A law containing several amendments to the Mexican tax system was published in the Official Gazette of 30 December 1996.
Provisions relating to tax havens:
- the law lists 87 tax havens for capital gains purposes and 65 for other types of income;
- all investments in tax havens have to be reported (as of February 1998). Failure to report such investments will be treated as a criminal offence;
- generally, payments made to residents of tax havens are not deductible, unless the taxpayer can prove that the underlying transaction is at arm's length;
- payments between Mexican enterprises or a foreign-owned permanent establishment in Mexico and residents of tax havens are treated as related-party transactions; and
- commission and agency fees paid to residents of tax havens are subject to a 30% withholding tax.
Controlled Foreign Company (CFC) Legislation
Under the CFC rules introduced by the amendments, individuals who own shares in a nonresident company, which is situated in a listed tax haven, are required to include in their taxable base the amount of income of such company which is attributable to the individual's ownership. This rule applies whether or not the profits of the company are distributed.
Foreign Tax Credit
The tax rules for consolidated groups have been clarified and a foreign tax credit is available to such groups. A second-tier foreign tax credit is available to resident companies which hold indirectly not less than 5% of the shares of the foreign company. A foreign tax credit is available for spin-offs, whether or not a tax treaty applies.
Flexibility to apply traditional or alternative methods according to international standards is granted for transfer pricing purposes. Interest payments between related parties are not deductible for the amount that exceeds market rates. Advance pricing agreements (APAs) may be concluded with the tax authorities for up to (a) 4 tax years following the date of conclusion of the APA and (b) 4 tax years prior to this date (formerly 1 year).
Withholding Tax For Nonresidents
- reinsurance premiums are subject to a 21% withholding tax, which is reduced to 10% if the beneficial owner of such premiums is a resident of a tax treaty country (formerly 35%);
- income derived by nonresidents under time-sharing arrangements for tourist purposes is deemed to be Mexican-source income if either the property is located in Mexico or the payer is a resident in Mexico (formerly only if the immovable property was located in Mexico);
- the amendments define time-sharing arrangements for tourist purposes; the income derived in connection with such arrangements is subject to a withholding tax of 21% (35% when the beneficial owner is a resident in a tax haven);
- the 30% withholding tax applicable to nonresident artistes and sportsmen for performances in Mexico is extended to all activities carried out in connection with these performances by such artistes and sportsmen;
- interest is deemed to be Mexican-source income when the underlying principal is (a) invested in Mexico or (b) paid by a Mexican resident or a foreign-owned permanent establishment in Mexico (formerly only if the principal was invested in Mexico); and
- nonresidents deriving income from the provision of independent personal services are subject to a general withholding tax of 21%.
Foreign exchange losses and losses due to inflation which are incurred by an individual in a tax year are deductible from income in that year.
Royalty And Technical Assistance Payments
Technical assistance fees are defined specifically and are not considered to be royalty payments. Patent, trademark, tradename or advertising royalties paid to nonresidents are subject to withholding tax at the rate of 35%; a 15% rate applies to payments of technical assistance fees that are deemed to be Mexican-source income if the underlying property or rights are used in Mexico or the payments are made by either a Mexican resident or a foreign-owned permanent establishment in Mexico.
The portion of interest which exceeds arm's length interest and interest on back-to back loans is regarded as a dividend for income tax purposes.
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