Peru – Chile double tax treaty: new interpretation guidelines from Peru’s Tax Administration radically affect the taxation of indirect disposals of shares

Background 

Under Peruvian Income Tax provisions, non-residents are levied on Peruvian-source income identified based on an all-exhaustive list. Capital gains arising from an indirect disposal of shares issued by a company incorporated in Peru qualify as Peruvian-source income. According to these rules, an indirect disposal occurs when shares of a non-resident company are sold, and the latter owns directly or indirectly the shares issued by one or more Peruvian entities, provided that the following conditions are fulfilled: 

• During the 12 months preceding the transfer, the market value of the shares of the Peruvian company equals 50% or more of the market value of all the shares of the non-resident company.  

• In any 12-month period, the disposal involves shares representing 10% or more of the capital of a Peruvian company. 

An indirect disposal could also be found in a situation where the total value of the shares in Peruvian companies whose indirect transfer occurred in any 12-month period, equals to, or exceeds 40,000 Tax Units (currently, 1 Tax Unit equals PEN 5,150). 

• In practice, the application of the Treaty to an indirect disposal of shares gave rise to diverse interpretations among tax practitioners, basically because it was not a taxable event under domestic provisions at the time the former was negotiated, and this generated different positions when it came to identifying the governing rule in the Treaty. As a result, formal interpretation guidelines were requested from SUNAT to provide more certainty to investors. The case submitted for consideration involved the application of the Treaty to the capital gain obtained by a company resident in Chile that implemented the sale of shares issued by another Chilean company that in turn held shares issued by a Peruvian company.  

• In this context, through Tax Ruling No. 001-2021-SUNAT/7T0000, published on SUNAT’s web portal on 23 February 2021, interpretation guidelines were issued on this matter, concluding that the capital gain deriving from this transaction could only be subject to taxation in Chile, in accordance with the provisions of paragraph 5 of Article 13 of the Treaty. This paragraph grants exclusive tax jurisdiction to the residence State concerning gains derived from the alienation of any property other than those specified in the previous paragraphs (i.e., paragraph 1 up to 4).  

• This ruling was binding for any tax inspector. Therefore, the tax position adopted by taxpayers that implemented share transactions since the issuance of these guidelines relied on the tax consequences supported by Tax Ruling No. 001-2021-SUNAT/7T0000. 

New interpretation guidelines  

Through Tax Ruling No. 000117-2023-SUNAT/7T0000, published on SUNAT’s web portal on 28 December 2023, a reevaluation was conducted, changing the interpretation previously outlined in Tax Ruling No. 001-2021-SUNAT/7T0000. These guidelines indicate that, within the framework of the Treaty, the capital gain obtained by a resident of Chile from the indirect transfer of shares issued by a Peruvian company, resulting from the transfer of shares issued by the Chilean holding company, may be subject to taxation in both Peru and Chile, in accordance with Article 21 of the Treaty. This article establishes shared taxation in the case of other income not mentioned in preceding articles. 

The change in SUNAT’s interpretation is based on the following arguments: 

• The indirect transfer of shares was not regulated in either of the two countries at the time of negotiating the Treaty. Therefore, paragraph 4 of Article 13 was not intended to apply to income deriving from other types of shares, different from the securities directly subject to disposal. 

• Paragraph 5 of Article 13 of the Treaty governs the taxing authority’s rights over taxation of capital gains from the alienation of “any property” distinct from immovable property, movable property, ships or aircraft, and shares; concepts mentioned in the preceding paragraphs. Thus, it should not be construed as pertaining to “other gains” such as those arising from the indirect transfer of shares. 

• The meaning of the residual clause in the Treaty, as outlined in paragraph 5 of Article 13, should not be interpreted by analysing the residual clauses of treaties signed by Peru with Portugal, Japan, Korea, and Switzerland. This is because, during the negotiation of the Treaty, the scope of share transfers was limited to direct transactions. In contrast, at the time of negotiating the treaties with the other countries mentioned, the scope had expanded to include indirect transfers, as evidenced by the explicit reference in those treaties. 

Comments 

• The interpretation guidelines issued by SUNAT are binding inside this institution. Therefore, in the event that SUNAT detects (through an audit of the Peruvian company issuing the shares, cross-referencing information obtained from the ultimate beneficiary’s ownership form, or exchanging information with another tax authority) that a non-resident transferor is in default as a result of the existence of an indirect transfer levied in Peru, it could demand payment of the omitted tax from the Peruvian issuer of the shares since it is considered jointly and severally liable. 

• In this context, it is advisable to evaluate the tax positions adopted in this matter regarding transactions concluded in the past where the statute of limitations is still open. If it is SUNAT could request the payment of the omitted tax from the Peruvian company (potentially without applying the limitations to recovery arising from reliance on the previous interpretation guidelines). 

• For future transactions, it will be necessary to take into consideration the specific set of rules applicable to indirect transfers of shares in Peru and adopt a tax position in line with the current interpretation. There may however, be a possibility that the Tax Court and/or Judicial process may in the future reach a different interpretation. In the end, the benefits and drawbacks of creating a situation that might lead to tax litigation must be considered.