| Criteria | Score
(4-0) | Rationale |
| Laws on VC/PE fund formation and operation | 1 | The Securities Commission's regulatory framework is incomplete despite pending reform projects (December 2006 interview). |
| Tax treatment of VC/PE funds & investments | 1 | October 2004 reforms stipulate that only investors, not funds, pay taxes (Procapitales). Capital gains from the stockmarket and earned interest are exempt from the 30% corporate tax, though that exemption is scheduled to be lifted from January 2009. Other capital gains are assessed at the same rate as other corporate income. A 4.1% tax is levied on resident shareholders (individual or corporate); non-resident shareholders have the 30% corporate tax withheld at the source. Sales tax is assessed on management fees charged to investors by VC funds. If the transaction was conducted via the financial system, it it also subject to the 0.08% tax on all financial transactions. Tax incentives for the industry are generally weak. (EIU, Country Commerce 2006; December 2006 interview; Procapitales). |
| Protection of minority shareholder rights | 1 | Open stock corporations (sociedades anónimas abiertas—SAA) must disclose non-confidential information at the request of shareholders representing at least 3% of capital. The Securities Commission has a committee for the protection of minority shareholder rights in SAA publicly traded companies. Shareholders with under 10% may request an inspector investigate transactions, but they do not have power to inspect documents prior to filing suit. Shareholder agreements are main recourse in absence of effective legal norms (World Bank, Doing Business 2006; EIU, Country Commerce 2006). |
| Restrictions on institutional investors (pension funds, insurance firms) investing in VC/PE | 2 | Pension funds and insurance funds are major players in the stockmarket with few formal restrictions, yet in exercising its regulatory authority in practice the Superintendencia de Banca y Seguros tends to push them away from riskier investments (EIU, Country Commerce 2006; December 2006 interview). |
| Protection of intellectual property rights | 1 | EIU Risk Briefing score. The Fujimori administration took concerted action to counter widespread abuse of intellectual property rights by strengthening enforcement of existing laws. Nevertheless, Peru was not removed from the US Trade Representative's "Priority Watch List" until 2001, and remains on the less stringent "Watch List". Abuses remain commonplace, enforcement is patchy and slow and punishments often disproportionately lax. Some local rules may be overridden by weaker Andean Community norms. Computer software and entertainment media, including videos and compact discs, are the most vulnerable areas, and trademark "pirating" occurs routinely in many consumer goods sectors, such as apparel. If approved by the US Congress, the free trade agreement with the US will strengthen protection of intellectual property rights, but effective enforcement may still be lacking. |
| Bankruptcy procedures/creditors' rights/partner liability in cases of an invested company's bankruptcy | 2 | The administrative bankruptcy procedure set up by the Toledo government, with similarities to US Chapter 11, has proved subject to delays and judicial intervention. Creditor rights are ranked extremely weak by the IDB's 2005 study. Partner liability varies, being strongest in the sociedad anónima cerrada (which cannot trade on the exchange), weakest in the sociedad de responsabilidad ilimitada and sociedad anónima abierta de responsabilidad, and somewhere in between in the case of the sociedad anónima abierta (companies with many shareholders and/or trading on the exchange). (EIU, Country Commerce 2006, US Country Commercial Guide 2006; December 2006 interview) |
| Capital markets development and feasibility of exits (ie, local IPOs) | 2 | Average of three EIU Risk Briefing scores. The authorities will continue to modernize stockmarket regulations to make the Bolsa de Valores de Lima (the Lima stock exchange) more transparent and to increase minority shareholders’ rights. Though the BVL was one of the world’s best-performing stockmarkets in 2006, it is still relatively small compared with others in the region, with trading volumes and market capitalization just a fraction of exchanges in Brazil and Mexico. At the end of 2006 market capitalization of the BVL was around US$60bn, compared with US$723bn for the Brazilian exchange. The authorities are expected to launch tax incentive schemes to encourage equity finance to become a source of capital for a wider range of companies than the present limited group of blue-chip companies and to form partnerships with other stockmarkets in the region to share best practice. Liquidity on the BVL has been increasing rapidly since 2005, and stock prices have risen dramatically, by 60.8% in 2004, 29.4% in 2005 and by 168.3% in 2006. The majority of growth in 2006 took place in mining company stocks listed on the BVL, having gained 263% during the year. |
| Registration/reserve requirements on inward investments | 3 | Peru has simple registration, foreigners can participate directly in the stockmarket and there are no reserve requirements. But from March 2004 there is a tax on all financial transactions, which has stood at 0.08% since January 1st 2005 but it scheduled to expire at end-2006. (EIU, Country Commerce 2006) |
| Corporate governance requirements | 2 | Peru has relatively strong financial disclosure requirements and allows shareholders to take legal action for publicly traded companies. Sociedades anónimas abiertas must disclose non-confidential information at the request of shareholders representing at least 3% of capital. Board composition and decision-making are only partially regulated, and must be dealt with typically in shareholder agreements. The Securities Commission set up a voluntary code in 2002, and in 2005 for the first time companies had required compliance reporting. (EIU, Country Commerce 2006; World Bank, Doing Business 2006). |
| Strength of the judicial system | 0 | EIU Risk Briefing score. The Toledo government failed to address judicial reform seriously, despite convening a commission on the subject, known by its acronym CERIAJUS, which made recommendations in 2004. The justice system will remain mostly slow and prone to corruption. In April 2005, the Toledo government opened a dedicated commercial court in Lima, fulfilling a condition of an IMF agreement, which will speed up the resolution of business disputes, cutting the average delay from four years to 18 months. Firms may want to consider alternatives to legal action. A 2006 measure obliges parties involved in commercial disputes to consider conciliation, an avenue that should be explored before undertaking legal action. Firms should seek advice regarding the several bilateral investment protection accords to which Peru is a signatory, which offer alternative dispute settlement procedures for foreign investors. |
| Perceived corruption | 1 | EIU Risk Briefing score. Public institutions remain weak and in need of reform, and managerial capacity in the public sector is poor. Corruption and lack of transparency are widespread problems. The legislative and judicial branches of government have high disapproval ratings of around 50% and 70%, respectively. |
| Quality of local accounting industry/use of international standards | 4 | International standards are in use and international firms are present, though inflation adjustment according to official figures is required (EIU, Country Commerce 2006; Deloitte; Securities Commission; Procapitales) |