MEXICO Law and Practice Contributed by: Javier Díaz de León, Monica Ramos and Martín Cortina, Díaz de León Abogados
are generally treated as fiscally transparent vehicles to conduct management, holding, guarantee, custodial and investment actions. The trustee, which is gener - ally a Mexican bank, is seen as the legal owner of the contributed assets, whereas the settlor and trust beneficiaries are attributed with the tax ownership of the trusts’ assets whether principal or income. Where the Mexican trust is engaged in business activities (business trust – fideicomiso empresarial ), the trustee is required to compute the annual taxable profit or loss under the Income Tax Law on behalf of the trust beneficiaries, including the monthly income tax payments. In this case, the trustee must issue digi - tal tax invoices (CFDIs) on the income and withholding relating to the business activities of the trust. Foreign trusts The taxation of foreign trusts is regulated by the Mexi - can Income Tax Law when they involve Mexican resi - dents either as settlor or beneficiaries or, alternatively, when they involve Mexican assets, which transfer is classified as Mexican source income in the hands of foreign tax residents. Foreign trusts must be care - fully analysed to understand whether they are fiscally transparent vehicles or subject to direct taxation as for any other taxpayers in their country of formation. Depending on the nature of the foreign trusts, Mexican residents, whether entities or individuals, may become subject to taxation in Mexico at a rate of 30% or up to 35%, respectively, in connection with the transfer, activities and income generated by such vehicles, pur - suant to Article 4-B of the Income Tax Law. Similarly, foreign trusts may become subject to income taxation pursuant to Article 4-A of the Income Tax Law when they derive an item of Mexican source income unless their beneficiaries are able to claim the benefits of the Double Taxation Treaties entered by Mexico and other jurisdictions providing fiscal transparency, exemptions or preferred withholding tax rates on Mexican source income. Foundations Foundations, pension funds, purpose trusts, profes - sional chambers, associations, and other not-for-prof - it entities are excluded from income tax, provided they comply with statutory thresholds dealing with author -
ised activities, use of funds, distribution restrictions and liquidation destiny. The tax-free treatment is gen - erally conserved to the extent that the funds are used in authorised activities, and the compliance regime is observed with respect to revenue, expenses, fees and investments. The distribution of any profits or surplus of these non-for-profit vehicles may become subject The Mexican Federal Congress has not yet formally discussed for approval any draft bill regarding the taxation of estate and gifts. The current draft bill pro - vides exemptions for estate, inheritances and gifts lower than MXN15 million. Different economic studies have suggested the inclusion of estate and gift taxes in Mexico, nevertheless, the expected tax collection is not representative considering the spectrum of tax - payers that would be subject to these controversial taxes. to income taxation. 1.2 Exemptions Mexican individuals may contribute, manage and operate assets through Mexican trusts without the transfer of such assets being classified as a taxable transfer, provided the Mexican transferor retains the power to recover ownership of the contributed assets. The trust vehicle ( fideicomiso ) allows for segrega - tion or concentration of investment projects, bank accounts, private equity and lending transactions, while conserving the pass-through treatment, unless it qualifies as a business trust ( fideicomiso empresarial ) as described in 1.1 Tax Regimes . Foreign Transparent Vehicles Mexican individuals may use business conduits including foreign limited partnerships (Canadian LPs), limited liability companies (US LLCs), foreign trusts (revocable or irrevocable) for multiple investments, succession planning and estate tax purposes. The Mexican tax system allows pass-through treatment on these vehicles; however, their resident participants must recognise the applicable income tax effects in Mexico on a yearly basis at the applicable tax rates ranging from 10% to 35%, depending on the type of income generated in other countries. 1.3 Income Tax Planning Mexican Transparent Vehicles
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