MEXICO Law and Practice Contributed by: Edgar Klee and Joel Gonzalez Lopez, Haynes and Boone, S.C.
1. Corporate Structures, Residence and Tax Treatment 1.1 Corporate Forms and Their Tax Treatment There are several types of corporate forms in Mexico. The most common is the Sociedad Anónima (com - monly referred to as an S.A.). There is also a Sociedad de Responsabilidad Limitada , also referred to as S. de R.L., which is analogous to a US limited liability company. Both structures limit the liability of their shareholders and members. A more sophisticated form of S.A. is a Sociedad Anónima Promotora de Inversiones (S.A.P.I.). The S.A.P.I. has a more modern corporate governance framework than an S.A. and offers more flexibility to set up differentiated rights related to dividend distribu - tion among categories of shareholders. From a Mexican tax perspective, these entities are treated as a separate taxpayer, distinct from their members and shareholders, and generally have the same tax regime (30% corporate income tax on prof - its) and have identical income recognition, applicable deductions and foreign tax credit rules. 1.2 Use and Taxation of Transparent Business Structures There are no Mexican legal entities that are treated as tax transparent. However, there are certain “agree - ments”, such as the Fideicomisos (which shares simi - larities with the common law trust), that may receive such treatment. Fideicomisos provide a flexible and efficient way to hold a separate patrimony from the settlor and the beneficiaries and represent an efficient form of admin - istration of assets. They are often used in real estate and investment transactions. From a tax perspective, Fideicomisos that primarily generate passive income are fully transparent. How - ever, those which carry out business activities (active income – ie, asset sales) must calculate the taxable profits and allocate them to the beneficiaries. Specific examples of Fideicomisos are:
• Fideicomisos de Inversión en Bienes Raíces ( FIBRAs), which are real estate investment vehicles that offer a tax-efficient way to invest in income- generating real estate; they distribute most of their income to shareholders and benefit from tax transparency; and • Fondos de Inversión (investment funds), which are investment vehicles providing a pooling mecha - nism for investors, allowing them to create diversi - fied portfolios; they are often used by private equity and hedge funds because of the flexibility and tax advantages derived from their tax transparency. Mexican income tax law recognises tax transparency for foreign entities solely for the purposes of determin - ing the taxable income generated by Mexican resi - dents abroad through these entities. 1.3 Tests for Determining Tax Residence Mexican law applies the “place of effective manage - ment” criterion to determine the Mexican tax resi - dency of an entity. This involves considering factors such as the location where the individuals who make decisions, or execute decisions relating to the control, management, and operation of the entity are situated, as well as where the entity’s activities are carried out. A foreign entity will be considered a Mexican taxpay - er if its place of effective management is located in Mexico. With respect to foreign transparent entities, their tax transparency is not recognised under Mexican law and they are therefore taxed in the same manner as any other legal entity, without taking into account that the tax consequences would ordinarily fall on their members or shareholders. This applies except for the exception described in 1.2 Transparent Entities . Under most of the tax treaties entered into by Mexico, tax residence is likewise determined by reference to the place from which the company or entity is effec - tively managed. Tax transparency is generally not recognised in most of these treaties, although there are certain exceptions, such as the tax treaty with Germany. In relation to the Mexico–US tax treaty, a limited degree of transparency is recognised for LLCs, provided that their members are US tax residents.
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