Mexico: Employee Incentives

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This country-specific Q&A provides an overview to tax laws and regulations that may occur in Mexico.

This Q&A is part of the global guide to Employee Incentives. For a full list of jurisdictional Q&As visit http://www.inhouselawyer.co.uk/practice-areas/employee-incentives/

  1. What kinds of incentive plan are most commonly offered and to whom?

    Incentive plans in Mexico are not mandatory and in general, the employer or a related company can design and offer them without limitation. The most common incentive plans are offered to white-collar employees in the form of performance bonuses, sales commissions and equity plans. Although certain companies have established incentive plans in favour of blue-collar workers based on productivity, this is still not a wide-spread practice and has the potential risk of involving the union representing the workers in the plan’s design and operation. Careful drafting of the country’s participating plan and/or participants’ enrolment forms will reduce potential labour risks of a joint liability, if the offeror of the plan is not the Mexican employer of the employees that can participate in the incentive plan.

  2. What kinds of share option plan can be offered?

    There is no limitation in Mexican law with respect to the possibility of offering an equity-based plan, where the employer or a related company would allow eligible employees (and sometimes contractors, agents or employees of selected providers) to participate in the same. Accordingly, share option plans may include (i) shares with or without corporate rights to selected employees; (ii) options to purchase shares at a discounted price; (iii) units or restricted units related to the performance of the company’s shares; (iv) phantom shares without issuing a title or certificate, among others. In every case, in order to achieve the intention of becoming mid or long-term incentive plans, a vesting period will require the participant to hold on the grant, until the shares, certificates or units can be exercised.

  3. What kinds of share acquisition/share purchase plan can be offered?

    Share acquisition or share purchase plans can be offered to either selected employees, to full-time employees, or employees with certain attributes (i.e. seniority, salary range, per site, etc.), provided it is not a public offering, which would require satisfying requirements under Mexico’s Securities Law. Normally, the plan will require participants to decide on a percentage of their salary to be contributed through payroll deductions, to purchase shares at a preferential price. Participants will be able to exercise their right of cashing out the purchased shares after a vesting period and normally at certain date following termination of employment with the Mexican employer.

  4. What other forms of long-term incentives (including cash plans) can be offered?

    It is becoming a trend in Mexico establishing long-term incentive plans in the form of equity programs, where the employees/participants will share the risk or benefits of the business in Mexico, regionally or globally. Because there are limited possibilities to defer the obligation of paying taxes on long-term incentives, there is not a relevant variety of plans or programs in Mexico.

  5. Are there any limits on who can participate in an incentive plan and the extent to which they can participate?

    Any employee, regardless of its job title, salary range or seniority can participate in incentive plan. Under Mexican labour law, there is no limitation on the type of employee that can participate in this type of plans, and thus; the employer or the related company sponsoring the plan can establish conditions or certain attributes on participants to become eligible, provided these are not discriminatory. Mexican labour law embodies the principle of equal access to employment benefits, but with the possibility of establishing differences based on “importance of services” and “efficiency conditions”. There are incentive plans allowing participation of individuals acting as contractors, agents or employees of vendors. This becomes problematic under Mexican labour law because incentive plans are interpreted to be part of an employee’s employment conditions and therefore, a Mexican labour or social security authority may characterized such participants as employees of the legal entity responsible for the plan.

  6. Can awards be made subject to performance criteria, vesting schedules and forfeiture?

    There is nothing in Mexican law that may limit the possibility of a performance evaluation as a condition to participate or receive a benefit under an incentive plan. This may allow the employer or the company sponsoring the plan to make a subjective decision, but it is always advisable having support for such decision (i.e. performance assessments). Vesting schedule and forfeiture are also common terms in an incentive plan in Mexico, which are valid, provided they are not contrary to the general principle of “employees’ acquired rights”. This is, an employee may forfeit a grant or benefit according to the terms of the incentive plan, for failing to comply with a specific requirement (i.e. exercising a right within a certain period), but cancelling an already vested right without further support in the corresponding incentive plan, may be challenged before a Mexican labour court.

  7. What are the tax and social security consequences for participants in an incentive plan including: (i) on grant; (ii) on vesting; (iii) on exercise; (iv) on the acquisition, holding and/or disposal of any underlying shares of securities; (v) in connection with any loans offered to participants (either by the company operating the incentive plan, the employer of the participant (if different) or a third party) as part of the incentive plan.

    (i) on grant;

    Income tax applies to an employee/participant at the time he/she receives a grant of shares or options to purchase shares, for which the employer must make a payroll deduction and then pay such tax before the Mexican Revenue Service. There is no social security effect under applicable Mexican law, at the time of the grant.

    (ii) on vesting;

    There are no tax or social security effects by the mere fact of reaching a date in which the grant becomes vested.

    (iii) on exercise;

    Normally, upon the exercise of the grant, the employee/participant will receive the payment of the value or spread of the grant. Because income tax applied at the time of the grant, there is no further tax effect on exercise. However, based on the amount received by the employee/participant and assuming that the payment is made through the employer’s payroll, the amount will sum up to the salary paid for the period in order to pay social security contributions.

    (iv) on the acquisition, holding and/or disposal of any underlying shares of securities; and

    The acquisition of a grant is interpreted to occur upon the grant itself and therefore, as explained, income tax applies at that stage. Holding the grant will not trigger a tax effect, but at its disposal, income tax applies based on the gain obtained by the participant, in connection with the value of the grant. Social security effects will not apply on the acquisition, holding or disposal of the grant, assuming the employee/participant received the payment of the associated benefit, at the time of its exercise.

    (v) in connection with any loans offered to participants (either by the company operating the incentive plan, the employer of the participant (if different) or a third party) as part of the incentive plan.

    Loans must be granted with appropriate document support and must include the obligation to repay the same plus, at least, the minimum interest established in the law.

  8. What are the tax and social security consequences for companies operating an incentive plan?

    (i) on grant;

    If the Mexican employer sponsors the plan or is charged with the cost of the same by a related party, at the time of the grant, it should deduct the corresponding income tax from the employee/participant’s salary. There is practical issue with this rule established by the Mexican Income Tax Law, which is making a deduction from the employee’s salary at a time where he/she has not received any income from the incentive plan. Companies in Mexico have designed a communication process to convey this situation to the participants and explain the benefits arising from the plan in the future to bear the payroll deduction. There is no effect from a social security contribution, because the Mexican employer will not be making any payment through its payroll, at the time of the grant.

    (ii) on vesting;

    There are no tax or social security effects for the company operating the plan by the mere fact of reaching a date in which the grant becomes vested.

    (iii) on exercise;

    If the exercise of the grant implies the payment of whole or part of the benefits arising from the incentive plan, there will not be a tax effect because this happened at the time of the grant. Based on the amount paid to the employee/participant and assuming through the Mexican employer’s payroll, the employer will pay a portion of the social security contribution corresponding to such amount and the salaries paid in the corresponding period.

    (iv) on the acquisition, holding and/or disposal of any underlying shares of securities;

    There are no tax or social security effects for the company operating the plan on the acquisition, holding and/or disposal of the underlying shares or securities.

    (v) in connection with any loans offered to participants (either by the company operating the incentive plan, the employer of the participant (if different) or a third party) as part of the incentive plan.

    The Mexican employer must obtain the repayment of the loan in terms of the agreement entered into with the employee/participant, including accrued interests. The employee/participant should authorize the company operating the incentive plan, to make deductions from his/her salaries in order to repay the loan and interests. If the company operating the plan is not the Mexican employer, it may agree with the latter to assist in the collection of the loans through payroll deductions, although this participation of the Mexican employer may be interpreted as a joint liability for the operation of the plan.

  9. What are the reporting/notification/filing requirements applicable to an incentive plan?

    Provided the incentive plan is not a public offering and does not entail a retirement benefit, there is no requirement to file or notify the plan before any Mexican government agency. However, if the incentive plan is granted directly by the Mexican employer or if the Mexican employer is charged for the cost arising from the incentive plan by a related legal entity, the costs of the plan must be reported in the general accounting structure of the local entity to the Mexican Revenue Service through its electronic platform.

  10. Do participants in incentive plans have a right to compensation for loss of their awards when their employment terminates? Does the reason for the termination matter?

    Most incentive plans in Mexico provide that the employee’s participation entails the understanding and assumption that there may be a risk of loss on the grant of shares or options to purchase shares. This is a valid term in an incentive plan and the employer or the company responsible for the plan does not need to guarantee a gain or compensation for loss, at any time during participation. This would not having to compensate for loss when employment terminates, regardless the cause may be.

  11. Do any data protection requirements apply to the operation of an incentive plan?

    The employer or the company sponsoring the incentive plan are obligated to comply with Mexico’s Federal Privacy Law, whereby the collection, storage, treatment and potential transfer of the participant’s personal data must comply with applicable regulation. Every participant should be granted with a privacy notice explaining the reason for collecting personal data, the purpose for handling the same and the protective measures to keep it safe.

  12. Are there any corporate governance guidelines that apply to the operation of incentive plans?

    N/A

  13. Are there any prospectus or securities law requirements that apply to the operation of incentive plans?

    The Securities Laws are only applicable to public offer of securities traded on the Mexican Stock Exchange and those individuals investing in such market. Stock options or any structure alike are not considered public since they are directed to employees.

  14. Do any specialist regulatory regimes apply to incentive plans?

    No, there are no special regulatory regimes applicable to incentive plans.

  15. Are there any exchange control restrictions that affect the operation of incentive plans?

    There are no controls on the transfer of foreign currency into or out of Mexico.

  16. What is the formal process for granting awards under an incentive plan?

    Given that the granting of awards in an incentive plans are not mandatory, there are no formal process to follow. Now, the Federal Labour Law establishes that once a benefit is granted, it becomes part of the benefit package of the employee, unless established otherwise. Given that the employers have the burden of proof, we recommend that the plan is perfectly drafted and any amounts paid to the employee are justified and documented by a receipt.

  17. Can an overseas corporation operate an incentive plan?

    Mexican entities commonly operate the short, mid and long term incentive plans, except for stock or share options plans, which are commonly managed and operated by the foreign entity abroad.

  18. Can an overseas employee participate in an incentive plan?

    Given that there is no limitation in Mexico for incentive plans, an overseas employee may participate, however this is not a common practice.

  19. How are share options or awards held by an internationally mobile employee taxed?

    If the Mexican entity grants the option or award while the employee is rendering services in Mexico, the Mexican entity must withhold and pay tax on the income.

  20. How are cash-based incentives held by an internationally mobile employee taxed?

    If the Mexican entity grants the incentive while the employee is rendering services in Mexico, the Mexican entity must withhold and pay tax on the income.

  21. What trends in incentive plan design have you observed over the last 12 months?

    Incentive plans are greatly used by employers (except for stock or shares), as they promote productivity. In most of the cases, employers have not implemented incentive plans, as in Mexico, there is a mandatory profit sharing, which in some cases it’s a substantial amount.

  22. What are the current developments and proposals for reform that will affect the operation of incentive plans over the next 12 months?

    The new administration is focused on guaranteeing the freedom of association and union democracy, therefore, we do not expect that there will be any affectation on operating incentive plans in the following 12 months.