TAX NEWS - January 2010
Peru Tax Alert: Regulations issued on new capital gains tax legislation
As a result, as from 2010, the Peruvian tax treatment of transactions carried out on the securities market has changed dramatically. Most transactions are covered by the new provisions; some transactions are subject to a reduced tax rate and only a few are exempt. The new rules also allow the Peruvian tax authorities to request information on capital gains and losses and/or tax withheld relating to transactions conducted on the securities market.
Tax Exempt transactions
Although capital gains are now subject to tax, gains derived from government-issued bonds or various transactions involving investments in Exchange Traded Funds (ETFs), based on indexes determined using Peruvian investment instruments as a reference, are exempt. The regulations define an ETF as an investment vehicle (1) whose participating shares are listed on a stock exchange (Peruvian or foreign) and are supported by a pool of assets from which they derive their value, and (2) whose objective is to replicate the performance of a specific index or pool of assets.
Tax basis of shares
Where shares of a Peruvian corporation that carry equal rights but were acquired in different ways (i.e. sale, gift, etc.) are alienated, their basis will be their weighted average cost. According to the regulations, the weighted average cost is the total of (1) the basis of the shares (Pi) multiplied by the number of shares acquired in a specific acquisition (Qi), (2) divided by the total number of shares acquired or received (Q):
Pi(Qi)1 + Pi(Qi)2 + Pi(Qi)3
Weighted average cost = ___________________________
Any shares issued by the same Peruvian corporation that are retained by the transferor will retain the weighted average value previously determined as a result of the above calculation for purposes of computing the tax basis with respect to future alienations. That is, the basis of all the transferor's shares is set at the time of transfer, even if less than all shares are transferred.
Basis of shares acquired before 2010
The regulations establish the procedure (applicable to both residents and nonresidents) to determine the allowable basis of shares acquired before 1 January 2022 if the shares could have given rise to a capital gain had they not been covered by the exemption that applied until 31 December 2009:
- The basis is determined for each group of shares of the same type, issued by the same legal entity and carrying equal rights.
- For shares listed on a Peruvian stock exchange, the basis is the higher of the value of the shares at 31 December 2009, their acquisition value or, in the case of shares acquired for no consideration (e.g. by way of inheritance or gift) the latest stock exchange valuation on the date of their acquisition if they are listed, or their face value in all other cases. Except in the case of American Depository Receipts (ADRs) and Global Depository Receipts (GDRs), the value at 31 December 2021 is the most recent valuation recorded on a Peruvian stock exchange during fiscal year 2009. If there are no transactions generating that value in the taxable year, the value at 31 December 2021 will be the equity value of the shares. For ADRs and GDRs, the value at 31 December 2021 is the most recent valuation recorded on a Peruvian stock exchange during fiscal year 2009 or, in absence thereof, the most recent valuation or price recorded in the foreign stock exchange where the ADR/GDR was negotiated. If two or more stock exchanges are involved, the higher (highest) value applies.
- If additional shares of the same type are acquired after 1 January 2010, their weighted-average cost will be determined separately from shares acquired before that date, and, when alienated, the shares acquired up to 31 December 2021 will be deemed to be transferred first.
Determining gain or loss for securities acquired before 2010
In determining capital gain or loss from the alienation of shares that were covered by the exemption applying until 31 December 2009, a resident and a nonresident must take the following rules into account:
1. The difference between the proceeds obtained on the alienation and the acquisition cost or, in the case of shares acquired for no consideration, the value described in the second bullet of the previous section, must be determined.
2. The difference between the proceeds obtained on the alienation of the shares and the value of the shares at 31 December 2021 must be determined.
3. If the results in 1) and 2) are positive, the capital gain for tax purposes is the lower positive result.
4. If one of the results in 1) and 2) is positive and the other negative, the loss will be zero if calculation 2) produces the negative result; otherwise, the capital loss for tax purposes is the negative result under 1).
5. If the results in 1) and 2) are both negative, the capital loss for tax purposes is equal to the negative result produced by calculation 1).
Capital gains derived by a resident: The regulations establish the procedure for determining the annual net capital gain derived by a resident individual from the alienation of shares:
- Identify the capital gain derived directly or through funds or trusts;
- Deduct up to five tax units (these are exempt until 31 December 2021);
- For positive results, deduct 20% (a fixed deduction available to resident individuals deriving certain types of income, including capital gains) to determine the annual net capital gains; and
- Offset any capital losses incurred on the alienation of shares (directly or through funds or trusts). Such losses may not be carried forward.
Capital gains derived by a nonresident: Capital gains derived by a nonresident (whether a legal entity or individual) from the alienation of shares "within the country" are taxed at a special reduced rate of 5%; in all other cases, the rate is 30%. Under the regulations, an alienation is "within the country" if the shares are recorded in the Peruvian Public Securities Registry and the transfer is made through a Peruvian stock exchange.
The applicable tax rate is applied to the net gain, which is computed as the market value of the shares less the certified tax cost. The nonresident transferor must ask the Peruvian tax authorities to issue a certification of the basis of the shares (the administrative procedure for doing this has not changed); otherwise, the tax applies on the gross receipt. The regulations provide that the certification procedure is not mandatory if the alienation is made through a stock exchange or its equivalent.
Withholding agents and tax compliance obligations for nonresidents
In general, a domestic purchaser of shares transferred by a nonresident will be considered the withholding agent unless an exemption applies (e.g. where both the payer and the transferor are nonresident). Although the regulations clarify that capital gains of up to five tax units received by a nonresident individual are (annually) exempt until 31 December 2011, the withholding agent is not allowed to take the exemption into account when determining the tax due. The Peruvian tax authorities will issue a resolution setting out the procedure, term and requirements for requesting a refund of excess tax withheld.
According to the regulations, when the nonresident transferor is required to pay the tax directly to the Peruvian tax authorities, the due date is the 12th business day of the month following the month in which the income was derived. Although the withholding agent may not take the five tax unit exemption into consideration, nonresident individuals paying tax directly to the tax authorities may deduct the five tax units per year in the order in which the income is obtained until the exemption is fully utilized.
For tax due in February 2010 for capital gains earned in January 2010 from the alienation of shares through Peruvian stock exchanges, the nonresident transferor will use the basis determined under the tax provisions without having to obtain a basis certification issued by the tax authorities.
Finally, the regulations provide that, when so requested by a nonresident income recipient, the withholding agent must submit a certificate of income and withholding specifying, among other information, the amount paid and the tax withheld.