REWARDING ENDS

Peru 2017 | EXECUTIVE GUIDE | REVIEW: LEGAL

Cesar Candela, Partner at Zavala Hernández & Candela Jara Abogados, discusses the role of investment in Peru's economic growth and how in order to raise funds it has established a stable and appealing legal framework for national and foreign private investment.

Peru has legislation aimed at maintaining a favorable environment for investment; in that sense, the constitution of Peru guarantees foreigners the same rights as domestic investors, including the right to receive non-discriminatory treatment vis-à-vis national investors, unrestricted access to domestic credit, freedom to acquire shares owned by domestic investors, the ability to purchase insurance abroad for investment here, and the possibility of signing Legal Stability Agreements with the state, among others.

National and foreign private investors have full freedom of organization to develop their business activities in the manner they deem appropriate. The only constitutional restriction on foreigners is that they cannot acquire or possess lands, forests, water, fuels, or energy sources within 50 miles of the border, unless otherwise cleared by Supreme Decree on the grounds of public necessity or national utility.

In order to create an enabling environment for private investment, Peru has developed strategies on private investment issues, corporate forms, and taxation and immigration regulation. As for the corporate forms in Peru, investors' freedom to adopt the corporate form they deem appropriate is recognized. Only for activities related to the financial system and mining activities might the law establish an obligation to adopt certain corporate forms. Among the most commonly corporate forms used by investors, there are:

Branches: whether domiciled in the country or not, companies may establish branches in Peru. They must register them in the Register of Legal Entities of the Registry Zone in their place of operation. The branch has no independent legal status from its headquarters. It enjoys the permanent legal representation and autonomy of management that its headquarters granted them, in accordance to the powers that are given to their representatives.

Another common and favorable corporate form for private investors is the Partnership Contract. Peru considers partnership contracts those corporate forms that create and regulate relations of participation and integration in business or of businesses in the common interest of the participants. The partnership contract does not generate a legal person; it must also be in writing and is not subject to registration in the Register. Partnership contracts are regulated in the Fifth Book of the General Corporation Law (LGS), and within them are the Partnership Contract and Consortium contract. However, there is another type of atypical partnership contract called Joint Venture.

The Joint Venture, also known as a shared-risk company, is a form of cooperation that acts as a “strategic business partnership" between two or more national and/or foreign companies, by integrating its activities and resources, and seeking to achieve common goals. It was established as one of the options that companies have to achieve mutual benefits and risk sharing.

Undoubtedly, tax incentives are a great attraction for investors who see Peru as a prosperous market economy. Through the signing of International Partnerships and/or Agreements, the country has managed to avoid double taxation; the same thing occurs when two or more countries consider they have the right to tax a certain income, an area in which Peru has signed International Conventions where all these agreements between the signatory states are frame-worked. These agreements may include the waiver of taxing certain income so that it is only one of the states collecting the tax or, in other cases, a shared taxation. Peru currently has Double Taxation Agreements with Chile, Canada, Brazil, Spain, Mexico, and the member countries of the Andean Community. Agreements signed with Spain and Mexico are in the process of ratification by Congress.
Another tax benefit offered to companies incorporated in Peru is the deduction of income tax (IR) in their national income as a foreign source. They are deductible for purposes of income tax expenses incurred to generate income or maintain their source productivity conditions.

Also, the General Sales Tax (IGV), a taxation on the in-country sale of goods, the provision and use of services, and the implementation of goods at a rate of 18%, applies to the sale of real estate, services provided or used, construction contracts, first sale of real estate by the builder, and the import of goods. It can be used as a tax credit against the IGV derived from the company's transactions. Exporters can request a refund of IGV paid on the purchase of goods and services. Companies that have not yet started their productive activities or imported or acquired their capital goods for the production of goods and services for export or to be taxed by the IGV are eligible for the so-called Early Recovery Regime of the IGV. That scheme consists of applying before the tax authorities for the refund of the tax credit of IGV paid on their purchases of goods and services and imports.
Finally, in order for foreign investors from countries other than Brazil, Chile, Colombia, and Mexico to develop their business-related activities, they must have a Business Visa. This allows its bearer to enter the country over a period of 12 months after approval; that is, the carrier may remain in the country up to 183 days. If the foreign national holding a business visa conducted activities that generated rental income from a Peruvian source, he will have to hand in a certificate of income and deductions issued by the payer of the income when leaving the country. To the extent that a foreign worker does not have a domiciled status in Peru for purposes of income tax, all income will be taxed to a rate of 30% annually.

As part of the globalization process today, the creation of global markets and strategic alliances is ideal for encouraging joint ventures, providing opportunities for foreign investment, and generating entrepreneurship and innovation in various areas. Peru has an extensive network of agreements and partnerships for the promotion and reciprocal protection of investments, one of the most important of which is the Pacific Alliance.
The Pacific Alliance was born after a communication from the former President of Peru, Alan Garcia, to the current President of Colombia, Juan Manuel Santos, a document in which President Garcia encouraged President Santos to establish a “Deep Integration Area" between countries like Ecuador, Chile, Panama, Colombia, and Peru. Thus on April 28, 2011, the First Summit of the Pacific Alliance took place, a date on which participants signed the Framework Agreement of the Pacific Alliance in with the presence of member countries Chile, Colombia, Mexico, and Peru.

The Pacific Alliance was created with clear objectives, among the most important of which are the free movement of goods, services, capital, and people among member countries; the generation of more investment; overcoming inequalities at the socioeconomic level; achieving the inclusion of millions of inhabitants; promoting and strengthening the growth of our economies; and generating growing trade and economic exchange, especially with Asia.

Since its inception, the Pacific Alliance has generated great expectations. Proof of this is that it already has registered various countries as participants, such as Costa Rica and Panama, and observers that will evaluate the progress and development of our activities, such as Germany, Austria, Australia, Belgium, Canada, China, Korea, Denmark, Ecuador, El Salvador, Spain, the US, France, Finland, Georgia, Greece, Guatemala, Haiti, Honduras, Hungary, India, Indonesia, Israel, Italy, Japan, Morocco, New Zealand, Paraguay, Poland, Portugal, the UK, the Netherlands, the Dominican Republic, Singapore, Sweden, Switzerland, Thailand, Trinidad and Tobago, Turkey, and Uruguay.

The Pacific Alliance has a structure that allows it to develop its activities. Firstly we have the so-called Presidential Summits, which represent the highest authority and are made up of the presidents of the (four) member countries; the Council of Ministers, made up of the Ministers of Foreign Trade and Foreign Affairs; the High Level Group (HLG), made up of Vice Ministers of Foreign Trade and Foreign Affairs and which oversees the progress of technical groups and promotes rapprochement with other agencies or external groups, preferably in the Asia Pacific region; Groups and Technical Subgroups, composed of civil servants of the (four) member countries, whose role is to agree on the various issues related to the Pacific Alliance; and finally, the Presidency Pro Tempore of the Alliance, which is exercised by each of the member countries in alphabetical order for year-long periods.

One of the most important achievements of the Pacific Alliance was the signing of the Additional Protocol to the Framework Agreement on February 10, 2014. This aims to deepen bilateral agreements on trade issues between member countries. It also encourages a more favorable situation for economic operators and promotes regional value chains with the goal of adapting project member countries of the Alliance into various international markets with an emphasis on the Asia Pacific region. Additionally, it constituted the Latin American Integrated Market (MILA), a market integration platform designed with the aim of encouraging financial adhesion between the stock exchanges of Peru, Colombia, and Chile without any corporate partnership by any of them. Mexico joined the MILA in 2014. It has also created the Platform for Academic and Student Mobility, which provides scholarships to students from Pacific Alliance countries with the aim of encouraging cultural exchange among hundreds of thousands of young people.

The Pacific Alliance is a great opportunity for the emerging economies of Latin America and Central America to expand their business horizons not only in Asia, but also in the European Union, thereby generating more exchange and investment opportunities for our developing country.

Cesar Candela, Partner, Zavala Hernández & Candela Jara Abogados - ccandela@zclawyers.com