Peru’s President enacted Legislative Decree 1424 on 13 September 2018, which amends the income tax law with regard to the thin capitalization rules, the indirect transfer of shares, the definition of permanent establishment (PE) and the indirect foreign tax credit.
The new thin capitalization rules extend the limit on interest deductibility (3:1Â debt/equity ratio) to unrelated parties. Previously, this limitation only applied to interest paid to related parties.
Beginning from 1 January 2021, a new set of thin capitalization rules will come into play. Under these rules, the interest that exceeds 30% of earnings before interest, taxes, depreciation and amortization (EBITDA) of the preceding year will not be deductible. Interest that is not deducted may be carried forward for up to four years, but will always be subject to the 30% of EBITDA limitation.
The Decree establishes an indirect credit for foreign tax credit purposes. Previously, Peru only allowed the direct tax 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: (i)Â the Peruvian entity indirectly owns at least 10% of the shares of the nonresident entity for 12Â months before the date in which the dividends are paid; and (ii)Â 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 from 1 January 2019.
