Peruvian Supreme Court holds Peruvian branches may not offset past losses when distributing dividends to nonresident parent

A recent Peruvian Supreme Court decision establishes that Peruvian branches are not entitled to offset losses from previous years when distributing dividends to a nonresident parent company.

Background

According to the Peruvian Income Tax Law, the after-tax result obtained by the branch is treated as deemed dividends for tax purposes and is considered as income of the parent nonresident entity, subject to a 5% withholding tax (WHT) rate. For Peruvian branches of nonresident entities, deemed dividends will be considered distributed on the annual tax return filling due date; the net income of the branch (i.e., the final amount of the distribution generated during the year) is increased by any exempted interest and dividends and discounted by the amount paid for corporate tax.

Note that, for tax purposes, Peruvian branches of nonresident entities are taxed only on Peruvian-source income generated and receive the same tax treatment as resident taxpayers.

In addition, Peruvian Income Tax Law establishes that taxpayers may select from the following two systems to obtain relief for their losses registered in the fiscal year:

• System A: Carrying forward losses to the four consecutive years beginning with the year following the year in which the loss is generated
  
  
• System B: Carrying forward losses indefinitely, subject to an annual deductible limit equal to 50% of the taxpayer's taxable income in each year
   

With the above in mind, the Supreme Court analyzed whether, for purposes of determining the net income that would be distributed as dividends, Peruvian branches are entitled to deduct their previous year's losses, according to the loss-offsetting regime they had chosen.

Court Ruling 31323–2022

On 20 July 2023, the Supreme Court enacted Court Ruling 31323-2022, analyzing how losses from previous fiscal years apply in the distribution of deemed dividends made by a Peruvian branch to its nonresident parent company.

The court concluded that, in a scenario of a distribution of dividends from a Peruvian branch to its nonresident parent company, the Peruvian branch may not offset its losses of previous fiscal years to determine the net income obtained by the branch after tax that would be distributed as deemed dividends.

Given that the tax withholding to be made by the Peruvian branch refers to income obtained by a nonresident entity, it is not possible to offset losses from previous fiscal years of a resident entity (Peruvian branches), as the loss-offsetting regime only applies to Peruvian residents and should not be extended to Peruvian branches of nonresident entities, the Court concluded.

For additional information with respect to this Alert, please contact the following:

Ernst & Young Asesores Empresariales S.C.R.L, Lima

• Roberto Cores
  
  
• Ramón Bueno-Tizón
  
  
• Ingrid Zevallos
  
  
• Yasmin Manzur
  
  
• Krizia Hurtado
   

Ernst & Young LLP (United States), Latin American Business Center, New York

• Lucas Moreno
  
  
• Ana Mingramm
  
  
• Pablo Wejcman
  
  
• Enrique Perez Grovas
   

Ernst & Young LLP (United Kingdom), Latin American Business Center, London

• Lourdes Libreros

Ernst & Young Tax Co., Latin American Business Center, Japan & Asia Pacific

• Raul Moreno, Tokyo
  
  
• Luis Coronado, Singapore
   

Published by NTD’s Tax Technical Knowledge Services group; Carolyn Wright, legal editor

For a full listing of contacts and email addresses, please click on the Tax News Update: Global Edition (GTNU) version of this Alert.