The income distributed by the active partner to the silent partner in a silent partnership (association in participation) will be treated as dividends. Therefore, dividends received by silent partners in a silent partnership will not be subject to withholding tax, if the silent partner is a Peruvian entity, and will be treated as passive income subject to withholding tax in Peru, if the silent partner is not a Peruvian entity.

On April 2, 2021, the Peruvian Tax Court published in the Official Gazette Resolution 02398-11-2021, which establishes that income distributed to the silent partner in a silent partnership will be treated as dividends. This Resolution is mandatory, which means the Peruvian tax authority must follow it.

Background

In Peru, a silent partnership (i.e., an association in participation) is a contract by which a person (the active partner) grants another person (the silent partner) part of the results or profits of one or more businesses of the active partner, in exchange for certain contributions (usually cash). The contract does not result in a new legal entity in Peru for tax and legal purposes. The active partner is subject to corporate income tax on the income from the business. It was not clear from a tax perspective whether the profits received by the silent partner qualified as business income or dividends.

Resolution 02398-11-2021

In Resolution 02398-11-2021, the Peruvian Tax Court concludes that the profits received by the silent partner will be deemed as dividends because:

• The active partner performs the business activities, while the silent partner does not interact with the business or third parties with respect to the business but has a right to participate in the profits of the business
• The Peruvian Income Tax Law defines dividends as any kind of profit distribution

Accordingly, the court determined dividends received by the silent partner will be taxed as follows:

1. If the silent partner is a Peruvian entity, no withholding tax will be triggered because dividend distributions between Peruvian entities is not subject to income tax.
2. If the silent partner is not a Peruvian entity (i.e., a Peruvian individual, a nonresident entity or a nonresident individual), the dividends will be treated as passive income subject to a 5% withholding tax in Peru.

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