07 Feb Tax effects of the sale of shares in Mexico
Introduction
The sale of shares in Mexico is a type of disposal that generates significant tax effects, particularly in relation to Income Tax (“ISR”). The tax treatment varies depending on the parties involved, i.e., individuals, corporations, Mexican residents or foreign residents. This article seeks to detail the tax implications of this type of transactions, applying the current provisions established in the Income Tax Law (“LISR”) and other relevant tax regulations.
The importance of planning a stock sale correctly is crucial to avoid tax contingencies. Since these transactions usually involve high amounts, a poor determination of income tax or non-compliance with tax obligations may result in considerable penalties.
What do we understand by the sale of shares?
According to Article 14 of the Federal Tax Code (“CFF”), the term “alienation of property” includes any transfer of ownership, even if the person transferring the property reserves the right of ownership. This means that the sale of the shares is considered a disposal for Income Tax purposes. It is crucial to understand this definition, as it establishes the basis for identifying the tax liabilities associated with these transactions.
ISR on the sale of shares
1. Individuals Resident in Mexico for Tax Purposes
For an individual tax resident in Mexico, income derived from the sale of shares is considered taxable income in accordance with Article 119 of the Income Tax Law. In accordance with this article, the determination of ISR is made by applying a 20% rate on the total amount of the transaction. This calculation must be made on the sale price, and the provisional payment of ISR must be made within 15 days after the income is obtained, in accordance with Article 126 of the Income Tax Law.
Example of ISR calculation for an individual:
| Concept | Amount | |
| Transaction Amount | 2’000,000.00 | |
| (x) | Income tax rate | 20% |
| (=) | Provisional income tax payment due | 400,000.00 |
In this case, the payment of income tax may be withheld by the seller if the seller is a tax resident in Mexico or a resident abroad with a permanent establishment in Mexico. If the seller does not comply with these characteristics, the seller must be the one who pays the tax corresponding to the transaction.
Income Tax Reduction Options
There are mechanisms to reduce the amount of ISR on the sale of shares. Article 215 of the Income Tax Law Regulation establishes that, through the filing of a report prepared by a Certified Public Accountant, the acquirer may withhold less than 20%. In order to qualify for this reduction, certain requirements must be met, such as filing a notice with the tax authorities within 10 days following the calendar month in which the sale occurred.
- Determine the average cost per share.
- Analysis of the result obtained in the sale.
- Calculation of tax profit or loss.
- Verification of compliance with tax regulations.
The presentation of this report can considerably reduce the amount of ISR to be paid, benefiting both the transferor and the acquirer.
Example of calculation with reportc
| Concept | Amount | |
| Gain per share | $2,000.00 | |
| (x) | No. of shares sold | 100 |
| (=) | Total gain | $200,000.00 |
| (x) | Income tax rate with 15% tax assessment | 15% |
| (=) | Provisional ISR payment | $30,000.00 |
This example shows a considerable reduction in the payment of ISR thanks to the tax ruling, making the operation more profitable.
2. Legal Entities Resident in Mexico for Tax Purposes
For legal entities that are tax residents in Mexico, the ISR calculation follows a different procedure. In accordance with Article 18, Section IV of the LISR, the taxable income derived from the sale of shares is determined by adding the gain obtained to the taxpayer's other nominal income.
The provisional payment is determined by applying the profit coefficient to the total nominal income, and the 30% ISR rate for corporations is applied to this base.
Example of the calculation for a legal entity:
| Concept | Amount | |
| Nominal income for the period | $4,200,000.00 | |
| (x) | Profit ratio | 0.04 |
| (=) | Profit for the period | $168,000.00 |
| (x) | Income tax rate | 30% |
| (=) | Tax for the period | $50,400.00 |
In this case, the legal entity only pays ISR on the gain obtained from the sale of the shares, unlike individuals, where the tax is calculated on the total amount of the transaction, reducing this tax payment considerably, thus generating a benefit for the taxpayer by being able to receive a higher income as a legal entity.
Now, it is of great importance to take into account that the calculation of the ISR in the Annual Return must be made in addition to the provisional payment, therefore, legal entities must include the profits from the sale of shares in their annual return, accumulating this income to the other income obtained during the fiscal year, effectively calculating the corresponding tax for the sale of shares.
3. Tax Residents Abroad (Individuals and Legal Entities)
Option 1:
Individuals and corporations tax residents abroad that carry out share sale transactions in Mexico must comply with the provisions of Article 161 of the LISR. This article establishes that the source of wealth from a sale of shares is considered in Mexico if it complies with any of these characteristics:
- The legal entity issuing the shares has tax residence in Mexico; or.
- The book value of the shares is derived in more than 50% from real estate located in Mexico
In these cases, the income tax withholding is 25% of the total amount of the transaction, without the possibility of deductions. However, if there is a Double Taxation Avoidance Treaty with the country of residence of the transferor in question, the provisions of the corresponding treaty may be applied, and therefore, most of these may include preferential rates or deductions on the tax payable, as well as the need to file a notice with the tax authority, since the transaction is carried out abroad.
Example of the calculation of ISR for residents abroad:
| Concept | Amount | |
| Transaction Amount | $1,000,000.00 | |
| (x) | Income tax rate | 25% |
| (=) | Provisional income tax payment due | $250,000.00 |
If the seller chooses to apply an international treaty, it is possible that the withholding tax is levied on the gain, rather than on the total amount, and the withholding tax rate may be lower than 25%. For example, in transactions covered by treaties with countries such as the United States, Canada or Spain, the withholding may be significantly reduced as there are preferential provisions that have encouraged a treatment that attracts nationals of such countries to enter into such transactions without being affected by the sale of the shares.
Option 2:
As a second option for individuals and corporations tax residents abroad who sell shares with source of wealth in Mexico, it is possible to make the ISR calculation on the profit obtained, applying a rate of 35%. In order to apply this option, it is indispensable to comply with several requirements established in the law and the regulatory provisions.
ISR on the gain is applied in the following cases:
1. Compliance with source of wealth conditions in Mexico:
• The legal entity issuing the shares has tax residence in Mexico.
• More than 50% of the book value of the shares derives from real estate located in Mexico.
2. Review and opinion by a certified public accountant:
• The calculation of the gain must be supported by a tax opinion issued by an authorized public accountant in Mexico, certifying the proven acquisition cost, related expenses and net gain.
In this sense, the foreign resident must comply with the established provisions, as well as comply with the Miscellaneous Tax Resolution, contemplating the need to have a legal representative in Mexico with all the formalities that this requires (appointed through a notarized and apostilled power of attorney), in order to achieve the efficient presentation of requirements and obtain the benefit of the 35% rule.
Example of the ISR calculation for residents abroad:
| Concept | Amount | |
| Total amount of the transaction | $1´000,000.00 | |
| (-) | Proof of acquisition cost | $600,000.00 |
| (-) | Related expenses | $50,000.00 |
| (=) | Gain obtained | $350,000.00 |
| (x) | Income tax rate | 35% |
| (=) | Income tax incurred | $122,500.00 |
Special considerations and international treaties
Mexico has subscribed more than 50 Double Taxation Avoidance Treaties, which allow the application of more favorable tax conditions to taxpayers residing abroad. It is important that the parties involved verify the existence of an applicable treaty and comply with the requirements established therein, such as obtaining a valid Tax Residency Certificate for verification by the Mexican tax authorities. In certain cases, it is stated that the tax may be paid in one or the other state, or that, in order to apply the benefit, it is necessary that the foreign resident partner or shareholder has a minimum percentage of participation in the capital stock. Therefore, it is of the utmost importance to be aware of the provisions in force within the international treaties signed by the related countries, in order to know the applicable regulatory framework.
Implications and prevention
Anticipating in time and having the correct legal and accounting advice is essential to optimize the operations of the sale of shares and to ensure full compliance with the tax provisions. In large transactions, the tax impact can be significant, so anticipating the possible effects of the sale is important for the seller to perceive a beneficial result and avoid penalties.
It is essential that any operation of this nature considers the fiscal impact from the planning stage, since adequate advice not only complies with the legal provisions in force but also allows maximizing financial benefits and mitigating risks. The correct application of international treaties and other mechanisms can result in substantial benefits but requires a thorough analysis and precise execution.
For any questions related to this matter, our experts can support you in whatever is needed, do not hesitate to contact them: Rafael Sánchez, Jorge González and Javier Castañeda, rsanchez@cuestacampos.com, jgonzalez@cuestacampos.com, jcastaneda@cuestacampos.com.