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Mexico: Proposed income on hydrocarbons law



David Cuellar

Sergio Lugo

On December 20 2013, the Mexican government published on the Official Gazette the amendments to the Constitution as stated by the approved Energy Reform. In addition, on April 30 2014, the Mexican President submitted to the Mexican Congress the proposed secondary laws to rule the Energy Reform. These secondary Laws include the Income on Hydrocarbons Law (the Law), which is being discussed in June 2014. Below are some of the most significant tax provisions of the Law.

Permanent establishment

For the purposes of both the Law and the Income Tax Law, foreign entities engaged in the exploration or extraction of hydrocarbons in Mexico will trigger a permanent establishment when performing activities for a period that exceeds 30 days in a period of 12 months. This is applicable on activities performed in Mexican territory and the exclusive economic zone in which Mexico has legal rights.

For the purposes of computing the 30 day period, the time incurred will be taken into account by other foreign related parties that perform similar or identical activities as part of the same project.

Profit sharing

Entities engaged in the exploration and extraction of hydrocarbons would not be obliged to pay the profit sharing (as opposed to most entities in Mexico, which are required to distribute profit sharing at the 10% rate) to employees. However, these entities could make other incentive payments to employees.

Salaries received by foreign residents

Foreign residents would be subject to income tax in Mexico on the salaries paid by foreign residents that do not have a permanent establishment in Mexico. For these purposes, the corresponding income tax will be calculated and paid based on the provisions stated by the Mexican income tax law.

Other considerations

There are several types of considerations that the Mexican government would receive from entities entering into exploration and extraction contracts, including upfront payments, royalties and a percentage of the profit generated. In this latter case, it is worth mentioning that the above mentioned profit is different from the one calculated for both financial and tax purposes. Some of the differences include: different depreciation rates, different limitations on deductibility of expenses, non deductibility of financial expenses, donations, rental or acquisition of land, training of employees, and certain advisory services, among others.

As noted, this proposal includes some aspects that need to be carefully analysed to properly identify and quantify the impact on multinational entities that are willing to invest in Mexico in light of the new Energy Reform. Moreover, further analysis should be required in light of the tax treaties signed by Mexico and the interaction of the proposed law with the existing laws in Mexico.

Lastly, it is important to bear in mind that the secondary laws, including the Law, are still under analysis and discussion at the Mexican Congress and therefore, the above provisions may be different once approved by Congress.

David Cuellar ( and Sergio Lugo (, Mexico City


Tel: +52 55 5263 5816

Fax: +52 55 5263 6010


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