating that an NDCE is considered owned by a Peruvian-resident taxpayer when, at the end of the taxable year, the taxpayer ‒ either alone or together with related parties domiciled in Peru ‒ holds a direct or indirect interest of more than 50% in the capital, profits, or voting rights of the entity. Accordingly, for CFC Rules purposes, ownership falls on the beneficiaries of the revocable trust, as they are entitled to participate in its benefits. Once the assets are transferred, the settlor no longer holds rights over them.
Article 112 of the LIR requires that an NDCE has a legal personality separate from its shareholders. However, the Regulation broadens this definition to include entities without legal personality (such as trusts or funds), which exceeds what is established by law. Although this extension may help prevent tax avoidance, it infringes upon the principle of legality enshrined in Article 74 of the Peruvian Constitution, as the Regulation cannot contradict or distort the law. In the authors’ opinion, while the concept of an NDCE should indeed encompass any type of entity, regard - less of whether it has legal personality, such a defini - tion should have been incorporated into the LIR itself, not into the Regulation. This would have respected the proper legislative process, ensuring greater transpar - ency and legitimacy in the creation of tax rules, and reinforcing legal certainty and adherence to the prin - ciple of legality. Presumption in the classification of passive income Article 114 of the LIR presumes that if 80% or more of an NDCE’s income is passive, then all of its income is considered passive. This presumption, which does not admit rebuttal, simplifies the application of the tax regime by clarifying which income should be deemed passive, particularly when the majority of the entity’s income is of this nature. However, the provision refers to “income” instead of gross income, which could lead to a situation where, even if passive income is less than 80% of total income, the presumption still applies to all income. This may create distortions when the basis of comparison is income rather than net income. For example, two entities with the same amount of passive income could be treated differently due to var - iations in their gross income. It is recommended that the law refer to net income instead of income to avoid inequitable outcomes. Notably, this issue also arises in the context of non-attributable income. As previ - ously mentioned, the LIR states that passive income earned by an NDCE will not be attributed during a tax year if such income accounts for 20% or less of the entity’s total income. However, calculating this per - centage based on gross income instead of net income can also lead to significant distortions.
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