Investing In Peru

Market Entry Strategy

U.S. products and services are highly regarded in the Peruvian market as are U.S. marketing techniques. U.S. companies are advised to appoint local representatives to investigate market opportunities and to participate in business operations. Successful companies have usually retained expert local legal counsel to successfully navigate Peru’s informal business practices, bureaucracy and somewhat unpredictable commercial climate. Caution should be exercised when responding to a Peruvian government bid for products or services to ensure it is a valid bid that conforms to the prevailing regulations. U.S. exporters may wish to contact the Commercial Service (U.S. Department of Commerce) at the Embassy, to obtain a market briefing, assistance in locating an agent, distributor, partner or arranging appointments during a business trip to Peru (Gold Key Service). Please refer to www.BuyUSA.com.pe for information about Commercial Service Lima’s services. The Foreign Agricultural Service and Economic Section (U.S. Department of State) can also provide briefings on the economic, financial, and investment climate in Peru.

Using an Agent or Distributor

Peruvian law does not require the use of local distributors for private sector commercial sales. However, for sales to the government, U.S. companies should contract and register a local agent. (See "Selling to the Government" later in this chapter.) It is also advisable to have a representative "on the ground" to stay abreast of the latest opportunities and developments in your company’s area of interest. Be diligent when selecting an agent or a representative in Peru. To maximize efficiency and minimize cost, U.S. companies may wish to take advantage of relevant U.S. Department of Commerce services by contacting the local Commercial Service Export Assistance Center (EAC) located in major cities throughout the United States, including Alaska and Hawaii. Services include the International Partner Search (IPS), which helps to pinpoint interested agents and distributors, the Gold Key Service (GKS), which arranges meetings in-country with potential company representatives (agents or distributors), and the International Company Profile (ICP), which reports on the credit and business history of individual local companies.

Establishing an Office

It is essential for companies planning to operate in Peru to retain reputable legal counsel. Law firms are referred to as “estudios” and attorneys as “Doctor” or “Doctora” followed by their last name. An attorney should be aware of matters concerning taxes on corporate and branch income, which have an identical regime, corporate residence, value added taxes, income determination, capital gains, inter-company dividends, stock dividends, depreciation and depletion, net operating losses (tax losses) and payments to foreign affiliates. Other significant issues to consider include workers’ benefits, payroll and withholding taxes, municipal operating permits and general labor laws that will affect the business when it starts operating. Most U.S. companies retain the local representative of their U.S.-based auditor. The Commercial Service in Lima can provide a list of local lawyers and/or tax and audit firms.

Foreign corporations interested in doing business in Peru on a permanent basis must be formally incorporated and registered in the Peruvian Mercantile Registry. Real estate may be acquired by any foreign entity without the need to establish an office. It is only necessary to vest a local individual with sufficient powers to conduct and close the sale. There are two main forms of business organization that can be used for these purposes: branch offices or incorporated subsidiaries.

Establishing a Branch

To establish a branch the following documents will be required:

1. Copy of the articles of incorporation of the parent company.
2. Certificate of incorporation and good standing or other official document certifying the existence and continuous operation of the parent company. This certificate must state that the parent company is not prohibited, either by law or by its own by-laws, from establishing branches abroad. If such statement cannot be included in the certificate, then a Notary Public may do so in a separate document.
3. Copy of the minutes of the board of directors' meeting where the resolution to establish a branch in Peru appears. This resolution should specify:
   1. The domicile in Peru.
   2. Duration of the branch (may be indefinite) and the commencement of operations.
   3. The purpose of the branch, clearly specifying the business and operations that will be conducted in Peru, stating that said purpose is comprised in the parent company’s purpose.
4. Name of person(s) authorized to act in the registration of the branch and in its representation, and powers vested in him/her, which must include powers to resolve any issue related to the branch activities; to hold the corporation liable for its operations; to appear in court; and to respond to suits brought against it. The holder of the parent corporation’s power of attorney, duly registered, directs the branch. The parent corporation can revoke such power anytime. There is no requirement for the parent
   company to submit its financial statements to Peruvian authorities.

A Notary Public or appropriate government official in the country of incorporation must legalize all documents granted abroad. A local Peruvian Consul must then authenticate the signatures of the Notary or the government official. The documents should be in Spanish, and if not, must be translated by an official Peruvian translator. Upon receipt, the signature of the Peruvian consul must be legalized in the Ministry of Foreign Affairs.

Registration fees are as follows:

• Registration fee: approximately 3/1000 of the assigned capital with a maximum of approximately U.S. $1,060 (one tax unit: 3,450 soles for 2007.)
• Translation fees: between U.S. $10 and U.S. $12 per page.
• Legalization at the Ministry of Foreign Affairs: U.S. $6 per document.
• Notary and legal fees: widely variable rates.

Once a residence or a domicile can be demonstrated, the foreign company must obtain the Registro Unico del Contribuyente (“RUC” or tax payer number.) The taxpayer will use his RUC number in all commercial transactions, similar to the federal tax identification number (EIN) in the United States.

Incorporating a Subsidiary

The corporation is the most common form of establishing a business entity in Peru. A minimum of two shareholders is required. One hundred percent foreign investment is allowed without restrictions, (except for a limited number of restricted activities). To comply with the rules of incorporation of a subsidiary, the following documents will be required:

If participating shareholders are foreign individuals they need only present valid identification (passport), but for corporations participating as shareholders the following documents must be filed:

1. Certificate of Good Standing; and
2. Copy of the minutes of the board of directors' meeting where the resolution to participate in the incorporation of a Peruvian company appears. This resolution should indicate the name of the person appointed as representative to act on behalf of the shareholders in all the incorporation procedures.
3. No minimum capital is required.

The Business Corporation Law regulates two forms of corporation: closed corporation (SAC: Sociedad Anonima Cerrada), similar to the private company, and open corporation (SAA: Sociedad Anonima Abierta), similar to the public company.

Closed Corporation

The closed corporation (SAC) must have a minimum of two and a maximum of twenty shareholders. The shareholders meetings, and Chief Executive Officer, manage the SAC. A board of directors is optional. In case of transfer of shares the law stipulates a right of first refusal for the existing shareholders. The by-laws may eliminate this right.

Open Corporation

The open corporation (SAA) does not limit the maximum number of shareholders and is intended for companies making public offerings. No limitations are allowed for the transfer of shares. The National Supervisory Committee of Corporations and Securities (CONASEV) supervise open corporations.

Limited Liability Companies (Sociedad Comercial de Responsabilidad Limitada) is another form of business organization that is a legal entity different from its owners, who can be either individuals or corporations. The liability of the partners is limited to the amount of their contribution. The minimum number of partners is two and the maximum is twenty. The name of the company must include the abbreviation "S.R. Ltda.". For more information on setting up a company in Peru visit the following web pages of ProInversion and the Ministry of Foreign Affairs. http://www.proinversion.gob.pe/english/orientacion/empresas/cont_3.htm

All potential investors should contact an attorney to understand the legal framework for investments found in the Foreign Investment Promotion Law, the Framework Law for Private Investment, the Law for the Promotion of Private Investment in State-Owned Companies, and the Law for the Promotion of Private Investment in Public Utility Facilities.

In the event of a dispute, national or international arbitration may be used, but only if agreed to by the parties in an agreement or contract, before the dispute arises. Arbitration cannot be imposed unilaterally after the fact as a means to resolve controversies or disputes. Please contact CS Lima to discuss arbitration venue options, as one of the leading centers has had some complaints. The American Chamber of Commerce in Peru (AmCham) maintains a fully staffed arbitration center open to members and non-members.

Franchising

As the franchise leader in a $500 million industry comprised of 120 Peruvian and foreign franchise businesses in Peru, the United States holds 70% of the franchise market share (mostly in food services.) There is no special legislation for franchising. Franchises in Peru are subject to general commercial law, Decision 486, Decision 608, Decision 291 of the Andean Community, and the general antitrust law. According to articles 162 through 164 of Decision 486 a written license agreement must be registered at the patents and trademarks office (INDECOPI – www.indecopi.gob.pe). Prospective franchisers need to be aware of a 30% income tax on royalties, 19% value added tax (paid by the local company) and an average 8.3% import tariffs. Countries that have signed double taxation agreements with Peru have a different regime on royalties withholding income tax (the U.S. is not included.) Franchises with promising potential include family style restaurants, Internet cafes, preschool educational training and security systems and services.

Direct Marketing

Direct marketing is well established in Peru in the service sector, especially among financial institutions and seminar organizers. One common practice is to hire personnel for telemarketing and mailing campaigns or to contract these services from specialized firms. Databases for direct marketing are zealously guarded and thus are not freely available. Nevertheless, commercial information can be obtained through Peru’s chambers of commerce and trade associations. Call centers (outsourcing from the U.S. or other Latin countries) are operating in Peru. Catalog sales for consumer goods in Peru are limited because of the high degree of mistrust in the quality of the product, difficulty in obtaining warranty support, and less than universal acceptance of credit card orders.

Joint Ventures & Licensing

Peruvian law allows for joint ventures and licensing agreements with a legally established local partner who will be accountable for all legal matters. Peru has largely integrated itself into the global commercial network, making it an attractive destination for joint ventures and licensing agreements. This is especially true in activities where there is local manufacturing or finishing assembly capacity and the U.S. product's market price is strongly affected by shipping costs. The textile manufacturing industry in Peru has attracted a great deal of licensing and joint venture activity. Productivity has increased through modern technology, resulting in significant production in exports for well known clothing brands. Peru offers excellent quality raw materials (e.g. high-grade cotton), skilled labor and competitive production costs.

Selling to the Government

To sell to the Peruvian government, U.S. companies may participate in a bid process, for which they must register with the National Register of Suppliers (RNP by its Spanish acronym.) The RNP has the following chapters: constructors, construction consultants, suppliers of goods, suppliers of services, and unqualified to contract with the government. An individual or company can register in any of the four first chapters and can choose to register jointly as goods and services provider. To register a company must:

1. Pay a fee at CONSUCODE according to its gross annual sales during the previous year.
2. Present the official form (available at http://www.consucode.gob.pe/) signed by the legal representative.
3. The legal representative must have its powers registered with the Peruvian Public Registry. If the powers of the legal representative are not registered, this can be done within the following 15 working days.
4. Copy of the municipal license, notarized by the Peruvian Consulate in the United States, and registered with the Peruvian Ministry of Foreign Affairs, translated by an official interpreter. If there is no municipal license or similar document in the country of origin, the legal representative may present an affidavit stating this fact, also within 15 working days after paying the fee.

Caution should be exercised when responding to a Peruvian government bid for products or services to ensure it is a valid bid that conforms to the prevailing regulations. Bidders also need to ensure it is a formal bid called by an authorized agency. In order to ensure that conflicts of interest do not occur, Peruvian law excludes all currently employed government officials from negotiating contracts for bidder firms with the government. There is no post-employment waiting period, however, for former government officials.

Peruvian law permits an independent distributor to pay commissions or fees to third parties in connection with sales to the government. For example, a company in Peru can purchase products from a company in the United States and then pay a third party a fee to resell them to the Peruvian government. There are no Peruvian restrictions on commissions or mark-ups on sales to the government by either agents or distributors, and the rates vary widely depending on product, client and competition. Government agencies usually publish tender notices in the main newspapers. The government, in an effort to ensure transparency for all government tenders, is currently using the United Nations Office for Project Service (UNOPS) to notify potential suppliers. Peru is not a signatory to the World Trade Organization (WTO) Plurilateral Agreement on Government Procurement.

Distribution & Sales Channels

The population of Peru is extremely centralized, with 30% of all inhabitants living in the capital city of Lima. Therefore, most sales occur in Lima. Sales opportunities do exist in other major population centers such as Arequipa, Chiclayo, and Trujillo. This should be a consideration for a U.S. company’s overall marketing strategy. Representatives in Lima typically have sales agents in these cities, covering sales opportunities in the provinces.

The most common method of distribution is the appointment of a qualified representative. Appointing an agent or distributor is advisable if your company is serious about developing the market on a sustained basis. At present, U.S. companies are successfully locating qualified local agents.

The decentralization of budgets, delegation of decision making to regional governments, the use of “canon” or tax imposed on extractive industries are important considerations when considering a local representative outside of Lima. It can also make completing the sale more challenging especially for municipal or provincial procurements due to the relative lack of financial and procurement expertise. The Ministry of Finance and Pro-Inversion have plans to provide more hands-on support to regional governments in 2007.

An alternative approach to distribution is to establish a local subsidiary or branch office. Companies with a complicated product or service use this method because it allows for effective after sales service and more aggressive promotion of your product. Expenses for commercial and industrial space are relatively high in the Lima area, however, making this an expensive option.

Selling Factors & Techniques

Product pricing is a key selling factor in the Peruvian market. Inexpensive products from Asian countries such as Taiwan and Korea outsell more expensive European or North American consumer products in the realm of consumer electronics, appliances and automobiles. Seconds, knockoffs and pirated goods are problematic as well. However, with investment in sales promotion and service infrastructure, U.S. goods can be competitive. The strengthening of the Nuevo Sol versus the U.S. dollar has increased the attractiveness of U.S. product imports.

Equipment performance and efficiency influence the decision maker when purchasing capital goods, notably advanced electronics and construction machinery. The customer often prefers more expensive U.S. or European products, which are highly rated for quality, durability, technology, customer support, and regional service.

Many of the larger representatives have small regional offices in a few additional cities outside of Lima. The rest of Peru is largely under populated, underdeveloped and does not offer an attractive market for technical equipment, with certain exceptions, such as the large-scale mining operations located along Peru’s sierra (central mountain range). Payment for major purchases is generally on a net 30-day basis. For new market entrants, or when dealing with new customers, it is advisable to request up front payment or work on a confirmed, irrevocable letter of credit basis. Over the counter purchases are done in cash (U.S. dollars are widely accepted), check or credit card. Most retailers use credit terms as a sale technique and major department stores issue their own credit cards.

Electronic Commerce

The Peruvian E-commerce market is developing slowly. It is small by international standards. B2B type commerce is conducted between large enterprises and the percentage of transactions is growing modestly. These companies use B2B as a commercial practice that will cut operational costs and thus increase their revenues. Most large and medium size firms do not clearly understand the real importance of B2B and B2C solutions. They focus mostly on cost reduction rather than using this new distribution channel and developing products/services to enhance their reach.

Trade Promotion & Advertising

Lima boasts 30 daily newspapers, a few of which strive for national coverage. Locally oriented newspapers can be found in most provincial capitals. First in terms of influence and national readership is "El Comercio," which is also the nation's oldest paper with more than 160 years of continuous publication. Other serious major dailies include "La Republica," “Peru.21,” the independent business daily "Gestion", tabloids “Correo” and “Ojo”, daily “Expreso,” and the official gazette “El Peruano.”

Radio enjoys the largest audience of all communications media, reaching even the most isolated populations in Peru. It is often the first source of current news, and is the principal vehicle for transmitting information about local issues and events outside of Lima. However, it has little power to shape opinions, particularly among Peru's decisionmakers. In all, there are over 1,000 radio stations in Peru, broadcasting on AM, FM, and short wave frequencies. Many of these stations are small storefront operations that serve relatively limited audiences. Radio's most influential source of news and information is "Radio Programas del Peru" (RPP), one of the many electronic media holdings of the Delgado Parker family. With transmitters and correspondents in virtually every important city in Peru, RPP constitutes Peru’s only true national radio network. In most major cities, including Lima, RPP leads most AM ratings and is second in FM audience to music-oriented "Radio Panamericana."

Television permeates the urban environment in Peru and has become increasingly available to rural audiences as well. As in the United States, television is often the primary source of news for a majority of those who have access to it. The most important players in TV are the six Lima-based television networks, along with a government-owned service, which for years was the only station available in many parts of Peru. These seven broadcasters use affiliates in the provinces much like their counterparts in the United States. In addition there are several independent stations that serve particular cities and regions.

Cable television has also begun to make inroads into the Peruvian market with over 100 cable TV and MMDS (Multichannel Multipoint Distribution Service) companies serving approximately 600,000 homes in different areas of Peru. The main cable service companies are Telefonica del Peru offering “Cable Magico”, with 490,000 subscribers; Corporacion Vicmar S.A. (Panama) with its product “Cable Express” former ”Telecable”, acquired from BellSouth/Tele 2000), with less than 5,000 subscribers; Star Global Com (part of the US company Liberty Media) serving Arequipa and Tacna with about 11,000 subscribers; and The DirecTV Group, Inc. (Great Britain), offering its new cable service "DirecTV" with less than 5,000 subscribers. Their packages include CNN and programming from other Latin American, Asian and European countries. The remaining cable companies are small firms offering their service in concentrated areas surrounding Lima or in the provinces.

Pricing

In general, Peru is a very open market, with minimal trade restrictions. The weighted average tariff is 5.6%. Distributor mark-up varies according to type of product, but usually ranges between 12% and 25%. All imports are subject to a 19% value-added local sales tax, which can be used as a tax credit by the importer. There are some exceptions: enterprises established in the industrial free zones and special treatment zones; and companies that have their operations in the jungle regions of Loreto, Ucayali, Madre de Dios, Amazonas, and San Martin, in accordance with the Peruvian-Colombian Amazon Cooperation Treaty. Some luxury items have higher tariffs and some specific goods such as cigarettes, beer, wine, liquors and automobiles, pay an excise tax according to the lists and rates included in Appendixes III and IV of Legislative Decree No. 821 (passed on April 23, 1996). In July 2000 the excise tax for new automobiles was reduced to 10%, while that applied to used ones was left at 30%. Imports from countries with which Peru has bilateral or regional agreements are covered by different, preferential tariff schedules.

Sales Service & Customer Support

Peruvians consider service and support a critical factor in making the final purchasing decision, especially for products that require periodic servicing. It is important for the product to be sold through a reliable distributor that offers the quality and services that the client requires. For example, servicing and availability are currently the two perceived advantages that new Asian autos enjoy over their U.S. competitors in the Peruvian market. Another example would be mining equipment, where the U.S. equipment after-sale service enjoys a superior reputation to that of third country competitors.

Protecting Your Intellectual Property

Protection of intellectual property rights (IPR) in Peru has improved over the past decade, but still falls short of U.S. and international standards in several areas. Peru remains on USTR's Section 301 "Watch List" due to concerns about continued high rates of copyright piracy, a lack of protection for confidential test data submitted for the marketing approval of pharmaceutical and agrochemical products, and inadequate enforcement of IPR laws, particularly with respect to the relatively weak penalties that have been imposed on IPR violators.

The Peruvian government agency charged with promoting and defending intellectual property rights is the Institute for the Defense of Competition and Protection of Intellectual Property (INDECOPI, http://www.indecopi.gob.pe), established in 1992. Legislative Decree 822 of 1996 and Andean Community Decisions 344 and 486 protect patents, trademarks, and industrial designs. Copyrights are protected by Legislative Decree No. 822 of 1996 and by Andean Community Decision 351. Peru belongs to the World Trade Organization (WTO) and the World Intellectual Property Organization (WIPO). It is also a signatory to the Paris Convention on Industrial Property, Geneva Convention for the Protection of Sound Recordings, Bern Convention for the Protection of Literary and Artistic Works, Brussels Convention on the Distribution of Satellite Signals, Phonograms Convention, Satellites Convention, Universal Copyright Convention, the World Copyright Treaty, and the World Performances and Phonographs Treaty and the Film Register Treaty. In December 1994, the Peruvian Congress ratified the World Trade Organization's Agreement on Trade-Related Aspects of Intellectual Property (TRIPs).

Peru’s legal framework provides for easy registration of trademarks and inventors have been able to patent their inventions since 1994. Peru’s 1996 Industrial Property Rights Law provides an effective term of protection for patents and prohibits devices that decode encrypted satellite signals, along with other improvements. Peruvian law does not provide pipeline protection for patents or protection from parallel imports. Although Peruvian law provides for effective trademark protection, counterfeiting of trademarks, copyrighted products, and imports of pirated merchandise are widespread. The International Intellectual Property Alliance estimates that the piracy level in Peru for recorded music was 98 percent in 2004-2005, with damage to U.S. industry estimated at $100 million. IIPA estimates motion picture piracy accounts for 60 percent of the market for a loss of $5.5 million. Indecopi considers that software piracy levels remained the same as 2004 levels, at 56 percent.

Peru’s Copyright Law is generally consistent with the TRIPs Agreement. However, textbooks, books on technical subjects, audiocassettes, motion picture videos and software are widely pirated. While the government, in coordination with the private sector, has conducted numerous raids over the last few years on large-scale distributors and users of pirated goods, and has increased other types of enforcement, piracy continues to be a significant problem for legitimate owners of copyrights in Peru. Despite increased enforcement actions by INDECOPI, the judicial branch has failed to impose sentences that adequately deter future IPR violations. The Peruvian government in July 2004 increased the minimum penalty for piracy to four year’s imprisonment, although there have yet to be any convictions under the new law. Peru now has six prosecutors (two fiscalias) dedicated full-time to intellectual property cases. In November 2006, five courts in Lima were assigned IPR duties.

As a practical matter, exporters and distributors should hire local counsel who specializes in IPR issues if they are concerned about piracy of their products in Peru. The Commercial Service has prepared the Ambassador’s IPR Toolkit which can be downloaded by clicking the following link: http://www.buyusa.gov/peru/en/166.html. A list of attorneys specializing in intellectual property is available from the Commercial Service office. Law firms that handle IPR matters can also assist in launching anti-piracy enforcement actions in collaboration with the government of Peru.

Due Diligence

U.S. businesses considering exporting to or investing in Peru should perform due diligence on their potential clients, associates, or partners. As a first step, the International Company Profile (ICP) program of the U.S. Commercial Service can provide a background check on the reliability of potential clients or partners. The ICP report includes information on a company’s owners, year established, size, sales, financial information and reputation in the market. The Commercial Service and the Economic Section of the U.S. Embassy in Peru are also available to provide commercial and economic briefings to U.S. businesspersons traveling to Peru.