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18 September 2018 Peru amends income tax law to add new thin capitalization rules and indirect foreign tax credit On 13 September 2018, Peru's President enacted Legislative Decree 1424, which amends the income tax law with regard to the thin capitalization rules, the indirect transfer of shares, the definition of permanent establishment (PE) and the indirect foreign tax credit. The new thin capitalization rules extend the limit on interest deductibility (3:1 debt/equity ratio) to unrelated parties. Previously, this limitation only applied to interest paid to related parties. However, beginning 1 January 2021, a new set of thin capitalization rules will come into play. Under these rules, the interest that exceeds 30% of earnings before interest, taxes, depreciation and amortization (EBITDA) of the preceding year will not be deductible. Interest that is not deducted may be carried forward for up to four years, but will always be subject to the 30% of EBITDA limitation. The Decree establishes that an indirect transfer of Peruvian shares will always be triggered if the amount paid for the shares of a nonresident entity that corresponds to the Peruvian shares is equivalent to or higher than 40,000 Tax Units (approximately US$50.3 million). Likewise, it is established that, for purposes of the indirect transfer rules, the fair market value of the shares will be determined according to a procedure to be set out in regulations, using the discount cash flow method or the net worth value based on audited balances.
The Decree establishes an indirect credit for foreign tax credit purposes. Previously, Peru only allowed the direct tax credit. With the new rules, a Peruvian entity receiving foreign income as dividends or profits from nonresident entities will be able to deduct:
To qualify for the indirect foreign tax credit, the Peruvian entity must directly own at least 10% of the shares of the nonresident entity for 12 months before the date in which the dividends are paid. The indirect foreign tax credit may be claimed for the income tax paid by the second-tier nonresident entity, provided the following conditions are met: (i) the Peruvian entity indirectly owns at least 10% of the shares of the nonresident entity for 12 months before the date in which the dividends are paid; and (ii) the second-tier nonresident entity is a resident of a country that has an exchange of information agreement with Peru or is a resident of the same country of residence as the first-tier nonresident entity.
Document ID: 2018-6089 |
