The Tax Administration (Superintendencia Nacional de Administración Tributaria, SUNAT) published on its website Report 097-2018-SUNAT/7T0000 (the Report), clarifying the attribution of net passive income of CFC rules for its Peruvian shareholders.
Peru’s “Controlled Foreign Company Rules” (CFC Rules) have been in force since January 1, 2013. The rule applies to a Peruvian resident, who controls a non-domiciled entity that, according to the law, qualifies as a Controlled Foreign Company (CFC) regarding their passive income. The non-domiciled entity shall be subject to CFC if such entities are established in tax havens or in countries where the income tax rate is equal to or less than 75% of the income tax rate in Peru.
A non-domiciled company shall be deemed controlled by a Peruvian resident when, at the end of the fiscal year (December 31), directly or indirectly (solely or together with any related party) he or she holds more than 50% of the equity, benefits or voting rights of the non-domiciled entity.
Thus, CFC Rules shall be applicable to passive income received (not necessarily distributed) by a company directly or indirectly controlled by a Peruvian resident. The passive income includes dividends, interests, royalties, and capital gains arising from sales of real estate sales and securities.
To the extent the passive income falls under this rule, such income is subject to income tax in Peru. The CFC rules are in force in order to avoid the deferral of income tax on passive income obtained from CFCs by domiciled taxpayers, provided such companies are situated in tax havens or jurisdictions with nil or reduced tax rates.
Attribution of Net Passive Income
Relating to the long-standing CFC rules, the Ministry of Finance clarifies the following issues regarding the attribution of net passive income of a CFC to its Peruvian resident shareholders:
- Net passive income attributed to resident individuals and companies is the income that qualifies as foreign-sourced income for Peruvian income tax purposes and Peruvian-sourced income under specific conditions (i.e. income arising from transactions between related parties, subject to an income tax rate lower than 30%, etc.), as stated in section 9, article 114 of the Income Tax Law; and
- If a Peruvian taxpayer is the holder of a foreign holding entity, and this holding entity, in turn, holds another foreign entity, and both entities qualify as CFCs under the CFC rules, the SUNAT is of the opinion that the profits of both CFCs cannot be consolidated in order to attribute them to the Peruvian resident individuals and companies. The net passive income must be assessed at the level of each CFC, i.e. on a stand-alone basis.
Source: Peruvian Government