Peru is one of the most attractive destinations to do business in Latin America and therefore lures foreign companies and investors to engage in commercial activities in the region. It is becoming easier to enter and operate within the Peruvian market due to national policy that facilitates investment in the region. Additionally, barriers that restrict foreigners to enter the market are getting torn down.
There are a variety of different ways to establish operations in Peru. It may be through working with a local distributor, engaging a local Peruvian PEO service provider or through establishing a company.
In this article, we will shed light on the difference between foreign branch offices and local/independent companies in Peru. Both can be attractive options depending on your business objectives and requirements in the region.
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Doing Business in Peru – Branch Office vs Local Company
Thanks to a very stable economic output with an annual GDP growth of 3.47% (World Bank Group, 2018), Peru became the fastest growing economy of Latin America primarily because of a large number of private investments, consumption and government spending. Peru’s main economic industries are the mining and manufacturing sector, while also being an essential exporter of agricultural products. In addition, approx. 4 million tourists visit Peru annually, identifying the strength of the tourism sector, and the business opportunities available for both locals and foreigners. This converts tourism into one of the most important service exports of the country, reaching a record amount of US$8.000 million in 2018, as stated by El Sistema Integrado de Información de Comercio Exterior (SIICEX). These economic factors provide incentives for foreign companies and investors to set up companies in Peru. According to the World Bank Group, Peru is the 58th easiest country to do business in. The primary reasons for this statistic are the overall ease of getting credit, registering property and protecting minority investors.
However, before incorporating a business in Peru, we want to inform you of the different types of legal structures of local/independent companies, their advantages and disadvantages and the differences when compared to foreign branch offices.
Legal Entity Structures in Peru
When a foreign company decides to establish a company in Peru, they have (2) options:
- Form a Local/Independent Company
- Form a Foreign Branch Office
In Peru, when establishing a local company, there are a variety of different types of legal entities. Both local companies (‘a subsidiary´) and branch office, are subject to a 30% tax rate on net income. So, what is the best type of local legal entity can a company should incorporate?
Joint Stock Companies (Sociedades Anónimas, S.A.)
Ordinary joint stock companies must have a minimum of two shareholders and require a minimum capital amount of $1,000 which should be deposited into a local Peruvian bank.
Advantages:
• Shareholder’s liability is limited to the value of their shares – this is an incentive for many people to invest in the company.
• The life of a S.A. is continual and doesn’t depend on the bankruptcy of shareholders or a change of ownership.
• Ownership is separated from its management.
Disadvantages:
• The Joint Stock company is subject to double taxation: The net income of the company and shareholders’ dividends are taxed.
• Financial statements need to be distributed frequently to shareholders, bankers or the stock exchange, among others.
Closely Held Corporations (Sociedad Anónima Cerrada, S.A.C.)
Closely held corporations require a minimum of two to a maximum of 20 shareholders. A S.A.C. cannot register shares publicly on the stock exchange.
Advantages:
• Control of the corporation is in the hands of one or a few owners. The owners don’t need to worry about public shareholder interest and can put company interests first.
• Owners have more freedom and can take risks for high-yield projects.
Disadvantages:
• A limitation on the maximum number of shareholders exists (no more than 20).
• Shares are not freely transferable in the Stock Market.
• It may be challenging to get new funds as equity capital is harder to acquire.
Publicly Held Corporations (Sociedad Anónima Abierta, S.A.A.)
Publicly held corporations are appropriate for larger amounts of capital. The company is required to make a public offering of shares and there must be more than 750 stockholders. In addition, 35% of the capital must be owned by a minimum of 175 stockholders.
Advantages:
• Shares are for sale to public investors.
• Debt is shared by a larger number of investors.
• The company is public and therefore can enjoy higher levels of publicity.
Disadvantages:
• The publicly held corporation depends on the shareholder’s votes to make a decision.
• The corporation is subject to fluctuations in the stock market.
Limited Liability Companies (Sociedad Comercial de Responsibilidad Limitada, S.R.L.)
A limited liability company can be a good alternative to a closely-held corporation. It can be established with a minimum of two shareholders but cannot exceed an amount of 20 shareholders. The capital is divided into equal and indivisible participations.
Advantages:
• Members of the limited liability corporation are not personally liable for debts.
• The company is not subject to double taxation, as business income can be treated as personal income.
Disadvantages:
• Companies have no board of directors but rather partner meetings.
• It might be harder to issue stocks as it is more difficult to find investors.
Having discussed the different legal entities that can be used for local/independent companies, we will now shed light on the alternative, foreign branch offices.
Foreign Branch Office (Sucursal)
According to the Peruvian Corporate Law, foreign branch offices are secondary setups through which companies might develop their activities in countries other than the location of their main office. As opposed to subsidiaries, foreign branch offices are not considered legally independent from the parent company. Still, they require an autonomously acting branch manager and are subject to a 30% Peruvian corporate tax rate, as is the case with independent companies.
Advantages:
• A foreign branch office provides access to new markets.
• Resources, strategies and investments can be provided by the parent company.
• The parent company will enjoy a good reputation if its branch office offers quality products/services locally.
• Projects with low risk can usually be performed by the foreign branch office.
Disadvantages:
• The parent company is fully liable for the foreign branch office.
• The parent company runs the risk of risky projects executed by the branch.
Should you Open a Foreign Branch Office or a Local/Independent Company?
We have provided you with the characteristics, advantages and disadvantages of both local Peruvian companies and foreign branch offices. So, which type of company should you decide on – a subsidiary or alternatively a foreign branch office?
Branch offices, not being considered legally independent from the parent company, are usually preferred by Multinational Corporations (MNCs), who have a centralized head office to coordinate their global activity. Additionally, companies in the financial and insurance sector who can use the brand name to win business contracts and obtain licences might set up foreign branch offices.
Mining companies usually prefer to set up a local/independent company, in many cases as a closely held corporation (S.A.C.). Another specific example of a sector tending to choose subsidiaries a way to enter the Peruvian market is the manufacturing industry, in fields such as consumer goods and food processing.
Do you Need Personalised Information?
Before incorporating your company, you need to assess which type of legal structure best fits your company’s business objectives and requirements.
Our team of professionals at Biz Latin Hub offers a wide range of professional multilingual legal and accounting/taxation services that can help your Peruvian expansion. Contact us now for personalised business advice.
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