When "State Ownership" Is Deemed "Related-Party" Status — A Full Review of MMG's Thin Capitalization Litigation Case in Peru

01 The Massive Tax Dispute Facing a World-Class Copper Mine

On March 5, 2025, MMG Limited (1208.HK) released a market-shaking announcement: its Peruvian subsidiary Minera Las Bambas S.A. ("MLB") had received a favorable ruling from Peru's Tax Court, affirming MLB's right to claim a USD 429 million tax loss for the 2018 tax year and to fully deduct interest expenses on a USD 378 million loan from a Chinese banking syndicate and a USD 242 million shareholder loan from an affiliated party.

The story dates back to 2014, when a Chinese consortium comprising MMG (62.5% stake), CITIC Metal (15%), and China Reform Holdings (22.5%) acquired the Las Bambas copper project from Glencore for USD 7.005 billion. It was the largest overseas mining acquisition by a Chinese enterprise at the time — MLB holds proven copper reserves of approximately 7.3 million tonnes, with an annual design capacity of 400,000 tonnes, ranking it among the world's lowest-cost large-scale copper mines.

To fund this massive acquisition, the Chinese side devised a complex cross-border financing structure. MLB, as the Peruvian project operating entity, obtained approximately USD 6.957 billion in project financing loans from a Chinese banking syndicate consisting of China Development Bank, Industrial and Commercial Bank of China, Bank of China, and The Export-Import Bank of China, while also securing approximately USD 4.3 billion in shareholder loans from MMG Swiss Finance A.G., a Swiss subsidiary of MMG. Under Peruvian tax law at the time, the general withholding tax rate on interest paid to non-resident lenders was 30%, but eligible overseas bank loans could benefit from a reduced rate of 4.99%.

However, starting in 2016, Peru's National Superintendence of Tax Administration (SUNAT) launched a comprehensive audit of MLB's tax filings for the 2014–2018 period and successively issued hefty tax assessments: in 2017, approximately USD 200 million for 2014 and 2015; in 2018, USD 174 million for 2016; in 2023, a staggering USD 960 million for 2017; and in 2024, USD 912 million for 2018. The cumulative tax assessments across the five tax years exceeded USD 2.2 billion — a figure that already surpassed MLB's net asset value at the time.

02 The Core of the Dispute: SUNAT's Three-Pronged Allegations

1 Related-Party Determination

SUNAT's most central argument in this case was to depart from traditional equity-control criteria and instead define related-party relationships on the basis of common state ownership. Its reasoning was: MLB's ultimate controlling shareholder is the central state-owned enterprise China Minmetals Corporation; the lending state-owned banks that provided the syndicated loan — China Development Bank, The Export-Import Bank of China, Bank of China, and others — likewise fall under the central state-owned enterprise system; both are subject to the control of the Chinese government; therefore, under Peru's Income Tax Law, they should be directly deemed related parties.

Court Ruling: State Ownership ≠ Related-Party Status

The court clearly defined the core criteria for related-party determination, rejecting the tax authority's homogenized state-ownership presumption. The ruling held that the legislative purpose of the related-party transaction provisions in the Income Tax Law is to combat tax evasion, not to indiscriminately presume related-party status among state-owned enterprises under the same sovereign state. The sole core standard for determining related-party status is whether substantive operational and financial control exists.

In this case, despite MLB and the lending state-owned banks all being part of China's state-owned asset system, there was no evidence of government intervention, non-market pricing, or similar circumstances in the relevant loans. The terms and interest rates of the syndicated loan in question all complied with arm's-length principles for international mining project financing. Furthermore, the court specifically invoked the core rules of the OECD Transfer Pricing Guidelines, explicitly rejecting the flawed logic that "state-owned equals related," and held that such an approach would seriously disrupt global market-based transaction order and lacked any legal basis for judicial application.

2 Interest Deductibility

Regarding the interest expenses on the shareholder loan MLB obtained from MMG Swiss Finance A.G., SUNAT invoked the causality principle under Peru's Income Tax Law to deny deductibility. The tax authority argued that deductible expenses must have a direct causal connection to an enterprise's ordinary operating income, whereas the shareholder loan proceeds in question were entirely used to finance the Las Bambas acquisition consideration — a long-term capital investment, not an ordinary operating expense of the mine — and therefore lacked a direct causal link to the enterprise's revenue, rendering the corresponding interest expenses non-deductible for tax purposes.

Court Ruling: Economic Substance > Immediate Causality

On the dispute over deductibility of shareholder loan interest, the court rejected the tax authority's narrow interpretation of the causality requirement, clarifying that the income-expense nexus under tax law does not require an immediate or direct operational linkage. As long as the expenditure serves the enterprise's overall business operations and can generate future economic benefits on an ongoing basis, it satisfies the conditions for pre-tax deductibility.

In light of the facts, the court found that the shareholder loan used by MLB to acquire the mine was a necessary investment for the enterprise to obtain its core operating assets. The revenue generated from mine operations is the enterprise's sole source of income, and the two form a complete and closed causal chain. Acquisition financing costs are part of an enterprise's routine investment and operating costs. Forcibly denying their deductibility would artificially inflate the enterprise's taxable income, violating the fundamental tax law principle of fair taxation.

3 Thin Capitalization

The most extreme position taken by SUNAT was its "negative equity" argument. Due to accounting treatments such as goodwill amortization arising from the Las Bambas acquisition, MLB's balance sheet showed negative equity after the acquisition. SUNAT accordingly argued that for purposes of calculating the thin capitalization ratio, MLB should be treated as having no equity capital, rendering its debt-to-equity ratio infinite and all interest expenses non-deductible.

Court Ruling: Real Capital > Book Figures

The court completely rejected the tax authority's negative equity taxation theory, holding that the standard for determining "equity capital" under thin capitalization rules must be based on an enterprise's actual paid-in registered capital, accumulated retained earnings, and other genuine equity capital, rather than notional book values arising from goodwill amortization, M&A accounting, or similar treatments.

The ruling further emphasized that the application of thin capitalization rules presupposes the existence of subjective tax avoidance intent. MLB's overall financing structure was a standard compliant model for large-scale international mining M&A transactions. The funds were used solely for project construction and operations, and there was no subjective bad faith to shift profits or evade taxation through debt arrangements. The tax authority's attempt to negate genuine capital contributions based on accounting book results had no legal foundation whatsoever.

03 Conclusion

MMG's comprehensive victory in the Las Bambas case is not only of decisive significance to MMG itself, but also leaves a profound institutional imprint on the broader landscape of Chinese overseas investment.

First, it establishes an international judicial precedent on the critical issue of whether state ownership alone can constitute related-party status. Had SUNAT's logic — that common state ownership equates to related-party status — been judicially confirmed in any jurisdiction, the systemic impact on Chinese overseas enterprises would have been incalculable. The Peruvian Tax Court's ruling, centered on the "actual control" standard, provides an authoritative reference point for resolving similar disputes globally.

Second, it imposes effective judicial constraints on Peru's tax enforcement practices. The Las Bambas ruling demonstrates that Peru's judicial system does not endorse SUNAT's ultra vires enforcement actions that go beyond the text and legislative purpose of tax laws. Following the announcement of the ruling, MMG's share price rose approximately 12% on the Hong Kong Stock Exchange, increasing its market capitalization by more than HKD 5 billion — reflecting capital markets' recognition of the rule-of-law signal sent by the ruling, no less than their recognition of its direct financial impact.

Finally, it offers systemic lessons for overseas enterprises in handling international tax disputes. The complete trajectory of the Las Bambas case shows that when faced with extreme allegations from host-country tax authorities, enterprises cannot rely on a "pay to make it go away" approach of compromise. Instead, they should make full use of the host country's domestic judicial remedies, and through rigorous legal reasoning and thorough evidentiary preparation, resolutely defend their legitimate tax rights and interests.