The Dividend Distribution by Branches, in View of Ruling 578

10 April, 2024

The Tax Court has recently pronounced the treatment of dividends distributed by branches of companies incorporated abroad and located locally under Ruling 578. 

Harmonious Interpretation of International and National Standards

In this regard, the Court highlights the significance of understanding that both international and national rules must be interpreted under a harmonious tax interpretation, i.e., although once these agreements have been subscribed, adopted, and ratified, they are part of the national law. Thus, their interpretation must be joint, prevailing the international rule as regards the regulations.  

Legal Entity of the Branches

Thus, in tax matters, branches, agencies, or other permanent establishments acquire the status of a legal entity, different and independent from its parent company. Conversely, corporately, branches lack legal capacity, working as an extension of their parent company.  

Definition of “Company” in Ruling 578

According to paragraph d) of Article 2 of Ruling 578, a “company” is an organization consisting of one or more individuals engaged in a profit-making activity, branches of foreign companies located in the country that are legal entities, and are subject to income tax. They are included herein only on their Peruvian source income.  

Dividend Distribution and Taxability Assumptions

The distribution of dividends regulated by Article 11 of the Ruling establishes that dividends and equity stakes will only be taxable by the Member Country where the company that distributes them is domiciled, i.e., in the case of controversy, the branch of the foreign company located in the country that distributes dividends must exclusively withhold in our jurisdiction and pay 5% to the tax authorities 

Equal Treatment between Branches and Subsidiaries

Considering them differently could be a misunderstanding between a branch and a subsidiary, given that the latter is taxed for the distribution of income generated in favor of their shareholders (as long as they are not domiciled legal entities).  

Special Cases of Dividend Distribution

It is questionable whether the term “dividend” contemplated by Ruling 578 also includes the special assumption or legal fiction regulated by our legislation regarding the dividend distribution by the branches. Conversely, the aforementioned Ruling has not defined this type of income, having to interpret it jointly and harmoniously, as mentioned. Therefore, our legislation does contemplate as a special assumption the dividend distribution made by a branch.   

Reflections on the Tax Community

Finally, this new resolution will generate significant reflections in the local tax community and the regional one. Nonetheless, more jurisprudence must be issued for productive purposes regarding international tax law.