There are new measures concerning “foreign exempt pension funds” in Mexico, with the publication of a new tax regulation in the official gazette (8 October 2015). There is a new article 272 that replaces article 248 under the prior rules, and 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.
The requirement for foreign exempt pension funds to register with the tax authorities was repealed in 2014.
New article 272 reflects this change to the registration requirement, and provides additional guidance concerning the availability of the exemption from tax when an investment is made through foreign exempt entities or investment funds (as long as these entities are registered with the Mexican tax authorities).
The additional language provided in article 272 seems to imply that the exemption provided under Mexico’s income tax law for certain categories of income of the foreign exempt pension fund is only available when the pension fund invests either directly or through one foreign entity (two levels only).
Below is an unofficial English translation comparing the language of new article 272 and prior article 248 (emphasis added).
Article 272 (new text)
For purposes of article 153 of the Law, when the pension and retirement funds incorporated in terms of the legislation of the country in question that participate directly in the capital of legal entities foreign residents, or, invest directly in foreign investment funds, the income that is obtained directly from such legal entities or investment funds derived from the transfer or the temporary granting of the use or enjoyment of land or soil attached to buildings located in Mexico, for the transfer of shares which value represents more than 50% of such concepts, also will be subject to the exemption established in article 153, ninth paragraph of the Law.
Article 248 (prior text)
For purposes of the sixth and ninth paragraphs of article 179 of the Law, the exemption set forth therein shall apply to income received by investment funds or foreign legal entities recorded at the Registry described in article 197 of the Law, through which pension and retirement funds invest their resources. Such exemption shall apply in the ratio in which the investment fund's capital is composed of resources from such pension and retirement funds.
Tax professionals in Mexico believe that the language in article 272 could be interpreted to mean that a foreign exempt pension fund can structure an investment using only one foreign entity in between the pension fund and the Mexican investment.
Hence, there is 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. This view is based also on unofficial comments made by tax officials, given that the Mexican tax authorities have concerns they may encounter certain complexities in verifying that the foreign exempt pension fund was the beneficial owner of the income that was the subject of the exemption if several intermediate foreign companies have been interposed and used. In such instances, it would appear the tax authorities are concerned that they could not state with certainty that other "taxable" investors would not take advantage of the exemption.
It has been observed that 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.
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