The Peruvian legal framework continues to develop along the same lines as in the last two decades, promoting foreign investments and competition, while attempting to include the poorest groups in the country’s economic growth. The following text highlights some of the most important recent changes, which have occurred in the areas of mining, electricity, tax, employment of foreign nationals, corporate transactions, banking and finance.
Mining is the most important economic activity and the main driver of economic growth. The most significant recent regulatory changes include: a re-interpretation of government-owned surface land rights; the introduction of the right to prior consultation by indigenous communities; mining royalties and new mining taxes; and the creation of a new environmental agency called the National Service for Environmental Certification for Sustainable Investments (Servicio Nacional de Certificación Ambiental, SENACE). Surface Land Rights: Under Peruvian law, a mining concession is considered a right that is distinct from surface land rights. To carry out mining activities, concessionaires are obligated to acquire the right to use the surface land from the corresponding landowner, who may be a private entity, a local indigenous community or the government.
Article 37 of the Peruvian General Mining Law states that concessionaires may use governmentowned surface land in order to develop mining activities. However, in 1995 the government passed what is commonly known as the “Land Law” (Law 26505), which stated that the government could only transfer government-owned land through a public auction. While Article 37 has not been expressly revoked, the Ministry of Energy and Mines (Ministerio de Energía y Minas, MEM) has recently reinterpreted the Land Law to mean that concessionaries may no longer use government-owned land for mining purposes. This recent shift in interpretation has been confirmed by other rulings as well as resolutions passed by MEM. As a result, mining sponsors now have to take into consideration the price and time it takes to acquire the surface land corresponding to their mining concessions. Prior Consultation Rights: In 1993, Peru ratified the International Labour Organisation’s Indigenous and Tribal Peoples Convention (No. 169). The principles of the convention were implemented through a law called the “Right of Prior Consultation”, which was passed by the Peruvian Congress in September 2011. This law acknowledges the right of indigenous and tribal peoples to be consulted when their collective rights may be affected by a piece of legislation or action, such as granting a permit to conduct mining activities (“autorización de inicio de actividades de exploración o de explotación”). The Ministry of Culture has the responsibility of identifying and preparing a list of indigenous communities protected by this law, but to date no list has been published. As a result, it may take longer to obtain necessary authorisations to initiate mining activities, as MEM has to enquire with the Ministry of Culture if there are any indigenous and tribal communities that are protected under the umbrella of this law that would be affected by the project.
The list of indigenous communities is expected to be published in the near future, expediting the process of obtaining mining permits. Mining Royalties and Taxes: In September 2011, three tax laws were passed that affect mining companies. The first one – Law 29788 – was beneficial for mining companies, since it modified the basis on which mining royalties are calculated. Up until September 2011, mining royalties were calculated by applying tax rates varying between 1% and 3% (depending on the annual revenues of a mining company) either to (i) the value of the mining concentrate, in the case of companies producing minerals with a readily available reference market price (such as gold, silver, copper, zinc, lead and tin); or (ii) the cost of the mineral extraction process, in the case of minerals without an international reference market price. Due to this change, the mining royalty is now calculated by applying a scale of rates that vary between 1% and 12% (depending on the company’s operating profit margin) to the company’s operating profit, as long as the result is greater than 1% of the company’s net sales. The amendment to the Mining Royalty Law has benefitted mining companies, as the amount that they pay for royalties is linked to their profit and not to a fluctuating factor, such as the market price of minerals.
The other two laws enacted in September 2011 are not as favourable, given that they increase the tax burden of mining companies. In addition to the mining royalty described above, Law 29789 requires concessionaires to pay the Special Mining Tax (“Impuesto Especial a la Minería”) for the sale of metallic resources. This special mining tax is calculated the same way as the mining royalty but with a different rate. It applies a scale of varying rates between 2% and 8.4% to the company’s operating profits, depending on operating margins.
The third tax law enacted was Law 29790, which provides that concessionaires that had stability agreements in place with MEM and were thus exempt from paying mining royalties and any other tax or contribution that were subsequently passed, such as the Special Mining Tax (“Impuesto Especial a la Minería”), are now required to pay a “voluntary contribution” for the exploitation of non-renewable natural resources – the Special Mining Levy (“Gravamen Especial a la Minería”). Similar to the Mining Royalty Law, as amended, and the Special Mining Tax, the Special Mining Levy is calculated by applying a scale of rates varying between 4% and 13.12% ( depending on the company’s operating profit margin) to the company’s operating profit derived from the sale of metallic resources. The Special Mining Levy was negotiated and accepted by mining companies that had stability agreements in place. New Environmental Authority: In December 2012 SENACE was established. This new entity will be in charge of reviewing and approving environmental impact assessments, which are required prior to performing mining exploitation activities. According to the law that created SENACE, it will be a specialised entity and will assume the responsibilities that are currently performed by the General Directorate of Environmental Affairs of MEM. SENACE is expected to start operations in the fourth quarter of 2013.
The key legal development affecting the electricity sector has been a legislative decree, which states that indigenous communities have the right to be consulted prior to the granting of any “electricity rights” or any legislative or administrative measure that directly affects their collective community rights. This applies to generation, transmission or the distribution of electricity projects that are likely to affect the rights of indigenous communities. Thus far, there have been no practical experiences testing these new rules.
A legal question arises in electricity projects as to which activity can be considered an “administrative measure” for purposes of the prior consultation law. The legal framework for electrical projects requires obtaining a definitive concession. However, one of the requirements to obtain a definitive concession is to have procured environmental permits, and, when appropriate, the right to use natural resources, such as water rights. These previous permits are granted through administrative authorisations, which could be considered “administrative measures”.
An MEM resolution provides that a prior consultation on electrical projects must precede awarding a definitive concession, clarifying that prior consultation is not required for obtaining natural resource licences or environmental permits.
This interpretation is reasonable to the extent that preliminary licences and permits are not intended to allow the development of a project or to begin any electrical activity.
On the other hand, the Guaranteed Transmission System has slightly different characteristics. A company which is interested in developing guaranteed transmission lines must win a concession in a public auction. The winner signs a build, own, operate and transfer (BOOT) contract for the construction and operation of public infrastructure. The contract grants the concessionaire the right to design, finance, build, operate and maintain the transmission lines for a 30-year period. After the concessionaire has signed the BOOT contract, it must obtain all licences and permits, and then apply for a definitive concession. In this case, it would be more appropriate to consider the BOOT contract as the administrative measure, given that the contract itself allows for the development of the project.
While the rules of the game for electricity projects have been delineated, similar difficulties to the ones associated with the prior consultation law will only be revealed through practical experience.
During the past year, several modifications were introduced to the Tax Code, the Income Tax Law and the Value-Added Tax (VAT) Law. The following highlights some of the most relevant changes. Definition of exportation for VAT effects: This tax change suggests that the sale of goods from a domiciled entity to a non-domiciled entity that is subject to the final export regime will be considered an export for VAT purposes.
In addition, the sale of goods conducted under an international sales contract will always be considered an export. This change is important since previously the Tax Authority considered any local sale subject to VAT, even if the local sale was intended for exportation. General anti-avoidance tax rule: A law which has generated a degree of controversy is the general “antiavoidance” rule that was recently adopted. If the tax regulator detects any tax avoidance scheme, it will be entitled to tax the allegedly “artificial” or “improper” transaction with the corresponding tax. Elimination of limits for training expense deductions: Deductions for training expenses were previously subject to a 5% limit of the total expenses deducted during any given year.
However, the government has considered that training employees is vital for companies and has a direct impact on taxable revenue and therefore has eliminated this limit. Deduction of research expenses: From now on, scientific, technological and development research expenses can be deducted whenever the amount of these expenses does not exceed 10% of a company’s net income or 300 tax units. For the expense to be deductible, the following two requirements should be met: the investigation must qualify as scientific, technological or for development purposes, and the investigation must be carried out by the taxpayer or someone hired by the taxpayer. Tax basis of real estate property acquired for free: Previously, a taxpayer that acquired real estate property without any consideration had to consider as its tax basis the tax assessment value determined by the local municipality or its market value if it was adequately supported by the taxpayer. Due to a recent legislative change, the tax basis for any real estate property received without consideration will be zero. However, the taxpayer may use the tax basis of the transferor of the real estate property, as long as the taxpayer provides sufficient proof of the transferor's tax basis. Controlled Foreign Corporations (CFC): Prior to passing the CFC rules, a Peruvian resident was able to avoid or defer taxes from income earned abroad through a foreign subsidiary. With the new CFC rules in place, if a Peruvian resident controls directly or indirectly more than 50% of the capital, voting rights or benefits of a foreign entity located in tax-haven countries, the resident will be taxed for its passive income, regardless of whether profits have been distributed locally. Transfer pricing for commodities: The amendments have introduced a comparable uncontrolled price method, considering the trade value known in the international market, stock exchange or similar entity as the market value. There have been more recent amendments allowing the possibility to make adjustments to the “market value” that is mentioned above.
Employment Of Foreign Nationals
In light of the recent economic growth the country has experienced, there have been several foreign companies opening offices or establishing branches in Peru.
Under Peruvian law, an employment relationship is characterised by three main elements: (i) the rendering of services; (ii) compensation; and (iii) subordination. If these three elements are present in a relationship, the law presumes there is an employment relationship between the two parties for an indefinite period of time. However, Peruvian regulations also permit temporary employment relationships under certain circumstances.
Generally, employment law is more flexible for start-ups or for companies entering into new businesses or operations. To encourage companies to make investments and undertake new risks, the employment law allows companies to hire employees on a temporary basis until the business becomes more stable. A company starting a new operation, opening a new establishment or entering into a new market, or even revamping its existing activities has the flexibility of hiring personnel under temporary agreements. Companies starting up businesses can execute short-term employment agreements for a maximum period of three years.
Peruvian regulations also allow employers to hire foreign nationals and may choose their employees’ immigration status. For example, if a local company needs foreign personnel to develop its business in Peru, it may hire foreign nationals with a permanent resident visa status or with a temporary visa status, whereupon the foreign national remains an employee of a foreign company in Peru. If a company prefers to have personnel working in Peru under a foreign company’s payroll, such personnel must be hired as independent service providers and receive orders from its foreign employer.
Foreign employees must have a written employment agreement approved by the labour authority and a working visa. Foreign employment agreements shall be made in writing with a term of no longer than three years, which can be extended for similar periods of time.
Local regulations restrict the proportion of foreign personnel relative to their compensation. The proportion of foreign personnel is not permitted to exceed 20% of the company’s total employee compensation and their salaries may not exceed 30% of the total payroll.
Employers may seek exceptions to these limits in some cases involving high-level executives or employees with highly specialised skills. Additionally, the law sets forth certain exceptions to these limits, such as employees who have a Peruvian spouse, ancestors, descendants or siblings; individuals with an immigrant visa; or citizens of a country with whom Peru has negotiated a dual nationality agreement or other reciprocity agreements.
If a foreign employee arrives in Peru and remains in the payroll of a non-domiciled entity, this person will need an assigned employee visa. Assigned employees are defined as those individuals who are sent to Peru to carry out specific employment tasks or activities or to perform a job that requires professional, commercial, technical or highly specialised knowledge and who do not intend to reside in the country permanently.
To obtain this immigration status, the following documents are required: a copy of the service agreement between the domiciled and non-domiciled company; an appointment letter from the foreign employee; and a certificate of service in which the local company accepts the appointment of the foreign employee. It is important to note that all documents executed or issued outside of Peru should be notarised and apostilled or legalised by the Peruvian Consulate. This immigration status is only permitted to be granted for a 90-calendar-day term, which is subject to a one-year extension.
Peruvian regulations allow a certain degree of flexibility at the beginning stages of a labour relationship. As we have seen, it provides a number of options to recruit foreign personnel but also allows companies to hire local staff through fixed-term employment contracts.
In 2012 there was a significant increase in merger and acquisition (M&A) activity in Peru, with more than $3.6bn in M&A transactions. In the banking sector, some of the major transactions included the acquisition of HSBC by Banco GNB Sudameris for around $400m and the acquisition of a controlling stake in IMT rust in Chile for $100m by Credicorp.
Other major transactions included the acquisition of Tricolor in Chile by Grupo Brescia for $96.1m and the acquisition of Salmofood, also in Chile, by Alicorp for around $62m. M&A activity has been fuelled, in part, by loans from international banks, mezzanine funds and other financial institutions, some of which have been structured as leveraged buyouts where the target assumes or secures the debt that finances the acquisition. Leveraged buyout transactions are required to be carefully structured in Peru due to certain legal limitations. Structuring Leveraged Buyouts: In contrast to other jurisdictions, under the Peruvian General Corporations Law, a company cannot lend funds to any person for the purpose of acquiring its own shares. Similarly, a company cannot secure a loan with its own assets if the proceeds of the loan will be used to finance the acquisition of that company's stock.
In addition, the shareholders and directors of any company cannot approve a transaction if there is a conflict of interest, such as a leveraged buyout transaction where no consideration is paid to the company for taking on debt or securing the loan.
Accordingly, leveraged buyout transactions must be carefully structured to avoid violating these laws, such as obtaining unanimous shareholder consent, confirming that the target company will be solvent after taking on debt or ensuring that the target company receives adequate consideration in exchange for securing a loan.
Taxes should also be carefully analysed in leveraged buyouts. To deduct expenses for tax purposes, a company must show that the expenses were used towards generating taxable revenue.
Interest derived from debt incurred by a company to purchase shares of another company is considered a deductible expense, since the sale of such shares will generate taxable revenue in the future.
However, if the target company incurs debt to purchase its own shares, it is questionable whether the interest expense from such debt was used to generate taxable revenue. In order to make such expenses tax deductible, in the past some transactions were structured as reverse mergers between the purchaser and the target.
Finally, under bankruptcy laws, any activity that takes place outside the ordinary course of business and that impairs a company’s net assets could be declared void if such activities were conducted within the 12-month period prior to the filing of bankruptcy or restructuring of the company.
If it is deemed that a leveraged buyout transaction constitutes an activity outside the ordinary course of business and impairs the net assets of the target company, such transaction is subject to Peruvian fraudulent conveyance laws. To mitigate this risk, lenders should have a high degree of certainty that the target will remain solvent for at least 12 months after the acquisition takes place. As well, they should consider whether it is necessary to request additional credit support during this period. DEVELOPMENTS IN BANKING & FINANCE Private pension fund system: In July 2012, Congress approved Law 29903, which attempts to reform the private pension plan system. This law seeks to increase the number of workers that contribute to the private pension system by lowering commission fees and increasing competition in the market, which is currently dominated by four private pension funds managers: AFP Prima, AFP Horizonte, AFP Integra and AFP Profuturo. Private pension funds manage almost $40bn and represent one of the country’s main sources of investment capital.
This new law represents the first major overhaul of the private pension plan system since its inception in 1992. As a result of this law, in December 2012 Chile’s AFP Hábitat became the first foreign private pension fund manager to win a bid to participate in Peru’s private pension plan system. AFP Hábitat won over local competitors by offering a lower mix of management fees and commissions.
In addition, the Central Reserve Bank of Peru recently increased the percentage of a private pension fund’s portfolio that can be invested in foreign assets to 36%. The increase will allow private pension funds to diversify their investment portfolios and increase investments in foreign assets. Money Laundering: In March 2013, the Peruvian securities regulator modified the Prevention of Money Laundering and Terrorism Financing Law through a resolution. The resolution aims primarily at standardising the law along the lines of a legislative decree regarding the prevention of money laundering and crimes related to illegal mining and organised crime (Legislative Decree 1106).
The new rules apply to any entity operating under a licence granted by the securities regulator and are akin to the US’s “know your customer” rules. Most importantly, the rules force entities to adopt a strict risk control system, which includes maintaining a client registry for any transaction over $10,000 for a period of 10 years. Data Protection Laws: In 2011 the Peruvian Congress passed the Personal Data Protection Law. The premise of the law is that personal information should not be used indiscriminately without a person’s consent, unless it is being utilised for public policy purposes. Regulations under this law are expected to be announced soon.
As a result, any future use of customer data will have to be done under express consent of the customer. Companies that will be most affected by these regulations will be retail banks, call centres, airlines and other companies that handle large customer data banks. A violation of these regulations could potentially result in fines of up to PEN350,000 ($131,810). OBG would like to thank Estudio Echecopar for their contribution to THE REPORT Peru 2014.
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