Typical due diligence issues

In Peru, environmental and regulatory noncompliance is not uncommon in a wide variety of industries, particularly where the target is a family-owned business. Sanctions for noncompliance range from fines to corrective measures, such as the seizure of assets, closure of the company or establishment in breach, as well as demolition of infrastructure (uncommon).

Labor and tax matters are key subjects to be reviewed as part of a due diligence process. Sanctions for noncompliance in both cases include the claw back of the unpaid amounts, plus interest and fines for all periods within the statute of limitations (generally, six years after the corresponding tax period; a two-year period applies for an asset sale and four years after termination of a labor relationship for labor). In a carve-out of assets or other forms of separation, under certain circumstances, tax and labor claims brought against the legacy entity may extend to the recipient entity, compromising the assets transferred to the recipient entity. This must be taken into account when defining the scope of the due diligence.

A thorough due diligence process focusing on these issues will help identify material breaches and assess the exposure of the target, taking into consideration typical enforcement and detection rates and the severity of the potential sanctions. It will also enable the parties to consider what remedies or actions are needed prior to signing, between signing and closing, and post-closing.

Pricing and payment

There are no special restrictions regarding pricing and payment in Peru from a strictly legal/corporate point of view. However, for tax purposes, the following considerations should be taken into account:

• Transfers of shares and assets are taxed at fair market value, determined according to the arm's-length principle, regardless of the contract price agreed. Transfer pricing rules apply to related party transactions. In share transfers (including nonrelated party transactions) of private companies, if the price per share agreed by the parties is lower than the valor patrimonial (i.e., the total net equity value divided by the capital stock of the issuing company) of each share, the tax authority shall deem the price per share to be the valor patrimonial for the calculation of the applicable capital gain tax.
• To be entitled to deduct a cost for tax purposes, foreign investors selling shares or assets in Peru must obtain a "Recovery of Invested Capital Certificate" from the SUNAT (the Peruvian tax authority) before receiving the purchase price. This document certifies the cost to be deducted, and any payment received in the absence of this certificate would determine that no cost could be deducted for the calculation of the applicable capital gain tax. The Recovery of Invested Capital Certificate can be obtained within 30 business days of filing and remains valid for 45 calendar days following its issuance.
• For a buyer to have the right to deduct the amount paid for the shares as a cost in a future share sale, the purchase price must be paid through a Peruvian bank account or another authorized means of payment, such as drafts or wire transfers from a foreign bank or financial entities, provided that payments are channeled through or into an account in a Peruvian financial institution. Likewise, if the seller is a domiciled corporate taxpayer, shares would have to be invoiced.
• In asset deals, it is necessary for tax reasons to itemize each transferring asset in the invoice issued by the seller.

Foreign exchange control

Peru has a floating exchange regime that operates as part of a wider inflation-targeting economic policy implemented by the Peruvian Central Reserve Bank (BCRP), which monitors currency flows and purchases foreign currency to ensure stability. In general, the BCRP does not restrict the free-flowing exchange market. Although local trade is usually carried out in local currency, the Peruvian sol, there are no restrictions on the currency of payment for goods or services. Foreign investors are therefore not legally required to exchange foreign currency into Peruvian soles. US dollar accounts are widely used in the banking system, and euro deposits are available in certain entities. The purchase price in a share or asset deal is usually expressed in Peruvian soles or US dollars.

While currency can be exchanged freely, the Superintendence of Banking, Insurance and Private Pension Fund Administrators (SBS) publishes an average exchange rate applicable for official purposes, such as tax calculations.

Signing/closing

A deposit is not required in Peru, nor is it common. Sometimes, a part of the purchase price is withheld to incentivize post-signing/post-closing compliance. The purchase price may be subject to other enforcement mechanisms, such as an escrow account or a guarantee trust.

Whether signing and closing is simultaneous or not will depend on the conditions and complexity of each transaction. Both mechanisms are common, but non-simultaneous closings may become more prevalent in the near future for high-value transactions, given the introduction of merger control provisions, as further detailed below.

Foreign investment restrictions

There is no national law in place in Peru regarding limitations on foreign equity and foreign companies for developing activities. In general, almost every activity, foreign equity holding or ownership of Peruvian companies is permitted. 

Nevertheless, under special regulations, there are some exceptions (established limitations) for certain activities. These activities include air transportation services, broadcasting services, aquatic transportation services, including gas and oil supply services, mooring and unmooring services, and aquatic transportation services.

Antitrust/Merger control

Peru has a mandatory pre-merger control regime when the concentration (a business concentration operation implies a change or transfer of control of an economic agent, such as: (i) mergers between independent companies; (ii) acquisition of companies (iii) joint ventures; or (iv) acquisition of operating productive assets) meets the established thresholds (thresholds are based on: (i) annual sales or gross income generated into Peru; and (ii) the value of assets in Peru.). The regime is voluntary when the concentration does not meet the relevant thresholds. Two separate assessments based on both parameters must be conducted. One based on the value of the annual sales or gross income generated into Peru, and the other one based on the value of assets. If the business concentration operation meets the thresholds based on any of both parameters, prior authorization of the Commission is required before closing the operation. In addition, the authority can conduct an ex post and ex officio review of transactions it considers may impact the market and harm competition. For further information, see the more detailed section on "Antitrust/merger control".

Other regulatory or government approvals

The rules vary depending on the specific sector or industry. Sector regulators may prescribe specific approvals and conditions for the incorporation of, or the acquisition/increase of shares in, a company. For example, approval by the SBS is required for certain acquisitions in companies in the financial, insurance and pension systems. These regulations are applied equally to foreign and domestic investors.

Share sales

When a business is transferred through a stock purchase, this transaction will not involve a change of employer. Therefore, employee conditions, benefits and entitlements are unaffected. Notice to, and consent from, employees are not required for the transfer.

Corporate reorganizations: If the transaction is structured involving a corporate reorganization (merger or spin-off) that entails the transfer of personnel, it would be considered an employer substitution if the parties have not previously assigned or terminated their employment agreements. This would operate automatically, by virtue of law, upon execution of the reorganization, and no prior consent by employees is required.

Corporate reorganizations (not related to merger or spin-off): In this case, the transfer of personnel will not be automatically triggered by law. Consequently, it is necessary to obtain the express consent of employees in order for them to be transferred. Employees can be transferred via a tripartite agreement between the employee, the employer and the new company or a termination-and-rehiring by the new company. Employees are legally entitled to refuse the transfer and it will not be considered a termination clause. There is no mandatory notice period.

Asset sales

If the transaction is structured as an asset purchase that entails the transfer of personnel, consent from employees must be obtained to allow their transfer. Employees can be transferred via a tripartite agreement between the employee, the employer and the new company or a termination-and-rehiring by the new company that is acquiring the assets of the business. Employees are legally entitled to refuse the transfer and it will not be considered a termination clause.

No stamp duty applies. For foreign investors, capital gains tax is applicable to the direct or indirect transfer of shares issued by a Peruvian company. The general applicable tax rate is 30%. However, a preferential rate of 5% for the direct transfer of shares via the Lima Stock Exchange applies subject to the fulfillment of certain conditions.

Value-added tax (VAT) is not applicable in a share transfer, but it does apply to asset deals and is calculated at a rate of 18%. If the seller is a corporate taxpayer, both assets and shares would have to be invoiced. However, VAT will only apply in the case of the assets. Under an asset deal transaction, the VAT taxpayer is the seller; however, the buyer bears the economic burden of the VAT. The VAT paid in the purchase of the assets qualifies as a VAT credit for the buyer, subject to compliance with certain tax requirements.

OECD's Two Pillar Solution

The OECD/G20 Inclusive Framework on Base Erosion and Profit Shifting has put forward a so-called Two-Pillar Solution to address the tax challenges arising from the digitalization of the economy. Pillar Two is intended to introduce a global minimum effective rate of tax of 15% for large businesses in each jurisdiction where they operate and will lead to fundamental changes in the international tax system. It is currently being implemented in a large number of jurisdictions.

Groups will need to consider how the Pillar Two rules could impact on the life cycle of M&A transactions from the pre-acquisition phase (including transaction planning (such as the choice of acquisition structure and financing) and due diligence of the target group), the acquisition phase (such as contractual risk allocation around Pillar Two) to the post-acquisition phase and the impact of Pillar Two on any post-acquisition integration.

For information on post-acquisition integration matters, please see our Post-acquisition Integration Handbook.