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Business Operations in Mexico (Portfolio 972)

Tax Management Portfolio, Business Operations in Mexico, discusses the significant features of Mexican income tax law as applied to foreign investors conducting business activities in Mexico.

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DESCRIPTION

In addition to a detailed discussion of the taxation of domestic and foreign corporations and individuals, this Portfolio includes an analysis of the legal and regulatory provisions governing the conduct of business operations within the country.


The Detailed Analysis addresses the principal business entities as well as the significant areas of investment and commercial regulations, and contains an in-depth analysis of the Mexican tax system. A guide to the Detailed Analysis is provided by a Table of Contents. To assist in researching a particular problem, the Portfolio contains a Bibliography.


The Worksheets supplement the information contained in the Detailed Analysis with English translations of laws affecting foreign investment in Mexico, the texts of the Mexico-U.S. and Mexico-Canada tax treaties, and important tax forms.


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AUTHORS

Business Operations in Mexico was authored by the following experts.
NICASIO DEL CASTILLO
Nicasio del Castillo, Universidad del Uruguay; Harvard Law School (International Tax Program, 1970); member, AICPA Subcommittee on International Taxation and International Fiscal Association.

MANUEL F. SOLANO
Manuel F. Solano, Universidad Autonoma de Centro America, Costa Rica; Youngstown State University (B.S., 1986); Georgetown University Law Center (J.D., 1989); member, American Bar Association; member, New York State Bar.

TERRI L. GROSSELIN
Terri L. Grosselin, West Virginia University (B.S. 1984, MPA, 1985).

TABLE OF CONTENTS

Detailed Analysis

I. Mexico - The Country, Its People and Economy

A. The Country

B. Language

C. Population

D. Political Organization

E. Legislative Power

F. Executive Power

G. Judicial Power

H. Economy

I. Foreign Trade

1. North American Free Trade Agreement

2. Other Trade Agreements

II. Foreign Investment Regulations

A. In General

B. Restrictions on Foreign Investment

1. Incorporation of Mexican Entities

2. Acquisition of Real Property

3. Investment in Neutral Shares

4. Registration of Foreign Investments

5. Penalties

6. Observations

C. Federal Law of Economic Competition

1. Individuals and Corporations Subject to Law

2. Monopolies and Monopolistic Practices

3. Creation of Conglomerates (Concentraciones)

4. Proceedings and Investigations

5. Requirements Set by Commission

D. Import Regulations

1. In General

2. Customs Duties

3. Other Taxes

4. Documentation Procedures

5. Other Charges

6. Fines and Other Penalties

7. Customs and Storage

8. Ports of Entry

9. Bonded Warehouses

10. Free Trade Zones Within Mexico

E. General Business Regulations

1. Monopolies and Restrictive Trade Practices

2. Price Controls

3. Securities Regulations

4. Patent and Trademark Protection

5. Licenses, Copyrights, and Trade Secrets

6. Bankruptcy

F. Maquiladora Program

1. Overview

2. Maquiladora Operation Structures

3. Geographical Locations

4. Taxation Issues

5. Assets Tax

6. Shelters

III. Forms of Doing Business in Mexico and Legal Requirements

A. Principal Investment Vehicles

B. Sociedad Anónima

1. Characteristics

2. Formation

3. Foreign Investment Requirements

4. Required Legal Capital

5. Classes of Shares

6. Shareholders' Meetings

7. Corporate Management

8. Statutory Examiner (Comisario)

9. Dividends

10. Capital Increases or Reductions

11. Amortization of Shares

12. Shareholder Redemptions

13. Recapitalizations

14. Issuance of Publicly Traded Securities by Corporation

C. Corporation with Variable Capital

D. Limited Liability Company

1. Organization and Capital Requirements

2. Management

E. Partnership

F. Limited Partnership

G. Other Investment Vehicles

1. Joint Venture Contract (Asociación en Participación)

2. Trust (Fideicomiso)

3. Branch of a Foreign Corporation

H. Corporate Reorganizations

1. Mergers

2. Corporate Divisions

I. Corporate Conversions

J. Dissolution and Liquidation of a Company

1. Dissolution

2. Liquidation

IV. Taxation - General Remarks

A. Legal Framework

1. Taxing Power

2. Federal Tax Laws

3. Rulings

4. Tax Court System

B. Administration and Procedure

C. Accounting Requirements

1. General Requirements

2. Audited Financial Statements

3. The Mexican Accounting System

D. Tax Certificate Issued by Public Accountant

E. Restructuring of Income Tax System

V. Income Taxation of Domestic Legal Entities

A. Entities Subject to Income Tax

1. Mexican Residents

2. Foreign Entities with Permanent Establishments in Mexico

3. Foreign Entities that Derive Mexican-source Income

4. Tax-exempt Entities

5. Joint and Several Liability

B. Worldwide Income Basis of Taxation

C. Tax Accounting

1. In General

2. Tax Accounting Periods

3. Functional Currency

4. Tax Accounting Methods

5. Tax Accounting for Inflation

6. Inventory

D. Taxation of Legal Entities

1. Corporate Taxation and Dividends

a. General Rules

b. Cuenta de Utilidad Fiscal Neta Reinvertida

2. Cuenta de Utilidad Fiscal Neta

3. Excess Distributions

4. Special Rules for Dividends Paid Out of Prior Years' Earnings

5. Taxation of Redemptions and Liquidations

6. Taxation on Disposition of Shares of Mexican Companies Other Than by Way of Redemption or Liquidation

7. Deemed Distributions and Shareholder Loans

E. Gross Income

1. Definition of Gross Income

2. Gains from Disposition of Stocks and Securities of Mexican Companies

3. Gains from Sale of Shares of Foreign Companies

4. Gains Arising from Alienation of Fixed Assets and Real Property

5. In-kind Payments

6. Improvements Made to Leased Real Property

7. Gains Realized as Result of Merger

8. Gains Realized as Result of Corporate Division

9. Inflationary Gains

10. Gains Arising from Financial Derivatives Transactions

11. Unreported Income from Financing Sources

F. Deductions

1. In General

2. Preoperating Expenses

3. Management Fees

4. Travel Expenses

5. Royalties and Technical Assistance Fees

6. Charitable Contributions

7. Casualty Losses

8. Bad Debts

9. Rents

10. Salaries, Wages and Stock Options

11. Research and Development Expenses

12. Payments to Tax Haven Residents

G. Interest and Inflation Adjustments

1. General Deductibility Rules and Limitations

2. Inflationary Adjustments

3. Exchange Gains and Losses

4. Matching of Exchange Losses and Inflationary Gains

H. Depreciation

1. In General

2. Annual Depreciation

3. Useful Lives of Assets

4. Special Rules for Depreciation and Amortization

a. Capital Expenditures

b. Deferred Expenses

c. Deferred Charges

d. Automobiles

e. Entertainment Facilities

f. Aircraft and Ships

g. Mergers

h. Bond Issues

i. Motion Pictures

j. Obsolete Equipment

k. Assets Used in an Asociación en Participación

I. Nondeductible Items

1. Taxes

2. Participation in Profits

3. Business Gifts

4. Representation Expenses

5. Business Meals and Entertainment Expenses

6. Fines, Penalties and Indemnifications

7. Certain Interest Expenses

8. Provisions or Reserves

9. Premiums Paid on Redemption

10. Losses Incurred in Merger, Liquidation or Redemption

11. Certain Losses on Assets

12. Goodwill

13. Certain Taxes

14. Losses on Sale of Shares and Certain Securities

15. Pro Rata Expenses

16. Losses Incurred in Certain Financial Derivative Transactions

17. Meals in Restaurants and Bars

18. Certain Expenses for Customs Services

19. Payments Made to Low-tax Jurisdictions

J. Net Operating Losses

K. Capital Gains and Losses

1. In General

2. Capital Losses Arising from the Disposition of Shares

L. Transfer Pricing Issues

M. Tax Rate

N. Credits

1. Foreign Tax Credit

2. Investment Credit

O. Filing and Payment of Tax

1. Annual Tax Return

2. Estimated Tax Return

3. Payment of Tax on Installment Basis

4. Amended Returns

P. Penalties and Interest

1. Penalties

2. Adjustment of Deficiency

3. Interest

4. Refunds

Q. Tax Fraud

R. Taxable Transfers of Property

S. Nonrecognition Provisions

1. Statutory Merger

2. Corporate Divisions

3. Securities Lending Transactions

4. Transfers of Shares under a Corporate Reorganization

T. Consolidated Returns

1. In General

2. Calculation of Consolidated Net Taxable Income or Loss

3. Ownership Requirements

4. Advantages of Filing on a Consolidated Basis

a. Use of Losses Within Group

b. Assets Tax

c. Consolidated Cuenta de Utilidad Fiscal Neta

d. Tax-free Dividend Distribution Within Consolidated Group

e. Deferral of Intercompany Transactions

f. Exit Strategy

g. Financing

5. Other Requirements

6. Nonqualifying Corporations

7. Establishing Holding Company Structure

U. Taxation of Other Investment Vehicles

1. Fideicomiso or Mexican Trust

2. Asociación en Participación

V. Financial Leases

1. In General

2. Income Tax Treatment

3. Withholding Rates

4. Lessee's Deductions

5. Value-added Tax

VI. Income Taxation of Foreign Corporations

A. Foreign Corporations Subject to Mexican Taxation

B. Concept of Permanent Establishment

C. Income Attributable to Mexican Permanent Establishment

1. In General

2. Computation of Tax Liability

D. Income of Nonresident Not Attributable to Permanent Establishment

1. In General

2. Dividends

3. Interest

a. In General

b. Definition under Domestic Law of Interest when Paid to Nonresidents

c. Withholding Tax Rates on Interest Payments to Nonresidents

d. Interest Payments to Nonresidents Exempt from Mexican Income Tax

e. Back-to-back Loans

f. Interest Payments to Residents of Tax Havens

4. Royalties and Technical Assistance Fees

5. Construction Fees

6. Rents

7. Sale of Shares of Mexican Company by Nonresident

8. Publicly Traded Shares

9. Gains from Sales of Real Property

10. Income from Financial Derivative Transactions

11. Exemption from Mexican Withholding Taxes for Foreign Tax-Exempt Pension Funds

VII. Taxation of Resident Individuals

A. Individuals Subject to Tax

B. Residence

C. Determination of Gross Income

1. Items Included in Gross Income

2. Capital Gains and Losses

3. Exempt Income

D. Allowable Deductions and Credits

1. Business Deductions

2. Small Taxpayers

3. Personal Deductions and Exemptions

E. Tax Rates

F. Assessments and Filings

1. Filing Date

2. Payment of Tax

3. Withholding Tax Obligation on Sale of Shares by Mexican Individual

VIII. Taxation of Nonresident Individuals

A. General

B. Salaries and Directors' or Administrators' Fees

C. Income from Pensions and Other Retirement Benefits

D. Independent Personal Services

IX. Other Taxes on Individuals and Payments That Must Be Made by Employers

Introductory Material

A. Social Security

B. Severance Pay

C. Seniority Premium

D. Christmas Bonus

E. Paid Holidays and Vacations

F. Profit Sharing

1. Obligation to Pay

2. Calculation of Profit Sharing

3. Effect of Profit Sharing

X. Other Taxes on Companies and Individuals

A. Value-added Tax

1. History

2. Method of Taxation

3. Taxpayers

4. Tax Rates

a. 10% Rate

b. 0% Rate

5. Exempt Transactions

6. Timing of Tax Liability

7. Independent Services

8. Importation of Goods and Services

9. When Sale Is Considered to Take Place in Mexico

10. Exportation of Goods and Services

11. Withholding of Value-added Tax

12. Determination of Value-added Tax Credits

13. Filing Requirements and Payment of Tax

B. Tax on Business Assets

1. Introduction

2. Entities and Persons Subject to Tax

3. Tax Rate

4. Exempt Periods

5. Assets Subject to Tax

6. Tax Basis

a. Financial Assets

b. Fixed Assets and Deferred Charges

c. Inventories

d. Land

7. Deductible Liabilities

8. Option to Calculate Tax

9. Filing Requirements and Payment of Assets Tax

10. Credit for Mexican Income Tax

11. Tax on Nonresident Companies with Assets in Mexico

12. Assets Used in Maquiladora Operations

13. Creditability of Tax in United States

14. Assets Tax for Members of Consolidated Group

C. Excise Taxes

D. Property Taxes

1. Tax on Acquisition of Real Property

2. Annual Property Tax

E. Single Rate Business Tax

1. General Provisions

2. Income Recognition

3. Deductions

4. Calculation of the Tax

5. Recoverability of Asset Tax

F. Tax on Cash Deposits

1. General Provisions

2. Obligations of Financial Institutions

3. Creditability of the Tax

XI. Taxation of Mexican Residents on Income from Investments in Low-tax Jurisdictions

A. General Rules

B. Exceptions to the General Rules

C. Scope of Investments

D. Calculation of Income

E. Foreign Tax Credits

F. Obligations of Taxpayers

XII. Avoidance of Double Taxation

A. Foreign Tax Credit

B. 1992 Mexico-United States Tax Treaty

1. Background

2. Residence

3. Permanent Establishment

4. Taxation of Business Profits

5. Dividends and Branch Profits Tax

6. Interest

7. Royalties

8. Possibility of Fees for Technical Assistance Falling Within Overall Definition of Royalties

9. Capital Gains on Share Dispositions

10. Other Fee Income

11. Associated Enterprises and Transfer Pricing

12. No Significant Relief from Assets Tax under 1992 Mexico-United States Tax Treaty

13. No Application to Value-added Tax

C. Other Treaties


WORKING PAPERS

Working Papers

Table of Worksheets

Worksheet 1 Filing Requirements for Incorporating Sociedad Anónima

Worksheet 2 Information To Be Presented to the Ministry of Foreign Affairs

Worksheet 3 Legal Requirements with Respect to Statutory Merger

Worksheet 4 Filing Requirements for Division

Worksheet 5 Information Required To Be Submitted to Ministry of Finance and Public Credit for Permission To File a Consolidated Tax Return

Worksheet 6 AFIL-02: Employee Registration for Social Security

Worksheet 7 AFIL-03: Notice of Modification on Employee's Salary

Worksheet 8 AFIL-04: Notice of Termination of Employment for Purposes of Social Security and Institute for Employees' Housing Fund Contributions

Worksheet 9 II-IN-010-96: Employer Payroll Return

Worksheet 10 II-IP-001-96: Property Return

Worksheet 11 Form 1-D: Estimated Payments Return (Corporations and Individuals)

Worksheet 12 Form 2: Corporations' Annual Tax Return General Regime

Worksheet 13 CF-1: Questionaire for Requesting Authorization To Consolidate Holding Corporations

Worksheet 14 Form 2-A: Consolidated Annual Tax Return for Holding Corporations

Worksheet 15 Form 13: Individuals' Annual Tax Return

Worksheet 16 Form 13-A: Individuals' Annual Tax Return (Salaries)

Worksheet 17 Form 30, Annex 1, Information Return for Payments of Salaries and Wages

Worksheet 18 Form 28: Certificate of Payments Made to Nonresidents Derived from Mexican-Source Income

Worksheet 19 Annex 9 of Form 30, Informational Return for Transactions with Related Parties

Worksheet 20 Form 36: Certificate of Residence for Tax Purposes

Worksheet 21 Form 37: Statement of Earnings and Withholdings with Respect to Salaries, Severance and Pension Payments

Worksheet 22 Form 37-A: Statement of Earnings and Withholdings in General

Worksheet 23 Form 39: Notice for Filing a Tax Audit Report on the Sale of Shares

Worksheet 24 Form 42: Information Return of Clients and Suppliers of Goods and Services

Worksheet 25 Form 30, Annex 3, Payments to Authorized Charities

Worksheet 26 Form 30, Annex 5, Informational Return: Payments to Low Tax Jurisdictions

Worksheet 27 Form 55: Information Return for Operations with Foreign Related Parties

Worksheet 28 1991 Mexico-Canada Income Tax Treaty

Worksheet 29 1992 Mexico-United States Income Tax Treaty

Worksheet 30 1994 Protocol to 1992 Mexico-United States Income Tax Treaty

Worksheet 31 2002 Protocol to 1992 Mexico-United States Income Tax Treaty

Worksheet 32 1989 Mexico-United States Exchange of Information Agreement

Worksheet 33 1994 Protocol to 1989 Mexico-United States Exchange of Information Agreement

Worksheet 34 List of Comprehensive Double Taxation Agreements and Related Protocols Signed by Mexico as of April 1, 2009

Worksheet 35 Tax Havens as Provided for Under Mexican Income Tax Law

Bibliography

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