U.S. shareholders of Rio Alto cannot access a Treaty to exempt their sale of Rio Alto shares for Tahoe shares from Peruvian gains tax

Tahoe is proposing to acquire all the Rio Alto common shares under a Plan of Arrangement in exchange for Tahoe common shares (together with nominal cash so as to require a joint s. 85(1) election to achieve Canadian rollover treatment), with Tahoe then dropping its Rio Alto shares into a wholly-owned subsidiary and causing their amalgamation in a conventional amalgamation. The share exchange, drop-down and amalgamation are intended to qualify as a Code s. 368(a) reorganization – so that tax deferral (except re the nominal cash) generally will be available for U.S. shareholders who acquired their Rio Alto shares after May 2011, as Rio Alto is believed not to have been a PFIC since then.

Rio Alto’s assets are mostly Peruvian mining/development subsidiaries. As the U.S. does not have a Treaty with Peru, U.S. shareholders of Rio Alto (unlike Canadian-resident shareholders) will not be exempt from Peruvian tax arising on the exchange of their shares under the Peruvian equivalent of the taxable Canadian property/FIRPTA rules, and generally will not be entitled to a U.S. foreign tax credit, as any gain on their Rio Alto shares would be treated as U.S.-source income.

There is no discussion of how Peru might collect this tax.

Neal Armstrong.  Summary of Rio Alto Circular under Mergers & Acquisitions – Mergers – Shares for Shares and Nominal Cash.