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Peru | Definition of 'Technical Assistance' for tax purposes

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While Peruvian residents are subject to taxation on their worldwide income, nonresidents are subject to tax only on their Peruvian-source taxable income.

As a general principle, an income qualifies as a Peruvian–source income when the credit is received in Peru, the tangible or intangible assets from where the income arises are situated in Peru or the activities are carried out in Peruvian territory.  However, despite the principle of "territorial source", there may be cases where the activity is carry out outside of Peru or partially within Peruvian territory and the income for performing these activities be considered as a Peruvian- source income and therefore subject to income tax.

This is the case of technical assistance, which is subject to a 15% withholding tax no matter that the service was rendered entirely abroad. Technical assistance is defined by tax regulations as every service –wherever it is performed- through which the provider undertakes to provide specialized technical knowledge, applied through the exercise of an art or technique, intended for the manufacturing of goods or rendering of services or the performance of other operations the purpose of which is to generate income.

According to this, technical assistance may include, inter alia, engineering services such as the execution and supervision of assembling, installation and startup of machinery, equipment, and production plants; calibration, inspection, repair and maintenance of machinery and equipment; performance of tests and trials, quality control, project research and development, execution of pilot programs, laboratory research and experiments.

Although it seems that technical assistance is linked to technical aspects and technical knowledge transfer, Peruvian Tax Court has recently issued the resolution No. 18368-8-2012, stating the following criteria:

'Tax regulation must be interpreted as meaning that, thanks to technical assistance, the user of such services will be able to provide services, produce goods and sell them. For example, if a law firm resident in Peru needs to provide legal services to a local client which does businesses in Spain and this Peruvian legal firm requires legal advice from an Spain law firm, the service performed by the Spain law firm would have to be qualified as technical assistance, because without such prior opinion, Peruvian legal firm could not provide the service for which it was hired. In the other hand, there are other services which are considered as accessories to the processes of production goods and rendering services, such as advertising and marketing services. This kind of services is not qualified as technical assistance.'

Accordingly, whether the service is technical or not, the important thing is to determine whether the service provided by the supplier will be a fundamental and substantial part (an input) of the production process of the user of the service. In that sense, even a legal advice  rendered by a foreign law firm could qualify as technical assistance if, as Tax Court stated, this services are going to be used by a Peruvian legal firm for resolving its clients' legal consultations.

The above interpretation of the phrase ‘techinal assistance’ is subject to the Double Taxation Avoidance Agreements. For example, according to Peru - Chile, Peru - Canada, and Peru - Mexico agreements, technical assistance will not be subject to a withholding tax in Peru if these services are performed without having a Permanent Establishment in Peru, despite the fact that this kind of services are subject to tax according to Peruvian Law.

David Bravo Sheen, Partner of EBS Abogados, Lima, Peru

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