On September 8, 2019, the Federal Executive Branch submitted to the Mexican Congress the Tax Bill for 2020, under which several amendments to the Income Tax Law, Value Added Tax Law, Special Production and Services Tax Law and Federal Tax Code are proposed.
After following the corresponding legislative process, on October 31 the Mexican Congress approved the amendments proposed by the Executive Branch, which will be published in the Federal Official Gazette and will mostly enter into force on January 1th, 2020.
In general terms, the amendments approved have as their main objective to incorporate the recommendations issued by the Organisation for Economic Cooperation and Development (OECD) to the Mexican tax legislation, establishing rules to tax the digital economy, tackle tax avoidance through aggressive tax planning and simulated acts, as well as to strengthen the faculty of the tax authority for such purposes.
The most important amendments derived from the Tax Bill for 2020 are described below:
Income Tax Law
Definition of Permanent Establishment
The definition of permanent establishment (PE) is updated to include additional cases in which a foreign resident can constitute a PE in Mexico.
It is established that a dependent agent can constitute a PE for a foreign resident when the agent regularly performs the principal role in the conclusion of contracts executed by the foreign resident. In addition, it considered that an agent will not be deemed to be of independent nature when the agent acts "exclusively" or "almost exclusively" on behalf of the foreign resident.
Also, it is stated that the PE exceptions applicable to the place of business or agency cases will only be applicable when the activities performed are, in fact, of a preparatory or auxiliary nature.
Finally, an extended anti-fragmentation rule is included to exclude the fragmentation of functions or activities performed by the foreign resident or its related parties from the PE exception for auxiliary or preparatory activities.
Income obtained by transparent foreign entities and foreign legal vehicles
Transparent foreign entities and foreign legal vehicles receiving Mexican source income must determine the tax result and pay Income Tax according to the rules applicable to the tax regime for Mexican entities. This applies even if the members, partners, shareholders or beneficiaries of the entities or vehicles accrue said income in their foreign residence jurisdiction.
It is worth mentioning that transparency of foreign legal vehicles is recognized to the extent that such vehicles administer private equity investments in Mexican companies and certain information is reported to the Mexican Tax Administration Service.
Income obtained by Mexican residents through transparent foreign entities and foreign legal vehicles
It is established that income obtained by Mexican residents through transparent foreign entities and foreign legal vehicles must be directly accrued by the Mexican residents along with any other income accrued. Thus, the possibility of deferring the payment of Income Tax under the exception of lack of control over the timing of distributions by such entities or vehicles is eliminated.
Because of this, income obtained from transparent foreign entities or foreign legal vehicles that are not deemed transparent will be determined based on the taxable profits obtained by such entities or vehicles in the corresponding calendar year, in accordance with the tax regime applicable to Mexican entities.
In addition, income obtained through transparent foreign legal vehicles must be accrued in accordance with the tax regime applicable to the Mexican resident that participates in such vehicle and will be taxed in the same tax year in which they are generated, considering the deductions corresponding to such vehicles.
It is worth mentioning that taxes effectively paid in Mexico or abroad may be credited for Income Tax purposes.
Finally, the obligation of keeping a Net After-Tax Profits Account (CUFIN per its Spanish acronym) of preferential tax regimes for purposes of recording the amount of income that has been already taxed and that can be distributed by the entities and vehicles, as well as the obligation of filing the corresponding informative tax return, are maintained.
Controlled Foreign Entities subject to Preferential Tax Regimes
The tax regime applicable to income subject to preferential tax regimes is modified, in order for such regime to be applicable only to income obtained by Controlled Foreign Entities subject to preferential tax regimes.
It is still the case that income is subject to a preferential tax regime when it is not taxed or is subject to less than 75% of the Income Tax that would be paid in Mexico. However, the basis to...