Top 10 Challenges of Doing Business in Peru
Article 4 minute read

Top 10 Challenges of Doing Business in Peru

15 June 2018

Peru offers attractive and profitable investment opportunities in a wide range of industries. Here are the top ten challenges you should know about doing business there.

Peru has one of the fastest growing economies in Latin America, even taking into account the slower 2017 growth of 2.5% (below that of 2016 (3.9%) and 2015 (3.26%) and below 2.8% which is the official estimate given by the Ministry of Economy and Finance. However, for 2018, according to IMF projections, the growth should be 4%. Economic growth has been driven by an increase in private investment, modernisation and development.

Peru offers a favourable, if complicated, legal framework for foreign investment and a friendly investment environment, reflected in the World Bank Ease of Doing Business Survey, where Peru ranks 58th overall. The top industries in Peru include mining, manufacturing, energy, petrochemical, tourism and real estate.

1. Starting a business

Starting a business in Peru, is a bureaucratic process, ranking it 114th in the World Bank Ease of Doing Business Survey. It takes around 27 days and seven procedures to set up a business. The heaviest procedures are signing the deed of incorporation before a notary public and filing it online with the Public Registry of Commerce, which takes 8 days, and obtaining a Municipal license from the District Council which takes 15 days. When the shareholders are from abroad, the incorporation process usually takes much more time.

2. Resourcing your business

Companies looking to do business and hire workers in Peru must be aware of all the local payroll rules and how to remain compliant to the payroll cycles. Peru’s Compensation for Length of Service (CTS) is a legal benefit given to workers for their time spent working for a company, made at the time of retirement. The CTS is deposited biannually in the worker’s bank of choice. Employers deposit 50% in May, for the period worked from November to April, and 50% in November for the period worked from May to October. If a company does not submit CTS payment in a timely manner it will be required to pay interest, accrued from the due date until the date the payment is made.

3. Dealing with construction permits & registering property

The World Bank ranks Peru 61st for ease of dealing with construction permits and 44th for registering a property. Dealing with construction permits takes 15 procedures and an astonishing 188 days! Other registrations include obtaining a construction license from the Municipality (licencia de obra para edificación nueva), which takes 45 days and obtaining drinking water service installation, which takes 50 days.

Registering a property is much more straightforward with just five procedures and takes 8 days.

4. Getting electricity

Obtaining electricity in Peru takes a couple of months and involves submitting an application to Luz del Sur and awaiting feasibility study and budget, which takes 17 days. This is followed by signing the supply contract and awaiting completion of external works by Luz del Sur, which can take around 50 days.

5. Regulatory changes

Transfer Pricing obligations in Peru are now being regulated in more detail than ever before. This could mean that intra-group operations will be subjected to greater scrutiny by the Peruvian tax authorities. The changes include more detail required for all files, including the minimum information required, such as identifying the personnel on whom the company's management and administration depend. Having local support is essential.

6. Transparency

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

7. Protecting intellectual property

Court rulings and the degree of enforcement are often inconsistent and allegations of political corruption and outside interference in the judicial system are common. While the legal framework for protection of intellectual property (IP) in Peru has improved over the past ten years, unfortunately enforcement remains weak. Stricter penalties for IP theft have been brought into law, yet they have still to be implemented. There have also yet to be convictions and penalties for IP violations.

8. Paying taxes

The World Bank Ease of Doing Business Survey ranks Peru 121st for paying taxes. It involves nine payments per year and 260 hours. Profit and labour taxes are the main ones, with corporate tax at 29.5%. All residents are taxed on income that they earn worldwide, while non-residents are taxed only on Peruvian earned income. For the purposes of taxation, a resident is a Peruvian national or a foreign national that has spent more than 183 days a year in the country.

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

9. Enforcing contracts and resolving insolvency

Peru is a little challenging and bureaucratic regarding contracts and insolvency. When enforcing contracts, anticipate around 430 days, 175 of which is enforcing the court judgement. This can cost around 36% of the claim. Dispute settlement generally remains problematic in Peru, and therefore it is recommended to include an arbitration clause in commercial agreements. Resolving insolvency takes over 3 years and the recovery rate is only 30 cents on the dollar.

10. Cultural barriers

Some of the cultural considerations you may need to factor in when doing business in Peru include handshakes as the most common greeting when 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. Or, when introducing a male and female, it is common practice for them to kiss each other once on the cheek. This practice is common among urban people, but not among Andean people who prefer handshaking and a hug. In conversations, relationships can be affected by volume and tone of voice: Peruvians usually speak softly, as speaking loudly is considered disrespectful.

Also, Peruvians are very proud of their food and archaeological heritage such as Machu Picchu, Nazca lines and Cuzco. 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.

Contact our local TMF Group experts

TMF Group has the local knowledge to help you identify and face any challenge or opportunity for your business. Whether you want to set up in Peru or just want to streamline your Peruvian operations we have the local knowledge to help. Talk to us today.

Learn more about TMF Peru.

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Written by

Esteban Hilgert

Managing Director
Esteban

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