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March 4, 2024

Peru's Tax Court confirms withholding on deemed dividends Peruvian branches pay to Andean Community parent

The Peruvian Tax Court recently confirmed, in Resolution 02171-12-2023, that Peruvian branches of an entity that is resident in an Andean Community member country are considered Peru-resident entities. Further, the court held that the deemed dividends distributed to the branch's parent entity should be subject to withholding exclusively in Peru under article 11 of the Decision 578, a Multilateral Agreement to avoid double taxation in the Andean Community (Peru, Ecuador, Colombia and Bolivia).


Under Peruvian Income Tax Law, Peruvian branches of nonresident entities are considered independent from their parent company. Furthermore, the Peruvian Income Tax Law has established a tax fiction in which dividends are deemed as distributed by Peruvian branches to their nonresident parent entities on the date of deadline of their Annual Income Tax Return filing, regardless of whether the dividends were actually distributed. Dividends distributed to nonresident entities are subject to a 5% withholding rate in Peru.

In Resolution 02171-12-2023, the Peruvian Tax Court analyzed the refund request of a Peruvian branch of an Ecuadorian entity for withholding on a deemed distribution of dividends to its parent entity. The taxpayer invoked Decision 578 of the Andean Community, under which dividends are exclusively taxed in the country where the entity distributing the dividends is resident.

Arguments made

The Peruvian branch of the Ecuadorian entity argued that, under Peruvian Corporate Law, branches are considered to be an extension of the parent entity. Moreover, under Decision 578, dividends are only taxed in the country where the entity distributing such dividends is resident. Therefore, given that the branch is an extension of the parent company, and the parent company is resident in Ecuador, deemed dividends should not be taxed in Peru, the taxpayer asserted.

Furthermore, the Peruvian branch argued that under the nondiscrimination clause of Decision 578, the Peruvian Tax Authority should not treat Peruvian branches differently than Peruvian-resident entities. And, because there is no "tax fiction" for Peruvian entities, applying the tax fiction for branches would be discriminatory treatment against the Peruvian branch of an Ecuadorian entity under Decision 578 of the Andean Community, the taxpayer contended.

Therefore, given that the branch is an extension of the Ecuadorian entity, and that Peru should not discriminate against Peruvian branches of entities resident in the Andean Community, the Peruvian branch's withholding for the deemed distribution of dividends to its Ecuadorian parent for 2019 — 2020 constituted undue payments and should be refunded, the taxpayer argued.

Tax Court decision

First, the Tax Court concluded that the Peruvian Income Tax Law, not the Corporate Law, applied to the instant case. Peruvian tax legislation establishes that branches are independent from their parent entity and are considered to be resident entities taxed only on their Peruvian-source income.

The court noted that Peruvian tax legislation has created a tax fiction in which dividends are deemed as distributed on the date of deadline of the filing of the annual income tax, irrelevant of whether dividends are distributed. Further, Decision 578 grants exclusive taxation rights to the country in which the entity that distributes the dividends is resident. Therefore, given that the branch of the Ecuadorian entity in the instant case is considered resident in Peru, the branch's deemed dividend distribution to its parent company in Ecuador is subject to tax only in Peru, the court concluded.

With regard to the discrimination argument, the Tax Court found that there was no discriminatory treatment for resident entities and Peruvian branches of entities resident in the Andean Community because both are subject to a 5% dividend tax. The only difference is the moment in which the tax obligation arises, one being when the dividend distribution is agreed to and the other being the deadline for filing the Annual Income Tax return.

Based on these conclusions, the Peruvian Tax Court confirmed the interpretation of the Peruvian Tax Authority and rejected the Peruvian branch's refund claim.

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Contact Information

For additional information concerning this Alert, please contact:

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

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