Dividend allocation of branches

10 May, 2024

The branches of a company incorporated abroad for tax purposes are qualified as an entity separate from its non-domiciled parent company. Conversely, clause e) of Article 56 of the Income Tax Law establishes a legal presumption linking the income earned by the branch to its parent company.  

Legal Fiction of Clause e) of Article 56 of the Income Tax Law

The referred article generates a legal presumption where the net income produced by a branch in the country will be considered a dividend sharing in favor of its parent company. In this regard, the parent company must pay the derived income tax from the dividends received.  

It should be noted that, due to the specific procedure established for calculating branch dividends, the determination of the presumptive basis regulated by Article 64 of the Tax Code will not be applicable. 

Income Allocation Method to the Non-domiciled Parent Company

Likewise, the procedure for calculating dividends will be as follows: 

  1. Determine the net income of the branch, calculated under the tax result and not based on the accounting or financial profit.  
  2. Add the exempt interest income.  
  3. Add dividends and other forms of profit sharing.  
  4. Deduct the income tax paid by the branch.  
  5. The result will be the amount of dividends subject to income tax. 

As mentioned above, the result will be subject to income tax payable by the parent company. 

Withholding Tax to the Non-domiciled Parent Company

Given that the taxpayer is non-domiciled (the parent company), the branch will operate as a withholding agent of the tax. Conversely, the allocation operates by a legal presumption. Therefore, it is necessary to specify the moment of the withholding.  

In this regard, RTF No. 00444-11-2023 resolves the case of a fine imposed by the commission of a violation of Article 177, paragraph 13 of the Tax Code, which does not withhold income tax on the dividends of a branch or permanent establishment of a legal entity non-domiciled in the country.  

The Court stated that although Article 56 e) of the Income Tax Law establishes that dividends are allocated on the due date the branch files its annual affidavit, the income tax cannot be withheld until the effective payment.   

Thus, two obligations are differentiated: 

  • Obligation of the branch to pay the amount equivalent to the withholding.  
  • Obligation of the branch to withhold. 

The expiration date of the former must be under Article 56 e), i.e., the due date of the annual affidavit of the branch, while the latter must be met when the branch pays the allocated dividends to its non-domiciled parent company.  

In this specific case, the Court verifies that Article 177, paragraph 12 of the Tax Code, refers to the obligation of the branch to withhold the tax. Therefore, given that the Administration did not verify the effective payment of the dividends subject to the tax, the Court concludes the violation was not proven.  


Due to the aforementioned, the dividend allocation of a branch in favor of its non-domiciled parent company requires compliance with the legal presumption determined by the Income Tax Law. Therefore, the following must be considered: 

  • The calculation method of dividends to be allocated due to Article 56 e) of the Income Tax Law must be applied, which is based on the taxable results and not on the accounting profit.  
  • The branch will have two obligations: i) Paying the withholding amount and ii) withholding the tax to the non-domiciled parent company. Each of these obligations is based on a different assumption and their non-compliance on different offenses. 

The observance of the analysis described above arises from the legislative and jurisprudential considerations of the Peruvian tax context. In this regard, VAG GLOBAL has significant assistance for companies in Peru through advice and tax returns services. 



Source: Tribunal Fiscal