Véronique Millischer
Baker McKenzie, Paris
veronique.millischer@bakermckenzie.com

Report on a Taxes Committee session at the 2024 IBA Annual Conference in Mexico City

Thursday 19 September 2024

Session co-chairs

Charlotte Kiès Loyens & Loeff, Amsterdam
Jorge Correa Creel García-Cuéllar Aiza y Enríquez, Mexico City

Panellists

Elizabeth González White & Case, Mexico City
Michael Silva McDermott Will & Emery, Miami
Antonio Barba de Alba Cuatrecasas, Madrid

Introduction

The panel addressed the main recent developments in the tax structuring of foreign investments into Mexico. Considering that such foreign investments are predominantly made by United States investors (41.4 per cent of investment over the period 2006–2024), and by Spanish investors (10 per cent of investment over the same period), the panel focused first on the main general tax implications arising in Mexico for foreign investors. It then deep-dived into the key aspects to be considered when investing (1) from the US and (2) from Spain. The discussion among the panellists provided valuable insights for investors and tax law practitioners.

Panel discussion

The panel discussion was divided into three key parts:

• general key tax considerations to be taken into account by foreign investors when structuring their investments into Mexico;
• specific aspects to be considered when investing from the US; and
• key points to be addressed by European investors when structuring their investments into Mexico, taking Spain as an example (Spain being the second largest investor into Mexico).

In this context, pertinent issues were discussed, in particular regarding the impact of the Multilateral Instrument (MLI) and Pillar Two.

In the initial phase of the discussion, the focus was on the latest developments in the Mexican tax legislation that may affect foreign investments.

Elizabeth González explained how Mexican tax and labour law changes that occurred in 2021 affect structures splitting operational activities and employees. These were traditionally used by foreign investors to manage the risk exposure to labour conflicts and optimise mandatory profit-sharing payments by excluding operational profits from the profit-sharing basis. González indicated that the reform now caps profit-sharing payments to workers at three months of the employee’s salary or the average profit-sharing received over the last three years, whichever is higher, and that payments made to non-compliant subcontractors are non-deductible for income tax purposes and non-creditable for VAT.

González then stressed the benefits provided to foreign investors by the huge tax treaty network entered into by Mexico when considering repatriation of profits, as well as the favourable Mexican tax landscape created by the domestic implementation of OECD guidelines, particularly in regard to transfer pricing regulations. She also highlighted the potential challenges faced by foreign investors resulting from the recent implementation of the MLI in 2023, and from the recent adoption of reinforced anti-avoidance measures such as:

• changes to permanent establishment (PE) rules;
• measures against ‘hybrids’ (including rules on tax transparency);
• changes to controlled foreign corporation (CFC) rules;
• a general anti-avoidance rule (GAAR); and
• a rule against sham transactions (Article 42-B of the Tax Code).

González concluded by reviewing the latest tax audit trends in Mexico that specifically target corporate reorganisations (mergers, spin-offs, sale of shares and intangibles), financing structures, tax treaty benefits, trusts, e-platforms, and e-commerce and electronic payments platforms.

The focus of the discussion then shifted to the most important aspects to be considered when investing into Mexico from the US.

Michael Silva explained that Mexico has three major advantages for US investors:

1. due to its large treaty network, Mexico can be used as a hub for structuring investments in Latin America;
2. US investors get foreign tax credit (FTC) on tax paid in Mexico on foreign-source income (Mexican corporate income tax qualifies as FTC in the US); and
3. US tax aspects of transferring property or employees to a Mexican entity are easy to handle.

Silva also highlighted a few points of attention, such as:

• the increased rates for tax years beginning after 31 December 2025, under the Tax Cuts & Jobs Act (TCJA), affecting all global intangible low-taxed income (GILTI), foreign-derived intangible income (FDII), and base erosion and anti-abuse tax (BEAT): this should lead to a potential review of the timing of income and deductions in light of the anticipated rate increases; and
• the anticipated effective dates of implementation of Pillar Two in the US, for which investors should be prepared, although the current position on this subject in the US is more of ‘wait and see’.

Finally, Silva stressed the importance of the USMCA Agreement that became effective for the US, Mexico and Canada on 1 July 2020, adopting significant changes in the rules of origin in the automotive industry, barriers to access to generic drugs in the pharmaceutical sector and labour matters, as well as providing for the addition of a chapter on electronic commerce and one on anti-corruption matters, among others.

Finally, the panel touched on the key points to be addressed by European investors when structuring their investments into Mexico, taking Spain as an example.

Antonio Barba de Alba summarised the key features of the Spanish tax legislation:

• a domestic corporate income tax rate of 30 per cent;
• a coherent tax treaty policy with Mexico: ie, Spanish and Dutch treaties abolish dividend withholding tax on substantial participations and limit capital gains taxation on shares; and
• being a signatory to the MLI Convention and member of the Inclusive Framework (IF), although there are no legislative developments on Pillar Two yet.

Barba de Alba then stressed that the investments made in Mexico by Spanish investors are predominantly direct investments, the latter being clearly higher than investments from entidades de tenencia de valores extranjeros (ETVE) holding entities in the recent period.

Barba de Alba then deep-dived into the impact of the implementation of the MLI in Mexico, in particular with respect to the former so-called ‘triangular structures’ (using PEs in low-taxed countries to get treaty benefits), which are now tackled by Article 10 of the MLI.

Barba de Alba touched upon the treatment of the Mexican maquiladora regime under the Pillar Two regulations: traditional Mexican rules allowed avoidance of PE for groups using Mexican entities for toll-manufacturing activities; it was possible until 2021 to agree advance pricing agreements (APAs) that would shelter the PE exemption. Nowadays, such PE exemptions only apply if the maquiladora reports taxable profits of at least 6.5 per cent on costs, or 6.9 per cent on assets, meaning that this will likely be captured by the minimum 15 per cent taxation provided by Pillar Two.

Conclusion and final remarks

In conclusion, structuring investments in Mexico from abroad presents unique challenges, including the need to review, in light of the ever-evolving domestic and international regulations, well-known structures such as dual structures splitting operational activities and employees, or maquiladoras.

It also presents unique opportunities, especially given the recent introduction in the Mexican legislation of the most advanced international tax proposals (MLI, recent OECD guidelines), and tax practitioners expecting in the future an increase in the number of mutual agreement procedures involving Mexico.

Despite the fact that some recent news, such as the Mexican judiciary reform, may be seen as raising more concerns, the final words of the panel were definitely ‘let’s hope for […] better’!