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Entities that qualify as a conduit company will not qualify as beneficial owner under the Peru-Chile income tax treaty, so payments they receive will be subject to a higher rate of withholding tax under Peruvian tax law.

The Peruvian Tax Court recently published Resolution 03306-9-2020, establishing guidelines for entities to qualify as beneficial owners, which are entitled to benefits under the Peru-Chile double tax treaty.

Background

A Peruvian taxpayer applied a 15% withholding tax (WHT) rate to lease payments for telecommunications equipment provided by a Chilean entity. The Tax Court analyzed whether the company resident in Chile qualifies as a beneficial owner that qualifies for the reduced 15% WHT rate in Article 12 of the Peru-Chile double tax treaty, instead of the 30% WHT rate under Peruvian domestic tax legislation.

The Chilean entity asserted that the Peruvian entity's payments qualify as royalties under Article 12 of the Peru-Chile double tax treaty and are subject to a 15% rate.

The Peruvian tax authority argued that the reduced 15% WHT rate does not apply because the Chilean entity qualifies as a conduit entity, not a beneficial owner.

Resolution 03306-9-2020

In Resolution 03306-9-2020, the Peruvian Tax Court concluded that only entities qualifying as beneficial owners may claim the reduced tax rate under Article 12 (royalties) of the Peru-Chile double tax treaty. Payments to lease equipment fall under Article 12. The court observed that an entity will be a beneficial owner if it has control over the income it obtains; otherwise, it is a conduit entity.

In this case, the Tax Court concluded that the Chilean entity was not the beneficial owner but a conduit entity, so the Peru-Chile double tax treaty did not apply. The court reasoned that the entity (1) did not have a physical place of business in Chile; (2) had no assets in its balance sheet according to its financial statements; (3) did not assume a reasonable risk compared to the income received, and (4) remitted the income to foreign entities almost immediately after receiving it.

The Peruvian Tax Court considered the following characteristics in determining whether an entity could qualify as a beneficial owner under Article 12 (royalties) of the Peru-Chile double tax treaty:

• The physical location where the company carries out its activities
• The existence of assets in the country where the company is incorporated
• The risks assumed in relation to the income received
• The company's functional capacity to carry out the activities (i.e., whether the company has employees)
• Whether the income received is transferred to third parties that are not residents of the Contracting States to the double tax treaty under analysis

Additionally, the Tax Court held that each case involving a possible conduit entity must be analyzed on a case-by-case basis, regardless of the holdings in similar cases.

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