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2016 Brings Tax Changes For Foreign Pension Funds In Mexico

Author:Mr Raúl Morales
Profession:Chevez Ruiz Zamarripa

Mexico is one of the few countries with a special exemption regime for foreign pension funds investing in the country. This exemption was incorporated into the tax system as a general withholding exemption for such funds when obtaining any type of Mexican source income through a presidential decree published on March 25 1992, and then into the Income Tax Law in July of that year. Raul Morales Medrano of Chevez, Ruiz, Zamarripa y Cía, outlines the latest changes impacting pension funds in Mexico.

In 1995, the possibility for such pension funds to invest in Mexico through foreign persons or investment funds to maintain the exemption was incorporated through administrative rules, as it was necessary for the regime to properly function considering that, in certain cases, regulatory restrictions limited funds to invest directly in Mexico. These intermediate vehicles needed to be registered in a special registry created for such purpose.

That was until 1998, when the exemption was limited to certain types of income. That year, the law established that only interest and capital gains earned by such pension funds would be exempt if the funds were registered in Mexico and some other requirements were met, including, for example, that such income was also exempt in the country of residence of the pension fund, and that such country established reciprocity for Mexican pension funds (this last requirement was quickly eliminated, for year 1999).

Leasing income from real estate was eliminated from the exemption, which apparently was not intentional, since this situation was corrected on February 14 1998 through an administrative rule that, for the first time, incorporated special requirements that had to be met in order for the withholding exemption for rental income to apply. Such requirements included that the rental income should not be linked or conditioned to the income of the lessees, and that capital gains would be understood as the sale of shares (in general) and of real estate assets located in Mexico, to the extent the real estate assets had been leased for a minimum period of one year preceding the sale.

Starting in 1999, the withholding exemption regime for foreign pension funds that has been described was incorporated into the law, and remained as such, substantially, until December 2013. Article 144 of the 1999 law provided that (i) interest income, (ii) rental income and (iii) certain capital gains earned by foreign pension funds from Mexican source, would be exempt in Mexico if certain requirements were met, such as the pension funds being registered in Mexico, a lock-up rental period of one year would be required for the sale of real estate property to qualify as an exempt capital gain, and the rental income could not be determined based on the income of the lessee. The definition of capital gains was narrowed to only include shares of real estate companies as defined by the law. This withholding exemption provided by the law will be referred to as the 'primary exemption'.

Article 144 incorporated a ninth paragraph with a second exemption for investments made by foreign pension funds in Mexico through Mexican resident entities (the 'secondary exemption'). The exemption would apply for Mexican resident entities that were owned by foreign pension funds to the extent that at least 90% of their total income...

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