MEXICO Trends and Developments Contributed by: Ángel Escalante, Gabriel Rojas, Uzziel Rodríguez and Daniel Colunga, Escalante & Asociados
Thin capitalisation rule In parallel, Mexico maintains a thin capitalisation rule under Article 28, section XXVII of the MITL, which specifically targets related-party debt. This provision limits the deductibility of interest when the taxpayer’s debt-to-equity ratio exceeds 3:1, effectively disallow - ing interest attributable to excess leverage. This rule is particularly relevant in multinational group structures where debt is concentrated in Mexican entities. Limitations on deductions Additionally, Article 28, section XXIII of the MITL intro - duces limitations on deductions in cases involving: (i) hybrid mismatch arrangements, where differences in tax treatment between jurisdictions result in double non-taxation; and (ii) payments to entities subject to preferential tax regimes. Importantly, these rules do not operate in isolation but rather apply cumulatively, creating a complex frame - work in which multiple limitations may simultaneously restrict the deductibility of a single financing arrange - ment. Layered limitation framework From a practical perspective, these rules operate cumulatively, creating a layered limitation framework. Taxpayers must therefore analyse interest deductibility from several angles simultaneously, including: • quantitative limitations (EBITDA test); • structural limitations (thin capitalisation); and • anti-avoidance provisions (hybrids and low-tax jurisdictions). Mexican tax authorities have increasingly focused on intra-group financing arrangements, particularly in audits involving multinational groups. Areas of scru - tiny include: • whether the borrower has the capacity to assume and service the debt; • whether the financing structure reflects a genuine business need; and • whether the interest rate complies with the arm’s length principle.
In recent years, Mexico’s international tax landscape has undergone a significant transformation, driven by a combination of OECD-led reforms (particularly the base erosion and profit shifting (BEPS) Project), increased audit activity by tax authorities, and struc - tural economic developments such as nearshoring and supply chain reconfiguration. These developments have resulted in a more sub - stance-oriented, enforcement-driven and internation - ally aligned tax environment, in which traditional tax planning structures are subject to increasing scrutiny. The following trends reflect the most relevant develop - ments currently shaping tax practice in Mexico, par - ticularly in cross-border scenarios. Interest Deduction Limitations and Financial Structuring One of the most significant developments in Mexican tax practice has been the strengthening of interest deduction limitation rules, reflecting Mexico’s align - ment with BEPS Action 4 (limiting base erosion involv - ing interest deductions and other financial payments). As a starting point, interest expenses must comply with general deductibility requirements under Mexi - can tax law, which requires that expenses be strictly indispensable for the taxpayer’s business activity, duly supported by tax invoices, properly recorded in the accounting records, and effectively paid through authorised means. Earnings-stripping rule The most relevant provision is contained in Article 28, section XXXII of the Mexican Income Tax Law (MITL), which establishes an earnings-stripping rule. Under this rule, net interest expense is deductible only up to 30% of the taxpayer’s adjusted taxable profit (tax EBITDA). Any excess interest is disallowed in the rel - evant fiscal year but may generally be carried forward for up to ten fiscal years, subject to certain limitations. This rule applies broadly to both domestic and cross- border financing. It represents a shift from transac - tional analysis to a global limitation approach, as it considers the taxpayer’s overall financial position rather than individual transactions.
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