The tax authorities issued an internal criterion through
which they intend to disallow the application of the reduced
4.9% withholding tax rate on interest paid by Mexican
non-regulated financial companies (commonly known as SOFOMs as
per their Spanish acronym), when interest payments are made to
non-Mexican "related persons". Even if such a position
overrides Article 166 of the Mexican Income Tax Law (MITL), the
Mexican authorities’ intention is to collect 35%
of the gross interest paid by SOFOMs.
In general terms, Article 166
states that the 4.9% withholding tax rate applies to Mexican
source interest when it is:
- Derived from securities listed in the Mexican Stock
- Paid by Mexican banks and SOFOMs;
- Received by foreign banks (applicable under Transitory
Article 2-VI of the MITL in force as of 2017); and
- Derived from securities listed by a Mexican resident in a
country with a double tax treaty with Mexico.
It is worth mentioning that interest paid and received by
banks and SOFOMs may come from all sorts of financial
instruments, including securities and plain vanilla loans.
Article 166 also establishes that the 4.9% rate should not
be applicable if the beneficial owners, directly or indirectly,
individually or together with other "related persons", receive
more than 5% of the interest derived from "a specific
security", and are:
- Shareholders of more than 10% of the voting shares of the
- A legal entity that is owned by the issuer who holds more
than 20% of the legal entity.
The term "related persons" is broader than "related parties"
as it covers any business link between two persons, any common
interest between two persons, and any relationship with a third
party that has a business link with two persons that have a
business link or common interest. This comprehensive definition
may convert many third party transactions into transactions
subject to the highest withholding tax rate applicable to
Mexican source interest.
The application of the 4.9% withholding tax rate was only
limited in transactions carried out between "related persons"
when dealing with securities issued by a Mexican resident
entity, which may include SOFOMs. However, based on what the
tax authorities called a "harmonic interpretation of the tax
law", in the recently published internal criterion 64/ISR/N,
it is concluded that in the case of SOFOMs,
these restrictions apply not only to securities but also to
other kinds of financial instruments or loans.
Internal criteria issued by the Mexican tax authorities is
not binding for taxpayers. Nevertheless, it should be observed
by officials during tax audits. Therefore, transactions
executed with Mexican SOFOMs should be carefully analysed to
make a risk analysis in case of a possible dispute, and
evaluate if other Mexican tax formalities have been properly
fulfilled in order to have a strong defence case (e.g.
electronic invoicing, informative returns, back-to-back or
dividend characterisation rules, thin capitalisation and
It would also be relevant to consider that this internal
criterion was issued in connection with interest paid by
SOFOMs. However, the same position should be applicable to
payments made by Mexican banks as they are regulated under the
same subsections and paragraphs of Article 166.
This article was written by Oscar A. López Velarde of
Ritch, Mueller, Heather y Nicolau, SC.
Oscar A. López Velarde (firstname.lastname@example.org)
Ritch, Mueller, Heather y Nicolau, S.C.