Mexico: Clarifying the exemption from tax, “foreign exempt pension funds”

Mexico: Clarifying the exemption from tax

Following the October 2015 publication of new measures for “foreign exempt pension funds” in Mexico, the Mexican tax authorities on 19 November 2015 issued a new general rule and then subsequently stated informally that transition rules and additional clarifications regarding the tax exemption will be released before the end of 2015, but that for control and transparency purposes, the intention is not to allow multi-level structures.

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Background

The tax regulation published in early October 2015 included new article 272 that replaced prior article 248. Article 272 addresses the availability of the exemption from tax when an investment of the foreign pension fund is made through certain foreign exempt entities or investment funds. 

Tax professionals in Mexico believed that the language in article 272 could be interpreted to mean that a foreign exempt pension fund could structure an investment using only one foreign entity in between the pension fund and the Mexican investment. Accordingly, there has been some concern that this interpretation could mean that when the foreign exempt pension fund—if having interposed several foreign entities in between itself and the investment—would not be able to claim the tax exemption. 

According to tax professionals, this view is not consistent with the previous registration procedure (under which foreign exempt pension funds were required to register all intermediate vehicles, and the exemption was granted to all of these entities in proportion to their ownership interest / investment by the foreign exempt pension fund). Additionally, the law in Mexico is not clear about such a restriction. The provisions in Mexico’s income tax law establish the exemption from tax when the foreign exempt pension fund is the effective beneficiary of the income and the income is exempt from income tax in the fund’s country of residence. Therefore, it appears that if the tax authorities were to interpret and apply the regulation in this manner, this could be subject to taxpayer challenges or even litigation. Read TaxNewsFlash-Americas

General rule clarifying tax authorities’ position

The Mexican tax authorities on 19 November 2015 published a new general rule in order to clarify their position. According to the general rule, Mexican resident entities may be exempt from Mexican tax when they have, as shareholders, foreign resident entities, the shares of which foreign entities are in turn owned by foreign exempt pension funds and provided the following requirements are met: 

  • The foreign exempt pension fund is exempt, including with respect to dividends received from the foreign resident entity.
  • The foreign exempt pension fund has a direct shareholding participation (voting rights and right to profits) of 95% or more in the foreign resident entity.
  • The foreign resident entity has a direct shareholding participation in the Mexican entity. 
  • The foreign resident entity resides in a country with which Mexico has in force a tax treaty for the avoidance of double taxation and is eligible for the benefits of this treaty.
  • The foreign exempt pension fund resides or is formed in a country with that has in force a comprehensive information exchange agreement with Mexico.

Click here to review a chart illustrating an approved structure.

KPMG observation

With respect to interest income, it seems that the position of the Mexican tax authorities is that the foreign exempt pension fund must invest directly in order to have the exemption applicable to interest payments. As noted above, the Mexican tax authorities have informally stated that transition rules and more clarification regarding the tax exemptions will be published by year-end, but they confirmed that for control and transparency purposes, the intention is not to allow multi-level structures.  

 

For more information, contact KPMG tax professionals:

José Manuel Ramirez | josemanuelramirez@kpmg.com

Catherine Thibault | catherinethibault@kpmg.com.mx 

Manuel Rico | rico.manuel@kpmg.com.mx

Ana Carolina Dominguez | anadominguez@kpmg.com.mx

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