By Guest Author Alfredo Sánchez Torrado*
On January 18, 2017 a Decree was published in the Mexican Federal Official Gazette whereby several tax benefits were granted with respect to income tax arising from foreign deposits and investments repatriated to Mexico. The Decree will be in force until July 19, 2017.
Such Decree establishes that Mexican individuals and legal entities, as well as nonresidents having a permanent establishment located in Mexico, that have obtained income from direct or indirect investments, that have been held abroad until December 31, 2016 may opt to pay the income tax due on such investments by applying the 8% rate, with no deduction, on the amount of the resources repatriated to Mexico that have been held abroad before January 1, 2017.
The benefits are applicable on taxable income determined under the terms of Title II (Mexican Legal Entities), Title IV (Mexican Individuals) and Title VI (Preferential Tax Regimes) of the Mexican Income Tax Law, except those corresponding to items that have been deducted by a Mexican resident or by a nonresident having a permanent establishment located in Mexico.
The benefits of the Decree apply to any foreign income or investment repatriated to Mexico during the period in which the Decree will be in force, to the extent that the resources are considered to be invested in Mexico during year 2017, situation that should be understood to occur in the following cases:
Mexican legal entities and nonresidents with permanent establishment in Mexico:
(i) Acquisitions of fixed assets deductible for income tax purposes;
(ii) Acquisition of land and constructions located in Mexico related to the taxpayers’ activity;
(iii) Research and development of technology;
(iv) Payment of liabilities contracted with independent parties, and;
(v) Investments in Mexico through Mexican credit institutions or brokerage houses.
(i) Investments made through the Mexican financial system in financial instruments issued in Mexico or in shares
(ii) Any of the investments mentioned in sections (i), (ii) and (iii) applicable to Mexican legal entities as described above.
Regarding the above, the Decree establishes that such resources must be repatriated and remain invested in Mexico for at least two years starting from the date in which they are returned to Mexico. The referred repatriation must be made through transactions between credit institutions (banks) or brokerage houses incorporated in Mexico, as well as through entities incorporated abroad rendering financial services.
As a consequence of the application of the Decree, any fiscal obligation related to the income and investments maintained abroad will be considered fulfilled. Also, it is established that the benefits should not be considered by taxpayers as part of their taxable income.
It is important to mention that the abovementioned benefits will not be applicable in the following cases:
(i) When the taxpayers are subject to an audit process by the Mexican tax authorities with respect to their income generate upon their investment maintained abroad;
(ii) When taxpayers have filed any legal procedure against the tax regime applicable to such income, unless previously withdrawn by the taxpayer; or,
(iii) If the income has been generated by any activity considered illegal or when the resources are utilized in any of those activities.
Regarding the above, on May 15, 2017 was published in the Federal Official Gazette the First Amendment to the Miscellaneous Tax Resolutions for 2017, in which fifteen administrative rules for the application of the Repatriation Decree were established by the Mexican Tax Authorities.
Through these rules, several additional requirements were established, in addition to those contained in the Decree that will need to be met, such as;
i. Income tax must be made paid using the tax authority's webpage and the specific return enabled for these purposes.
ii. If the tax payment corresponding to the resources returned to Mexico is not made within 15 calendar days after their return, the taxpayer shall pay the tax restated by inflation and surcharges.
iii. When the related income tax is not fully paid by August 3, 2017, the benefits of the Decree will not apply and the Mexican tax authorities shall require full payment of the unpaid taxes.
iv. No later than December 31, 2017, taxpayers who applied the Decree must file a notice whereby the use of the resources is informed to the Mexican tax authorities, specifying the aggregate amounts returned and the investments made in Mexico in 2017.
v. Mexican financial institutions and brokerage firms will be required to strictly apply the anti-money laundry and terrorism financing measures and procedures with their clients that apply the repatriation decree.
*Alfredo Sánchez Torrado, Partner in Chevez Ruiz Zamarripa, is a tax insurance lawyer in Mexico and a long-time legal adviser of Lombard international Assurance.
This article was originally published in the Latin America & Iberia Insights Review.
This article contains information of a general nature, and thus it does not address any particular case or facts. The information contained herein is accurate as of the date of issuance; however, we make no representation as to the fact that such information be accurate in the future. Accordingly, we recommend that specific advice addressing your particular circumstances be requested.