MEXICO Law and Practice Contributed by: Alejandro Stamoglou, Jesús Pérez Alcántar and Julio Jiménez Manrique, Bello, Gallardo, Bonequi y García, S.C.
Regarding HoldCo financings, these are common in Mexico and are typically secured through a customary collateral package that includes a pledge of shares in operating subsidiaries, upstream guarantees, and, in some cases, assignments of cash flows or project rights. 3.8 Payment in Kind/Amortisation The authors believe that payment in kind is not a com - mon practice in Mexico, as prevailing market stand - ards require cash-pay interest to maintain liquidity discipline and reduce credit risk. Regarding amortisation, private credit providers typi - cally require scheduled principal repayments rather than pure bullet structures, although bullet arrange - ments may occur in exceptional circumstances. 3.9 Call Protection In Mexico, private credit providers typically require call protection to safeguard their expected returns against early prepayment. The most common mechanism is a prepayment fee, applied when the borrower repays the loan before maturity. These fees are generally structured based on the timing of the prepayment. For instance, if prepayment occurs within the first year, the fee is fixed; in later years, it often decreases gradually. In senior secured loans, it is also common for parties to negotiate voluntary prepayment without penalty after a short initial period. In Mexico, payments of principal are not subject to withholding tax. However, interest and other amounts that are treated as interest under Mexican tax law, such as discounts, premiums, commissions for grant - ing credit, are subject to withholding when paid to non-residents. The withholding rate can be up to 35%, although reduced rates may apply for certain benefi - ciaries that meet the applicable legal requirements; for example, a 4.9% rate for banks and other qualifying financial institutions. These reductions are generally available under Mexican tax law or applicable double taxation treaties, provided the beneficiary complies with the relevant conditions. 4. Tax Considerations 4.1 Withholding Tax
Typical structures used to mitigate these tax burdens include, among others, the creation of specific vehi - cles such as SOFOMEs, which for tax purposes are considered part of the Mexican financial system and may benefit from preferential withholding rates. 4.2 Other Taxes, Duties, Charges or Tax Considerations In addition to withholding tax on interest, lenders should consider value-added tax (VAT) on interest payments, which generally applies to transactions between Mexican residents. However, the Mexican VAT Law provides exemptions in certain cases, par - ticularly when interest is paid to or received by entities that are part of the Mexican financial system, such as SOFOMEs. 4.3 Tax Concerns for Foreign Lenders Foreign lenders should consider that interest pay - ments may be subject to withholding tax and value- added tax. Accordingly, it is advisable to include gross-up clauses in the relevant credit agreements to ensure that the lender receives the full amount of the payments without any deductions for taxes. Additional risks include the potential creation of a per - manent establishment if the lender carries out activi - ties deemed habitual in Mexico, and limitations on treaty benefits if the lender cannot demonstrate ben - eficial ownership or sufficient economic substance. These risks can be mitigated through proper structur - ing, including treaty-based planning, use of regulated local vehicles such as SOFOMEs, and ensuring com - pliance with substance and anti-abuse requirements.
5. Guarantees and Security 5.1 Assets and Forms of Security
In the Mexican market, private credit transactions commonly involve the creation of security interests over a broad spectrum of assets. Typical collateral includes: (i) shares representing the borrower’s equity interest; (ii) machinery and industrial equipment; (iii) accounts receivable; (iv) rights to collect receivables; (v) rights arising under material agreements; (vi) rights to insurance proceeds; and (vii) real estate. Such
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