- Income Tax Law:
- Tax Transparency: In general terms, the reform eliminates tax transparency for foreign entities and vehicles, which will now calculate and pay their taxes as legal entities, in terms of the applicable sections of the Mexican Income Tax Law (MITL). Additionally, such entities or vehicles that are managed from Mexico will be considered as tax residents thereof. However, following the recommendations mainly proposed by the Mexican Association of Private Equity Firms (AMEXCAP), it includes a tax incentive to maintain the status quo of pension and private equity funds as well as other association agreements in Mexico, granting tax transparency to foreign vehicles that manage private equity investments in Mexican entities, for interest, dividend, capital gains, or rental (immovable property) income. Nevertheless, this amendment creates new obligations that may require an adjustment to existing investing structures. For further details, please refer to our Newsflash “The new tax transparency regime for the private equity industry”.
- Restriction on interest deductions (earnings stripping): The amendment restricts yearly net interest deductions to 30% of the “Tax EBITDA”, without distinguishing whether transactions are carried out with related or unrelated parties, such as a financial institutions. Despite several suggestions that were made by private associations, this restriction was approved without addressing our main concerns, as described in our Newsflash “Comments to the interest deductibility limitation published in the 2020 tax reform”. It is important to mention that, as a consequence of this amendment, there are several constitutionality issues that could be challenged through an amparo lawsuit, as they seem to directly infringe several tax principles provided for in the constitution.
- Payments made to related parties: A new rule prohibiting the deduction of payments to a related party or through a “structured agreement” was included, and shall apply whenever the recipient of such payments is subject to a preferential tax regime (PTR); that is, when such recipient pays less than 75% of the taxes that would have otherwise been payable in Mexico. This rule will also apply if whoever receives a payment, either directly or indirectly, uses such income to make deductible payments to other related parties and such income is, in turn, subject to a PTR. Unfortunately, despite suggestions made through private associations, payments that are not sourced in Mexico, and those made to foreign pension funds and multilateral or government organizations will be considered as non-deductible subject to this rule. For a more detailed explanation, please refer to our Newsflash “Deductibility limitations for payments made to foreign related parties”.
- Income received through foreign transparent entities or vehicles and CFCs subject to a PTR: The reform separates the tax treatment of income obtained by Mexican residents or non-Mexican residents with a permanent establishment in Mexico through foreign entities and vehicles into two: income obtained through transparent entities and income obtained through non-transparent CFCs. This tax treatment is very similar to the one currently applicable, but several concepts were added or clarified, which will have a relevant impact in most of the wealth management structures currently used by Mexicans in order to carry out investments abroad, as well as in the way in which Mexican multinationals treat income from their foreign subsidiaries.
