Peru Advice: Employee Profit Sharing
Understanding the intricacies of each country is extremely important when growing your business internationally. Almost all countries in Latin America have more generous labor legislation than Western countries including Australia. Peru is no different. Profit Sharing can have a substantial impact on the finances of a growing business which is why we always advise clients to understand their obligations and if needed, create a strategy to manage the impact.
The following conditions apply regarding the right of the employees to have a share in the profits of a company:
- The right only applies in the case of corporate entities that qualify as a business, this means, to the ones that are taxed with the corporate income tax.
- The right only applies to companies that generate net profits. From a Peruvian Corporate Tax Law standpoint, a corporate entity has net profits when after deducting tax costs and deductions from the total annual revenue produced in a fiscal year, the entity has still net profits subject to income tax.
- The right only applies to corporate entities with 20 or more payroll employees (on average during the previous year).
- The right is not contingent to the revenue or equity size of the entity. It applies both to SMEs and big corporations.
- The right applies to any corporate entity incorporated and domiciled in Peru, independent from the corporate form, and both to foreign and locally controlled companies.
- The right applies to companies in all industries and areas of business, although the percentage of the profit share to be applied to be contingent on the industry and business activity of the company.
The Profit Share system will not apply:
- To employers that do not qualify as a business, such as a non-profit association, a non-profit foundation, a charity, a Government Agency, etc.
- To corporate entities that generate losses or a neutral result and thus do not produce any net profit.
- To employers that have less than 20 payroll employees.
For an employee to acquire the right to have a share in the profits of the employer, the employee shall:
- Have an employment relationship with the Corporate Entity (freelancers, trainees, and independent services providers do not qualify for receiving the benefit).
- Have effectively worked during the previous year (employees who were all year on leave will not qualify).
- The benefit applies for both full time and part time employees, and for open end and term employment agreements.
- Employees that do not have a full record, because the employment agreement terminated before the end of the year, or because the employee started at some point during the year, will still receive the benefit.
Calculation of Profit Share:
The employer’s main business activity will decide what will be the percentage to be applied to the Net Profits:
- Fishing – 10%
- Telecommunications – 10%
- Manufacturing – 10%
- Mining – 8%
- Wholesale, retail, and restaurants – 8%
- Other activities – 5%
The Corporate Entity will be in a position to calculate the Profit Share, once the Financial Statements have been approved by the Annual Shareholders Meeting (the deadline is March 31, each year) and once the Entity has filed with the Tax Revenue Service the annual income tax returns (between March 22 and April 9). From the deadline date for filing the tax returns, the Employer has 30 days to calculate and pay the Profit Share.
Once the percentage has been applied over the net profits, according to the industry of the Employer, the Employer will calculate the total amount to be distributed among all employees entitled to receive said benefit. The exact amount to be paid to each employee will be calculated according to the following criteria:
- 50% of the total amount will be distributed among all employees, based on the days effectively worked by each employee.
- The remaining 50% will be distributed in proportion to the salary of each employee.
There are strategies available to mitigate some of the risks associated with the profit share legislation. Companies that enter Peru and project to grow their headcount over a number of years should develop their plans early because some of the mitigation strategies involve structuring their business and employment relationships in a specific way. This is much easier to be done when the company is small since companies can not unilaterally change the employee’s work contracts without their consent.
Harris Gomez Group is a Common Law firm, with offices in Santiago, Bogotá, and Sydney. We also have legal teams in Peru, Mexico, Brazil, and Argentina. Over the last 16 years, we have been supporting foreign companies with their growth in Latin America. Many of our clients are technology companies, service providers and engineering companies that focus on the mining, energy and infrastructure markets.
To better understand how we can support your management team in the Region, please contact Cody Mcfarlane at email@example.com
 Article 29º of the Political Constitution of Peru of 1993.
 Legislative Decree 677, Legislative Decree 892, Law 28873 and Supreme Decree 009-98-TR.
 Regardless if at the time of the profit sharing there is no employment relationship.