cover image AMINEWS
June, 2013
 
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  Peru’s Controlled Foreign Company Rules Regime  
     
  Peru’s “Controlled Foreign Company Rules” (CFC Rules) have been in force since January 1, 2013. This new regime is applicable to any Peruvian resident, who controls a non-domiciled entity that, according to the law, qualifies as a Controlled Foreign Company (CFC) regarding their passive income. Thus, CFC Rules shall be applicable to passive income received (not necessarily distributed) by a company directly or indirectly controlled by a Peruvian resident.

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 (hereinafter, 50%Test).

A company shall be subject to CFC Rules if:
  1. For tax purposes, the company has separate legal personality. The law specifically states that the following entities shall be shall be considered as non-domiciled in Peru: companies, investment funds, trusts, partnerships, joint ventures and foundations.
  2. Is incorporated, domiciled or resident of a country or territory that impose no tax, a low tax rate or the applicable tax rate is equal or lower to 75% of the income tax that would be applicable in Peru (amount actually paid).
The following income shall be considered as passive income:
  1. Dividends and any kind of disbursement of profits (other than dividends paid by a CFC to another CFC).
  2. Interests (unless the CFC is a bank or financial institution).
  3. Royalties.
  4. Capital gains arising from sales of real estate sales and securities.
Passive income equal or lower than 20% of the total income of a CFC shall not be subject to CFC Rules.

In addition to the CFC Rules and to complete the anti-avoidance legislation, the Peruvian Tax Authority also included Rule XVI. Thus, the Peruvian Tax Administration is empowered to disregard transactions solely driven by tax reasons. Hence, for tax purposes a substance-over-form principle shall be applicable.

In light of the above, Amicorp can propose the following solutions:
  1. Foreign Investment Fund

    Establishing a foreign investment fund with a pool of Peruvian resident investors with similar investment risk. Each investor may participate with less than 50% of the equity of such fund. The fund shall have an investment manager and a fund administrator, not related to the investor and subject to auditing. Thus, the investor does not have any control. Risk of the underlying investments shall be held by the investors according to their participation in the fund.

    With the above mentioned structure, the 50% test is not fulfilled as long as the Peruvian investor holds less than 50% of the equity and profits of the fund and voting rights of the fund shall remain with the fund administrator. Since the fund has an independent investment manager, fund administrator and auditors the foreign fund shall not qualify as CFC.


  2. Irrevocable Discretionary Trust

    Using an irrevocable discretionary trust the Peruvian resident, acting as settlor (the “settlor”) transfers the ownership of the assets to the trustee who holds title to such assets specifically for the benefit of designated persons (the “beneficiaries”).

    An irrevocable trust can no longer be amended or terminated unless the deed provides for specific powers for the trustee to do so. In addition, if the trust is discretionary the trustee has the discretion or power to do whatever is necessary to manage the trust. Thus, once the assets are transferred to the trustee the settlor has no control over the assets and therefore cannot be considered as CFC of the settlor.

    As for the beneficiaries, as long as they do not have access to the profits or these are not at their disposal, the 50% test should not be considered as fulfilled and therefore CFC Rules shall not be applicable. Finally, for substance purposes it is advisable to have under age beneficiaries.
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  4. Split Trust

    A trust exists when a trustee holds title to assets specifically for the benefit of designated persons. Although a trust may be established for any number of reasons, its ultimate purpose is to transfer the assets to its beneficiaries. The trustee becomes the legal owner of the trust property and the beneficiary becomes the beneficial owner of the trust property.

    In a Split Trust, two trusts are formed: one being revocable and the other irrevocable. A holding company is established which issues two classes to the trusts, income shares (“ordinary shares”) and zero-dividend preference shares. The preference shares are issued to the trustee of the revocable trust when it transfers the capital assets received from the settlor of the trust to the holding company. These shares are not entitled to dividend income. The ordinary shares are issued to the trustee of the irrevocable trust (the “Income Trust”) upon the acquisition by the trustee and these shares have voting rights. The ordinary shares are entitled to benefit from the income produced by the assets and provide the trustee of the Income Trust with voting control over the holding company. Chart
The settlor shall be a beneficiary of the capital trust but not of the income trust. In this way the settlor can get a return of capital contribution if he or she wishes by disposing of the capital . The Settlor has more flexibility to use or dispose the assets abroad.

Finally, for substance purposes it is also advisable to have under age beneficiaries.
 
     
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  For more information contact:  
  profile photo Catalina Montt Muller
Sales Officer

Amicorp Americas LLC, Agencia en Chile, (Representative Office).
Email-ID: C.Montt@amicorp.com
   
   
   
 
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This document is prepared for general information purposes only. Amicorp Group does not provide tax or legal advice to its clients. Any opinions contained herein should not be construed or interpreted as advice provided by Amicorp Group.