Mexico: Tax-focused investments in energy projects

Mexico: Tax-focused investments in energy projects

A new investment-focused program in Mexico—FIBRA E—is intended to provide for the securitization of “mature” energy and infrastructure projects so as to provide funding and resources for future investments in new projects and to support the energy industry. The FIBRA E investment vehicle was first proposed as part of the economic package presented in early September 2015.

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Specific provisions relating to the FIBRA E program were published in late September 2015 as part of the Fourth Amendments to the Administrative Tax Regulations for 2015 (Cuarta Resolución de Modificaciones a la Resolución Miscelánea Fiscal (RMF) para 2015). In general, FIBRA E-created trusts may opt to apply the tax treatment that is available under the income tax law provisions that apply for real estate investment trusts (REITs).

The FIBRA E regime is not intended to reform the current income tax law. Accordingly, the tax incentives in the tax law continue to apply only to REITs. The tax requirements and tax benefits for FIBRA E would be included in the RME (tax regulations). 

The rules for the creation of the FIBRA E regime would be effective 23 October 2015 (unlike the proposals for income tax reform, that generally would be effective in 2016). 

Characteristics of FIBRA E

There are certain characteristics or requirements for FIBRA E-created trusts. 

  • They must be organized in accordance with Mexican law.
  • The fiduciary must be a credit institution or brokerage house based in Mexico.
  • At least 70% of the annual average value of the trust assets must be invested in Mexican entities, while the balance must be invested in securities issued by the federal government. 
  • The fiduciary must issue securitize trust certificates, and the FIBRA E trust must distribute at least once a year, and no later than March 15 of the following year, at least 95% of the determined result. 
  • The fiduciary must file a notice with the Mexican tax authorities via a “tax mailbox” and this notice must be signed, under oath, attesting that the trust complies with the requirements for the favorable tax regime. 
  • The fiduciary and taxpayer entities must collaborate with Mexican tax authorities, each six-month period, concerning their participation in the program.
  • The trust must be registered as a FIBRA E.
  • Concerning value added tax (VAT), the trust must opt to compute VAT at the level of the trust, and not at the level of the trustees. 
  • The trust agreement must include rules for paying the administrator, the trust settlor or related persons, their compensation, fees, commissions, distributions or incentives that would remain subordinate to the payment of a certain amount (either fixed or determinable) to holders of the securitization certificates.

Investment rules

The main objective of the trust would be to invest in shares of Mexican companies (i.e., those that are residents of Mexico for tax purposes). Mexican companies in which FIBRA E invests also satisfy certain requirements including:

  • All shareholders (other than FIBRA E) must be legal entities that are residents of Mexico for tax purposes.  
  • The entities must be assignees or contractors in accordance with Mexico’s law on hydrocarbons.
  • The companies must perform exclusively any (or a combination) of the following activities: (1) treatment, refining, transport, and oil storage; (2) processing, compression, liquefaction, decompression, and regasification, as well as transport, storage, and distribution of natural gas; (3) transport, storage, distribution, producing and sale of petroleum to the public; (4) transport by pipeline and subsequent storage of petrochemicals and other similar products; (5) generation, transmission, and distribution of electricity; and (6) infrastructure investment projects that include concessions, services or any other contractual agreement.

Administration of FIBRA E

Within 45 days immediately following the day when a trust satisfies the requirements and acquires shares of a corporation, all shareholders of that entity must agree and report to the “tax mailbox” that they have opted to apply the new FIBRA E regime and that they assume joint responsibility for all tax obligations of the legal entities arising prior to the regime.

Shareholders of the companies must make changes in the company’s status or sign agreements among themselves obligating the company to make distributions to shareholders, including the FIBRA E, consistent with the terms of the agreement of FIBRA E trust and other “publicly traded documents.”

If these requirements are met, the special regime applies to the FIBRA E and to the legal entities in which it invests, shareholders, securities depositories that have the security custody of the fiduciary securitization certificates, holders of the certificates, as well as to legal entities that contribute shares to the FIBRA E. 

Tax regime FIBRA E

Under the FIBRA E regime, the tax treatment applies as if it were business trust. This allows the tax results, as determined by each entity or trust, to be allocated to the trustees (or shareholders). Also, this removes an obligation to make advance payments of income tax.

If there is a tax loss, it will remain at the level of the person or trust, and only can be applied against future profit generated at the level of the person or trust (that is, the loss is not distributed so as to be available to be applied at the next level). The withholding tax on income tax (10%) for the distributions made by entities to FIBRA E will not apply. 

The tax provisions regarding income tax on profits or dividends, net tax profit account (CUFIN), and the profit distributed in the capital reduction do not apply. 

The fiscal year in which FIBRA E starts investing in an entity is considered to be an “irregular” year, measured from the beginning date until the date when the FIBRA E invest in its capital (thus having to compute the tax obligations which would had been generated at that date).

Concerning computation of the tax result, taxable income represents the part of tax result of the year that corresponds to the corporation in accordance with its shareholding. In addition, deductions of deferred charges related to the acquisition of assets are considered based on the corresponding proportion, as well as the deductions deemed necessary under the income tax law.  

On the sale of shares (even if fiduciary certificates are received in exchange for shares), the gain or loss on the disposal of land and fixed assets would be determined as if such had been alienated proportionately. Profits are added or losses deducted in the fiscal year in which the shares are transferred. 

At the moment of the sale of the first share to a trust, all of the shareholders of the company must compute their average cost per share in accordance with the provisions of the income tax law.

There are rules for foreign residents who hold fiduciary securitization certificates issued by the trust. For example, they may be released from the requirement to comply with certain formal obligations applicable for a permanent establishment. They may not be required to register with the Federal Registry of Taxpayers (Registro Federal de Contribuyentes (RFC)). 

Those who acquire shares issued by trusts corporations are not required to withhold tax on income obtain from the sale.

If these requirements are not satisfied, the trust will not be entitled to apply the tax regime. Also, if the tax authorities determine certain irregularities, the parties must compute and comply their tax obligations as if they had not been subject to the new regime.

 

Read an October 2015 report (Spanish) prepared by the KPMG member firm in Mexico.

 

For more information, contact a tax professional with KPMG´s Mexico tax center:

Jose Manuel Ramirez | +1 (212) 872-6541 | josemanuelramirez@kpmg.com

 

Or contact an international tax professional with the KPMG member firm in Mexico:

Catherine Thibault | +52 555 246 8474 | catherinethibault@kpmg.com.mx

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