Tax Effects of share buybacks

30 April, 2024

In the stock market, the value of a company’s shares reflects its growth, success, and, indeed, its value. Nowadays, companies requiring to improve their position in the market often resort to the so-called share buyback. 

What Is a Share Buyback?

It is the corporate decision to buy from its shareholders part of their shares. Corporately, it produces three important changes: 1) The number of shares is reduced, 2) the equity stakes of the shareholders are increased, and 3) the capital stock is reduced. In Peru, Article 104 of Law No. 26887 – General Corporations Law stipulates that this disposal may be for valuable consideration or gratuitously. Likewise, it stipulates that the buyback must comply with the amortization of the shares and be acquired on a pro-rata basis, except in special cases.   

Those shares are registered as part of the capital stock and assets of the company. In this regard, in the buyback, the company returns part of the contribution of the shareholder, thus decreasing these accounts. It should be noted that the acquisition of such shares could be made at par value, at a value lower, or higher than par value. Thus, does this transaction generate any tax liability? 

Tax Effects on the Shareholders

Given that the shareholder transfers its shares to the company to determine the income tax levy, the amount received by the shareholder must be assessed if it qualifies as a capital gain: 

  1. If it was made at par value, there is no capital gain due to the transaction that consists of the return of the contribution to capital made; therefore, it is not taxed.  
  2. If it was made at a lower value than the par one, the shareholder receives a loss of the invested capital; in this regard, given that it is not a capital gain, it will not be taxed. 
  3. En el supuesto que la enajenación se realice a un valor superior al nominal, el accionista si está generando una ganancia por el capital invertido en las acciones. According to letter d) of Article 24-A of the Income Tax Law and Report No. 104-2006-SUNAT/2B0000, such gain qualifies as a dividend and, thus, is subject to income tax. 

This last provision raises another question: if the shareholder is non-domiciled, should that tax be withheld by the company issuing the shares? 

Tax Effects on the Company

Indeed, the buyback does not generate a gain or loss for the company. The aforementioned report also established that regardless of whether the shares are acquired at par value, below, or above par value, this only generates movements in the company’s Balance Sheet accounts and does not generate gains or losses reflected in the Income Statement. Therefore, in a systematic interpretation of the rules on the part of the company, the disposal is not levied with income tax.  

Therefore, according to Article 76 of the Income Tax Law, the company must withhold the income received by its non-domiciled shareholders for the buyback of shares, which only occurs when the buyback is at a value higher than the par one. 


This corporate mechanism is attractive for companies, given that it can enhance their position in the market without any tax burden for the company. Indeed, by a systematic interpretation of the Peruvian regulatory body, the buyback has no tax effects for the company, while the shareholder will be only affected if the buyback is at a higher value than the par one.   

Despite being used more often, the Peruvian tax legislation has not settled this assumption. On the U.S. side, upon observing this recurrent transaction in large companies, this country implemented a tax on the share buyback through the IRA (Inflation Reduction Act) of 2022.  

Due to the low legislative and jurisprudential exploration of this issue, VAG GLOBAL has lawyers specialized in business and tax law who will assist you with the legal advice necessary for your business. 


Sources: SUNAT / Baker Institute / Santander