Background

The new Mexican Income Tax Law (Ley del Impuesto sobre la Renta) (“MITL”) is in force as of January 1, 2014.

Relevant Aspects

Article 166 (prior Article 195), establishes that the foreign financial entities, banks, pension and investment funds are no longer required to be registered at the Registry of Foreign Financial entities of the Ministry of Treasury and Public Finance (Secretaría de Hacienda y Crédito Público) ("SHCP") in order to obtain a preferential withholding tax rate on interest payments payable by Mexican residents to foreign financial entities.

Applicable witholding tax rate 

According to Article Eighth Transitory of the MITL, foreign banks, including investment banks, who are the effective beneficiaries of the interests (beneficial owners), would be entitled to a 4.9% withholding tax rate during the fiscal year 2014, as long as they are residents, for tax purposes, of a country that has entered into a treaty to avoid double taxation with Mexico and the requirements to apply preferential withholding tax rates mentioned in said treaty, are met.

Additionally, pursuant to Article 166 of the MITL, a 10% withholding tax rate would be applicable to interest payments made to foreign financial entities, owned by foreign governments, provided that said foreign financial entities are the effective beneficiaries of the interest payments and a 4.9% withholding tax rate would be applicable to interest payments made to foreign financial entities in which the Mexican Federal Government, through the SHCP or the Central Bank of Mexico, participate in the capital stock, provided that the latter are the effective beneficiaries of the interests payments.

Conclusion

The Registry of Foreign Financial entities of SHCP has been eliminated.

Based on the foregoing, in order for a foreign financial entity to apply a preferential withholding tax rate, it is necessary that said foreign financial entity is a resident of a country that has entered into a treaty to avoid double taxation with Mexico and that it is the beneficial owner of the interests.

It is important to mention that pursuant to Article 166 of the MITL, the corresponding taxes must be withhold and paid by Mexican residents.