the legal and regulatory framework for cso self-financing in peru

This publication contains information prepared bysources outside NESsT, and opinions based on thatinformation. NESsT strives to provide accurate infor-mation and well-founded opinions, but does notrepresent that the information and opinions in thispublication are error-free. The laws and regulationscited herein may change.

This publication is for informational purposes, andNESsT is not engaged in providing legal advice. Aslegal advice must be tailored to the specific circum-stances of each situation, the information and opin-ions provided herein should not be used as a substi-tute for the advice of competent counsel.

For more information on NESsT, its publicationsand services, please contact: NESsTJosé Arrieta 89, Providencia Santiago, Chile Tel: +(56 2) 222-5190. [email protected]

The Legal and RegulatoryFramework for CSOSelf-financing in Peru

Peru October

2007

Nonprofit Enterprise and Self-sustainability Team (NESsT)

NESsTLegalSeries English

Copyright © 2007 NESsT. Do not cite, copy, distribute or duplicate without prior written permis-sion from NESsT.

Written by Beatriz Parodi

Edited by Nicole Etchart

This guide examines the legal and regulatory framework governing the

self-financing activities of civil society organizations (CSOs) in Peru and

provides an assessment of the relevant laws and their practical effects in

order to identify areas where the law might be improved. Chapter 1

explains the regulatory environment as it relates to self-financing, defines

the concept of CSO self-financing, and explains the methodology NESsT

used in researching and assessing the current legal framework in Peru.

Chapter 2 outlines a typology initially developed by the International

Center for Not-for-Profit Law (ICNL). Chapter 3 describes the current regu-

latory framework in detail and its application in Peru. Although CSO self-

financing activities are permitted in Peru, this chapter illustrates that tax

laws vary, especially in regard to income tax, depending on the social pur-

pose of the organization. This chapter also explains the procedures for

CSOs to follow and includes a case study. Finally, Chapter 4 discusses the

Peruvian legal framework for CSOs carrying out commercial activities and

makes recommendations for improvement.

The Legal and Regulatory Framework

for CSO Self-financing in Peru

October 2007

Beatriz Parodi Luna is a Peruvian attorney, legal con-

sultant and specialist in nonprofit entities and interna-

tional technical cooperation. Beatriz was responsible for

the legal editing of this guide, based on her knowledge

of the Peruvian legal framework for nonprofit organiza-

tions, as well as the development of chapters 3 and 4.

She has been a professor in the area of Legal Entities at

the School of Law of the Pontifical Catholic University of

Peru (Lima). Beatriz currently works as a legal consultant

for public and private entities in general, both for-profit

and nonprofit, with a special emphasis on the latter. She

has conducted research on the Third Sector and corpo-

rate social responsibility and has presented at a variety

of national and international events and conferences on

the Peruvian legal framework for nonprofit entities. She

is a member of the Advisory Council of the International

Center for Not-for-Profit Law (ICNL) and a member of

the board of the Peruvian Association of Alumni of IDLO

(International Development Law Organization, based in

Rome).

The International Center for Not-for-Profit Law provided

the typology for classifying the use of economic or com-

mercial activities among civil society organizations and

the framework for assessing the Peruvian legislation.

Anna Zucchetti, CEO of GEA, provided information on

the organization´s legal status and the legislation that

governs its self-financing activities. The guide was edited

by Nicole Etchart, Co-founder and CEO of NESsT. It was

translated by Kerry Dudman, and developed with the

editorial support of Rosario Payet, Ana Victoria Soto,

Hazel Vargas, Kora McNaughton and Carola Delgado;

Jorge Moraga did the layout.

Finally, NESsT would like to acknowledge and thank the

International Finance Corporation (IFC) Grassroots

Business Initiative; the Multilateral Investment Fund (MIF)

of the Inter-American Development Bank; Open Society

Institute Foundation (Zug); CARE Enterprise Partners; the

Rohatyn Group; and the Tinker Foundation for their sup-

port in the development and publication of this guide.

2

NESsT wishes to acknowledge the following people for

their invaluable contribution to the development and

publication of this guide:

NESsT

The term “civil society organization” (CSO1)encompasses nonprofit, non-state organizations aswell as community-based associations and groupsthat fall outside the realm of the government andbusiness sectors. Given limited philanthropic andgovernment assistance, many CSOs undertakeself-financing activities2 to generate revenues insupport of their mission and programs.

NESsT has documented hundreds of cases ofCSOs in Latin America and Central Europe whichengage in these types of activities, and has ana-lyzed the impact of these strategies on the organi-zations’ performance and sustainability. Animportant factor that emerged from this researchis the need for a clear and supportive legal andregulatory framework to encourage the adoptionof self-financing strategies among CSOs. Thisframework defines whether or not CSOs mayengage in self-financing activities and influencesthe way in which they do so. The tax structure,the level of bureaucracy, and the clarity of exist-ing laws are also factors that have a direct bearing

3

Setting the Stage:

Purpose and Methodology

Chapter 1The Legal and RegulatoryFramework for CSOSelf-financing in Peru

1 In Peru, this definition includes the legal classifications of associa-tion, foundation, and committee.

2 NESsT uses the term “self-financing” to refer to diverse strategiesused by civil society organizations to generate their own revenues(sale of products, service fees, use of hard or soft assets, member-ship dues, and investment dividends). NESsT uses the term “social

enterprise” to refer to self-financing activities that are designed by aCSO to significantly strengthen the financial sustainability and themission impact of the CSO.

on the development of self-financing activities.CSOs are often unaware of these regulations.Many organizations believe that they cannot prac-tice self-financing activities or income-generatingbusiness activities; others feel that if they do, theirreputation or relationship with donors will beadversely affected. Even when CSOs are aware ofthe respective legislation, they often do notunderstand what taxes they need to pay, whatforms to file, or what administrative procedures tofollow.

The purpose of this guide is to clarify the legalframework for CSOs in Peru and to assess thedegree to which this framework provides anenabling environment for them to pursue self-financing strategies.

1.1 What Is Self-financing and Why Is ItImportant?

Self-financing or self-financing strategies are usedby CSOs to generate revenues in support of theirmissions. The use of these strategies is a responseto the current funding paradigm in which CSOscompete for a limited pie of existing governmentand philanthropic funding from both nationaland international sources. This reality makesmany CSOs heavily dependent on short-term,project-based funding and prevents them fromfocusing their attention on long-term, strategicdevelopment. Through self-financing, CSOs maybe able to increase their long-term viability andindependence by generating some of their ownresources to supplement support from public andprivate donors.

Self-financing does not necessarily lead to thecommercialization of CSOs. Rather, it can providethese organizations with a greater level of inde-pendence and sustainability without compromis-ing their mission purpose or values. Income fromself-financing can be one alternative for CSOs tosupport work that is often more difficult to

finance through traditional sources of funding,such as core operating expenses, new programs,advocacy efforts, and others.

NESsT does not believe that self-financing shouldentirely replace traditional sources of financing,but instead posits that self-financing can provide apowerful complement to government and philan-thropic support. Through self-financing, manyCSOs are not only financially strengthened, butalso institutionally empowered by their own abilityto generate new revenues and to determine thecourse of their work with fewer constraints fromdonors.

Furthermore, when pursued in a socially and envi-ronmentally responsible manner, the enterpriseactivities of CSOs can help create an “alternativeeconomy” more responsive to the needs of localcommunities, small producers, and low-incomepeople. By purchasing products and services soldby CSOs, consumers are simultaneously promot-ing their missions and contributing to a moreequitable and sustainable world.

Types of self-financing activities include the fol-lowing:

• Membership dues: raising income through duesfrom members or constituents in exchangefor some kind of product, service, or otherbenefit. An example of this would be anewsletter or magazine for members, or dis-counts on products or services3. If the fee isnot paid in exchange for a product or serv-ice, it is considered a donation.

• Fees for services: capitalizing on some existingskill or expertise of the organization by con-tracting work to paying clients in the publicor private sector (for example, a CSO pro-vides consultation services to businesses orlocal government agencies).

• Product sales: Selling, rather than giving away,



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3 NESsT is aware that under the current legal framework in Peru,membership dues are not considered business activities.



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the products of projects (for example, booksor other publications); reselling products(for example, in-kind donations) with amark-up; or producing and selling new prod-ucts such as T-shirts or mugs.

• Use of “hard” assets: renting out real estate,space/facilities, equipment and other assets,when not in use for mission-related activities.

• Use of “soft” assets: generating income frompatent licenses or other intellectual propertyor by endorsing products with the CSO’sname or reputation.

• Investment dividends: passive investments suchas savings accounts and mutual funds, orother more active and sophisticated financialtransactions (for example, active trading onthe stock market or engaging in debt swaps).

As previously mentioned, CSOs engage in self-financing activities primarily to strengthen theirfinancial resources or to advance their social pur-pose. Some of these may be solely interested ingenerating profits that they can use to fund coremission programs. In these instances, the organi-zation is not concerned with advancing its socialmission directly through self-financing, but ratherindirectly by applying the profits earned throughthis activity to further its social mission. An exam-ple of this is a health education organization thatstarts a printing business and uses the revenues tofund research projects. This activity would be con-sidered non-mission-related.

Other CSOs may be primarily interested in usinga self-financing strategy to advance their socialmission. For example, a CSO whose social missionis to offer carpentry training and job placementto recovering substance abusers may begin sellingthe furniture that the trainees produce in orderto pay for the costs of the materials and thesalaries of the trainees. This activity would be con-sidered mission-related.

These two examples are not mutually exclusive,and neither are the financial and social goals thatmotivate CSOs engaging in self-financing activi-ties. Many times, CSOs aim to achieve financialand social goals simultaneously through self-financing. The health organization may be betterpositioned to disseminate the findings from itsresearch by publishing its own materials, and thejob training organization may be able to applysurpluses from its furniture sales to fund otherprograms of the organization or its core operat-ing expenses. In each of these scenarios, theobjectives of CSO self-financing activities and therelationship between these activities and the orga-nization’s primary mission are fundamental indetermining the legal treatment of these activi-ties, as this guide will illustrate.

Generally speaking, all legal entities (as is the casewith CSOs in Peru that are organized under thelegal classifications of association, foundation,and even committee; the most common of theseis association) are governed by “specialty” doc-trine. This implies that they may undertake anyactivity or contract that is directly or indirectlyrelated to their social purpose.

1.2 Purpose and contents of this guide

In an attempt to diversify their funding base,many Peruvian CSOs have initiated self-financingstrategies. For the most part, however, most ofthese have done so with little expertise, capital, orother forms of support. NESsT research on theuse of self-financing among CSOs in LatinAmerica in general and in Peru in particular,demonstrates that many do not have the internalcapacity (skills, human resources, adequate finan-cial systems, stakeholder support, business plans)or the external support (financing, consultingsupport, favorable legal and regulatory environ-ment) to engage in self-financing activities. Whensuch organizations nevertheless attempt to pursueself-financing strategies, a great deal of stress is



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This typology was first developed by theInternational Center for Not-for-Profit Law (ICNL)to examine the legal treatment of CSO economicand commercial activities in Central and EasternEuropean countries4. It has now become a widelyaccepted typology for understanding and assessingthe tax treatments of such activities. The ICNLtypology is presented in Chapter 2; Peruvian legis-lation is analyzed in the context of this typology inChapter 3; and the criteria presented are used as abasis for the assessments and recommendationsoffered in Chapter 4.

1.3 Background and Methodology

This guide is a component of NESsT’s efforts tofoster self-financing among CSOs in LatinAmerica. In 1999, NESsT began conductingapplied research on CSO self-financing in theregion in order to identify common challengesand needs. The objectives of the applied researchwere as follows:

• Assess the current use of self-financing activi-ties among CSOs in Latin America. NESsThas completed 15 case studies (includingthree Peruvian cases), documenting successstories and obstacles in self-financing activi-ties carried out in five Latin American coun-tries5.

• Examine the current legal environment forCSO self-financing in the region overall,specifically in Colombia and Chile, includingthe regulatory and tax framework in place atlocal and national levels that affects theseactivities.

• Disseminate lessons from the research – by

6

put on their staff and indirectly on their otherprograms and the underlying mission. When aCSO decides to pursue self-financing activities, itis important that it do so with the appropriate lev-els of technical and financial assistance and withinan external framework that makes such activitiespossible.

The pressures and demands faced by CSOs engag-ing in self-financing activities in Peru highlightthe need to understand the legal frameworkaffecting them. In this context, the purpose ofthis guide is to address the following areas:

1. Outline the key laws, regulations, and procedures

governing the use of self-financing by CSOs in Peru.

Chapter 3 explains what Peruvian law, specificallythe Civil Code and tax law, says about the use ofself-financing (the terms “commercial activities”or “business activities” are also used in Peru). Itprovides an analysis of the administrative reg-istries and tax regulations that apply to CSOsengaging in such commercial activities. The chap-ter also offers a general overview of these laws andregulations, so that Peruvian CSOs have a clearidea of where they fit within the legal system andthe tax implications of the commercial activitiesthey operate for self-financing.

2. Assess the relevant laws governing CSO self-financ-

ing activities in Peru, evaluate their practical effects,

and identify areas where the law might be improved.The guide identifies the strengths and weakness-es of Peruvian laws — whether they are a helpor a hindrance to self-financing, whether theyallow for transparent use of self-financing, andwhether they foster the development of the CSOsector as a whole. The legislation is analyzedwithin a tax treatment typology that makes iteasy to understand and assess.

4 ICNL is an international organization whose mission is to facilitateand support the development of civil society and the freedom ofassociation on a global basis. ICNL, in cooperation with other inter-national, national, and local organizations, provides technical assis-tance for the creation and improvement of laws and regulatory sys-tems that permit, encourage, and regulate the not-for-profit, non-governmental sector in several countries around the world. ICNLmaintains a documentation center for laws, regulations, self-regula-

tory materials, and other relevant documents; provides training andeducation; and conducts research relevant to strengthening andimproving laws affecting the NGO sector. For more information onICNL, see www.icnl.org.

5 These cases were included in Risky Business: The Impacts ofMerging Mission and Market, published by NESsT in 2003.



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publishing case studies and legal guides andorganizing local workshops – for stakeholdersfrom all sectors in an effort to develop strate-gies for assisting CSOs in the use of self-financing.

The research methodology for this guide was devel-oped by NESsT to assess the legal framework forCSO self-financing activities in a given country. Thismethodology strives to help answer the followingcore concerns and questions:

1. What the law states. What is the current legaltreatment of CSO self-financing activities, includ-ing current legislation, legal provisions, history ofthe law, revisions of the law, regulatory approach,tax rates, reporting requirements, other laws orregulations, legal cases, and organizations orlawyers providing advice or assistance?

2. How is the law understood? Are the regulations ofCSO self-financing activities understood by CSOs?

3. Effects of the law. What is the effect of currentregulations on CSO self-financing activities?

4. Recommendations for the law. What are the mostimportant recommendations for addressing cur-rent regulatory problems?

Beatriz Parodi Luna, an attorney and specialist innonprofit entities and international technicalcooperation with extensive experience in analyz-ing the legal framework governing CSOs, collabo-rated with NESsT on the development of chapters3 and 4 of this guide. She considered the coreissues and concerns arising from the NESsTmethodology. She also conducted a legal reviewof Chapters 1 and 2 drawing on her knowledge ofPeruvian legislation and her practical experience,the product of more than 15 years of legal con-sulting and advising for nonprofit entities andinternational technical cooperation agencies. Shealso considered research and papers she hasdeveloped on the issue, including “The

7

Regulatory Framework for Civil SocietyOrganizations in South America” (MarcoRegulador de las Organizaciones de la SociedadCivil en Sudamérica), compiled and edited byICNL in 1997.

Likewise, in preparing this guide, NESsT drewfrom the research for “Self-financing ActivitiesAmong Civil Society Organizations in Peru: ANational Assessment”, which included interviewswith CSOs, donors, CSO support organizations,academics, and other experts in the area. Thisresearch was commissioned by NESsT to JuanLuis Dammert, for presentation at the SocialEnterprise Symposium in June 2006 in Santiago,Chile, and was expanded, updated, and publishedby NESsT in 20076. In addition, three case studieswere developed to provide an in-depth look at theCSO experience in this area. To illustrate thelegal framework developed in Chapter 3, we haveincluded a case study of EnvironmentalEnterprise Group (Grupo de EmprendimientosAmbientales, or GEA) a Peruvian CSO.

6 Juan Luis Dammert is a sociologist and professor at the PontificalCatholic University of Peru.



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9

A Typology for Assessing the

Legal and Regulatory Framework

Chapter 2The Legal and RegulatoryFramework for CSOSelf-financing in Peru

This chapter presents a typology for analyzing theregulations that govern CSO self-financing activi-ties. The typology was developed by ICNL7.NESsT has expanded and modified the typologyto be more applicable to the Peruvian legal sys-tem. The following section presents four key areasthat are vital for understanding the legal structurefor CSO self-financing before assessing thespecifics of Peru: 1) the legal characteristics ofCSOs; 2) the legal definition of self-financing; 3)the criteria for permitting self-financing; and 4)the taxation of self-financing activities.

It is important to note that in its texts, ICNL usesthe term “nonprofit organizations” (NPOs) or“NGOs” which refers to a subgroup of the broad-er classification of “CSOs,” the term used byNESsT. This guide uses the term “CSO,” except inparts that specifically draw upon the ICNL typolo-gy, where it maintains the original ICNL terminol-ogy. The broad scope of organizations encom-passed by the term “CSO” is consistent with exist-ing Peruvian law in the Civil Code with regard tononprofit legal entities: associations, foundations,and committees. The term most commonly usedin Peru by CSOs is civil association, and therefore,

7 The overall typology presented in this chapter was adapted, withpermission, from the paper “Regulating Economic Activities of Not-for-Profit Organizations” that was first prepared by ICNL for theRegulating Civil Society” Conference in Budapest, Hungary, in May

1996 (copyright ICNL, 1997) and from the Handbook on GoodPractices Relating to Non-Governmental Organizations, Appendix I:Economic Activities and Taxation (copyright ICNL, 2000).



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this discussion addresses NPOs of various legalforms as long as they provide a public benefit anduphold the principle of non-distribution (non-profit purpose).

Organizations are considered NPOs as long asthey provide a public benefit and uphold theprinciple of non-distribution.

However, as explained in Chapter 3, the CivilCode of Peru, which regulates nonprofit legalentities, considers the following legal types:a) The civil association is the typology most usedby NPOs. It is broadly defined as “a stable organi-zation of natural persons or legal entities or both,who pursue a nonprofit purpose through a com-mon activity” (Article 80). As can be seen, thisdefinition is very broad and flexible and is notnecessarily related to the fulfillment of a “publicor social interest” purpose. Consequently, the dis-tinctive feature of an association is the nonprofitstatus (the non-distribution of equity or incomebetween members) and not the type of activity itdevelops.b) The foundation is a non-associative organiza-tion that pursues religious, aid-based, cultural orsocial interest purposes (article 99 of the CivilCode).c) The committee, which is rare, is an organiza-tion with a specific purpose, dedicated to publicfundraising for an altruistic end (article 111 ofthe Civil Code).

2.2. Legal Definition of Self-financing

There are many terms and definitions, both legaland non-legal, currently in use to describe activi-ties that generate revenues for CSOs (e.g., com-mercial activity, economic activity, philanthropicenterprise, social enterprise, social-purpose busi-ness, earned income, income-generating activity).ICNL uses the term “economic activity” to refer toself-financing activities. ICNL defines economic

this guide primarily considers the case of CSOsthat are legally organized as such.

2.1 Legal Characteristics of NonprofitOrganizations

The characteristics listed below highlight the keydifferences between nonprofit and for-profitorganizations and therefore provide a context forunderstanding how nonprofit organizationsengage in self-financing activities. The discussionthat evolves in this chapter and the rest of theguide addresses a subgroup of all NPOs: thosewhose philanthropic purposes are intended topromote the public benefit. There is no agreed-upon definition of what constitutes the publicbenefit, which is why a large part of Chapters 3and 4 addresses this issue in terms of Peruvianlaw. It is important to recognize that some NPOs,such as mutual associations of stamp collectors orchess players, may not pursue public benefitgoals. These organizations are still consideredNPOs and generally the same regulations apply tothem, but this guide will address only those NPOs

that pursue the public benefit.

ICNL, however, does make this distinctionbetween NPOs, and its typology accordingly iden-tifies two basic legal assumptions that distinguishpublic benefit NPOs from for-profit entities:

1. Non-distribution constraint. Although NPOs arenot prohibited from generating profits, theseprofits may not be distributed to private partieswho might be in a position to control them forpersonal gain, such as founders, members, offi-cers, directors, agents, employees, or any relatedparty.

2. Public-benefit purpose. By definition, this class ofNPO is organized and operated primarily to pro-vide a public benefit.

These characteristics are not dependent on theparticular legal form of the NPO. Accordingly,



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activities as “regularly pursued trade or businessactivities,” with the exception of those that havetraditionally been excluded (such as ticket salesfor cultural events, tuition fees at educationalinstitutions, and patient fees at nonprofit hospi-tals). NESsT, on the other hand, uses the term“self-financing” to refer to activities that generaterevenues for CSOs, including the six types ofactivities described in the previous chapter.

Peruvian legislation does not differentiatebetween “commercial activities” and othertypes of income-generating activities forCSOs.

In fact, in Peru both the Civil Code and the gen-eral tax framework (especially the Income TaxLaw) do not expressly differentiate between “com-mercial activities” and other types of income-gen-erating activities for CSOs. A provision indicatingthat CSOs were not exempt from income tax on“income from commercial operations other thanthe purposes expressed in their bylaws” wasrecently overruled, and the regulation on this wasnever issued.

This guide refers to the general term “commer-cial activities” specifically for the Peruvian contextin Chapters 3 and 4, as this term (or “economicactivities”) is more commonly used in Peru torefer to activities or operations that CSOs adoptto generate revenue, whether these are directlyrelated to their social purpose or they contributeto sustainability. Likewise, this guide uses theterms self-financing and economic activities inter-changeably when presenting the ICNL typology.

2.3 Criteria for Allowing Self-financing

According to ICNL, “a threshold issue is theextent to which NPOs should be permitted toengage in economic or commercial activities with-out losing their philanthropic status.” At this stage

of the analysis, the question is not whether suchactivities should be tax-exempt, but under whatcircumstances they should be permitted at all.

At this stage of the analysis, the question isnot whether such activities should be tax-exempt, but under what circumstances theyshould be permitted at all.

In countries that permit CSOs to participate incommercial activities, NESsT considers thatexcluding CSO commercial activities is not a goodregulatory practice, because it limits the sustain-ability of the sector. There are two typical testsused by governments around the world for deter-mining whether economic activities are “nonprof-it” or “for-profit”:

1. Principal-purpose test. The principal-purpose testprovides one legal model for regulating NPO self-financing. It does not prohibit the use of self-financing activities, but rather emphasizes thatthe NPO is established and operated primarily fornonprofit purposes and not for private gain. Thiscriterion implies that self-financing would be formission-related purposes and would not be theprincipal activity of the organization. Commonexamples of principal-purpose tests found in regu-latory frameworks of many countries are: that eco-nomic activities are not the principal purpose(i.e., the principal activity) of the NPO; that eco-nomic activities are complementary (or addition-al) to the NPOs programs; or that economic activ-ities are related to institutional objectives.

2. Destination-of-income test. Contrary to the princi-pal-purpose test, the destination-of-income test, inits pure form, ignores the economic or commer-cial nature of the activity in question and focusesexclusively on the purposes for which profits fromthe activity are used. Under this test, an organiza-tion must devote all of its income to its not-for-profit purposes in order to qualify as an NPO.Accordingly, an organization that spends 99% of



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its time pursuing commercial endeavors, spends1% of its time undertaking public-benefit activi-ties, and devotes all of its profits to these public-benefit activities could still qualify as an NPO. Anexample of a destination-of-income test is whenthe profits from economic activities are used tosupport the organization’s mission purpose andnot distributed as earnings.

Under either test, an NPO is permitted to engagein economic activities that further the mission(nonprofit purposes) for which it is organized. Itshould be noted that governments can — and insome cases do — use a combination of conditionsunder the principal-purpose test and desti-nation-of-income test to determinewhether the economic activities ofan NPO are permitted. For exam-ple, a government can authorizeonly those commercial activitieswhich are related to the missionof an NPO (principal-purposetest) and require that the rev-enues from these be used exclu-sively for mission-related activities(destination-of-income test). Butwhat justification is there for governments to permitNPOs to conduct self-financing activities? There aretwo main public policy rationales for permittingNPOs to engage in such activities:

1. Self-financing applies non-public resources to the pub-

lic good. Income from economic activities is a pri-mary source of funds for NPOs (particularly inemerging market countries, where there is anabsence of private capital and philanthropic tradi-tion) and enables them to do their public-benefitwork with less dependence on governmental sup-port and charitable donations.

2. Self-financing accomplishes public-good objectives.Certain economic and commercial activitiesdirectly accomplish public-benefit purposes. Forexample, although the sale of a book on teachingtechniques by an educational organization is an

economic activity, the distribution of the bookdirectly serves the public-benefit purpose of pro-moting education. Preventing NPOs from usingsuch commercial and economic means to attaintheir goals could directly impair their ability toserve public-benefit purposes.

Preventing NPOs from using self-financingactivities to attain their goals could directlyimpair their ability to serve public-benefit pur-poses.

2.4 Taxation of Self-financing Activities

Although the legal treatment ofCSO self-financing varies on a prac-tical level from country to country,most have avoided going to

extremes (i.e., a complete prohibi-tion on economic activities or, con-versely, allowing economic activi-ties to be the principal activity of

the organization). However, theimportant issue is the tax treatment

of such activities. Governments havetypically employed four approaches, singly or incombination, to determine the tax treatment forCSO self-financing activities:

1. Blanket tax. A “blanket tax” policy is applied toincome from all economic activities, regardless ofthe source or destination of the income. Underthis approach, the organization is not limited bylevel or type of activity, but is taxed on all rev-enues generated by these activities regardless ofhow the revenues are used.

2. Destination-of-income tax. A “destination-of-income tax” policy exempts income from eco-nomic activities that is used for public-benefit pur-poses. Under this approach, the organization isnot limited by level or type of economic activity,but is taxed on all income that is not used to fur-ther its public-benefit purposes.



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instead generally establishes a (temporary) taxexemption for associations and foundationswhose self-financing income is used for specificand exclusive purposes in the country.

No general exemption exists for CSOs based ontheir nonprofit status; rather, the exemption isgiven under the Income Tax Law provided thatthis income or revenue is not directly or indirectlydistributed among members (nonprofit status).

There is no consensus on which of these taxapproaches is best, since each entails certain ben-efits and costs and defines a different public poli-cy objective. ICNL applies five criteria to shedlight on the practical implications of eachapproach.

1. Simplicity or complexity of administration. Blankettaxation of all economic activity is the simplestapproach to administer. Once economic activitiesare defined, NPOs are treated the same way asfor-profit organizations. The “destination-of-income” rule is slightly more complex to adminis-ter. The main difficulty is establishing and enforc-ing criteria for what constitutes expenditures tosupport public-benefit purposes. A “mission-relat-edness” test (source-of-income tax) is the mostcomplicated to apply because it is difficult to spec-ify the necessary connection between the econom-ic activity and the public-benefit purpose.

2. Effects on revenue collection. Assuming the taxrates under the various treatments are equal, thegreatest tax revenue is generated under the blan-ket taxation approach, since it subjects the largestnumber of NPO self-financing activities to taxa-tion. However, it is empirically unclear how muchtax would in fact be collected, because, all thingsbeing equal, the level of commercial activities byNPOs will presumably be lower under this rulethan under the others (because taxation providesa disincentive for CSOs to initiate commercialactivities).

3. Source-of-income tax. A “source-of-income tax”policy focuses on the source of the income, grant-ing a tax exemption only when the income is gen-erated by activities that are related to the public-benefit purposes of the organization. Under thisapproach, the organization is taxed for all incomegenerated from non-mission-related activity evenif the income is used to support mission-relatedprograms.

4. Mechanical tax. A “mechanical tax” policymakes a rigid distinction based on “mechanical”criteria in order to determine the differencebetween economic activities that are taxed andthose that are not; or it may establish an exemp-tion ceiling (a maximum profit level). Income lev-els below the ceiling are tax-exempt and above itthey are taxable.

Governments have typically employed fourapproaches, singly or in combination, todetermine the tax treatment for CSO self-financing activities.

Some governments have created hybrid tax poli-cies that are based on one, two or more of theseapproaches. For example, it is possible to allownet income from economic activity to be tax-exempt below a specified threshold and to apply amission-relatedness mechanical test to determinewhether net income above that threshold shouldbe taxed.

The following chapter analyzes the legal frame-work in Peru and the criteria that apply to the“destination-of-income” tax. These criteria indi-cate that in order to qualify as NPOs, CSOs mustput all their profits toward nonprofit purposes. Interms of income tax, a “destination-of-income tax”is applied, which exempts from tax all profitsfrom economic activities that are for public-bene-fit purposes. The Income Tax Law does not makea distinction among origins or sources of income(for income from commercial activities), but



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In its purest form, the “destination-of-income”rule has the lowest potential to produce tax rev-enue because all income, regardless of the source,is free from taxation if it is applied toward public-benefit purposes. In practice, many countriesimpose limits on the amount of income that isexempt under the “destination-of-income” rule,thereby limiting potential losses to the state’s rev-enue base. The “mission-relatedness” test alsopotentially reduces the size of the tax base, butprobably less so than the “destination-of-income”test, because it only provides tax benefits for mis-sion-related activities. However, it has the addi-tional benefit of channeling NPO economic activi-ty into specific areas that produce public benefit.

3. Effects on the commercial sector. The “blanket taxa-tion” approach to NPO income from economicactivities is most favorable for the commercial sec-tor, since there is no possibility of “unfair” or prej-udicial competition (i.e., NPOs do not receivepreferential tax treatment when compared to for-profit entities). The “destination-of-income” ruledoes nothing to prevent claims of unfair competi-tion, since the nature of the use of income maygive NPOs a tax advantage that their for-profitcompetitors do not share. However, a limit on thisbenefit reduces the comparative advantage forNPOs. The “mission-relatedness” test minimizesunfair competition by encouraging NPOs to focuson activities that produce a public benefit and byapplying the standard tax treatment used for for-profit enterprises when NPO activities are con-ducted purely for profit. The difficulty in imple-menting this “mission-relatedness” rule lies inestablishing which economic activities advancethe public benefit and which do not (or which donot advance it enough).

4. Effects on the development of the NPO sector. The“blanket taxation” approach reduces resources forthe nonprofit sector, essentially transferringmoney from NPOs to the public sector. It is gen-erally accepted that NPOs devoted to public-bene-fit purposes should at the very least not be

required to transfer resources to the state if theyare not eligible for state subsidies (similar to for-profit enterprises). Blanket taxation of all NPOincome from economic activities eliminates theincentive to engage in income-generating, public-benefit activities and is the most unfavorable tothe nonprofit sector. NPO proponents claim thatsuch taxes should be at a lower, more preferentialrate than taxes for for-profit enterprises.

The “destination-of-income” rule provides thegreatest potential revenue to NPOs, since virtuallyany income can be made tax-exempt if channeledinto public-benefit activities. The “mission-related-ness” test is less favorable to NPOs because activi-ties that are undertaken purely to obtain revenueenjoy no tax exemption. However, the “mission-relatedness” test still provides significant tax bene-fits for NPOs, particularly when they focus onactivities associated with public-benefit purposes.Moreover, this approach channels NPO economicactivities into more socially beneficial directionsthan the “destination-of-income” test, whichencourages NPOs to engage in economic activi-ties that can earn the greatest potential financialreturn but not necessarily the greatest socialreturn.

5. Practical implementation issues. The “blanket taxa-tion” approach is the easiest approach to imple-ment, since there are uniform rules for NPOs andfor-profit organizations alike. The “destination-of-income” rule uses a mechanical approach that isrelatively easy to administer, although it is neces-sary to define what constitutes expenditurestoward furthering public-benefit purposes and tosupervise the actual use of profits. Nonetheless, itis still necessary to monitor NPOs and their use offunds, and this “policing” function may prove tobe administratively difficult. Moreover, thisapproach creates a greater potential for abuse byunscrupulous individuals seeking to use NPOs asvehicles for tax evasion. The “mission-relatedness”test is relatively difficult to implement, since aprecise definition and application of this concept



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is elusive. However, it tends to work best whendeveloped over time through administrative prac-tice. This “mission-relatedness” approach is alsothe most likely to keep NPOs focused on econom-ic activities that also provide public benefit.

Chapter 1 presented a background for under-standing CSO commercial activities; Chapter 2established the analytical typology for assessingthe legal framework that governs such activities.Chapter 3 discusses Peruvian laws and regulationsthat are relevant to CSO commercial activities.Chapter 4 evaluates the existing Peruvian legisla-tion using the typology presented in Chapter 2.



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17

The Peruvian Regulatory

Framework

Chapter 3

This chapter analyzes the legal framework thatgoverns CSO commercial activities in Peru. It isimportant to note that although there is noexplicit regulation in Peru for CSOs that under-take commercial activities, there are also no legalconstraints to this type of activity. Therefore,CSOs are generally permitted to engage in self-financing activities, as will be explained in section3.2. Although the Civil Code is generally flexiblein terms of CSO regulation, it does not establishspecific tax legislation that promotes greater taxincentives for CSOs or that awards them this ben-efit in practice (a specific case is qualification forinclusion in the Registry of Income-Tax-ExemptEntities).

3.1 General Legal FrameworkRegulating CSOs

The Civil Code of Peru (1984) regulates nonprof-it legal entities and recognizes three types oforganizations: associations, foundations and com-mittees.




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3.1.1. Associations

A civil association is legally defined as “a stableorganization of natural persons or legal entities orboth, who pursue a nonprofit purpose through acommon activity” (Article 80 of the Civil Code).

According to this definition, having a “socialinterest” or “public-benefit” purpose does not dis-tinguish a civil association, but does enable it toengage in any activity as long as its purpose is not-for-profit.

The legal definition of a civil association includesvarious types of entities with nonprofit ends: com-munity kitchens, beach or recreation clubs,NGOs, philanthropic entities, alumni associations,trade unions (chambers of commerce, for exam-ple), cultural or educational entities, and others.

The Civil Code makes little mention of associa-tions, with just 19 articles (numbers 80-98) regu-lating them. These articles regulate the uniquecharacteristics of an association: definition; bylawscontent requirements; general assembly (mini-mum scope, notification and quorum, decision-making procedures); specific member-relatedaspects; objection to board resolutions; and desti-nation of corporate assets.

The constitution of a civil association requires aplurality of members or associates, who may benatural persons, legal entities or both, but there isno legal minimum number of members (two ormore).

In order for a CSO to acquire legal entity status— i.e., for it to be a legal entity subject to rightsand with assets and responsibilities independentof its members – it must be registered with thePublic Registry (article 77 of the Civil Code).Associations are required to have a corporatecharter comprised of the declaration of intent ofthe founding members to form a civil association,the approval of the bylaws, and the designation of

the first board of directors and legal representa-tive. This charter is filed with a notary public, whodrafts an abstract of the charter (which can besigned by the member designated in the corpo-rate charter), and is registered with the corre-sponding public registry based on the domicileindicated by the association.

3.1.2. Foundations

The foundation is legally defined as a “nonprofitorganization created through the endowment ofone or more assets for engaging in religious, aid-based, cultural, or social-interest purposes” (arti-cle 99 of the Civil Code).

This classification is less common in Peru, due toits limitations. The founder does not participatein the organization or make decisions regardingbasic aspects of the foundation’s institutional life,although he or she may act as administrator.There are no expedited and flexible proceduresfor decision-making. For example, the Peruviangovernment, through the Foundation OversightCouncil (Consejo de Supervigilancia deFundaciones), authorizes the disposition andencumbrance procedures for assets that do notpertain to the regular foundation operations,establishes the procedure to follow in each case(article 104, clause 5 of the Civil Code), andapproves financial accounts and statements.There are also neither clear nor flexible regula-tions on the modification of bylaws.

The government – through the FoundationOversight Council – generally controls and over-sees foundations, and as indicated, has the capaci-ty to make decisions that affect their institutionallife.

There are two legal procedures for constituting afoundation: 1) by public deed, through corporatecharter, granted by one or several natural personsor legal entities, indiscriminately, or 2) by testa-ment, granted by a single person.



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According to the Civil Code, a foundation’s cor-porate charter must state its purpose and theasset or assets endowed, which are required ele-ments for its incorporation. The other aspects(name and address, organizational structure, des-ignation of administrators, and other informa-tion) may be added by the Foundation OversightCouncil if they are not documented in the corpo-rate charter. The corporate charter should be reg-istered with the Public Registry. Foundations arealso registered with the administrative registry ofthe Foundation Oversight Council.

3.1.3. Committees

The committee is a nonprofit organizationformed for a specific and temporary purpose. It isdefined in the Civil Code as an “organization ofnatural persons or legal entities, or both, dedicat-ed to public fundraising for an altruistic end”(article 111 of the Civil Code).

Its activity involves public collections, aid or chari-table activities that can generally be undertakenas part of the social purpose of other types ofnonprofit legal entities, such as civil associations.

Since the committee is a temporary organization,the corporate charter and bylaws of this type oforganization may be registered with the PublicRegistry or through a private document withnotary certification of the founding members.

3.1.4. The Case of NGOs in Peru

Non-governmental organizations deserve a specialmention in the Peruvian context.

In Peru, NGOs do not figure as a special type oflegal entity. They fall under the category of non-profit legal entities regulated by the Civil Code, andgenerally use the classification of civil association.

The denomination and typification of NGOs

comes from an administrative registry that cur-rently falls under the purview of the PeruvianAgency for International Cooperation (AgenciaPeruana de Cooperación Internacional, or APCI)within the Department of Foreign Affairs. This isknown as the “Registry of National Non-Governmental Development OrganizationsReceiving International Technical Cooperation”(NGDO), based on the International TechnicalCooperation Law (Executive Order No. 719 andits regulations) and the APCI Creation Law (LawNo. 27692 partially modified by Law No. 28925).This administrative registry is effective for a two-year term, renewable for equal terms.

The International Technical Cooperation Lawdefines NGOs that register with the administra-tive registry in the following way:

“These legal entities are characterized asnot-for-profit and for the purpose of carry-ing out development activities that involveinternational technical cooperation in oneor more of the modes indicated in theRegulation.” (Article 73).

Under Law No. 289258, several articles of theAPCI Creation Law (Law No. 27692) were modi-fied, its functions were reinforced, and more enti-ties were put under its supervision. This modifica-tion also determined the provisions for infrac-tions and penalties regarding the parties super-vised by APCI.

Before the enactment of Law No. 28925, theresponsibility for registration with the NGDOadministrative registry was interpreted as corre-sponding to those organizations that receivedinternational technical cooperation fundingthrough Peruvian government agencies. This wasalso a prerequisite for qualifying for certain taxbenefits derived from the provisions mentioned:refund of the value-added tax (VAT) applied tothis type of organization through the acquisitionof goods and services by the NGO in Peru; and

8 Published on December 8, 2006.



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VAT exemption on the importation or transfer ofgoods free of charge, i.e., donations of movableproperty. With the issuance of Law No. 28925 inDecember 2006, APCI’s jurisdiction was expandedto include entities that receive international coop-eration funds without government involvement,but that receive some state benefit, exemption, orprivilege and use state resources. The law alsoincludes organizations that establish relationshipswith a bilateral or multilateral cooperation organ-ism that the Peruvian government belongs to. LawNo. 28925 therefore establishes that inscription inthe administrative registry of the APCI “is manda-tory for engaging in international technical coop-eration, irrespective of the juridical nature of thesource of aid”.

This legal recourse was alleged to be unconstitu-tional, because it threatened a series of funda-mental rights of NGOs: freedom of association,commerce, private life, equality under the lawand others. The issue was settled recently by theConstitutional Court of Peru, which found theclaim was partially justified. The ConstitutionalCourt ruled that “inscription in the APCI registrydoes not constitute a mandatory condition forengaging in international technical cooperation”(Conclusion 95 of the ruling). Therefore, inscrip-tion in the APCI registry is no longer mandatoryfor recipients of international technical coopera-tion that do not wish to acquire the asset-basedbenefits of the international technical coopera-tion provisions (such as the VAT refund), unlesscooperation funding is received through the state.

3.2. CSO Commercial Activities andNonprofit Status

The Peruvian regulatory framework has no explic-it legal definition for the concepts “commercialactivities” or “economic activities”. As indicated,the regulation of nonprofit legal entities in theCivil Code is very general.

Although Peruvian civil legislation does not con-

tain explicit regulations for CSOs that undertakecommercial activities, it does not prohibit themfrom engaging in these types of activities.

To define the scope of permissible CSO commer-cial activities, the following basic principles mustbe considered: 1) the principle of specialization,which regulates all legal entities, and 2) nonprofitstatus that characterizes CSOs (associations andfoundations).

As indicated in Chapter 1, legal entities are gov-erned under the principle of “specialization”,according to which:

“The capacity of legal entities extends onlyas far as the rights and responsibilities nec-essary for institutional purposes. This ruleis known as the principle of specialization.(…) The principle is not strict; however,the capacity defined in terms of the purpos-es of the association extends to all legalrelationships that directly or indirectly takepart in such purposes” (author´s empha-sis).9

A CSO may engage in any commercial activitythat derives directly from its social purpose (e.g.,credit-lending activities, sale of products) or activi-ties that indirectly contribute to sustaining orfinancing the organization specifically for further-ing its social purpose (paid consultancies, eventsand conferences, and other activities). The limita-tions on certain activities are often hard to define,as indicated in Chapter 1.

According to the legal definitions contained inthe Civil Code of Peru (association, foundation,and committee), it is important to distinguish thecommercial activities undertaken by CSOs withrespect to the nonprofit status that characterizesthem.

The nonprofit status in this sense is not definedin terms of the type of activity undertaken (as is

9 In Arauz Castex, Manuel (1965), Derecho Civil (Civil Law), BuenosAires, p. 470.



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typically the case with a civil association that canengage in any “common activity” in Peru), butrather in the destination or application of a CSO’sincome and assets. Therefore, these resourcesmust be used for activities directly related to aCSO’s social purpose throughout its institutionallife and/or during the dissolution and settlementprocess. In the case of associations, the regula-tions stipulate that “members may not request thereimbursement of their contributions” (article 91of the Civil Code). Likewise, in the event of disso-lution, if the association has net assets, theseshould be transferred to those people designatedin the statute, excluding members (article 98 ofthe Civil Code).

Through the Registry Tribunal, the PublicRegistry has indicated the following:

“What defines an association is not thecommon activity that the members engagein – which could be any activity – but ratherthe purpose for which the common activityis undertaken, which must necessarily benonprofit, i.e., profits must not be distrib-uted among members. What distinguishesassociations that conduct economic activi-ties from corporations – characterized asengaging in economic activities as perArticle 1 of the General Corporate Law – isthe distribution of benefits between mem-bers, which is specific to corporations, asper Articles 39 and 40 of this law.” (author’semphasis).10

Therefore, an association (the most legal status ofPeruvian CSOs) does not necessarily have to men-tion that it may potentially engage in commercialactivities in its bylaws when registering with thePublic Registry.

A CSO’s engagement in commercial or economicactivities does not threaten its nonprofit statusprovided that the revenue or profit derived from

these activities is destined towards its social pur-pose or to promote its sustainability in order toguarantee its permanence and therefore fulfill-ment of its primary social purpose. To this end:

“The designation of nonprofit status doesnot prevent the association from engagingin economic activities provided that theprofits from these are not distributeddirectly or indirectly among the membersof the association. In conclusion, this prin-ciple does not conflict with the generationof economic revenues destined for theattainment of the social purpose” (author’semphasis).11

The organization may undertake commercialactivities directly (paid consultation services, con-ferences, sale of publications) or indirectlythrough independent corporations. In the lattercase, there is no legal limitation for an associationor foundation to participate as partner or share-holder in a business corporation (through anincrease in capital or purchase of shares), provid-ed that the dividends distributed by this corpora-tion to the partner association or foundation arereinvested in its social purpose. Some CSOs par-ticipate as shareholders or partners in businesscorporations in conjunction with other stakehold-ers who are “beneficiaries” of the social-purposeprojects. In other situations, such as the case ofGEA cited in this guide, CSOs have created spe-cial enterprises (business corporations) to diversi-fy or professionalize self-financing activities thathave served as a link to the national financial andbanking system. There have also been cases whereCSOs have used their know-how and institutionalreputation to create independent consulting com-panies (as in the case of DESCO and DESCON-SULT SAC).

Decision-making regarding engagement in corpo-rate operations or activities varies among thetypes of CSO legal entities. For associations, thistask falls to internal entities (a general assembly,

10 Resolution No. 024-2001-ORLC/TR.

11 File No. 1027-2004-Constitutional Protection Action (Acción de

Amparo).



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board of directors and the legal representativeonce such a person has been designated in thebylaws). The state has the authority, through theFoundation Oversight Council, to approve a foun-dation´s decision when commercial activitiesresult in the distribution of assets (for example,participation in the founding of an enterprisethat requires a contribution or purchase ofshares), or when the activities do not form part ofthe foundation´s regular operations.

Finally, APCI supervises the actions of NGOs inthe administrative registry, particularly economicand commercial activities developed from interna-tional cooperation funds. This is done to ensurethat the funds are applied to “social-interest”projects, especially when the funds are not to bepaid back.

3.3. Taxes on CSO Commercial Activitiesin Peru

Taxation on CSO commercial activities in Perufundamentally applies to income tax and value-added tax (VAT), as explained below.

3.3.1. Income Tax

Income tax in Peru is regulated by theConsolidated Text (Texto Único Ordenado, orTUO) of the Income Tax Law, approved byExecutive Decree No. 179-2004-EF and modifica-tions, and their regulation, approved by ExecutiveDecree No. 122-94-EF.

For income tax, there is no general blanketexemption for CSOs. Rather, this is addressedthrough the establishment of specific purposesdetermined by law and qualified by the NationalSuperintendency of Tax Administration(Superintendencia Nacional de AdministraciónTributaria, or SUNAT) when a CSO applies to thecorresponding administrative registry.

Income tax exemption has been established forassociations and foundations, but not for commit-tees. The law stipulates:

a. In accordance with Article 18, clause “c” ofthe Income Tax Law, the following parties arenot tax payers:

“Legally established foundations, whose corporate charter exclusively comprises any or several of the following purposes: culture, advanced research, charity, medical or social assistance, and socialbenefits for company employees. Compliance with these purposes mustbe accredited through the legal provisionsin force on such matters.”

b. Notwithstanding the above, because mostCSOs classify themselves as civil associations,the most commonly used article for incometax exemption is Article 19, clause “b”, whichhas undergone numerous modifications overtime.

Article 19, clause “b” of the TUO of theIncome Tax Law currently establishes taxexemption until December 31, 200812 (tem-porary, but in practice it has been renewedrepeatedly), for:

“b) Income from foundations and nonprofit associations, whose corporate charter exclusively comprises any or several of the following purposes: charity, socialassistance, education, culture, science, art, literature, athletics, politics, unions, housing, provided that their profits are destined towardstheir specific purposes in the country, are not distributed directly or indirectly among members, and whose bylaws establish thatin the case of dissolution, assets will be destinedtowards any of the purposes contemplated in thisclause”.

12 Text as it appears in the provision modified under LegislativeDecree No. 970, in effect from January 1, 2007.



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The bylaw provisions cited in this clause will not be applicable to international technical cooperation organizations andinstitutions (entidades e instituciones decooperación técnica internacional, or ENIEX) constituted outside Peru, whichshould be registered with the Registry ofInternational Technical Cooperation Organizations and Institutions under the Department of Foreign Affairs.”

The Income Tax Law contains no explicitprovision regarding taxation for CSOs engag-ing in commercial activities (specifically forfoundations and associations that pursue asocial purpose).

Before January 1, 200713, the text of clause“b” of Article 19 read as follows:

“Income from foundations and nonprofitassociations, which is used for furtherance oftheir specific purposes in Peru, whose corpo-rate charter exclusively comprises any or sev-eral of the following purposes: charity, socialassistance, education, culture, science, art, lit-erature, athletics, politics, unions, housing,provided that it is not distributed directly orindirectly among members, and whose bylawsestablish that in the case of dissolution, assetswill be destined towards any of the purposescontemplated in this clause.

Income from business operations of founda-tions and nonprofit associations, other thanthe purposes established in the bylaws, willnot be exempt from this tax. TheDepartment of Economy and Finance willdictate regulations for classification of thebeneficiaries and the corresponding applica-tion of this clause” (author’s emphasis).

However, the Department of Economy andFinance never issued the regulation.

In practice, there are several Tax Court rul-ings indicating that wherever the associationscited in this clause use their income for theirspecific social purpose, they will be exemptfrom income iax payment, even though theirincome may come from activities other thanthose contemplated in their bylaws. In con-clusion, the determining factor in Peru forincome-tax exemption is not the nature ororigin of the income generated, but rather itsapplication to the purposes explicitly fore-seen in the Income Tax Law, provided thatthere is no distribution (direct or indirect)among partners or members (nonprofit sta-tus). This may be subject to SUNAT inspec-tion.14

c. As can be seen, Article 19, clause “b” of theIncome Tax Law defines the social purposesof foundations and associations that are clas-sified as income-tax exempt. In other words,nonprofit status does not necessarily entitleall associations and foundations to this bene-fit. In addition, income must be destinedtowards the specified purposes in Peru.

Moreover, SUNAT determines the qualifica-tion of an association’s social purpose as sci-entific, cultural, pertaining to social assis-tance, or of another nature specified in theIncome Tax Law, based on the association’sbylaws when it applies to the correspondingadministrative registry.

Based on the current Tax Administration cri-teria, many environmental associations andothers that promote the economic activitiesof certain groups do not qualify for income-tax exemption because their social purpose is

13 Based on the partial modification made to the Income Tax Lawthrough Law No. 27386 (in effect from January 1, 2001).

14 Tax Court Resolution RTF 1253-3-96 (13-08.1996) establishesthat “From this ruling, it can be deduced that the develop-ment of such business activities does not constitute the pur-pose of the association, but rather one of the mechanismsthat it may utilize to obtain income in the pursuit of its insti-

tutional purposes”. (Criteria reiterated in RTF 3237-3-2003). There is a more recent Tax Court Resolution, RTF 3237-3-2003,which establishes the following: “A revision of the bylaws of theconcurring party indicates that the party may engage in activitieswhose revenues form part of the assets of the association, activitiesthat it effectively engages in, as can be seen from the copies of theinvoices filed in court records. The association’s purpose is the devel-opment of trade union activities and although the concurring



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not specifically identified in the Law. In these cases, there is a very literal applica-tion of the Law along these lines. This hasresulted, on many occasions, in these entitieshaving been forced to modify or redefinetheir social purpose in their bylaws in orderto qualify for this benefit.

Likewise, the Tax Administration specificallyconsiders the exclusive character of the pur-pose established in the Income Tax Law. Thisimplies that if the bylaws of a CSO specifysocial or scientific purposes, included withinthe exempt group, but also identify othersthat are not mentioned in this regulation, theTax Administration considers that it does notmeet the exclusivity requirement and is con-sequently denied the corresponding registra-tion as tax-exempt. As a result, income tax(third-category income) applies to all of theassociation’s income or revenue.15

d. The bylaws must also explicitly anticipate thatin the event of dissolution, assets will remainin the country and be used for the purposescontemplated in the regulation. Moreover,there may be no direct or indirect distribu-tion of income among members.

The regulation also encompasses nonprofitentities constituted abroad (such as interna-tional cooperation organizations and institu-tions, or ENIEX, which are recognized in aspecial ledger for foreign legal entities and aspecial administrative registry under the aus-pices of APCI). However, these do notrequire the specific provision in the bylawsindicating that any remaining asset settlementwill be used in the fulfillment of their purpos-es in Peru. Strictly speaking, these are foreignentities with offices or branches in Peru anddo not have a separate legal status from the

parent company. However, they must main-tain current their inclusion in the “Registryof International Technical CooperationOrganizations and Institutes” within APCI.

e. SUNAT holds a special registry of entitieswhich are exempt or exonerated from payingincome tax, where those foundations andassociations indicated in clause “c” of article18 and clause “b” of article 19 of the IncomeTax Law may register.

The Regulation of the Income Tax Lawestablishes in Article 8 that this registration“is declarative and does not confer rights”.However, although SUNAT defines the legalrequirements for tax exemption (definitionof social purposes), individual CSOs mustapply to the registry in order to avoid the riskof a tax audit determination that they are notexempt and therefore belong to the categoryof regular income-tax payers.

For inscription in the registry, an associationmust provide proof of registry of its corpo-rate charter and bylaws in the Public Registryand a foundation must also present proofthat it is registered with the FoundationOversight Council.

The CSOs that are registered with SUNATmust update their registration every timethey modify their statutes and attach proof ora single copy of the corresponding instru-ment, in order for SUNAT to verify compli-ance with the exemption requirements estab-lished in the Income Tax Law.

f. If associations or foundations do not qualifyfor income-tax-exempt status, they enter intothe general income tax payment category, --third category income (business income) --

party engages in activities that can be characterized as com-mercial ventures, this does not impair the association fromfulfilling its purpose. Therefore, the Tax Administration mustdetermine whether the revenues accrued through the servic-es undertaken by the concurring party have or have not beenused for its social purpose” (author’s emphasis).

15 RTF 3237-3-2003: “(…) in keeping with the provisions of clauseb) of Article 19 of the Consolidated Text of the Income Tax Law,approved by Executive Decree No. 054-999-EF, the requirements forincome tax exemption stipulate that the nonprofit association mustengage exclusively in a purpose or purposes that are indicated inthe provisions. If the association does not comply fully with thisexclusivity, the totality of its income will be taxed.”



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with a current rate of 30% of net income.

g. The income-tax-exemption provisions thatapply to certain CSOs do not exonerate themfrom compliance with the formalities associ-ated with this tax: complete accounting pro-cedures, affidavits, and other formal commu-nications.

Likewise, CSOs should retain income taxfrom employee salaries (fifth categoryincome) and from payments made to inde-pendent consultants or professionals or oth-ers not directly under the service of the CSO(fourth category income).

Income-tax exemption is also of vital importancefor the Provisional Tax on Net Assets (ImpuestoTemporal a los Activos Netos, or ITAN), which isregulated by Law No. 2842416.

This tax is applied to the value of net assets indi-cated on the balance sheet for the period endingon December 31 of each year after deduction ofdepreciation and write-offs allowed by the IncomeTax Law. Third-category income generators aresubject to the general income tax structure.

The current rate is 0.5% for net assets exceeding1 million soles17 (below this amount the rate is0%)18. The amount effectively paid for ITAN maybe used as a credit against regular income tax pay-ments or in the corresponding income-tax pay-ment for the tax period in question, as identifiedin the regulations.

Associations or foundations that are exempt orexonerated from income tax as per Articles 18,clause “c” and 19, clause “b” of the Income TaxLaw are also exempt from paying ITAN.

SUNAT Resolution 067-2007 addressed the issueof formal compliance (presentation of an affi-davit) associated with ITAN and determined thatthis obligation is not applicable to: 1) ITAN tax-payers whose total net assets on December 31,2006 amounted to less than 1 million soles, with-out considering deductions cited in Article 5 ofthe Law; or 2) parties exempted from ITAN basedon the provisions of Article 3 of the Law.19

3.3.2. Value-added Tax (VAT)

Value-added tax is regulated by the TUO of theValue-added Tax and Excise Tax Law, approved byExecutive Decree No. 055-99-EF and its modifica-tions, as well as their Regulations approved byExecutive Decree No. 29-94-EF and its modifica-tions.20

In Peru, among other operations21, VAT isapplied to the sale of movable property and theuse and supply of services provided for a fee.

The current total rate is 19% (17% VAT and 2%Municipal Promotion Tax, or IPM).

The following provisions apply to CSOs:a. There is no explicit exemption for commer-

cial activities undertaken by nonprofit organi-zations. Therefore CSOs that engage in VAT-applicable operations will be considered tax-payers.

The VAT Law generally defines that, amongother entities, legal entities that “do notengage in business activities” (such as civil asso-ciations or foundations) will be considered tax-payers provided that they “habitually engage inoperations included under the scope of taxapplication” (article 9 of the Consolidated Text

16 Through article 8 of Law No. 28929, Law of Financial Balance ofthe Public Sector Budget for the tax year 2007, the effective termof ITAN (created under Law 28424 with its corresponding regulato-ry and complementary provisions) was extended until December 31,2007.

17 Equivalent to about US$320,000 at an average exchange rate (in2007) of 3.12 soles to the dollar.

18 Modification provided by Legislative Decree No. 971, publishedon December 24, 2006. Previously, the limit was 5 million soles.

19 Superintendent’s Resolution No. 067-2007/SUNAT (publishedApril 6, 2007 and effective from that date): Approves provisions forthe declaration of provisional tax on net assets for fiscal 2007.

20 Under Executive Decree No. 136-99-EF, Section I of theRegulation of the Value-added Tax and Excise Tax Law was substi-tuted, and has since been subject to partial modification.

21 VAT is also applied to construction contracts and the initial saleof movable property by contractors.



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of the Value-added Tax Law approved byExecutive Decree No. 055-99-EF).The Tax Administration defines a habitualoperation based on the nature, characteristics,amount, frequency, volume or regularity ofoperations, as specified in the VAT LawRegulation. Resale is considered to be habitual.

The VAT Law specifies that “where servicesare concerned, paid services that are similarto those of a commercial nature will be con-sidered habitual”. This is applicable to manyassociations that provide consulting, techni-cal assistance or other services as a means offinancing and therefore are considered VATtaxpayers, a tax that is passed on to the end-user of this service.

Nevertheless, the VAT transferred to CSOswhen they acquire goods and services in thecountry may be used as a tax credit for VATpayments by CSOs for their taxable opera-tions.

b. Some CSOs may not use the VAT for the pur-chase of goods and services they utilize inPeru as a tax credit because they do notengage in taxable activities. In this case,CSOs may use the VAT and IPM refundmechanism for purchases of goods and serv-ices in Peru made possible with funding fromforeign donors or non-reimbursable interna-tional technical cooperation, per LegislativeDecree No. 78322-23. These donations aregiven by foreign governments and institu-tions or international technical cooperationorganisms to the Peruvian government, stateentities except state-run companies, or non-profit institutions previously authorized andapproved by the Peruvian government.

The regulation defines the following as “pre-viously authorized and approved nonprofitinstitutions”: ENIEX (cooperation entitiesconstituted overseas), NGOs and private non-

profits, recipients of social assistance andeducational donations from abroad (IPRE-DA), who are registered with APCI.

To be applicable for a VAT refund for thepurchase of goods and services where this taxapplies, CSOs must have previously registeredwith APCI. Likewise, the regulation requiresinscription with the Registry of Income TaxExempt Entities under SUNAT. These CSOsmust also register their projects and opera-tional plans with APCI and comply with otherAPCI administrative formalities.

c. In addition to VAT payment, CSOs mustcomply with the formality of issuing a pay-ment receipt; this obligation is independentof the applicability of VAT to the activity(whether sale of movable property or supplyof services). In addition, CSOs must keepspecial records of VAT sales and purchasesand present affidavits.

d. VAT does not apply to the transfer of used(movable) property by individuals or legalentities who do not engage in business activi-ties, unless these actions are habitual (Article2, clause “b” of the VAT Law).

e. Likewise, VAT does not apply to the followingoperations (Article 2, clause “g” of the VATLaw):e.1. The transfer or importation of goods

and the supply of services that are under-taken by educational, public or privateinstitutions for the sole purpose of com-pliance with their own ends. AnExecutive Decree countersigned by theDepartment of Economy and Financeand the Department of Educationapproves the specific relationship ofgoods and services where VAT paymentis “inapplicable”.

e.2. The transfer or import of goods and thesupply of services duly authorized by

22 Regulation approved under Executive Decree No. 36-94-EF andits modifications.

23 Under Legislative Decree No. 964, published December 24,2006, the effective term of Legislative Decree No. 783 was extend-ed until December 31, 2009.



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Executive Decree and related to internalpurposes undertaken by cultural or ath-letic institutions cited under clause “c” ofArticle 18 and clause “b” of Article 19 ofthe Income Tax Law (foundations andassociations that meet determined socialpurposes), which have been qualified bythe National Institute of Culture or thePeruvian Athletic Institute, respectively.

f. The law makes special note of CSOs andespecially NGOs that engage in credit-lend-ing activities as part of their social promotionprograms to benefit certain sectors (microand small enterprise, agro-industry).

VAT generally applies to payment (i.e., inter-est) derived from credit-lending activities(from a legal standpoint, loans).

However, when these are credit-lending oper-ations undertaken by the country’s bankingand financial entities, VAT is not applied toincome (commissions, interest) derived fromthese operations24. Without losing their legalstatus as civil associations, CSOs have alsofounded commercial corporations under therubric of EDPYMES (entities for the develop-ment of small and micro enterprises) fordevelopment of credit-lending activities tomicro and small enterprises. These enterpris-es are eligible for the VAT exemption appli-cable to national banking and financial sys-tem entities overseen by the Superintendencyof Banking and Securities (SBS).

3.4. Other Administrative Registries orFormalities

As indicated in point 3.3, CSOs in Peru are notexempt from compliance with the formalitiesassociated with income tax and value-added tax

filings, such as: full accounting procedures, spe-cial VAT accounting registries and affidavits.

Likewise, CSOs (legally constituted as associationsor foundations) must comply with the followingbasic administrative registries:

a. Consolidated taxpayers’ registry (RegistroÚnico de Contribuyentes, or RUC) underSUNAT and communication of their legalrepresentative (declaration of change in legalrepresentative).

b. Authorization of Forms by the Department ofLabor and Employment Promotion, whichgenerally apply to all entities which can bedefined as employers, i.e., which hire workersdirectly under the service of a private enter-prise and issue the respective paychecks.

c. Municipal permits for operation from themunicipality where the CSO’s offices arelocated, even though it may operate in anoffice closed to the public. In this case, theCSO must meet requirements (such as zon-ing) and follow procedures established foreach municipality, based on territorial juris-diction.

In terms of labor law, as employers CSOs mustcomply with regulations in terms of employeebenefits and withholding: health care payments(ESSALUD), which is 9% of the salary and is paidby the employer, and social security withholdingfor deposit in the National Social Security System(under the Social Security Standards Office),which is set at a rate of 13%, or in the PrivateSocial Security Fund Administration System(operated by private social security fund adminis-trators at an average rate of 12%).

24 Under Legislative Decree No. 965. published December 24,2006, a special clause (“clause r”) was added to Article 2 of theVAT Law in terms of non-taxable operations, namely credit servicesderived from income received by banking and financial enterprises,municipal savings and loan associations, municipal credit associa-tions, EDPYMEs, savings and loan cooperatives, and rural savingsand loan associations, registered in Peru or abroad, for capital earn-

ings derived from the purchase and sale of bills of exchange, prom-issory notes, commercial invoices, and other commercial papers, aswell as commissions and interest derived from the internal opera-tions.

Previously, this exemption was included among the temporaryexemptions cited in Appendix II of the VAT Law: VAT-exemptServices.



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3.5. Other Sources of Financing

Although this guide primarily refers to thedevelopment of commercial or business activi-ties by CSOs, this section identifies the primarylegal aspects regarding financing from member-ship dues and receipt of donations.

3.5.1. Membership Dues

a. In principle, the Civil Code does not regu-late the establishment of membership duesas a legal obligation of association membersor as a mandatory means for constitutingcorporate assets.

As indicated, the Civil Code of Peru estab-lishes a minimum regulation regardingaspects of the institutional life of the associ-ation and allows the determination of sever-al issues to be self-regulated (throughbylaws or internal regulations), includingthe establishment of membership dues25.The only explicit provision contained in theCivil Code on this matter indicates that“former members, excluded members anddescendants of deceased members arerequired to pay unpaid dues and are notentitled to reimbursement of their contri-butions” (Article 91 of the Civil Code),derived from the nonprofit status that char-acterizes a civil association.

Consequently, associations are free to setmembership dues and define the entity thatis responsible for approving these (this may

be the General Assembly of members or theBoard of Directors; if not otherwise stipulat-ed, this decision falls to the General Assemblyas the highest-ranking entity).

In practice, membership dues are typical inPeru in trade unions (professional or busi-ness associations), loan associations, alumniassociations, social or similar clubs. However,charging membership dues is not a commonpractice (although not prohibited) amongNGOs, whose financing primarily comes frominternational technical cooperation.

b. In addition, membership dues are not con-sidered by the Tax Administration to be aservice and therefore are not VAT-applicable.

In fact, VAT is applied to the provision ofservices by an individual or an entity toanother for a fee. In the case of membershipdues, the association is not providing a serv-ice to a third party (the member) but rather:1) the member joins, becoming part of thecivil association; 2) payment of membershipdues is an economic obligation, establishedin the bylaws, for the member to contributeto the development and maintenance of theassociation to which the member belongs.

SUNAT identifies this in its Directive No. 004-95-SUNAT (still in force) upon determiningthat “Value-added tax is not applicable toincome received by nonprofit associations inpayment of monthly membership dues”26.

25 To this extent, article 82 of the Civil Code establishes the mini-mum bylaws content. This includes a determination of corporateassets (clause 3), without the need to specify the goods comprisingcorporate assets or accredit a corporate contribution from mem-bers. It is sufficient that the bylaws indicate the general and poten-tial composition of corporate assets (membership dues, donations,income from activities identified within its social purpose and gen-erally derived from any legally permissible means), as well as therights and responsibilities of members (clause 5).

26 The SUNAT Directive cites the following arguments:“ (…) membership dues (monthly payments) constitute a commonfund for the association that cannot be reimbursed, divided or dis-tributed. In this sense, the perception of membership dues does notinvolve the concept of sales.

5. In addition, the services provided by the association arenot itemized for each member, but rather granted collectively basedon their corresponding solidarity contributions or payments.

The services mentioned may or may not be used as awhole or in part by members, because their use is subject to mem-ber discretion. Therefore, membership dues do not constitute a pay-ment in exchange for services, as established in clause c, Article 3 ofLegislative Decree No. 775.

6. Income obtained by nonprofit associations frommonthly membership dues do not imply a payment inexchange for services, but rather fulfillment of memberresponsibilities for the maintenance and operation of theassociation; similarly, for the member, this means maintaining



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3.5.2. Donations

This section addresses tax benefits for donationsmade by income-tax payers in Peru, as well asdonations from overseas.

Regardless of whether donations made, forexample, by a local enterprise to a CSO have taxbenefits for the donor from a civil standpoint, alegally constituted CSO (registered with thePublic Registry, according to the laws of legalentities in Peru) is an autonomous entity andtherefore assumes rights and responsibilities. Inthis sense, it can legally receive donations fromthird parties through previously established con-tracts or agreements.

3.5.2.1. Local Donations

This section analyzes the tax structure ofincome tax and value-added tax on local dona-tions, or those made by entities that receiveincome under the Peruvian Income Tax Law.

a. Income Tax

a.1. In general, donations are not income tax-deductible for the donor (income-taxpayer), except in specific cases that meetcriteria and authorizations from the rele-vant government authorities.

a.2. Under Law 27804 (which modifies theIncome Tax Law, in effect since January 1,2003)27, donations made to nonprofit enti-ties whose social purpose involves one ormore of the following are considered (perclause “x”, Article 37) third-category (busi-ness) income-tax-deductible expenses: chari-ty, social assistance or public benefit, educa-tion, culture, science, art, literature, athletics,health, historical heritage, indigenous cul-

ture, and other similar areas.

The deduction may not exceed 10% of thethird-category net profit after compensationfor losses.

This benefit can also apply in general tonational taxpayers who include the resultsof various productive sources of Peruvianincome, with the exception of third-catego-ry income and dividends and any otherform of profit distribution. Donations tothe aforementioned nonprofit entities of upto 10% of a legal entity’s annual overall netincome after compensation for losses maybe deducted from its overall net income(article 49, clause “b” of the Income TaxLaw).

a.3. This only applies to donations made to non-profit entities previously qualified as dona-tion recipients by the Department ofEconomy and Finance through ministerialresolution.

Ministerial resolution No. 240-2006-EFestablishes the necessary requirements forthis benefit. To be qualified as a donationrecipient by ministerial resolution, a non-profit entity must have a SUNAT resolutionthat approves inscription in the Registry ofIncome Tax Exempt Entities. The benefitthus will apply to associations or founda-tions that fulfill the purposes specified inthe aforementioned Article 18 clause “c” orarticle 19 clause “b” (see 3.3.1).28

The qualification as a donation recipient iseffective for three years and can be succes-sively renewed. If approved, the renewal iseffective from the moment the ministerialresolution is notified.

her/his status and therefore her/his exercise of rights within the association” (author’s emphasis).

27 Previously, Article 88, clause “d” (which was overruled by LawNo. 27804) established a taxpayer credit on income tax for anytaxpaying entity that makes donations to educational or culturalinstitutions, in either case foundations or associations included in

the income-tax-exempt category, or to public educational institu-tions. The value of this credit was established at the average taxrate of the taxpayer applied to the donated amount, which couldnot exceed 10% of tne taxpayer’s overall net profit or 10% of thethird-category income after compensating for losses. To be entitledto this benefit, both donors and recipients had to be registered withthe SUNAT special registries.



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a.4. The Income Tax Law specifies that the dona-tion can only be deducted if the beneficiariesare previously qualified by the Ministry ofEconomy and Finance under the aforemen-tioned procedure as donation recipients.

Likewise, donors (income-tax payers) mustregister with the SUNAT Donors Registrybefore making any donation. Registration isvalid for three years.

a.5. Both donors and donation recipients mustpresent formal statements to SUNAT. Donorsmust inform SUNAT of the donations theymake and recipients must inform SUNAT ofthe application of funds and goods received,backed by payment receipts.

Likewise, donation beneficiaries must providereceipts for donations received and indicatethe name or trade name of the donor, con-solidated taxpayers’ registry (RUC) numberor other identifying document if no RUC isavailable. It must assign a value and conserva-tion status to the donated goods.

b. Value-added Tax

b.1. In accordance with clause “a” Article 1, of theVAT Law, the sale of movable property inPeru is subject to taxation.

According to the VAT Law, “sale” is not onlydefined as transfer of ownership of movableproperty on a payment basis, but also anycost-free act that transfers ownership of VAT-applicable goods29 (removal of goods). Inthis sense, the donation of goods (money isnot considered movable property for VAT

purposes) generally constitutes a VAT-applica-ble sale.

The VAT taxpayer is the entity or enterprisethat makes the donation; the taxable basis isset in accordance with the payment opera-tions this entity makes with third parties. Inthe absence of this, a market-value is applied.

The VAT applied to removal of goods cannotbe considered a cost or expense by the com-pany that removes the goods. It may not bededucted as a tax credit or considered a costor expense by the procurer.

b.2. However, there is a special system in place forthe transfer of goods through donationsmade to public sector entities and privatenonprofit institutions registered with APCI.

Based on article 2, clause “k” of the Value-added Tax Law, VAT is not applicable30 tothe “cost-free” transfer of goods made infavor of ENIEX, of national NGDOs and nonprofit private institutions receiving dona-tions of a social assistance or educationalnature, registered with the correspondingregistry, under APCI of the Department ofForeign Affairs, provided that this act isapproved by ministerial resolution from thecorresponding entity. In the case of ENIEXs,NGOs, and IPREDAs, the ministerial resolu-tion corresponds to the Department ofForeign Affairs.

In addition, the donor does not lose the rightto apply for the tax credit corresponding tothe donated good.

28 In addition, Ministerial Resolution No. 240-2006-EF establishesthe presentation of the following documents to qualify as a dona-tion recipient: (i) the Consolidated Taxpayers’ Registry (RUC); (ii) theSUNAT Resolution of Income-Tax Exemption; (iii) proof of publicdeed of incorporation and modification of bylaws, where relevant,in which: the social purpose must include one or several of the pur-poses included in clauses “x” of Article 37 and “b” of Article 49 ofthe Income Tax Law; and its assets, in the event of dissolution, areto be destined towards purposes equal or similar to those estab-lished in the Income Tax Law. The aforementioned dissolution clause

is not applicable to ENIEX; in the case of religious associations, thisdissolution clause is applicable provided the bylaws are approved bythe respective ecclesiastical authority; (iv) a certified copy of theentry in the registry, emitted within the last three months; (v) anaffidavit signed by the nonprofit entity’s legal representative declar-ing that it will not directly or indirectly distribute general incomeamong members and that it will be destined to specific purposes.

29 Number 3, Article 2 of the Consolidated Text Regulation of theValue-added Tax Law.



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Therefore, the donation of movable proper-ties issued in favor of CSOs registered in theAPCI administrative registry is not subject toVAT, provided that this is approved by therespective ministerial resolution and followsthe procedures established in the correspon-ding regulation31.

3.5.2. Donations from Overseas

a. Based on article 2, clause “k” of the Value-added Tax Law, VAT is also not applicable tothe importation of goods donated to entitiesand departments of the public sector, exceptbusinesses; as well as those donated toENIEX, national NGDOs and IPREDAs32,included in the corresponding registry, underthe jurisdiction of APCI of the Department ofForeign Affairs, provided that this act isapproved by ministerial resolution from thecorresponding entity.

As previously indicated, in the case ofENIEXs, NGOs, and IPREDAs, the ministerialresolution corresponds to the Department ofForeign Affairs.

b. Law No. 28905, the law on facilitation of thedispatch of goods donated from overseas, dic-tated on November 9, 2006, modified article15 of the Consolidated Text of the GeneralCustoms Law (approved by Executive Decree

No. 129-2004-EF) in order to establish the“inapplicability” of payment of customs tariffsto CSOs, as follows:

“Article 15: the following parties are exemptfrom payment of customs tariffs, based onthe requirements and conditions establishedby the Regulation and other legal provisionsthat regulate these:(…)

e) Donations approved by ministerial resolutionfrom the corresponding entity made to pub-lic sector entities with the exception of thebusinesses that are part of the state’s enter-prise activity, as well as international coopera-tion organizations and institutions - ENIEX,national non-governmental developmentorganizations, NGDO-PERU, and nonprofitprivate Institutions that receive donations ofa social assistance or educational nature -IPREDAS, registered in the correspondingregistry, under the care of the PeruvianAgency for International Cooperation –APCI.(…)

l) Donations made to religious entities andlegally established foundations, whose corpo-rate charter exclusively comprises any or sev-eral of the following purposes: education,culture, science, public benefit, social ormedical assistance.”

30 The current text is taken from the modification made to theValue-added Tax Law under Legislative Decree No. 935, publishedon October 10, 2003 (entering into effect the day following its pub-lication).

This exemption previously referred only to the Peruvian state, as perthe following text:

“k) The importation or transfer of goods free of charge in favor ofEntities and Departments of the Public Sector, except businesses,when this is approved by Executive Decree countersigned by theDepartment of Economic and Finance and the correspondingSectorial Department. In this case, the donor does not lose theright to apply for tax credit corresponding to the donated good.”

31 By Executive Decree No. 096-2007-EF (previously known asExecutive Decree No. 041-2004-EF), Regulation of Inapplicability of

VAT and Excise Tax to Donations, the following operations areestablished as exempt:

“The importation of goods transferred free of charge to donation recipients.

(...)The transfer of goods transferred free of charge to donation recipients.”

For these purposes, the following donation recipients qualify: ENIEX,national NGDO-PERU, and nonprofit private institutions recipients ofdonations of a social assitance or educational nature-IPREDA, regis-tered in the corresponding registry under the care of APCI.

32 Private nonprofit institutions that receive donations of a socialassistance or educational nature (IPREDA) are organized as nonprofitlegal entities regulated by the Civil Code (association or founda-tion). Their denomination derives from a special administrative reg-



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This Law will enter into effect the day follow-ing the publication of the issuance of its reg-ulation.

3.6. Expertise Required to ManageCommercial Activities

CSOs generally comprise a heterogeneousgroup of diverse organizations that have beengrowing exponentially in Peru. This can be seenclearly in the case of NGOs towards the end ofthe 1960s and during the 1970s. However, dur-ing those decades NGOs developed along nar-row lines according to requirements imposed byinternational technical cooperation.

The 1990s brought the boom of neo-liberalismas the prevailing economic policy under the gov-ernment of Alberto Fujimori, and this impliedthe following for CSOs:

“(..) the central government had no coher-ent concept of the existence or the impor-tance of a third sector in itself, independentfrom the government and the business sec-tor. On the one hand, there was a climateof relative freedom of association that hadpredominated in Peru since the return todemocracy in 1980 and there was no system-atic state interference in private corporatelife. But on the other hand, there was nosignificant recognition of this sector in pub-lic discourse, and in practice, the concen-tration of power and resources in the cen-tral government reflected a general distrustof autonomous and private initiatives”.33

Although there generally has been and contin-ues to be an important flow of internationaltechnical cooperation into Peru, based on APCI

statistics34, NGOs considered that internationaltechnical cooperation agencies were leavingPeru, in large part motivated by the redirectionof resources into higher priority areas, namelyAfrica, Asia, and Eastern Europe.

As a result of this situation, CSOs – especiallyNGOs – were forced to find new ways to gener-ate income, and one of these was by engaging incommercial or economic activities. But giventhe lack of experience on the part of CSOs inmanaging these commercial activities, a growingdemand emerged for technical support in finan-cial, legal (particularly tax-related), accountingand administrative services. Yet, CSOs often lackthe economic means to pay for such specializedassistance.

Consequently, making this expertise accessibleto CSOs in general – not just NGOs – is veryimportant in order for them to start up,strengthen, and expand their self-financingactivities without incurring risks (especially of atax nature).

The following is a list of institutions -- which is illus-trative rather than exhaustive – that provide sup-port to CSOs in Peru. While not all of these provideservices specifically related to commercial activities,their expertise may be useful to CSOs seeking assis-tance in this area.

ASHOKAAshoka is a global organization of “social entre-preneurs” with system-changing solutions forthe world’s most urgent social problems. It pro-vides professional support and access to a globalnetwork of peers in over 60 countries and devel-ops models for collaboration and designs infra-structure needed to advance the field of socialentrepreneurship and the citizen sector.

istry under APCI called the “Registry of private nonprofit institutionswho receive donations of a social assistance or educational naturefrom overseas” with a successively renewable two-year duration,and registers nonprofit entities that engage in social assistance oreducational activities that benefit disadvantaged populations.

33 Source: Portocarrero, F; Sanborn, C; Cueva, H and Millán, A.

Más allá del individualismo: El tercer sector en el Perú (BeyondIndividualism: The Third Sector in Peru), ( 2002) Universidad delPacífico Research Center, Lima, pp. 154-155.

34 “Situación y Tendencias de la Cooperación Internacional en elPerú: Año 2005” (“Situation and Trends in InternationalCooperation in Peru, 2005”), www.apci.gob.pe.



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ASHOKAProlongación San Martín No. 12Departamento 602Barranco, Lima Phone: +51-1-2473322Web: www.ashoka.org

NATIONAL ASSOCIATION OF CENTERS(ASOCIACIÓN NACIONAL DE CENTROS, orANC)ANC is a nonprofit civil association made up of non-governmental organizations that promote develop-ment and poverty relief in diverse regions of thecountry. The organization coordinates the efforts ofits members and other civil society organizations andstrengthens CSO capacities. Among ANC’s activitiesare seminars and training workshops and it also pro-vides legal consulting services such as NGO manage-ment support for both members and non-members,consulting on projects and training.

ANCProlongación Arenales 279San Isidro, LimaPhone: +51-1-4411063Web: www.anc.org.pe

AVINAAvina’s mission is to contribute to sustainable devel-opment in Latin America by encouraging construc-tive alliances based on trust between social and busi-ness leaders and by brokering consensus aroundagendas for action. To achieve its mission, Avinaidentifies the best opportunities to form allianceswith leaders from civil society and the business sectorin shared high-potential initiatives promoting sustain-able development.

AVINAAv. Camino Real 1236 Piso 6, San IsidroLimaPhone: 51-1-2215070, 4406438Web: www.avina.net

CAMINANDO JUNTOSCaminando Juntos is an association that collectsand channels contributions from businesses andemployees from the private sector and directsthem towards projects that affect the neediestcommunities in Peru. This institution was creat-ed thanks to business efforts to contribute to thedevelopment of a better future for low-incomecommunities and to achieve greater nationalsolidarity and equality, facilitating the develop-ment of social corporate responsibility for com-panies and employees.

CAMINANDO JUNTOSCalle Jorge Buckley 192 Oficina 401LimaPhone: 51-1-2432222Web: www.caminandojuntos.org.pe

CARECARE is an organization that has been workingin Peru since 1970 and whose general purpose isto address the factors that generate poverty. Theorganization works in association or collabora-tion with district and provincial municipalities,regional governments, grassroots organizations,ministries, national and international NGOs,universities, private enterprise and communitiesaround the country.

CAREAv. General Santa Cruz 659Lima 11Phone: 51-1-4317430Web: www.anc.org.pe

Nonprofit Enterprise and Self-SustainabilityTeam (NESsT)NESsT works to solve critical social problems inemerging market countries by developing andsupporting social enterprises that strengthencivil society organizations’ financial sustainabili-ty and maximize their social impact. NESsT is



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dedicated to supporting CSOs in their self-financing and commercial activities. To achieveits mission, NESsT coordinates three initiatives:The NESsT Venture Fund (Fondo Nido), NESsTUniversity and NESsT Consulting.

Through NESsT University, NESsT advances thefield of social enterprise through the publica-tion of a “Practitioners Series”of case studies,legal guides and training manuals, as well as a“Learning Series” of books and handbooks onthe subject. It also organizes forums, symposiaand small “Investor Circles” to inform CSOs, pri-vate and public sector representatives on theseimportant topics.

NESsT Consulting offers services to CSOs,donors and international organizations in theareas of social enterprise and venture philan-thropy through training workshops, tailoredone-on-one consultations and technical assis-tance, seminar presentations and research andwriting.

NESsTCalle Mártir Olaya 201, Oficina 602MirafloresLimaPhone: 51-1-4465441Web: www.nesst.org

PACTPACT is a global alliance of individuals and organ-izations committed to strengthening local capaci-ties to generate a positive social change. It facili-tates access to providers of innovative organiza-tional capacity-building programs and services.The principal goal of PACT is a stronger globalcivil society composed of effective and sustainableorganizations that demonstrate leadership, vision,dedication, organizational and technical skills tobetter respond to the increasingly complex needsof their communities.

PACT Roca de Vergallo 123Edificio Las Begonias Oficina 401Magdalena del MarLima.Phone: 51-1-2640505Web: www.pacto.org.pe

SAVE THE CHILDREN SWEDENSave the Children Sweden develops its work basedon the Convention on the Rights of the Child andencourages the development of social, cultural,and political environments in civil society andgovernment. Through its work and the work of itssocial organizations, Save the Children Swedenproduces and disseminates knowledge as a tool toinfluence decision-makers. It also promotes publicparticipation for the purpose of fostering impor-tant changes in society for children and teens inthe region.

SAVE THE CHILDREN SWEDENCalle La Sta. María 120LimaPhone: 51-1-4229292Web: www.scslat.org



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CASE STUDY:

ENVIRONMENTAL ENTERPRISE GROUP (GEA)

1. The Organization

The Environmental Consultancy Office (Oficina de Asesoría y Consultoría Ambiental - OACA),now known as the Environmental Enterprise Group (GEA), was created in 1992 as a nonprofitorganization dedicated to health and environmental activities. Three partners with NGO experi-ence founded this organization after identifying a niche in the environmental sanitation and pro-tection area.

Initially, OACA engaged in activities relatd to water and sanitation, meeting the demand for servic-es that originated from the historic lack of available infrastructure and supply of water and sanita-tion services in Peru.

Until 1995, the organization was focused on gaining experience and during this time, the foundersidentified a growing demand in the market for environmental services. One of the reasons for thiswas the growth of the mining sector, because a requirement of the state-mandated mining conces-sions was that they develop environmental impact assessments for their projects. That year, thefounding partners decided to create ECOLAB, an enterprise dedicated to providing preparationand assessment services for environmental management plans, and made use of a small laboratorythey had implemented at OACA years before. Although currently the founders and board membersof GEA and ECOLAB are the same, the organizations are separate legal entities.

In 1998, OACA was incorporated into the Latin American Forum of Environmental Sciences (FLA-CAM), at which point it diversified its work into three integrated areas: (i) environmental engineer-ing and management; (ii) economic development and communities; (iii) education, participation,and culture.

In 2004, in order to change the image of the organization, the members decided to change thename from OACA to GEA, to better describe its activities and mission.

Today, GEA manages integrated sustainable development programs and has revolutionized conven-tional government plans that affect sectorial interventions. The organization operates programs inassociation with or supported by other CSOs, government entities, private businesses, and civil soci-ety. Its major programs include:

• Green Valley (Valle Verde, in Lurin andPachacámac, Lima province): its purpose is the conser-vation and development of the Lurín river basin and promotion of civil society self-manage-ment. This program began in 1998 and is still in operation.

• Revive the Rimac (Revivir el Rímac, in the upper Rimac river basin, Lima province): its missionis local capacity-building for conservation and recuperation of the Rimac river. This programwas developed between 2000 and 2003.



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• Pro–Chili (upper Chili river basin, Arequipa province): its purpose is the transfer of capacitiesto leaders and local governments for integrating the Chili river into the Arequipa metropolitanarea. This program was developed between 2000 and 2003.

• Good Voice (Buena Voz, metropolitan Lima): its purpose is the formation of young leadersinto proactive citizens, developing transformation projects in their communities and neighbor-hoods. This program began in 2003 and is currently undergoing expansion on a national(Lima, Arequipa) and regional (Brazil) level.

• MUNDOCOLCA (Colca Valley): the purpose of this program is the diversification of the localeconomy based on tourism, building capacities and promoting job creation for local inhabi-tants. This program began in 2007.

• Center for Eco-efficiency and Social Responsibility (Centro de Eco-eficiencia y ResponsabilidadSocial): this is a program aimed at promoting competitiveness of Peruvian companies throughthe adoption of cleaner production measures and social responsibility. This program began in2007.

In terms of financing, GEA considers that it has enough funds to develop its primary activities.However, the institution feels that it can improve financing for other activities and for the future. In2006, more than 50% of the organization’s income came from foreign sources (international coop-eration) and 34% from services.

The organization has faced a significant challenge in terms of the availability of funds. The privatebanking system in Peru generally does not give loans to NGOs because of their lack of “financialcredibility”. To obtain loans, oftentimes GEA partners have put up personal property in guarantee,increasing the interest rates they must pay.

2. Self-financing Activities

Since its founding, GEA has concentrated on the development of self-financing activities. Thesecurrently involve two types of activities: 1) provision of services and consultancies related directly toits programs, and 2) the creation of ECOLAB, a legal entity that is economically and administrative-ly independent from GEA, dedicated to providing environmental management services for the pri-vate sector. The enterprise, whose founding members are the same as those of GEA, transfers eco-nomic resources and business knowledge to GEA, the civil society organization. It also serves as alink between GEA and the private financial system, for example when bidding in public tenders ofPeruvian state funds.

The primary motivation for engaging in self-financing activities was the development of the organi-zation’s social mission. This required that the organization generate new resources to finance itsprograms and operational expenses through mission-related services that would enable it to reach anew client base.



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2.1. Provision of Services and Consultations

Since its early days, GEA has provided consultation services on sustainable development projectsand conducted applied research. It also provides environmental services, including environmentalmanagement and planning, cultural and experiential tourism, environmental education, culturalheritage preservation, environmental engineering and sanitation, social and business participationand environmental communication.

The percentage of GEA’s overall income that comes from consultations has been progressivelyincreasing. In 2006, it represented 34% of the organization´s total budget. The organization hasdeveloped expertise in the services it provides and is currently considered one of the best consult-ants in its area.

Self-financing activities have allowed it to diversify its resources and avoid exclusive dependence oninternational cooperation, which its board of directors considers a strength.

2.2. Start-up of the Enterprise (ECOLAB)

ECOLAB was created as a private enterprise in 1995 with two objectives. The first was to generateeconomic resources to support GEA’s institutional sustainability, and the second was the technicaland scientific development of human resources on environmental issues.

For the founders, the creation of an enterprise independent from the CSO represented the chal-lenge of professionalizing the services the organization offered and developing business skills.They believed that by managing ECOLAB as a business, it would be more efficient and provide amore attractive image to potential clients in the private sector that prefer to retain the services of abusiness rather than a CSO.

2.3. Links Between GEA and ECOLAB

The services provided by GEA and ECOLAB are different, as are their clients and target markets,so competition between them is not an issue. While GEA primarily develops projects aimed at pro-moting sustainable development, ECOLAB provides specialized services in environmental monitor-ing and analysis. GEA’s most important clients are international cooperation agencies, ministries,local governments, and enterprise foundations; ECOLAB’s principal clients, on the other hand,are in the business sector, specifically in manufacturing, hydrocarbons, mining, and energy.However, the services of the organization and the enterprise are complementary.

A positive effect of this situation is the potential to create synergies between projects. This alsoenables the founding members in many cases to transfer resources to benefit both organizations.

ECOLAB has also served as a bridge between GEA and the private financial system; it has providedletters of guarantee for GEA when the organization bids on public projects (goverment tenders) or



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takes out “emergency loans”. As mentioned, NGOs in Peru are unable to obtain credit from theprivate financial system. In addition, ECOLAB transfers its business know-how to GEA, both infor-mally and through its participation in the “Live Green Valley” enterprise (which is still in the start-up process).

Finally, ECOLAB’s leadership has considered investing in the stock market, building up capitalassets, and creating a trust fund for GEA to pay for overhead expenses and potentially reduce itsadministrative costs.

3. Legal Aspects

GEA was created in 1992 as a nonprofit civil association and is therefore exempt from payingtaxes on the income it receives or produces as a result of the consulting services it provides, aslong as this income is used or reinvested in the organization (nonprofit purpose) towards thesocial purposes that are granted exemption under the Income Tax Law.

GEA’s experience illustrates that Peruvian law allows nonprofit organizations to engage in self-financing activities, provided that these are linked to or further the social mission and that prof-its and overall income received are not distributed among partners or members, as required bythe nonprofit status of a civil association.

Also, under the Peruvian legal framework, there is no limitation or prohibition on the creationof private enterprises (business corporations organized under the legal classifications providedin the General Corporate Law) by partners or members of a nonprofit organization. It is alsolegally permissible for the association itself to participate as partner or shareholder of the com-pany, provided that the profits transferred to it are reinvested in the CSO.

In this specific case, GEA and its founding partners did not consider it beneficial for the associ-ation to be a partner in the company; therefore, the CSO has no formal ties to GEA, apart fromcommon shareholders and some shared directors. As a result, legally ECOLAB profits do nothave to be reinvested in GEA. GEA has now launched a second company called Zero Waste(Zero Residuos) for providing integrated industrial waste management services. This situationhas generated some questions within the organization regarding the new company and its rela-tionship to the CSO. So far, the idea that the directors have in mind is for Zero Waste to befully independent from GEA and contribute a percentage of its profits to GEA as part of a socialresponsibility policy.

4. Challenges of Self-financing

The organization faces three important challenges in terms of its self-financing activities:



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4.1 In terms of consulting services, an important challenge is increasing the quantity and per-centage of the contribution of this activity to GEA’s overall budget. Consulting services cur-rently contribute 34% of the budget, which is significant but still low compared to the per-centage that comes from international cooperation (52%). As a result, the organizationcontinues to search for new and varied forms of self-financing, such as re-launching andrestructuring economic activities for the “Live Green Valley” project.

4.2. For ECOLAB, the greatest challenge stems from the need to formally guarantee andincrease the transfer of resources to the CSO.

4.3. The third most important challenge involves the amount of time and energy that GEA andECOLAB partners must allocate to dealing with business matters rather than focusing onprograms.



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Interpreting and Critiquing the

Peruvian Legal Framework

Chapter 4

4.1. Evaluation and Critique of the LegalFramework for CSO CommercialActivities

4.1.1. As discussed in Chapter 3, the general legalframework for CSO regulation and opera-tion is flexible. Although there are no spe-cific legal provisions for regulating CSOeconomic activities, the development ofthese types of activity is contemplated andlegally permissible, provided that they donot threaten the nonprofit status and arerelated to or further the social purpose.

A separate case is made for NGOs, whichare nonprofit entities that engage in ormanage international technical coopera-tion. As indicated in Chapter 3, inDecember 2006, Law No. 28925 wasenacted, modifying Law No. 27692, theAPCI Law. This modification representedan act of unconstitutionality, resolvedunder Constitutional Court rulings onAugust 29, 2007. This ruling declared thatthe claim was partially justified and it inter-preted and specified the functions — espe-

41




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cially the control – of APCI over NGOs thatoperate with international technical coop-eration and specified the cases in whichinscription in state administrative registrieswas indeed mandatory.

4.1.2. The situation of Peruvian NGOs deservesspecial mention in relation to self-financ-ing. Many NGOs, especially those with alonger institutional track record – haveexperience with commercial or self-financ-ing activities. Given the high level of finan-cial dependence of most NGOs on interna-tional development assistance, their eco-nomic activities have often resulted fromspecific, long-term programs or projectsthat reflect the latest trends in internation-al development.

In specific cases (such as DESCO, throughits company DESCONSULT SAC), experi-ence and abilities developed in specificareas have been channeled by CSOs to pro-vide services to a variety of clients. This hasenabled them to diversify their incomebase through the creation of independententerprises separate from the nonprofitorganization, which continues to operateits social, mission-related projects.

4.1.3. No clear legislation has been established inPeru for promoting CSO self-financingactivities. Specifically, no significant taxincentives have been created which wouldmotivate CSOs to develop economic activi-ties. This situation is the result of the gen-eral Tax Administration policy over the lastfew years, which is designed to increase taxcollection and eliminate tax exemptions orlimit their application.

In this respect, the review of the legal taxframework and its practical applicationidentifies the following problems or broad-er issues:

a) Income tax-exemption is limited to theestablishment of specific social purposesexplicitly indicated in the legislation, whichmust be carried out exclusively by CSOs. Inaddition, the Tax Administration (SUNAT)takes a very literal and limited interpreta-tion of social purposes contained in theCSO bylaws, which on occasion results inCSO reformulation of their social purposeto fit within the law.

In practice, it is possible to find entitieswhose social purpose is “economic activi-ties” (for nonprofit ends) such as technicalassistance activities or support in economicproduction areas for specific local groups.However, they do not qualify under SUNATas income-tax-exempt entities, althoughthey engage in social interest or promotionactivities in favor of determined socialgroups.

The Income Tax Law does not distinguishamong differing origins or sources of CSOincome or earnings (i.e., resources derivedfrom commercial activities) for tax-exemp-tion purposes. There was a previous(though somewhat unclear) differentiationregarding exemption of this tax whenapplied to “income from business opera-tions other than those purposes expressedin the bylaws”. This confusion stemmedfrom defining the scope of this exemptionin cases where income was derived from abusiness activity, and it was unclear if theactivity fell within the purposes describedby the organization’s bylaws.

In 2007, the Income Tax Law eliminatedthe provision indicating that “income frombusiness operations other than the purpos-es defined in the bylaws” was not eligiblefor exemption. However, CSOs are stillunclear on the limits established for thedevelopment of this type of activity, espe-



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cially if such activities are not deriveddirectly from their social purpose, andwhether this could result in tax liabilities.

b) Generally, the application of value-addedtax is the same for CSOs and private busi-nesses. The VAT is applied to the sale ofmovable property and provision of servicesfor a fee by CSOs.

Given the way VAT is structured, its impacton the economic activities of CSOs is lessburdensome for several reasons, including:1) VAT is transferred to the end-user (pro-curer of the good or user of the service);and 2) VAT that has been transferred toCSOs in the acquisition of goods and servic-es in Peru can be used as a tax credit.

The problems that have arisen for CSOs arerelated to lack of knowledge regarding VATapplication to commercial activities or com-pliance with formalities (presentation ofaffidavits and special registries) associatedwith this tax.

CSOs who do not engage in VAT-applicableactivities cannot “unload” the VAT trans-ferred to them through the acquisition ofgoods and services in the country. Theseorganizations have to turn to the VATrefund through APCI, established underLegislative Decree No. 783 and its regula-tions. To be eligible for this refund, as indi-cated in Chapter 3, they must have previ-ously registered with APCI and SUNAT andmust present APCI with information onprojects and purchases made. In practice,access to this benefit is a lengthy and com-plicated procedure due to the administra-tive burden this implies for the CSO.Therefore, many small CSOs or those withlimited budgets cannot assume the adminis-trative burden that this process implies.

c) In general, CSOs are unaware of or unclearon the tax application system, as well as thelegislation established for compliance withformal procedures (which is not the sameas tax payment or lack thereof), which canalso result in significant contingencies(presentation of affidavits, issue of paymentreceipts irrespective of whether the activitypays VAT). This affects CSO commercialactivities, since these organizations oftenlack information, management capacities,and technical expertise in financial, legal(especially tax-related) and accountingissues.

There is a growing demand for consultingservices among CSOs in the taxation,accounting and legal areas which theyoften cannot obtain given a lack of untiedfinancial resources. This is especially trueamong NGOs whose main source of financ-ing is international technical cooperationfunds for specific projects or programs witha pre-determined time frame.

The CSOs that are able to obtain special-ized consulting services tend to be primari-ly longstanding NGOs or those with institu-tional financing.

.

4.2. Application of Assessment Criteria

The following sections apply the assessmentcriteria from Chapter 2 of the Legal Guideto Peru.

4.2.1. Simplicity or Complexity of Administration:Poor

In Peru, knowledge of and compliancewith the tax framework is generally not sim-ple. This is especially true in terms of com-pliance with procedures associated with taxpayment (accounting, completion of tax



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forms, tax declarations, and others). Oneexample of this is the application of value-added tax derived from commercial activi-ties undertaken by CSOs. This situation isexacerbated in the case of CSOs that lackspecialized technical assistance (such aslegal, accounting and tax services).

CSOs do not receive special treatment(except possible exemption from incometax, which does not exonerate them fromcompliance with the respective proce-dures), and therefore come under the cate-gory of “general tax treatment” for com-mercial activities. As a consequence, the taxsystem in Peru in general is complex, mak-ing it difficult for CSOs to understand theregulations and apply them correctly.

4.2.2. Effects on Revenue Collection: Poor(CSO); Good (SUNAT)

The Peruvian Tax Administration is con-cerned with increasing tax collection andeliminating tax exemptions and specialtreatment.

In practice, although income-tax regula-tions establish that the registry of tax-exempt entities is merely declarative, ifCSOs do not have the respective exemp-tion resolution, SUNAT considers the pay-ment of this tax to be applicable (third-category tax) and therefore mandatory,particulary for CSOs with a significantmovement of income or assets. This issue isespecially important in the application ofthe Provisional Tax on Net Assets (ITAN),which is only waived for CSOs registeredwith the Registry of Income Tax ExemptEntities. The impact of income tax forCSOs that are not able to register asexempt is significant, because it significant-ly cuts into profits (30% of net income)from business activities. When considering

that in most cases, these commercial activi-ties are related to a CSO’s social purpose,the applicability of income tax discouragesthese activities because it makes them diffi-cult to sustain.

In addition, SUNAT verifies compliancewith tax payment procedures through taxaudits, which in practice represent contin-gencies for CSOs.

4.2.3. Effects on the Commercial Sector: Good

CSOs essentially receive the same regulato-ry treatment for development of commer-cial activities, especially in terms of VAT,that for-profit enterprises receive. However,the authors of this guide believe that, ingeneral, the business sector does not per-ceive the development of CSO commercialactivities as “unfair competition”. This isparticularly true because CSOs undertakecommercial activities within the frameworkof their social purpose and their nonprofitstatus.

It is important to understand that CSOengagement in commercial activities in Peruderives from the capacities they have devel-oped in the pursuit of a social mission. Theyhave acquired important know-how in rela-tion to specialized consultation services orsale of information to determined sectorswhere the business sector generally does nothave a presence (human rights, the environ-ment and support for marginalized popula-tions, among others).

This argument is especially applicable toCSOs which are exonerated from income-tax payment due to the specific purposesthat they are implementing and not from amore general or blanket tax treatment,and, as previously mentioned, are subjectto SUNAT qualification.



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4.2.4. Effects on the Development of Civil Society:Poor

Although commercial activities are not pro-hibited in Peru and a CSO’s right to imple-ment commercial activities derived from orto further its social purpose is recognized(under the broad definition of associationin Article 80 of the Civil Code), the legalframework – especially tax-related – forengaging in this type of activity is not clear,or at least is not perceived as clear by CSOsand is not encouraged under the currenttax system.

This problem requires explicit legal regula-tion, because CSOs are often confusedabout the legal possibilities and limitations(especially regarding tax law). This is exacerbated by the lack of specialized legalor technical expertise in the area.

Moreover, the lack of necessary experienceor capacity-building, access to capital andcapacities for initiating commercial activi-ties are conditions that, when added to thebelief that income-generating economicactivities are prohibited or detract from thesocial mission or nonprofit status, have verynegative consequences for CSO develop-ment.

4.2.5. Practical Implementation Issues: Poor

The implementation of the tax system forcommercial activities and general CSOdevelopment of activities is a lengthy andcomplicated process. There is no consensuson the tax structure for CSO activities,compliance with the respective procedures,or engagement in commercial or self-financing activities, which has tax conse-quences and therefore negative effects.

4.3. Recommendations and FinalReflections

As indicated, in terms of private enterprise,the Civil Code of Peru provides very flexi-ble regulation for civil associations, thelegal organizational form most often usedby CSOs. However, the minimal regulationthat does exist has left areas open to inter-pretation, and this produces uncertainty interms of the scope of commercial activitiesof CSOs, particularly those that do nothave access to specialized legal advice.

At the same time, the Peruvian tax frame-work is difficult to understand and to usefor taxpayers in general, and particularlyfor CSOs. This situation is further exacer-bated by a policy pursued by recent gov-ernments that seeks to limit tax exemp-tions.

The situation described below considersspecific areas for reforming or improvingthe legal framework and administrativeprocedures associated with CSO commer-cial activities in Peru:

A. With regard to income tax, the law shouldbroaden the purposes of associations andfoundations that are eligible for income-tax exemption (Article 19, clause “b” ofthe Income Tax Law), in order to incorpo-rate other explicit types of social purposeswith a social benefit or that support asocial agenda, including: environmentalprotection, tourism, technical assistance,and local institution-building or similarareas. Its application should also beexpanded to “other purposes that con-tribute to social development in general”,in order to include a wide variety of organ-izations that undertake important socialwork, but until now have been left out of



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the income-tax-exemption benefit.

The tax legal framework is viewed as afavorable instrument for the promotion ofCSO activities through special tax breaks(such as income-tax exemption). In thissense, by issuing tax exemptions to CSOs(and therefore to their activities, includingcommercial activities that derive from andfurther their social mission), the state pro-vides a sort of indirect financing through apartial waiver (tax waiver) mechanism of itstax collection expectations. This has impor-tant redistribution effects: it contributes tothe strengthening of nonprofit organiza-tions that provide social-purpose goods andservices in a way that complements thestate, or in areas the state does not reach.This benefits a broader group of stakehold-ers (CSOs, local organizations or benefici-aries of the social programs that CSOsdevelop and donor agencies), includingthe government itself.

CSO involvement in economic or commer-cial activities should be considered a conse-quence of project development (NGOs) ora means of financing designed to con-tribute to the organization’s social purpose;in other words, the income generated isreinvested in the social mission pursued bythe CSO and therefore, these activitiesshould be promoted by the state.

B. In terms of value-added tax, reform shouldbe directed towards increasing the flexibili-ty of the legal context (regulation) andAPCI practices, registries, or requirementsestablished for granting CSOs exemptionfrom VAT applied to the acquisition ofgoods and services in Peru. The VATimplies a significant cost for CSOs, especial-ly for those that may not use it as a taxcredit because they don’t operate businessactivities subject to VAT, but whose social

purpose would benefit from the availabilityof these additional resources. Likewise, inbusiness activities where CSOs transfer thecorresponding 19% VAT for their goodsand services to their users or buyers, thisalso results in a significant cost as the usersor buyers are often low-income people.

Beyond the legal interpretation, in light ofthe absence of an explicit regulation in theCivil Code and the tax framework on thescope and limitation of CSOs engaging incommercial activities, it is important to pro-mote dissemination programs or policieson the legal framework – especially thoserelated to taxation – regarding CSO eco-nomic activities and their general opera-tion. Such policies should be directedtowards government employees who areresponsible for application of the legisla-tion. These policies should also be directedtowards the CSOs themselves, as many havedifficulty understanding and implementingself-financing economic activities in combi-nation with their programs. Therefore, theyrequire specialized technical assistance andsupport, which is oftentimes unaffordable.

It is our hope that this guide will make acontribution towards consolidating theseefforts in order to strengthen CSO opera-tions and activities in Peru through thedevelopment of self-financing activities.

the legal and regulatory framework for cso self-financing in peru

Documents

current legal framework

theperuvian legal framework

legal consultantfor

nonprofit entities

cso selffinancing activities

profitand nonprofit

private entities

peru andprovides