This country-specific Q&A provides an overview to tax laws and regulations that may occur in Mexico.
It will cover witholding tax, transfer pricing, the OECD model, GAAR, tax disputes and an overview of the jurisdictional regulatory authorities.
This Q&A is part of the global guide to Tax. For a full list of jurisdictional Q&As visit http://www.inhouselawyer.co.uk/index.php/practice-areas/tax-4th-edition/
How often is tax law amended and what are the processes for such amendments?
Tax laws in Mexico are subject to constant amendments, usually on a yearly basis. Any and all statutes concerning the essential elements of tax law (subject, object, taxable basis, tax rate or tariff and time of payment) must be set forth by tax laws issued by the Mexican Congress in order for them to be valid. What is more, the Mexican Constitution expressly states that tax laws must be initially discussed at the House of Representatives (failing to comply with said mandate could lead to the unconstitutionality of the relevant law).
In this regard, initiatives and amendment proposals must be discussed and approved both by the House of Representatives and the Senate. Once the relevant amendment has been authorized, the executive branch orders its issuance and publishing in the Federal Official Gazette.
Even though bar associations are consulted on some occasions concerning tax law amendments or proposals, it is not deemed as a formal practice, much less, a legal requirement for such proposals to be valid.
Notwithstanding the foregoing, it should be noted that the executive branch is entitled to issue provisions or regulations relating to the applicability, construction or enforcement of tax laws (but not concerning the essential elements of tax laws) without having to abide by the amendment procedure reserved for tax laws.
On a different subject, tax laws are often contested by means of the amparo figure (an extraordinary trial that can be initiated either once ordinary recourses have been used or directly, in cases where a constitutional violation is claimed). Generally speaking, the effects of judicial rulings produced as a result of an amparo trial are limited to the plaintiff seeking legal remedy, that is, not erga omnes. Nonetheless, precedents or jurisprudence crystallized under the procedure set forth in the applicable laws renders tax laws subject to the interpretation and constitutional review by the competent courts.
A tax law of relevance is the Ley de Ingresos de la Federación, which regulates the annual income that the Mexican state foresees to obtain from different sources, including taxation. In 2019, this law had a tremendous impact on taxpayers in Mexico since it drastically changed the mechanism in order to contribute with federal taxes – the compensation between different federal taxes was forbidden.
Lastly, it is important to bear in mind that tax regulations known as Resolución Miscelánea Fiscal are published annually by the Treasure Ministry, establishing particular rules and facilities for the taxpayers in order to comply with their fiscal obligations.
What are the principal procedural obligations of a taxpayer, that is, the maintenance of records over what period and how regularly must it file a return or accounts?
Individuals and legal entities deemed as Mexican tax residents are required to register under the Federal Registry of Taxpayers, specifying a tax domicile within national territory.
Additionally, Mexican tax residents are bound to maintain accounting records that in general terms consist of books, ledger entries, account statements, inventories, notices to the Federal Registry of Taxpayers, tax returns, financial statements, information concerning shares or securities held, customs documentation, invoices and documentation supporting the materiality thereof.
Accounting records ought to be duly kept for a period of five years (some exceptions could apply) and digitally filed before the tax authorities on a monthly basis.
Generally speaking, taxpayers are also required to file provisional income tax returns on a monthly basis and a definitive annual tax return. Concerning value added tax, taxpayers ought to file monthly returns, which are considered as definitive.
Depending on the taxpayers’ activities or corporate structure, the filing of informative tax returns regarding their participation in offshore legal entities or income perceived in jurisdictions considered to be subject to preferential tax regimes in terms of Mexican law could be mandatory.
It is of paramount importance to point out that failing to comply with the abovementioned formal obligations, whether it be the registry under the Federal Registry of Taxpayers, properly maintaining accounting records or filing the corresponding returns, could result in infractions or even in the commission of tax crimes sanctioned with prison.
Who are the key regulatory authorities? How easy is it to deal with them and how long does it take to resolve standard issues?
Most tax related matters are dealt with the Tax Administration Service. In recent years, stringent criterions relating even to ´standard´ issues have been adopted, making it hard for taxpayers to comply with the authorities’ interpretation of the applicable tax laws. In this sense, procedures such as tax refunds (particularly concerning value added tax), or the annulment of tax liabilities determined by the authorities often require strenuous efforts and, considering the several stages of proceedings available both for authorities and taxpayers, such procedures could take several months.
In addition to the federal Tax Administration Service, other local taxes such as property taxes, payroll taxes or taxes on the acquisition of real estate ought to be dealt with local tax administrations or treasuries. Furthermore, other administrative authorities such as the Mexican Social Security Institute are also entitled to initiate audit procedures concerning employer contributions.
Are tax disputes capable of adjudication by a court, tribunal or body independent of the tax authority, and how long should a taxpayer expect such proceedings to take?
In terms of the applicable laws, taxpayers have the option of contesting tax liabilities before a different organ of the Tax Administration Service than the one that determined it. Nevertheless, taxpayers are not required to do so in order to have access to different stages of proceedings before jurisdictional bodies.
In this regard, taxpayers are entitled to challenge and request the annulment of resolutions issued by tax authorities directly before the Local or Federal Court of Administrative Justice. Likewise, in the cases where taxpayers decide to challenge the tax liability before the Tax Administration Service, they still have the option of filing an annulment lawsuit against the administrative resolution that confirms the tax liability that was initially determined.
Furthermore, in cases where constitutional violations are claimed to have occurred as consequence of a tax dispute, or the administrative or judicial rulings related thereto, taxpayers could be entitled to file an amparo lawsuit in order to be ruled by the Judicial Power of the Federation.
Most tax disputes could take an average of one to four years to be fully concluded, considering the stages of proceedings available, both for authorities and taxpayers.
Regardless of the foregoing, it is worth noting that taxpayers that are being audited are also entitled to seek remedy before the Mexican Tax Ombudsman (PRODECON). Taxpayers can request the intervention of the tax ombudsman in order to negotiate with the Tax Administration Service, or any other tax authority, solutions for the contingencies that may arise from federal taxes so as to prevent said liabilities from escalating into litigation. Alternative means of dispute resolutions before the tax ombudsman can be sought in as long as the tax authorities have not served notice to the taxpayer of a resolution determining the existence of a tax credit or liability.
Are there set dates for payment of tax, provisionally or in arrears, and what happens with amounts of tax in dispute with the regulatory authority?
Depending on the tax at hand or the applicable tax regime, different set dates for payment could apply. For instance, income tax is generally paid by means of an annual tax return that must be filed within the first three months following the end of the fiscal year for which it is being filed. However, taxpayers are also required to file estimated monthly returns relating to income tax due. Concerning value added tax, taxpayers ought to file their corresponding returns on a monthly basis.
In pursuance of the Federal Tax Code, whenever the applicable law does not indicate the relevant tax’s date of payment, it ought to be paid by means of a tax return filed: (i) within the first seventeen days of the subsequent month for which the corresponding tax is being paid, in cases where the taxpayer is required to withhold; or (ii) within the next five days after the corresponding tax has been caused for all other cases.
In cases where taxpayers challenge a tax liability before the Tax Administration Service, the payment in dispute is postponed until the corresponding administrative resolution is issued and served to the taxpayer.
Notwithstanding the foregoing, whenever taxpayers challenge a tax liability before the Local or Federal Court of Administrative Justice or any court of the judicial branch, the disputed amount ought to be guaranteed by the taxpayer in order for it not to be collected by the tax authorities.
In any case, once the tax dispute has been resolved, the winning party is entitled to receive the disputed amount updated to present value as well as interests accrued in connection therewith (interests are accruable for up to five years).
Is taxpayer data recognised as highly confidential and adequately safeguarded against disclosure to third parties, including other parts of the Government? Is it a signatory (or does it propose to become a signatory) to the Common Reporting Standard? And/or does it maintain (or intend to maintain) a public register of beneficial ownership?
In terms of the Federal Tax Code, information provided by taxpayers to the competent authorities is considered as confidential and it is duly protected from disclosure to third parties. In this sense, such information could only be provided to other governmental authorities in cases sanctioned by law and assuming that due process has been abided by.
Nonetheless, it should be noted that certain information could be required from tax authorities on an international scale, in pursuance of broad exchange of information agreements or other relevant instruments such as FATCA or CRS.
As a member of the G20, Mexico has subscribed to the Common Reporting Standards (CRS), and even has adapted the local set of laws to meet the standards set forth by the OECD.
Additionally, Mexico has executed the Model Agreement for Competent Authorities on the CRS, along with other 105 jurisdictions. As consequence thereof, parties engaged as or with Mexican taxpayers could be required to submit country-by-country reports describing the operations in which they are involved.
What is more, Mexico has made efforts to obtain the names, accounts and balances of Mexican taxpayers that have opened accounts outside the country.
What are the tests for residence of the main business structures (including transparent entities)?
In terms of article 9 of the Income Tax Law, a legal entity could be deemed as a Mexican tax resident whenever they establish their main seat of business or effective management within national territory. In this regard, a legal entity could be considered as a Mexican tax resident when the parties entitled to decide its business strategies, policies, distribution of profits, dividends or other core subjects are located within Mexican territory.
On the other hand, individuals could be deemed as Mexican tax residents whenever: (a) they establish their dwelling home in Mexico; (b) they have their centre of vital interests therein (when more than 50 per cent of the total income received by such individuals is Mexican-sourced); (c) the centre of their professional activities is in Mexican territory; (d) Mexican nationals that are public servants (even if their centre of vital interests is located elsewhere).
Foreign legal entities could need a tax residency certificate or official documentation issued by competent authorities confirming that they filed their annual tax return in order to evidence their tax residence before Mexican tax authorities.
Furthermore, the tax residency of a given foreign resident could be determined in terms of the procedures or conditions set forth in the applicable double taxation agreement concluded by Mexico and the respective country or jurisdiction.
Have you found the policing of cross border transactions within an international group to be a target of the tax authorities’ attention and in what ways?
In line with the BEPS Action Plan, Mexican tax authorities are particularly concerned with base-eroding practises. Consequently, in the case of cross border transactions, they tend to focus on transactions between related parties, corporate reorganisations and similar operations conducted by multinationals.
To this regard, tax audits with respect to such operations tend to focus on the adequate compliance with transfer pricing rules (arm’s-length transactions), the (non)deductibility of certain expenses, or the actual existence of double taxation when the parties involved claim treaty benefits. For instance, parties that claim treaty benefits are required to comply with certain formal tax obligations under Mexican law in order to evidence that they actually qualify as residents in terms of the corresponding double taxation agreement and as such, that they are in fact entitled to the relevant tax benefits.
Moreover, concerning transactions between related parties in which treaty benefits are claimed, Mexican tax authorities could request a sworn affidavit (executed by the foreign resident’s legal representative) stating the existence of double taxation and identifying the statutes or provisions under foreign law that cause it.
Furthermore, taxpayers in Mexico are bound to file informative returns in relation to their transactions with related parties or concerning their participation in offshore structures (they are subject to country-by-country and other returns based on CRS), pursuant article 76-A of the Federal Tax Code. The Supreme Court has settled jurisprudence on the constitutionality of such measures.
Is there a CFC or Thin Cap regime? Is there a transfer pricing regime and is it possible to obtain an advance pricing agreement?
Concerning CFC rules, the Income Tax Law establishes that Mexican tax residents and foreign residents with a permanent establishment in Mexico could be deemed to receive income from jurisdictions considered as preferential tax regimes whenever: (i) income deriving therefrom is not subject to taxation in the relevant jurisdiction; or (ii) the income tax to which said income is subject to in the relevant jurisdiction is less than 75 per cent of the income tax that would have been levied in Mexico for such an operation.
To this regard, Mexican tax residents or foreign residents with a permanent establishment within national territory could be required to pay income tax in terms of Title VI of the Income Tax Law (Preferential tax regimes and multinationals) on income received through foreign legal entities in which they participate, directly or indirectly (in proportion to their participation therein), as well as on income received by means of foreign legal entities deemed as tax transparent.
In general terms, taxpayers that receive income considered as subject to a preferential tax regime are required to keep specific accounting records concerning each of the legal entities through which they perceive income, and to pay the related income tax separating it from the rest of their accruable income.
Additionally, thin capitalisation rules ought to be abided in terms of the applicable Mexican tax laws. The allowed debt-to-equity ratio for Mexican resident legal entities is of 3 to 1. In general terms, interests due on contracted debt that exceed by threefold the company’s net worth would be deemed as non-deductible for income tax purposes.
Nonetheless, the Tax Administration Service could authorise a higher debt-to-net equity ratio for legal entities considered as part of specific industries, such as the financial system or other national strategic sectors.
Furthermore, it is of paramount importance to point out that Mexico, as part of the G20, has been actively participating in the development and implementation of OECD guidelines in several subjects including CFC and thin capitalisation rules, to the extent of amending the local set of laws. Therefore, more stringent requirements have gradually been incorporated to the Mexican tax system.
The Mexican transfer pricing rules have been adapted to the OECD guidelines on the subject. Accordingly, transactions between related parties are required to comply with the arm’s-length principle.
Moreover, concerning transactions between a Mexican tax resident and a non-related foreign tax resident, the first would be required to determine its accruable income and authorised deductions bearing in mind that the price and compensation for the relevant transaction should be equal to that which would have been paid to an independent party (arm’s-length principle).
It is worth mentioning that in terms of the applicable Mexican laws, it is possible to obtain an advanced pricing agreement. Nevertheless, the issuance of the corresponding resolution could take from two to three years. Generally speaking, resolutions issued by Mexican authorities with respect to advanced pricing agreements could be valid and enforceable during the tax year in which the corresponding application is filed, for the previous tax year, and up to the subsequent three tax years. Nonetheless, advanced pricing agreements could be valid for a longer period in case they resulted from an amicable procedure in terms of an international treaty subscribed by Mexico.
Is there a general anti-avoidance rule (GAAR) and, if so, in your experience, how would you describe its application by the tax authority? Eg is the enforcement of the GAAR commonly litigated, is it raised by tax authorities in negotiations only etc?
The Mexican tax system contemplates transfer-pricing, thin capitalisation, CFC, back-to-back and tax re-characterisations as general anti-avoidance rules. Moreover, Mexican authorities have established more stringent requirements that ought to be complied with for a double taxation agreement to be applicable (e.g. the filing of a sworn affidavit executed by the foreign resident’s legal representative stating the existence of double taxation). Additionally, it should be noted that Mexico has been actively participating in the development and implementation of OECD guidelines and adapting the local set of laws to comply with the standards set forth by the BEPS action plan. In this sense, for the past few years, tax authorities have adopted more stringent requirements and standards to measure the taxpayers’ compliance with anti-avoidance rules. As consequence of the foregoing, it is common for taxpayers to challenge the application of such rules by Mexican tax authorities.
Have any of the OECD BEPS recommendations been implemented or are any planned to be implemented and if so, which ones?
Mexico participated actively in the development of the Base Erosion and Profit Shifting (BEPS) Action Plan. Consequently, since the tax reform of 2014, the local set of laws have been amended to abide by the standards set forth therein. To this regard, more stringent conditions and requirements have been established relating to hybrid mismatches (Action 2), controlled foreign corporation rules (Action 3), interest deduction (Action 4), treaty abuse (Action 6), transfer pricing rules (Actions 8 through 10) and reporting obligations (Action 13).
In your view, how has BEPS impacted on the government’s tax policies?
The BEPS Action Plan has had a considerable impact on Mexican tax authorities and on the local set of laws. Accordingly, more stringent criterions concerning the applicability of tax benefits, such as the use of tax treaties, the conditions necessary to acquire (avoid) a permanent establishment status, the deductibility of certain expenses, transfer pricing rules, amongst other concepts, have been driving the government’s tax policies for the past few years. What is more, the Mexican government has been actively participating in the development and application of multilateral international instruments and broadening its network of tax information exchange agreements.
Does the tax system broadly follow the recognised OECD Model? Does it have taxation of; a) business profits, b) employment income and pensions, c) VAT (or other indirect tax), d) savings income and royalties, e) income from land, f) capital gains, g) stamp and/or capital duties? If so, what are the current rates and are they flat or graduated?
In general terms, Mexican tax laws adhere to the recognised OECD Model, even to the extent that in some cases the content of local statutes is given by the OECD guidelines.
With respect to the taxes included in the Mexican taxation system, the following should be noted:
a. Taxation of business profits. Legal entities deemed as Mexican tax residents are liable for income tax on a worldwide basis. That is, all income received by such entities could be subject to taxation in Mexico irrespective of their source. 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. The current corporate tax rate is of 30 per cent.
In the case of foreign residents that generate business profits in Mexico, the applicable tax treatment would vary depending on whether such income is attributable to a permanent establishment or else, considered as a Mexican-sourced income (that is not attributable to a permanent establishment, in the event that the relevant foreign resident had one).
Foreign residents with a permanent establishment would trigger income tax on business profits they derive (attributable to the permanent establishment) and income tax thereupon would be levied on a similar basis as if the relevant foreign resident were a Mexican legal entity (subject to the corporate tax rate of 30 per cent).
Lastly, income tax on business profits obtained by a foreign resident without a permanent establishment (or to which said income item cannot be attributed), would be triggered depending on the nature of the activities from which such income is derived. That is, whilst certain business profits could be considered not to be Mexican-sourced (as such, not subject to income tax in Mexico), other income items that fall under the characterisation of business profits could indeed be subject to taxation.
With respect to the double taxation agreements entered by Mexico, it is worth noting that an ample debate exists on which type of business profits (income items) can be characterised as business profits in terms of article 7 of the Model Tax Convention (and the respective DTAs).
b. Taxation of employment and pensions. In pursuance of the Income Tax Law, employers are required to withhold income tax due over the salary or wages of their employees. The applicable withholding rate varies depending on the relevant employee’s income, ranging from 0 (minimum wage) up to 35 per cent.
In general terms, social security pensions and state workers’ social security pensions are not subject to taxation.
In cases where a foreign resident receives a salary or wage as consideration for subordinate personal services, the source of income would be deemed to be located in Mexico when the foreign resident’s services are rendered within national territory. Should this be the case, depending on the amount of the remuneration, the foreign resident could be exempted (for the first $125,900 Mexican pesos perceived during the corresponding calendar year), or subject to a tax rate of 15 per cent (when the remuneration is somewhere in between $125,900 and $1’000,000 Mexican pesos) or a tax rate of 30 per cent (when the remuneration exceeds the amount of $1’000,000 Mexican pesos).
Concerning pensions received by foreign residents, their source of income would be deemed to be located in Mexico whenever the party that makes the corresponding payments is a Mexican resident for tax purposes or a foreign resident with a permanent establishment in Mexico, or whenever the contributions to the relevant pension are linked to a subordinate personal service rendered by the foreign resident within national territory. Income tax due would be calculated based on the same parameter as in the case of salaries or wages perceived by foreign residents.
It should be noted that aside from income tax, employers could be subject to a state tax on payrolls. Depending on the relevant state, the corresponding tax rate could range from an approximate of 1.90 to 3 per cent.
c. Value added tax. Both individuals and legal entities that, within national territory, sell goods, render independent services, lease goods or import goods or services, could be subject to value added tax in Mexico. The general tax rate is 16 per cent.
Nonetheless, depending on the nature of the goods or services that are being sold, rendered or imported, the relevant operation could be exempted from value added tax or subject to a 0 per cent tax rate. Moreover, it should be noted that the exportation of goods or services are subject to a 0 per cent tax rate in terms of the value-added tax law.
It is of paramount importance to distinguish between goods or services exempted from value added tax and those subject to the cero per cent tax rate, since only the latter could eventually be credited by taxpayers.
d. Taxation of savings income and royalties. Income received by Mexican individuals by means of savings funds could be exempted from income tax so far as they meet the requirements set forth by the Income Tax Law in order to be deemed as deductible. Additionally, interests paid to them by financial institutions or cooperatives over chequing accounts, accounts for the deposit of pensions, retirement or savings could be exempted from income tax provided that the average daily balance of the investment does not exceed an amount equivalent to five minimal wages to the year (approximately $187,390 Mexican pesos).
In cases where the aforesaid conditions are not met, the Mexican individual would be required to pay income tax at the corresponding tax rate (ranging from 1.92 to 35 per cent).
Concerning royalty payments made to a foreign tax resident, the applicable tax rate could range from 5 to 35 per cent, depending on the concept for which royalties are being paid.
e. Taxation on income from land. Two state taxes should be considered on this subject. Depending on the state, the acquisition of land could trigger taxation. The applicable tax rates could range from an approximate of 1 to 5 per cent. Additionally, land could be subject to a state property tax.
It is worth mentioning that both taxes should be paid to the corresponding local treasuries instead of the Tax Administration Service.
On a federal scale, income perceived by taxpayers as consequence of the exploitation of land could trigger income tax. It is worth mentioning that the transfer of land is generally considered as exempted from value added tax.
f. Taxation of capital gains. Generally speaking, Mexican tax residents are required to pay income tax on a worldwide basis. In this sense, capital gains ought to be added to their accruable income for the relevant fiscal year.
Income resulting from the disposal of stock issued by a Mexican resident company could be subject to taxation at a rate of 25 per cent over the gross amount of the corresponding consideration, when in the hands of a foreign tax resident seller.
Nonetheless, provided that certain requirements are met, foreign tax residents could opt to calculate income tax due at a rate of 35 per cent over the capital gain in question (with the possibility to deduct the cost of the shares).
It is important to point out that in order for the latter alternative to be available, foreign tax residents are required to designate a representative in the country in charge of complying with several obligations, such as remitting the corresponding tax.
Furthermore, more beneficial tax treatments could be achieved by means of double taxation agreements, provided that certain formal requirements are met.
Additionally, the disposal of stock listed in the Mexican Stock Exchange, as well as other recognised markets, could be subject to a 10 per cent tax rate.
g. Stamp and/or capital duties. The Mexican tax system does not foresee any stamp or capital duties.
Is the charge to business tax levied on, broadly, the revenue profits of a business as computed according to the principles of commercial accountancy?
Mexican resident legal entities are subject to income tax on a worldwide basis. Concerning foreign tax residents, they could be subject to taxation in cases where they have a permanent establishment within national territory or whose income source of wealth is located therein.
Unless otherwise provided by the applicable laws, and depending on the activity that triggers income tax, income could be considered to have been received by a taxpayer (and should therefore be accrued) when the corresponding invoice is issued, when the good or service is materially delivered or rendered, respectively, or when the consideration is paid or is entirely or partially due and payable. However, it should be noted that income tax is generally paid by means of an annual tax return.
In general terms, the taxable basis on which a Mexican resident legal entity is required to pay is determined as follows: the entity’s profits are reduced with the corresponding fiscal year’s authorised deductions and the workers’ participation in the entity’s profits. Additionally, net operation losses from past fiscal years could be reduced.
Regardless of the fact that legal entities are usually required to pay income tax by means of an annual tax return, monthly estimated provisional tax returns (whose amount is determined taking into account the past fiscal year’s results) ought to be filed.
Concerning foreign tax residents, taxes due on their operations within Mexican territory (or that are Mexican-sourced) are generally withheld by the entity that made the corresponding payment.
Are different vehicles for carrying on business, such as companies, partnerships, trusts, etc, recognised as taxable entities? What entities are transparent for tax purposes and why are they used?
Pursuant article 7 of the Income Tax Law, the concept of legal entity comprises, amongst other, business corporations or companies, decentralised agencies whenever they primarily carry out business activities, financial institutions, partnerships and joint ventures.
Nevertheless, different tax treatments could be applicable depending on the nature of the relevant legal entity. Although tax transparency is not recognised per se with respect to Mexican entities or vehicles, certain types of trusts could be subject to a pass-through treatment as if they were fiscally transparent. That is, tax consequences arising from income derived by such trusts would be triggered at the level of its beneficiaries. Said vehicles are commonly used due to the versatility they offer. For instance, they are incorporated by means of an agreement or contract and can adopt a wide range of corporate purposes. Furthermore, they tend to be considered as attractive vehicles to channel foreign investment in the country since they allow for tax consequences to be triggered at the level of the beneficiaries (for instance, treaty benefits could be claimed by the beneficiary participating in the vehicle).
Notwithstanding the foregoing, it should be noted that in certain cases Mexican tax laws do recognise the tax transparency of foreign entities or vehicles.
Is liability to business taxation based upon a concept of fiscal residence or registration? If so what are the tests?
The Mexican income tax system is mainly built around the concepts of residence and source. To this regard, whilst Mexican resident legal entities are required to pay income tax on a worldwide basis, foreign tax residents could be required to pay income tax on all income attributable to permanent establishments located in Mexico, or on Mexican-sourced income.
Are there any special taxation regimes, such as enterprise zones or favourable tax regimes for financial services or co-ordination centres, etc?
On December 31, 2018, a Decree with several fiscal incentives was published in the Official Gazette of the Federation, establishing for some taxpayers located in the border region a value added tax rate of 8 per cent and some benefits related to income tax.
Mexican tax laws do provide a favourable tax regime related to financial institutions. In this sense, interest payments deriving from loans between said institutions could be exempted from value added tax. Moreover, financial institutions could be subject to reduced income tax rates.
Also, some incentives are granted for national cinematographic and theatrical production, as well as for innovation (CONACYT). Also there are some incentives on the FIBRA (real estate investment trust) and on investments in risk capital and on the Maquila industry (IMMEX Program).
Are there any particular tax regimes applicable to intellectual property, such as patent box?
No special tax regimes concerning intellectual property are considered by Mexican tax laws.
Is fiscal consolidation employed or a recognition of groups of corporates for tax purposes and are there any jurisdictional limitations on what can constitute a group for tax purposes? Is a group contribution system employed or how can losses be relieved across group companies otherwise?
As of January 1, 2014, an optional regime for groups of companies was incorporated to the Income Tax Law. This regime is composed of two types of companies: an integrating company and the integrated companies.
In general terms, this optional regime enables the integrating company to determine income tax due by the group on a consolidated basis and to defer a portion thereof for up to three fiscal years.
It should be noted that in order for a legal entity to be eligible as an integrating company, the following conditions ought to be met: (i) it must be a Mexican tax resident; (ii) it must hold more than 80 per cent of the integrated companies’ voting shares (even if said shares are indirectly held by the integrating company by means of another integrated company of the group); (iii) no more than 80 per cent of the integrating company’s voting shares ought to be held by one or more companies, unless they are tax residents of a jurisdiction with which Mexico has concluded a tax information exchange agreement.
On the other hand, more than 80 per cent of the voting shares of a corporation must be directly or indirectly (or both) held by an integrating company for the first to be eligible as an integrated company.
However this regime does not include all type of entities, i.e.: (a) non-profit legal entities; (b) legal entities that are considered to be part of the Mexican financial system, (c) foreign tax residents even in cases where they have a permanent establishment in Mexico (d) maquila companies, etc.
Are there any withholding taxes?
Generally speaking, under certain circumstances taxpayers can be subject to income and value added tax withholdings. For instance, the Income Tax Law provides that employers ought to withhold income taxes due on their employees’ wage. Additionally, income tax due by a foreign tax resident that carried out a transaction with a Mexican tax resident is often required to be withheld by the latter.
Concerning value added tax, the following parties could be required to withhold taxes due:
(i) financial institutions that receive payments in kind or obtain goods by judicial or fiduciary allocation or awarding;
(ii) legal entities that: (a) receive personal independent services from or use goods leased to them by individuals; (b) acquire industrial waste used as consumables for their activities; (c) receive transportation services from individuals or other legal entities; (d) receive services from commission agents that are individuals;
(iii) individuals or legal entities that acquire, temporarily use, sell or lease to foreign tax residents without permanent establishments, tangible assets.
Are there any recognised environmental taxes payable by businesses?
No environmental taxes are recognised under the applicable Mexican tax laws. However, businesses could be required to pay for specific carbon credits or certificates depending on the number of tons of carbon dioxide produced by them.
What is more, taxpayers that have invested on renewable energy projects could be entitled to accelerated deductions related thereto.
Is dividend income received from resident and/or non-resident companies exempt from tax? If not, how is it taxed?
Dividends paid by Mexican tax resident legal entities are not subject to further taxation when they are paid out of the after-tax earnings and profits account, since such income would have already been subject to taxation. If that is not the case, the entity paying dividends would be required to pay corporate tax on such untaxed profits at the moment of the distribution.
Regardless of the abovementioned corporate tax, dividends paid to foreign tax residents, whether individuals or legal entities, as well as to Mexican resident individuals, would be subject to an additional 10 per cent withholding tax. Profits distributed by a foreign resident’s permanent establishment set up within national territory to its parent company could be deemed as dividend income and as such, the 10 per cent withholding tax could also be triggered.
Nonetheless, it should be noted that relief in the form of reduced withholding rates could be provided by double taxation agreements (in so far as certain requirements are met).
If you were advising an international group seeking to re-locate activities from the UK in anticipation of Brexit, what are the advantages and disadvantages offered?