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Adjustment to the tax basis of shares

20 March, 2024

Background

The indirect disposal of shares, regulated in Article 10(e) of the Income Tax Law, is a case of Peruvian source income subject to taxation by the Peruvian Tax Authorities. According to Article 20 of the Income Tax Law, the taxable amount will be the gross income herein, consisting of the difference between the total net income from the transaction and the tax basis of the shares.  

Hence, regarding the determination of the tax basis, the Tax Court, through RTF (Resoluciones del Tribunal Fiscal – Tax Court Ruling) No. 100946-4-2023, ruled on the additional amounts agreed upon in agreements between the parties, which must be recognized as part of the cost of the disposed shares.   

As context, a share sale contract was previously entered into by a non-domiciled party (Company A) to another non-domiciled party (Company B) in which Peruvian shares were indirectly disposed of, which were subsequently transferred by Company B to the appellant (Company C).   

In addition, the sale contract included clause 4.4, which states the conditions that, in case the buyer increases the offer price of the general offer, Company A would be compensated by this to receive the same total price for each of the shares on sale as the new offer price. Conversely, these conditions were not met, and through an addendum, the general offer was modified, increasing the total price of the shares, thus causing Company B to compensate Company A.  

Administered Position

Company C, the appellant, in the determination of the tax to be withheld, considered that the tax basis of the shares consisted of the price agreed upon in the contract plus the subsequent adjustment to the price agreed upon through the addendum.  

SUNAT Position

The Tax Administration, after an audit of Company C, repaired the withholding made considering that only the price agreed upon in the contract could be assumed as the tax basis. Considering that the addendum paid was not for acquiring the ownership of the shares, this was disregarded, given that the ownership had already been transferred. Therefore, it qualifies that payment is a liberality act by company B. 

Tax Court Ruling

The Court ruled in favor of company C, stating that part of the price set by the addendum is part of the tax basis of the shares due to its relation to the share sale contract, thus increasing the offer price. In this regard, it lifted the objection and revoked the resolution of the determination appealed herein.  

Conclusion

Considering the inclusion of an addendum in the contract by modifying, substituting, or adding the agreed conditions, in this case, the Administration cannot argue the will of the parties regarding the considerations agreed upon by them, especially if there is a contractual obligation.   

The criterion applied by the Administration to the objections is not always the most appropriate, so resorting to tax and legal advice is highly necessary for a company. At VAG Global, we understand the complexities of the Peruvian tax environment and are committed to providing customized solutions tailored to the specific needs of each client. Our team of expert tax lawyers is focused on providing comprehensive and timely advice, thus ensuring calmness and financial success for our clients.