In the global business environment, the merger of companies is a very effective legal mechanism for the corporate reorganization and for integrating acquisitions.

For instance, last year due to the labor outsourcing subcontracting reform in Mexico, thousands of companies abandoned the model of internal service providers (insourcing) and migrated their personnel to operating companies. For this reason, many of these business groups resorted to the figure of the merger in order to integrate the former insourcing company to other subsidiary, thus avoiding keeping alive a company that became unnecessary due to that legal reform.

However, all these mergers have found obstacles, often impenetrable, to be able to materialize taxwise. The foregoing, due to the fact that the tax authorities have refused to accept the filing of the merger notices required by the tax provisions, which are necessary to not consider that transaction as a disposal for tax purposes or, once the notices have been filed, reject them later on, based on the fact that the merged company has differences between the income reported and the digital tax invoices issued of the last 5 tax years.

This derives from a reform to the Federal Fiscal Code of 2021, in which the Treasury was empowered to establish various requirements for taxpayers to be able to cancel the Federal Taxpayers Registry (“RFC” per its Spanish acronym) in cases of liquidation or merger, including that the company requesting the cancellation of the RFC has no difference between the reported income and withheld taxes pursuant to the information included in the tax return and the invoices or simply that such information does not match with the documents or tax authorities’ database.

This has meant that the merger notices filed in 2021 have ultimately been rejected and the RFC remains active, because there are differences between the income or withholdings of the merged company and the information that tax authorities has in its database. This has led to tax requests by tax authorities to merged companies for non-compliance with monthly estimate payments despite the fact that they no longer exist legally speaking, because the merger has been registered in the Public Registry of Commerce and has produced all its legal effects.

This situation has exacerbated even more from 2022, because on December 30, 2021, a new procedure that must be carried out by merging companies was published (Annex 1-A of the General Tax Rulings), in order for tax authorities to verify compliance with the requirements for the cancellation of the RFC due to merger, which must be carried out prior to filing the notice of merger required by the tax provisions.

The tax provisions provides that the notice of merger must be submitted within the month following that the merger is carried out and the new procedure establishes a period of 10 working days for the tax authority to respond to it, although in practice the authority exceeds that timeframe to resolve. Consequently, considering these deadlines and also the difficulty that prevails to find appointments for the attention of any face-to-face procedure before the tax authority, including the filing of merger notices, this has resulted that this year it has not been possible for taxpayers to file the merger notices and cancellation of the RFC.

The underlying problem lies in the way in which the tax authority reviews compliance with requirements for the cancellation of the RFC by merger, because if according to tax authorities’ database of the 5 previous fiscal years that the taxpayer's income is not "congruent" with the reported accrued income and does not match with the invoices issued by the taxpayer, the authority does not issue an Acknowledgment of compliance report and therefore the merger notice is not accepted. 

The reality in the vast majority of taxpayers is that their declared income does not necessarily match with their invoices, since there are certain tax revenues that do not require the issuance of a digital invoice, as is the case of the exchange gain due to currency fluctuation or the annual adjustment for inflation. Therefore, in these and other cases, the income reported by merging companies does not match with the invoices issued, which is sufficient for the tax authority not to consider that the requirements to file the merger notice and cancel the RFC of the merged company are met.

Additionally, in practice, tax authorities do not indicate specifically and precisely the inconsistency between income and invoices, so that the taxpayer can know exactly the information from which the authority is starting to determine these differences and, therefore, to be in a position to distort them and explaining the reasons why there is a mismatch between the reported income and the invoices issued.  The above has led to the filing of administrative appeals or complaints with the Taxpayer's Ombudsman Attorney 's Office (“PRODECON”) to try to solve these situations and, ultimately, to tax nullity lawsuits to contest tax authority’s resolutions, which are in process.

It is worth mentioning that on March 9, 2022, an amendment was published to the General Tax Rulings, and a tax rule was incorporated that establish that the procedure of prior review of merger requirements suspends the timeframe of one month for filing the merger notice, until the authority issues the report in which it is determined whether or not the taxpayer complies with the applicable requirements.

However, this has not solved the underlying problem, since in practice the tax authority has found that the vast majority of the merged companies have inconsistencies, which has the consequence that an acknowledgment of compliance is not issued, the deadline for submitting the notice of merger is reactivated, the merger notice it is rejected, then the requirements for monthly estimate tax payments are issued and other adverse consequences to taxpayers begin.

Additionally, on May 6, 2022, Procedure Form 86/CFF of Annex 1-A of the General Tax Rulings was updated, in order to set forth that the deadline for submitting the notice of merger will be suspended until the tax authority issues the Acknowledgment of compliance report. This opens-up the possibility for various interpretations, including that, as long as the Acknowledgment compliance report is not issued, the deadline for submitting the merger notice will remain suspended. However, other interpretations form tax authorities could also be possible.

All of the above has led business groups to seriously consider carrying out mergers, preferring to leave dormant companies that need to continue complying with their periodic tax obligations, or even better to go to the liquidation of companies because, at least in that case it is avoided to involve other subsidiaries in acts of nuisance and possible tax contingencies.

This situation only increases the administrative burden of taxpayers and also of the tax authorities, by having in their databases companies that no longer carry out operations or in a liquidation process that can take years.  Moreover, this situation is considered unnecessary from an audit and collection perspective because the tax authorities have full and sufficient powers to review the tax results of the merged companies, through the surviving entity, given that the latter is the tax liability for them due to the merger.

The lawyers of the tax practice of the Firm are at your service in order to advise you on how to comply with the various applicable rules on corporate reorganizations and resolve any dispute that may have arisen.