UPDATE: Essential Issues of the Peruvian Legal System
By Sergio Endress Gómez
Update by Milagros Bustillos Pinto
Milagros Bustillos Pinto specializes in Tax Law (graduated from Pontificia Universidad Católica del Perú in 1985) and a Partner of Hernández & Cía. Abogados in Lima, Perú. She has participated in several research projects carried out by the Peruvian Institute of Tax Law, the International Fiscal Association (IFA) Peruvian Group, the International Association of Taxation and Human Rights, Latin American Institute of Tax Law, among others. She is a Past-President of the Board of Directors of the Peruvian Institute of Tax Law (IPDT) and an active member of the International Fiscal Association (IFA), Peruvian Group. She is former assistant professor of Tax Law I (Tax Code) at the Law School of the Pontificia Universidad Católica del Perú and former Professor of Tax law II (Income Tax) at the University of Lima. She was also professor of Tax Law II at the Administration and Accountancy Schools of the Academic Department of Political and Social Sciences at The Pacific University.
Published January/February 2020
Table of Contents
- 1. Introduction
- 2. Constitutional Principles
- 3. Type of Government
- 4. Judicial System
- 5. Administrative Organizations
- 6. Foreign Investment Promotion
- 7. Legal Stability Agreements
- 8. Tax Regime
- 8.1. Main Taxes
- 8.2. Value Added Tax (VAT)
- 8.3. Temporary Net Assets Tax (ITAN)
- 8.4. Financial Transaction Tax (ITF)
- 8.5. VAT Early Recovery Regime
- 8.6. Tax Treaties
- 8.7. Ultimate Beneficial Owner Rules
- 9. Main Laws and Regulations
Peru is located on the Pacific Coast side of the continent of South America, with an area of 1,285,215 km2 (slightly smaller than the State of Alaska), and has a population of 31,237,385 habitants (2017). The capital city is Lima, located in the center coast of the country with a population of 9,485,405 habitants (2017). The population is majority-Catholic (76%) and from an ethnic point of view they are 28% Indigenous, 60% mixed, 5% Caucasian, 3% Afro-American, Orientals, and other. As part of its cultural wealth, a multitude of native languages coexist in Peru. Although Spanish is the language of common use, Quechuan is an important inheritance from its Incan past. There also exist other dialects such as the Aymara and diverse Amazon languages that are distributed in a surprising variety of families. In general terms, the weather is mixed from tropical in the eastern rainforest, passing through cold on the Andes, to dry desert in the western coast. The official currency of Peru is the Sol (S/).
The Republic is ruled by the Political Constitution of 1993 (Constitución Política de 1993), approved by the Democratic Constituent Congress (Congreso Constituyente Democrático) and then ratified by referendum with 52% of the vote (the number of total electors was 8,178,742), and in force since December 31, 1993. Reform of the Constitution requires a simple majority from Congress and popular referendum. Otherwise, the reform can be approved by two consecutive congressional approvals, with specific quorums. Thirty-nine articles of the Political Constitution of 1993 have been modified since it came into force.
As it is expressed in the Political Constitution of 1993, the Republic of Peru is democratic, social, independent and sovereign.
The government is Unitarian, representative and decentralized, and is organized according to the principle of separation of powers (Executive, Legislative and Judicial Powers).
The President is the Chief of State and represents the nation. He must be more than 35 years old and must enjoy suffrage rights. He is directly elected by public elections for the people and he has to win a half plus one of the total electors. As in other countries, Peru has a second ballot formula to elect from two main majorities if none of them can obtain more than 50% in the first round. The presidential mandate is for five years without chance for immediate reelection.
Alongside the President is a Council of Ministers (Consejo de Ministros) who have to approve, with a majority, Legislative Decrees (Decretos Legislativos) and proposal Laws (proyectos de Leyes) from the President.
Congress: The legislature is currently the unicameral National Congress. It has a Legislative Chamber composed of 130 legislators serving five-year terms. Elections were last held on April 10th, 2016 (next to be held in April 2021). The Congress has among its duties the task of issuing, modifying and derogating laws and Legislative Resolutions (resoluciones legislativas), as well as authorizing International Treaties. The President and congressmen have legislative initiative, but in specific matters certain organizations (and even citizens) have this power.
When Congress approves a law, it is sent to the President for his signature. The President can propose changes to the law before enacting it, within fifteen days, and have it reconsidered by the Congress. Even when the President refuses to sign a law, the President of the Congress with the approval of the majority of members, can nevertheless enact the law.
The Executive Power could issue Legislative Decrees, which has the same authority as a law (issued by the Congress). Notwithstanding that, the Congress must give authority (via a law) to the Executive Branch (President) to act in place of the Congress with the purpose to make and enact new laws. In these cases, the delegation act (enabling law) must precede the enactment of laws by the President (executive power). Certain matters regarding the functions and structure of state entities require a certain quorum.
The judicial system consists of the Supreme Court and other Courts and judges as defined by law. The National Board of Justice (Junta Nacional de Justicia) selects and appoints judges. There is a Public Prosecutor and a Public Defender. The Public Prosecutor has the duty to represent the public interest and to defend the rule of law. Poder Judicial del Peru has a jurisprudence database.
The Constitutional Court (Tribunal Constitucional) is autonomous and independent, formed by seven members elected for five years by the Congress. The Court must review the contradictions/oppositions between laws and the Political Constitution of 1993. The Court also makes the final judgment in the constitutional trials about habeas corpus, habeas data, amparo and cumplimiento. The Tribunal Constitucional website provides full access of jurisprudence via the link “JURISPRUDENCIA” found on the left side on the main page of the site.
The Republic is divided into 24 regions, which are further divided into provinces and districts. The regions are Amazonas, Ancash, Apurimac, Arequipa, Ayacucho, Cajamarca, Cusco, Huancavelica, Huanuco, Ica, Junin, La Libertad, Lambayeque, Lima, Loreto, Madre de Dios, Moquegua, Pasco, Piura, Puno, San Martín, Tacna, Tumbes y Ucayali. There is also one constitutional province named Callao.
The Foreign Investment Promotion Law, Legislative Decree 662 and Law for the Increase of the Private Investment, approved by Legislative Decree 757 are the cornerstone of a sound legal framework that establishes clear rules and security for the development of foreign investments in the country.
Foreign investments are allowed, without restrictions, in most economic activities. No prior authorization is required for foreign investments and acquisition of national investor’s shares is fully allowed through a stock exchange or other mechanism.
As to ownership, foreign individuals or corporate bodies are under the same conditions as Peruvians. However, foreigners may not acquire mines, lands, woods, water, fuels, and energy sources, within fifty kilometers of the borders, except in cases of public necessity, expressly declared by Supreme Decree and approved by the Cabinet.
Foreign Investors have the following basic rights:
- Right to receive non-discriminatory treatment versus national investors.
- Freedom to conduct commercial and industrial activities and to perform import and export operations.
- Right to remit abroad profits or dividends, after payment of the corresponding taxes.
- Right to use the most favorable exchange rate existing in the market for any exchange operation.
- Right to free re-exportation of invested capital, whether from a sale of shares, reduction of capital or total or partial liquidation of investments.
- Unrestricted access to domestic loans, under the same conditions than national investors.
- Free acquisition of technology and free remittance of royalties.
- Freedom to acquire shares of national investors.
- Right to acquire insurances for investments.
- Right to subscribe Legal Stability Agreements with the State over an investment in the country.
Investors and local entities that house foreign investment can apply for legal stability agreements with the Private Investment Promotion Agency - PROINVERSION.
PROINVERSION, on behalf of the Peruvian government, guarantees foreign investors legal stability on income tax regulations and dividend remittance abroad. Foreign investors granted legal and tax stability are those willing to invest in Peru, in a two-year term, at least US$ 10 million in the mining and hydrocarbon sectors or US$ 5 million in any other economic activity.
Through the Legal Stability Agreements, the Peruvian government grants to Foreign Investors:
- Equal treatment, by which the national legislation does not discriminate against investors participating in enterprises, due to their status of foreign person.
- Stability of the Corporate Income Tax Regime in force at the time the agreement is concluded.
- Stability of the system of free availability of foreign currency and remittance of profits, dividends and royalties.
The term of the Legal Stability Agreements is 10 years except in the case of concessions in which case the legal stability extends to the term of the concession.
Taxes are created, modified or repealed, or an exemption is established, exclusively by law or legislative decree in case of delegation of powers, except for tariffs and fees, which are regulated by supreme decree. The State, when exercising tax authority, must respect the principles of reserve of the law, and those of equality and respect for the fundamental rights of the person. No tax shall be confiscatory.
The taxes are managed by:
- Central Government - Income Tax, Value Added Tax, Temporary Net Assets Tax (ITAN), Financial Transaction Tax (ITF), etc.
- Local Government (municipalities) - Property Tax, Alcabala Tax, etc.
- Other institutions - Contribution to SENATI, Contribution to SENCICO, etc.
Peruvian income tax legislation establishes that entities incorporated in Peru qualify as residents for tax purposes, and thus are subject to the tax on their worldwide income with a tax rate of 29.5%. In order to determine their taxable income, resident entities are entitled to deduct expenses, to the extent that they are necessary to produce or maintain the income and its source.
When determining their annual tax obligation, resident companies are entitled to offset net operative losses carried forward from previous years, according to any of the following systems:
- For four consecutive years, beginning in the first year after the losses arise. Any remaining loss that could not be offset during this four-year term cannot be carried to any later year.
- Indefinitely but with an annual limit of 50% of the taxpayer taxable income.
Also, resident companies are obliged to make monthly advance payments of the annual income tax. Advance payments are calculated based on monthly revenue, either by applying a 1.5% rate or a factor obtained by dividing the tax on the net revenue of the prior year.
Peruvian Income Tax legislation establishes that all transactions should be made at market value for tax purposes. In the case of transactions between related parties and those carried out with companies whose residencies are in tax havens, the market value will be determined according to transfer pricing provisions. In general, Peruvian legislation aligns with the OECD transfer pricing guidelines.
Non-residents companies are only subject to Income Tax on their Peru source income. In general, income derived from civil, commercial, business or any other activities that are carried out in national territory is considered as Peruvian source income, hence subject to a general withholding tax of 30% (certain income is subject to specific tax rates).
VAT applies to the following operations:
- Sale of goods within the country.
- Rendering or use of services within the country.
- Construction contracts.
- The first sale of real estate made by construction firms.
- Import of goods.
In general, the vendor or service provider is subject to VAT (18%), except in the case of import of goods and services rendered by non-residents, in which case the VAT is reverse charged to the importer and/or user. Peruvian VAT has a debit/credit system, which allows to offset input VAT against output VAT. Excess input VAT obtained in a month can be offset against output VAT of the following months, until it is exhausted.
Companies subject to Income Tax shall pay the ITAN, except those companies in preoperative stages or that commenced business on January 1st of the fiscal year in which this tax must be paid. The taxable basis of the ITAN is the value of the assets on the balance sheet of the taxpayer, as of December 31st, of the year prior to that of the tax payment. In order to assess the tax basis, some adjustments/deductions shall be made (e.g. the value of shares of companies subject to ITAN and machinery or equipment that are not older than three years, can be deducted).
The tax is assessed by applying the following tax rates:
- Up to one (1) million PEN: 0%
- Excess of one (1) million PEN: 0.4%.
ITAN can be used as credit against Income Tax prepayments and the Income Tax annual installment.
The ITF is applied at a rate of 0.005% on all deposits and/or withdrawals on Peruvian bank accounts held by taxpayers. This tax applies on the total amount of the operation. Deposits/withdrawals or transfers between accounts of a taxpayer within the same bank or between accounts in different banks are no subject to the ITF. The following operations are also exempted of the ITF, among others:
- Deposits to bank accounts for payment of salaries.
- Deposits and/or withdrawals from bank accounts opened by clearing and settlement companies in order to manage funds for stock exchange purposes.
- Deposits and/or withdrawals from bank accounts opened by authorized stock brokerage firms for trading operations in/out stock mechanisms authorized by the Superintendence of Securities Market.
- Deposits and/or withdrawals in bank accounts held by trading agents for trading operations in the stock market and in/out centralized trading mechanisms authorized by the Superintendence of Securities Market.
The ITF paid can be deducted as an expense for Income Tax purposes.
Companies at a preoperative stage with large projects may apply for the early recovery of VAT, which allows them to obtain a VAT refund prior to starting operations.
The following requirements should be met:
- Execution of a project in any sector of the economic activity that generates a third category income.
- Investment commitment of not less than USD five (5) million as total investment amount.
- The project shall have a preoperative stage equal to or of more than two years.
Approval to those eligible to benefit from the regime shall be given by means of Ministerial Resolution of the relevant sector.
The Peruvian Government has signed treaties to avoid double taxation on international transactions with the following governments, which contains rules that restrict the legal authority of such governments to levy income taxes on certain activities:
- Chile, in force since 2004.
- Canada, in force since 2004.
- Members of the Andean Community (Bolivia, Ecuador and Colombia), in force since 2005.
- Brazil, in force since 2010.
- Mexico, in force since 2015.
- Korea, in force since 2015.
- Switzerland, in force since 2015.
- Portugal, in force since 2015.
Legislative Decree 1372 regulates the obligation of legal entities and/or other legal bodies (i.e. investment funds, trusts, etc.) to report the identity of their final beneficiaries. The objective of the regulation is to provide the Peruvian Tax Administration (SUNAT) with timely access to accurate and updated information on the final beneficiary, to strengthen the fight against money laundering and terrorist financing, and national and international tax evasion, ensuring compliance with the obligations of mutual administrative assistance in tax matters; based on the Organization for Economic Co-operation and Development (OECD) and Financial Action Task Force (FATF) standards and recommendations.
Laws and regulations are published in "El Peruano," a newspaper founded in 1825 by Simon Bolivar, an important Latin-American hero during the independence wars. Peru has a civil law system.
In accordance with article 36, paragraph 2, of the Statute of the International Court of Justice, Peru recognizes as compulsory ipso facto and without special agreement, in relation to any other State accepting the same obligation and on condition of reciprocity, the jurisdiction of the International Court of Justice in all legal disputes.
Legislation is accessed by year and month. A separate library, similarly organized, provides brief summaries arranged by subject of laws and regulations appearing in El Peruano.
Researchers can find in vernacular the full text of laws for free online (on a government website).
Most Important Rules:
- The Constitutional Procedural Code (Código Procesal Constitucional), Law Nº 28.237 was enacted in May 28, 2004, and published in May 31, 2004. It contains process rules to exercise the most important constitutional actions and remedies like, habeas corpus, habeas data and amparo. The trial of amparo is the main remedy to protect most of the rights granted/established in the Peruvian Political Constitution of 1993.
- The Civil Code (Código Civil) was enacted in 1984 and was enforced in November of the same year by the Law Nº 23.403 of July 27, 1984. It was a result of special commissions who revised a proposed project of the Civil Code made by a Commission established in 1965, by the Supreme Decree (Decreto Supremo) Nº 95, from March 1, 1965. The text has 2.132 articles, distributed in ten Sections (Libros") with a final section.
- The Commercial Code (Código de Comercio) was enacted in February 15, 1902.
- The Corporate General Law (Ley General de Sociedades) was established by Law Nº 26.887 in 1998.
- The Penal Code (Código Penal) was enacted in April 3, 1991 and published in April 8, 1991. It was the result of several Commissions appointed to revise and improve a previous project. The Congress gave authority (throughout the law Nº 25.280) to the Executive Branch (President) to act in place of the Congress with the purpose of drafting and enacting a new penal code.
Links for Laws and Government in Peru
- Peruvian State Site
- Tribunal Constitucional
- Presidencia Consejo de Ministros
- Biblioteca Nacional
- Basic Legislation and Codes
- Archivo Digital de la Legislación del Perú
- Ministerio de Justicia
- Poder Judicial
- All constitutions of Peru
- Tribunal Fiscal
- Superintendencia Nacional de Registros Públicos
- Comisión Andina de Juristas
- Colegio de Abogados de Lima
- Universidades del Peru
- Superintendencia Nacional de Aduanas y de Administración Tributaria
- Agencia de Promoción de la Inversión Privada – PROINVERSION