New Mexican tax obligation: identification of beneficial owners

Norma Chayo Dichi

Creel, García-Cuéllar, Aiza y Enríquez, Mexico City

Norma.Chayo@creel.mx

The 2022 Mexican Tax Reform introduced a new obligation regarding the identification of beneficial owners into the Mexican Federal Tax Code. This new obligation came into force on 1 January 2022, and taxpayers and practitioners alike are making an effort to ensure compliance with the new rules, which are relatively complex to interpret and apply. This addition was triggered by the recommendations given to Mexico as part of the peer review process on the implementation of the international standard on the Exchange of Information on Request (EOIR) undertaken by the OECD Global Forum on Transparency and Exchange of Information for Tax Purposes (‘OECD Global Forum’).

The new obligation comprises obtaining, verifying, record keeping and providing information upon request from the Tax Administration Service on the beneficial owners of legal persons, trusts and any other legal arrangements (‘Legal Vehicles’). It applies to: the Legal Vehicles themselves, the service providers involved in their incorporation or formation (eg, lawyers, notaries and other relevant professionals), as well as the financial institutions that enter into a business relationship with the Legal Vehicles. Failure to comply with this obligation is subject to sanctions with fines ranging from MXN 500,000 to MXN 2,000,000 for each beneficial owner that was not identified, partially identified, or for which the information on file is incomplete, inaccurate (eg, due to the failure to properly verify the information), or not up-to-date. The annually published administrative tax regulations provide further details on the identification and verification of beneficial owners.

The new rules provide for a definition and process for identifying beneficial owners. In the case of legal persons, such as companies, the beneficial owner shall be an individual or group of individuals (ie, not a legal person or arrangement) that falls into one of the two defined categories. These categories are applicable in cascade (ie, only when no beneficial owner has been identified under the criteria provided in the first category do the provisions of the second category apply). The respective categories contain specific criteria, which may be summarised as follows:

1. Economic benefit. An individual (or group of individuals) that directly, or through another, or through any legal act:

i. obtains a benefit derived from its participation in the Legal Vehicle or from any other legal act; and/or

ii. who ultimately exercises the right of use, enjoyment, benefit, exploitation, or disposition of a good or service, or on whose behalf a transaction is carried out, even on a contingent basis.

2. Exercise control. An individual (or group of individuals) that exercises, directly, indirectly, or on a contingent basis, the control of the Legal Vehicle. For these purposes, control means to have the power, through the ownership of securities, by contract, or by any other legal act, to:

i. impose, directly or indirectly, decisions in the shareholders’ meetings or the supreme corporate body, appoint or remove most of its directors, administrators, or their equivalents; and/or

ii. exercise, directly or indirectly, more than 15 per cent of the voting rights in the shareholders' meetings; and/or

iii. decide, directly or indirectly, on the management, strategy, or main policies of the corresponding entity, trust, or other legal arrangement.

A fallback provision applies when no individual is identified pursuant to the above criteria. In such scenario, the sole administrator or, as applicable, the members of the board of directors (or an equivalent body) of the relevant entity, are to be considered as the beneficial owner(s).

Further, the rules explicitly provide for the determination of beneficial owners in the case of trusts. For trusts, a functional approach is followed, whereby the beneficial owners are understood to be the settlor(s), the trustee, the beneficiary(ies), and any other person who exercises effective control over the trust, even on a contingent basis. In this regard, the domestic legal framework does not specify how to proceed when the determined persons are not individuals. However, the OECD Global Forum guidelines on beneficial ownership, ie, the Beneficial Ownership Implementation Toolkit published in March 2019, provide that when the respective parties of a trust are legal persons or arrangements, they should be looked at to identify the relevant individuals behind such legal vehicles. Cross-referencing these guidelines as a source of interpretation is explicitly endorsed in the domestic framework, which also mentions the Financial Action Task Force (FATF) Recommendations from which the definition of beneficial ownership used by the OECD originally derives.    

Nevertheless, the interpretation and application of these new rules poses practical challenges, even when read in conjunction with the relevant international standards and guidelines. For example, the Mexican rules applicable to the determination of beneficial owners of legal persons can be interpreted in a very broad manner, which creates uncertainty for those applying them. Some other key aspects of the rules also remain unaddressed, such as, for example, whether a minimum ownership threshold is needed to satisfy the economic benefit criteria. Further guidance from the Mexican tax authorities is needed to ensure consistent compliance and facilitate its application.