Foreign tax credit
The Mexican Income Tax law allows Mexican corporations and individuals to credit for Mexican income tax purposes the income tax paid abroad in connection with non-Mexican source income. The tax credit would only be applicable if the relevant income item from non-Mexican source is deemed as taxable for Mexican tax purposes in respect to the full amount (i.e. including the income tax paid abroad).
In general, creditability is available in respect of foreign income taxes withheld from foreign-source income or paid with a tax return filed in the foreign country in the name of the Mexican resident or by a foreign branch of a Mexican corporation. However, in the case of profit or dividend distributions by non-Mexican resident legal entities to Mexican resident legal entities, the proportional income tax paid by the non-Mexican resident distributors would be creditable in Mexico. Note that the Mexican Income Tax Law provides a specific computation to determine the proportional income tax paid abroad.
Furthermore, the creditability of the proportional income tax paid abroad in respect of dividend or profit distributions mentioned in the preceding paragraph would only be applicable if the Mexican resident entity receiving the dividend or profits holds at least 10% of the equity of the foreign distributing entity during a six-month period prior to the distribution.
In the case of dividend or profit distributions from a foreign legal entity that are in turn distributed to another foreign legal entity that then distributes the dividend to the Mexican legal entity, Mexican income tax credit for the proportional income taxes paid by both foreign legal entities may be allowed, in accordance with a specific computation provided by the Mexican Income Tax Law. Note that the creditability is strictly limited to two foreign corporate levels. In addition, the creditability in such cases would only be applicable if the entity distributing the dividends on the second corporate level resides in a jurisdiction having an in-force broad exchange of information agreement with Mexico and the Mexican entity holds an indirect 5% participation in such non-Mexican resident entity equity during the six-month period prior to the dividend distribution.
The foreign tax credit will be allowed up to the effective Mexican rate of tax on the taxable income (tax result) shown by the annual return on a country-by-country basis and per income type limitation. Taxpayers who are not in a position to take full credit for the taxes paid to a foreign country on foreign-source income are allowed a ten-year carryforward of such excess foreign taxes, provided certain compliance requirements are met and the credit would be limited to the corporate tax rate in Mexico of 30%.
The Mexican tax authorities have published internal criterion to determine whether or not a foreign tax should be considered as an income tax for purposes of applying the aforementioned creditability provisions. Such criteria provides, among other situations, that the main qualifying feature to be met is that the relevant tax is levied on income (i.e. revenue subtracted by authorised deductions in similar moments to those established by the Mexican Income Tax Law). Note that such criterion is not binding to taxpayers and refers to a law that was amended in 2014; however, it is still consulted in practice as it provides insight on the Mexican tax authorities view on such topic.
A deferral program is an authorisation provided by the Mexican Ministry of Economy to those companies importing raw materials or fixed assets to manufacture finished products within Mexico for export.
In addition to the benefits described for CIT purposes in the Income determination section, Maquiladoras under the IMMEX program are entitled to the following customs benefits:
- No payment of import duties for temporarily imported raw materials, as long as they are exported.
- Temporarily imported raw materials and fixed assets will not be subject to VAT when the Mexican entity importing the goods obtains a VAT certification (see VAT in the Other taxes section) from the tax authorities related to the adequate control of such imports or posts a bond guaranteeing the VAT payment until the goods are exported.
Another program allowing preferential duty rates is the Sectorial Relief Program (known as PROSEC), which allows manufacturers to apply lower duty rates on the import of raw materials and machinery required for their productive processes, regardless of their country of origin and regardless of if they are for the Mexican market or for export. These programs were created by the federal government in order to establish competitive tariff conditions for Mexican manufacturers needing to import raw materials and fixed assets from non-NAFTA or trade partner countries.
Companies in Mexico that carry out import operations with values of MXN 300 million per semester, or IMMEX companies, can take advantage of significant customs and administrative benefits if registered into the ‘Certified Company Registry’ (authorised by the Ministry of Finance). In addition, companies that comply with certain requirements regarding controls and security within their supply chain, regardless of the MXN 300 million obligation, can also obtain the 'Certified Company Registry’; this specific type of registry is known as New Scheme of Certified Companies (NEEC for its acronym in Spanish), which is different from the newer VAT certification for IMMEX companies mentioned before.
In general terms, the main benefits provided by the Certified Company Registry allows simplified procedures to process imports and exports, including the reduction in time and number of reviews when clearing goods at customs facilities.
Research and development (R&D) incentives
The Mexican Income Tax Law provides a 30% tax credit for R&D expenses, including investments in R&D. The tax credit will be equal to current-year R&D expenses in excess of the average R&D expenses incurred in the previous three years. This incentive cannot be combined with other tax incentives. The government will set up a committee to analyse and approve R&D credits. Further, taxpayers will have to file an information return each February with details of the R&D expenses to be validated by the authorities. Additional rules for the R&D tax credit were published in the Mexican Official Gazette in February 2017 and are in force since 17 March 2017. The given rules provide clarity on the procedural requirements to apply for such tax incentive, some limitations, and a list of expenses that are deemed as qualifying for purposes of obtaining the tax incentive benefits (e.g. fees paid to third party investigators, expenses incurred in testing, tools for testing, specialised equipment necessary for the development of the project, laboratory equipment, among others).
An incentive offers a credit equivalent to 100% of the income tax corresponding to the salary paid to workers/employees with certain types of disabilities.
An additional deduction, equivalent to 25% of the salary paid to such workers/employees, is also available.
Both benefits cannot be applied in the same fiscal year.
Incentives for investments in movie production
A limited credit is applicable for investments in movie production activities through an immediate tax credit, which is capped at 10% of the total income tax of the prior year, provided certain requirements are met.
Incentives for investments in theatre production
A limited credit is applicable for investments in theatre production activities through an immediate tax credit, which is capped at 10% of the total income tax of the prior year, provided certain requirements are met.
Real estate investment incentives
Some tax benefits exist for qualifying real estate investment trusts (i.e. REITs or the so-called FIBRAS for its acronym in Spanish) in Mexico.
There are certain incentives to encourage risk capital investments in Mexico.
Special Economic Zones (ZEE)
The ZEE were introduced by the Mexican government with the aim of promoting economic growth and investment in certain estates of the country that have fallen behind with respect to others parts of Mexico in industrial and economic development (e.g. Chiapas, Guerrero, Michoacán, among others).
In this regard, from a tax perspective, the Mexican government provided tax incentives to investors in the ZEE which projects should be aimed at encouraging the creation of jobs and infrastructure to promote the economic development of the region.
The specific tax incentives for the ZEE were introduced via decrees in the later part of 2017 and are effective from 30 September 2017. The main tax incentives from an income tax perspective and VAT perspectives are the following:
- From an income tax perspective, taxpayers obtaining income generated within the ZEE will be granted an income tax reduction of 100% during the first ten fiscal years and a 50% income tax reduction for the following five fiscal years, subject to the compliance of certain requirements.
- From a VAT perspective, 0% VAT rate will be applicable to goods acquired by investors in the ZEE to the extent certain documentation requirements are satisfied. Furthermore, investors in the ZEE may be able to obtain accelerated VAT refunds for goods acquired by Mexican residents located outside the ZEE. Further, Mexican residents outside the ZEE may apply a 0% VAT rate to services or the leasing of goods provided to investors in the ZEE, subject to the compliance of certain requirements. In addition, no VAT is applicable to transaction among taxpayers within the ZEE.
Note that additional tax incentives may be available at a state level; however, those are typically negotiated with the local tax authorities on a case-by-case basis and depend on the nature of each specific investment project.
Tax benefit for the northern border region
The Presidential Decree published on 31 December 2018 grants the following tax benefits for the northern border region, effective during 2019 and 2020, aiming to boost the development of the regional economy.
Income tax benefit
The Decree grants a tax credit equivalent to a third of the income tax determined by taxpayers residing or having operations in the region (reducing the income tax rate to 20%). For purposes of obtaining the benefit, taxpayers must fulfil the requirements established and be authorised by the tax authorities.
While the referred tax credit is not applicable to taxpayers that are already subject to a preferential tax regime (such as Maquiladoras, trusts, among others), it fully represents an important benefit.
Focused on acts and activities carried out in the region, the Decree grants a tax credit equivalent to 50% of the VAT computed by taxpayers. For the purposes of facilitating the benefit, the Decree allows taxpayers to reduce the tax credit from the 16% regular rate, fixing the VAT rate to 8%.
This benefit is not applicable to certain activities (e.g. sale of real estate, intangibles, digital content), and, for purposes of being subject to it, taxpayers must fulfil the requirements established and be authorised by the tax authorities.
Tax credit against income tax withholding on interest payments from bonds and capital gains
Through the Presidential Decree published on 8 January 2019, a tax benefit is granted to Mexican residents required to withhold income tax on interest payments made to non-Mexican residents from bonds issued by companies resident in Mexico publicly traded through stock on recognised stock markets. Such benefit consists of a tax credit equivalent to 100% of the income tax withholding applicable to the mentioned interest payments, which will be creditable only against the income tax that shall be paid in the amount equivalent to the withholding, provided that the Mexican resident does not make such withholding to the non-Mexican resident.
This benefit is only applicable with respect to interest payments made to residents in a country or jurisdiction with which Mexico has a DTT or an exchange of information agreement in force.
The credit shall not be considered as income for the Mexican taxpayer, nor for the foreign resident. The application of this benefit will not give rise to any refund or offset. The credit will be lost if the Mexican taxpayer fails to apply it in the corresponding fiscal year.
The tax benefit provides a tax credit equivalent to 100% of the income tax withholding applicable to interest payments from bonds issued by Mexican entities placed among the large number of investors, crediting only against income tax equivalent to the corresponding withholding, as long as the resident in Mexico did not carry out the tax withheld. The application of the benefit shall not be considered as cumulative income.
Mexican residents may apply for the tax benefit to a foreign resident of a country or jurisdiction with which Mexico has a DTT or an exchange of information agreement.
The tax benefit provides a 10% income tax rate to the profits obtained by foreign residents from the transfer of shares issued by Mexican entities on stock exchanges.
The transfer of the shares is carried out through the stock exchange or through an initial public offering of a Mexican entity that has not previously listed on stock exchanges. The value of the stockholders' equity of the Mexican company whose shares are disposed of corresponds to an amount of at least MXN 1 million.
Certain other specific and limited tax incentives are available for taxpayers engaged in certain activities (e.g. those engaged in air or sea transportation of goods or passengers with respect to aircraft and ships with a federal government commercial concession or permit; in the agricultural and forestry sectors; and in-bond warehouses with respect to real property used for the storage, safeguarding, or conservation of goods or merchandise).
Taxpayers dedicated exclusively to the generation of energy from renewable sources or efficient energy through co-generation systems and that have fully deducted their investments shall establish an account designated as a ‘Tax Profit Account for Investments in Renewable Energy’, which will allow for the distribution of dividends without payment of CIT.
Individual shareholders of companies that reinvest profits generated from 2014 to 2016 are entitled to a reduction in tax on dividends of up to 5% to the extent such profits are distributed beginning in 2019.