The foreign investment regime promoted in Peru since the 1990s has focused on encouraging a vast program to restructure the state, privatizing state-owned companies, cutting subsidies, opening the market and fighting tax evasion to create a free-market policy. During that decade, Peru reinserted itself into the international financial community and became eligible again for loans from the World Bank and other multilateral agencies and commercial banks. The inflation rate dropped dramatically to one digit and economic recuperation began.
All this was achieved within the free social market economy under the 1993 Constitution, whereby it is established that all controls are excluded and unfair market practices prohibited. Under the Constitution, business competition, unrestricted investment and free flow of capital by national and foreign investment are permitted. Likewise, the tax system has been simplified and labor laws have become more flexible. The market, instead of the State, is the agent in charge of regulating the economic activity. Areas previously reserved to the state for exploitation are being given to the private sector.
Moreover, the current government of President Alejandro Toledo intends to maintain the aggressive privatization process that was in effect during the past decade.
However, as Dr. Manuel P. Olaechea maintains in his recent book(1) related to the current public discussion over whether to replace the 1993 Constitution with the 1979 Constitution, the pace of these reforms will only continue as long as the free social market economy legal framework included in the 1993 Constitution is kept in force.
The economic regime of the 1993 Constitution has allowed sectors such as telecommunications to attract investments on the order of $2.6 billion, as of June 2001. This represented about 26% of total foreign direct investment. The mining industry attracted $1.6 billion in investments and energy received around $1.5 billion.
As of June 2001, the stock of registered foreign investments in Peru totaled about $10 billion. There is a further $5.8 billion in investments pending registration. Foreign equity investors have bought shares worth $2.3 billion on the Lima Stock Exchange.
Compared to data for 1994, foreign investment has increased significantly. As of December 1994, total registered foreign investment totaled about $4.4 billion, with another $145 million pending registration. Foreign investment through the Lima Stock Exchange was $ 1.48 billion.
Legal Basics
Peru’s foreign investment regime is governed by Legislative Decree Nº 662, the Foreign Investment Promotion Law, and Legislative Decree Nº 757, Framework Law for Private Investment, published on September 9, 1991 and November 13, 1991, respectively. Legislative Decree Nº 662 creates mechanisms to guarantee foreign investors tax and legal stability, the availability of foreign currency and non-discriminatory treatment between national and foreign investors to stimulate flows of foreign capital.
Legislative Decree Nº 757 contains provisions required for growth of private investment in all economic sectors, including the elimination of all legal and administrative barriers and distortions that block economic development and restrict free private initiative, leaving competition to the companies in the private sector. This law also establishes basic provisions regarding taxes, protecting investors from arbitrary changes. Foreign investment is defined as investment coming from abroad and may be carried out in any economic activity that generates income. It may take any of the following forms.
Contributions by foreign individuals or corporations to the capital of a new or already existing company, in freely convertible currency or in physical or tangible goods; investments in national currency that has the right to be repatriated; conversion of private foreign debt into equity; reinvestment of profits in accordance with current laws; acquisition of assets located in Peru; intangible technological contributions such as trademarks, industrial models, technical assistance and technical know-how, patented or not, which may be classified as physical goods, technical documents and instructions; investments in securities, negotiable instruments or bank certificates in foreign or domestic currency (portfolio investment); resources for joint-venture agreements or similar agreements, which grants the foreign investor participation in the productive capacity of the company, without this involving capital contributions; any other type of foreign investment that contributes to the country’s development.
All economic activities are open to foreign investment with no restriction on the participation of foreign investors who have numerous rights. Foreign investors have the same rights as nationals and enjoy equal legal status with these and with the State. They also may acquire shares, participation or property rights from national investors.
Foreign investors may remit in foreign currency the entire amount of their profits after deducting the corresponding taxes, as well as all dividends, which are exempted from taxes. They may repatriate their entire capital in foreign currency. No government authorization is required in any of the previously cases but remittances of foreign currency should be carried out through the banking system. Foreign investors in Peru also have access to short, medium and long-term internal credit without limits.
Registration and Restrictions
Capital contributions must be channeled though the Peruvian banking system. Foreign investments to be made in the country are automatically authorized. Once made, they must be registered with the National Commission of Foreign Investment and Technology (CONITE), which will issue a certificate of registration reflecting the amount invested. CONITE is also the agency in charge of matters relating to the signing of stability agreements.
There are few restrictions on foreign investment. Article 71 of the Constitution states that foreign investors must obtain prior government authorization to acquire minerals, soils, water, forests, fuel and energy resources that lie within 50 kilometers of the national border. Acquisition of TV channels by foreigners is also restricted.
Investments in foreign currency do not require any previous official authorization. There is complete freedom to hold and dispose of foreign currency in Peru and its value is set freely by the market. The exchange rate is based on a floating rate. The Peruvian Central Bank intervenes on a reduced basis only to stabilize the Peruvian currency’s rate of devaluation against the dollar or to avoid short-term speculative movements of the exchange rate.
Moreover, there are no restrictions on the flow of capital. Investors are allowed to use foreign currency to purchase foreign goods and cover financial obligations. Individuals and companies may maintain bank accounts in foreign currency, either in local or foreign banks. Furthermore, foreign exchange losses can be charged in full to the profit and loss account.
Foreign investors do not need any type of authorization to transfer abroad funds from capital, profits, dividends and royalties. These funds can be transferred in freely convertible currency after taxes have been paid. Dividends and capital are exempted from taxes.
National and foreign investors may sign stability agreements with the government through CONITE to maintain certain legal provisions in force at the time the investment is made. The legal stability is granted for 10 years and in the case of mining investments, for up to 15 years. Legal provisions that could be locked in include tax laws, free access to foreign exchange and the right to non-discriminatory treatment between investors in companies on the basis of national or foreign participation.
To qualify for these benefits, investors must invest within the following two years after executing the stability agreement more than $5 million in any economic activity, except for mining and hydrocarbon sectors; or, invest within the following 10 years after executing the stability agreement more than $10 million in mining and hydrocarbon sectors; or acquire more than 50% of the stock of a state-owned company by participating in the privatization process.
The investor must comply with the following requirements: that one of its shareholders shall have executed the Legal Stability Agreement; that in case Tax Stability is requested, the contributions shall be greater than 50% of the paid-in capital and reserves and be destined to expanding the installed capacity or for technological improvement purposes; and that in case Tax Stability is requested, the transfer should be for more than 50% of the shares of a state-owned company in process of privatization.
Estudio Olaechea is the senior law firm in Peru and one of the oldest in the hemisphere, founded in 1878. The firm is a leader in all aspects of international business law, particularly those relating to foreign investment and arbitration.