Permanent Establishment In LIR Peru

Permanent Establishment In LIR Peru

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The treatment of the Permanent Establishment (hereinafter PE) is, perhaps, one of the most important points in international taxation, because when a non-domiciled subject does not qualify as a PE according to the legislation of the country of the source, it will only be taxed in the country of residence. In this sense, it is essential to delimit correctly and to know under what circumstances a taxpayer qualifies or does not qualify as a PE.

Thus, by means of Legislative Decree No. 1424, in force since January 1, 2019, a definition for the concept of PE was introduced for the first time in the Income Tax Law (IR). Indeed, although the concept of PE is mentioned in the IR Law in its articles 7 and 14, related to the domicile for tax purposes and the condition of taxpayers, such regulation did not define what it was or how a PE was generated in the country of foreign entities.

As of fiscal year 2019 this situation has changed, having been incorporated through Legislative Decree No. 1424, Article 14-B to the Income Tax Law, which expressly establishes the assumptions of PE.

“Article 14°-B.- For the purposes of this Law, a permanent establishment is considered as follows:

  1. Any fixed place of business through which a sole proprietorship, partnership or entity of any nature constituted abroad develops, totally or partially, its activities. As long as the activity is carried out in accordance with the above provisions, permanent establishments are management headquarters, branches, agencies, offices, factories, workshops, warehouses, stores, mines, oil or gas wells, quarries or any other fixed or mobile place, facility or structure used in the exploration, exploitation or extraction of natural resources.
  2. Construction, installation or assembly works or projects, as well as the supervision activities related to those, when their duration exceeds one hundred eighty-three (183) calendar days within any twelve (12) month period, unless a shorter term has been established in the Double Taxation Avoidance Agreements in which case that will be the applicable term.
  3. The rendering of services, when performed in the country for the same or a related project or service, for a period or periods that in total exceed one hundred eighty-three (183) calendar days within any twelve (12) month period, unless a shorter period has been established in the Double Taxation Avoidance Agreements, in which case that will be the applicable period.
  4. When a person acts in the country on behalf of a sole proprietorship, partnership or entity of any nature incorporated abroad and as such, habitually concludes contracts or habitually plays the leading role in the conclusion of contracts routinely entered into without substantial modification by the sole proprietorship, partnership or entity of any nature incorporated abroad and such contracts are entered into: (i) on behalf of them; or, (ii) for the transfer of the right of ownership or the right of use of property owned by them or over which they have the right of use; or, (iii) for the rendering of services by them.

Notwithstanding the provisions of paragraphs 1 and 4 of the preceding paragraph, a permanent establishment is not considered to exist when the activity carried out is of a preparatory or auxiliary nature. An activity is considered to be of a preparatory or auxiliary nature when it is not an essential and significant part of the activities of the sole proprietorship, partnership or entity of any nature incorporated abroad, unless such activity, together with others carried out in the country by it and/or its related parties, constitute complementary functions that are part of the operation of a cohesive business.

For purposes of determining whether the assumptions of permanent establishment referred to in paragraphs 2 and 3 of this article are configured, the period or periods in which the sole proprietorship, company or entity of any nature constituted abroad performs the activities mentioned in said paragraphs, shall be added to the period or periods in which related parties to it, develop identical, substantially similar or related activities.

The provisions of paragraph 4 of this article are not applicable when the person acting on behalf of the sole proprietorship, partnership or entity of any nature incorporated abroad performs an economic activity in the country as an independent agent and acts on its behalf in the ordinary course of such activity. However, a person shall not be considered as an independent agent for the purposes of this paragraph when, among others: i) performs more than 80% of its activities on behalf of the sole proprietorship, partnership or entity of any nature incorporated abroad and in its commercial and financial relations with it, conditions are agreed upon or imposed that differ from those that would have been agreed upon between independent parties; or, ii) performs more than 80% of its activities on behalf of one or more sole proprietorships, partnerships or entities of any nature incorporated abroad with which it is related.

A sole proprietorship, partnership or entity of any nature incorporated abroad is considered to have several permanent establishments when it has in the country several fixed places of business or performs in the country clearly distinguishable activities, which independently meet the requirements to qualify as permanent establishments, provided that their management is carried out separately. If so, each permanent establishment shall have the status of taxpayer of the Tax in accordance with the provisions of Article 14 of this Law and shall be taxed independently.

For the purposes of the provisions of this article, the relationship shall be determined in accordance with the provisions of paragraph b) of article 32-A of this Law”.

As we can see, among the main novelties introduced in the IR Law regarding PEs are:

Temporary establishments:

Under this concept, two assumptions of PE have been introduced, namely:

(a) Construction, installation or assembly works or projects, as well as supervision activities related to those, when their duration exceeds one hundred eighty-three (183) calendar days within any twelve (12) month period. This is the case of the Agreement signed between Peru and Mexico, which establishes a term of ninety (90) days in the case of technical assistance; and

(b) The rendering of services, when performed in the country for the same or a related project or service, for a period or periods that in total exceed one hundred eighty three (183) calendar days within any twelve (12) month period.

For both cases, the rule has indicated that, if a shorter term has been established in the IDCs, such shorter term shall be the applicable one. In addition, it has been specified that, for the purpose of determining whether the PE in question is configured, the period or periods in which the sole proprietorship, company or entity of any nature incorporated abroad performs the referred activities will be added to the period in which parties related to it, perform identical, substantially similar or related activities.

Fixed place of business:

The Law considers as permanent establishment any fixed place of business through which a sole proprietorship, partnership or entity of any nature incorporated abroad (hereinafter “foreign company or entity”) carries out, totally or partially, its activities.

Permanent establishments also include head offices, branches, agencies, offices, factories, workshops, warehouses, stores, as long as the foreign enterprise or entity carries out its activities in such establishments, as well as mines, oil or gas wells, quarries or any other fixed or mobile place, facility or structure used in the exploration, exploitation or extraction of natural resources.

Preparatory or auxiliary activities:

According to the definition of the Regulation, the maintenance in Peru of (i) goods or merchandise for the exclusive purpose of storage or exhibition, or use of facilities intended for such activities, or (ii) fixed place dedicated exclusively to the purchase of goods or merchandise for their supply or the obtaining of information, or to carry out any other activity of a preparatory or auxiliary nature, does not constitute a permanent establishment of the foreign company or entity.

However, the Law has gone a step further by stating that “An activity is considered to be of a preparatory or auxiliary nature when it is not an essential and significant part of the activities of the sole proprietorship, company or entity of any nature incorporated abroad, unless such activity together with others developed in the country by the former and/or its related parties constitute complementary functions that are part of the operation of a cohesive business”.

As can be appreciated, the rule has intended to give certain content to the concept of “activities of a preparatory or auxiliary nature” by outlining a definition of this concept -everything that is not essential and significant to the activities of the entity, which could also be confusing-. But not only that. The rule has also pointed out that even in the case of activities of a preparatory or auxiliary nature, a PE could be configured when these are carried out jointly with other activities in the country developed by the foreign entity or its related parties and, constituting complementary functions, are part of a cohesive business.

Dependent agent:

The Regulation provides as permanent establishment the person acting in the country on behalf of a foreign company or entity, when such person has, and habitually exercises in the country, powers to enter into contracts on behalf of the company or entity, or habitually maintains in the country stocks of goods or merchandise to be negotiated in the country on behalf of the company or entity.

Now, according to the amendment to the Income Tax Law, a permanent establishment will also exist when a person acts in the country on behalf of a foreign company or entity, and habitually plays the main role in the conclusion of contracts, and not only when concluding such contracts, provided that such contracts are routinely entered into by the foreign company or entity without substantial modification by it, and such contracts are entered into: (a) On behalf of the foreign enterprise or entity; or (b) to transfer rights of ownership or use over property of, or to which the foreign enterprise or entity has a right of use; or, (c) for the provision of services by such enterprise or entity.

Independent agent:

The Regulation states that it will not constitute a permanent establishment when the foreign company or entity carries out commercial operations in the country through a broker, general commission agent or any other independent representative, provided that they act as such in the usual performance of their activities. However, when such a representative performs more than 80% of its activities on behalf of the foreign company, it will not be considered as an independent representative. Now, the amendment to the Income Tax Law adds as a requirement that in the commercial and financial relations between both, the conditions differ from those that would have been agreed between independent parties.

The amendment to the Law adds that an independent agent that performs more than 80% of its activities on behalf of one or more foreign companies or entities with which it is related will also constitute a permanent establishment.

The Law adds that, in order to determine the existence of a permanent establishment, the period or periods in which parties related to it carry out identical, substantially similar or related activities will be added together.

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