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Mexican tax law is based on the concept of "source of wealth" to determine when the payment of the income tax ("IT") is applicable, to ensure different taxpayers to pay such tax in Mexican territory, even when such taxpayers are foreign residents. Therefore, if a foreign resident obtains income in Mexico, (e.g., from a company incorporated under Mexican law), the tax authority is entitled to claim the tax resulting from such income. It is important to consider that, despite this, there are different international treaties executed by Mexico with different countries which allow such foreign residents to have access to different tax benefits in case certain requirements are complied with.

In many occasions, parent companies with Mexican subsidiaries or foreign individuals who are shareholders or partners of Mexican companies are unaware of the tax effects produced by the purchase/sale or transfer of shares or equity interests of Mexican companies, whether the same result from corporate restructuring, or a sale to a non-related third party abroad, having the mistaken belief that such transactions do not generate tax effects in Mexico, since they take place abroad, and therefore result in an IT payable by the selling party.

Who is responsible for the payment of the IT generated in the transaction of purchase sale of shares or equity interests?

In all cases, the taxpayer of the IT will be the seller, since the same obtains the income from the sale transaction. However, the withholding must be made by the acquirer in case the acquirer is a resident in Mexico or abroad with a permanent establishment in Mexico.

Otherwise, it will be the seller who must directly pay the corresponding IT either: (i) by means of a tax statement, which must be filled before the corresponding tax offices within the 15 (fifteen) days as of the receipt of the income; or (ii) through the appointment of a legal representative.

For both cases, there are different tax implications and applicable rates, which we explain below.

What is the tax rate applicable to the foreign residents for calculating the IT generated?

Under the scenario of item (i) above mentioned, regarding the tax return, the general rule is that the seller, as foreign resident, will be subject to a 25% (twenty-five percent) IT rate on the total sale price, without any deduction. However, for this scenario, the disadvantage is that the law does not clearly states the procedure to carry out such tax statement, considering that the resident abroad does not have a Federal Taxpayers Registry (“RFC”) through which the payment of taxes could be made.

Under the scenario of item (ii) aforementioned, referring to the appointment of a legal representative in Mexico, the foreign resident may choose to apply the 35% tax rate or even less on the income obtained, under certain international treaties to avoid double taxation, by means of:

a) The filing of an opinion prepared by a public accountant registered before the tax authorities, in terms of the Income Tax Act and its Regulations, as well as the general rules issued by the tax authorities; and

b) The appointment of a legal representative.

What are the requirements for the appointment of a legal representative in Mexico?

As a result of the Tax Reform for 2022, certain requirements for the appointment of a legal representative by foreign residents were added to the 2022 Miscellaneous Tax Resolution ("RMF"). Both the requirements established in the Income Tax Act and in the RMF have a significant relevance, since they constitute a complex and expensive obligation, and if not complied, there could be certain penalties. Nevertheless, such new requirements may affect the application of tax benefits in the application of treaties to avoid double taxation.

Some of the most relevant requirements set forth in the Income Tax Act are that the legal representative must:

• Be a Mexican resident or a resident abroad with a permanent establishment in Mexico.
• Keep available to the tax authorities the supporting documentation related to the payment of the tax on behalf of the taxpayer, for a period of 5 years following the date in which the tax return has been filed.
• Voluntarily assume joint and several liability, which is limited to the taxes payable by the resident abroad.
• Have sufficient assets to be jointly and severally liable.
Likewise, there are additional requirements in the Annex 1-A of the RMF to consider, which refer to:
• The taxpayer must file a notice before the tax authorities informing of the designation of a legal representative.
• The representative must be entitled to dispose the assets of the foreign resident.
• The taxpayer must submit a list of the foreign resident or legal representative assets subject to seizure to guarantee the income tax applicable amount.
The above has generated uncertainty, since in the event the tax authority considers that the assets are insufficient to guarantee the IT, that they are unseizable, or that they are not easy to execute, the foreign resident will not be able to apply certain preferential tax benefits and treatments, such as: (i) wave the obligation to file a tax report of its financial statements; (ii) have access to a fixed rate in case of sale of shares; and (iii) apply benefits of treaties to avoid double taxation.

The purpose of such requirements is to ensure the payment of the IT by not losing the point of contact with the foreigner's representative, also proving the necessary assets to guarantee its payment. However, there are several questions since it is often not easy for the foreign resident to grant general powers of attorney for acts of ownership over the assets of the foreign company or individual, and at the same time for a third-party resident in Mexico to voluntarily assume such level of responsibility and evidence the necessary economic solvency to pay a tax debt. With respect to the assets, it is important to consider that no objective parameters are established to quantify the value of such assets, or the possibility of their seizure in the event of noncompliance.

Is the Mexican corporation considered as jointly and severally liable for the payment of such IT by the seller?

The Federal Tax Act does not consider companies whose partners or shareholders are residents abroad as jointly and severally liable with taxpayers. This is not the case when the Mexican company registers in the book of partners or shareholders an acquirer resident in Mexico, who due to such condition, would have the obligation to withhold the applicable IT.

Is there any notice to be given by the Mexican company derived from the transfer of equity interests or shares?

As of this year, Mexican companies with foreign partners or shareholders without a permanent establishment in Mexico that carry out transactions involving the transfer of their equity must submit a notice to the tax authority.

The reason for this new obligation is that, since these transactions are carried out abroad, between foreign residents without a permanent establishment in Mexico, the tax authority did not have a mechanism to identify such transactions (and therefore, tax them).

This is relevant since, as a result of the transfer of shares, the transferor must pay the corresponding IT in order to file the proof of payment.

The filling of the notice shall be made by the Mexican company within 30 (thirty) calendar days as of the transaction, providing the following information:

1. Name, corporate name, tax identification number and country of residence of the acquirer(s) and transferor(s).
2. Date of transfer
3. Date of payment of the IR.
4. Amount of tax paid.
5. Instrument evidencing the personality of the legal representative of the company filling the notice.
6. Official identification of the legal representative.

Is there any notice to be given by the Mexican corporation resulting from the change in the capital structure?

When there is a transfer, disposal or simply a corporate restructuring (including merger and spin-off) that results in a change in the capital structure of a Mexican entity, a notice must be filed with the tax authorities within 30 (thirty) business days following the date of such modification or incorporation, which may be filed online through the company´s tax mailbox.

This, in order for the tax authority to keep updated the information regarding the partners and shareholders, which are part of the organic structure of the company. This notice is a relevant tax obligation, since it may result in potential fines and even that the foreign partners or shareholders must register in the Federal Taxpayers Registry in Mexico.

Conclusions and important considerations.

As result of the abovementioned, it is very important to be aware of the tax effects in the transaction of shares or equity interests, in order to comply with the tax provisions applicable in Mexico, and hence, have access to the possible statutory legal advantages or benefits set forth in international treaties to avoid double taxation.

Likewise, it is convenient to analyze the cost-benefit with respect to the withholding rate to be adopted, since for example, when determining the gain from the sale of shares or equity interests through a tax return, certain deductions may apply (such as expenses, appraisals, proven acquisition costs, commissions, among others), while in the 25% income tax on the total sale price do not allow any deductions.

In our opinion, the applicable tax legislation is very ambiguous and has many edges that produce uncertainty in the case of any of the chosen rates. For example, in the case of electing to pay the 25% IT rate on the total price of the sale, the procedure to file the tax return is dubious, considering that the foreign resident does not have a Federal Taxpayers Registry and most likely, cannot physically appear before the authorized office to file a letter or to appoint a legal representative.

In the case of adhering to the 35% IT withholding rate, the application of the aforementioned requirements regarding the designation of the legal representative could result in the impossibility of applying the most beneficial alternative or in the inapplicability of the benefits set forth in the corresponding double taxation avoidance treaty, since it is necessary to comply with all the new requirements to designate a legal representative, a matter that now goes beyond the requirements established in the Income Tax Act, which we consider are excessive, complex and expensive.

Likewise, we consider that it leaves foreign residents in a state of legal uncertainty regarding the amount required to guarantee the assets, as well as the interpretation of the requirements to be in compliance with the Income Tax Act, its Regulations and the RMF.

Author

Franscela Sapien
fsapien@cuestacampos.com

Rafael Sánchez
rsanchez@cuestacampos.com

The above is provided as general information prepared by professionals with regard to the subject matter. This document only refers to the applicable law in Mexico. While every effort has been made to ensure accuracy, no responsibility can be accepted for errors or omissions. The information contained herein should not be relied on as legal, accounting or professional advice being rendered.