Peru Practical Advice – Employee Profit Sharing

Peru has been one of the fastest growing economies in Latin America over the last decade. One of the standout sectors which is attracting global attention has been the mining industry, which is the second largest copper producer after Chile.

The potential of the Peruvian mining industry is attracting many foreign companies to the market who are looking to provide equipment, technology, and services.  It also means that companies need to adapt to new labor laws which are quite generous to workers in comparison to North America or Australia.

One of the specific areas that companies need to consider when doing business in Peru is is how employee profit sharing works. The right of employees to receive a share in the employer’s net profits is a benefit covered by Peruvian Constitution and developed through several employment-related legal provisions.

Employee Profit Sharing Overview

Profit-sharing is an employment benefit which involves withholding a percentage of the employer’s business income to directly distribute it among the employees.

Employees are entitled to profits under the following circumstances –

• The business must be incorporated using a legal structure as per Peruvian Corporate Law and subject to corporate income tax. 
• The business generates net profits. Net profits under Peruvian law are determined after deducting tax costs and deductions from the total annual revenue produced in a fiscal year, leaving net profits that are subject to income tax. 
• The business has 20 or more payroll employees (on average during the previous year). 
• The revenue or equity size of the entity is not important. The law applies to all companies regardless of their size as long as they have more than 20 employees. 
• The law applies to all industries and areas of business, although the actual percentage used to calculate the profit share is contingent on the industry and business activity of the company. 

Companies are not required to distribute profits under the following circumstances –

• Companies that do not qualify as a business under Peruvian law. For example, non-profit association and government agencies. 
• Companies that generate losses or do not produce any net profit. 
• Companies that have less than 20 employees on their payroll. 

Employees need to meet the following requirements to be eligible for the profit sharing –

• Prove that there is an employment relationship with the business. In this case, freelancers, trainees, and independent service 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 who have employment agreements, regardless, if they have a fixed term or open-ended employment agreement.
• The benefit applies even if employees do not have a full year of employment with the company or if their position ended before the end of the year. The amount will be determined by the time they worked in the company.

How to calculate the employee profit share amount?

The companies main business activity will determine the percentage that would be applied to the Net Profits: 

How are the individual employee amounts calculated?

Upon the payment of employees’ profit-sharing, companies must provide all current and former employees with a statement detailing the method applied to compute such payment.

• 50% of profits are prorated among employees, by dividing such amount between the total sum of the days worked by all employees during the year, and the result is multiplied by the number of days worked by each employee.
• 50% of profits are prorated among the employees, by dividing such amount between the total sum of the salaries paid to all employees during the year, and the result is multiplied by the total of the salaries paid to each employee.

When is an employee profit share paid?  

The Profit Share is calculated once the companies have filed its yearly declarations with the Peruvian Tax Revenue Service which is between March 22 and April 9 of each year. The company the has 30 days to calculate and pay the Profit Share from the deadline to file the Annual Income Tax Return.

Conclusion

Peru already has substantial employment costs with other bonuses required by labour legislation and the employee profit sharing can be difficult to understand for companies who are not accustomed to it. For this reason, it is important to have advisors that can explain how it works and provide proper guidance on strategies to manage it. Companies will need to take these factors into consideration when opening their Peruvian entities and hiring employees. 

Ax Legal is an advisory firm that works with foreign companies in Latin America. Our team of legal and commercial advisors have a distinguished track record of helping foreign technology and services companies to grow and operate in Latin America. Over the years, we have worked with starts up, mid-size businesses, and publicly listed companies. The one common factor that connects our clients is that they are leaders in their field, providing innovative technologies and services to the industrial sectors.

To better understand how we can support you in the Region, please contact Cody Mcfarlane at cmm@ax.legal