Income tax

The tax result for each corporation is determined by subtracting the allowable deductions from the total taxable income obtained over the year. These deductions include profit sharing paid over the year.

If the deductions are greater, a tax loss will be obtained, which may be offset against the tax results of the following 10 years.

Corporations are subject to income tax on their worldwide income at a rate of 28% of their annual tax result.

Additionally, corporations file monthly estimated income tax payments, which may be credited against their annual income tax. If the estimated payments exceed the annual income tax, corporations may request the refund of the difference.

Employee profit sharing

Corporations are obliged to pay their employees 10% of the tax profit obtained in the year, which will be distributed in consideration of their salary and years worked.

In general terms, the tax profit is determined in a way similar to the result for income tax. However, if a tax loss is obtained when computing the tax profit, it may not be offset against the tax profits of the following years.

The Supreme Court of Justice has established several criteria for determining the profit sharing that should take place.

Dividends

In general terms, corporations distributing dividends will pay the corresponding income tax by applying the 28% corporate rate to the dividend distributed, grossed up by a factor of 1.3889.

When distributing dividends from profits that have already had income tax deducted at the corporate level, no further income tax will be due. Therefore, corporations receiving dividends from other Mexican corporations will not be subject to income tax payment on the dividend obtained, as it would be taxed at the level of the corporation distributing the dividend.

Capital redemptions

Capital redemptions carried out by corporations are subject to income tax, provided that the reimbursement is greater than the amounts contributed to such a corporation, updated according to inflation.

Reimbursements exceeding this amount are treated as dividends and are therefore subject to the usual income tax assessment for dividends.

Mexican tax provisions establish another calculation that corporations must carry out in order to determine the income tax payable on capital redemption, which in general terms consists of comparing the amounts contributed (updated according to inflation) with the stockholders' equity as of the date of the redemption.

If the amount contributed is lower than the stockholders' equity, the amount reimbursed will be deemed a profit distribution up to the difference and subject to the usual tax for dividends.

Thin capitalisation rules

Mexican tax provisions establish a limit on the deduction of interest derived from debts contracted by a Mexican corporation with non-resident related parties when the total debts of the corporation exceed the 1:3 ratio with respect to its net equity.

When the total debts of a Mexican corporation to non-resident related parties exceeds the 1:3 ratio with respect to its net equity, a limit is placed on the deduction of interest paid to non-resident related parties. If the amount exceeding the referred ratio is greater than the amount of debts contracted with non-residents, the interest derived from such debts as a whole will not be deductible; otherwise, the referred interest will not be proportionally deductible.

Credit on taxes paid abroad

Corporations are entitled to credit the income tax paid abroad on income proceeding from a foreign source, against their income tax payable, provided that the referred income is subject to taxation in Mexico.

In the case of corporations receiving dividends from non-residents, they may credit the income tax paid by the latter on the tax profit that gave rise to the dividend, in the proportion that corresponds to the dividend. Additionally, corporations must fulfill certain requirements for the purpose of crediting such taxes.

Consolidation for tax purposes

Holding corporations owning more than 50% of the voting shares in one or more corporations either directly or indirectly may consolidate their tax results provided they obtain authorisation from the Mexican tax authorities.

In general terms, in order to consolidate their tax results, holding corporations will add the tax results or subtract the tax losses obtained by its subsidiaries to its own tax result or loss. The consolidated tax result obtained will be subject to the 28% rate. For such purposes, holding corporations will consolidate the tax results or losses while taking into consideration the percentage of their participation in their subsidiaries. If a consolidated tax loss is obtained, it may be offset against the consolidated tax result of the following 10 years.

There is a tax-free flow of dividends under the tax consolidation regime.

The income tax deferred under the tax consolidation regime will be paid upon the deconsolidation of the group and in other specific cases.

Mexican real estate trusts

In order to promote the Mexican real estate market, there is a special tax treatment applicable to infrastructure and real estate trusts (FIBRAS following its initials in Spanish).

Basically, such treatment provides two benefits for the trusts: (i) it exempts them from filing monthly estimated income tax payments; and (ii) it defers the income tax payable by the trustor when contributing real estate to the trust.

The special tax treatment mentioned above applies to corporations that meet more specific requirements established in the tax provisions.

Foreign investment funds

Transparent trusts

In order to promote the investment and growth of small and medium-sized corporations, Mexican residents and/or non-residents may invest capital or grant financing in corporations not listed on stock exchanges through a Mexican trust that will be considered as a pass-through vehicle for Mexican tax purposes. Consequently, the investors will be subject to income tax in Mexico as if they had made the investment or granted financing directly to the corporations.

In order to determine the corresponding income tax, the provisions established in the tax legislation or in the treaties for the avoidance of double taxation entered into by Mexico may be applicable.

Foreign pass-through vehicles

Limited partnerships (LPs) may be treated as pass-through entities for Mexican tax purposes, provided that they do not have legal personality and are considered to be fiscally transparent in their country of residence, which must have in force an agreement for the comprehensive exchange of information with Mexico.

In this sense, the partners of the LPs will be subject to income tax in Mexico, as if they had made the investment directly, in the proportion that the income obtained by the LPs corresponds to each partner. For such purposes, the provisions established in the Mexican tax legislation, or in the treaties for the avoidance of double taxation entered into by Mexico, may apply.

According to the tax provisions that came into force in 2008, income obtained by Mexican residents from these types of vehicles may be treated as income subject to a preferred tax regime.

Foreign residents

General provisions

Non-residents obtaining income in the form of cash, goods, services or credit from a Mexican source of wealth will be subject to income tax in Mexico, which is withheld by the Mexican resident from which the income is received.

Permanent establishment in Mexico

Non-residents with a permanent establishment in Mexico are subject to taxation in Mexico at the tax rate applicable to corporations (28% on the tax result derived from their income).

Interest

The withholding tax rate applicable to interest received by non-residents may vary from 4.9% to 40% depending on the type of interest and the recipient, and in some cases they may be tax exempt.

Royalties

Non-residents are subject to withholding tax on royalties. The withholding tax will be computed by applying the following rates to the income obtained by the non-resident, with no deductions allowed:

• 5% for the temporary use or enjoyment of railroad cars;
• 28% for the temporary use of patents, certificates of invention or improvement, trade marks, trade names or advertising; and
• 25% for royalties other than those already mentioned.

Dividends

Dividends received by non-residents from corporations are not subject to withholding income tax.

Alienation of shares

Non-residents are subject to withholding tax on the alienation of shares when they are issued by entities resident in Mexico or when more than 50% of the book value of the shares derives directly or indirectly from real estate property located in Mexico.

Income obtained from the alienation of shares is subject to a 25% withholding tax rate with no deductions allowed. Alternatively, non-residents with a legal representative in Mexico may elect to apply the 28% rate to the gain obtained, provided that certain requirements are met, including the filing of a CPA report.

Financial derivative transactions

Non-residents entering into financial capital derivative transactions with residents of Mexico are subject in some cases to income tax in Mexico.

The withholding tax is determined by applying the 25% rate on the gain obtained, and in certain cases it may be tax exempt. Alternatively, non-residents may elect to apply the 28% rate on the gain obtained from transactions executed in the same month with the same entity, provided that certain requirements are met.

Non-residents executing financial debt derivative transactions can be subject to income tax. The withholding tax rates may range from 4.9% to 28%, depending on the beneficiary of the income, and in certain cases they may be tax exempt.

Preferred tax regime (tax haven)

Income obtained by non-resident related parties from a Mexican source of wealth that are subject to a preferred tax regime (where income is subject to a tax rate below 21%) will be taxed in Mexico at a rate of 40% of the total income obtained, with no deductions allowed. This does not apply to income from dividends or profits distributed by corporations or, in some cases, to interest.

Mexican residents who obtain an income subject to preferred tax regimes through foreign juridical entities, or entities in which they have a direct or indirect participation, are subject to specific tax treatment. This also applies to revenues obtained through foreign juridical entities or entities that are fiscally transparent in foreign countries.

Revenues in cash, goods, services or credit generated by foreign entities or juridical entities must be considered as income subject to taxation in Mexico, even if such revenues have not been distributed to Mexican residents.

Transfer pricing

Transactions with related parties

Corporations carrying out transactions with related parties are obliged to determine their taxable income and authorised deductions according to prices that would have been used with or between independent parties in comparable transactions. This is called the arm's-length principle. They must obtain and maintain evidentiary documents demonstrating the determination of the amounts involved.

Additionally, corporations are obliged to file an annual informative return regarding transactions carried out with non-resident related parties before the Mexican tax authorities.

In both cases (for Mexican and non-resident related parties), the tax authorities may modify the tax profit or loss determined by corporations where the transactions have not been determined according to the arm's-length principle.

Flat rate business tax

General provisions

The flat rate business tax (IETU in Spanish) was included in the 2008 tax reform, which substitutes the asset tax and levies at a fixed rate on a cash flow basis.

Corporations and permanent establishments are subject to the IETU on income they receive for the alienation of goods, the rendering of independent services and from the granting of temporary use or enjoyment of goods, regardless of where the revenues are generated.

The IETU is determined by subtracting the authorised deductions from the total taxable income and applying a 17.5% tax rate (for 2008 and 2009 the applicable tax rates will be 16.5% and 17% respectively). Interest and certain types of royalty payment made between related parties are not subject to the IETU.

Corporations may credit income tax payable against the IETU; they will therefore have to pay the greater of the two taxes.

VAT

General provisions

Corporations are obliged to pay VAT when they carry out the following activities on Mexican territory: the alienation goods; the rendering of independent services; the granting of the temporary use or enjoyment of goods; and the import of goods or services.

VAT is triggered on a cash flow basis, which means that VAT is only triggered when it is effectively collected. Consequently, VAT taxpayers may only credit the VAT effectively paid.

Generally, VAT is applied at a rate of 15% to the agreed value of carrying out these activities. In border regions the VAT rate is 10%.

There are some activities that are taxed at a 0% rate, such as the export of some services and the alienation of food and medicines, among others. Some activities are exempt from VAT, such as the alienation of land, profits from shares and certain other forms of interest, among others.

Treaties to avoid double taxation

Mexico is a party to several treaties to avoid double taxation. These are with countries such as the US, Canada, Brazil, Chile, France, Germany, the UK, the Netherlands, Italy, Spain and Switzerland, among others.

By means of such treaties, withholding tax rates on revenues received by non-residents may be reduced as follows: interest from 4.9% to 15%; royalties from 10% to 15%; and the alienation of shares (tax-exempt in certain cases), among others.

Tax litigation

There are procedures in place to challenge the administrative rulings issued in federal tax matters and to address possible breaches of the constitution.

Appeals

Appeals can be lodged against federal tax rulings and may be used against certain other acts of the federal tax authorities.

The Federal Tax Court (TFJFA)

Proceedings may be brought to challenge federal tax rulings and the acts of federal tax authorities. Taxpayers can choose to file actions directly before the TFJFA or to appeal against a tax authority's remedy. Trials are contested before the Regional Chamber of the TFJFA.

If the TFJFA issues a judgment against the rate of interest charged, taxpayers can impose an amendment of the situation. If there is a favourable resolution, the tax authorities may submit an amendment. In both cases, a Federal Court will resolve the trial.

Writ of amparo

The writ of amparo is the legal instrument used to challenge a law when it breaches any constitutional principle. The writ must be filed within 15 days of the legal observance or within 30 days of its creation when, due to its nature, the mere creation of the law affects individuals or entities.

Both tax authorities and taxpayers can challenge the sentence issued by the federal judge, which is then referred to the Supreme Court of Justice.

Other forms of tax

Other tax laws apply to real estate property, the acquisition of real estate, labour costs (including social security contributions) and custom duties.

Author biographies

Eduardo Ocampo Ortiz Sosa Ysusi y Cía Eduardo Ocampo was a founding associate of Ortiz Sosa Ysusi y Cía, SC, where he is now a partner. Eduardo studied accounting at the Instituto Tecnológico Autónomo de México (ITAM). He completed the international tax programme jointly organised by ITAM and Harvard University. He is a member of the Mexican College of Public Accountants, the Mexican Institute of Public Accountants and the International Fiscal Association. Eduardo has lectured on tax-related topics at ITAM and the Unversidad Iberoamericana. Jorge R Flores Ortiz Sosa Ysusi y Cía Jorge R Flores is an associate at Ortiz Sosa Ysusi y Cía, SC. A public accountant and graduate of the Universidad Iberoamericana, Jorge is a member of the Mexican College of Public Accountants and has worked as a tax consultant for Chevez Ruiz Zamarripa y Cía, SC, as a supervisor in the Unión Fenosa Tax Department. He then joined Deloitte, where he was promoted to fiscal area manager in 2003.