5 Mexico

Mrs. Ana Paula Pardo • Mr. Jorge San Martín Elizondo

I.1. Corporate Income Tax at Domestic level

Under the Income Tax Law, Mexican resident legal entities are subject to income tax on a worldwide basis. That is, they are required to pay income tax in Mexico with respect to the totality of income they receive, regardless of the source from which it may derive.

Since Mexican resident legal entities are bound to pay income tax over the totality of their income, irrespective of its source, it is important to address the concept of residency. Accordingly, a legal entity could be deemed as a Mexican resident when their business’ headquarters or their effective centre of management are established within Mexican territory.

In contrast, foreign tax residents could be subject to income taxation in Mexico regarding (i) any and all income attributable to a permanent establishment of theirs set up within Mexican territory; and/or (ii) Mexican-sourced income received by them (that cannot be attributed to a permanent establishment).

Generally speaking, a foreign tax resident could be deemed to have a permanent establishment in Mexico when business activities, whether in part or entirely, are carried out in Mexico or independent personal services are rendered therein. Therefore, any branch, agency, office, manufacturing facility, workshop, mine, or any other place for the extraction, exploration or exploitation of natural resources, could be deemed to constitute a permanent establishment. Furthermore, a permanent establishment could also be deemed to exist if the foreign tax resident acts in Mexico by conduct of a dependent agent or an independent agent acting beyond its ordinary course of business.

Lastly, it is worth noting that the Income Tax Law provides the normative premises under which each income item received by a foreign resident could be considered as having its source in Mexico, hence triggering income tax therein.

I.1.1. Active Income

Considering that: (i) Mexican resident legal entities are liable for income tax on a worldwide basis; (ii) foreign residents are liable for income tax on income attributable to a permanent establishment of theirs set up within the country; and/or (iii) for any income whose source is deemed to be located in Mexico (that cannot be attributed to a permanent establishment), the distinction between active and passive income would appear not to be as relevant at a domestic level.

Nonetheless, such distinction could be of vital importance vis-à-vis the tax treatment applicable to specific transactions.

For instance, identifying an income item as business profits (an active income item) could be of paramount importance for foreign residents (without a permanent establishment within national territory). The foregoing given that business profits could in some occasions be considered not to have their source of income in Mexico and, as such, would not trigger income tax therein (in so far as such business profits are not subject to a preferential tax regime in the relevant entity’s jurisdiction, in terms of the Income Tax Law. What is more, in terms of an administrative rule, certain income items could be deemed not to have their source of wealth in Mexico when the relevant transactions are conducted by independent parties or at fair market values).

Moreover, this distinction could be of relevance when deciding on the applicability of a particular tax regime (i.e., whether a trust should be considered as a business trust or not), or when it comes to deciding the applicable withholding tax for certain Mexican-sourced income items received by foreign residents.

I.1.1.1. Business Profits

Under Mexican law, business profits are considered as an active income item. For such purposes, business profits mean income obtained as consequence of the performance of commercial (as defined by the Code of Commerce), industrial, agricultural, stockbreeding and fishing activities.

In this regard, the Code of Commerce sets forth two general principles per which the character of commercial could be attributed to an activity. First, a subjective principle under which the following persons would be deemed as a (commercial) business: (i) individuals that have legal capacity to conduct business activities and do so as their occupation; (ii) business corporations incorporated in terms of Mexican commercial laws; and (iii) foreign corporations or agencies or branch offices thereof located within national territory that conduct business activities.

Secondly, an activity could be considered of a commercial nature in terms of an objective principle if it is one of the activities listed in article 75 of the Code of Commerce (article 75 consists of an extensive list of activities that are deemed as commercial activities). In view of the foregoing, the following, amongst others, could be identified as commercial activities: (a) the purchase and sale of immovable property when performed for speculation purposes; (b) transportation of people or goods by land or sea and tourism-related enterprises; (c) banking activities; (d) transactions involving securities in terms of the Negotiable Instruments and Credit Operations Law; or (e) insurance agreements of any sort.

I.1.1.1.1. Taxable Event

The recognition of an income item that could fall under any of the abovementioned categories, that is, commercial, industrial, agricultural, stockbreeding or fishing activities, by a taxable legal entity could trigger income tax on such business profits. Therefore, it is of paramount importance to identify the subject (taxpayer) receiving the relevant income for purposes of determining when income tax is triggered and how it should be calculated and paid.

Since Mexican resident companies are liable for income tax in Mexico on a worldwide basis, income items recognised by them as business profits would need to be added to the rest of their accruable income for the current tax year for purposes of determining the corresponding taxable basis.

When it comes to foreign residents, the tax treatment applicable in Mexico to business profits varies depending on whether it is attributable to a permanent establishment located in Mexico, or else, deemed as a Mexican-sourced income item.

In the first case, that is, when business profits are attributable to a permanent establishment set up in Mexico by a foreign resident, income tax would be triggered when income is derived by the permanent establishment and the foreign resident would be liable for the corresponding income tax as if it were a Mexican legal entity (a similar tax treatment applies).

Lastly, concerning foreign residents without a permanent establishment set up within national territory (or that even when having one, business profits cannot be attributed thereto), income tax would be triggered depending on the nature of the activities from which business profits are derived. Arguably, whilst certain business profits would not be considered as Mexican-sourced and as such would not be subject to income taxation in Mexico, other income items deemed as business profits could indeed be taxed therein (i.e. Mediation fees subject to a preferential tax regime in the creditor’s jurisdiction could be considered as business profits subject to income tax in Mexico).

Without prejudice of the foregoing, under article 7 (Business Profits) of several of the double taxation agreements concluded by Mexico, business profits obtained by foreign residents (from jurisdictions with which such a treaty has been concluded) could be exempt from income tax in Mexico.

I.1.1.1.2. Taxable Basis

Mexican resident companies that receive business profits are required to accumulate them along with the rest of their accruable income generated during the corresponding tax year. Generally speaking, they would then subtract from their gross income allowed deductions (as set forth in the applicable tax laws), employees’ profits sharing and pending losses from previous tax years, if any, for purposes of obtaining the taxable basis on which income tax ought to be paid.

It should be noted that whenever Mexican companies carry out activities from which business profits are derived by conduct of a business trust, then said trust would be required to determine income tax due by such entities and to comply with several formal tax obligations on behalf of them.

As per foreign residents with a permanent establishment located in Mexico, all income attributable thereto, including business profits, would be deemed as taxable income under the Income Tax Law. Since permanent establishments are given a similar treatment than that applicable to Mexican residents, foreign residents with a permanent establishment would also be required to determine their (gross) accruable income for the current tax year and could be allowed to reduce their taxable basis with specific deductions (i.e. in certain cases, expenses shared by permanent establishments of the foreign resident located in different jurisdictions could be deducted by the Mexican permanent establishment in the corresponding proportion).

Concerning taxable Mexican-sourced business profits obtained by a foreign resident (not attributable to a permanent establishment), the general rule would be for the taxable basis to be the gross amount of income received (business profits), without the possibility of claiming deductions.

Furthermore, when taxable income is received by a foreign resident acting through a Mexican trust, the latter would be required to determine income tax due on behalf of the first (consequently it would calculate the corresponding taxable basis) and to withhold the relevant amounts.

However, it should be noted that certain income items deemed as business profits received by foreign residents would not trigger income tax in terms of the Income Tax Law, or could even be exempted in terms of the applicable double taxation agreement concluded by Mexico and the country of which the relevant foreign resident is a tax resident.

I.1.1.1.3. Taxpayers

As per mentioned above, Mexican resident companies, foreign residents with a permanent establishment located in Mexico and in certain cases foreign residents without a permanent establishment in Mexico (or that even when having one the relevant income item cannot be attributed to), could be deemed as taxpayers as consequence of the attainment of business profits.

I.1.1.1.4. Tax rates

Mexican companies are taxed at the corporate rate of 30 per cent on taxable profits derived in the corresponding tax year.

Similarly, foreign tax residents with a permanent establishment within Mexican territory are required to accrue all income attributable thereto and to pay income tax thereupon (less allowed deductions, that is, on the taxable basis) at a 30 per cent tax rate.

In general terms, business profits received by foreign tax residents without a permanent establishment located in Mexico (or to which such business profits cannot be attributed) could be exempted from income tax in Mexico by means of a double taxation agreement.

Nonetheless, in cases where a Mexican-sourced income item received by foreign resident is deemed as taxable business profits, the applicable withholding tax rate could be of 40 per cent if such income item is considered as subject to a preferential tax regime in the country of which the creditor (the foreign resident) is a tax resident. The foregoing, in so far as the entities involved in the transaction are related parties and no tax information exchange agreement between Mexico and the corresponding jurisdiction is in force.

I.1.2. Passive Income

Hereunder you will find a comprehensive analysis with respect to the tax treatment to which income items traditionally characterised as passive income could be subject to under Mexican law. Accordingly, dividend, interest and royalty payments will be addressed with the purpose of outlining a general overview of the tax treatment applicable thereto.

I.1.2.1. Dividends

Pursuant to recent tax reforms implemented in Mexico and in effect as of 2014, the Mexican Income Tax Law adopted the form of a classic taxation system, that is, income tax is triggered: (i) when (taxable) profits are obtained; and (ii) whenever profits are distributed to the relevant shareholders (as explained further below certain exceptions apply).

In general terms, corporate entities are therefore liable for income tax due on profits derived during the relevant tax year and are required to withhold income tax whenever they distribute such profits or pay dividends to their shareholders (again, certain exceptions apply).

I.1.2.1.1. Taxable Event

Bearing in mind that, in principle, corporate entities are taxed on the profits they obtain in the corresponding tax year, (after-tax) net profits resulting from their activities are added to the relevant entity’s after-tax earnings and profits account or “Cuenta de Utilidad Fiscal Neta” (commonly, and for purposes hereof, referred to as “CUFIN”).

Dividends paid by a Mexican resident company are not subject to additional taxes on a corporate level in so far as they are paid out of their after-tax earnings and profits account or CUFIN since the balance of said account consists of distributable income which has already been subject to corporate taxation. However, should that not be the case (if dividends are not paid out of the CUFIN), the entity paying dividends would be required to pay the corresponding corporate tax at the time of the distribution.

In addition, and whether the distributable income is being paid out of the CUFIN or not (and therefore is subject to corporate taxation), an additional withholding tax would be triggered by the distribution of dividends if they are paid to foreign residents (legal entities or individuals) or Mexican individuals.

In light of the foregoing, foreign tax residents receiving dividends could trigger income tax in Mexico when said income item is deemed to be sourced in Mexico, that is, whenever the distributing entity is a Mexican company. In such cases, the Mexican company would be required to withhold income tax (regardless of the corporate tax paid at the time the corresponding profits were generated).

However, the aforesaid withholding tax would not be triggered if the dividends are paid by a Mexican resident company to another Mexican resident company. Instead, the amount distributed (paid) would be added and computed in the CUFIN of the recipient entity and subtracted from the CUFIN of the distributing entity.

I.1.2.1.2. Taxable Basis

As per mentioned above, whenever Mexican companies pay dividends out of their CUFIN, no additional corporate tax would be triggered. Nevertheless, in cases where dividends are not paid out of the CUFIN, corporate income tax (in addition to the withholding tax, if applicable) would be triggered.

Consequently, the distributing Mexican entity would be required to determine income tax due by multiplying the amount being paid (dividends) by 1.4286 and applying the corporate tax rate of 30 per cent to the result of the product.

It should be noted that the aforesaid mechanics or procedure would substantially vary in cases where the Mexican entity distributes profits (in terms of article 78 of the Income Tax Law) instead of properly paying dividends (i.e. reimbursements resulting from a capital reduction in a Mexican company could be treated as the distribution of profits).

With respect to foreign tax residents that receive taxable dividends from a Mexican company (deemed as Mexican-sourced), the taxable basis on which the withholding tax would be applied would be equal to the gross amount being paid (as dividends).

Furthermore, it should be noted that remittances paid by a permanent establishment in Mexico to its parent company abroad could also be subject to withholding on the gross amount being paid, since such payments would be deemed as dividends.

I.1.2.1.3. Taxpayers

As per mentioned above, taxation on profits and the distribution thereof in the form of dividends is twofold. Indeed, the taxpayers involved in such a transaction would be both the distributing entity (liable for the underlying corporate tax) and the recipient thereof as consequence of the applicable withholding tax, if any.

That is, the Mexican resident company paying dividends is deemed as a taxpayer with respect to the corporate tax due on the profits it obtains. Then, the recipients of the profits or dividends (i.e., the shareholders) are also deemed as taxpayers as consequence of the withholding tax in so far as they are foreign residents or Mexican individuals (considering that the tax effect regarding distributions between Mexican resident companies is reflected at the level of their respective CUFIN).

Moreover, foreign tax residents could be deemed as taxpayers when a permanent establishment of theirs sends remittances to its parent company abroad.

I.1.2.1.4. Tax rates

Currently, the corporate tax to which Mexican resident companies are subject to is of 30 per cent. Consequently, whenever a Mexican resident company pays dividends that have not been subject to corporate taxation (not from their CUFIN), the corporate tax applicable thereto would be the result of applying the 30 per cent rate to the amount distributed multiplied by 1.4286.

It is worth noting, however, that (assuming certain requirements are met) corporate income tax paid (30 per cent) at the level of the distributing Mexican company could be credited by the recipient of the dividends against income tax on future profits in the current tax year or in the following two tax years.

Regarding dividends paid by a Mexican resident company to foreign residents (legal entities or individuals), as well as to Mexican resident individuals, the additional withholding tax would be determined by applying a 10 per cent tax rate to the gross amount being distributed.

In some cases, in addition to the applicable withholding tax, Mexican individuals that receive dividends could have an additional tax burden of up to 5 per cent, depending on their applicable progressive tax rate (since they are subject to income tax on the totality of income they receive at a rate of up to 35 per cent and are only allowed to credit the corporate tax paid by the distributing entity at a rate of 30 per cent).

Notwithstanding the abovementioned tax treatment under Mexican laws, relief in the form of reduced tax rates or even exemptions could be provided by means of a double taxation agreement concluded by Mexico and the country of which the (foreign) recipient is a tax resident.

I.1.2.2. Interest

Pursuant to the Income Tax Law, the term interest applies to yields on credits of any kind, regardless of the name used or given thereto. Amongst others, the following items are considered as forms of interest: yields on public debt, on bond or debentures, including discounts and premiums; premiums on repurchase agreements or securities lending; commissions charged for opening or guaranteeing credits; considerations for accepting joint liabilities or granting a guarantee or a liability of any kind, except when said considerations must be paid to insurance and bonding institutions; gains on the sale of bonds, securities and other negotiable instruments, provided that they are of the type that are placed among the general investing public in accordance with the general rules issued for said purposes by the tax authorities.

Generally speaking, interest payments are accruable income for the recipient and a deductible expense for the payer, provided that certain requirements are met. It should be kept in mind that the term payment includes any form under which the obligation to pay the interest is extinguished.

Amongst the conditions that ought to be met for interests to be deductible for income tax purposes the following, inter alia, can be found:

  1. Interest payments (expense) must be strictly necessary for the performance of the taxpayer’s activity.
  2. Where applicable, income tax due on interest payments must be effectively withheld for the relevant payment to be deemed as deductible.
  3. The loan must be duly recorded with proper documentation supporting the transaction (agreements, notes, wire transfer, checks, bank account statements).
  4. The loan must be duly registered in the relevant entity’s accounting records.
  5. Concerning transactions between related parties, the arm’s length principle must be abided by (fair market values);
  6. Other formal obligations such as the filing of informative tax returns regarding payments realised abroad, identifying related parties, amongst others; and
  7. Thin capitalisation rules must be abided by.
  8. Interest payments made in favour of a foreign legal entity that controls or is controlled by the taxpayer making the corresponding payments would not be deductible if any of the following conditions are met (certain exceptions could apply):
    1. The foreign legal entity that receives interest income is fiscally transparent, unless the shareholders or beneficiaries thereof are actually subject to income tax on income derived from said legal entity and the payment made by the (Mexican) taxpayer abides by the arm’s-length principle (in which case interest payments could be deducted);
    2. The relevant payment is deemed as inexistent (for tax purposes) in the country or jurisdiction where the foreign legal entity is located; or
    3. The foreign legal entity is not bound to recognise such payment as taxable income under the laws applicable thereto.
I.1.2.2.1. Taxable Event

Mexican resident corporations are subject to income tax on a worldwide basis. Bearing this in mind, income received as interest payments ought to be accrued with the rest of income items received by the relevant Mexican entity during the current tax year.

Likewise, interest payments received by a foreign resident with a permanent establishment status from a Mexican company would be deemed as income attributable to the permanent establishment and as such, as taxable income. In such cases, the foreign resident with the permanent establishment status would also be required to accrue said interest payments with the rest of income items attributable to the permanent establishment in order to determine income tax due in the current tax year.

Concerning interest payments received by a foreign resident (without a permanent establishment set up within the country or to which interest payments cannot be attributed to), income deriving therefrom would be deemed as sourced in Mexico if the capital or principal on which such interests are being accrued is invested within the country or when the debtor (the entity paying interests) is a Mexican resident or a foreign resident with a permanent establishment in Mexico.

Accordingly, interest payments received by a foreign resident that are considered as Mexican-sourced could be subject to taxation in Mexico.

Interests paid by a Mexican resident to a foreign resident without a permanent establishment within national territory are deemed to have a Mexican source of wealth. In accordance with the Income Tax Law, in such cases, the payer would be required to withhold the corresponding tax (the applicable rate may vary depending on several factors including the nature of the parties involved, nonetheless the top rate is 35%) when such interests become due or are paid, whatever happens first.

I.1.2.2.2. Taxable Basis

Mexican companies ought to add interest payments with the rest of accruable income received during the current tax year. Their taxable basis would then be determined by subtracting allowed deductions, employee’s profit sharing and pending losses from previous tax years, if any, from gross income received during the corresponding tax year.

Interest payments received by a foreign resident’s permanent establishment located within Mexican territory would be deemed as accruable income. Therefore, the taxable basis on which the permanent establishment would be required to pay income tax could be its net profits (gross income, less allowed deductions) for the relevant tax year.

However, in cases where interest payments regarding the permanent establishment located in Mexico are made to the parent company or another permanent establishment thereof, the Mexican permanent establishment would be bound to make the corresponding withholding within the following 15 days after that in which the interest payment is made or the (Mexican permanent establishment) deducts such expense, whatever happens first.

Generally speaking, the taxable basis on which foreign tax residents that receive taxable interest payments (Mexican-sourced) from a Mexican company or a foreign resident’s permanent establishment located in Mexico would be required to pay income tax, would be equal to the gross amount being paid (without the possibility of claiming deductions)

I.1.2.2.3. Taxpayers

As per mentioned above, under the applicable Mexican laws, Mexican resident companies, foreign residents’ permanent establishments located in Mexico and foreign residents (receiving Mexican-sourced income) could be deemed as taxpayers with respect to interest payments.

I.1.2.2.4. Tax rates

Mexican resident companies receiving interest payments are subject to the corporate tax rate of 30 per cent (applied to the taxable basis determined for the corresponding tax year).

Similarly, foreign residents with a permanent establishment located in Mexico would be bound to accrue the totality of income they perceive, amongst which interest payments could be found, and to pay income tax at the corporate rate of 30 per cent on their taxable basis (gross income, less allowed deductions).

Lastly, the tax rate to which foreign tax residents receiving Mexican-sourced interest payments could be subject to ranges from 4.9 to 35 per cent, depending on the nature of the creditor and the debtor or the concept for which such interests are being paid. Nonetheless, a withholding tax rate of 40 per cent could result applicable if income received by the foreign tax resident is deemed to be subject to a preferential tax regime (according to Mexican laws) and the applicable provisions are not complied with.

Despite the foregoing, interests due or paid to a foreign resident could benefit from reduced withholding rates set forth in a double taxation agreement to which Mexico is part (i.e. withholding tax rates of 5%, 10% or 15%).

I.1.1.3. Royalties

In general terms, royalties and technical assistance paid by a Mexican resident to a foreign resident are subject to income tax in Mexico. However, it is important to define the concepts for which such payments are made, given that tax treatment corresponding to royalties or technical assistance could greatly vary, both for purposes of the Income Tax Law and the applicable double taxation agreements. In fact, whereas the payment of royalties could be subject to a withholding tax, the payment of technical assistance could be exempt from income tax in Mexico pursuant to the tax treatment set forth in double taxation agreements. 

For such purposes, the term royalties under Mexican Law (Article 15-B of the Federal Fiscal Code) includes payments of any kind for the temporary use or enjoyment of patents; certificates of invention or improvement; trademarks, trade names; copyrights of literary, artistic or scientific works, including motion pictures and recordings for radio or television, as well as of drawings or models, blueprints, formulas, procedures, industrial, commercial or scientific equipment, and amounts paid for technology transfers or information regarding industrial, commercial or scientific experiences, or other, similar rights or property. Furthermore, the consideration paid for the transfer of patrimonial rights could also be deemed as royalty payments.

Moreover, pursuant to Article 12 of the OECD’s Model Tax Convention on Income and on Capital, royalties means: “ […] payments of any kind received as a consideration for the use of, or the right to use, any copyright of literary, artistic or scientific work including cinematograph films, any patent, trade mark, design or model, plan, secret formula or process, or for information concerning industrial, commercial or scientific experience.

From the preceding definition, please note that the term royalties includes payments for the use of information concerning industrial, commercial, or scientific experience (commonly known as know-how). Therefore, payments as consideration for know-how would also fall under the scope of Article 12, and would therefore be treated as royalties.

What is more, royalties paid to a foreign related party could be fully deductible for income tax purposes, provided that the benefit derived thereof is realised in the same year in which the deduction is claimed. Otherwise, they may be depreciated annually, under the straight-line method at the 15% rate.

In addition, for royalty payments to be deductible other requirements should be met, amongst which the following (essential requirements) can be found:

1) Royalties must be strictly necessary for the taxpayer’s activity;

2) The arm’s length principle must be abided by; and

3) Income tax withholdings must be performed (for which a tax residency certificate of the beneficiary for each year should be obtained).

On the other hand, from a Mexican legal standpoint, technical assistance and technical services mean the rendering of independent personal services for which the service provider undertakes to provide non-patentable knowledge that does not entail the transfer of confidential information on industrial, trade or scientific experiences and undertakes with the provider to intervene in implementing said knowledge.

In this regard, Commentary 11.3 of the OECD’s Model Tax Convention on Income and on Capital, establishes that the following criteria could be relevant to distinguish royalty and technical assistance payments:

  • Contracts for the supply of know-how (royalties) concern information that already exists that has not been patented and does not generally fall within other categories of intellectual property rights. It generally corresponds to un-divulged information of an industrial, commercial or scientific nature arising from previous experience, which has practical application in the operation of an enterprise and from the disclosure of which an economic benefit can be derived or concern the supply of that type of information after its development or creation and include specific provisions concerning the confidentiality of that information.
  • In the case of contracts for the provision of services (technical assistance), the supplier undertakes to perform services which may require the use, by that supplier, of special knowledge, skill and expertise but not the transfer of such special knowledge, skill or expertise to the other party.
  • In most cases involving the supply of know-how, there would generally be very little more which needs to be done by the supplier under the contract other than to supply existing information or reproduce existing material. On the other hand, a contract for the performance of services would, in most cases, involve a very much greater level of expenditure by the supplier in order to perform his contractual obligations. For instance, the supplier, depending on the nature of the services to be rendered, may have to incur salaries and wages for employees engaged in researching, designing, testing, drawing and other associated activities or payments to sub-contractors for the performance of similar services.

In light of the foregoing, pursuant to Commentary 11.4. of the OECD’s Model Tax Convention on Income and on Capital, the following payments should not be considered as consideration for the provision of know-how but, rather, for the provision of services:

  • payments obtained as consideration for after-sales service;
  • payments for services rendered by a seller to the purchaser under a warranty;
  • payments for pure technical assistance;
  • payments for an opinion given by an engineer, an advocate or an accountant, and payments for advice provided electronically, for electronic communications with technicians or for accessing, through computer networks, a trouble-shooting database such as a database that provides users of software with non-confidential information in response to frequently asked questions or common problems that arise frequently.
I.1.2.3.1. Taxable Event

As was the case of other income items, income tax would be triggered whenever a Mexican company receives royalty payments (since they are taxed on a worldwide basis).

Likewise, royalty payments attributable to a foreign resident’s permanent establishment located within Mexican territory would be considered as taxable income in Mexico.

Lastly, concerning foreign tax residents that receive royalty payments, income tax would be triggered in Mexico in so far as such payments are sourced in Mexico. In this regard, the Income Tax Law provides that income deriving from royalties (as well as technical assistance or advertising), could be deemed as Mexican-sourced when the assets or rights for which the royalties (or the technical assistance) are paid are exploited in Mexico; or whenever royalties (or technical assistance fees or the advertising fees) are paid by a Mexican resident or by a foreign resident with a permanent establishment set up in Mexican territory.

I.1.2.3.2. Taxable Basis

Mexican companies that receive royalty payments would be required to accumulate such income item with the rest of their accruable income. The corresponding taxable basis would then be determined by subtracting allowed deductions, employee’s profit sharing and pending losses from previous tax years, if any, from their gross income.

Concerning foreign residents with a permanent establishment located set up in Mexico, royalty payments attributable thereto would also be deemed as accruable income. Therefore, their taxable basis would be equal to the result of subtracting allowed deductions from the gross income attributed to the permanent establishment during the relevant tax year.

However, it should be noted that whenever royalty payments (in connection with foreign residents with a permanent establishment in Mexico) are made by the parent company or by a permanent establishment thereof set up in a different jurisdiction, income tax due would need to be withheld by the Mexican permanent establishment within the following 15 days after that in which the corresponding payment is made or when the Mexican permanent establishment deducts such expense, whatever happens first. The applicable withholding tax rate would need to be applied to the gross amount of the consideration.

Finally, the applicable taxable basis for foreign tax residents receiving royalty payments sourced in Mexico would be equal to the gross amount of the consideration (royalty payments), without the possibility of claiming any deduction.

I.1.2.3.3. Taxpayers

As has been the case throughout this chapter, Mexican companies, foreign tax residents with a permanent establishment set up within Mexican territory and foreign residents with Mexican-sourced income that receive royalty payments could be deemed as taxpayers under the Income Tax Law.

I.1.2.3.4. Tax rates

Taxable profits obtained by Mexican companies are subject to income tax at the corporate rate of 30 per cent. That being said, royalty payments are no exception thereto and as such they must be accrued and income tax paid thereupon at the corporate tax rate.

Foreign tax residents with a permanent establishment status would be taxed alike at the corporate tax rate of 30 per cent regarding accruable interest payments (on the taxable basis).

Concerning foreign tax residents that receive royalty payments, the applicable withholding tax rate (on the gross amount of the consideration, without the possibility of claiming any deduction) could be of 5, 25 or 35 per cent (whilst the withholding rate applicable to technical assistance fees is of 25 per cent).

Notwithstanding the foregoing, foreign tax residents whose income is deemed as subject to a preferential tax regime pursuant to the Income Tax Law, could be subject to a 40 per cent withholding tax on royalty payments they receive (or technical assistance fees), without the possibility of claiming any deduction to reduce the taxable basis. Income tax due in such cases would be paid via withholding when the entity making the corresponding payment is a Mexican resident or a foreign tax resident with a permanent establishment within the country.

Nonetheless, pursuant to most of the double taxation agreements concluded by Mexico, whereas withholding tax on royalty payments could be capped at 10 per cent of the gross amount of the relevant consideration (royalty payment), technical assistance fees could in some cases fall under article 7 (Business Profits) and as such, could be exempted from income taxation in Mexico.

I.1.3. Special Features of the CIT system

As explained further in section 1.6 hereof, the Mexican corporate income tax system can be characterised as profoundly influenced by recent developments at an international level, such as OECD guidelines, multilateral instruments and normative projects.

In line with the above, provisions typically reserved for such international legal systems have been gradually incorporated to Mexican tax laws. For instance, under Mexican law, taxpayers conducting activities abroad could be subject to certain filing obligations derived from the OECD Common Reporting Standard (CRS).

I.1.3.1. Existence of Group Regime

As of January 2014, the consolidation tax regime was repealed from the Income Tax Law. However, an optional group regime was added in its place, named integrating regime.

In terms of the optional regime for groups of companies, two types of entities are relevant: the integrating company (Integradora) and the integrated companies (Integradas). Pursuant to the newly added regime, taxpayers may be entitled to defer, for up to three fiscal years, part of the income tax payable by both the integrating or parent company and the integrated companies taking into account losses of the parent company (several rules and requirements may apply).

For an entity to obtain the authorisation to operate under the optional regime for groups of companies, certain requirements must be met, as follows:

  1. It must be a Mexican resident company.
  2. Directly or indirectly hold more than 80% of the shares with voting rights of the companies that will be integrated.
  3. Obtain the written consent of the legal representative of each of the companies that will be integrated.
  4. File before the tax authorities a request to operate under the optional regime for groups of companies (accompanying thereto, supporting information and documentation such as the companies’ shareholders and their participation therein).

It should be noted that several restrictions apply both to the integrating company and to the integrated companies. For instance, entities that form part of the financial system, foreign residents, or legal entities with non-profit purposes may not be subject to this tax regime.

I.1.3.2. Treatment of Losses

Tax losses (NOL’s) will exist when the amount of authorised deductions exceeds the amount of taxable income. Tax losses may be used to reduce the taxable profit for the following ten (10) fiscal periods. In the event that the taxpayer fails to carry forward its tax loss from previous years, even though the taxpayer could have done so, the taxpayer would then forfeit the right to do so in subsequent years, for up to the amount that could have been deducted.

NOL’s are also subject to inflation adjustment from the date in which they were originally incurred until the date they are used to amortise taxable income.

As a general rule, the right to amortise NOL’s corresponds exclusively to the taxpayer that incurred in such losses, and may not be transferred, even as a consequence of a merger.

I.1.3.3. Tax Holidays

Tax holidays under the Income Tax Law mainly consist of specific incentives or tax regimes for various purposes, most of which are contained in Title VII of the Income Tax Law (De los estímulos fiscales).

As mentioned before, the tax incentives contained therein serve different purposes such as allowing specific deductions for employers that hire disables or elderly people (a tax credit for an amount equal to the 100 per cent of income tax withheld and paid by such employees) or granting tax credits for the distribution and production of cinematographic projects, for the investment in cultural projects (theatrical productions, visual arts, amongst others).

From a business perspective, other tax incentives in the form of specific tax regimes have been included in the Income Tax Law. For instance, tax deferrals concerning Mexican trusts incorporated for purposes of acquiring, developing and leasing real estate located within Mexican territory (trusts known as FIBRAS that can either be public or private entities, and that resemble in certain aspects to the US REITS), or more beneficial tax regimes for parties that invest in Mexican trusts incorporated to promote risk capital investments in Mexico (FICAPS).

Lastly, the possibility of incorporating a sole-member business corporation was recently included to the Business Corporations Act. Accordingly, a specific tax regime was tailored for these simplified business corporations.

I.2. Corporate Income Tax on International Level

Hereunder you will find a comprehensive analysis with respect to the tax consequences that could be triggered from Mexico’s standpoint both by inbound and outbound transactions involving the active and passive income items studied in section 1.1. of this chapter.

I.2.1. Inbound Transactions

As per mentioned in section I.1 of this chapter, foreign tax residents could be liable for income tax in Mexico either on all income attributable to a permanent establishment of theirs located within national territory, or on income sourced therein.

In this regard, foreign tax residents planning on doing business in Mexico should keep in mind that they could acquire a permanent establishment status if any of the following conditions arises:

  1. If business activities are conducted or independent personal services are rendered in Mexico. Accordingly, any branch, agency, office, manufacturing facility, workshop, mine, or any other place for the extraction, exploration or exploitation of natural resources located within Mexican territory could be deemed to constitute a permanent establishment. 
  2. A foreign resident could also acquire a permanent establishment status if it were to act by means of a dependent agent; and
  3. A foreign resident could be deemed to have a permanent establishment in Mexico if it were to act therein by conduct of an independent agent acting beyond its ordinary course of business.

In cases were the foreign resident conducting its business were to acquire a permanent establishment status, any and all income attributable thereto would be subject to taxation in Mexico.

It should be noted that double taxation agreements concluded by Mexico would seldom be considered to provide relief regarding the avoidance of the permanent establishment status, since the criteria contained therein for purposes of identifying a permanent establishment are close to identical to those set forth in the Income Tax Law.

What is more, backed by recent developments in the international arena (i.e. BEPS Action 7), tax authorities are ever more likely to identify artificial schemes for the avoidance of the permanent establishment status, such as commissionnaire arrangements.

In view of the foregoing, any of such active (business profits) or passive (dividends, interests and royalties) income items mentioned in section I.1., could trigger income tax in Mexico in so far as they are attributable to a foreign resident’s permanent establishment located within Mexican territory.

Moreover, foreign tax residents with a permanent establishment within Mexican territory that receive income deemed as subject to a preferential tax regime (as per the Income Tax Law) could be required to pay income tax in terms of Chapter I of Title VI of the Income Tax Law, that is, the applicable provisions for preferential tax regimes.

Income items could be considered to be subject to a preferential tax regime if: (i) they are not taxed in the foreign residents’ jurisdictions; (ii) the applicable tax rate in the foreign residents’ jurisdictions is lower than 75 per cent of the income tax that would have been paid in Mexico; (iii) such income items are received by conduct of foreign tax transparent legal entities or vehicles; or (iv) the relevant income items derive from a listed jurisdiction presumed to have a preferential tax regime pursuant to the Income Tax Law.

In general terms, the foreign resident with a permanent establishment status in Mexico that receives income deemed as subject to a preferential tax regime would be required to accrue the relevant income items as of the moment they are received by the foreign entity or vehicle (instead of having to accrue such income when attributed to the permanent establishment), that is, even without said income being distributed to the permanent establishment. Furthermore, income tax would be levied at the corporate tax rate of 30 per cent.

Regardless of the foregoing, income tax could also be triggered at the level of foreign residents whenever they are deemed to receive Mexican sourced income items. Generally speaking, income tax due by foreign residents would be paid via withholding in cases were the corresponding payment (from which taxable income derives) is made by a Mexican resident or a foreign resident with a permanent establishment located within Mexican territory. Moreover, the applicable withholding tax rate could vary depending on the relevant income item received by the foreign resident.

Irrespective of the general tax treatment to which a foreign tax resident could be subject to, in cases where Mexican-sourced income received by a foreign tax resident is deemed to be subject to a preferential tax regime in its jurisdiction (in terms of the Income Tax Law), a withholding tax at a rate of 40 per cent could result applicable (except for dividend and certain interest payments, in which case the 40 per cent tax rate would not be applicable in so far as the corresponding requirements under the general tax treatment are met).

As a general rule, income items received by a foreign tax resident could be considered as subject to a preferential tax regime whenever they are not subject to taxation in the foreign resident’s jurisdiction or the applicable tax is lower than the equivalent of 75 per cent of income tax that would have been triggered in Mexico for such an operation. In addition, income could also be considered as subject to a preferential tax regime if it is received by conduct of a tax transparent legal vehicle or entity or in cases where the Mexican-sourced income is received by a tax resident of a listed jurisdictions in terms of the Income Tax Law.

Notwithstanding the foregoing, relief in the form of reduced withholding tax rates or even tax exemptions could be provided by means of the double taxation agreements concluded by Mexico.

Furthermore, depending on the applicable double taxation agreement, foreign residents taxed on Mexican-sourced income could be entitled to credit or deduct income tax paid in Mexico, at the level of the jurisdiction in which they are tax residents.

I.2.2. Outbound Transactions

Since Mexican resident companies are liable for income tax in Mexico on a worldwide basis, that is, on any and all income they receive irrespective from where its sourced, any income item received from abroad could be deemed as an accruable income (for purposes of determining the taxable basis for the relevant tax year and thus, income tax due). Consequently, Mexican entities obtaining income sourced in other jurisdictions would be subject to taxation in Mexico even if the corresponding income items were taxed (or not) in the jurisdictions from which they derive.

Nevertheless, either the Income Tax Law and/or the applicable double taxation agreement could allow Mexican taxpayers to mitigate or in some cases avoid the effects of double taxation (i.e. possibility of crediting income tax paid abroad).

However, it should be noted that Mexican residents could be subject to a special tax regime concerning income they receive that is deemed as subject to a preferential tax regime.

For such purposes, income items could be considered as subject to a preferential regime if they are not taxed in the foreign jurisdiction from which the applicable tax rate is lower than the equivalent of 75 per cent of the income tax that would have been paid in Mexico, in cases where they are received by conduct of fiscally transparent legal entities or vehicles or derived from a listed jurisdiction presumed to have a preferential tax regime, pursuant to the Income Tax Law.

Mexican tax residents would be liable for income tax due on income items subject to a preferential tax regime as of the moment in which the foreign legal entity or vehicle in which they participate receives them (such income items would be deemed as accruable income). Income tax due thereupon would be levied at the corporate tax rate of 30 per cent.

I.3. Anti-Avoidance Legislation

Concerning anti-avoidance provisions, the following rules should be kept in mind:

  1. CFC rules: Mexican residents could be forced to accrue in advance profits considered to be subject to a preferential tax regime abroad, or perceived by means of a fiscally transparent legal entity or vehicle that controls or is controlled by the local taxpayer.
    Pursuant to applicable laws, profits could be considered as subject to preferential tax regimes abroad in cases where they are not taxed in the jurisdiction of origin or regardless of being taxed, it is done so at a rate lower than 75 per cent of the income tax that would have been caused in Mexico for the corresponding transaction.
  2. Thin capitalisation rules: Concerning the debt contracted by a local entity and a related party located abroad, the deduction of interest payments arising therefrom could be challenged in cases where the totality of the debt’s value exceeds by threefold of the debtor’s net worth. In certain cases, particularly concerning entities involved in the financial system and in the country’s strategic sectors, higher debt-to-net equity ratios could be allowed given the nature and scale of the operations.
  3. Back-to-back loans: Interest payments deriving from loans contracted between related parties could be challenged and re-characterised by Mexican tax authorities as a distribution of profits or dividends, thus, limiting the deduction thereof.
  4. Transfer-pricing rules: In general terms, transactions between related parties are required to comply with the arm’s-length principle, therefore, it should be noted that tax authorities are entitled to exercise auditing powers in order to determine whether transfer-pricing rules have been abided by in the performance of certain transactions.
    Moreover, taxpayers could be required to file transfer-pricing studies, accounting and tax documentation, as well as annual informative returns.
  5. Pro rata expenses: Generally speaking, the deduction of expenses incurred abroad on a pro rata basis with foreign entities that are not subject to taxation in Mexico could be forbidden, unless certain specific requirements are met.
  6. Restrictions on the deduction of interest, royalty and technical assistance payments: When interest, royalty and technical assistance payments are made by a local entity to a foreign entity that controls or is controlled by the first (in cases where the foreign entity is considered fiscally transparent, that the payment in question is deemed as non-existent for tax purposes pursuant to laws of the foreign entity’s jurisdiction, or that the profits deriving therefrom are not considered as taxable in terms of the applicable foreign laws) the deduction thereof could be forbidden.
    For purposes of the foregoing, control means that one entity has effective control over the other or its administration to the extent of being able to decide (directly or indirectly) when to distribute profits or dividends.
  7. Additionally, it should be noted that certain formal requirements under Mexican law ought to by abided by in order for treaty benefits to be eligible. In this regard, Mexican tax authorities could request a sworn affidavit stating the existence of double taxation and identifying the statutes or provisions under foreign law in terms of which said double taxation exists.

I.3.1. Abuse of Law

All activities conducted by taxpayers in Mexico ought to be duly recorded in compliance with the requirements set forth in corporate and tax laws. Additionally, taxpayers must be able to evidence that their transactions were indeed performed (business rationale).

In this regard, article 69-B of the Federal Tax Code sets forth the procedure that ought to be conducted by tax authorities in order to characterise as inexistent or sham transactions the activities performed by taxpayers.

In general terms, when tax authorities suspect that certain transaction did not take place or that it was simulated in order to obtain a tax benefit, they must serve notice to the corresponding taxpayer of such circumstance and are required to have published in the official gazette a list of taxpayers whose activities are deemed as inexistent or sham transactions.

The corresponding taxpayers (as well as the third parties that allegedly entered into the relevant transactions with them) are required to produce evidence with respect to such transactions. However, if they fail to evidence that the transactions were indeed performed, tax authorities would be entitled to publish a definitive list of taxpayers whose activities are deemed as inexistent (or sham transactions). What is more, tax benefits/consequences in relation to the invoices issued as a result of such transactions would be annulled by tax authorities. Furthermore, taxpayers listed therein could be subject to criminal charges.

I.3.2. Thin Capitalization Rules

Under Mexican laws, interest payments are one of the most strictly regulated deductions. In this sense, tax authorities have established stringent requirements and rules, such as thin capitalisation rules, that ought to be complied with in order for those payments to be deductible.

Pursuant to the thin capitalisation rules set forth in Mexican laws, Mexican resident entities could be entitled to deduct interest payments resulting from debt contracted with a related party abroad, as long as the relevant entity’s total amount of debt does not exceed by threefold its equity, that is, the allowed debt-to-equity ratio under Mexican law is 3:1.

To calculate the amount of debt exceeding the allowed debt-to-equity ratio indicated above, the sum of the shareholders´ equity at the beginning and at the end of the tax year shall be divided by two. The quotient thereof shall be then multiplied by three, and the result shall be finally subtracted from the annual average balance of all the relevant taxpayer´s interest-accruing debts.

If the annual average balance of the taxpayer´s debts entered into with foreign resident related parties is lower than the excess amount of the debts referred above, no interest accrued on those debts may be deducted. If the annual average balance of the debts entered into with foreign resident related parties is greater than the aforementioned excess, interest accrued from said debts entered into with the foreign resident related parties shall not be deductible in an amount equal to the result of multiplying said interest by the factor obtained by dividing the excess by said balance.

Nonetheless, entities engaged in specific industries such as the financial system or the country’s strategic sectors could be allowed to have a higher debt-to-net equity ratio.

I.3.3. CFC Legislation

Residents in Mexico or foreign residents with a permanent establishment status in Mexico are subject to taxation on income earned abroad when the corresponding income items are derived from a jurisdictions considered to have a preferential tax regime, whether these are received directly, or through legal entities in which they directly or indirectly participate (in their capital stock).

Said income, whether it be received in cash, goods, services or credit, and as long as it is not subject to taxation abroad or subject to a tax rate which is less than the equivalent of 75 per cent of the income tax that would have been levied in Mexico, could be subject to taxation in Mexico.

Income tax on income deriving from preferential regimes could be due even though said income had not actually been received by the Mexican residents (accrued in advanced). Notwithstanding the foregoing, in cases where the persons who receive said income do not have effective control of the management of the relevant entities subject to the preferential tax regimes, the corresponding tax would be payable until income is effectively received.

Income subject to this regime shall need to be determined each calendar year, and shall be accrued to the rest of income of the taxpayer. A rate of 30 per cent or 35 per cent shall be assessed on the taxable income, depending the nature of the taxpayer (entity or individual).

I.4. Tax Treaty Law

Mexico is both a Member State of the United Nations and of the OECD. In this regard, model conventions, multilateral instruments, guidelines and other normative projects issued by the aforementioned organisations have had a large impact on the design and implementation of tax laws in Mexico.

I.4.1. Adherence to UN or OECD MC

As per mentioned above, Mexico has been a member State of the United Nations since November 7, 1945. What is more, Mexico has been a non-permanent member of the security council of the United Nations in 1946, 1980 and 2002.

With respect to the OECD, Mexico deposited its instrument of ratification as a member State on May 18, 1994, and has since been an active member thereof.

I.4.2. Special Features commonly present on Tax Treaties

Tax treaties concluded by Mexico are based on the OECD Model Tax Conventions. Nonetheless, certain particularities can be adverted.

For instance, the tax treaty entered into by Mexico and the USA is the only Mexican treaty currently in force that allows foreign residents (US residents) to pay income tax in Mexico derived from the leasing of real estate located therein on a net basis as if the foreign resident had a permanent establishment status.

On a different subject, tax treaties concluded by Mexico still address the rendering of independent services based on article 14 of the OECD Model Tax Convention.

I.4.3. Treaties Currently in Force

As of July 2017, Mexico has concluded or is currently negotiating either double taxation agreements or tax information exchange agreements with the following countries or jurisdictions:

Germany

Bahrein

Korea

The Netherlands Antilles

Barbados

Costa Rica

Saudi Arabia

Belgium

Chile

Argentina

Belize

China

Aruba

Bermuda

Denmark

Australia

Brazil

Ecuador

Austria

Canada

Egypt

Bahamas

Colombia

United Arab Emirates

Slovenia

Estonia

Spain

United States of America

Philippines

Finland

France

Gibraltar

Guatemala

Greece

Hong Kong

Hungary

India

Indonesia

Iran

Ireland

Isle of Man

Cayman Islands

Cook Islands

Guernsey

Jersey

Marshall Islands

British Virgin Islands

Iceland

Israel

Italy

Jamaica

Japan

Kuwait

Lithuania

Lebanon

Lichtenstein

Latvia

Luxembourg

Malesia

Malta

Morocco

Monaco

Nicaragua

Norway

New Zealand

Oman

The Netherlands

Pakistan

Panama

Peru

Poland

Portugal

Qatar

United Kingdom

Czech Republic

Slovakia

Rumania

Russia

Samoa

Santa Lucia

Singapore

South Africa

Sweden

Switzerland

Thailand

Turks and Caicos Islands

Turkey

Ukraine

Uruguay

Vanuatu

Venezuela

I.5. Community Law

N/A

I.5.1. Participation in a Community/Union

N/A

I.5.2. Rules regarding Corporate Income Taxation within the Community/Union

N/A

I.5.3. Jurisprudence regarding Corporate Income Taxation within the Community/Union

N/A

I.6. Influence of BEPS Action Plan on the Country

The BEPS Action Plan has had a major impact on the design and implementation of tax laws in Mexico. Furthermore, said document has made Mexican tax authorities aware of the everchanging nature of cross-border structures and transactions conducted by taxpayers.

As consequence thereof, provisions normally reserved to international instruments have gradually been incorporated to local statutes and regulations.

I.6.1. Adoption of rules in line with BEPS Reports

In line with the Common Reporting Standard and recent BEPS developments, filing obligations regarding transactions with related parties abroad have been included in the Income Tax Law.

Taxpayers could now be required to file (no later than on December 31 of the following tax year to which the filing obligation corresponds to) the following informative returns: (a) Master file, information concerning the structure and activities of multinational corporate groups; (b) Local file, describing the structure and activities conducted with related parties at a local level; and (c) country-by-country reporting, with respect to the activities, distribution of income and taxes paid in each jurisdiction.

On a different subject, it should be noted that more stringent requirements concerning the deductibility of certain income/expense items have been incorporated to Mexican laws in view of recent BEPS advances. For instance, in order for taxpayers to be able to claim treaty benefits, tax authorities could request a sworn affidavit from the foreign party stating the existence of a double taxation and identifying the statutes or provisions under foreign law in terms of which said double taxation exists.

I.6.2. Participation in Multilateral Instrument

In 2010, Mexico, as an active member of the OECD, subscribed the Convention on Mutual Administrative Assistance in Tax Matters and its Protocol. More recently, on June 7, 2017, Mexico adhered to the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting.

I.7. Jurisprudence

Mexico’s legal system can be characterised as a civil law legal system (as opposed to a common law legal system). Nevertheless, jurisprudence or precedents are deemed as sources of law.

However, it should be noted that jurisprudence derived from Mexican courts’ rulings can be either binding on non-binding to other courts depending on whether certain procedural requirements are met.

I.7.1. Inbound Transactions

Since the Mexican legal system follows civil law tradition, jurisprudence at an international level is generally considered as a set of guidelines for the construction or interpretation of provisions.

I.7.2. Outbound Transactions

As mentioned above, the Mexican legal system tends to conceive jurisprudence as a set of guidelines for the construction or interpretation of provisions.



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