Understanding Payroll in Peru: What Global Companies Need to Know About Peru Payroll
Peru is perhaps known more for its tourist destinations than for its business opportunities. The towering Andes Mountains and the ancient ruins of Machu Picchu may grab all the headlines, but for international companies looking at expansion, there’s much more to offer if you investigate Peru in more detail.
Mining represents a significant chunk of the Peruvian economy, alongside fishing and manufacturing, and the country’s GDP is currently around 4.5 times what it was at the start of the 21st century. Its population of around 33 million are largely keen to work, too, as unemployment remains high, especially in rural areas.
As can be the case in many developing countries, dealing with payroll in Peru can be complicated, both in terms of the paperwork involved and the country’s tax structure. As the chances of being audited in Peru are high, it’s vital to ensure you’re compliant with the rules. This guide covers the basics around running payroll in Peru.
It’s essential to seek professional help when starting a business in Peru: partnering with someone who knows the local system can shorten the set-up process from months to weeks.
Most foreign enterprises will set up in Peru as a limited liability entity called a Sociedad Anonima Cerrada (S.A.C). There is no minimum capital requirement, although the CEO or general manager of the entity must live in Peru. Once the name of the company is lodged with the Public Registry, deeds of incorporation should be prepared and notarized.
After this, an in-country bank account can be opened if needed (minimum deposit requirements are minimal and this is not compulsory), followed by registration with the National Superintendences of Public Registries (SUNARP) and Tax Administration (SUNAT). The process is completed by gaining an operational license in the relevant municipality where the business will operate: this tends to be much simpler in the capital city Lima than it is in more rural areas.
Unions and collective bargaining are rare in Peru, so it falls on the government to protect Peruvian workers. Unlike at-will agreements, Peruvian workers are not allowed to be laid off for just any reason: the employer must show just cause for an employee's incompetency or inadequacy. No more than 20% of a workforce can be made of foreign workers, and there are caps as to how much employees can be paid relative to those on the lowest rung of the compensation ladder.
Probationary periods can last anywhere from three months to a full year, with terms stipulated in the form of a contract. All fixed-term contracts must be in writing and registered with the Labor Ministry.
Working hours in Peru are a maximum of 48 per week, spread across six eight-hour days (Monday to Saturday). Overtime is unlimited and the pay rate should be agreed upon between employee and employer. Minimum overtime rates are 125% of pay for the first two hours of overtime each day, and 135% thereafter. The 135% rate also applies to all work between 10pm and 6am.
Compensation, Bonuses, and Severance
The minimum wage in Peru is low: as of 2021, the rate is 930 Peruvian soles per month (approximately £180, $250, €210). However, it should be noted that the cost of living and basic expenses in Peru are also relatively low. Employees are entitled to two bonuses of one month’s salary each year, paid for Peru’s Independence Day (July 1) and Christmas respectively. Any other bonuses and raises are generally discussed during the contract signing.
Severance pay generally isn’t paid to employees who have been dismissed, unless they have been dismissed without cause or unlawfully. In these circumstances, the employee is entitled to one month’s salary per year of service, up to a maximum of a year’s salary.
Tax and Social Security
Income tax in Peru is levied progressively across five bandings, although the first PEN 30,100 (approx. £5800; $8100; €6800) is exempt. The bandings are applied as follows:
- Beyond PEN 30,100 to PEN 51,600 (approx £10,000; $14,000; €11,700): 8%
- Beyond this up to PEN 116,100 (approx. £22,500; $31,500; €26,500): 14%
- Beyond this up to PEN 180,600 (approx. £35,000; $49,000; €41,000): 17%
- Beyond this up to PEN 223,600 (approx. £43,500; $60,500; €51,000): 20%
- Beyond PEN 223,600: 30%
Non-residents pay taxes only on income earned in Peru, paid at a flat rate of 30%. VAT is 18% and corporate income tax is 29.5%. Employers are required to make social security contributions of 9% for healthcare and 13% for pensions.
Audits are common in Peru and compliance to payroll regulations is one of the first things government auditors tend to check. To complicate matters, the tax rates change from year to year. It helps to have specialists in your corner to stay on top of it all, especially considering the laws on the amount of Peruvians you need to have working for you.
Holidays and Leave
The laws around paid leave in Peru were overhauled in 2019 to give workers more flexibility around when they can take time off. Workers still receive 30 days paid leave per year, but are no longer required to take it all in one go, and holiday can be taken before it has been accrued with the written consent of the employer. On top of this, employees are also paid for the 12 public holidays each year.
Maternity leave is 98 days, split equally pre- and post-birth. Paternity leave entitlement was increased to ten days in 2018. Paid sick leave entitlement is five days per year; employers are not required to pay employees for any sick leave over and above this.
Starting a business in Peru is not without its challenges. Living standards are poor for many people and there is demand among the population for better working conditions. Additionally, the admin and bureaucracy of running payroll in Peru can be a burden, and it is safer to work on the basis that you will be audited at some point. To ensure that your organization is compliant, and is ready for auditing and all the other challenges of the Peruvian economy, the experience and expertise of a global payroll partner can make a huge difference.
This article is for informational purposes only and not intended to convey or constitute legal or any other advice. It is not a substitute for advice from a qualified professional.