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The new Decree is good news for companies investing or considering investing in corporate debt bonds. Companies doing business in Mexico should review the Decree to determine whether they qualify for the tax incentives.

On January 8, 2019, President Lopez Obrador published, in the Official Gazette, a special decree (the Decree) that grants certain tax incentives related to the withholding tax on interest paid by Mexican residents for publicly traded corporate debt bonds. The Decree also reduces the tax rate for certain taxpayers on the gain obtained from the sale of public shares through an initial public offering.

Background

According to the Decree, because Mexican companies need financial resources at competitive costs to fund their operations, the Mexican Government considered it necessary to establish mechanisms to encourage investment through the acquisition of corporate debt bonds.

Also, the Decree states that the corporate debt bonds market in Mexico is underdeveloped because the tax treatment varies depending on the tax residence of the investor or the issuer of the bonds, which causes investors to opt for investments in government bonds.

Additionally, the Decree points out that the stock market is an important source of capitalization for medium-sized companies and, in recent years, national and foreign investors have become more interested in acquiring private equity instruments issued by Mexican companies. Certain aspects limit these investments, however, such as the varying income tax rates that apply to the capital gains from the sale of shares in the stock exchange for an initial public offering.

Tax credit on the income tax withholding on interest from corporate debt bonds

In Mexico, the nonresident does not pay the withholding tax on interest. Rather, the Mexican withholding agent is required to withhold from the interest payment an amount equivalent to the tax and must remit the withholding tax to the tax authorities.

The Decree establishes a tax incentive for Mexican taxpayers required to withhold income tax on the interest payments for bonds issued by Mexican resident companies, provided the bonds are sold through the stock exchanges under the terms of the Securities Market Law. Specifically, the Decree establishes a tax credit of 100% of the income tax for interest payments made by residents in Mexico to a resident in a country or jurisdiction with which Mexico has a double tax treaty in force or a broad agreement for the exchange of information. The tax credit is creditable only against the income tax withholding that should be paid on the interest payments, provided the Mexican tax resident does not withhold on the interest payments to the nonresident.

The Mexican withholding agent must claim the credit in the respective tax year or the right to the credit will be lost. The Decree also establishes that the tax credit will not result in taxable income and will not create the right to a refund or offset other than the one included in the Decree.

Reduced capital gains tax

For tax years 2019, 2020 and 2021, the Decree reduces the capital gains tax rate from 35% to 10% when shares issued by Mexican companies resident in Mexico are sold through the corresponding stock exchanges. For the reduced rate to apply, the following conditions must be met:

1. The sale of shares in the stock exchange, which are considered to be placed among the general investing public, is carried out through an initial public offering of a Mexican company that has not previously traded on stock exchanges.
2. The value of the stockholders' equity in the Mexican company whose shares are disposed of equals MXP $1 million pesos (approximately USD $50,000); this amount may be adjusted through rules issued by the Mexican tax authorities.

The reduced capital gains tax rate will not apply when i) a person or group of persons that, directly or indirectly, hold 10% or more of the shares in the capital stock of the issuing company, dispose of those shares through one or several successive or simultaneous transactions within 24 months; ii) a person or group of persons that control the entity sell it through one or several successive or simultaneous transactions within 24 months, including those sales performed through derivatives or any other similar transaction; or iii) capital gains are derived from share exchanges from mergers or de-mergers. Also, the reduced rate will not apply to capital gains derived from transfers of shares performed out of the stock exchanges.

The reduced tax rate may be granted to a person or group of persons that control the issuing entity and sell it through one or several successive or simultaneous transactions within 24 months , when at least 20% of the shares of the Mexican company have been acquired by a venture capital investment trust in Mexico (FICAP in Spanish). For the reduced rate to apply, the trust's certificates must be placed among the general investing public through a stock exchange under the terms of the Securities Market Law or in recognized markets. Additionally, the transfer must be part of the trust's disinvestment transition process to initiate the public listing of the company being acquired.

Effective date

The Decree went into effect on January 9, 2019. The tax authorities may issue general rules for the correct application of the tax incentives.

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