Client Alert

As a mechanism to provide liquidity to companies, it has been identified that several of them have chosen to obtain resources through other entities or individuals (parent companies, subsidiaries or members of the same group). Therefore, we recommend analyzing the nature of these resources, as this could result in tax implications and generate greater obligations. Likewise, it is extremely important to define in advance the treatment that should be applied to said resources in order to prepare the documents that support the operations carried out. As a result of the foregoing, we recommend handling such funding in the following ways:

Loan – Short Term (return is expected):

• The contribution received by companies as loan is recorded as an account payable and must be considered as debt for accounting and tax purposes.
• Due to the fact that the resources are delivered by a related party, it must be stipulated, at least, the following terms: (i) interest at market value, (ii) guarantees, and (iii) payment terms also according to market conditions.
• Likewise, it is of utmost importance to have a transfer pricing study, to support the interest rates.
• The interest payable as result of the loan will be considered as income for Income Tax purposes and, likewise, will be subject to VAT, and so the obligations established in the respective laws regarding withholding and payment of taxes must be met.
• Finally, it is extremely important to take into consideration the thin capitalization rule (three to one), in connection to the capital stock of the Mexican entity.

Increase of the capital stock – Long term (no return is expected):

• The alternative to the loan is to treat the contribution as an increase to the capital stock.
• For this, it is necessary to have the following documents: (i) corporate resolutions or meeting minute that approve said increase, (ii) notary document with the formalization of the corporate resolutions, (iii) entries in the corporate books, (iv) notification to the Tax authorities in accordance with Art. 27 Section (B), (v) notification to the Ministry of Economics through the Electronic System, and (vi) notification to the National Registry of Foreign Investment.
• It is important to note that a transfer pricing study is not necessary, since there is no loan nor payment of interests.
• It is of utmost importance that the contribution is not treated as “future capital increases”. This can be considered as income for tax purposes by the authority.

Our previous recommendations are intended to give an adequate treatment to the contributions or funding of related parties to Mexican entities, in order to avoid this being treated as tax revenue.

Prior to any contribution, we recommend carrying out an analysis to find out the implications and obligations that best suit the company’s goal.

If you have any questions, require our assistance or additional information, please contact the professionals of Cuesta Campos & Asociados, S.C.

Contact

Rafael Sánchez
rsanchez@cuestacampos.com

Andrea Mendoza
amendoza@cuestacampos.com

www.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.