MEXICO Law and Practice Contributed by: Eduardo Triulzi, Eric Silberstein and Ana Jáuregui, Ritch Mueller
to the extent that certain requirements are met, including appointing a legal representative in Mexico. In addition, non-Mexican residents may be subject to a 10% withholding tax when the entity distributes dividends. The 10% tax rate can be reduced by claiming the benefits of a tax treaty. Tax Treatment for Common Investment Structures There is a growing trend of investing in Mexican growth/start-ups/venture capital fund portfolio companies using Cayman Islands entities or US limited liability companies (LLCs) that are not subject to US taxes. In principle, this investment structure seems to be tax-efficient, given that only the direct transfer of shares issued by Mex - ican-resident entities or the indirect transfer of shares in Mexican land-rich assets are subject to taxes in Mexico. This trend has led to increased transfers of Mexican investments, assuming that there will be no capital gains taxes if investors sell the Cayman Islands entity or the US LLC. However, Mexican tax residency is determined based on factors such as the main place of busi - ness administration or effective management, rather than merely the location of incorporation. Under these structures, many holding com - panies – where operations and management remain in Mexico – are likely to be considered Mexican tax residents, making the sale of their shares subject to Mexican income tax. Implications for Mexican Investors Mexican residents (entities and individuals) are subject to income tax on income from world - wide sources. Consequently, Mexican entities are taxed in Mexico at a rate of 30% on income earned from this type of investment (except for dividends distributed by Mexican legal enti - ties, which qualify as non-taxable income), and
Mexican individuals are subject to a progressive tax rate of up to 35%. Mexican individuals who receive dividends from non-Mexican resident companies should be subject to an additional 10% tax rate. 4.3 Government Endorsement A systematic issue for venture capital funds in Mexico is identifying exit strategies that max - imise the value of their investments. Mexico’s securities market is a natural exit strategy for many investors, such as venture capital funds, but is relatively illiquid and has shrunk during the past few years. In December 2023, a series of structural amendments to the Mexican Secu - rities Market Law, supported by Mexico, were enacted to: • incorporate a new simplified procedure for the registration of securities in the Mexican National Securities Registry; and • make amendments to the issuers’ corporate regime aimed at revitalising the Mexican securities market, including the removal of the ceiling for non-voting stock. Long-term commitment is often sought by offering equity (or equity-linked incentives) to employees, which provides them with a sense of ownership and aligns the incentives for employ - ees with those for equity holders. 5.2 Securities Incentive plans are typically structured as stock options, phantom shares, performance bonuses or profit-sharing mechanisms. In Mexico, compa - nies tend to prefer to grant stock options, which are typically the most burdensome to implement. 5. Employment Incentives 5.1 General
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