Peru continues to present itself as one of the most attractive economies for investment, especially in sectors such as mining, agriculture, textiles and coffee.
Although Peru’s relative ease of doing business will contribute to your Peruvian business success, the fiscal system is a challenging one.
It’s important to be aware of the how’s and why’s of tax legislation as a foreign expat or company in Peru. Read on to find out more about individual taxes and contributions, or see our discussion summarizing all corporate tax obligations.
Identifying your residency status
At first, it’s important to understand the difference between residency versus domicile. Peruvian tax (such as personal income tax) is not determined by residency. Instead, it is determined by domicile.
In Peru, foreign individuals have a ‘’domicile’’ if they have been in Peru for over 183 days, within a 12-month timeframe. Temporary absence within this period does not change the residency status of the individual.
Important: domiciled individuals have to pay income tax on their worldwide income, whereas non-domiciled individuals are only subject to income tax on their Peruvian-source income.
Individual taxes and contributions
In Peru, the National Superintendency of Customs and Tax Administration (SUNAT) supervises, collect and deals with personal labor taxes and other tax obligations. They are also in charge of the RUC number, which is mandatory to obtain. This identifies the taxpayer and is required for all economic activities.
Labor Income Tax
Peru has a tax on labor income that consists of different tax brackets. It identifies tax rates with ‘Unidad Impositiva Tributaria’ (UIT) rates. For 2019, one UIT stands for S/. 4,200 PEN, which is equal to approximately US $1,270.
|Bracket||UIT units||Applied tax rate|
|First||Up to 5 UIT units||8%|
|Second||5 to 20 UIT units||14%|
|Third||20 to 35 UIT units||17%|
|Fourth||35 to 45 UIT units||20%|
|Fifth||Over 45 UIT units||30%|
Domiciled individuals are subject to labor income tax according to the brackets above. However, the labor tax on non-domiciled employees is imposed at a flat rate of 30% on their gross Peruvian-source income. No deductions or credits are available to non-domiciled employees.
Pension Funds (ONP or AFP)
The Peruvian National Pension System states that employees must contribute monthly withholdings for pension funds at a rate of 13% of the gross salary of its employees. This withholding is a discount on the employee’s monthly gross salary too.
When making contributions for retirement, it is necessary to understand the differences between the Pension Systems that exist in Peru. In general, people’s choice is based on their needs. Below, we sum-up the most important distinctions:
Oficina de Normalización Previsional (ONP):
- The government is responsible for this fund
- The discount will be made each month based on gross salary, which will go to a common fund
- Your pension has a limit, unlike the private system.
Las Administradoras de Fondos de Pensiones (AFP):
- This is a private pension fund
- The contribution depends on the working condition
- Independent worker can make voluntary contributions through AFPnet
- People can build their own pension and profitability
- The more contributions, the higher the pension
- Average monthly rate is approximately 12.8%, depending on which AFP provider. The 4 providers are Habitat, Prima, Profuturo and Integra.
National Health System (EsSalud)
Employers with employees in their payrolls must pay monthly contributions for public health care purposes. The payment rate is 9% of the employee’s monthly gross salary and must be paid monthly.
There is also a Private Health System in Peru. Employees can either choose to affiliate with EsSalud or the Private Health System (EPS). In the second case, 25% of the paid amount may be credited against EsSalud contributions.
Other mandatory employer contributions include social benefits. It includes monthly contributions related to:
- Vacations: employers must save 8.33% of the employee’s gross salary per month, and pay the full amount (one full gross salary) after 12 months.
- Extra bonus (July and December): every working calendar, employers have to pay a ‘bonus’ twice a year. The total of both of these bonuses is two gross salaries. This means that employers must save 16% of the employee’s gross salary per month.
- Compensation for time worked (CTS): there are two calendar opportunities to pay this contribution; one in May and one in November. The amount is one gross salary in total. This means a savings rate of 8.33% per month.
A summary of the above information is shown in the table below:
|Concept||ONP or AFP||Income tax: employee’s withholding||EsSulad||Employee’s social benefits||Total min.||Total max.|
|Employee’s withholding||13%||8% – 30%||21%||43%|
|Employer’s withholding||9%||25% – 45%*||34%||54%|
*Depends on labor regime.
Tax on Dividends
The Peruvian government applies a tax on dividend incomes and other profit distributions. They are subject to a withholding tax when paid to a domiciled and non-domiciled individual, as well to non-domiciled legal entities. From 2019 onwards, the rate will be 9.3%.
Tax on Royalties
For individuals, royalties are second category income with a rate of 6.25% (domiciled individual) or a 30% rate on the amount of the royalty (non-domiciled individual).
In general, deductions are a challenging topic. Therefore, we advise working with a local tax team in order to correctly navigate the different kinds of deductions. Below, we round up a few key types.
Domiciled individuals that benefit from employment income or professional income are qualified to deduct up to seven tax units (UIT) from their gross income. Individuals that benefit from both employment and professional income are only allowed to deduct the fixed amount once.
Employers can also deduct certain expenses that are required to generate income and maintain its source. This includes expenses related to travel.
In terms of individual deductions, donations with specific purposes to entities and dependencies of the government or non-profit entities are deductible (limit is 10% of net taxable income). Specific purpose areas include education, culture, science, art, health care and sports, among others.
Seek local tax support
When opening a business in Peru, understanding Peruvian corporate requirements can be challenging. Principally, information and experience on fiscal matters are indispensable.
That’s why cooperating with a local partner is vital to your Peruvian expansion. Biz Latin Hub is a market leader in providing customized back office and market entry services, including expert accounting and taxation services. Our tailored business solutions ensure your business stays compliant with local regulations.
To get support with your expansion, please reach out to our Country Manager of Biz Latin Hub Peru, Leo, at [email protected]. Find out how his local team can add value to your Peruvian business activities.
You can also watch our short video below explaining why Peru is an attractive investment option in Latin America.