Disposals of Shares Among Related Parties

December 12, 2023

The disposal of shares refers to the sale or transfer of shares of a company from one shareholder to another. In the context of financial markets, shares represent the ownership of a part of a company. Therefore, this process entails the transfer of ownership of the shares and may result in financial and tax implications.

If related parties had a share disposal transaction, these are within the scope of the Transfer Pricing regulations, according to Article 32°-A of the Income Tax Law.

 

As from Legislative Decree 1539, paragraph 2 of Article 32 of the Income Tax Law is modified to establish the market value when the quotation value does not apply to the disposal of shares or equity stakes representative of capital.

 

Methodology Description
Discounted Cash Flow Method It is applicable when the legal entity proves a foreseeable horizon of future cash flows or has elements, such as licenses, authorizations, or intangibles, supporting the existence of such cash flows. The market value calculated under this method must be supported through a technical report containing the minimum information established by the Regulation.

It should be noted that this methodology will not apply when:

 

ü The transferor holds a shareholding lower than 5% of shares and equity stakes representative of the paid-up capital of the legal entity whose shares or equity stakes are being transferred.

ü The income accrued in the previous taxable year of the issuing company does not exceed 1’700 Tax Units (S/. 7’820,000).

Equity Method of Accounting When the discounted cash flow method does not apply, the market value will be the value of the equity participation.

 

On the other hand, Supreme Decree No. 326-2022-EF amends Article 19 of the Income Tax Law Regulation regarding the market value of securities and establishes considerations for the application of the Discounted Cash Flow and Equity of Accounting methodologies, as detailed below:

Methodology Description
Discounted Cash Flow Method Projection:

ü Cash flow period, which must have at least ten (10) years. In case the business unit or economic activity of the company lasts for a shorter period, the balance of the duration is considered.

 

ü  Discount rate:

 

Company’s cash flow: WACC.

Shareholder’s cash flow: COK

 

ü Continuity value: Residual value.

 

ü Other considerations: For the projection of the main cash flow accounts, the growth rate of the economic sector, the expected variation of prices, or the growth rate of sales based on historical information, among others, may be considered.

 

Determination of the Value of the Shares or Equity Stakes of the Issuing Company:

 

ü Company Cash Flow:

 

Ø Company cash flow:

 

a)   The total value of the discounted future cash flows is added to their current value.

 

b)   To the result obtained in the previous sub-item is added or deducted, as appropriate, the debt for financial obligations, cash, the appraisal value of non-operating assets, contingencies, and other assets available for sale, among others.

 

c)   The result obtained in the previous sub-item is divided by the number of shares or equity sttakes issued.

 

ü Shareholder’s Cash Flow:

 

Ø Company’s cash flow

 

a)    The total value of the discounted future cash flows is added to their current value.

 

b)    To the result obtained in the previous sub-item is added or deducted, as appropriate, interest, the difference between the principal of the debt for the financial obligations acquired less the principal of the financial obligations granted or awarded, the appraisal value of non-operating assets, contingencies, and other assets available for sale.

 

c)     The result obtained in the previous sub-item is divided by the number of shares or equity stakes issued.

 

Methodology Description
Equity Method of Accounting  

ü The balance sheet used for the calculation of the value of the equity of the legal entity must have been closed within ninety (90) days before the referred disposal and audited by an auditing corporation domiciled in the country and currently registered in the Registry of Auditing Corporations of a College of Certified Public Accountants.

 

ü When the capital stock of the legal entity is reduced within ninety (90) days before the disposal, the balance sheet on which the value of the equity of the legal entity is determined is the one that corresponds after the referred reduction.

 

ü After determining the value of the equity of the legal entity, the value of the shares or equity stakes is calculated by dividing the value of all the equity of the issuing company by the number of shares or equity stakes issued, adjusting for inflation for tax purposes, if required for the legal entity.

 

ü When the last balance sheet closed before the disposal date is applied, increased by the monthly average active market rate in local currency, it must have been closed within ninety (90) days before the disposal and prepared under the accounting standards officialized or approved, as appropriate, by the competent body in the country of domicile or residence of the issuing company.

 

ü If the capital stock of the legal entity is reduced within ninety (90) days before the disposal, the balance sheet on which the equity value of the legal entity is determined is the one corresponding after the referred reduction. The monthly average active market rate in local currency is that published by the Superintendency of Banking, Insurance, and Private Pension Fund Administrators on the date of disposal of shares or equity stakes or, if not, the last one published.

 

ü When the appraisal value is applied, it shall be established within six (6) months before the date of disposal of shares or equity stakes.