If a Mexican resident company obtains loans or credits from its parent company or from a financial entity abroad, interest on the debt (including foreign exchange losses) must be reduced by an inflation adjustment with respect to all debts (including non-interest-bearing debts). This adjustment may exceed the interest expense and create a corresponding taxable gain.

Although there are currently no specific debt-to-equity rules in Mexican tax law, Mexican tax provisions that have been in effect since 1 January 1997 require that loan transactions between related parties be on an arm's length basis. Under these provisions, interest charged at an excessive rate and interest on back-to-back loans may be treated as a dividend.

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 Rodolfo Calvo, Galaz, Gomez, Morfin, Chavero, Yamazaki, Mexico City, Mexico on Fax: +52 5 281 5184