Mexico: Lack of business purpose as factor in determining sham transactions

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: Lack of business purpose as factor in determining sham transactions

Sponsored by

Sponsored_Firms_deloitte.png
The new CIT project will bring changes to the existing model

A recent court ruling in Mexico has enabled the tax authorities to dive deeper into taxpayer affairs to determine whether transactions have real substance. Carlos Ramírez & Víctor Masón of Deloitte Mexico explain why taxpayers should take note of this judgment.

Mexico's Superior Chamber of the Federal Administrative Court published a decision in November 2017 in which it concluded that the tax authorities can take into account the fact that a transaction lacks a business purpose when determining whether a transaction has substance. The principles of the court's decision will apply in cases where the tax authorities discover during a tax audit that the transaction is not reflected in the taxpayer's accounting books.

The court stated that even though Mexican law does not define the term "business purpose", the concept is related to the profit earnings of an enterprise and, therefore, the absence of a business purpose for a particular transaction can be a factor that is relevant in determining whether a transaction is genuine and whether it lacks a real economic effect other than to create a tax advantage.

According to the Federal Administrative Court, the tax authorities can rely on the lack of business purpose provided other facts are present that corroborate that the transaction never took place, such as whether the transaction is unusual or exceptional, there is inconsistent data and documentation, there is an absence of infrastructure or personnel to carry out the transaction, a lack of cash flow, etc. In such cases, the burden then shifts to the taxpayer to demonstrate that the relevant transaction does have substance. Failure to do so can result in an assessment and potential criminal liability, depending on the circumstances. However, it appears that the lack of business substance on its own (i.e. without corroborating other factors), would not be sufficient to consider a transaction to be a sham transaction.

It should be noted that the tax authorities will be able to make the determination that a transaction is simulated without the involvement of a civil court. Under Mexican law, the tax authorities are required to provide a statement to the civil court in cases where they intend to make a sham transaction determination.

Taxpayers should be aware of this decision of the Federal Administrative Court and ensure that they maintain appropriate records of all documentation and other evidence that demonstrates a business purpose for their transactions.

Carlos Ramírez and Víctor Masón

Deloitte Legal

Website: www.deloitte.com/mx

more across site & shared bottom lb ros

More from across our site

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
The UK accountancy firm’s transfer pricing lead tells ITR about his expat lifestyle, taking risks, and what makes tax cool
Dolphin Drilling intends to discuss the final liability amount and manner of settlement with HM Revenue and Customs
Winning the case against the 20% VAT imposition was always going to be an uphill challenge for the claimants, UK tax advisers argue
A ‘paradigm shift’ in Chile’s tax enforcement requires compliance architecture built on proactive governance, strategic documentation and active monitoring of judicial developments
Gift this article