MEXICO Law and Practice Contributed by: Edgar Klee and Joel Gonzalez Lopez, Haynes and Boone, S.C.
Certain tax treaties may eliminate taxation on direct or indirect capital gains, depending on the level of ownership (normally more than 50%) and the length of time of ownership (normally more than 12 months). 5.4 Tax Implications of Change of Control When there is a change of control in a foreign holding company that owns a subsidiary in Mexico, taxation in Mexico can apply to the sale of shares. This tax is applicable if more than 50% of the foreign holding’s accounting value is represented by immovable prop - erty located in Mexico. However, certain tax treaties may provide relief in these scenarios. 5.5 Formula-Based Income Attribution There are no specific rules governing how to deter - mine the taxable income of foreign-owned local affili - ates. Transfer pricing provisions will apply. There are certain rules applicable to Mexican entities with an IMMEX authorisation (manufacturers) where the annu - al profit must be determined based on a percentage of the cost or assets used in the manufacturing process. 5.6 Deductibility of Intra-Group Management and Administrative Charges Deductions for payments by local affiliates for man - agement and administrative expenses incurred by a non-local affiliate are allowed as long as transfer pricing rules are complied with. A withholding tax is applied in these cases. These payments are normally considered business profits under a tax treaty. The expense must be considered strictly indispen - sable for business operations and sufficiently docu - mented to prove that the service was rendered. Specific rules govern the allocation of expenses incurred by the non-local affiliate. These rules dictate how the expenses are distributed between the foreign entity and its Mexican subsidiary. 5.7 Restraints on Related-Party Borrowing Related-party borrowing will be subject to transfer pricing rules and to the income deduction limitations stated in 2.5 Deduction of Interest . Payments made to a related party or derived from a structured agree - ment will not be deductible items if the income for the counterparty is subject to a preferential tax regime
(REFIPRE) or if the party that directly or indirectly receives the payment uses such payment to make other deductible payments to other members of the same group or under a structured agreement subject to a REFIPRE. 6. Taxation of Foreign Income of Local Corporations 6.1 Foreign Income Exemptions The foreign income of local corporations is not exempt from corporate tax. A tax credit is available if certain requirements are satisfied. Monthly advance tax pay - ments do not take foreign income into account, as such income is only included in the annual tax return. 6.2 Non-Deductible Local Expenses Foreign income from local corporations is not exempt. Local expenses shall follow the general rules for its deduction (strict indispensability, proper registration, materiality, etc) and the specific rules applicable to interest, royalties, etc. 6.3 Dividends From Foreign Subsidiaries Foreign dividends received by Mexican entities are treated as ordinary income and subject to the 30% tax rate. Income tax paid by the non-local subsidiary can be credited (some limitations apply). There is a second-tier indirect tax credit. 6.4 Taxation of Intangibles Developed by Local Corporations The use of intangibles developed by local corpora - tions by non-local subsidiaries is subject to transfer pricing regulations and the arm’s length principle in Mexico. Thus, consideration for the use or the transfer will be required. The tax authorities have issued non-binding criteria addressing the transfer of intangible assets abroad. According to this criterion, the deduction of royalties for licensing intangible assets that were transferred out of Mexico at a price below their arm’s length value is considered an improper tax practice. This might qualify as a business restructuring subject to further scrutiny under recent OECD Transfer Pric -
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