The Sub-capitalization rules limit the deductibility of interest expenses for income tax purposes and are applied suppletory to the well-known causality principle, establishing for the deductibility of an expense from the income tax base, it is necessary to be linked to the generation of taxable income or the maintenance of the production source of such income. Therefore, for the interest expense to be deductible, it must comply with the aforementioned causality principle and not exceed the sub-capitalization limit.
Loans with Related Parties
Until 2018, these rules were applied only in the case of interest on loans acquired with related parties, meaning companies belonging to the same economic group and being deductible only for the portion of the loan not exceeding 3 times the net worth of the Peruvian entity at the end of the previous fiscal year (sub-capitalization).
Limits Expand to Independent Third Parties
From 2019, a new limit on the deductibility of interest on loans acquired from independent third parties is introduced from September 14, 2018, to which the 3:1 ratio provided for loans with related parties will apply until 12.31.2021.
Therefore, loans from banks or commercial loans, in general, are now considered part of the sub-capitalization limit.
In this regard, two limits may coexist until December 31, 2021, for loans from independent third parties: (i) for loans acquired until September 13, 2018, only the loan will be required to comply with the causality principle requirement for its interest to be deductible and (ii) for those loans acquired from September 14, 2018, the deductibility of interest will be complied with the sub-capitalization requirement foreseen for related parties.
What will apply as of 2021?
As of January 1, 2021, interest on all types of loans, whether contracted with related parties or independent third parties, will be deductible provided not exceeding thirty percent (30%) of the EBITDA of the previous year. Furthermore, the possibility of deducting those net interests that could not be deducted in the fiscal year for exceeding the aforementioned limit is incorporated within the following four (4) fiscal years, is subject to the limit as established in the Regulations.
If after the following four (4) fiscal years it has not been possible to deduct such interest, its deductibility will be lost.
Is It Necessary to Suspend the Sub-Capitalizacion Rules?
In our opinion, although there are exceptions to these rules, such as indebtedness for public infrastructure projects or issuance of securities through public offerings and some others, we consider these new rules to be extreme since the so-called safe harbors that usually accompany this type of rules have not been adopted.
In addition, the government must suspend the rules. Today, companies need financing more than ever to keep their businesses afloat, which in turn generates new jobs and reactivates private investment and consumption. Moreover, next year the limit for the deduction will be considerably lower, as the EBITDA of companies will clearly be affected.