Mexico's economy has been performing adequately for the last few years. However, the international recession, especially in the US, may lead the country to a slowdown in the economy, reducing the current capital market offer.
Mexico's stock exchange is seeing a gradual erosion of its trading volumes and liquidity, and is now trying to attract listings from medium-sized companies in order to increase the investment opportunities for the general public.
In general terms, the Mexican capital market provides better investment opportunities for large national or international corporations (particularly because there are no restrictions on foreign currency exchanges), while other potential investors are still facing difficulties accessing local capital market products. Nevertheless, there are still several good alternatives to access the Mexican capital market.
CAPITAL STOCK INVESTMENTS
In general terms, capital earnings derived from investments in shares quoted on the stock market are subject to tax payable by business entities resident in Mexico (but not so for individuals resident in Mexico and residents abroad), provided the following are complied with:
the sale is carried out through an authorized stock exchange; and
the seller and purchaser make no adjustments to the price prior to the sale of the shares (prearranged trade).
The foregoing rules are also applicable to american depositary receipts (ADRs) related to the shares of issuing companies in Mexico.
In the specific case of the sale of shares through public biddings by a party, who at the time of quoting the company on the stock exchange was a shareholder, the abovementioned exemption applies, provided the following is complied with:
the shares have been quoted in a known stock exchange, for at least five uninterrupted years since they were publicly placed;
at least 35% of total paid-in shares are placed;
the offer includes all series of shares and the price is the same for all shareholders; and
the shareholders are allowed to accept more competitive offers.
In the event these conditions are not complied with, or in the case of capital earnings from shares of companies not quoted in the stock exchange, the following conditions will apply:
Individuals resident in Mexico
Income is taxable and 20% is payable on the total amount of the operation as an income tax advance payment, which can be reduced by complying with certain requirements.
Parties resident abroad
5% must be withheld on the sales price, or 20% on the profit earned by the local party making the payments. The withholding tax can be reduced by complying with certain requirements.
Many tax treaties signed with other countries establish that if certain circumstances are met (a limited period of ownership, usually 12 months) and there is a limited participation in the capital stock (usually up to 25%), capital earnings are only taxable in the state of residence of the beneficiary, and therefore no income tax withholding would be applicable, which means that each case would have to be evaluated in order to define the applicable tax treatment. This treatment is also applicable to investments in variable income mutual fund companies.
Residents in tax havens selling shares are subject to 40% withholding tax on income earned, with no deductions whatsoever. The sale of shares is exempt from value-added tax (VAT), at the 15% general rate.
Dividends
Dividends earned from companies resident in Mexico follow a tax transparency treatment. Under this scheme, dividend distributions to Mexican corporations are not considered to qualify as taxable income. When these dividends are distributed by the Mexican corporation to the individual shareholder resident in Mexico, he must consider them taxable income, but he may also credit the income tax that the original distributing company would have paid (34% in 2003), which means that the effect could be neutral, since the maximum income tax rate for individuals is 34%.
For shareholders resident abroad, dividend payments are not subject to any income tax withholdings whatsoever.
Commercial paper and long-term bonds (three or more years)
Any yield or profit earned from this type of instrument, issued by companies resident in Mexico, are considered interest for tax purposes.
Companies resident in Mexico, must recognize income for these items on accrued bases, and the party paying interest or the local intermediary must withhold 0.5% (annually) on the capital earned from the interest as an advance income tax payment.
As from 2003, individuals resident in Mexico must also consider this type of income to be taxable income on a real base (that is, eliminating the effects of inflation). This type of income was exempt up to December 31 2002, and is now also subject to the aforementioned withholding. If an individual earns income solely from interest, and the real amount does not exceed $9,000 a year (exchange rate used II x I), he can file no annual return and the income tax withheld will represent the definitive tax.
There is a transition procedure under which certain investments in long-term bonds issued prior to January 1 2003 are entitled to the income tax exemption for individuals.
In the case of investors resident abroad, interest earned from the instruments are subject to an income tax withholding that ranges from 4.9% to 10%, depending on whether or not the beneficiary is resident in a country with which Mexico has signed an effective tax treaty, and on whether certain information requirements are complied with by the issuer of the securities.
Securitization of assets
Although this type of operation is not yet that common, they have been increasing at the cross-border level, mainly as concerns accounts receivable in dollars. An example is operations carried out by Petróleos Mexicanos (PEMEX), Mexico's largest government company, which used income from oil exportations and private companies with accounts receivable generated from exportations. However, securitizations have also been carried out by a number of large local corporations with accounts receivable in pesos. In fact, a significant increase in such operations is expected to take place in connection with accounts receivable arising from mortgages for the acquisition of low-income housing, since in most cases the Mexican government offers the necessary support and guarantees.
Income earned from investments in securities issued as a result of these operations is considered interest, which represents taxable income for individuals and business entities resident in Mexico (on a real basis for individuals and nominal basis for business entities, respectively). In both cases, the party paying the interest must withhold 0.5% on the capital as an advance income tax payment.
In the case of investors resident abroad, the party making the payment must withhold income tax at the rate of 4.9% or 10% on the interest portion, depending on whether or not the party receiving the interest is a resident of a country with which Mexico has signed a tax treaty currently in effect.
Government bonds
As a result of the guarantee provided by the Mexican government, investment in this type of instruments is one of the safest and most versatile alternatives, since securities are issued in foreign currencies (USD), in pesos or in investment units (an alternative unit whose value is based on inflation), which has made this type of investments quite popular, especially when considering that until 2002, individuals resident in Mexico had to pay no income tax on yields earned from this type of operation, and parties resident abroad were not subject to any withholding tax on such yields, which evidently directly affected the yield rates.
On the basis of the foregoing, as from January 1 2003, (with certain exceptions) during a transition period, interest earned from investments in government bonds is considered taxable income for individuals resident in Mexico, and is subject to the provisional income tax withholding of 0.5% on the invested capital. This results in fair competition between government bonds and bonds issued by private companies, since as from this year they are following the same tax treatment.
As concerns parties resident abroad, it is not clear whether, under the regulations in effect, the exemption for interest arising from government bonds has been lost. However, the stance of the tax authorities is that this exemption is no longer applicable and that yields must be subject to income tax withholding that could be up to 4.9%, provided certain requirements are complied with.
Given that the local financial intermediary has the obligation to withhold income tax, and is also jointly liable for any tax not withheld, in practice, the logical step is to carry out the aforementioned income tax withholding, at least until a different stance can be determined, since otherwise, certain investors resident abroad could be severely affected.
Income derived from said securities and earned by business entities resident in Mexico is taxable on an accrued basis, even in prior years.
Financial leasing
Although companies offering financial leasing in Mexico should secure specific authorization to carry out such operations, aside from being subject to a series of regulatory obligations, in practice, parties resident abroad may also provide financing under the financial leasing scheme to residents of Mexico, and receive a similar tax treatment to that of local operations. This is true to the extent that the respective agreement complies with the following requirements:
it must be in writing;
it must include the obligation of one party to offer the use of goods to another party over a specific and mandatory period of time;
the lessor must be required to pay the value of such goods, plus the financial burden involved in the transaction; and
on termination of the agreement, the lessor must either acquire the goods at a reduced price, extend the life of the agreement with a lower periodic payment or sell the goods to a third party, and share the profit with the lessor.
In general terms, for tax purposes, financial leasing implies the sale of the goods in question, which gives rise to no profits, since the sales price and the cost are considered to be the same and the interest portion is not usually the important portion of income.
Nominal interest income earned by the Mexico-resident lessor from this type of operation qualifies as taxable income on an accrued basis. Lessees resident in Mexico are required to withhold 15% income tax on operations carried out with lessors resident abroad on the amount previously agreed as interest; the withholding should be made at the due date or at the date of payment, whichever occurs first.
However, if the goods are in Mexico at the time the operation is entered into, they will be subject to 15% VAT, which in general terms represents no additional cost, since the lessor can usually credit and recover said tax.
PricewaterhouseCoopers
Mariano Escobedo, No 573,
Colonia, Rincon del Bosque
México City,
11580 México DF
Tel: +52 52 636054
Fax: +52 52 636010
Internet: www.pwcglobal.com
