Tax Guide for US Expats Living and Working in Peru
Who Is Liable For Income Taxes in Peru
Individuals resident in Peru are taxed on their worldwide income. Nonresidents are taxed on their Peruvian-source income only.
Residency of foreign citizens is established on 1 January of the calendar year subsequent to the foreign citizen’s continuous presence in Peru for more than 183 days in any 12-month period.
Peruvian citizens who leave Peru regain residency status on the first day of the first calendar year after their return to Peru, unless they return temporarily and live in Peru no more than 183 days in any 12-month period.
Income subject to tax
Employment income. Tax is imposed on all remuneration received by an employee in the form of salaries, bonuses, living and housing allowances, tax reimbursements, benefits in kind and any other fringe benefits at the rates.
Salaries and remuneration received by nonresidents for services provided in Peru are taxed at a rate of 30%.
Self-employment and business income. Taxable self-employment income includes fees from independent professional, artistic and scientific activities, and from skilled occupations carried out by individuals, and is taxed at the rates.
Taxable income for self-employed persons equals their gross income minus a deduction of 20%. Such deduction is allowed up to a maximum of PEN 86,400, which equals 24 annual tax units
Nonresidents are allowed a deduction equivalent to 20% of gross income received as remuneration for services as an independent professional. As a result, they are subject to an effective withholding tax rate of 24%.
Business income includes profits from personal business and is taxed at a rate of 30% of net income. For information regarding the deductibility of expenses, see Deductions.
Directors’ fees. Directors’ fees are included in taxable income and are subject to tax at the rates. In addition, directors’ fees are subject to a 10% withholding tax, which may be taken as a credit against a director’s income tax liability.
Investment income. Dividends and other forms of profit distributions, as well as remittances of net profits by branches, are subject to a 4.1% withholding tax if paid to resident individuals or to nonresident individuals or entities.
For residents, interest on deposits in Peruvian banks and interest from bonds issued by the government are exempt from income tax. Other interest and royalties must be included in taxable income.
For nonresidents, interest is subject to withholding tax at a rate of 4.99%. Royalties are subject to withholding tax at a rate of 30%.
Income from the rental of real estate received by residents is taxed as a capital gain at a rate of 6.25%. A deduction of 20% of gross rental income is allowed. As a result, the effective rate is 5%.
Income from the rental of real estate received by nonresidents is subject to an effective final withholding tax at a rate of 5%.
Taxation of employer-provided stock options. The Peruvian Income Tax Law has not established specific rules regarding taxation of equity awards. Under the general taxation rules, the benefit obtained from a stock option plan equals the spread between the purchase price and the fair market value of the shares. Such spread must be recognized as compensation income because it is provided as part of an employment relationship. However, on the sale of the shares, the individual derives a capital gain equal to the difference between the sale price and the purchase price. Because no specific rule allows the purchase price to include the spread previously taxed as compensation income, a double taxation issue may arise.
Capital gains. For residents, capital gains derived from the sale of real estate (except for real estate occupied as dwellings) are subject to a definitive payment, which equals 5% of the sale value. For nonresidents, the tax rate is 30%.
Taxable capital gains include profits derived from the sale of shares issued by Peruvian entities and gains derived from an indirect sale of shares (including, among others, the sale of more than 10% of the shares of a nonresident company in any 12-month period, provided the total share value of the nonresident company included 50% or more of a Peruvian company’s shares in any month in the 12-month period before the sale). For resident individuals, this rule is effective from 1 January 2012. For nonresident individuals, the rule took effect on 16 February 2011.
For the sale of shares by resident individuals, the first 5 ATUs, which equal PEN 18,000, are exempt from tax.
Net taxable income for resident individuals derived from capital gains on shares equals their gross income minus a deduction equal to 20%. Withholding tax is imposed on this amount at a rate of 6.25%. As a result, such income is subject to an effective withholding tax rate of 5%.
Nonresidents are taxed at a rate of 5% if the shares are listed and traded in the Chilean, Colombian or Peruvian Stock Exchange Market. Otherwise, they are subject to tax at a rate of 30% on their gross income.
Capital gains also include profits derived through investment funds, trust funds or pension funds established in Peru. These profits are taxed at an effective rate of 5% for residents and 30% for nonresident individuals.
Gains derived from sales of personal property are not considered capital gains.
Deductions. Individuals receiving business income may deduct expenses incurred to earn the income or maintain the source of income. In addition, individuals earning business income may deduct donations to public agencies and nonprofit organizations certified by the Ministry of Economy and that are dedicated to educational, social welfare and other similar activities. This deduction may not exceed 10% of net business income after losses carried forward are applied.
Individuals earning employment and self-employment income may deduct from taxable income the first PEN 25,200 of income earned, which is equivalent to 7 ATUs.
Rates. For resident employees, the tax rates are applied on a progressive scale expressed in ATUs.
Relief for losses. No relief is provided for nonbusiness losses incurred by individuals. However, individuals may select either of the following two systems to carry forward losses related to business income:
- Carrying forward losses to the following four consecutive years
- Carrying forward losses indefinitely, subject to an annual limit equal to 50% of the taxpayer’s taxable income in each year. Business losses may not be carried back.
B. Other taxes
Property tax. Property tax is imposed on urban and rural property and is payable by the property owners. The tax is administered and collected by the government of the locality where the property is located. The property tax base equals the total value of the taxpayer’s property in every jurisdiction. To determine the total value of the property, land tariff values and construction official unitary values in force as of 31 October of the preceding year and the depreciation tables formulated by the National Council of Valuation must be applied. Property tax is levied at progressive rates ranging from 0.2% to 1%.
Vehicle tax. Vehicle tax is imposed on automobiles, vans, buses and station wagons that are up to three years old. The tax is payable by the vehicle owners. If the ownership of the vehicle is transferred, the new owner becomes the taxpayer from 1 January of the year after the transfer. The tax base equals the original value on acquisition or importation of the vehicle, which cannot be lower than the value approved by the Ministry of Economy and Finance. Vehicle tax is levied at a rate of 1%. The amount of tax cannot be less than 1.5% of one ATU as of 1 January of the year in which the tax is payable.
Tax on financial transactions. Effective from 1 April 2011, the rate of the tax on financial transactions is reduced from 0.05% to 0.005%. This tax is generally imposed on debits and credits in Peruvian bank accounts.
C. Social security
Employees must contribute 13% of their salaries and wages to the government-sponsored pension fund (Oficina de Normalizacion Previsional, or ONP). Under an alternative system, employees must contribute an average of 13.175% of their salaries and wages to the Private Pension Funds Trustee (Administradora de Fondo de Pensiones, or AFP). These amounts must be withheld by employers under both the ONP and AFP systems. Employers must contribute to the Health Care Fund at a rate of 9%.
Double tax relief and tax treaties
A tax credit is granted for taxes paid or withheld abroad, within certain limits. Under a treaty with Bolivia, Colombia and Ecuador (signatories to the Andean Pact), income earned in those countries is excluded from taxable income in Peru to avoid double taxation. Peru has also entered into double tax treaties with Brazil, Canada and Chile. Peru has signed a double tax treaty with Spain, but this treaty is not yet in force.
To learn more about the history, culture, economy and other information about Peru
We have been preparing US income tax returns for US Citizens and permanent residents living in Peru for over 15 years. As a US Citizen or permanent resident (green card holder) you are required to file a US return each year regardless of the fact that you file and pay taxes in your residence country. The expatriate earned income exemption ($100,800 for 2015) can only be claimed if you file a timely tax return. It is not automatic if you fail to file.
We have scores of clients located in Peru and know how to integrate your US taxes into the local income taxes you pay. Any income tax you pay there can be claimed as a dollar for dollar credit against the tax on your US return on the same income.
As an expat living abroad you get an automatic extension to file until June 15th following the calendar year end. (You cannot file using the tax fiscal year for US tax purposes). You must pay any tax that may be due by April 15th in order to avoid penalties and interest. You can get an extension to file (if you request it) until October 15th.
There are other forms which must be filed if you have foreign bank or financial accounts; foreign investment company; or own 10% or more of a foreign corporation or foreign partnership. If you do not file these forms or file them late, the IRS can impose penalties of $10,000 or more per form. These penalties are due regardless of whether you owe income taxes or not.
There are certain times you may wish to make elections with respect to your Corporation or Investment Company which will give you US tax benefits. There are other situations where forming a US corporation to receive your business income may be more advantageous than using a corporation in your resident country. We can help you with these decisions.
If you are self-employed while working, you will have to pay US self-employment taxes (social security). If you are a bona-fide employee you do not have to worry about paying US social security on your wages earned in Peru.
We have helped hundreds of expats around the world catch up because they have failed to file US returns for many years. Unfortunately, unlike India, Canada, UK, etc. you must also file so long as you are a US citizen or resident. You can if you follow proper IRS and State Department procedures surrender your US Citizenship and therefore cut off your obligation to pay US taxes in the future. You must surrender that Citizenship for non-tax avoidance reasons and then can usually not return to the US for more than 30 days per year for the subsequent ten years.
Let us help you with your US tax returns, US tax planning and other US tax and legal concerns. Download our expat tax questionnaire or request a consultation by phone, skype or email