Foreign resident capital gains taxation in Mexico: a practical guide
Juan José Paullada Eguirao and David Guakil Raffoul of Ritch Mueller explain the computation and payment process of capital gains taxes derived from the sale of shares by non-Mexican residents
Article 161 of the Mexican Income Tax Law (MITL) provides that income derived from the sale of shares by non-Mexican residents shall be considered to be of Mexican source and subject to tax in Mexico if the shares:
Are issued by a Mexican resident; or
Derive more than 50% of their accounting value from immovable property located in Mexico (for further details on real estate shares, click here).
What are the applicable domestic law rates?
As a general rule, capital gains derived by non-Mexican residents are subject to tax at a rate of 25% on the gross proceeds (with no deductions allowed).
However, the MITL provides for an optional ‘net basis’ regime that a taxpayer may apply if it complies with certain requirements (described below). If this is the case, the applicable rate is 35% on the net gain. The optional regime is unavailable for residents in preferential tax regimes or jurisdictions with a territorial tax system, which, in principle, makes it complex to apply for foreign taxpayers that:
Are subject to a participation exemption regime, such as most European tax residents; or
Have a preferential tax rate for capital gains, such as US tax residents.
The MITL also provides for a regime for non-Mexican residents that sell public stock that is listed on recognized markets, where the tax may be reduced to a 10% rate on the gain or be exempt from taxation in Mexico, if the requirements described below are complied with.
Who is required to withhold the tax?
The tax charged upon a sale of shares must be withheld by the purchaser if it is a Mexican resident or a non-Mexican resident with a permanent establishment in Mexico, and remitted to the tax authorities on the 17th day of the month following the date on which the seller obtained the income.
If the purchaser is a non-Mexican resident, then the seller shall directly pay the tax through a return that must be filed within 15 business days following the date on which the proceeds were received.
What are the requirements to apply the net basis regime?
To apply the optional net basis regime, the non-Mexican resident must appoint a legal representative in Mexico that, under Article 174 of the MITL, must:
Be a Mexican resident for tax purposes (whether an individual or a company);
Keep evidence of the taxes that were paid on behalf of the seller for at least five years;
Voluntarily assume joint liability to cover for any tax deficiencies derived from the sale of shares (this is typically formalized in the power of attorney that is granted to the legal representative);
Pay the tax through a return that must be filed within 15 business days following the date on which the seller receives the income; and
Be solvent enough to respond as a jointly liable person for any tax deficiencies derived from the transaction (the threshold is explained below).
The legal representative must file a notice to the tax authorities informing about its designation (an Appointment Notice) before the deadline to pay the tax elapses, and submit the following documentation:
A power of attorney evidencing its appointment, which must grant enough powers for the representative to be able to sell assets and to subscribe to securities on behalf of the non-Mexican resident;
A notarized written statement in which the legal representative voluntarily assumes joint liability in connection with any tax deficiencies derived from the sale of shares;
The notarized share purchase agreement or corporate deed attesting for the sale of shares;
The calculations to determine the income tax due following the sale of shares; and
A list of the non-Mexican resident’s assets over which the legal representative would have power, to guarantee payment of the income tax following the sale of shares, or a letter of credit to cover any deficiencies.
If it is a Mexican entity, the legal representative would be considered to comply with the solvency requirement if the seller’s tax due amount does not exceed 10% of the representative’s paid-in capital, and it must not have reported a tax loss within the two previous fiscal years. This requirement is not applicable if the representative submits a letter of credit for the amount of the computed tax.
Taxpayers that opt to apply the net basis regime must file a tax report prepared by a certified public accountant, with the tax calculation derived from the sale of shares, attaching a copy of the power of attorney used to appoint the legal representative.
The report must be signed by the seller’s legal representative and a notice informing the tax authorities that the report will be prepared must be filed within 15 business days following the date on which the tax return derived from the sale of shares is filed. The report must be filed within 30 business days following that date.
There is no obligation to file a tax report if the sale of shares is exempt under a tax treaty provision. However, the obligation to appoint a legal representative would still apply and the legal representative would be required to submit the Appointment Notice with a copy of the seller’s tax residency certificate.
What requirements must taxpayers comply with to apply a double tax convention?
Benefits established under double tax conventions only apply to taxpayers that are able to support their tax residency in the corresponding country. This is typically achieved through a tax residence certificate or, when not available, a tax return of the non-Mexican resident as submitted for the previous fiscal year (or a return from a second prior year if the prior year’s return is not yet available). Taxpayers must also appoint a legal representative and file the report described above.
From an international tax perspective, taxpayers must comply with the requirements established in the applicable double tax convention, such as limitation of benefits and other anti-abuse provisions, which Mexico typically does include under its conventions.
Through the application of double tax conventions, non-Mexican residents are not only able to obtain reduced tax rates but also access the net basis regime otherwise unavailable under domestic law for taxpayers that are residents in a territorial or preferential tax regime.
What is the domestic tax regime regarding the sale of public shares?
Non-Mexican taxpayers that transfer public stock on a Mexican stock exchange may be eligible for reduced taxation at a 10% rate. The tax must be withheld by a financial intermediary and is applicable if the following requirements are met:
The transferred shares are placed among the general investment public;
The sale/acquisition of the shares is made through Mexican authorized stock exchanges (as established under the Securities Law);
The seller does not belong to a group of persons that, directly or indirectly, hold 10% or more of the outstanding shares, within a period of 24 months; and
The seller does not dispose of 10% or more of the outstanding shares of the relevant company.
However, no withholding tax should apply if the seller is a resident of a country with which Mexico has executed a double tax convention if the taxpayer provides a sworn affidavit and a valid tax identification to the financial intermediary.
With regard to public offerings made through foreign exchanges, the exemption may be preserved if the offering consists of securities that exclusively represent equity participation in Mexican public companies (i.e., American depositary shares), and if the securities are sold through foreign recognized markets. Regrettably, this exemption does not include the direct transfer of shares through a foreign exchange.