July 11, 2023
Peruvian Tax Authority rules merger between nonresident entities triggers indirect transfer of Peruvian shares
- The Peruvian Tax Authority considered whether a merger by absorption between nonresident entities in which the absorbed entity is the indirect shareholder of a Peruvian entity has tax consequences in Peru.
- The Tax Authority ruled the merger triggers an indirect transfer of Peruvian shares.
In Ruling 000076–2023, published on 13 June 2023, the Peruvian Tax Authority determined that a merger between nonresident entities in which the absorbed entity is an indirect shareholder of a Peruvian entity triggers an indirect transfer of Peruvian shares.
According to Peruvian Income Tax Legislation, an indirect transfer of Peruvian shares will be triggered if one of the following rules is met:
- 50% FMV Threshold Rule: Both requirements must be met:
- 50% Test: At any time within the 12 months prior to the transfer, 50% or more of the fair market value (FMV) of the nonresident entity shares are derived from the FMV of the shares of one or more Peruvian entities
- 10% Test: During any given 12-month period, shares representing 10% or more of the nonresident entity shares are transferred either by the transferor or jointly with its related parties
- 40,000 Tax Units Rule: During any given 12-month period, the total amount of Peruvian shares indirectly transferred, by the transferor or jointly with its related parties, equals or exceeds 40,000 Peruvian Tax Units (approx. USD 54m)
With the above in mind, the ruling analyzes a set of facts in which a foreign holding company (Company A) absorbs a foreign subsidiary (Company B); both entities are residents of the same country; Company A owns 100% of the shares of Company B; and Company B is the indirect owner of 100% of the shares of a Peruvian company (Company C).
Under the given facts, the Peruvian Tax Authority concluded that the merger triggers an indirect transfer of Peruvian shares, basing its conclusion on the following considerations:
- A merger implies the transfer of the entire equity of one company (absorbed company) to another one (absorbing company), in exchange for shares issued by the absorbing company. Consequently, through the merger, the ownership of the assets is transferred from the absorbed company to the shareholders of the absorbing company.
- For Peruvian Tax purposes, a transfer constitutes any act for consideration whereby the title to/ownership of an asset (including shares of stock) or right is transferred.
- In this sense, a merger could be considered as a transfer of assets from one company to another, as the ownership of the assets of the absorbed entity are transferred to the absorbing entity.
- Furthermore, if the absorbed entity owns Peruvian shares, whether directly or indirectly, it could be interpreted that the merger triggers an indirect transfer of Peruvian shares.
Applying this analysis, the Peruvian Tax Authority concluded that for purposes of an indirect transfer of shares regulated under the Peruvian Income Tax Law, the merger at issue triggers an indirect transfer of shares in the Peruvian Company C and resulting tax consequences.
For additional information with respect to this Alert, please contact the following:
Ernst & Young Asesores Empresariales S.C.R.L, Lima
Ernst & Young LLP (United States), Latin American Business Center, New York
Ernst & Young LLP (United Kingdom), Latin American Business Center, London
Ernst & Young Tax Co., Latin American Business Center, Japan & Asia Pacific
Published by NTD’s Tax Technical Knowledge Services group; Carolyn Wright, legal editor