Taking care of the Money- Protecting our assets abroad.
By Gustavo Lazo, Partner at Estudio Olaechea
June 2011, Semana Económica Magazine
The great economic growth Peru has experienced in recent years has given rise to new wealth (we have about four thousand “millionaires”) some of which have sought haven abroad.
This phenomenon was intensified by the uncertainty lived during the electoral process. There are some who simply sent money to accounts in foreign banks whilst others adopted far more sophisticated measures in order to safeguard their earned assets. There are also those who await the outcome of the electoral contest, or the measures the new administration may decide to adopt.
Some of the legal mechanisms chosen by people in order to protect their assets abroad include property funds such as “trusts” – defined in Anglo Saxon law in somewhat different terms when compared to our “fideicomiso” – foundations, holding entities of shares or different kinds of interest, re-invoicing companies, service delivery companies, trading firms, “off-shore” banking and investment funds, web portals, etc...
It is up to individuals to asses in each specific case which jurisdiction and what legal tools are those that best meet their particular needs. It goes without saying that the above-mentioned legal mechanisms can only be legitimately employed as long as the capital's origin is legal. Experience has taught us how important it is for those who choose to protect their assets, that the structure they finally decide to adopt in a particular jurisdiction is adequate from both a legal and a tax viewpoint. Incidents such as the one lived by a well-known politician who “lost” with the SUNAT (the Peruvian Tax Authority) must be avoided at all costs.
The rules of the game with the National Superintendency of Tax Administration (SUNAT).-
Don't let yourself be misled into thinking that just because you took out your money from the country you will be exempted from taxation in Peru or that SUNAT will not keep you accountable for your money. Whether you receive income, such as for example, dividends, interests, capital gains, you have to declare them in Peru and pay the relevant taxes thereupon.
A valid question that may be asked is when you have to produce your income tax return and pay the applicable taxes on these incomes in Peru.
SUNAT has stipulated that local companies who are actively exploiting businesses abroad have a tax obligation when said income accrues in their favor, even when it has not been collected in cash or in kind. This implies that if the company limits itself to obtaining income in a passive manner, such as receiving dividends, royalties, interests, etc., they should not have to pay taxes on them until they receive them, whether in cash or in kind.
This also applies to individuals domiciled in Peru, in the sense that the tax obligation takes place only when they receive said passive income. This implies that the obligation to pay taxes in Peru may be deferred until the year on which the entity abroad makes the income in their favor available to the individual domiciled in Peru. If this is not the case, this kind of income should not pay taxes in Peru.
Some years ago, SUNAT sent an annotation to a politician who, along with his spouse tried to protect their accumulated assets by designing a structure composed by “trusts” located in tax havens where the money flowed through accounts opened in several banks abroad.
Apart from the political implications of the case, it is relevant to note that SUNAT's investigation concluded that the passive income received by the “trusts” should have been declared and paid to the Peruvian tax authorities, by this couple, on the year on which the “trusts” received said income. In practice, this means that the “trusts’ legal status was not recognized and they were treated as “transparent” entities, which is why the payment of the taxes in Peru could not be deferred to subsequent years. The generalization of this criterion is critical as it may be a hazard for those who seek or have sought to protect their assets by using this alternative.
Also, broadly speaking, it was relatively easy for the Tax Court to back SUNAT's resolution with a certain degree of forcefulness due to the fact that in this case the legal mechanisms adopted by the above-mentioned subjects where deficiently structured, in order to ignore the possibility of postponing the income obtained by said “trusts”.
Indeed, in this case, the marital partnership was not able to demonstrate the discretionary powers of the manager of each “trust”, and it was instead established that the manager acted really as per the instructions of the marital partnership. Therefore, it was established that the spouses had permanent and full access to the “trusts'" income and this additionally helped to conclude that the income obtained by the “trust” was really directly obtained by the spouses. Moreover, in this case those who set up the “trusts” and the “trusts’ beneficiaries in fact shared the same identity (i.e., they are the marital partnership).
All things considered, it is of outmost importance for whoever legitimately seeks to protect their assets abroad, that the structure they finally decide to adopt in a specific jurisdiction be the most appropriate one from the legal and tax viewpoint.