In January 2002 the Mexican Federal Congress passed legislation making substantial changes to the country's tax structure and introducing new rules for foreign or non-Mexican residents. This new legislation removes the many different withholding rates applicable to non-residents that in the past had led to tax avoidance, by reconsidering the nature of the income in question. The new legislation introduces a sole 25% withholding rate for most types of taxable income on a gross basis and reduces to 35% the tax imposed on non-residents that elect to be taxed on a net income basis. For 2003, 2004 and 2005, this rate will be reduced to 34%, 33% and 32% respectively. Although significant amendments were introduced by this new legislation, this article will only cover two of the most widely applied rules, the sale or disposition of shares and interest.
Sale or disposition of shares
The law allows the taxpayer to elect to be taxed on a gain basis not a gross basis, after complying with certain requirements. These requirements include, among other things, the filing of a certified tax calculation signed by an authorized public accountant. With regard to related-party transactions, the previous law required the accountant to report the market value of the shares, indicating how it was determined based on transfer pricing principles. This requirement is now removed and the accountant must report the book value of the shares to be sold. The exemption for income obtained from the sale of publicly-traded securities is removed under certain circumstances. This exemption previously applied to non-residents' sales made in an authorized stock market or broad-based market. The new law provides for a 5% withholding rate on the income obtained from the sale of shares in the Mexican Stock Market, provided that the securities were publicly traded. An optional 20% rate is also available if the taxpayer elects to be taxed on the gain and not on a gross basis. Non-resident individuals are granted the same exemption as residents with respect to the sale of shares issued by Mexican companies on an authorized stock market, pursuant to the Mexican securities law, or shares issued by foreign companies and traded on such markets.
With respect to the equity restructuring of companies wholly owned by the same group, the tax authorities may authorize deferral of payment of tax on the gain in the transfer of shares within the group. Nonetheless, the tax deferred will have to be paid, adjusted for inflation, within the 15 days immediately following the date on which a subsequent sale is made by which those shares were to cease to be owned by the controlling group. The new provisions now defines 'group', for the purposes of the authorizations, as an aggregate of companies which have 51% or more of their voting shares owned, directly or indirectly, by the same entity. Taxpayers are now required to file documentation showing that the shares under this approval have not been disposed by the controlling group. This informational filing must be made in the first 15 days of March in the calendar year immediately following the date on which the sale was made and in all years in which such shares remain in the group. In the event that such a filing is not made, it will be presumed by the Mexican tax authorities that the shares were disposed by the controlling group.
For the sale of shares of investment companies or funds investing in equity instruments, the withholding rate is 5% on a gross basis, with an optional 20% rate applied to the gain. However, the sale or disposition of shares in investment companies or funds investing in equity instruments where the shareholders or members are exclusively individuals, will be taxed as interest.
The new law provides for a much broader definition of interest; it now includes the gain on the sale of shares of investment companies or funds investing in debt instruments, as well as the interest generated in debt-related derivative transactions. In addition, the 4.9% withholding rate on interest payable to foreign banks in general (instead of a 10% withholding rate) has been extended so that it now applies to any beneficial owner of the interest provided he or she is a resident of a country with which Mexico has a treaty for the avoidance of double taxation. Interest arising from debt instruments issued by the Mexican federal government or the Mexican central bank, which are acquired and paid abroad, are still exempt from any withholding tax.
Alberto J Morales