Gains derived from the sale of Mexican public debt instruments listed abroad between two foreign tax residents will soon be exempt from Mexican tax. Currently, for Mexican income tax purposes, any gains derived from the transfer of publicly-traded bonds, securities and other credit instruments are treated as interest. If the interest is paid on capital invested or placed in Mexico or if it is paid by a Mexican resident or a non-resident with a permanent establishment in Mexico, that interest is treated as Mexican source income and, generally, subject to a tax in Mexico. Thus, under current law, the sale between foreign tax residents generally will result in Mexican tax on the deemed interest profits from such a sale. The problem with this was that in the event that the debt instrument listed abroad was sold, the Mexican Revenue Service (SAT) has no or limited means to force a foreign broker or financial intermediary (through which the sale must be performed) to inform or collect and pay the tax to Mexico.
To resolve this issue, on Nov. 28 the SAT published the Preliminary Draft for the Seventh Amendment to the Miscellaneous Regulations, whereby it incorporated a new tax exemption for foreign holders of Mexican debt instruments. Under the new Rule I.3.17.30 (Rule) of the Amendment, the SAT established that profits obtained by foreign tax residents (without a permanent establishment in Mexico) from the sale of bonds, securities and other credit instruments placed through banks, stockbrokers or other financial intermediary resident in a country with which Mexico has a Double Tax Treaty are to be tax exempt provided the following requisites are fulfilled:
- The foreign stockbrokers or financial intermediaries must be residents in a country with which Mexico has a “Comprehensive Tax Information Exchange Agreement”;
- The disposition of the debt instrument must take place between foreign tax residents without a permanent establishment in Mexico; and
- The debt instruments must be publicly traded and listed on the Mexican National Registry of Securities.
The Rule further provides that if the above requirements are satisfied, the stockbrokers and intermediaries abroad will not be obliged to withhold any tax triggered by the sale. This might confuse some investors since foreign brokers actually have never been obliged to do such a thing. Finally, it is important to mention that despite the fact that the present Rule was thought to provide certainty to the energy sector and specifically to debt placed by PEMEX in foreign markets, the exemption will be applicable to any foreign investor. This Seventh Amendment should be entering into force in the next several weeks. Please contact us if you are interested in being personally notified the day this Rule becomes effective or if you need additional information regarding the final terms and interpretation of this Rule.