13 July 2023 Peru replaces LIBOR with SOFR for WHT purposes on interest paid to nonresidents - To calculate the threshold for applying reduced withholding tax on interest paid to nonresidents, an amendment to the Regulations of the Income Tax Law in Peru deems the Secured Overnight Financing Rate must now be applied.
- This Tax Alert highlights the reason for the law change.
- Affected taxpayers should become familiar with the new provision and its implications.
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On 29 June 2023, Peruvian government enacted Supreme Decree 137-2023, establishing the use of the Secured Overnight Financing Rate (SOFR) in place of the London Interbank Offered Rate (LIBOR) for calculating the threshold to apply the reduced 4.99% withholding tax (WHT) rate on interest paid to nonresidents. According to Peruvian Income Tax Legislation (Law and Regulations), interest paid to nonresidents is generally subject to WHT at a rate of 30%; however, the rate is reduced to 4.99% if the following conditions are met: - For loans in cash, the proceeds of the loan are brought into Peru as foreign currency through local banks or are used to finance the import of goods.
- The proceeds of the loan are used for business purposes in Peru.
- The participation of the foreign bank is not primarily intended to cover a transaction between related parties (back-to-back loans).
- The transaction is entered into by unrelated parties.
- The interest rate does not exceed the LIBOR plus seven points. For this purpose, interest includes expenses, commissions, premiums and any other amounts in addition to the interest paid.
With the pending "retirement" of LIBOR, it was unclear which rate should apply for determining the threshold for utilizing the reduced 4.99% WHT rate. On 29 June 2023, Supreme Decree 173-2023 was enacted, amending the Peruvian Income Tax Regulations and replacing LIBOR with the SOFR 30-day average. Therefore, for purposes of applying the reduced WHT rate of 4.99% for interest, the interest rate may not exceed the SOFR 30-day average rate plus seven points. Supreme Decree 173-2023 is in force as of 30 June 2023. 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 Document ID: 2023-1231 | 
