Some years ago, it was very common to use foreign vehicles to promote and channel private equity investments in Mexico, such as Canadian limited partnerships, which were, and still are, widely used in Mexico considering their legal and tax transparency.
However, Mexico has undergone significant regulatory changes, including modifications that expanded the scope of allowed investments for investment companies specialized in retirement funds (SIEFORES).
Such modifications, together with other changes made to tax regulations in recent years, have broadened the type of vehicles (local and foreign) that are nowadays used in Mexico for this purpose, which include Canadian limited partnerships, US limited partnerships, US limited liability companies, several types of Mexican fideicomisos, such as regular non-business fideicomisos, real estate investment fideicomisos (FIBRAs), and private equity investment fideicomisos (FICAPs), among others.
In general terms, these investment vehicles could be classified as follows:
1) Transparent figures (local and foreign)
The principal tax advantage of using a transparent figure is that it is completely disregarded for tax purposes, as if the corresponding income had been directly obtained by its investors.
For Mexican tax purposes, corporations and others that have legal capacity of their own are considered to be 'entities', whilst a 'figure' is something that has no legal capacity of its own. An entity or figure is deemed as 'transparent' when it is not considered as a taxpayer in its country of incorporation, and therefore the corresponding income is attributed to its members or beneficiaries.
Therefore, investors are allowed to apply benefits contained in the treaty entered into by Mexico with their country of residence, if any, regardless of the jurisdiction in which the figure was incorporated, to the extent applicable requirements are met.
These vehicles, since they are completely disregarded for tax purposes, do not represent a risk of treaty abuse; on the contrary, they are used with the intention that investors are taxed under their applicable tax regime, which may include the application of benefits under their respective treaties. Treaty abuse may exist depending on the way in which each investor structures its own investment.
2) Foreign regular entities
These are normally treated as tax 'blockers' in Mexico, even if they are deemed as fiscally transparent in their country of incorporation. Accordingly, in order to determine the possibility of applying treaty benefits in these cases, the relevant tax residence would be, in principle, that of the blocker (not of the investors).
The application of such treaty benefits may still be subject to the compliance of certain 'substance' requirements (ie. limitation-onbenefits rule or 'LOB rule'), in which case the tax residence of the investors, among other factors, may...