It is important when merging or acquiring shares or assets
of a Mexican company that several methods are discussed and the
varied tax consequences for each option are considered. For
instance, if the acquisition of a target company is structured
as a stock deal, the purchasing actor could benefit from
existing tax concessions by not being subject to a value-added
tax (VAT). However, if the target is brought in an asset deal,
the specific assets the buyer purchases may draw its own unique
tax considerations. While this only represents two key major
merger and acquisition (M&A) avenues, this article explores
the varied tax implications of this and several other
acquisition strategies in Mexico.
In situations where a target company is acquired in a stock
transaction, has pending tax losses to be carried-forward, and
its income in the previous three years is less than the amount
of its listed tax losses, relevant tax losses can only be
carried forward in order to offset tax profits that correspond
to the same business activities from which the tax loss is
The acquisition of a Mexican target company could also be
structured as an asset deal. This strategy would allow the
purchasing actor to handpick the assets deemed to be valuable
for the operation of the target company, while discarding
assets considered undesirable. In an asset deal, deduction and
amortisation rules apply to the purchasing actor, with certain
In situations where the target still has ongoing business,
the purchasing actor involved in an asset deal could be held
jointly liable for any and all tax liabilities existing prior
to the acquisition for an amount that totals up to the entire
Furthermore, existing tax concessions cannot be transferred
in such deals, while VAT also applies on most transfers
whenever real estate is involved.
There are a number of considerations when a Mexican target
company is bought as a consequence of a merger.
Firstly, provided the entities involved in the merger are
Mexican tax residents and that certain requirements are met,
the transaction could be treated as tax-neutral.
Secondly, the tax attributes of the merged company could be
incorporated into the newly formed company. However, there are
certain limitations that should be observed in this case.
For instance, tax losses generated at the level of the
merged company would not be transferrable to the surviving
entity. Likewise, tax losses of the surviving company could
only be applied against profits deriving from the same type of
business activities from which the first were generated.
In addition, anti-abuse rules apply on the acquisition of
Mexican target companies where the only purpose is to take
advantage of the tax losses.
Structuring M&A in Mexico
Based on the above considerations, regardless of the method
in which an acquisition is structured, it is of the utmost
importance to conduct thorough due diligence to identify the
strengths and potential liabilities of the transaction.
Furthermore, agreements should have adequate warranties in
order to minimise the purchasing actor's exposure to potential
liabilities and to entitle the purchasing actor to seek
Depending on the structure of the transaction, it is also
important to consider the step-up basis in stock deals, where
no step-up in the tax basis can exist in the assets of the
target company. A step-up could only occur regarding the
consideration paid for the relevant stock (the price of the
assets if the target company is not altered).
The tax basis in asset deals could be offset by certain
deductions such as fixed assets, certain intangible assets,
deferred costs or charges, preoperative expenses, technical
assistance, or royalty fees set forth in Mexico's Income Tax
Regarding corporate restructures, Mexican tax authorities
may grant foreign residents authorisation for the deferral of
the tax payable from the transfer of shares among companies
belonging to the same group of interest. For this purpose,
companies belonging to the same group are those where at least
51% of the voting stock belongs, either directly or indirectly,
to the same parent.
This authorisation has to be obtained prior to the corporate
restructure. The consideration stemming from the transfer
consists solely of an exchange of shares issued by the legal
entity that purchases the shares transferred.
Foreign investor considerations
Foreign investors should also consider the potential tax
consequences that could arise depending on whether the
acquisition is completed directly or indirectly. This is
largely dependent on the vehicle used to acquire the target
If a non-resident investor decides to directly acquire a
domestic target company, or uses another foreign legal entity
or vehicle to do so, the wide range of tax treaties concluded
by Mexico could provide relief for the allocation of resources
between the holding legal entity and the target company. This
may be applicable when dividends or interests are paid by
reduced withholding rates, tax credits or even certain
exemptions depending on the relevant treaty.
Regardless of the aforementioned considerations, it is
important to note that in cases where a foreign investor
directly purchases the assets that are essential for the target
company, and decides to continue the merger or acquisitions, a
permanent establishment (PE) for the non-resident could be set
up nationally. Consequently, all income attributable could be
subject to income tax in Mexico.
In cases where a foreign investor uses a Mexican legal
entity to acquire stock in the target company, the cost of the
transaction would firstly be generated at the level of the
holding company. This is because the capital increase for
purposes of the purchase would be generated at the level of the
Such a transaction could either result in a positive of
negative tax outcome, which is ultimately dependent on several
factors including the financial position of the domestic target
company. Therefore, the importance of conducting thorough legal
and tax due diligence is once again emphasised.
Income tax considerations
When designing an investment strategy, non-residents should
bear in mind that while Mexican tax residents (individuals or
legal entities) are subject to income tax on a worldwide basis,
foreign tax residents could be subject to income tax in Mexico
for any income whose source is deemed to be located in Mexico,
as well as any income attributable to a PE established
It is important to note that Mexican tax laws provide
special tax treatment whenever real estate is involved in a
transaction, triggering both federal and local taxes.
Additionally, real estate in Mexico is subject to property tax
in many states.
As a result, a transaction could be deemed to be sourced in
Mexico whenever shares or securities are directly or indirectly
derived from real estate nationally. This is the case even in
situations where a transaction takes place between non-resident
parties. Consequently, the relevant transaction could be
subject to income tax in Mexico.
Furthermore, trusts whose purpose consists of acquiring and
constructing real estate to be leased, or acquiring income
derived from such leases, could be subject to a tax incentive
under Mexican Income Tax Law. For instance, a real estate
developer could deduct acquisition costs for land or lots used
in the same year in which they are acquired.
Since 2016, the legal provisions that regulate these
investment vehicles have been amended to address previous
limitations, transforming it into an attractive option to
invest in Mexico.
However, there are a few other real estate considerations.
Mexican tax residents or even PE's of non-residents could be
required to withhold income tax on transactions with
non-residents. Additionally, individuals and legal entities
that sell goods, render independent services, lease goods, or
import goods or services on home territory could be subject to
In certain cases, VAT ought to be withheld. For instance,
whenever Mexican tax residents (individuals or legal entities)
acquire or lease goods from a non-resident without a PE in
Mexico, the relevant Mexican tax resident could be required to
withhold. This is the same whenever a legal entity receives
services from an individual.
Concerning withholding income tax, the corresponding rates
can vary greatly depending on the transaction. Nonetheless,
non-residents entering into transactions with a Mexican party
should bear in mind that the broad range of tax treaties
executed by Mexico could provide relief in the form of reduced
tax rates, exemptions or tax credits.
With respect to VAT, the general tax rate is 16%. However,
certain operations could be subject to a 0% tax rate or simply
just exempt. Distinguishing between such operations is highly
important given that only the first option would allow VAT
Non-residents should also be aware of the fact that specific
legal presumptions are set forth in Mexico's VAT Law in order
to determine when a transaction should be considered executed
within Mexican territory, and thus subject to taxation.
In this regard, goods could be presumed to have been sold
within Mexican territory under the following conditions:
i) If the relevant goods are located therein
at the time when they are shipped to the purchaser;
ii) If no shipment has been made, and the
seller materially delivers the relevant goods to the purchaser
within national territory; or
iii) Goods subject to Mexican certifications
or registrations sold by a Mexican resident seller or by a
foreign resident with a PE in Mexico could be deemed to have
been sold on domestic territory in spite of them actually being
Concerning intangible goods, the transaction would be deemed
to have taken place within Mexican territory if both the seller
and purchaser reside therein.
Based on this framework, any transaction not performed
within national territory would not be subject to VAT in
Mexico. Consequently, VAT could be mitigated or avoided based
on the terms agreed upon by the parties. As a caveat, specific
industries such as the Maquila industry could be subject to
In general terms, the acquiring party could be exposed to
the tax liabilities of a target company, so it is of paramount
importance for adequate warranties to be incorporated into the
relevant agreement in order to mitigate such contingencies.
In this regard, it is common for acquiring parties to
negotiate indemnity clauses and in some cases, for such
indemnities to be backed-up with collateral or guarantees by
Furthermore, indemnity payments received both by Mexican tax
residents and PEs of non-residents set up nationally could be
considered taxable income. For foreign entities that receive
indemnity payments, income tax due would be determined in
consideration of the total amount of indemnity payments made in
their favour by Mexican residents or non-residents' PEs located
It is also worth mentioning that indemnification payments
are not deductible for income tax purposes, however specific
International regulatory impacts
It is important to take into consideration international
trends and regulations. Mexican tax authorities have been
addressing profit shifting in accordance with the OECD's BEPS
Action Plan, with Mexican authorities playing closer attention
to thin capitalisation, back-to-back and transfer pricing (TP)
rules in any transaction.
Additionally, stringent requirements concerning interest
payments have been incorporated. As a result, it is common for
tax authorities to try to re-characterise interest payments as
dividends in order to yield the tax treatment of the
Mexico is also an active member of the OECD, and closely
follows TP regulations given that tax authorities can initiate
audits in cases where arms-length standards are not complied
with, and discrepancies are believed to exist between the fair
market value of a transaction.
Mexico also has an extensive tax treaty network and is
constantly expanding it. Apart from tax treaties concerning the
exchange of information, Mexico has executed more than 60 tax
treaties for the avoidance of double taxation.
Finally, it is important to bear in mind that the general
statute of limitations for tax liabilities in Mexico is five
However, if tax authorities consider that a taxpayer has
deliberately failed to comply with certain formal tax
obligations such as registering with the Federal Taxpayers
Registry, keeping accounting records, or giving notice of any
change of tax domicile, the statute of limitations could be
extended to 10 years.
Ana Paula joined SMPS Legal in 2015 as tax partner.
Her main practice is domestic and international,
corporate and individual taxation.
She regularly advises clients on matters involving
commercial transactions, tax advisory, start-up
businesses, joint ventures, investments, acquisitions,
mergers, spin-offs, dispositions, tax-free
reorganisations, and transfer pricing.
Ana Paula has extensive experience with
international transactions, corporate law, in
representing multinational and domestic groups, tax
controversy and litigation, and in tax audits and
Ana Paula has a law degree from Universidad
Panamericana (2002), and a postgraduate degree
from the University of Salamanca (2004). She also has
an LLM from the University of Florida (2007).
San Martín Elizondo
Jorge San Martín Elizondo is both a lawyer and a
certified public accountant.
Jorge's practice is focused on tax and business
advisory, and includes mergers and acquisitions
(M&A) and corporate reorganisations with particular
focus on permanent establishments and other tax-related
Jorge assists his clients in structuring
tax-efficient systems, including the tax treatment of
acquisitions and investments.
His practice includes the representation of clients
before the Mexican tax authorities in a broad range of
national and international tax controversies and
litigation, in addition to advising on tax matters
covering cross-border operations, investments and
Jorge obtained his juris doctor from the National
University of Mexico (UNAM), and is a certified public
accountant from Universidad Anahuac del Norte
from Mexico City. He is a member of Mexico's Public
Accountants School and of the Mexican Institute of
Public Accountants. He is also a member of the Canadian
Chamber of Commerce and the American Chamber of
Commerce in Mexico City.