The Peruvian Tax Authority issued a ruling at the end of 2023 establishing that, in applying Article 21 of the Peru-Chile Double Tax Treaty (DTT), capital gains obtained by a Chilean resident from an indirect transfer of Peruvian shares through a direct transfer of Chilean shares could also be taxed in Peru.

Background

Peruvian income tax law sources the indirect transfer of Peruvian shares as taxable. An indirect transfer is defined as the transfer of shares of a foreign company that owns, directly or indirectly, shares issued by a Peruvian entity, provided certain thresholds are met.

According to Article 13(4) of the Peru-Chile DTT, capital gains that the resident of a member country obtains from the transfer of shares issued in the other member country (source country) could be taxed in the source country. In addition, Article 13(5) establishes that capital gains from the transfer of other goods will be taxed only in the transferor's country of residence.

In this regard, in 2021 Peruvian Tax Authority issued Ruling 1-2021-SUNAT, which established that capital gains obtained by a Chilean resident as a result of an indirect transfer of Peruvian shares through a transfer of Chilean shares are taxed exclusively in Chile. The Peruvian Tax Authority concluded that because in the indirect transfer of Peruvian shares, the shares transferred are issued in Chile — not in Peru — and Article 13(4) does not come into play. Article 13(5) applies to this situation, so capital gains will be taxed only in Chile. (For more information, see EY Global Tax Alert, Peru establishes gains from indirect transfer of Peruvian shares will be taxed only in Chile under Peru-Chile DTT, dated 1 March 2021.)

Ruling 117-2023

The Peruvian Tax Authority issued Ruling 117-2023 on 28 December 2023, establishing that, in applying article 21 of the Peru-Chile DTT, capital gains obtained by a Chilean resident from an indirect transfer of Peruvian shares through a direct transfer of Chilean shares could also be taxed in Peru. The new ruling also repealed criteria established in Ruling 1-2021.

The Peruvian Tax Authority interprets that Article 13(4) of the Peru-Chile DTT includes capital gains from the sale of shares located in the source country, understanding the term "located" in its regular or common meaning. In addition, because at the time they subscribed to the DTT (8 June 2001) neither Chile nor Peru had rules with regard to indirect transfers of shares, it cannot be interpreted that Article 13(4) includes the indirect transfers of shares within its scope. Thus, the shares covered by this clause refer to those issued by companies incorporated in Peru that dispose of the shares directly, as the meaning of the term "located" cannot be extended to extraordinary or non-ordinary cases of sale (i.e., indirect transfer of shares).

On the other hand, the Peruvian Tax Authority interprets that Article 13(5) of the Peru-Chile DTT does not allow the inclusion of "other shares," because the treatment of capital gains on shares was exhausted in Article 13(4), and it cannot be interpreted that Article 13(5) includes capital gains of transfer of shares, even in the case of indirect transfers. Thus, the indirect transfer of Peruvian shares is not included in Article 13(5) of the Peru-Chile DTT.

Finally, the Peruvian Tax Authority concluded that, as Article 21 of the Peru-Chile DTT has a residual nature, in that it is applies to "income not mentioned in the previous articles," capital gains derived from the indirect transfer of shares should be included within its scope. Article 21 allows the taxation in the source country.

In the instant case, and applying Article 21, capital gains obtained by a Chilean resident from an indirect transfer of Peruvian shares through a transfer of Chilean shares could also be taxed in the source country (i.e, Peru).

With the above in mind, the Peruvian Tax Authority has repealed the previous Ruling 1-202, changing its official interpretation in connection with the taxation of capital gains in cases of indirect transfer under Peru-Chile DTT.