Mexico’s 2022 Tax Reform

On Nov. 12, 2021, Mexico’s Executive Branch published, in the Official Gazette, the decree through which several amendments were made to Mexican tax provisions (the 2022 Tax Reform).

The key takeaways from the 2022 Tax Reform are described below.

Corporate Reorganizations

Tax-Free Share Transfers

The Mexican tax provisions include the option to carry out tax-free corporate restructures involving the transfer of shares of Mexican companies of the same group, provided that certain requirements are complied with.

In this regard, the relevant provisions were amended in order to:

• clarify that such option is applicable for the shares issued by Mexican resident companies;
• include the obligation to report the “relevant transactions” that were, or will be done, by the company five years before and after the reorganization;
• include the obligation to provide additional information when requesting the authorization (e.g., value of the shares, corporate structure); and,
• allow the Mexican tax authorities to revoke the authorization should they determine that there was not a “business reason” for the reorganization.

On the last point above, taxpayers should consider that Mexican tax provisions are silent as to when transactions have a valid “business reason”; therefore, all the supporting documentation in order to prove that the reorganization has a “business reason” should be kept in case the tax authorities should request it.

The only definition for “business reason” is included in the general anti-abuse rule (GAAR); however, it is not clear whether such definition should apply to all the Mexican tax provisions that use such term.

Mergers and Demergers

Regarding merger and demergers, the Mexican tax authorities will have the power to verify and determine if there was a transfer for tax purposes, when the relevant merger and/or demerger did not have a valid business reason.

The obligations to (i) inform of the “relevant transactions” for the five years following the merger/demerger; and (ii) audit the financial statements used in the merger/demerger, were included. These obligations are important to taxpayers; failure to comply could result in the merger and/or demerger being deemed a taxable event.

Back-to-Back Loans

A new provision is included to consider as back-to-back loans financing transactions entered into by Mexican resident entities or permanent establishments, that do not have a valid “business reason.”

As mentioned above, Mexican tax provisions are vague regarding the definition of “business reason”; taxpayers should therefore consider this when entering financial transactions and should keep documentary evidence to enable them to claim that such transactions had valid business reasons.

Transfer Pricing Requirements

Provisions that were previously administrative rules are now included in the statute, with regard to the obligation to comply with Mexican transfer pricing obligations in cases involving transactions entered by and between Mexican resident entities that are related parties.

This means that the transfer pricing requirements should now be complied with on the same terms involving transactions between Mexican residents and nonresidents. The possibility to enter into an advance pricing agreement with the Mexican tax authorities involving maquiladoras is eliminated, but they may still claim the safe harbor rules.

Non-Bank Banks (SOFOMs)

Several amendments were made in connection with non-regulated non-bank banks (SOFOMs as per their acronym in Spanish). The Mexican tax provisions in force (i.e., prior to the 2022 Tax Reform) consider non-regulated SOFOMs as part of the Mexican financial system, and they therefore received substantially similar treatment to Mexican banks.

However, the Technical Explanation of the 2022 Tax Reform stated that the Mexican tax authorities when conducting tax audits have identified aggressive tax planning by taxpayers where non-regulated SOFOMs were used with the sole purpose of benefiting from their preferential tax regime.

In this context, the following amendments applicable to non-regulated SOFOMs were made:

• the application of the preferential withholding rate applicable to SOFOMs may be limited for interest payments made in favor of nonresident related parties; and
• the thin capitalization rules may be applicable when entering transactions mainly with related parties.

In relation to the first point above, although the Technical Explanation was clear that the limitation of the preferential withholding rate was for cases of aggressive tax planning involving non-regulated SOFOMs, the text of the law approved by the Mexican Congress is vague, and it might be interpreted that the limitation of the preferential withholding rate applies to banks with regard to interest payments made to nonresident related parties (i.e., Mexican subsidiaries in favor of their holding companies).

Requirements for Legal Representatives of Nonresidents

The Mexican tax provisions include certain options for nonresidents having Mexican-sourced income to be taxed on the gains (and not on the proceeds) if they appoint a legal representative in Mexico, among other requirements.

Before the 2022 Tax Reform, the only requirement applicable for a legal representative was to be a Mexican resident (either an individual or a corporation). However, as part of the 2022 Tax Reform, an additional requirement is introduced that the legal representative shall have the financial capability to pay the tax of the nonresident should the Mexican tax authorities require the legal representative to do so.

This may be relevant for taxpayers that enter into transactions in Mexico, and may have implications for the closing stage of the transactions if the taxpayer needs to appoint a legal representative in Mexico.

Reporting Obligations of Beneficial Owners

A new obligation is added for trustees (e.g., Mexican banks), entities and other legal arrangements, upon request by the Mexican tax authorities, to report information related to their beneficial owners, as well as to keep such information as part of their accounting records. This obligation is also applicable to public notaries, brokers, and any other person involved in the formation of such trusts, entities, and other legal arrangements.

It is expected that the Mexican tax authorities will issue administrative rules regarding the record-keeping and reporting requirements.

Source of Income on Acquisition of Real Estate in Mexico

With regard to real estate located in Mexico that is acquired by a nonresident, the Mexican tax authorities will be able to carry out an appraisal and if the value of such appraisal exceeds the price agreed (and paid) by the parties by more than 10%, the difference will be considered as Mexican-sourced income for the acquirer and therefore taxable in Mexico.

This would be relevant for taxpayers involved in real estate transactions in Mexico, as the seller would be jointly and severally liable for the tax. Increased complexity in such transactions may be anticipated as a result, as sellers may wish to ask for an indemnity in case the Mexican tax authorities should determine there is omitted income tax on the acquisition, as described above.

Reporting Obligations of Mexican Companies on Sale of Shares

A new obligation is included for Mexican resident issuers to report sales between nonresidents (in the month following the month of the sale). The Technical Explanation of the 2022 Tax Reform states that such obligation was included since the Mexican tax authorities do not have visibility of the sale of shares by nonresidents and therefore were not able to tax the corresponding income, if it was determined that there was a source of income in Mexico on the sale of the shares.

Notwithstanding that the new obligation was intended for cases involving shares of privately-owned Mexican resident companies, the text of the law does not distinguish between them and publicly listed Mexican resident companies.

This is relevant since, should the Mexican issuer fail to comply with the report, it would be jointly and severally liable for the nonresident’s income tax. The issuance of administrative rules by the Mexican tax authorities is expected to provide guidance regarding the reporting obligations.

Obligation for Mexican Companies to File Tax Reports

The obligation to file a tax report, for Mexican companies that have taxable income above a certain threshold in the preceding tax year, is included. This obligation was in force previously, but it was changed to be optional for Mexican entities for recent years.

One point to note is that the certified public accountants that execute the tax report may face penalties or even a prison sentence if they do not report omitted tax, when such tax is determined by the Mexican tax authorities by means of an audit.

This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.

Author Information

Jorge Correa is a Partner and Diego Rico is an Associate with Creel, García-Cuéllar, Aiza y Enriquéz S.C.

The authors may be contacted at: jorge.correa@creel.mx; diego.rico@creel.mx