Mexico: Federal Tax Court position on re-characterisation of interest payments derived from back-to-back loans as dividends

International Tax Review is part of Legal Benchmarking Limited, 1-2 Paris Garden, London, SE1 8ND

Copyright © Legal Benchmarking Limited and its affiliated companies 2025

Accessibility | Terms of Use | Privacy Policy | Modern Slavery Statement

Mexico: Federal Tax Court position on re-characterisation of interest payments derived from back-to-back loans as dividends

cuellar.jpg

salagaray.jpg

David Cuellar


Cesar Salagaray

It is well known by most Mexican taxpayers that Mexican Income Tax Law (MITL) provisions provide a disconcertingly wide definition of back-to-back loans. A clear understanding of when a finance scheme may fall under the scope of the back-to-back rules becomes crucial since interest derived from back-to-back loans are re-characterised as dividends and thus considered non-deductible for income tax purposes. According to the wording of the law, a back-to-back loan consists of "transactions whereby a person provides cash, assets or services to another which in turn provides cash, assets or services directly or indirectly to the former or to a other related party of the first one; and operations in which a person grants financing and the credit is guaranteed with cash, a cash deposit, shares or debt instruments of any nature of the creditor or a related party of the creditor".

Although under such definition there are many cases where taxpayers could not obtain certainty on whether a specific financing would fall under the scope of the anti-abuse rule, certain intercompany financing schemes have been implemented attending to business driven reasons and economical logic principles.

Nonetheless, the Mexican courts confirmed that having a business purpose is not a valid argument to circumvent the back-to-back limitation on interest since the rule does not establish that possibility.

Another example is a scheme under which a party (A) provided funds (cash or goods) as equity to another party (B), and the latter provided funds to another entity (C) related with the first as debt. These type of schemes are usually known as "equity blocker" structures.

Although there could be grounds to prevail on the argument that an equity blocker should not be considered as a back-to-back loan, a resolution from the Mexican Federal Tax Court has introduced even more uncertainty in this topic.

In this regard, the Federal Tax Court concluded that a transaction where entity A transfers its ownership in a company to another related party B, and subsequently B transfers the interest received to another related party C in exchange for a note and shares in C, fell under the scope of article 92 section V of the MITL, and thus, interest expenses derived from the note should be re-characterised as dividends, thus non deductible for C.

As can be seen, the wording of the above mentioned anti-abuse rules are so broad that there is not legal certainty on which transactions could qualify as back-to-back loans. On top of that, the tax authorities seem to be taking an aggressive approach that may jeopardise potential foreign investment in Mexico. As a consequence, a case-by-case analysis is highly advisable to determine whether a transaction falls under the back-to-back rules and which actions might be taken to mitigate a possible exposure.

David Cuellar (david.cuellar@mx.pwc.com) and Cesar Salagaray (cesar.salagaray@mx.pwc.com)

PwC

Tel: +52 55 5263 5816

Fax: +52 55 5263 6010

Website: www.pwc.com

more across site & shared bottom lb ros

More from across our site

The South Africa vs SC ruling may embolden the tax authority to take a more aggressive approach to TP assessments, an adviser tells ITR
Indirect tax professionals now rate compliance as a bigger obstacle than technology and automation; in other news, Italy approved a VAT cut on art sales
AI-powered tax agents are likely to be the next big development in tax technology, says Russell Gammon of Tax Systems
FTI Consulting’s EMEA head of employment tax and reward tells ITR about celebrating diversity in the profession, his love of musicals, and what makes tax cool
Canadian Prime Minister Mark Carney and US President Donald Trump have agreed that the countries will look to conclude a deal by July 21, 2025
The firm’s lack of transparency regarding its tax leaks scandal should see the ban extended beyond June 30, senators Deborah O’Neill and Barbara Pocock tell ITR
Despite posing significant administrative hurdles, digital services taxes remain ‘the best way forward’ for emerging economies, says Neil Kelley, COO of Ascoria
A ‘joint understanding’ among G7 countries that ‘defends American interests’ is set to be announced, Scott Bessent claimed
The ‘big four’ firm’s inaugural annual report unveiled a sharp drop in profits for 2024; in other news, Baker McKenzie and Perkins Coie expanded their US tax benches
Representatives from the two countries focused on TP as they met this week to evaluate progress under a previously signed agreement – it is understood
Gift this article