MEXICO Law and Practice Contributed by: Edgar Klee and Joel Gonzalez Lopez, Haynes and Boone, S.C.
ing Guidelines. Tax authorities, exercising their audit powers, scrutinise intercompany transactions, with a particular focus on intangible assets. The significance of functional and comparability analyses is empha - sised in addressing such transactions. Additionally, since 2020, the Mexican tax code has included a business purpose test. This empowers tax authorities to disregard artificial transactions lacking a business purpose when taxpayers derive a tax ben - efit greater than the reasonably expected economic benefit. Therefore, transactions involving the use of intangibles between local corporations and non- local subsidiaries should comply with transfer pricing regulations, ensuring that the pricing aligns with the arm’s length principle and serves a legitimate busi - ness purpose to avoid potential challenges from tax authorities. 6.5 Controlled Foreign Corporation-Type Rules A local entity will be taxed on the income (in some cases only the profits) generated abroad by a con - trolled non-local subsidiary, according to the partici - pation of the Mexican resident, even if the entities do not distribute this income. The tax triggered will be 35% + 10% for the distribution of dividends. These CFC rules are applicable if there is control and if the revenue obtained is not subject to tax or subject to a tax rate of less than 22.5% in the foreign country. Active business income will not be considered subject to these rules. If taxpayers have operations through these entities, they will have to file a tax report with the Tax Admin - istration Service. The income will be attributed directly to the Mexican taxpayer and the tax paid abroad by these entities will be considered paid by the Mexican resident only for the taxable income taken into account. The tax paid will generate a tax credit for the Mexican resident in the proportion that the income received by the entity or legal vehicle was considered taxable income by the taxpayer.
The exception of being considered a CFC when the taxpayer does not have “effective control” over the foreign entity still applies. Nevertheless, the rules to determine if there is “effective control” are substantial - ly modified. Under these new rules there is “effective control” over the foreign entity if the taxpayer holds more than 50% of the shares or rights, which allows the taxpayer to obtain the profits or the assets in the case of a capital reduction or liquidation. To determine if the participation exceeds the 50% threshold, and therefore if “effective control” over the foreign entity exists, all rights owned by any related party or linked individuals will be taken into account. 6.6 The Substance of Non-Local Affiliates General anti-avoidance rules (GAAR) apply to trans - actions that lack a genuine business purpose and are primarily aimed at achieving a tax benefit. Under the GAAR, if certain transactions with non-local affiliates are deemed to lack a substantive business purpose, they may be subject to a recalculation of their tax effects. 6.7 The Sale of Shares in Non-Local Affiliates Local corporations are taxed on the gain on the sale of shares in non-local affiliates. The taxable income is determined by subtracting the average cost per share from the sale price per share. The average cost per share for shares issued by foreign resident entities is calculated based on the adjusted original amount of the shares, which includes the verified acquisition cost reduced by any reimbursements paid, with adjust - ments for inflation. Reimbursements paid include amortisation and capital reductions. However, taxpayers should only consider amortisation, reimbursements or capital reductions applicable to shares that have not been cancelled due to these operations.
7. Anti-Avoidance Provisions 7.1 Overarching Provisions
Tax authorities, in the exercise of their audit author - ity, are entitled to recharacterise any transaction that does not have a legitimate business purpose and
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