Real Estate Peru: Preoperative expenses and income tax
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Real Estate Peru: Preoperative expenses and income tax

4 min.

In cases where a company has carried out a specific real estate project and then chooses to continue with its economic purpose and carry out new projects, the question arises as to whether the expenses related to the latter can qualify as preoperative expenses under income tax law. The Ecovis experts explain the details.

According to article 57 of the Peruvian Income Tax Law, a taxpayer’s expenses are charged in the exercise of their accrual, which generally occurs when substantial events take place for their generation.

However, under article 37 (subsection g) of the same law and article 21 (subsection d) of its Regulation, special treatment is given to so-called pre-operative expenses – including those for expanding activities – “And to the accrued interests during the pre-operative period, which may be deducted in the first year of exploitation or operation or proportionally amortised within a maximum period of 10 years.”

It should be noted that the tax legislation does not define “activity expansion expenses”. It is therefore necessary to consider the judgements and criteria issued by the national financial administration SUNAT (Superintendencia Nacional de Administración Tributaria) and the Tax Court.

What the tax authorities have determined

In Report No. 173-2016 SUNAT the financial administration defined this concept as “The disbursements needed to open a new facility or to start an operation or the launch of new products, processes or projects related to the activity carried out by a company”.

On the other hand, although the Tax Court would initially have taken the same view as SUNAT, it took a different position with Resolution No. 5917-3-2019. Here, in the case of a taxpayer whose business is construction, the court specified that expenses for expanding activities are expenses of ongoing companies “(…) aimed at the planning, implementation, development, and/or execution of new economic activities and/or ventures, of a different nature and characteristics or incurred for the exploitation of a new production unit different from those already existing, in order to achieve a new line of business, product or service (…).”

It is important to add that even though the precedents at this level do not qualify as mandatory observance, they do represent the current interpretative line of the Tax Court (especially since the disputes involve two different chambers). According to Article 154 of the Tax Code, binding jurisprudence is given through a resolution of the Tax Court “that expressly interprets and with a general character the meaning of tax norms, as well as those issued under Article 102”.

The above definition means that when the business or income generating activity is carried out by a real estate company (i.e., an entity dedicated to the sale of real estate units), it is logical to conclude that there is only one preoperative phase, as companies whose economic activity is based in this sector only have a single economic purpose from which their income originates from the beginning of their operating phase. In the case at hand, this could have occurred in previous years, when the first real estate project was developed.

We support you in correctly assessing the tax side of your real estate project.
Gary Salazar Paz, Partner Public Accountant and Lawyer, ECOVIS PERÚ, Lima City, Peru

In strict accordance with the provisions of the Tax Court, the various real estate projects carried out by a real estate company whose production phase has already begun should not be confused with a new activity, since the execution of these projects is an intrinsic part of the actions carried out by the taxpayer in the scope of their business.

Following this reasoning, even if projects of new characteristics and dimensions could be differentiated, they still fall under the realisation of the same industrial or commercial activity for the achievement of the taxpayer’s corporate purpose.

Consequently, it must be assumed that once the real estate business has commenced operations in accordance with the Income Tax Law (and is thus in the production phase), administrative and sales expenses must be deducted in the exercise of their accrual, even if they are related to projects that have not yet been constructed or exploited.

It is important to note that based on previous experience of audits and claims, SUNAT has sometimes accepted that new real estate projects by the same taxpayer could qualify as a separate preoperative phase and therefore that the expenses associated with each project could be deferred until the start of its exploitation.

For further information please contact:

Gary Salazar Paz, Partner Public Accountant and Lawyer, ECOVIS PERÚ, Lima City, Peru

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