Mexico: Latin American Tax: Special Report

Last Updated: 28 October 2015
Article by Alejandro Barrera

Most Read Contributor in Mexico, July 2017

Mexico is experiencing a rough time, economically speaking at the moment, but hopes are high for better times ahead. With new tax laws and a relatively young government, these are interesting times for this country. To find out more about how the recent tax reforms will affect Mexico and the other taxation issues that are impacting the economy, Lawyer Monthly speaks to Alejandro Barrera, tax partner of Basham, Ringe y Correa, S.C., a Mexican full-service law firm.

How favourable is the tax regime in Mexico? Are there any advantages of conducting business in Mexico from a tax perspective?

As of January 1, 2014 a major tax reform came into effect including the amendment to eight different tax laws and the repeal of the tax deposits in cash and the single rate business tax.

The new tax regime in Mexico is similar to those of developed countries, however Mexico is still a developing country therefore the tax regime should be consistent with this fact and thus offer reasonable incentives to attract national and foreign capital to invest into Mexico especially when the international economic environment is not favorable.

However, when drafting the proposal of the amendments to the tax laws, the economic perspective was very different from the current situation. Oil prices were over USD$100.00, labor reforms were enacted to make the labor hand more productive, Antitrust amendments were enacted to permit stronger competition in the market, energy sector was open to private investors, so the business environment was very favorable and optimistic when the Mexican Government drafted the proposals for the Tax Reform.

The economic boost that the newly enacted reforms were expected to bring were enough to provide national and foreign capital an unprecedented attractive which would disregard any downside of a tax reform oriented mostly in increasing collection of taxes, reduce tax benefits to taxpayers which created "economic distortions" and even further adopting some of the Base Erosion Profit Shifting ("BEPS") recommendations made by the OECD. Reforms where passed, however the fall on the prices of oil change dramatically the growth expectations of the country and so the new tax regime in effect as of 2014 is not consistent with the current economic situation.

However, just recently Executive sent two proposals to the Congress to grant certain tax relieves to conduct business in Mexico: the first one is a proposal to amend certain tax laws, specially the Income Tax Law to include some tax incentives specially for energy or infrastructure investments such as accelerated depreciation, release of thin capitalization rules. By the same token it is proposed to grant a tax credit on reinvestment of dividends as well as a repatriation capital plan for Mexicans holding investments abroad; the second proposal send to Congress aims to create "Special Economic Federal Zones" to grant tax, customs and financial benefits to said special zones.

Although these proposals sill have to go to Congress at least is clear that the Federal Government is perceiving a change on the economic environment and is intending to adapt to the new conditions.

What are the potential tax implications of a corporate restructuring? What do businesses need to know before they embark on a restructuring program?

The potential tax implications that could result from a corporate restructure are either the taxation of the transfer of shares or assets, and in the worst case scenario, the liquidation of the company (ie. Change of tax residence from Mexico to another country will trigger a deem liquidation of the company). When embarking into a restructuring program, business need to keep in mind the purpose of the corporate restructure as well as the impact of said restructure on a 360º perspective.

Some aspects to take into account from a tax perspective when undertaking corporate restructures are:

  1. Indirect ownership taxation. The source of wealth will be considered to be located in Mexico and therefore taxable in Mexico when either: the person who issued the shares is a Mexican resident; or more than 50% of the accounting value of the shares or securities transferred derives directly or indirectly from immovable property located within Mexico. Therefore an indirect transfer of shares of a foreign resident might result in a taxable event in Mexico if the value of the foreign company derives from immovable property located in Mexico.
  2. Net Operating Losses. NOL's are not transferable, not even by merger. Therefore this sometimes determines that the surviving company in a merger is the one which has more NOL's.
  3. Tax rulings, court rules, and other rights. There are some cases where a company would have received a favorable tax ruling, court ruling or recognition of certain right which is not transferable. This could also determine the orientation of the corporate restructure.
  4. Mergers. Mergers may not be considered as a taxable event if certain requirements are met. Therefore it is of the utmost importance to comply with these requirements.
  5. Deferral of taxes in corporate restructures. Mexican tax law does provide deferral of taxes in corporate reorganizations if certain requirements are met.
  6. Tax treaties. Mexico has signed over 57 Double Tax Treaty Agreements which provides different type of relieves for corporate restructures, depending upon the jurisdiction.
  7. Joint liability. Shareholders, purchasers of business, and management may be hold jointly liable with the company in certain cases.

What strategies can be used to ensure M&A deals are structured in a tax efficient way?

In the cases of mergers, tax provisions grant a benefit for considering the transaction as a non-taxable event if certain requirements are met. However, this alternative is available only when the purpose is to reorganize the economic group.

Acquisitions may be reduced into shares or assets. The decision on the best strategy will depend upon the specific purpose of the deal as well as the imbedded risks and advantages of each of the entities.

The purchase of shares is recommended only after a very deep and thorough due diligence and guarantees are offered in case of any risk materializes due to any exposure or risk from past operations, not only from the tax perspective but in every single operation . However, Mexican law also provides that assets deals may carry joint liability over taxes due from the activities performed by the company previous to the acquisition of the assets and up to the amount for which it was acquired, if the assets acquired raise to be considered the acquisition of the business (most important assets of the business). So the decision on the structure will depend upon the analysis undertaken of these aspects as well as the particularities of each of the companies involved.

Originally published by Lawyer Monthly

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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