Mexico: Tax Flash: 2015 - No. 2

Last Updated: 9 February 2016
Article by Chevez Ruiz & Zamarripa

On September 29, 2015, the Fourth Amendatory Resolution to the Miscellaneous Tax Resolution for 2015 and its Annexes 1, 1-A, 3, 7, 11, 14, 15, 23 and 26-Bis were published in the Federal Official Gazette and, in general terms, its content will enter into force starting October 23, 2015.

Some of the most important additions in this amendatory resolution are the following:

Energy and Infrastructure Investment Trusts

It establishes that Energy and Infrastructure Investment Trusts (Investment Trusts) may apply the tax regime afforded to Mexican Real Estate Investment Trusts (FIBRAs, per their acronym in Spanish) with certain differences, providing specific provisions for this new kind of Investment Trusts. These Trusts would be entitled to apply this new tax regime to the extent they meet, among others, the following requirements:

  1. That they make capital investments in Mexican entities (Promoted Entities), which must meet the following:

    • All the shareholders thereof must be Mexican-resident entities.
    • Their activities must be exclusively related to Energy and Infrastructure activities carried out in Mexico.
    • In any case, more than 25% of the average annual value of their nonmonetary assets may be invested in new assets.
    • The entity's bylaws must be amended to establish several rules dealing with the distributions, which should correspond to the rules applicable for the Investment Trust.
  2. At least 70% of the average annual net worth of the Investment Trust must be invested in shares issued by Promoted Entities.
  3. The trustee shall issue participation certificates, which shall be registered before the Mexican Banking and Securities Commission.
  4. At least once a year, no later than March 15, the trustee shall distribute to the holders of the participation certificates, at least 95% of the taxable income, which shall be computed according to the applicable rules.
  5. Estate under oath that the Trust meets the corresponding requirements to apply the tax regime applicable to Investment Trusts.
  6. The Trusts shall be registered before the Federal Registry of Taxpayers as a FIBRA, explicitly stating that it elects to be subject to value added tax, and that it will be able to issue digital tax receipts.

Tax Treatment

Energy and Infrastructure Investment Trusts may apply the tax regime applicable to FIBRAs, with certain particularities, among others:

  1. The Promoted Entities shall:

    • Apply the tax treatment provided by the Mexican Income Tax Law as if their shareholders undertook business activities through a Mexican trust, without the obligation of carrying out advance income tax payments.
    • The 10% additional withholding on dividends distributed to Mexican individuals and non-residents, shall not be applicable.
    • When an Investment Trust acquires its shares for the first time, it shall consider an anticipated end of the tax year, in the date when such shares are acquired by the Trust, with all applicable tax obligations thereof.
  2. The shareholders, others than the Investment Trusts, shall consider the provisions of the Mexican Income Tax Law that are applicable for them in respect of the income obtained from the Promoted Entities.
  3. The trustee of the Investment Trusts shall consider: i) as taxable income the portion of the tax basis computed by the Promoted Entities that corresponds to its participation; and ii) a deduction for the goodwill that derives from the acquisition of the assets related with the activities carried out by the Promoted Entities, as well as the deductible items required for the operation of the Investments Trusts or, if applicable, a deferred taxable income at a 15% per annum, in case of obtaining a gain in the purchase.
  4. A specific procedure is provided in order to determine the capital gain or loss in the transfer of shares in favor of Investment Trusts.
  5. Non-resident certificate holders would not create a permanent establishment in Mexico, exclusively for the income obtained through Investment Trusts, in this case, the corresponding withholding shall be considered as a definitive income tax payment in Mexico.

Contribution of goods to Promoted Entities

It is established that the contribution of land, fixed assets and deferred expenses exclusively intended to: i) certain activities provided by the Mexican Hydrocarbons Law (midstream and downstream); and ii) activities of generation, transfer or distribution of electric energy, when said goods are contributed by a Mexican-resident entity into another Mexican-resident entity, shall not be considered as a transfer for federal tax purposes.

Among other requirements, in order to apply the abovementioned exception, an Investment Trust must acquire at least 2% of the voting shares issued by the Mexican-resident entity into which the goods were contributed, within a period of 6 months after the contribution.

Also, in order to determine its annual tax liability, the entity that receives the goods shall take into account the deductible items derived thereof, considering for such purposes as their tax basis the same original basis held by the contributor at the moment of carrying out the referred contribution.

Shareholding continuance requirement in spin-offs

In case of tax-free spin-offs, the shareholding continuance requirement (the owners of at least 51% of the voting shares of the original and the spun-off companies, must remain the same for a period of 3 years. During such period, said shareholders must maintain the same proportion in the equity of the spun-off companies as they did in the original company, as well as in the original company itself) shall not be deemed as breached, if at least 5% of the voting shares issued by the spun-off entity are acquired by an Investment Trust, within 6 months after the spin-off takes effect.

This would only be applicable for spin-offs of Mexican-resident entities, where the goods transferred to the spun-off entity are land, fixed assets and/or deferred expenses exclusively intended to: i) certain activities provided by the Mexican Hydrocarbons Law (midstream and downstream); and ii) activities of generation, transfer or distribution of electric energy.

Withholding tax on interest payments

Entities considered as part of the financial system shall not apply the corresponding income tax withholding on interest payments made in favor of Investment Trusts.

No deemed business activity is undertaken

For purposes of the rules that list when it is not deemed that business activities are undertaken through a Mexican trust, or as a consequence of entering into an agreement, it is established that the capital gain derived from the transfer of certificates issued by an Investment Trust would be considered as passive income.

Through transitory provisions, is provided that the provisions abovementioned related with the Investment Trust will enter into force starting October 1st, 2015.

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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