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On 9 December 2016, the Peruvian Executive Branch issued Decree Law No. 1,264 providing a temporary tax amnesty procedure (the “Amnesty”) to regularize unreported income (“Régimen Temporal y Sustitutorio del Impuesto a la Renta para la Declaración, Repatriación e Inversión de Rentas No Declaradas”).  The Amnesty will come into force on 1 January 2017 and taxpayers will have until the 29 December 2017 to adhere to it.  The scope of the Amnesty includes non-declared income accrued up to the fiscal year 2015.
 
The tax rate applied to regularize the unreported assets will vary depending on whether the assets are repatriated and invested in Peru or not.  That is to say, 7% if the assets/cash are repatriated to Peru and invested for a minimum period of 3 months through financial institutions and investments expressly indicated in Peruvian regulations; or 10% in any other case (for instance, if the unreported assets are duly regularized but still kept in an offshore account).
 
The Amnesty adopted by the Peruvian Executive is in line with similar tax amnesty schemes adopted recently by neighbouring countries such as Mexico, Brazil and Argentina.  It responds to a request made by the Organisation for Economic Co-operation and Development (OECD) with regards to the implementation of the Common Reporting Standard (CRS) in those jurisdictions that have adhered to it.  In this context, it is important to highlight that Peru has not committed as yet to the CRS as it has not signed the CRS Multilateral Competent Authority Agreement.
 
Nonetheless, the Amnesty approved by the Peruvian Executive clearly indicates that Peru may be closer than ever to become a jurisdiction participating with the CRS.  Hence, Peruvian clients should carefully consider, in conjunction with their advisors, the possibility to regularize their tax affairs within the context of the Amnesty, as this may be the last opportunity before Peru starts to automatically exchange financial information under the CRS.  From then, Peru will start receiving financial information on bank accounts held by Peruvian residents (directly or indirectly e.g. through corporate/fiduciary structures) in foreign jurisdictions, including Switzerland, Panama, Bahamas and most other financial centres around the globe.
 
Furthermore, Peru has already taken bold steps towards a modern tax framework, comparable to OECD standards, in relation to resident investors with foreign investments and assets.  An excellent example of this is the enactment on 1 January 2013 of international tax transparency rules (i.e. Peruvian Controlled Foreign Corporation Regime or CFC rules).  Since the introduction of said regime, any foreign source passive income such as dividends, interests, royalties and capital gains earned by Peruvian tax residents through CFCs need to be added to their personal income tax base and be taxed accordingly on an accrual basis.
 
The three key criteria to establish the existence of a CFC for Peruvian tax purposes are the following:

Control: the Peruvian tax resident owns or is entitled, directly or indirectly, to more than 50% of the foreign entity’s equity, votes or results.

Low taxation: effective tax rate applicable on the passive income at the level of the offshore structure is less than 75% of the Income Tax rate applicable to this same type of income in Peru.

Foreign vehicle: any non-domiciled company, investment fund, trust, foundation, partnership or joint venture.

In this context, Peruvian investors need to adapt to the relatively new situation. Private banking clients need to regularise their tax situation, when this is required, and restructure their wealth through valid and robust wealth planning solutions, which are fully compliant with the new Peruvian tax, legal and regulatory framework.  One of the solutions which Peruvian investors may consider is international unit-linked life insurance.  This is a fully recognized wealth planning tool in Peru which, if properly structured, may provide the investor with a great degree of flexibility and a tax efficient treatment.
 
Indeed, international unit-linked life insurance meets overall objectives and needs of Peruvian high net worth individuals (HNWIs) in terms of (a) access to international investment opportunities, (b) flexibility e.g. possibility to maintain the existing investment strategy with the same financial advisors, (c) asset and investor protection e.g. State-controlled policyholder protection regime, securities held off balance sheet of the custodian bank and the insurance company, (d) estate and succession planning e.g. ability to nominate and revoke beneficiaries at any time, (e) international mobility e.g. easy adaptability of the contract in case the client relocates and (f) multi-jurisdictional tax and legal issues e.g. cross-border solutions for families with members spread across different countries.
 
From a tax perspective, an international unit-linked life insurance solution remains an attractive solution for Peruvian-resident High Net Worth Individuals (HNWI) in the new legal and tax context.  This is because it continues providing (i) full tax deferral during the life of the contract i.e. if properly designed it is out of the scope of CFC rules, (ii) tax exemption for partial or total surrender of the policy by the Peruvian resident policyholder (for more information on this, please refer to our article dated 2 March 2016) and (iii) tax exemption on the life insurance proceeds paid to Peruvian resident beneficiaries.
 
If you have any questions or require further information regarding our solution for Peruvian clients, please contact your usual Lombard International Assurance representative.
 
By Pablo Peciña Toña and Gonzalo García Pérez