The wave of foreign investment that followed the sweeping reform to the energy industry, which opened the door to private investment, together with a clear bet from the current administration to fund infrastructure projects through private-public partnerships, quickly exposed the lack of modern and dynamic tax restructuring rules that could encourage foreign investors to create strong partnerships with local companies and smart inbound investment structures.
President Peña Nieto made the development of Mexico’s infrastructure the cornerstone of its administration, favouring an increased level of private sector participation as a means to finance infrastructure projects, but fell short in laying the tax groundwork to bolster such investments. As a result, foreign investors in Mexican infrastructure projects have been faced with tax rules that were not tailored to meet their industry’s needs.
While the Mexican tax provisions do establish certain benefits for corporate restructures, which include tax free spin-offs and mergers, transfers at tax cost basis and certain tax deferral rules, these mechanisms are not always efficient as its requirements are often difficult to meet for businesses.
Similarly, the majority of treaties within the Mexican double tax treaty network have proven not to be a solution as they commonly do not contain provisions that favour tax-free restructures or, if included, are limited to very specific transactions (generally share-for-share transactions).
In practice, the big players of the energy and infrastructure industries have set the pace and have been able to lobby the tax authorities into issuing new tax rules that respond to their industries’ needs. This has generally been achieved through new rules issued by the tax administration service.
Specifically, a new tax rule was issued in order to grant a tax deferral for carve outs of infrastructure assets. In general terms, such rule sets forth that capital gains obtained from the sale of shares issued by a spun-off entity that received infrastructure assets subject to a government concession as a result of a spin-off, may be apportioned proportionally during the term of the concession (without exceeding 20 years), and recognised as taxable income on a yearly basis.
In order to claim such a deferral, the following requirements should be met:
- The proceeds received from the sale of shares should be invested in other infrastructure projects subject to a government concession or private-public partnerships, or used for the payment of loans acquired to carry on these types of projects;
- The parent company and its shareholders must not distribute dividends or profits during the two years following the sale of shares of the spun-off entity;
- Dividends or profits distributed by the spun-off entity to the shareholders of the parent company must be used for the purposes listed under point one above during the two years following the sale of shares;
- The shareholders of the parent company prior to the spin-off must retain 80% of the voting shares of both the parent and spun-off entities after the spin-off and not sell more than 49% of the shares of the spun-off entity; and
- A notice must be filed before the tax authorities.
This new rule was issued to stimulate foreign investment in specific Mexican infrastructure projects as it allows isolating a cherry-picked asset in a new entity that may be subject to –limited – new direct foreign investment without triggering all the capital gains taxes related to such transfer at once.
Non-residents that are currently looking to invest in Mexican infrastructure projects should bear in mind that the tax authorities have been constantly issuing new tax rules to allow for tax free restructurings or tax deferrals on the transfer of shares or assets, which should be analysed in detail when structuring their investments.
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