Mexico: Tax Overview

Last Updated: 13 October 2010
Article by Ignacio Sosa López

Highlights

 

National Level Tax Rates

Corporate Income Tax

30%1

Capital Gains Tax:

30%

Branch Profits Tax:

30%

Dividends Tax:

0%2

   

Tax Withholding3 on:

 

- Interests:

From 4.9% to 30%

- Royalties:

5 %, 25% or 30%

- Technical Assistance:

25 %

- Technical Services:

25 %

- Other Services:

From 0% to 25%

   

Net Operating Tax Losses

 

Carry-Forward Term:

10 years

Transfer Pricing Rules:

Yes

Tax Free Reorganizations:

Mergers, spin-offs, transfer of shares, etc., provided that certain requirements are met

   

VAT on Sales:

16% (11% on border region)

VAT on Services:

16% (11% on border region)

VAT on Imports:

16% (11% on border region)

   

Flat Rate Business Tax:

17.5%

Tax on Cash Deposits:

3 %

TREATY TAXATION:

Items of Income

Contracting State(1)

Dividends

Interest(3)

Patent and know-how Royalites(4)

Tech. Services(8)

Tech. Assistance

(8)

Australia

0/15%

10/15%

10%

0%

0%

Austria

5 /10%

10%

10%

0%

0%

Barbados

5 /10%

10%

1-%

0%

0%

Belgium

5 /15%

10/15%

10%

0%

0%

Brazil

10/15%(2)

10/15%(2)

10/15%(2)

0/15%(2)

0/15%(2)

Canada

5 /15%

10%

1 0%

0%

0%

Chile

5/10%

15%(2)

15%(2)

0%

0%

China

5 %

10%

10%

0%

0%

Czech Republic

10%

10%

10%

0%

0%

Denmark

0/15%

5 /15%

10%

0%

0%

Ecuador

5%

10/15%

10%

0%

0%

Finland

0%

10/15%

10%

0%

0%

France

0/5/15%

5 /10/15%(2)

10/15%(2)

0%

0%

Germany

5 /15%

5 /10%

10%

0%

0%

Greece

10%

10%

10%

0%

0%

Iceland

5 /15%

10%

10%

0%

0%

India (5)

         

Indonesia

10%

10%

10%

0%

0%

Ireland

5 /10%

5 /10%

10%

0%

0%

Israel

5 /10%

10%

10%

0%

0%

Italy

15 %

10/15%(2)

15%

0%

0%

Japan

0/5/15%

10/15%

10%

0%

0%

Korea

0/15%

5 /15%

10%

0%

0%

Luxembourg(6)

5 /8/15%

10%

10%

0%

0%

Netherlands(7)

0/5/15%

5 /10%

10%

0%

0%

New Zealand

15 %(2)

10%

10%

0%

0%

Norway

0/15%

10/15%

10%

0%

0%

Poland

5 /15%

10/15%

10%

0%

0%

Portugal

10%

10%

10%

0%

0%

Romania

10%

15 %

15 %

0%

0%

Russia

10%

10%

10%

0%

0%

Singapore

0%

5/15%

10%

0%

0%

Slovakia

0%

10%

10%

0%

0%

Spain

5 /15%

5 /10/15%(2)

1 0%(2)

0%

0%

Sweden

5 /15%

10/15%

10%

0%

0%

Switzerland

5 /15%

10/15%

10%

0%

0%

United Kingdom

0%

5 /10/15%

10%

0%

0%

United States

0/5/10%(2)

4 .9/10/15%

10%

0%

0%

  1. Tax Treaty network as of January, 2010.
  2. These treaties have a most favorable nation clause (MFN). Under the MFN the withholding may be reduced in certain circumstances.
  3. In some cases, interest may only be taxed in the Contracting State in which the beneficial owner is a resident (i.e. if the beneficial owner is a Contracting State, a political subdivision or local authority, etc.).
  4. In some cases, royalties may only be taxed in the Contracting State in which the beneficial owner is a resident (i.e. copyright royalties).
  5. India Tax Treaty has already been signed and it is pending to be published in the Mexican Official Gazette, in order for such treaty to enter into force.
  6. In order to benefit from the provisions, a resident of one of the Contracting States shall be required to produce to the tax authorities of the other Contracting State a certificate counter signed by the tax authorities of the first mentioned State, specifying the income obtained and certifying that this income will be liable to direct taxation in the resident's country.
  7. The benefits provided in the Tax Treaty are not applicable to the entities or other persons that are total or partially exempt of taxes by a special regime according to legislation of the administrative practices of any of the States. A special regime only will be considered as such, when the authorities in the matter of both States have decided by mutual agreement, that such is the case.
  8. In general terms, technical services and technical assistance are not subject to withholding in the Country of source. However this should be analyzed on a case by case basis, in accordance with the specific Tax Treaty and its Protocol. The commentaries of the Model Income Tax Convention adopted by the OECD should also be considered.

1. INCOME TAX

1.1 General Aspects

1.1.1 Income Tax Rate

Mexican resident corporations are subject to a federal corporate income tax at a rate of 30%. The rate will be reduced to 29% in 2013 and to 28% starting 2014.

1.1.2 Taxable Base

Corporations resident in Mexico are subject to income tax on their worldwide income. Corporations are deemed to be Mexican residents for tax purposes if their actual management site is located in Mexican territory.

The taxable basis shall be determined by reducing the deductible expenses from the worldwide income obtained by the corporation.

Non-residents carrying out business activities in Mexico through a permanent establishment (i.e., office branches, agencies, etc.) are subject to income tax on income attributable to such permanent establishment and, in general terms, they shall comply with the same obligations applicable to Mexican corporations.

1.1.3 Deductions

As a general rule, all costs and expenses are deductible provided that they are related and strictly necessary for purposes of carrying out the business activity of the taxpayer. Expenses will be non-deductible in the same proportion that the tax exempt income obtained by the taxpayer represents from its total income. Some costs and expenses are limited, depending on the facts and circumstances of each case (i.e., related party charges, travel expenses, tax losses derived from the alienation of shares, leasing of automobiles and airplanes, among others).

Starting 2005, the cost of goods sold shall be considered as a deductible item, instead of deducting the purchase of such goods. Transitory provisions are contemplated to deal with inventory existing as of December 31, 2004.

Mexican tax legislation establishes thin capitalization rules, providing that the deduction of interests derived from accounts payable to foreign related parties will be limited when such accounts exceed a 3:1 ratio regarding the total equity of the Mexican entities.

Because of inflation adjustments, the total amount of interest may not be fully deductible for tax purposes.

1.1.4 Employee Profit Sharing (EPS).

EPS is allowed as a deduction from the taxable income (gross income minus tax deductions). Although it results in a lower taxable income, technically the EPS is not a deduction. Taxable loss resulting in a fiscal year will be increased by the EPS paid in the same year.

1.1.5 Depreciation.

The method used to depreciate tangible fixed assets and to amortize intangible assets is the straight line method. Depreciation is calculated considering the maximum annual percentages established by the Mexican Income Tax Law. Taxpayers may elect to use lower depreciation percentages.

Depreciation of new assets acquired during the fiscal year is calculated on a proportional basis according to the number of months it was used during such fiscal year.

Depreciation is computed considering the original cost of fixed assets as a basis, indexed for inflation.

1.1.6 Transfer Pricing

The Mexican Income Tax Law provides as traditional transaction methods: the Comparable Uncontrolled Price Method (CUP Method), the Resale Price Method (RPM) and the Cost Plus Method (Cost Plus Method). And as transactional profit based methods: the Profit Split Method (PSM), the Residual Profit Split Method (RPSM) and the Transactional Operating Profit Margin Method (TOPMM).

As a member of the Organization for Economic Co-operation and Development (OECD), Mexico has enacted transfer pricing laws that are generally consistent with OECD guidelines for Multinational Enterprises and the Tax Administrations. Mexico's best method rule favors traditional methodologies, starting with the CUP method, over profit-based methods. Given the Mexican tax authorities' aggressive enforcements of transfer pricing rules, careful compliance with filing requirements and transfer pricing reports is strongly advisable.

1.1.7 Inflation Adjustments.

Mexico has an annual inflation adjustment, which consists in determining the monetary gain or loss, derived from the effect of the inflation on debts and credits.

For such purposes, taxpayers shall compare the average balance of their debts with that of their credits; in case the balance of the debts is higher, an inflationary gain will be obtained which shall be considered as a taxable income; otherwise, an inflationary loss will be obtained, which may be considered as a deductible item for income tax purposes. The referred inflationary gain or loss is determined by applying to the annual average of debts or credits an annual inflation ratio.

1.1.8 Net Operating Tax Losses (NO L's) Carry-Forward.

NOL's can be carried forward for a maximum term of 10 fiscal years adjusted for inflation. There is no carry-back possibility.

Certain limitations apply to the NOL's (i.e. mergers, in the case where partners or shareholders holding 50% of the voting shares of a company change).

1.1.9 Tax-Free Reorganizations.

Mergers and spin-offs are considered tax free reorganizations, provided that certain requirements established in the Federal Tax Code are met.

Also, the stock-for-stock reorganizations are tax free, provided that certain requirements are fulfilled and that an approval from the Mexican tax authorities is obtained.

In the case of stock-for-stock reorganizations involving non-residents, the income tax derived from the transfer of shares by the non-resident may be deferred, provided that certain requirements are met and that the corresponding authorization from the Mexican tax authorities is obtained. The deferred income tax shall be paid when such shares are sold out to an entity not related to the Group.

1.2 Payment and Filing

The annual income tax return must be filed within the three months following the end of the corresponding fiscal year. Monthly income tax payments must be filed during the fiscal year, within the seventeen days following the end of each month. Such payments can be credited against the annual income tax.

1.3 Penalties on Unpaid Tax or Tax Paid Belatedly

Unpaid taxes are subject to surcharges which shall be computed on a monthly basis. In addition, such unpaid taxes must be restated by inflation occurred from the date in which they should have been paid to the date of actual payment.

If the omission of the tax payment is discovered by the Mexican tax authorities, a penalty may be imposed to the taxpayer.

1.4 Dividends

Mexican resident corporations receiving dividends from Mexican corporations are not subject to the payment of income tax in Mexico on the dividends received; however, the Mexican corporation distributing the dividend shall pay the corresponding income tax on the distributed dividend. Such income tax shall be determined by applying the 30% rate (29% for 2013 and 28% starting 2014 ) to the distributed dividend, grossed-up by the 1.42 86 ratio (1.4085 for 2013 and 1.3889 starting 2014 ). However, if the dividend proceeds from the "Net Tax Profit Account" (Spanish acronym CUFIN) generated by the corporation distributing the dividend, no income tax would be triggered.

In general terms, the CUFIN account is comprised by the tax profits that have already been subject to income tax at the corporate level.

Income tax paid on the distributed dividends may be credited by the Mexican Corporation in the following three years.

The above tax treatment is applicable also to remittances made abroad by branches of foreign corporations which are treated as permanent establishments in Mexico.

1.5 Cross-border Payments

1.5.1. Tax Withholding.

Non-resident individuals or entities receiving Mexican sourced income are subject to income tax withholding in Mexico. This is a final tax applicable to foreign residents.

1.5.2 >Dividends.

Non-residents receiving dividends from Mexican corporations are not subject to thepayment of income tax in Mexico on dividends received. However, as mentioned in section 1.4. above, the corporation/branch distributing the dividend shall pay the corresponding income tax at the 30% rate on the dividend distributed grossed-up by the 1.4286 ratio, except in case such dividend proceeds from the CUFIN account, in which case no income tax would be triggered.

1.5.3 Royalties

Royalty payments to non-residents are deemed to be from source of wealth in Mexico, when the benefit of the assets or rights for which the royalties are paid is taken in Mexico, or when such royalties are paid by a Mexican resident or a non-resident with a permanent establishment in Mexico.

Royalty payments derived from the grant of temporary use or enjoyment of railroad cars are subject to a 5% income tax withholding with no deductions allowed. Royalty payments different from that mentioned before, are subject to a withholding income tax rate that may vary from 25 % to 30% of the income received, with no deductions whatsoever.

1.5.4 Technical Services, Technical Assistance and Consulting Services.

Non-residents are subject to income tax withholding in Mexico on income received from the rendering of technical assistance services, when benefit of the assets or rights for which the technical assistance is paid is taken in Mexico, or when such technical assistance is paid by a Mexican resident or a non-resident with a permanent establishment in Mexico. The applicable withholding tax rate is 25% on the income received, with no deductions allowed. In general terms, non-residents receiving income derived from technical and consulting services, are subject to withholding tax in Mexico, when such services are rendered in Mexico, in which case the 25 % withholding tax rate will be applicable, with no deductions allowed.

1.5.5 Other Services.

Income received from the rendering of services in Mexico, even if they are performed in the country partially, are deemed to be from source of wealth in Mexico. The 25% withholding tax rate will apply, with no deductions allowed.

1.5.6 Interest and Leasing Payments.

The withholding income tax rate on interests paid to non-residents may vary from 4.9% to 30%, depending on the beneficial owner of the interest and the type of interest. In general terms, the following withholding tax rates shall apply:

a) 4 .9% to foreign banks resident in a country with which Mexico has a Tax Treaty in force, provided that they are registered with the Mexican tax authorities; to interests paid to non-residents derived from negotiable instruments placed within public investors, among others.

b) 1 0% to financial entities property of foreign states, provided that they are registered with the Mexican tax authorities; to entities placing or investing in Mexico capital proceeding from negotiable instruments issued by them and placed within the investing public, provided that they are also registered; to foreign residents when proceeding from negotiable instruments placed through banks or a brokerage firm in a country that does not have a Tax Treaty with Mexico, provided that certain requirements are met, among others

c) 15 % to reinsurance companies.

d) 21 % to foreign credit institutions different from those mentioned above; to foreign suppliers or registered financial entities derived from the alienation/financing of machinery and equipment, provided that certain requirements are met.

e) 3 0% to interests different from those mentioned above.

1.5.7 Grant of temporary use or enjoy of goods.

In the case of payments for the grant of temporary use or enjoyment of goods, nonresidents shall be subject to income tax withholding in Mexico when such goods are used in Mexico. The applicable withholding tax rate is 25%, with no deductions allowed. In the case of containers, airplanes or vessels with Federal Government concession or permit, the taxable rate is 5%.

1.5.8 Preferential Tax Regime.

Any payments made to an individual or entity subject to a preferential tax regime which is deemed to be from source of wealth in Mexico will be subject to a withholding tax rate of 40% with no deductions allowed. However, this rule is only applicable to payments made to related parties, certain exceptions apply to dividend or profit distributions and interest payments.

Mexican residents are required to pay income tax on foreign source income subject to a preferential tax regime either generated directly or through foreign entities or legal figures in which they participate directly o indirectly.

Foreign source income would be subject to a preferential tax regime if effectively taxed abroad at a rate lower than 75% of the income tax payable in Mexico, regardless of whether such a reduced tax rate is applicable due to a legal, regulatory or administrative provision, an authorization, refund, credit or any other procedure. In order to determine if income is subject to a preferential tax regime, each one of the transactions from which they arise must be considered.

Income obtained through foreign entities or vehicles considered as pass-through entities for foreign tax purposes will be considered as proceeding from a preferential tax regime, regardless of the fact that such income is not subject to a preferential tax regime. Certain exceptions apply.

The recognition of income will be on accrual basis, regardless of whether or not the income, dividend or profit have not been distributed to the Mexican resident. Moreover, tax payers subject to these provisions are also required to file, during the month of February of each year, an informative return. Special cases are also applicable to comply with this obligation regardless of the fact that such income is not subject to preferential tax regime.

In the case of foreign entities or vehicles carrying out business activities, it will be considered that income obtained from such activities is subject to a preferential tax regime if their passive income amounts over 20% of their total income.

Taxpayers may not consider as income subject to a preferential tax regime, those obtained by foreign entities or vehicles paid for the use or concession of patents or industrial secrets, provided that certain requirements are met. Other exceptions apply.

Likewise, in case of international corporate restructures in which shares are sold within a group of entities and consequently are subject to a preferential tax regime, may not apply the provisions applicable to preferential tax regimes provided that certain requirements are met.

2. FLAT RATE BUSINESS TAX

Effective January 1, 2008, the Flat Rate Business Tax (Spanish acronym IETU) was introduced as an alternative minimum tax. This tax substitutes the asset tax in force until December 31, 2007. IETU shall be paid by individuals and entities, resident for tax purposes in Mexico, as well as by nonresidents with a permanent establishment in the country, who obtain income derived from the alienation of goods, rendering of independent services and granting of temporary use of goods. Foreign residents with a permanent establishment in Mexico are obligated to pay the IETU, only on income attributable to such permanent establishment.

This tax shall be determined on a cash-flow basis, at the general rate of 17.5%.

Holding and controlled entities, who file a consolidated tax return for income tax purposes, shall pay the IETU individually. For purposes of the income tax credit (explained further on), the controlled entities shall consider as own income tax paid, the income tax delivered to the holding entity, as well as any income tax paid directly to the tax authorities.

Although IETU is not covered by several Tax Treaties previously negotiated by Mexico, most of the countries with which Mexico has a Tax Treaty in force, acknowledge IETU as identical or substantially similar to the revoked asset tax.

2.1 Exemptions

Certain entities and activities are tax exempt for IETU purposes, some of which are listed below:

i) Alienation of corporate participations, shares, documents pending collection and credit instruments, among others.

ii) Royalties paid between related parties, except when they are paid for the temporary use of industrial, commercial and scientific equipment.

iii) Interest, except when it is deemed part of the price of any activity subject to IETU payment.

iv) Financial derivative transactions, as long as the sale of the underlying asset is not subject to this tax.

v) Non-profit entities authorized to receive donations that qualify as deductible for income tax purposes, as long as certain requirements are met.

vi) Alienation of national or foreign currency, except when such alienation is made by entities or individuals exclusively engaged in this kind of activities (i.e. money exchange offices).

2.2 Taxable Income

The tax basis is determined by subtracting the allowed deductions from the taxable income, on a cash flow basis4. There are certain concepts that cannot be considered for the calculation of this tax, and therefore, are not considered as taxable income, such as royalties paid between related parties and interest deriving from financial transactions or derivative financial transactions.

Entities deemed members of the financial system in terms of the Income Tax Law, as well as taxpayers whose sole activity is the financial intermediation, should consider as independent services rendered, its financial intermediation margin (interest charged minus interest paid, plus/minus certain financial concepts derived from the application of the Mexican GAAP) corresponding to services for which interest is charged or paid.

2.3 Allowed Deductions

Allowed deductions for IETU purposes consist of payments made for the acquisition of goods, independent services or the temporary use of goods, used to carry out activities that generate income subject to IETU5. Payments made in connection with the management of the aforementioned activities or in the production, marketing and distribution of goods and services giving rise to income subject to IETU, are also considered as deductible items.

Donations made by taxpayers are also allowed deductions for IETU purposes, in the same terms and limits established for such purposes by the Income Tax Law.

New fixed assets acquired and paid during the last quarter of 2007 can be deducted by one third in each tax year as from 2008, until 2010. For these purposes, new fixed assets are those used for the first time in Mexico.

Among others, deductions shall meet the following requirements: a) they shall correspond to the acquisition of goods, independent services or the temporary use or enjoyment of goods, b) they must be strictly indispensable for the performance of activities subject to IETU, c) they shall be actually paid at the time of the deduction, d) they must meet the deduction requirements established in the Income Tax Law.

2.4 Tax Payment

The IETU shall be computed on an annual basis and paid by a tax return, to be filed before the tax authority in the same term established for the filing of the annual income tax return (within three months following the date on which the tax year ends). Also, monthly payments in advance of the annual tax should be made.

2.5 Tax Credits

Taxpayers are allowed to apply the following tax credits against its payable IETU:

a) Tax credit for deductions in excess of income. The IETU Law does not provide the possibility for taxpayers to offset tax losses against profits of the following tax years; however, tax payers may apply a tax credit against its payable IETU of the following years, in those cases in which in a tax year, the authorized deductions exceed the taxable income. The statute limitation for the use of this credit is 10 years carry forward.

b) Wages and salaries tax credit. For IETU purposes, wages and salaries are not considered as deductible items; however, taxpayers are entitled to apply a tax credit against its payable IETU, which is equivalent to the result of applying the IETU rate to salaries and wages subject to income tax.

c) Fixed assets tax credit (acquired between 1998 and 2007). In each tax year and during 10 tax years (starting in 2008), taxpayers are entitled to apply against its payable IETU, a tax credit equivalent to 5% of the balance pending deduction (as of January 1, 2008) of those fixed assets acquired between 1998 and 2007.

d) Own income tax credit. Taxpayers may credit against its payable IETU, an amount equal to its own income tax paid in the same period.

e) Other credits. The Presidential Decrees published in the Official Gazette on November 5, 2007 and on March 4, 2008, establish some additional tax credits allowed to taxpayers.

The tax provisions establish the order in which the tax credits previously mentioned shall be applied.

2.6 Asset Tax Paid in Previous Years

According to the Asset Tax Law in force until December 31, 2007, taxpayers were entitled to request the refund of the asset tax paid in the previous 10 tax years, as long as certain requirements were met.

Due to the revocation of the Asset Tax Law, a transitory provision of the IETU Law establishes the rules in order for taxpayers to recover any outstanding asset tax subject to refund. Since this transitory provision has adverse effects on taxpayers, it may be challenged in the competent courts.

3. VALUE ADDED TAX (VAT)

3.1 General Aspects

3.1.1 Taxable Transactions.

Alienation of goods, rendering of independent services, grant the temporary use or enjoy of goods and import of goods and services are subject to VAT provided that such activities are carried out within national territory. Each one of these activities has its own exemptions and definitions according to the VAT Law.

3.1.2 Tax Rates Effective 2010.

The general VAT rate is 16%. There are certain exempt activities for VAT purposes. Some other activities are rated at 0%, among which are the export of goods and certain services. In the border regions, the VAT rate is of 11%.

3.1.3 Taxable Base.

As a general rule, the taxable base is the price or value of the consideration agreed. Total price or value, include tax costs, interest, penalties and any other fees charged.

The VAT is triggered on a cash flow basis, which means that it is only triggered at the time the payment is actually collected when received in cash, in kind, in services or when the interest of a creditor is satisfied through any of the legal forms of which the debtor fulfills or extinguish any obligation. Consequently taxpayers may only credit the VAT effectively paid.

In the case of importation of services, the VAT triggered is virtual (no cash flow) considering specific rules.

3.1.4 Creditable VAT

As a general rule, taxpayers have the right to credit against its payable VAT all VAT paid on the acquisition of goods, services, leasing, and imports. In order to credit the VAT paid, there are certain requirements that shall be met. In general terms taxpayers may credit 100% of the VAT paid that is identified with taxable activities, otherwise, they may only credit the portion that is identified with such activities. VAT paid that is identified with non-taxable activities may not be credited.

3.2 Payment and Filing

Taxpayers must file monthly final VAT returns at the latest the 17th day of every month. In these returns the difference between the payable VAT and the creditable VAT paid to suppliers of goods, services, leasing, etc., must be paid. In case the creditable VAT is greater than the payable VAT, taxpayers can credit the difference against the payable VAT of future periods or request for its refund, or else, offset it against other federal taxes.

4. Other Taxes

4.1 Tax on Cash Deposits

The tax levies at a 3% rate the cash deposits exceeding $15 ,000 Mexican Pesos received by a taxpayer in one month6, whether in national or foreign currency, made in any type of account that individuals or entities resident in Mexico or abroad, including permanent establishments, have in a financial institution. Such financial institutions are obligated to collect such tax on the last day of the corresponding month.

Deposits made in favor of individuals or entities through wire transfers, cross-account transfers, securities or any other document or system set in place with institutions of the financial system as provided by the applicable laws are excluded from this tax.

4.1.1. Exemptions

The following individuals and entities are exempt from paying this tax:

  • Non-profit entities.
  • Financial system institutions for the cash deposits made in their own accounts as a result of their financial intermediation or in order to purchase and sell foreign currency.
  • Diplomatic and consular agents on the income obtained that is also exempt for income tax purposes.
  • Individuals and entities that opened an account in order to receive a loan granted by a financial institution. Certain exceptions apply.

4.1.2 Tax credit

The tax on cash deposits can be credited in the first place against the monthly income tax prepayments and annual income tax due of the taxpayer after reducing such tax with the monthly income tax prepayments made in such year.

In the event of a surplus, the taxpayer may credit such amount against the income tax withheld to third parties. In case there is still an amount left, it can be offset against any federal tax.

In case surplus results after the above credits are made, the taxpayer may request its refund. There is a credit option that taxpayers may apply in their monthly income tax prepayments which consists in estimating the amount of the tax on cash deposits that would be paid in the following month instead of the tax effectively paid in the current month.

4.2 Excise Tax

This tax levies on the alienation of certain products, final importation of goods and rendering of certain services within National Territory (Spanish acronym IEPS) such as alcohol, tobacco, gas, diesel, etc. The tax rate may vary according to the product or service provided.

Effective 2010, a new 3% tax rate is established for the rendering of telecommunication services through one or more public networks, within national territory. Certain exceptions apply.

Taxpayers may credit the tax paid for the acquisitions of goods and services against the payable IEPS, provided that certain requirements are met.

IEPS is also triggered under a cash flow basis, therefore it is only generated when it is effectively collected, and taxpayers may only credit the IEPS effectively paid.

4.3 Local Taxes

There are municipal (local territorial level) or state taxes on the alienation and acquisition of real estate, on the payment of salaries, among others. The rate for these taxes may vary depending on the state or local territory.

5. TAX INCENTIVES

5.1 Risk Capital

On 2006, a new tax incentive was approved with the purpose of encouraging the investment and growth of the small and medium companies resident in Mexico, which will be implemented through the creation of a pass-through investment vehicle.

In general terms, the incentive consists in allowing Mexican residents or foreign residents to invest capital or grant financial support to Mexican companies that are not quoted in stock markets, through a trust that will be considered as a pass-through entity for tax purposes, in which the investors will be subject to income tax as if they had made the investment or granted financial support directly to the Mexican company.

5.2 Real Estate Investment Trusts

This incentive is applied for income tax purposes to those trusts created for the purpose of the acquisition or the construction of real estate intended for lease or for the acquisition of the right to obtain revenues proceeding from the lease of such assets and also for the grant of financing for said purposes, subject to compliance of the requirements expressly established in the Income Tax Law.

The incentive seeks to grant transparency to the trust for investors who participate in them, allowing them to maintain the tax regime that they ought to have as if they have made the investment in real estate directly. Such is the case of foreign pension and retirement funds who may continue to maintain its tax exemption scheme, or any other resident abroad to claim for any available tax benefits that it may be eligible.

5.3 Immediate Asset Deduction for Fixed Assets

There is a tax incentive that allows accelerate the tax deduction of new fixed assets7 acquired by entities or individuals which carry out business activities, instead of applying every fiscal year the maximum annual percentages set by law as mentioned in section 1.1.4. This option may be taken in the fiscal year when the investment of the fixed assets is made, the fiscal year in which they are first used or the following fiscal year. However, this option is not available for certain fixed assets and in certain geographic areas as stated in the Income Tax Law.

5.4 Capital Repatriation Decree

The Decree that regulated capital repatriation published in the Official Gazette last March 2009, which granted different tax benefits for taxpayers that return to Mexico resources held abroad, is no longer applicable.

However, the option for individuals to confidentially pay the income tax arising from returns on investments held abroad is still in force during 2010.

5.5 Tax Incentive for technology research and development

The tax incentive related to expenses and investments in technology research and development is eliminated in 2010. A transitory provision establishes that taxpayers will be able to continue using the unapplied credit until it is fully applied, based on the rules in effect as of December 31, 2009.

Footnotes

1. The income tax rate for 2010, 2011and 2012 will be 30%; for 2013, 29% and starting 2014, 28%

2. If the dividend does not derive from profits that have already paid income tax at the corporate level, a 30% tax rate will apply on the distributed dividend, grossed-up by the 1.4286 ratio. For tax year 2013, the applicable ratio will be 1.4085 and starting 2014, 1.3889

3. Final Tax applicable to nonresidents

4. By means of a transitory provision, it is established that the income derived from the activities carried out before January 2008 will not be considered as taxable income for IETU purposes, even if the income is collected after such date, except in specific cases.

5. By means of a transitory provision, the payments due before 2008 will not be considered as tax deductions for IETU purposes, even if the payments are made after such date..

6. The $15,000 limit is not applicable to the acquisition of cashier checks, i.e. the requisition of such check is taxed according to the law, regardless the amount of the check.

7. For Mexican Income Tax Law purposes, new assets are the ones used for the first time in Mexico.

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