International Tax Review is part of the Delinian Group, Delinian Limited, 8 Bouverie Street, London, EC4Y 8AX, Registered in England & Wales, Company number 00954730
Copyright © Delinian Limited and its affiliated companies 2023

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

Why you should invest in Mexico

Mexico is not just one of the most attractive investment locations in Latin America, but one of the best investment locations all around the globe, argue Yazmin Cáceres, David Cuellar, and César Salagaray of PwC.

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; Mexico.

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, didn't we?

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 characteristics.

  • 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 Mexican entity.

  • Acquire assets (and liabilities) representing an ongoing business.

  • Take control of another company through a horizontal merger process.

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 exemption.

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 reorganisations.

  • 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 question:

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 purposes.

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 loans.

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 it?

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 our sight?

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 years.

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 made.

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, if any.

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 others.

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 specific needs.

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 liability.

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.

Yazmin Caceres




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 PwC Mexico.

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).

César Salagaray




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 transformation.

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.

David Cuellar




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 administration.

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 forums.

more across site & bottom lb ros

More from across our site

The BEPS Monitoring Group has found a rare point of agreement with business bodies advocating an EU-wide one-stop-shop for compliance under BEFIT.
Former PwC partner Peter-John Collins has been banned from serving as a tax agent in Australia, while Brazil reports its best-ever year of tax collection on record.
Industry groups are concerned about the shift away from the ALP towards formulary apportionment as part of a common consolidated corporate tax base across the EU.
The former tax official in Italy will take up her post in April.
With marked economic disruption matched by a frenetic rate of regulatory upheaval, ITR partnered with Asia’s leading legal minds to navigate the continent’s growing complexity.
Lawmakers seem more reticent than ever to make ambitious tax proposals since the disastrous ‘mini-budget’ last September, but the country needs serious change.
The panel, the only one dedicated to tax at the World Economic Forum, comprised government ministers and other officials.
Colombian Finance Minister José Antonio Ocampo announced preparations for a Latin American tax summit, while the potentially ‘dangerous’ Inflation Reduction Act has come under fire.
The OECD’s two-pillar solution may increase global tax revenue gains by more than $200 billion a year, but pillar one is the key to such gains due to its fundamental changes to taxing rights.
The solution to address the tax challenges arising from digitalisation and globalisation will generate more revenue than previously estimated.