That Mexico is the best investment location globally might
seem somehow biased and even a bit conceited when it comes from
a Mexican, but let's be honest; we are thinking as foreign
investors, so this is not about what Mexicans think about their
own country, but rather about how the rest of the world starts
to see Mexico as a great place for doing business.
A few weeks ago, Thomas Friedman, foreign affairs columnist
for the New York Times, said that to the question of
which country will become the more dominant economic power in
the 21st century, China or India, the answer would be clear;
Among other virtues, the renowned columnist highlighted that
"Mexico has signed more free trade agreements than any other
country in the world which, is more than twice as many as China
and four times more than Brazil". He also confirmed, that
"Mexico has also greatly increased the number of engineers and
skilled laborers graduating from its schools" (actually, even
more than the US, but we don't want our northern neighbors to
know this). Friedman concluded that "it is no surprise that
Mexico now is taking manufacturing market share back from Asia
and attracting more global investment than ever in autos,
aerospace and household goods", although we already knew this,
You don't read the New York Times? Ok, what about
The Economist? The European magazine recently
published a special 14-page report where we found headlines
such as "Señores, start your engines", "The world's
biggest migration has gone into reverse", "The rise of Mexico"
and so on.
You don't read The Economist either? Then you must
be one of those acronym people, the briefer the better, right?
Then we bet you were familiarised with the term BRICS coined in
2001 by Jim O'Neill to refer to the, at that time, four largest
emerging-market economies (Brazil, Russia, India, and China).
Well, as Eric Martin wrote for Bloomberg Businessweek
market and finance magazine, it's time to "move over BRICS,
here comes the MISTs", a much more catchy term also coined by
our friend Jim O'Neill to promote the new foursome of
fast-track countries: Mexico, Indonesia, South Korea, and
Turkey, and it might be a coincidence but Mexico goes in the
first place, which sounds good to us.
But we don't want to repeat what has been already written,
we just intend to refresh our minds about what the
opinion-leaders think about Mexican economy and what are the
latest investing trends of most of the multinational companies
(MNCs) around the world.
Let's assume we buy all this and forget about putting some
numbers together that would likely support all the statements
made above. Assume we are CEOs of a great multinational and
have decided to do business in Mexico. The first question that
should come to our mind should be:
How to invest in Mexico?
That depends on what we are looking for. We might be a
little bit shy and then opt for registering a branch in Mexico,
just to test how things go and later think about doing a more
permanent investment. Or we might be brave and go directly for
incorporating a company by ourselves; we know how to do
business and are confident about the opportunity that Mexico
represents. We also might be prudent or a people's person, then
we will opt for doing business together with a local partner,
forming a JV would be our choice. And what if we have plenty of
cash? We could also opt to acquire an already ongoing business,
either shares or assets, that's how we do things.
But this is an M&A special, so let's forget for a moment
about the shy and the brave CEOs and focus on the joint venture
and the acquisition alternatives. What should we keep in our
sight and what are the pros and cons of each option?
Generally, JV schemes would allow us to start our adventure
walking along a partner that already knows the particularities
of the market, understands how people do business in Mexico and
introduces us to a portfolio of reliable suppliers and wealthy
customers. To do so, the Mexican legal system provides a number
of vehicles that would cover all our specific needs:
- Traditional JV agreements, for example asociaciones
en participacion (associations in participation), which
would allow us to do business under a single agreement which
is treated as a corporation for pure tax purposes.
- Trusts and partnerships. For example fideicomiso
empresarial (business trust), also assimilated to
corporations for tax purposes but with some specific
- A traditional company, either corporations (SA) or
disregarded entities (S de RL).
- And lastly, the trendy SAPIs (sociedad anónima
promotora de inversiones - investment promotion
company), which are Mexican corporations that allow us a
great flexibility to determine different political and
economic rights among the shareholders.
On the other hand, if we decide to walk alone acquiring an
ongoing business we would also have many choices:
- Acquire a majority interest in an already existing
- Acquire assets (and liabilities) representing an ongoing
- Take control of another company through a horizontal
Under such a wide variety of choices, it is clear that we
should be able to find one that would fit best our interests
and needs. But the decision making process has just started,
and a second question comes to our mind:
How do we structure our investment?
We may have a universal answer for this question: That
depends. There are many factors that would affect our decision:
Do we already have a holding structure somewhere? Is there any
internal requirement to put our Mexican business under a
specific company? Is our group regionally structured? Do we
really have people and infrastructure (the famous substance) in
the country we are thinking of to set our holding company?
All these questions may have many different answers, but we
should be able to provide some guidelines or clues that would
help us to define how we could structure our business.
Firstly, think in a country that has double tax treaty in
force with Mexico. Someday we would like to repatriate cash
from Mexico (either through dividends or a capital redemption);
we might need to finance our Mexican operation using a debt
scheme receiving interest payments; we could also license our
Mexican subsidiary for the use of IP, brands or know-how,
getting the corresponding royalties; or why not, we might
decide to sell our interest in a Mexican subsidiary get our
money back and retire to an idyllic island. In any case we will
be happier where any of these payments may benefit from a
reduced withholding tax (WHT) rate or even better a treaty
Of course, a case-by-case analysis is required to define
which holding structure would fit best our needs, but there are
some countries that are more common options than others to
invest in Mexico, such as the following:
- The Netherlands with its brand recently amended treaty
and protocol which provides competitive benefits for interest
payments, capital gains on sales of shares and corporate
- Luxembourg, showing off its competitive participation
exemption regime, financing tax incentives and a quite nice
double tax treaty including reduced WHT rates for interest
payments and royalties.
- Spain, the European cousin of Mexico, proud of having the
world's broadest tax treaty network with Latin America, a
useful foreign branch income exemption regime and some nice
treaty benefits for corporate reorganisations and capital
gains on sales of shares.
- And last but not least, Panama. A closer neighbour which
is working hard to increase its tax treaty network, provides
brilliant tax incentives and a modern and beneficial treaty
in force with Mexico. However, don't forget about the LOBs
clause, it might be tricky.
Then, think of some non-tax issues (not everything is about
taxes). Free trade agreements and investment protection
agreements are some examples. In this regard, the Netherlands
and Spain could make the difference.
Good, we have a target investment and also our holding, next
What's the most efficient acquisition strategy?
There must be tons of paper about this topic. Being
realistic, we cannot cover all the potential strategies
provided by the Mexican tax system, but there are some typical
questions that would slip out through our tongue when we are in
front of a qualified tax adviser.
Debt versus equity. Although it is true that debt structures
might help to make our structure more efficient, we must be
very careful about this. The Mexican tax system generally
allows interest expense tax deduction; however, there are a
number of formal and substance requirements that need to be
met, and some anti-abuse rules that could end up in a
re-characterisation of the interest payments as non-deductible
dividends. This, without mentioning the friendly inflation
adjustment and that interests are non-deductible for flat tax
Some topics that may be useful to remember when implementing
a debt scheme would be: A thin capitalisation 3 to 1 ratio rule
applies for loans granted by foreign related parties, and that
interest from back-to-back loans may be re-characterised as
dividends, one of the most wide and vague definitions in the
Mexican Income Tax Law. This may apply also to debt agreements
that are not arm's length or to certain profit participating
It also may happen that the seller is the one proposing an
acquisition structure. The question that should arise in such a
case would be: Is the seller the only one responsible for any
potential tax liability or there is any risk we may inherit
them? Again, many things could be brought over the table but,
for now, we'll just keep in our minds the following warnings:
Bargain tax may apply for foreign residents acquiring Mexican
companies for a price which is lower than the company's fair
market value assessed by the tax authorities in 10% (yes, even
if we are talking about unrelated parties), some prior
squeeze-out strategies such as dividend payments or capital
redemptions, may trigger income tax effects for the target
company paying being squeezed either where those payments
exceed the after tax earrings account (CUFIN) and shareholders
contributions account (CUCA) balances, or where the capital
redemption is re-characterised as a deemed sales of shares (for
example when a prior capital contribution took place in the
previous two years).
International deals may also be quite delicate, especially
when a Mexican subsidiary is involved. How to do you allocate
the portion of the price paid for a whole group to the Mexican
entity? Do it carefully, because Mexican tax authorities would
kindly ask you to determine its value on a standalone basis,
and guess what happens if the value allocated to the Mexican
entity is lower than the value assessed by the tax auditor!
Simple, you may end up paying a bargain tax. It's nice, isn't
Let's keep going, after considering all the above we have
already opted for an acquisition structure. Now it's time to
know what we are buying.
What are the main potential liabilities we should keep in
No one would be surprised by saying that before any
acquisition we must go through the inevitable due diligence
process. Before buying we must take the time to dive into the
target's papers and numbers and understand which are the main
liabilities that we may inherit when acquiring a company.
When we talk about inherited liabilities we must know that
those might arise either when we acquire shares (seems fair
that the target company will still be responsible for its tax
liabilities after a change in its shareholding) and when we
acquire a group of assets and liabilities consisting of an
ongoing concern. However, in the second example our
responsibility as buyers would be limited to the amount of the
consideration paid for the deal.
Mexican tax provisions provide a general statute of
limitation of five years, which means that we might need to
take our Delorean and go back five years in time to review
rules and taxes that may have changed or even disappeared. That
would be the case for the IMPAC (impuesto al activo -
asset tax) which was repealed in 2008 and replaced by the IETU
(impuesto empresarial a tasa unica), the flat tax,
also known as the anti-planning tax. The tax consolidation
regime, and anti tax haven rules (preferred tax regimes) are
other topics that have suffered many changes in the last
If five years were not enough, Mexican law includes an
exception by virtue of which the statute of limitations might
be extended up to 10 years where, among other situations, the
taxpayer did not obtain a tax ID; didn't keep books and records
within the legal period or did not file the relevant annual tax
return, so watch out.
Corporate reorganisations are usually a tricky topic.
Reorganisation processes are usually complex and might provide
sometimes significant tax benefits. Mexican law allows certain
tax free reorganisations where certain requirements are met.
Sometimes, those requirements are not clear enough (for example
the law provides some specific additional requirements for
mergers carried out under a corporate reorganisation but it
does not clearly state which are those requirements and what
should be understood by a corporate reorganisation). Thus, when
acquiring a company that was part of a restructuring process in
the past, we must be especially careful and confirm that each
and any of the legal requirements in force at the time the
restructure was made, were duly met on time.
We've already talked about capital redemptions and dividend
payments, but it is quite common that a seller might want to
squeeze out the cash from the target company before selling it.
As mentioned, dividend payments and capital redemptions might
be treated as taxable events when those are paid in excess of
the CUFIN and CUCA balances. In the case of capital
redemptions, a complex double test calculation must be carried
out to define whether the repayment is taxable or not, so a
close review of such transactions made in the past will become
crucial. Also, Mexican rules state that where a capital
redemption takes place in the subsequent two years of a
preceding capital contribution, it might be treated as a deemed
sale of shares, so we must make sure that the seller's squeeze
out does not trigger any income tax at the time the deal is
Talking about tax credits, we must be aware that Mexican tax
law provides certain limitations to the transfer of NOLs when
there is a change in the company's shareholding, and the new
owners decide to change the business activity of the target
entity. Also, we must bear in mind that NOLs may not be
transferred by virtue of a merger.
Mexican tax consolidation is one of the most complex
consolidation regimes we could think about. Recapture rules and
deferred taxes might be only perfectly understood by the most
experienced tax consolidation experts, so please don´t
scrimp time and resources on this topic, it may bring an
unpleasant surprise to us. By the way, did you know that the
new Mexican government intends to repeal the consolidation
regime? We can't wait to see how the transitory regime works,
Lastly, you may want to know that Mexican legislation will
provide you with an unexpected partner, your employees, which
are entitled by virtue of law to get a 10% profit sharing based
on the company's tax result. In the past, some companies
implemented certain strategies to manage the profit sharing
rule, but some of those strategies were more aggressive than
Let's start doing business
Nowadays, Mexico has become one of the most attractive
investment territories in the world. Supported by its political
stability, a modern tax and legal system and encouraged by a
sustainable growing economy, Mexico is clearly the right choice
for expanding our business.
However, a right decision may end up in a failure if we
don't structure our investment properly and according to our
First of all, we might need to think about what is the most
appropriate vehicle to carry on our business; a branch that may
allow us to flow through to our holding company the losses we
might bear in the fist years? Or a subsidiary that would
provide limited liability to the shareholders and separate the
income / loss position of our Mexican business from the rest of
the group? Are we in Mexico just for the short term? Then a JV
agreement could be a simpler alternative.
Once we choose our vehicle, we must select the best possible
holding structure. A properly implemented holding structure may
allow us to avoid double taxation issues and obtain reduced
withholding tax rates on payments abroad.
There are different acquisitions strategies, and we must
decide on how to finance our business, debt or equity, however
there is no a universal rule to conclude on which option is
better but we'll rather need to put some numbers together and
understand which is the best option to meet our needs.
Sellers may propose us some acquisition strategies; however,
we must be very careful and get a deep understanding on whether
those structures may imply or not inheriting a tax
Finally, a proper due diligence work becomes crucial to
understand and valuate any potential outstanding liabilities
that may come with the package we are acquiring.
Let's start doing business in Mexico.
Tel: +52 55 5263 6148
Fax: +52 55 52 63 6010
Yazmin is an M&A tax partner and leader of the
M&A tax practice for the Mexico City office of PwC.
Yazmin has worked for more than 13 years as an M&A
professional. She has broad experience in due diligence
engagements and has provided tax advisory services that
include identifying, analysing and quantifying risks,
advisory for tax planning and streamlining, planning
transactions and assistance for the closing of
transactions. She is member of the M&A committee at
Core expertise areas: (i) tax due diligence, (ii) tax
efficient structuring, (iii) addressing due diligence
issues and opportunities, (iv) reviewing tax compliance
including estimated payments and annual filings, (v)
advice on transfer pricing requirements, (vi) tax audits,
(vii) communication with Mexican tax authorities, (viii)
ensuring correct reporting of tax teams involved in the
due diligence process (social security, custom duties,
labour, transfer pricing).
Tel: +52 55 5263 8587
Mobile: + 52 1 55 28552559
César Salagaray is a senior manager in PwC Mexico,
specialised in international taxes and value change
In his 11 years of professional experience, he has been
working in cross-border and local reorganistaions and
acquisition processes of multinational companies from the
sectors of technology, pharma, reatail, industrials and
consumer products, telecommunications, and energy.
Although he developed most of his career in PwC Spain, he
is now based in PwC Mexico dealing with inbound
restructuring processes in Latin America of EU and US
based multinationals and outbound tax planning for Latin
American multinationals investing abroad. More
specifically, during the last years he have specialised
in value change transformation projects assisting
multinational groups on the reallocation of functions,
risks and intangibles to more efficient jurisdictions
from a tax, legal and operative standpoint, including the
design and implementations of shared services centres,
toll and contract manufacturer schemes, center leds,
principal integrated models and so on.
He is a lawyer in Spain and graduated with a master's
degree in international taxation at Instituto de Empresa
Business School, an executive MBA at ESADE and a degree
in Mexican taxes.
He also collaborated as a professor of international tax
planning at Instituto de Empresa in Madrid, and as
lecturer for Universidad Villanueva and the Association
for Progress and Development in Spain and at the Escuela
Bancaria y Comercial in Mexico.
Tel: +52 55 5263 5816
Mobile: +52 1 55 91854388
Fax: +52 55 5263 6010
David Cuellar is an international tax services partner
with PwC Mexico. He has more than 16 years experience in
M&A and structuring operations for foreign companies
doing business in Mexico and has helped several
multinational companies in expanding their operations
into Mexico and abroad.
David is the lead partner of the priority accounts group
for tax and legal services at PwC Mexico. He was seconded
to PwC UK for more than three years where he was in
charge of the firm's Mexican tax desk for Europe, Middle
East and Africa, based in London.
David is a co-author of several books and has authored a
number of articles in numerous tax magazines, including
International Tax Review (where he is the
correspondent for Mexico), Tax Business Magazine
and Tax Notes International and has been
involved in several in-house publications.
He graduated summa cum laude from the Escuela
Bancaria y Comercial, receiving two degrees, one as a
certified public accountant and the other in business
In addition, David is a tax professor and also the
coordinator of the tax department at his alma mater and
has taught taxes and held conferences in several Mexican
and European universities and other international