Ten challenges when setting up shop in Peru Ten challenges when setting up shop in Peru

Ten challenges when setting up shop in Peru
30 Aug 2018

Despite growth of only 2.5% during 2017 (compared with 3.9% in 2016 and 3.26% in 2015), which was below the official 2.8% estimate provided by Peru’s Ministry of Economy and Finance, the country boasts one of the fastest growing economies in Latin America. Moreover, according to IMF projections, growth rates should hit 4% in 2018 driven by an increase in private investment, modernisation and development activity.

Peru offers a favourable, if complicated, legal environment for foreign investment but also a friendly one, as reflected in the World Bank’s ‘Ease of Doing Business’ survey, in which Peru ranks 58th overall out of 190. The country’s top industries include mining, manufacturing, energy, petrochemicals, tourism and real estate.

  1. Starting a business

Starting a business in Peru is a bureaucratic process, taking around 27 days and seven separate procedures to do so. The country is rated 114th in simplicity terms here by the World Bank.

The most onerous activities involve signing a deed of incorporation before a notary public and filing it online with the Public Registry of Commerce, which takes eight days. Obtaining a Municipal license from the District Council takes a further 15 days. If shareholders are based abroad, the incorporation process usually takes even longer.

  1. Hiring staff

Companies looking to hire workers in Peru must familiarise themselves with the country’s local payroll compliance rules and cycles. Employers must pay the Compensation for Length of Service (CTS) benefit to all workers when they retire based on the length of time they have worked at their organisation.

The CTS is deposited twice a year in the worker’s bank of choice - 50% in May to cover the period from November to April, and 50% in November to cover from May to October. If a CTS payment is not submitted in a timely manner, it will be necessary to pay interest, accrued from the due date until the date the payment is made.

  1. Dealing with construction permits and property registration

The World Bank ranks Peru as the 61st easiest country for dealing with construction permits and as the 44th for registering a property.

Handling construction permits involves undertaking 15 procedures over an astonishing average of 188 days. It is also mandatory to register for a construction licence from the Municipality (licencia de obra para edificación nueva), which takes a further 45 days, while having drinking water installed takes another 50 days.

Simply registering a property is much more straightforward though, requiring just five procedures to be followed over about eight days.

  1. Obtaining electricity

Obtaining electricity in Peru takes a couple of months and involves submitting an application to Luz del Sur. Waiting for the energy company to complete its feasibility study and budget will take about 17 days. After signing a supply contract, it will usually be another 50 days for Luz del Sur to undertake external works.

  1. Getting on top of regulatory changes

Transfer Pricing  obligations in Peru are now subject to more detailed regulation than ever before, which could mean in turn that intra-group operations come under more scrutiny by the Peruvian tax authorities than was previously the case. Changes include the requirement that files contain more detail, such as identifying the personnel on whom a company's management and administration depend.

  1. Ensuring transparency

Maintaining open, honest and compliant business practices is important in a country where corruption is still a big issue. In 2016, there was an infamous case involving a large Brazilian construction company, which admitted paying bribes in more than half the countries of Latin America, including Peru. This situation not only prompted a change in the country’s legislation but also had a major impact on its local economy. Peruvian legislation now attaches corporate criminal liability to bribes, which means that companies need to maintain legal, transparent business practices that are fully compliant with the law.

  1. Protecting intellectual property

Court rulings and enforcement levels are often inconsistent, while allegations of political corruption and outside interference in the judicial system are common. Although the legal framework for protecting intellectual property (IP) in Peru has improved over the last decade, unfortunately enforcement still remains weak. Stricter penalties for IP theft have been brought into law but have yet to be implemented. There have also yet to be convictions and penalties for IP violations.

  1. Paying taxes

Peru ranks 121st in the World Bank’s ‘Ease of Doing Business’ survey in terms of paying taxes. Employers must make nine payments per year, which takes about 260 hours in total. The main taxes are based around profits and workers, with the corporate tax rate set at 29.5%. All residents are taxed on the income they earn worldwide, while non-residents are taxed only on Peruvian-earned income. For taxation purposes, a resident equals a Peruvian or foreign national who has spent more than 183 days each year in the country.

VAT is also added to most goods for sale, particularly imported items and some services. The rate here is 18%, which can make the cost of some imported goods seem quite high. In light of this, locally-produced offerings often provide better value for money. Stamp duty on property purchases is not payable in Peru.

  1. Enforcing contracts and resolving insolvency situations

With regards to contracts and insolvency, Peru can be a little challenging and bureaucratic.

When enforcing contracts, expect it to take around 430 days, 175 of which will be spent enforcing the court judgement. Doing so can cost around 36% of the claim. Because dispute settlement is generally problematic, it is recommended that you include an arbitration clause in commercial agreements.

Resolving insolvency takes more than three years and the recovery rate is a mere 30 cents in each dollar.

  1. Navigating cultural barriers

When doing business in Peru, shaking hands is the most common greeting on being introduced. While shaking with the right hand, it is common practice to touch the arm of the other person with your left hand, especially among men. When introducing males and females, it is common practice for city-dwellers to kiss each other once on the cheek. People from the Andes, however, prefer a handshake and hug.

During conversations, it is important to remember that relationships may be adversely affected by things like volume and tone of voice: Peruvians usually speak softly as speaking loudly is considered disrespectful. Although not recommended, if discussing politics, never engage in an ideological discussion. Any conversation about local or international politics should remain very superficial, avoiding one’s personal point of view.

It is also worth noting that Peruvians are very proud of both their food and archaeological heritage, which includes Machu Picchu, the Nazca lines and Cuzco

 Esteban Hilgert

Esteban Hilgert is managing director at TMF Peru. He has extensive experience of outsourcing services, having worked for companies such as Arthur Andersen, Deloitte and TMF Group in Argentina. Esteban is a public accountant, certified by the University of Buenos Aires, and also holds an MBA from the Universidad Argentina de la Empresa.

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Despite growth of only 2.5% during 2017 (compared with 3.9% in 2016 and 3.26% in 2015), which was below the official 2.8% estimate provided by Peru’s Ministry of Economy and Finance, the country boasts one of the fastest growing economies in Latin America. Moreover, according to IMF projections, growth rates should hit 4% in 2018 driven by an increase in private investment, modernisation and development activity.

Peru offers a favourable, if complicated, legal environment for foreign investment but also a friendly one, as reflected in the World Bank’s ‘Ease of Doing Business’ survey, in which Peru ranks 58th overall out of 190. The country’s top industries include mining, manufacturing, energy, petrochemicals, tourism and real estate.

  1. Starting a business

Starting a business in Peru is a bureaucratic process, taking around 27 days and seven separate procedures to do so. The country is rated 114th in simplicity terms here by the World Bank.

The most onerous activities involve signing a deed of incorporation before a notary public and filing it online with the Public Registry of Commerce, which takes eight days. Obtaining a Municipal license from the District Council takes a further 15 days. If shareholders are based abroad, the incorporation process usually takes even longer.

  1. Hiring staff

Companies looking to hire workers in Peru must familiarise themselves with the country’s local payroll compliance rules and cycles. Employers must pay the Compensation for Length of Service (CTS) benefit to all workers when they retire based on the length of time they have worked at their organisation.

The CTS is deposited twice a year in the worker’s bank of choice - 50% in May to cover the period from November to April, and 50% in November to cover from May to October. If a CTS payment is not submitted in a timely manner, it will be necessary to pay interest, accrued from the due date until the date the payment is made.

  1. Dealing with construction permits and property registration

The World Bank ranks Peru as the 61st easiest country for dealing with construction permits and as the 44th for registering a property.

Handling construction permits involves undertaking 15 procedures over an astonishing average of 188 days. It is also mandatory to register for a construction licence from the Municipality (licencia de obra para edificación nueva), which takes a further 45 days, while having drinking water installed takes another 50 days.

Simply registering a property is much more straightforward though, requiring just five procedures to be followed over about eight days.

  1. Obtaining electricity

Obtaining electricity in Peru takes a couple of months and involves submitting an application to Luz del Sur. Waiting for the energy company to complete its feasibility study and budget will take about 17 days. After signing a supply contract, it will usually be another 50 days for Luz del Sur to undertake external works.

  1. Getting on top of regulatory changes

Transfer Pricing  obligations in Peru are now subject to more detailed regulation than ever before, which could mean in turn that intra-group operations come under more scrutiny by the Peruvian tax authorities than was previously the case. Changes include the requirement that files contain more detail, such as identifying the personnel on whom a company's management and administration depend.

  1. Ensuring transparency

Maintaining open, honest and compliant business practices is important in a country where corruption is still a big issue. In 2016, there was an infamous case involving a large Brazilian construction company, which admitted paying bribes in more than half the countries of Latin America, including Peru. This situation not only prompted a change in the country’s legislation but also had a major impact on its local economy. Peruvian legislation now attaches corporate criminal liability to bribes, which means that companies need to maintain legal, transparent business practices that are fully compliant with the law.

  1. Protecting intellectual property

Court rulings and enforcement levels are often inconsistent, while allegations of political corruption and outside interference in the judicial system are common. Although the legal framework for protecting intellectual property (IP) in Peru has improved over the last decade, unfortunately enforcement still remains weak. Stricter penalties for IP theft have been brought into law but have yet to be implemented. There have also yet to be convictions and penalties for IP violations.

  1. Paying taxes

Peru ranks 121st in the World Bank’s ‘Ease of Doing Business’ survey in terms of paying taxes. Employers must make nine payments per year, which takes about 260 hours in total. The main taxes are based around profits and workers, with the corporate tax rate set at 29.5%. All residents are taxed on the income they earn worldwide, while non-residents are taxed only on Peruvian-earned income. For taxation purposes, a resident equals a Peruvian or foreign national who has spent more than 183 days each year in the country.

VAT is also added to most goods for sale, particularly imported items and some services. The rate here is 18%, which can make the cost of some imported goods seem quite high. In light of this, locally-produced offerings often provide better value for money. Stamp duty on property purchases is not payable in Peru.

  1. Enforcing contracts and resolving insolvency situations

With regards to contracts and insolvency, Peru can be a little challenging and bureaucratic.

When enforcing contracts, expect it to take around 430 days, 175 of which will be spent enforcing the court judgement. Doing so can cost around 36% of the claim. Because dispute settlement is generally problematic, it is recommended that you include an arbitration clause in commercial agreements.

Resolving insolvency takes more than three years and the recovery rate is a mere 30 cents in each dollar.

  1. Navigating cultural barriers

When doing business in Peru, shaking hands is the most common greeting on being introduced. While shaking with the right hand, it is common practice to touch the arm of the other person with your left hand, especially among men. When introducing males and females, it is common practice for city-dwellers to kiss each other once on the cheek. People from the Andes, however, prefer a handshake and hug.

During conversations, it is important to remember that relationships may be adversely affected by things like volume and tone of voice: Peruvians usually speak softly as speaking loudly is considered disrespectful. Although not recommended, if discussing politics, never engage in an ideological discussion. Any conversation about local or international politics should remain very superficial, avoiding one’s personal point of view.

It is also worth noting that Peruvians are very proud of both their food and archaeological heritage, which includes Machu Picchu, the Nazca lines and Cuzco

 Esteban Hilgert

Esteban Hilgert is managing director at TMF Peru. He has extensive experience of outsourcing services, having worked for companies such as Arthur Andersen, Deloitte and TMF Group in Argentina. Esteban is a public accountant, certified by the University of Buenos Aires, and also holds an MBA from the Universidad Argentina de la Empresa.

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A brief guide to Argentina's labour laws

Minding your manners in Brazil

What to think about when setting up shop in Mexico

 

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