When dividends or earnings distributed do not arise from the balance of the net tax profit account (see below), tax at the rate of 34% is charged on the paying company on the result of multiplying distributed dividends by a factor of 1.515; therefore, the tax is charged by grossing up the dividend declared. This tax is paid in addition to income tax and is final, although resident individuals may opt to add dividends earned to other taxable income. When dividends are distributed out of the balance of the net tax profit account, no tax is charged. The balance of a company's net tax profit account is computed as follows:
Sum of net Dividends Dividends paid Balance of tax profits + (excluding stock - from account = net tax for each year dividends) profit account received from other resident companies
The net profit for each year is the company's taxable income, less corporate income tax on that income, statutory profit-sharing payments to employees, and permanent nondeductible business expenses. The balance of the net profit account may be adjusted for inflation.
When stock dividends are paid or dividends are reinvested by subscriptions in more shares or capital increases in the distributing company, tax on dividends is levied on any repayment of such investments deriving from a capital reduction or distribution in the course of a liquidation.
Companies generally must keep a capital contributions account, the balance of which is determined by subtracting capital reductions from total contributions from shareholders plus additional paid-in capital and repayment of loans granted to partners or shareholders that would have been considered deemed dividends. Adjustments are made to the balance to take account of the effects of inflation. When a company repays shareholders on a capital reduction, the amount of the repayment per share is compared with the subscribed capital per share, adjusted for inflation. If the repayment exceeds the adjusted capital, the difference is multiplied by the number of shares held by each shareholder in order to determine the amount that constitutes the shareholder's dividend. The shareholder is then entitled to draw as capital that portion of the net tax profit account that represents the original holding.
In addition, when a company reduces its capital by making repayments to shareholders, the company may be liable for a charge to tax on deemed dividends. The liability arises when the company's equity capital exceeds the balance of the capital contributions account. The calculation is made as follows:
Shareholders' Balance of Amounts Deemed equity - capital - treated = dividend (adjusted contributions dividends paid to for account shareholders inflation) (adjusted for individually inflation)
The deemed dividend cannot exceed the actual amount of the capital repayment. It is subject to dividend tax that is additional to any paid on actual dividends paid to shareholders. The rate of tax is 34% if the deemed dividend cannot be paid out of the net tax profit account and nil if it can. The deemed dividend is regarded as a capital contribution for the purposes of subsequent capital repayments.
The rates of withholding tax deductible from interest payments to nonresidents depend on the nature of the interest. The rate for interest paid to foreign financial entities and banks is 15% if they are registered with the Ministry of Finance and Public Credit and 35% if they are not. In the case of interest paid by Mexican credit institutions to other foreign individuals or corporations, interest paid to foreign suppliers of machinery and equipment that form part of the fixed assets of the purchaser, and interest paid to lenders registered with the Ministry of Finance and Public Credit to finance the acquisition of such assets or for working capital credits, the rate is 21%. Other interest is taxed at 35%. However, the rates of 4.9% (instead of 15%) and 10% (instead of 21%) are applicable to interest payments made to the above-mentioned entities, provided that the beneficial owner of the interest is a resident of a country with which Mexico has a double tax agreement in effect and that the requirements established in the treaty for application of such rates are met.
Some types of interest paid to nonresidents are not subject to tax, including interest arising from credits for three or more years granted or secured by financial entities resident abroad engaged in promoting exports via preferential loans or guarantees, provided that the financial entities are registered for this purpose with the Ministry of Finance and Public Credit.
In the case of resident individuals, corporations, and non-profit-making organizations, tax at the rate of 20% is charged on interest paid by Mexican banks and on interest derived from securities traded on the stock exchange. In both cases, only the first 10% of interest is subject to tax, so the effective rate of tax is 2%. However, if the agreed annual interest rate is at least 10%, withholding can be made at a 1.7% rate on the amount of the investment that produces the interest. This rate is final. Other types of interest are, if paid to individuals by resident corporations, subject to withholding tax at the rate of 35% on the taxable amount (nominal interest deducted by inflation).
The withholding tax rate for royalty payments to nonresidents is 15% in the case of royalties for the use of copyrights and technical assistance. It is 35% in the case of royalties for the use of patents and trademarks and for advertising materials or services.
When a nonresident receives the proceeds from a sale of Mexican real estate or of a partnership or equity interest in a Mexican business entity, the gross amount of the proceeds is subject to a withholding tax at 20%. The same rate applies to the gross proceeds on a sale of a debt owed by a Mexican resident when the debt is sold by a non-resident (other than the original creditor) in the course of a debt-equity exchange (swap).
A nonresident individual or company that appoints a representative in Mexico may, in a number of cases, opt to pay tax at a rate of 30% (35% for real estate) on net gains as computed under the standard procedure for calculating the taxable income of resident individuals. The option may not be exercised when a partnership interest, an equity interest in a Mexican business, or a debt or security is sold, when the beneficiary of the income resides in a country where income tax due is lower than 70% of the tax that would have been charged in Mexico if such income had been earned by a Mexican entity as if it were that beneficiary's sole revenue.
Gains on sales of shares are subject to 20% withholding tax when over 50% of the accounting value of shares held by nonresident companies arises from real estate located in Mexico.
Table A shows rates of withholding tax applicable to miscellaneous payments to nonresidents. A withholding tax rate of 10% applies to payments by companies to resident individuals of fees and rents of real property, as well as payments for personal services rendered. The withholding tax represents a provisional payment of annual tax.
RATES UNDER DOUBLE TAX TREATIES
Reduced rates for dividends, interest, and royalties are available for residents of countries that have concluded a double tax treaty with Mexico, as shown in Table B.
TABLE A WITHHOLDING TAX RATES ON MISCELLANEOUS PAYMENTS TO NONRESIDENTS Type of Payment Rate on Gross Amount (%) Salaries, wages, and professional fees: Up to Ps$57,496 Ps$57,496 to Ps$463,161 Over Ps$463,161 -1530 Fees paid to board members, administrators, or the legal examiner 30 Income from construction, maintenance, and related inspection or supervision activities 30(a) Rentals from the leasing of real estate or movable property 21 Rentals from the leasing of railroad cars, containers, and airplanes and vessels authorized for commercial use 5 Interest on leasehold financing contracts 15 (b)
a. A nonresident having a legal representative in Mexico may elect to be taxed at 34% on the gross revenue less authorized deductions directly connected with the work done.
b. A rate of 10% applies if the beneficial owner of the interest is a resident of a country with which Mexico has a double tax agreement in effect and the requirements established in the treaty for application of the 10% rate are met.
TABLE B WITHHOLDING TAX RATES FOR TREATY COUNTRIES Country of Major Minor Major Interest (a) Royalties Recipient Rate Rate Holding (%) (%) (%) (%) (%) Canada - - - 15 10 (b) France - - - 15 10 (b) Germany - - - 15 10 Italy - - - 15 15 (b) Korea (Republic of) - - - 15 10 Netherlands - - - 15 10 Norway - - - 15 10 Spain - - - 15 10 (b) Sweden - - - 15 10 Switzerland - - - 15 10 United Kingdom - - - 15 10 United States - - - 15 10
a. Other rates may apply depending on the recipient of the interest income. Recent changes have reduced the interest rate to 4.9% and 10% in some cases for residents of tax treaty countries.
b. Copyright royalties, excluding film royalties, are exempt.
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.
For further information contact Deirdre Silberstein, Deloitte & Touche, Washington on +1 202 955 4000 or enter a text search 'Deloitte & Touche' and 'Business Monitor'.