M&A transactionsi Real estate acquisition agreements
The most common type of transaction for the acquisition of real estate properties in Peru is the asset sale and purchase contract, whether related to an existing property or a future asset.
The main reason for the buyer to proceed with the direct acquisition of a real estate property is to avoid assuming the liabilities of the existing legal entity holding the property. Prior to executing a sale and purchase contract, a complete legal and technical due diligence review of the property is highly recommended.
The legal due diligence review is focused on the property title (to confirm the areas and boundaries of the property, verify the ownership status and the existence of any mortgages, liens or encumbrances, the registration of any limitation for the sale of the property, and the registered constructions), the zoning and urban parameters, the existence of outstanding payments for property and municipal taxes, and any existing licences or permits, among other relevant matters.
On the other hand, the technical due diligence review will seek to verify the areas of the property, the structural shell and the quality of the soil, as well as the functionality of the technical installations (water supply, drainage, power and electricity systems, air conditioning, elevators, exterior lighting, heating systems and others). Also, a physical review of boundaries and environmental conditions may be useful in many cases.
It is also common to execute a future asset sale contract when the real estate property is still in the project or construction phase. These contracts are definitive agreements conditional on the effective existence of the property (usually when the property is registered as an independent unit in the real estate public register).
A share purchase agreement is less common, as it is used when the seller wishes to sell its entire real estate business, and the buyer is interested in acquiring an ongoing enterprise. One of the main reasons for the buyer to acquire the business is to receive a fixed rental income arising from contracts executed by the target company (lease contracts or any other type of onerous contract that grants use rights over the property to third parties). Spin-offs and mergers are also sometimes used to trade real estate.
In this case, the scope of the due diligence review of the target company will involve several matters focusing on identifying the liabilities arising from labour, tax, and contractual matters, as well as judicial proceedings. In addition, the buyer will need to obtain detailed information from the seller with respect to its assets, finances and business operations.
Since the information collected during the due diligence process is confidential, it is standard to execute a confidentiality or non-disclosure agreement before obtaining access to this information. It is also standard practice in this type of transaction for a letter of intent to be signed, agreeing on the main terms of the transaction and specifying that the execution of the transaction is subject to the satisfactory results of the due diligence process.ii Financing considerations
There are no special regulatory considerations regarding the financing of real estate acquisitions in Peru. Real estate operations are typically financed from a combination of equity and debt. The most common types of structures used to secure lending obligations are mortgages, share pledges, and warranty trusts.
Under Peruvian legislation, a mortgage works as a lien over a specific real estate property. To be enforceable against third parties, it must be formalised through a public deed and must be registered in the real estate public register.
On the other hand, share pledge agreements allow companies to use their shares as collateral to avail themselves of a loan. Pursuant to Peruvian legislation, for the agreement to be effective against third parties it must be formalised through a public deed and registered in the public Moveable Property Contracts Register and in the company's share ledger.
Finally, warranty trusts have been used more frequently over the past few years as security for financings. Warranty trusts can be used in relation to either real estate property or moveable goods, and they also must be formalised through a public deed. If the trust is created using real estate property, it must be registered in the real estate public register, and in the case of moveable goods, the registration must be made with the Moveable Property Contracts Register.
With the real estate market being boosted by the entry of investment funds, it is expected that the public market will be targeted as a source of funds for the financing of real estate acquisitions or projects. However, the traditional mechanisms of financing remain those mentioned above.iii Tax regime on real estate transactionsBuying real estate
The acquisition of real estate property is subject to a real estate transfer tax at a rate of 3 per cent of the transfer value of the property. An amount of 10 UIT (a unit of monetary measurement, updated every year by the government to handle payments to be made to the government, such as taxes and fines) may be deducted from the transfer value to determine the tax base. The UIT for 2019 is 4,200 Peruvian soles (approximately US$1,273). Note that the taxpayer of the real estate transfer tax would be exclusively the purchaser of the property.
In the case of the first sale of a new real estate property by the constructor (a real estate company), real estate transfer tax would only apply to the value of the land. In addition, the transaction will be subject to value added tax (VAT) at a rate of 18 per cent, applicable to 50 per cent of the transfer value (i.e., an effective rate of 9 per cent).Selling real estate
In general terms, the transfer of real estate property located in Peruvian territory is subject to income tax. Income tax must be paid on capital gains derived from any transfer (e.g., sale or capital contribution in kind) of real estate property qualifying as taxable income.
The capital gains are determined as the difference between the transfer price (which must meet market value standards) and the tax base the seller has in the corresponding property. The tax rate applicable to the capital gain depends on the seller's status. Currently, the following rates may apply:
- Peruvian domiciled and non-domiciled individuals must pay 5 per cent tax on the gross income. However, non-domiciled individuals may request to be taxed only on the difference between the initial purchase price and the selling price through an administrative procedure before the tax authority, known as 'reimbursement of invested capital'.
- Peruvian domiciled entities must pay 29.5 per cent tax on their net income, and non-Peruvian entities will be subject to 30 per cent tax on the gross income. Notwithstanding, the non-Peruvian entity must also follow the 'reimbursement of invested capital' procedure before the tax authority.
For transfers of real estate property through corporate reorganisations (e.g., mergers, spin-offs, simple reorganisations), it is important to highlight that the income tax and VAT regulations establish special tax regimes, so assets can be transferred without generating tax effects. Nevertheless, the acquisition of real estate property between Peruvian entities through a corporate reorganisation would still be subject to real estate transfer tax, as previously explained.Renting real estate
Peruvian domiciled and non-domiciled individuals who obtain an income from the lease of a real estate property must pay 5 per cent on the rental income.
Peruvian domiciled entities that lease a real estate property in Peru must pay 29.5 per cent tax on the rental income after applying the tax deductions permitted by the applicable laws, and non-Peruvian entities that lease a real estate property in Peru will be subject to 30 per cent tax on rental income.Holding real estate
Real estate property owners are subject to property tax and to municipal taxes, the rates for which are calculated based on the value of the property and the area where the property is located.