On 13 September 2018, the Peruvian government has published Legislative Decree No. 1422 and Legislative Decree No. 1424, which include measures for the implementation of the General Anti-Avoidance Rule (GAAR), new thin capitalization and interest restriction rules, the definition of a permanent establishment, and the indirect foreign tax credit.

Decree No. 1422 includes following measures:

• Where the tax authority (SUNAT) intends to apply the GAAR, the case must be submitted to a Review Committee that will notify the taxpayer of a hearing and must issue its opinion within 30 days of the hearing, which is binding for both SUNAT and the taxpayer;
• Boards of directors (for entities having a board of directors) will be responsible for approving the entity’s tax planning and cannot delegate this obligation
• The board of directors must evaluate the tax planning implemented up to 14 September 2018, in order to ratify or modify the plan (the period for ratifying or modifying the tax plan will end on 29 March 2019)
• The Peruvian Tax Authority, to apply the GAAR in tax audits, must follow a special procedure that requires the auditor to send the case to the Revision Committee, which will notify the taxpayer of a hearing
• The Revision Committee’s opinion is issued within 30 days after the hearing, and is binding for the Peruvian Tax Authority and taxpayer

The Decree is effective from 14 September 2018.

Decree No. 1424 includes following measures:

• With respect to thin capitalization, the Decree provides that from 1 January 2019 to 31 December 2020, the thin capitalization rules (3:1 debt-equity) will apply in relation to both related and unrelated party debt (currently, just related).
• From 1 January 2021, the thin capitalization rules will be replaced with a general restriction on the deduction of net interest expense exceeding 30% of EBITDA, with excess interest expense carried forward up to four years. An exception from the restriction is provided for financial and insurance institutions, taxpayers whose income in the fiscal years is less than or equal to 2,500 UIT, companies operating under public-private partnership projects, and interest on debt for public projects.

Decree No. 1424 also provides for the introduction of a new definition of a permanent establishment, which includes:

• Any fixed place of business through which activities are totally or partially carried out, including places of management, branches, agencies, offices, factories, workshops, warehouses, stores, mines, oil and gas wells, quarries, or any other place, installation, or fixed or mobile structure used in the exploration, exploitation, or extraction of natural resources;
• A construction, installation, or assembly project, as well as related supervisory activities, if the duration is greater than 183 calendar days within any 12-month period, unless a shorter period has been established in an applicable tax treaty;
• The provision of services when performed in Peru for the same or a related project for a period or periods exceeding 183 calendar days within any 12-month period, unless a shorter period has been established in an applicable tax treaty; and
• When a person acts in Peru on behalf of a non-resident entity and routinely concludes contracts or plays the main role in the conclusion of contracts on behalf of the non-resident entity without substantial modification on the part of the non-resident entity.
• In any case, it will not be considered a permanent establishment when the activity carried out is of a preparatory or auxiliary nature. An activity is considered preparatory or auxiliary when it is not an essential or significant part of the activities, unless the activities taken together with other activities carried out in Peru by a non-resident entity or related parties constitute complementary functions that form part of the operation of a cohesive business.
• Further, it is provided that identical, substantially similar, or related activities carried out in Peru by related parties will be considered in determining if the 183-day period limit for a construction or service permanent establishment has been exceeded.
• Lastly, it is provided that permanent establishment will not be deemed to exist when a person acting on behalf of a non-resident entity acts as an independent agent in the ordinary course of business, subject to certain conditions.

Furthermore, Decree No. 1424 introduces the possibility of an indirect foreign tax credit for dividend and other profit distribution income received by Peruvian entities in addition to the current direct credit. With the new rules, a Peruvian entity receiving foreign income as dividends or profits from nonresident entities will be able to deduct:

• The income withheld for the dividends or profits distributed (direct credit)
• The income tax paid by the first-tier nonresident entity (indirect credit)

To qualify for the indirect foreign tax credit, the Peruvian entity must directly own at least 10% of the shares of the nonresident entity for 12 months before the date in which the dividends are paid.

The indirect foreign tax credit may be claimed for the income tax paid by the second-tier nonresident entity, provided the following conditions are met:

• the Peruvian entity indirectly owns at least 10% of the shares of the nonresident entity for 12 months before the date in which the dividends are paid; and
• the second-tier nonresident entity is a resident of a country that has an exchange of information agreement with Peru or is a resident of the same country of residence as the first-tier nonresident entity.

The provisions will be effective 1 January 2019.