Tax on Real Estate Transactions in Peru

By Ricardo Guevara Bringas RGB Avocats

While many countries have recently seen the real estate sector fall dramatically, the market in Peru seems to keep on going. Everyday, we see new projects going up, and people are still buying new flats, offices and houses.

In this context, it’s appropriate to give a brief overview on the taxes applicable to real estate transactions in Peru. Our analysis will be made from a Peruvian law standpoint and will summarize the main taxes involved in the most common real estate related transactions.

1. Buying Real Estate

An individual or corporation that buys any property must pay the Alcabala Tax (there are some exemptions, such as religious congregations). The applicable rate is 3% of the property value. The property value is assessed based on the declared value of the property (autovaluo) less 10 UIT, a sum of about US$12,000. "UIT" stands for Unidad Impositiva Tributaria. The UIT is a unit of monetary measurement set by the government in order to handle payments made to the government, such as taxes and fines. For the 2009 period, 1 UIT is equal to S/. 3,550.

In addition, the first sale of a new property made by a real estate company will only have to pay the Alcabala tax on the value of the land, and VAT will apply (19%).

2. Selling Real Estate

For individuals, revenues that come from the sale of property in Peru do not fall within the scope of Peruvian income tax as long as it meets one of the following criteria:

1. The property was acquired before 1 January 2004, or
2. The property was the main residency of the seller (casa habitacion). According to Peruvian law, a property is considered a casa habitacion when the individual uses it for domestic purposes. The property must not be used for business purposes. One individual can only have one casa habitacion.

Apart from the above mentioned situations, the sale of property is subject to the application of income taxes.

Individuals that have their tax residency in Peru will pay income taxes of 5% of the gross revenue . The gross revenue is the result of the difference between the original price paid for the property and the price for which it was sold.  5% of this amount is payable to the tax administration.>

Individuals who are not tax residents in Peru are taxed at a rate of 30% on the sums obtained from the sale. However, they may request that they only be taxed on the difference between the original purchase price and the selling price. This procedure is called “devolucion del capital invertido”.

Corporations located in Peru that sell real estate will have to pay 30% tax on the net income after applying all tax deductions permitted by Peruvian Law. Sales made by corporations located outside of Peru will have to pay 30% tax on the sums they obtain from the sale.

3. Renting Real Estate

Individuals who are tax residents in Peru and receive income from the lease of property must pay 5% on the rental income.

Individuals that are not tax residents in Peru will have to pay 24% on the sums they obtain from the lease. Starting January 1st 2010, the rate will increase to 30%.

In any case, the rent payments received by the landlord on rental property must not be less than 6% of the property’s value (autovaluo) on a yearly basis.

Corporations located in Peru that lease real estate will have to pay 30% tax on the net income earned after applying all tax deductions permitted by Peruvian Law. Corporations not located in Peru that lease real estate here will have to pay 24% tax on the sums they obtain from rentals. Starting January 1st 2010 the rate will increase to 30%.
And as above, the rent payments received by the landlord on rental property must not be less than 6% of the property’s value (autovaluo) on a yearly basis.

4. Holding Real Estate

There are some taxes that apply only to property owners.

The Impuesto Predial (property tax) is payable by all property owners. The tax amount is based on the declared value of the property (autovaluo).

This tax must be paid by the person who is the owner of the property as of January 1st of the relevant year.

Finally, the owner must also pay the local taxes, called arbitrios, which are calculated according to the property value (autovaluo) and the area in which the property is located.

In conclusion, it should be stressed that people who aren’t tax residents of Peru pay very high levels of taxation on the sale and lease of property here. Consequently, when there are several properties at stake, it would be wise to set up a company in order to make real state transactions and deduct all costs related to this activity.