SUNAT commented through Report No. 98-2021 on whether the payment for the purchase of a certain amount of standard software from non-domiciled companies with its respective final user license, to be subsequently commercialized, is subject to income tax withholding.
1. Operation details
A local distribution company acquires, through the Internet, a certain amount of standard software from non-domiciled companies that supply these programs with their respective final user licenses.
This company aims to commercialize these acquisitions in the country through downloading them from the cloud of the aforementioned non-domiciled provider and permanent fixation in different electronic devices of the final user, considering the following:
- The non-domiciled supplier does not assign the ownership of all or some of the property rights arising from the creation of such software to the domiciled company.
- The non-domiciled entity subscribes a license agreement for the use of the aforementioned software with the final user thereof under the terms the referred entity authorizes to download the software, its updates, and its maintenance, not paying the final user any payment to such entity, in addition to the payment made to the distributor domiciled in the country.
According to the aforementioned, it is asked whether the payment by the company domiciled in the country to the non-domiciled supplier for the operation carried out between them is subject to income tax withholding.
2. Analysis
To determine whether the remuneration paid by a company domiciled to a non-domiciled service provider is subject to income tax withholding, it is necessary to verify whether such remuneration qualifies as Peruvian source income.
According to the second paragraph of Article 6 of the Income Tax Law, the tax is levied only on taxable income from Peruvian sources in the case of taxpayers not domiciled in the country.
In this regard, it must be clarified whether the remuneration paid by the software distribution company domiciled in the country to the non-domiciled supplier constitutes Peruvian source income for the latter or not.
Concepts considered as Peruvian source income
The most similar case to the operation under analysis is the regulated one in paragraph b) of Article 9 of the Income Tax Law, which states that regardless of the nationality or domicile of the parties involved in the operations and the place of entering into or performance of the contracts, among others, are considered income from Peruvian sources:
“b) Those produced by goods or rights, including the arising ones from their disposal when the goods are physically located, or the rights are used economically in the country. In the case of royalties referred to in Article 27, the income derives from Peruvian sources when the goods or rights for which the royalties are paid are used economically in the country or when the royalties are paid by a taxpayer domiciled in the country. “
In this regard, Article 16 of the Income Tax Law Regulations states that the assignment of software use whose consideration is royalty is the one through which the ownership of all or some of the property rights over the software, which entails the right to its economic exploitation, is temporarily transferred.
On the other hand, the aforementioned article also establishes that it is not royalty, but the result of the disposal:
- The consideration for the definitive, unlimited, and exclusive transfer of the ownership of all or some of the property rights over the software, which entail the right to its economic exploitation, even when these are restricted to a specific territorial scope.
- The consideration that the original or derivative holder of the economic rights over the software, which entails the right to its economic exploitation, charges third parties for using the software, according to the conditions agreed in a license agreement.
In addition, SUNAT, through Report No. 104-2020, has stated that:
“Regarding the payments that local software distributors make to non-domiciled companies engaged in the sale of such product to acquire a certain amount of software with its respective final user license, which will be subsequently sold by them:
1. If it refers to standard software, the source rules contained in the first paragraph of subsection b) of Article 9 of the Income Tax Law do not apply to the income obtained by these companies.”
Therefore, under the aforementioned regulations and SUNAT’s pronouncement, it can be stated that in the case under analysis, the remuneration paid by the distributor company domiciled in the country to the non-domiciled supplier for the acquisition of the software and the user licenses referred to in this case, which will be subsequently sold for acquisition by the final users, does not generate income from Peruvian source and, therefore, is not subject to income tax withholding.
3. Conclusion
The remuneration paid by a local distribution company that acquires from a non-domiciled supplier, through the internet, a certain amount of standard software with its respective license of use for the final user, to be commercialized in the country by the non-domiciled supplier through its download from the cloud of the referred non-domiciled supplier, and permanent fixation in different electronic devices of the final user, is not subject to income tax withholding; in the case that, for such operation:
- The non-domiciled supplier does not assign, in favor of the domiciled company, the ownership of all, some or some of the patrimonial rights arising from the creation of such software.
- The non-domiciled entity subscribes a license agreement for the use of said software with the final user thereof, under the terms of which said entity authorizes the downloading of the software, its updates, as well as its maintenance; the end user not making any payment to said entity, in addition to that made to the distributor domiciled in the country.
Source: SUNAT 22/11/21