August 1, 2023
Peruvian Tax Authority interprets Non-Discrimination Clause of Multinational Agreement to avoid Double Taxation as not applicable to transfer of Peruvian shares in international reorganizations
In Ruling 89-2023, published on 11 July 2023, the Peruvian Tax Authority determined that the Non-Discrimination clause of Decision 578 of the Andean Community does not apply to the transfer of Peruvian shares in international reorganizations.
According to the Peruvian Income Tax Law, a tax-free corporate reorganization will be deemed to exist if the entities involved are Peruvian residents, including the new entity resulting from the reorganization. Likewise, domestic reorganizations are not subject to income tax but fall under a tax-free regime.
Under Decision 578 of the Andean Community (Bolivia, Colombia, Ecuador and Peru) capital gains tax generated from a disposal of shares will only be levied in the country where the shares were issued.
In addition, Decision 578 includes a Non-Discrimination Clause under which no member country may treat residents in other member countries less favorably than that it treats its own residents in its territory.
The ruling analyzes a set of facts in which two Colombian entities enter into a demerger by which one Colombian entity spins off an equity block consisting of shares issued by a Peruvian company and transfers it to another Colombian entity.
The Peruvian Tax Authority concluded that because the Non-Discrimination Clause is based exclusively on residency criteria, it does not apply when the less-favorable treatment is based on factors other than residency. With regard specifically to demergers, domestic rules on local demergers require that, for tax-free treatment to apply, both the demerged entity and the entity receiving the assets must be Peruvian residents.
The Non-Discrimination Clause must be viewed in terms of the demerged entity, which is the party that will be generating the taxable income (capital gain resulting from the transfer of Peruvian shares). In Ruling 89-2023, the Tax Authority concluded that the transaction is taxable in Peru, without considering the residence of the seller (the entity being demerged) and instead basing its conclusion on the parties' noncompliance with other conditions required for tax-free treatment under the Peruvian legislation.
The condition not met in the case under analysis is that the acquirer is a non-Peruvian entity. In other words, the Peruvian Tax Authority seems to have concluded that the imposition of capital gains tax in the case at issue does not stem from the seller's nonresidency in Peru, but from the acquirer's nonresidency in Peru.
For additional information with respect to this Alert, please contact the following:
Ernst & Young Asesores Empresariales S.C.R.L, Lima
Ernst & Young LLP (United States), Latin American Business Center, New York
Ernst & Young LLP (United Kingdom), Latin American Business Center, London
Ernst & Young Tax Co., Latin American Business Center, Japan & Asia Pacific
Published by NTD’s Tax Technical Knowledge Services group; Carolyn Wright, legal editor