Business & Investment Guide - Peru 2008

Business & Investment
Guide - Peru
2008
Contacts:
David De la Torre
(51)(1) 411-4471
david.de-la-torre@pe.ey.com
Marcial García
(51)(1) 411-4424
marcial.garcia@pe.ey.com
Elizabeth Rosado
(51)(1) 411-4457
elizabeth.rosado@pe.ey.com
María Julia Sáenz

(51)(1) 411-4480
maria-julia.saenz@pe.ey.com
Fernando Tori
(51)(1) 411-4479
fernando.tori@pe.ey.com
Andrés Valle
(51)(1) 411-4440
andres.valle@pe.ey.com
2 Business & Investment Guide - Peru Ernst & Young

Business &
Investment Guide -
Peru
2008
Business &
Investment Guide - Peru
2008
Contents
Background
8 Currency
9 Population
10 Economic performance
10 Foreign investment
11 Foreign debt
Setting up a business presence in Peru

13 Corporation
15 Limited-liability company
16 Branch
16 Other corporate matters
Foreign investment
20 Mining
20 Oil & gas
21 Intellectual property protection
22 Antitrust law
22 Unfair competition and advertising
23 Settlement of disputes
Environmental protection
25
Compulsory use of means of payments

27
Income tax
29 Legal entities
32 Thin capitalization rules
32 Transfer pricing rules
32 Individuals
35 Permanent establishment
Temporary net assets tax
37
Tax on financial transactions

39
Excise taxes
40 Value added tax
40 Early recovery system
41 Joint ventures
43 Excise tax
Amazon rain forest special tax regime

45
Customs duties
46 Drawback
46 Special regime
47 International trade
Tax treaties
51
Other taxes
52 Social security
Immigration
55
Labor legislation
56 Job stability
57 Employees’ benefits
59 Expatriates
Accounting standards
61
Ernst & Young Business & Investment Guide - Peru 7
Background
Peru, located on the Western Coast of South

America, is divided into three geographical
regions: the Coastal Region, which is an
81-km wide desert strip running along the
Pacific Ocean coastline; the Andean highlands;
and the Amazon Rain Forest (which occupies
62% of its territory).
According to the Political Constitution of 1993,

the Peruvian government is composed of an
executive branch, a single chamber congress
and a judiciary branch. The President of the
Republic and all congress members are directly
elected by popular vote every five years. The
current government term ends on July 28,
2011. Voting is mandatory for all citizens over
18 years old.
Currency
The Peruvian currency is the Nuevo Sol
(abbreviated S/.). The annual inflation rate for
2007 was 3.9% (1.1% in 2006). The annual
devaluation rate during the year 2007 was
-6.99% (-6.40% in 2006). See Graph 1.
Peru has a free-floating managed exchange

rate regime. Banks are currently
(June 30, 2008) buying US dollars at
S/. 2.965: US$1.00 and selling at US$1.00:
S/. 2.967. Parallel market rates are slightly
different.
There are no restrictions or limitations on

holding bank accounts in foreign currency or to
remit funds abroad.

Graph 1 - Devaluation and inflation
Source: Instituto Nacional de Estadística e Informática - INEI

(National Institute of Statistics and Information Technology)
Population
Based on the 2007 census and on an annual
average population growth rate of 1.6%, the
estimated population of Peru for the year 2007
was 28.2 million, of which 8.4 million (29.8%)
reside in Lima, the capital of the country.
The labor force is estimated to be about 20.2
million.
The main official language is Spanish and the

predominant religion is Roman Catholicism.

Economic performance
Gross Domestic Product (GDP) for the year
2007 was US$ 104 billion. GDP grew 9% in
2007 (8% in 2006). The leading exports are
mining and fishing. Total exports grew 17.46%
in 2007 and reached US$ 27.96 billion FOB
while imports reached US$ 19.6 billion.
Graph 2 - GDP variations
Source: Instituto Nacional de Estadística e Informática - INEI

(National Institute of Statistics and Information Technology)
Foreign investment
The legal framework opens the economy
to private investment. It also promotes
competition and foreign investment. See graph
3 and 4.

Graph 3 - Foreign investment by industry
(June 2007)
Source: Agencia de Promoción de la Inversión Privada

(Private Investment Promotion Agency)
Graph 4 - Accumulated foreign investment in

US$ million (1998 - June 2007)
Source: Agencia de Promoción de la Inversión Privada

(Private Investment Promotion Agency)
Foreign debt
Peru’s current public foreign debt reaches
about US$ 20.08 billion.

Setting up a business
presence in Peru
Corporation
The corporation is the most common form of
creating a business enterprise in Peru. A minimum
of two shareholders is required. Non-resident
shareholders should appoint a proxy to sign off
the by-laws on their behalf. Funds in local and
foreign currency for the initial investment should
be deposited in a local bank.
The by-laws must be converted into a public deed

and then registered with the public registry. In
addition, the corporation should be registered
with the National Supervisory Commission of
Companies and Securities (CONASEV) if certain
revenue limits are reached.
Main characteristics:
• Limited liability - Shareholders' liability is limited
to the par value of the shares they hold.
• Centralized management - Shareholders
Meetings, Board of Directors and Chief Executive
Officer (General Manager).
• Transfer of interest - The transfer of shares
is free; nevertheless, in the case of close
corporations the by-laws may provide the right
of first refusal for the existing shareholders.
Likewise, the by-laws may establish or the
shareholders may agree to prohibit temporarily
the transfer or the encumbrance of shares for a
term no longer than ten years, extendable.
• Continuity - Death, illness, bankruptcy,
retirement or resignation of any shareholder does
not cause the dissolution of the corporation.
Under certain circumstances the purchase of

shares listed in the stock exchange market to
obtain a controlling interest in a corporation (25%
of shares) must be made through a Takeover Bid
(Oferta Pública de Adquisición-OPA).
Corporations shall allocate 10% of their
distributable profits, net of certain deductions
(i.e. income tax), up to a limit equivalent to
20% of the paid-in capital in order to create a
legal reserve. Distributable profits should be
understood to be current year profits after
deducting accumulated losses. Moreover,
current year losses can be compensated
against the legal reserve as long as such
reserve is replaced.
Close corporation
Close corporations resemble the limited-
liability companies and must have a
minimum of two and a maximum of twenty
shareholders. Shares cannot be registered in
the Public Registry of the Stock Market.
The particular characteristics of this form of

companies are:
• Management - Shareholders Meetings

(which can be held without the physical
presence of the shareholders) and Chief
Executive Officer (General Manager). The
Board of Directors is optional.
• Transfer of interest - The Law establishes
a right of first refusal for the existing
shareholders in case of transfer of shares.
However, the by-laws may eliminate this
right.
Public corporation
Public corporations are intended basically
for companies with a large number of
shareholders or which have made a Public
Offering (Oferta Pública de Venta). They
have to be registered in the stock market’s
registry.

The particular characteristics of this form of
corporation are:
• Supervision - Public corporations are

subject to the supervision of the National
Supervisory Commission of Companies and
Securities (CONASEV).
• Transfer of interest - Transfer of shares is
totally free. No restrictions or limitations
are allowed.
Limited-liability company
The limited-liability company is organized by
a minimum of two and a maximum of twenty
partners. The limited-liability company releases
no shares. The setting-up procedures are the
same as those for corporations.
The main features of this type of entity are:
• Limited liability - Partners are not personally

liable for the company's liabilities.
• Centralized management - Partners Meeting
(which can be held without physical presence
of the partners) and Chief Executive Officer
(General Manager).
• Transfer of interest - Transfer of partners'
interest to third parties is subject to approval
by the existing partners (right of first refusal
is mandatory) and must be registered in the
public registry.
• Continuity - Death, illness, bankruptcy,
retirement or resignation of any partner does
not cause the dissolution of the entity.

Branch
Procedures for organizing a branch in
Peru are similar to those applicable to the
establishment of corporations. The Parent
Company agreement to set up a branch in Peru
must be validated by the Peruvian Consulate
and authenticated by the Peruvian Ministry
of Foreign Affairs, before it is converted into
a public deed and registered with the public
registry. An official Certificate of Good Standing
of the Parent Company is required.
According to the Business Corporation Law,

branches of foreign companies may be
converted into any other form of entity and re-
registered as such in the public registry.
Other corporate matters

• Mergers and spin-offs - Entities subject to
the Business Corporation Law may merge
or be divided by shareholders or partners'
agreement of the companies involved.
Mergers and corporate divisions will enter
into effect on the date agreed by the parties,
provided that they are registered with the
public registry.
Tax benefits applicable to mergers and
corporate divisions have been eliminated.
• Dividend distribution - Dividends can only be
distributed on the basis of a balance sheet
that shows the existence of profits or retained
earnings surplus and as long as the net worth
is not less than the paid-in capital.

• Notwithstanding, distributable profits can be
accumulated for a later dividend distribution.
• Check-the-box regulations - Under the
"check-the-box" regulations issued by the
United States Internal Revenue Service
(IRS), the only Peruvian entity that qualifies
as a "per se corporation" for U.S. tax
purposes is the "sociedad anónima”. Other
types of entities are regarded as “eligible
entities” and as such may elect whether to be
treated as a corporation or as a pass-through
entity such as a partnership (more than one
owner) or branch (if wholly owned).
A “sociedad anónima” willing to be considered

as a “pass-through entity” for U.S. tax purposes
would have to be transformed into any other
type of entity foreseen by the Peruvian
Business Corporation Law (i.e. limited-liability
company).

Foreign investment
Direct foreign investment must be registered

with the Private Investment Promotion
Agency - ProInversión. No prior authorization is
needed for this purpose.
Foreign investors are allowed to remit abroad

(without restrictions) net profits originating
from the registered investment as well as
proceeds from the transfer of shares, ownership
participation or rights, capital reductions and
dissolution of companies.
ProInversión, on behalf of the Peruvian

government, guarantees foreign investors
legal stability on tax regulations and dividend
distributions. Foreign investors entitled to
obtain 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; US$5 million in any other economic
activity or to acquire more than 50% of the
shares of an enterprise participating in the
privatization process.
Local companies that hold foreign investment

may apply for tax and legal stability
agreements. The investment of profits available
for distribution out of Peru qualifies as foreign
investment for this purpose. Tax stability is
limited to income tax at the rate in force at the
time of execution of the agreements.
Foreign companies which make investments

under agreements are allowed to keep
accounting records in foreign currency, under
certain requirements.

Mining
Exploration, production, refining and transport
of minerals by individuals or companies, require
concession rights granted by the government.
Mineral trade is free.
The Mining Law offers the following main

benefits:
• Free access to foreign currency.

• Free trade and export of ore production.
Investors who undertake large mining

operations may enter into tax law stability
agreements with the government for periods
of ten and fifteen years, depending upon the
investment commitment and other factors.
Oil & gas

Oil and gas exploration and production
activities are conducted under license or
service contracts granted by the government.
Under license contracts the investor pays
a royalty, while under service contracts
the government pays remuneration to the
contractor.
In both cases, however, the distribution of the

economic rent (royalty/remuneration) between
the government and the investor is determined
as a function of gross production according to
a sliding scale based on an R factor calculation.
The R factor in the case of Peru is the ratio of
cumulative revenues divided by cumulative
costs on a cash basis.
Oil and gas obtained under these contracts

can be exported with no restrictions or export
taxes.

Exploration and development expenditures, as
well as investments made by the contractor up
to the date production begins, including the
cost of wells with respect to each contract, can
be amortized under the following accounting
methods:
• Unit of production; or,
• Straight-line, during a period not less than
five years.
Imports of goods during the exploration stage

are not subject to import taxes. A customs
duties temporary exemption may apply during
the production stage.
The government guarantees that exchange

regulations and tax law in effect on the
agreement date will remain unchanged during
the contract term.
Intellectual property protection

Intellectual property in Peru is ruled by the
Paris Agreement, Decision 486 of the Andean
Pact Commission and the Industrial Property
Law. The National Institute for the Defense of
Competition and the Protection of Intellectual
Property (INDECOPI) oversees the proper
use of intellectual property rights. Trademarks
should be registered with INDECOPI to obtain
protection. Registration follows the Niza
International Classification. A certificate that
grants exclusive rights over the trademark,
for a ten-year period, is issued after following
the registration procedure. Third parties are
allowed to file oppositions to a trademark
registration. The certificate can be renewed,
six months before or six months after the
expiration date. However, if a trademark is not
used within a three-year-period, a third party is
entitled to file a cancellation petition.
Well-known trademarks are protected by
INDECOPI without registration. Origin
denominations, such as geographical sites,
cannot be appropriated. Patents are registered
with the Inventions Office. The patent owner
is granted exclusive use for 20 years. Trade
names are protected by a “first use-first right”
principle or by registration. However, in the first
case, protection is limited to the geographical
area of the potential clients of the user.
Antitrust law
Under the 1991 Antitrust Act, acts or conducts
related to economic activities which may result
in an abuse of a dominant position in the
market or which restrain, limit or distort free
competition are forbidden.
Acquiring a dominant position is not forbidden;

however, those who abuse of such position
may be subject to important penalties.
According to this principle, mergers require
no prior approval, even when a monopolistic
participation in the market may result.
Nevertheless, in the electrical sector, acts

which may result in vertical and/or horizontal
integration within the activities of generation,
transmission and distribution of electric power,
are subject to prior authorization by INDECOPI.
Unfair competition and advertising

According to the Unfair Competition Law,
any conduct that threatens good commercial
practices, normal development of economic
activities and, in general, that opposes to those
principles, is forbidden. Among others, the
following acts are regarded as illegal:

(i) those directed to create confusion with
competitors’ activities, services, products
or enterprises;
(ii) the use or dissemination of wrong or false
indications or information, which may
mislead consumers;
(iii) the dissemination of denigrating
manifestations on competitors;
(iv) the systematic imitation of services
provided by, or initiatives from third
parties;
(v) the exploitation of the goodwill of other
enterprises;
(vi) the violation of industrial secrets.
On the other hand, according to the Advertising

Law and its regulations, advertising should
contain no information or images which directly
or indirectly, due to omission, ambiguity or
exaggeration, may mislead the consumer.
Explicit comparison of products, including
prices, is allowed provided that it is based
on verifiable facts, and it does not slander
competitors or confuse consumers. Both the
advertiser and the advertising agent are liable
on failure to comply with these provisions.
Settlement of disputes
Foreign investors are protected against
inconvertibility, expropriation, political violence
and other non-commercial risks through
access to the corresponding multilateral and
bilateral conventions such as the Overseas
Private Investment Corporation (OPIC)
and the Multilateral Investment Guaranty
Agency (MIGA). Also, Peru has joined the
International Convention for Settlement of
International Disputes (ICSID) as an alternative
to settle disputes arising between investors and
the government.

Environmental
protection
Environmental protection is ruled by

Legislative Decree 613 as well as by further
regulations according to each economic
sector. New companies or new projects
of existing companies should file an
Environmental Impact Assessment (EIA) with
the corresponding authorities, before starting
operations.
Mining companies must also submit for

approval to the Ministry of Energy and Mines
a “Mine Closure Plan” (Plan de Cierre) and
grant an “environmental guaranty” to answer
for the performance of any rehabilitation,
reclamation and closure costs that may be
required under the plan.

Compulsory use of
means of payments
As from 2008, any payment in excess of

S/.3,500 or US$1,000 must be made through
the Peruvian banking system using the
so-called “Means of Payments”, which include
bank deposits, wire transfers, pay orders,
credit and debit cards and non-negotiable
checks. The consequence for not complying
with this obligation is the disallowance of the
corresponding expense or cost for income tax
purposes. In addition, any VAT paid upon the
acquisition of goods and services will not be
creditable.

Income tax
Legal entities
Resident corporations are subject to taxation in
Peru on a worldwide income basis. Nonresident
corporations and branches are only taxed on
Peruvian source income.
The tax year ends on December 31; no

exceptions are allowed. Income tax returns for
corporations, branches and individuals should
be generally filed by March 31 of the following
year.
Estimated monthly prepayments are required.

Expenses incurred in the generation of
revenues or in maintaining its source are
generally deductible for determining the
income tax base of taxpayers.
However, with certain exceptions, expenses for

services, assignment of rights or intangibles, as
well as for the use of property located abroad,
will not be deductible for tax purposes when
those transactions are carried out, directly
or indirectly, with residents of tax havens
jurisdictions.
Taxpayers can pick between the following two

systems to get relief for their losses:
• Losses can be carried forward for four

consecutive years, beginning with the first
subsequent year in which the losses arise; or,
• Losses can be carried forward indefinitely,
but with an annual limit equivalent to 50%
of the taxpayer's taxable income of each
subsequent year.
Loss carry backs are not permitted.

Interest on loans to the Peruvian government
(except for interest accrued on financial
entities’ mandatory cash reserve deposits in
the Central Reserve Bank) and any other type
of fixed or variable interest, in either local
or foreign currency, earned on deposits in
the Peruvian banking system, are income tax
exempt until December 31, 2008.
The maximum annual depreciation rates for

income tax purposes are 20% for vehicles,
25% for cattle and fishery nets, 20% for
machinery and equipment used in the mining,
oil and construction industries, 10% for other
machinery and equipment acquired since
1991, 25% for hardware and 10% for other
fixed assets. Tax depreciation will be deductible
provided that it does not exceed the maximum
rates and is registered in the accounting
records, regardless of the depreciation method
used. On the other hand, buildings are subject
to a fixed 3% depreciation rate.
The income tax rate is 30%. Dividends and

other forms of profit distribution, as well as
remittance of net profits by a branch, are
subject to a 4.1% withholding tax when paid to
resident and nonresident individuals, and to
nonresident entities.
Revenues from activities performed partially

in Peru and partially abroad by non-domiciled
companies, including those obtained by their
branches or permanent establishments, are
subject to withholding tax on a portion of gross
revenues, according to the following chart
(unless otherwise indicated, the withholding
tax rate is 30%):

* The withholding tax rate for these activities is 10%.
Fees paid abroad for technical assistance used

economically within Peru are subject to a 15%
withholding tax, regardless of whether or not it
is provided in Peru.
Gains from the sale, exchange or redemption

of shares, bonds and other securities issued
by companies, or by investment funds or
trusts incorporated or organized in Peru, are
considered from Peruvian sources and, are
consequently taxed at 30%.
However, capital gains from the sale of stocks

and securities within the local stock exchange
market are income tax exempt until December
31, 2008.
Royalties are subject to a 30% withholding tax.
Interest paid abroad is subject to a 4.99%

withholding tax if the related debt meets
certain conditions; otherwise the tax rate is
30%.

Thin capitalization rules
Under these rules, interests paid by domiciled
taxpayers to economically related or associated
enterprises are not deductible in the portion
that exceeds the result of applying a coefficient
(debt/equity ratio) equivalent to three times
the taxpayer’s net equity at the end of the
preceding year.
Transfer pricing rules

Transfer pricing rules are based on the arm’s
length principle as interpreted by the OECD.
In Peru, however, these rules do not only
apply to transactions between related parties
(both domestic and cross-border) but also to
transactions with companies resident in tax
havens. Moreover, they must be considered not
only for income tax purposes but also for Value
Added Tax and Excise Tax purposes.
The following are acceptable transfer pricing

methods: the comparable uncontrolled price
method, the resale price method, the cost-plus
method, the profit-split method, the residual
profit-split method and the transactional net-
margin method.
Individuals
The tax year for individuals is the calendar year.
Under the Peruvian income tax system,

Peruvian citizens residing in Peru are subject to
taxation on their worldwide income, regardless
of the country from which the income derives,
the country in which payment is made or the
currency in which the income is received. By
contrast, nonresident aliens are only taxed in
Peru on their Peruvian source income.

However, after being present in Peru for a
period or periods aggregating more than 183
days within any twelve/month period, foreign
nationals will be considered residents and will
also be taxed on a worldwide income basis.
An individual’s status as resident or nonresident

must be judged based on conditions existing
at the beginning of the tax year. Any change
during the tax year will affect the residence
status as from the following tax year.
Tax rates for domiciled individuals are

determined using a three-bracket cumulative
scale, as shown below:
(*) A tax unit is currently equivalent to S/. 3,500.
Certain deductions are allowed in arriving at

the taxable income depending on the kind of
income obtained. For salaries, wages and other
remuneration derived from independent and
dependent personal services, the deduction
allowed is equivalent to 7 tax units (currently
S/. 24,500).
Professional fees for services provided within

Peru by non-domiciled individuals are subject to
a 24% income tax (effective rate).

Permanent establishment
For income tax purposes permanent
establishments of non-resident companies
would be deemed to exist in the following cases:
• In the event of the existence of a fixed place

of business through which a non-resident
entity carries out business activities in Peru.
• When a proxy or representative acts within
the country, in the name and on behalf of a
non-resident entity, with enough power to
sign contracts on a regular basis.
• If the representative brings or keeps
inventory in the country, on a regular basis,
with the purpose of selling products in Peru
in the name and on behalf of the non-resident
entity.
• The performance of activities regarded as
preparatory or auxiliary do not determine
by themselves the creation of a permanent
establishment (i.e. Inventory kept in Peru
exclusively for display purposes). Like
branches of foreign companies, permanent
establishments are only taxed on Peruvian
source income.

Temporary net assets
tax
A so called Temporary Net Assets Tax (ITAN)

equivalent to 0.5% of the value of total assets
over S/.1,000,000, determined as of December
31st of the previous year, companies in a pre-
operative stage are excluded.
The ITAN payments can be used as a tax credit

to offset income tax liabilities (i.e. monthly
prepayments and the final income tax payment
due when the annual tax return is filed).
Nevertheless, to avoid a double taxation

problem, subsidiaries and branches of foreign
companies may elect to reverse the order
of the tax credit so the Peruvian income tax
is creditable against the ITAN and not vice
versa. In such a way the taxpayers might be
able to claim a foregin tax credit in their home
countries for the full amount of the Peruvian
income tax liability.

Tax on financial
transactions
A 0.07% tax is generally imposed on debits and

credits in Peruvian bank accounts.

Excise taxes
Value added tax

A 19% Value Added Tax (Impuesto General
a las Ventas - IGV) applies to the following
activities:
• Sale of goods within Peru

• Services performed or used within Peru
• Construction contracts performed within
Peru
• First sale of real estate by the constructor
• Import of goods
IGV paid upon acquisition of goods or services

can be deducted from IGV related to the sale of
finished products or services.
Exporters are reimbursed for any IGV paid on

the acquisition of goods and services. Also,
exporters can apply such reimbursement as a
credit to offset IGV or income tax liabilities.
Early recovery system

The law provides for a general and an
enhanced early recovery system for enterprises
performing productive activities. Under the
general system, which is applicable to all
productive companies on a preoperative stage,
the IGV paid upon acquisition of capital goods is
reimbursed through negotiable credit notes.
The enhanced system, on the contrary, is

restricted to companies that have entered
into contracts with the Peruvian government,
making a minimum investment commitment of
US$ 5MM, in projects with preoperative stage
of not less than two years.

Under this regime, the IGV paid on the
acquisition of new capital goods as well as
on the acquisition of intermediate goods
and services and construction contracts, can
be recovered on a monthly basis through
negotiable credit notes.
The application of one system does not

preclude using the other for different items.
In addition, there is an definitive recovery

system exclusively for exploration. Under this
regime, IGV paid on the acquisition of goods
and services used directly in mining and oil
& gas exploration activities can be recovered
without having to wait until a commercial
discovery takes place or production begins.
For this purpose, certain administrative
requirements shall be met. For example,
mining companies must enter into the so-called
"Exploration Investment Agreement" with the
Peruvian government, making a minimum
investment commitment of US$500,000 in
mining exploration.
IGV recovery is restricted to the IGV paid after

the Agreement is signed.
Joint ventures
Allocation of costs and expenses incurred
by the operator in a joint venture that does
not keep independent accounting records, as
well as the assignment of resources, goods,
services and construction contracts made by
the parties of the joint venture agreement for
the performance of their common business and
the allocation of the goods produced under
such agreement to each party, are not subject
to IGV.

Likewise, any grant, sale, transfer or
assignment of an interest in a joint venture is
not subject to IGV.
Joint ventures that keep independent

accounting records are considered as legal
entities and are subject to income tax and
IGV. Joint ventures not keeping independent
accounting records shall allocate the income
to each of the parties involved in proportion to
their interest in the contract.
Excise tax
A tax named “Selective Consumption Tax”
(ISC) is applied to so-called luxury goods, such
as beer, cigars, cigarettes, liquor, soft drinks,
fuel and others. ISC rates fluctuate between
10% and 100% on CIF (imports) or sale value,
depending on the goods concerned.
In the case of the sale and import of fuel, the
ISC is determined using a fixed soles amount
per gallon, fluctuating between S/. 0.39 and
S/. 2.30.

Amazon rain forest
special tax regime
A special tax regime applies for businesses

settled in the Amazon Rain Forest Zone. This
regime provides reduced income tax rates of
10% and 5%, according to the location of the
taxpayer within the area.
Besides, certain activities carried out within

the area, such as the sale or exchange of goods
to be consumed in the area, the rendering
of services in the zone, the construction
contracts and the first sale of real estate by the
constructor, are IGV exempt(*).
Finally, the sale or exchange of fuel in certain

areas of the Amazon Rain Forest Zone is ISC
exempt(**).
(*) As from 2009, certain areas of the Amazon Rain Forest Zones will
be excluded from this benefit.
(**) As from 2008 to 2012, this benefit will be progressively
eliminated.

Custom duties
There are no restrictions to import goods. For

security and public health reasons the import
of certain goods is not allowed. The applicable
customs duties and taxes are summarized
below:
(a) Customs duties rates depend on the kind of items

imported.
(b) IGV can be used as a tax credit by the importer.
(c) Certain items are subject additionally to ISC.
Drawback
A drawback regime allows producer-exporter
companies fully or partial recovery of customs
duties affecting the import of raw materials,
and spare parts as long as the CIF value does
not exceed 50% of the FOB value of exports.
Special regime
A special customs duties installment regime
applies to:
• Companies that have entered into contracts

with the Peruvian government for the
exploration, development and/or production
of natural resources, which require an
investment period of more than four years.
• Companies that have entered into contracts
with the Peruvian government (including
those having tax stability agreements under
the General Mining Law) for the development
and production of natural resources, which
require an investment period of between two
and four years. In this case, companies under
exploration stage are excluded.

• Companies that have entered into concession
contracts with the Peruvian government
for the development of investment projects
in public infrastructure and public services
works. This regime will also apply to those
companies that transfer to the government
the goods acquired and built during the term
of the concession, pursuant to the terms
of the contract executed with the Peruvian
government.
The main features of this special regime are:

• Scope - The regime is available for productive
companies on the pre-operative stage.
Service companies are excluded.
• Goods - The regime may be applied to
imports of new capital and intermediate
goods, as well as to used capital goods that
entered the country under the customs duties
temporary exemption regime.
• Installments - The number of installments
will be specifically set by the authorities on a
case-by-case basis.
Companies joining the enhanced regime do not

have to waive any other special tax regime.
International trade
The main agreements executed by the
Peruvian government in order to gain access to
international markets are the following:
• Andean Trade Promotion and Drug

Eradication Act (ATPDEA) - Enables the
duty free importation of Bolivian, Colombian,
Ecuadorian and Peruvian products into
the United States. This Act will be in effect
until December 31, 2008 and covers
approximately 6,000 products.

• Andean Community (CAN) - Peru maintains
a duty free zone with Bolivia for most of its
products. Peru and the rest of the member
countries (Colombia, Bolivia and Ecuador)
have agreed to progressively reduce the
custom duties levied on the trade of goods
among such countries. In that sense, from
2006, Peru fully enjoys the benefits from
the free trade zone established by this
agreement for all its member countries.
Although Venezuela is no longer member of
the CAN; it has maintained its commitment
to comply with the establishment of a free
trade zone with the remaining member
countries until 2011. Also, Peru is a member
of other Andean Community agreements
related to the service market liberalization,
transportation, telecommunications and
several other matters related to international
trade.
• Latin American Integration Association
(ALADI) - Peru maintains certain customs
preferences with countries of the region
(Argentina, Brazil, Chile, Cuba, Mexico,
Paraguay and Uruguay) established by
the agreements signed under the 1980
Montevideo Treaty.
• Southern Common Market (Mercosur) -
Partial agreements executed by the Peruvian
government with each of the member
countries (Brazil, Argentina, Paraguay
and Uruguay) are in effect. By means of
the aforementioned agreements, Peru
and Mercosur’s member countries have
reciprocally granted each other preferential
customs duty margins. Notwithstanding,
currently the member countries of the
Andean Community are working all together
in the implementation of a Free Trade
Agreement with Mercosur.
• Free Trade Agreements with the United
States, Canada and Singapore – These
agreements have already been approved but
are still facing an implementation process.
• Current negotiations - At present, Peru is
negotiating different FTAs with Thailand,
China and the European Free Trade
Association.
In order to apply these preferential treatments,

goods shall meet, among others, an origin
requirement.
Finally, it is important to mention that Peru

is a founding member of the World Trade
Organization (WTO). Therefore, the WTO’s
regulations regarding antidumping practices,
subsidies and countervailing duties and,
service market liberalization, among others,
are applicable in our country. The WTO’s
regulations about customs valuation are
applicable to all importation of goods into
Peruvian territory.

Tax treaties
Peru has a tax treaty with the Andean

Community countries (Bolivia, Colombia and
Ecuador), which calls for exclusive taxation at
source and tax treaties with with Chile and
Canada, which are largely based on the OECD
Model Tax Convention on Income and on
Capital.
More recently, Peru has also signed tax treaties

with Brazil which has been recently approved
by Peruvian Congress, but is not inforce yet and
with Spain which is still subject to ratification in
accordance to the procedures of each country,
Peru is also currently negotiating tax treaties
with France, Switzerland, Italy, Thailand,
Sweden and UK.

Other taxes
Social security
The Peruvian Health Social Security Office
(EsSalud) runs the National Health System
(RPS). The employer contributes 9% of total
payroll to the RPS. EsSalud provides employees
disability, illness, maternity and death benefits,
as well as medical care.
According to the Health Care Law, the National

Health System will be complemented by the
health programs and plans that the employers
may grant to their workers with their particular
health services or with private Health Care
Companies (Empresas Prestadoras de Salud
- EPS) that shall be authorized to carry out
such activities. The employers may elect
the healthcare plan or program for their
employees; however, they shall previously
submit it to their vote. Employees, who would
like to remain or enter the RPS, may do so.
The employers that provide healthcare through

the complementary plans and programs are
also obliged to pay the 9% contribution to the
RPS. However, employers may use a portion of
the expenses incurred in healthcare as credit
against the 9% contribution.
The Health Care Law and regulations also

foresee a complementary insurance for workers
that carry out activities that are deemed to
involve a significant level of risk. This insurance
coverage shall be provided by the employer.

In addition, employees have to contribute
either to the National Pension System (SNP)
or to the Private Pension System (SPP),
at their election. The contribution rate in
the SNP is 13% of the salary while in the
SPP is 12.75% on average. Both provide
employees retirement, disability pensions and
funeral costs. Employers are responsible for
withholding employees’ contributions from
monthly salaries.

Immigration
Foreigners can enter Peru under the following

migratory qualifications:
As a general rule, income obtained for personal

work or civil, commercial or any other type
of business carried out within the Peruvian
territory is considered to be Peruvian source
income. However, non-resident individuals
entering the country temporarily to perform the
following activities are not taxed for revenues
obtained in their home country, since they are
not considered as Peruvian source income:
• Acts that precede a foreign investment or any

other business;
• Supervision or control of an investment or
business, (i.e. gathering data or information,
meeting public or private sector personnel, etc.);
• Hiring local personnel; and,
• Signing agreements or similar documents.
Any other amount an expatriate receives in

cash or in kind, as a compensation for work
carried out within Peru, is considered as
Peruvian source income and, consequently, will
be taxable.

Labor legislation
Job stability
In accordance with the Constitution, employees
are protected against arbitrary dismissal.
This right, called “job stability”, is granted to
employees who work for the same employer
for more than four hours per day, after a
three month trial period. Once this period is
completed, the employees are regarded as
permanent and can only be dismissed under
circumstances concerned with their behavior at
work or ability to carry out their duties.
Employers may enter into employment

contracts for an undetermined period of time
or for fixed terms. Fixed term contracts are
expressly foreseen by Law and are basically
allowed for cases such as business expansion,
production increments, temporary labors,
extraordinary circumstances and seasonal
activities. These contracts must be entered
into in writing and communicated to the labor
authority.
In the event of unjustified dismissal, an

employee may demand a severance payment
equivalent to one and a half monthly salary
per year of service. The maximum severance
payment is twelve salaries. Alternatively, the
employee can demand the restitution to the
same job he had. The law allows collective
dismissals under certain circumstances such
as acts of God or force majeure, financial or
technical streamlining, dissolution, bankruptcy
or operating downsizing without having to
grant the severance payment.

Employees’ benefits
Employers are required to provide the following
benefits for employees:
• Family allowance equivalent to US$ 19

(approx.).
• One month paid vacation per year.
• One month salary bonus in July and
December.
• One month salary per year (approx.)
as severance indemnity which should be
deposited in advance with a bank elected by
the employee. Deposits are regarded as final
payments of the accrued liability.
• Profit sharing in cash, which is calculated
on the employer’s taxable income and
distributed among the employees. The
rates are 5%, 8% and 10% depending on the
employer’s activity. This benefit does not
apply to enterprises employing less than 20
individuals.
All these benefits are deductible for income tax

purposes.
Employers can negotiate with workers earning

a monthly salary equivalent to S/.7,000 an
annual remuneration, including all the benefits
described above, except for the profit sharing.

Expatriates
Expatriates working in Peru and foreign
corporations carrying out activities in Peru are
subject to Peruvian labor laws. As a general
rule, foreign employees should not exceed
20% of total personnel. Additionally, wages
paid to foreign employees should not exceed
30% of total payroll cost. Such limits can
be waived for professionals and specialized
technicians or management personnel of a new
entrepreneurial activity or in case of a business
reconvertion.
No restrictions apply to foreign individuals

working in Peru with Peruvian immigrant visa,
individuals married to Peruvians or having
Peruvian children, parents or siblings and
foreign investors with a permanent investment
in Peru of at least 5 tax units (S/.17,500).
Expatriate employees should register their

employment contract with the labor authorities
and obtain a special non-immigrant resident
visa. No additional work permit is needed.

There are some differences
between Peruvian and US
GAAPs. The differences
usually found in Peruvian
companies are basically
those differences between
IFRS and US GAAP.
Accounting standards
The Peruvian Business Corporation Law

establishes that the financial statements of
companies incorporated in Peru must follow the
Peruvian GAAPs and other legal provisions on
the matter. The National Accounting Standards
Board has established that Peruvian GAAPs are
basically referred to the accounting standards
issued by the International Accounting
Standards Board (IASB) and the specific
provisions approved for particular businesses
(banks, insurance companies, etc.). Likewise,
on a complementary basis, the US GAAPs will
be applicable.
The National Accounting Standards Board,

appointed by the government, is responsible
for issuing accounting standards and
methodologies that apply both to private
business and government entities. The Board
generally adheres to the standards approved by
the accounting profession.
The accounting profession in Peru follows the

accounting standards set forth by the IASB.
The Certified Public Accountants Association
of Lima has the responsibility of studying and
introducing these standards into Peru. The
National Accounting Standards Board approves
these standards for their application.
The preparation of financial information is

subject to ruling issued by CONASEV. Such
ruling is closely related to IFRS (International
Financial Reporting Standards) and
International Auditing Guidelines issued by the
International Federation of Accountants - IFAC.
CONASEV requires financial information of
companies that are registered before the Public
Registry of the Stock Market or the ones that
quote their shares in the stock exchange.

Ernst & Young
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We set the difference, helping our people,

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Business & Investment

María Julia Sáenz

2 Business & Investment Guide - Peru Ernst & Young

Setting up a business presence in Peru

Compulsory use of means of payments

Tax on financial transactions

Amazon rain forest special tax regime

Peru, located on the Western Coast of South

According to the Political Constitution of 1993,

Peru has a free-floating managed exchange

There are no restrictions or limitations on

8 Business & Investment Guide - Peru Ernst & Young

Source: Instituto Nacional de Estadística e Informática - INEI

The main official language is Spanish and the

Ernst & Young Business & Investment Guide - Peru 9

Graph 2 - GDP variations

Source: Instituto Nacional de Estadística e Informática - INEI

10 Business & Investment Guide - Peru Ernst & Young

Source: Agencia de Promoción de la Inversión Privada

Graph 4 - Accumulated foreign investment in

Source: Agencia de Promoción de la Inversión Privada

Ernst & Young Business & Investment Guide - Peru 11

The by-laws must be converted into a public deed

Under certain circumstances the purchase of

The particular characteristics of this form of

• Management - Shareholders Meetings

14 Business & Investment Guide - Peru Ernst & Young

• Supervision - Public corporations are

The main features of this type of entity are:

• Limited liability - Partners are not personally

Ernst & Young Business & Investment Guide - Peru 15

According to the Business Corporation Law,

Other corporate matters

16 Business & Investment Guide - Peru Ernst & Young

A “sociedad anónima” willing to be considered

Ernst & Young Business & Investment Guide - Peru 17

Direct foreign investment must be registered

Foreign investors are allowed to remit abroad

ProInversión, on behalf of the Peruvian

Local companies that hold foreign investment

Foreign companies which make investments

Ernst & Young Business & Investment Guide - Peru 19

The Mining Law offers the following main

• Free access to foreign currency.

Investors who undertake large mining

Oil & gas

In both cases, however, the distribution of the

Oil and gas obtained under these contracts

20 Business & Investment Guide - Peru Ernst & Young

Imports of goods during the exploration stage

The government guarantees that exchange

Intellectual property protection

Acquiring a dominant position is not forbidden;

Nevertheless, in the electrical sector, acts

Unfair competition and advertising

22 Business & Investment Guide - Peru Ernst & Young

On the other hand, according to the Advertising

Ernst & Young Business & Investment Guide - Peru 23

Environmental protection is ruled by

Mining companies must also submit for

Ernst & Young Business & Investment Guide - Peru 25

As from 2008, any payment in excess of