A Presidential Decree by Mexico President Andrés Manuel López Obrador granting a new set of income tax incentives to capital gains and interests derived from corporate bonds (the Decree) became effective on Jan. 9, 2018.
With the aim of incentivizing the corporate bond and private equity markets in Mexico, interests paid to investors abroad and profits realized from the disposition of certain shares by Mexican individuals and non-Mexican tax residents will be subject to certain tax incentives as established below.
Currently, under the Mexican Income Tax Law (MITL), interests paid to foreign tax residents are subject to different withholding tax (WHT) rates in Mexico depending on the type of interest and the nature of the foreign beneficiary. Exemptions to this WHT, such as those applicable to interests derived by foreign tax residents from governmental bonds, are limited.
A 4.9 percent WHT generally applies to interests paid to foreign financial institutions, beneficial owners of the interest, residents of countries with which Mexico has an income tax treaty in force, and to interests derived from publicly traded debt securities in Mexico and abroad through banks or stockbroker firms located in a treaty country, under certain circumstances.
Alternatively, a 10 percent WHT could apply, such as in the case of interests paid to entities that raise capital by issuing publicly traded debt securities abroad and that invest such capital in Mexico as well as in the case of interests derived from securities publicly traded through banks and stockbroker firms in a country with which Mexico does not have an income tax treaty, under certain circumstances.
Under the Decree, however, a tax credit is granted to Mexican withholding agents, generally financial intermediaries or securities depositories, equivalent to 100 percent of the income tax to be withheld in Mexico under the MITL from interest payments to foreign resident investors. The effect of this incentive is in fact exempting the interests from WHT in Mexico.
This benefit will apply so long as the interests derives from publicly traded bonds issued by Mexican resident entities and the recipient is resident in a country with which Mexico has an income tax treaty or a broad exchange of information agreement, such as the United States.
Currently, in general terms, capital gains derived by resident individuals and non-Mexican residents from the sale or disposition of publicly traded shares issued by Mexican tax resident entities (Mexican Shares) are subject to a 10 percent income tax rate when the transfer is carried out through authorized Mexican exchanges, as long as the Mexican Shares were not acquired outside the Mexican Stock Exchange (e.g., founding shares).
If that were to be the case, however, the applicable tax rate could be as high as 35 percent.
The Decree establishes a beneficial tax rate of 10 percent applicable over the earnings realized by resident individuals or foreign tax residents during tax years 2019 to 2021 from the sale of founding shares in authorized Mexican exchanges, so long as:
- the sale is done through an initial public offering and the Mexican entity has never been publicly traded in authorized Mexican exchanges or in recognized foreign exchanges
- the company's equity, of which shares are being sold, corresponds to an amount of 1 million pesos (approximately US $52,650)
- the disposition does not comprise more than 10 percent of the shares of the issuing company, within a 24-month period, by shareholders who directly or indirectly hold 10 percent or more of the issuer or control over the same
- the sale is not carried out through protected crossings or derives from certain merger or spinoff processes, among other requirements
The incentive may apply to taxpayers in the position of No. 3 above if at least 20 percent of the shares are acquired by a Mexico private equity investment trust (FICAP), in which certificates are publicly traded in authorized Mexican exchanges or recognized foreign exchanges – and if the sale pertains to a disinvestment process to initiate the listing of the company target of the investment.
The beneficial tax rate mentioned above may also apply when the shares are acquired by another investment vehicle similar to FICAPs created under Mexican laws, which, in addition to complying with the requirements set forth in the paragraph above, invests at least 80 percent of its patrimony in shares of Mexican resident entities not previously listed and also satisfies certain other conditions.