On 8 September 2019, Mexican president Andrés Manuel López Obrador’s presented Economic Package for the fiscal year 2020 to Congress. The economic package proposed following tax reform measures:
Transparent Entities
International companies doing businesses particularly affected by the reform include those that receive payments from Mexico, such as interest; companies making payments to controlled foreign corporations; and structures that use tax-transparent entities.
Permanent establishment (PE)
The proposal extends the definition of Permanent Establishment (PE) in which a foreign resident constitutes a permanent establishment, in accordance with the recommendations of the Project to tackle Base Erosion and Profit Shifting (the “BEPS Project”) of the OECD. A Mexican resident is not an independent agent when such person acts almost exclusively on behalf of nonresident related parties. The definition of an independent agent would be expanded, in which an independent agent acts exclusively or almost exclusively on behalf of a nonresident related party. Instead, a permanent establishment is not created if these activities are auxiliary. If the activities are a complement to a single business structured transaction, then the activities will create a permanent establishment.
Deduction of Interest
Net interest in excess of the amount resulting from multiplying net income by 30% is not deductible. This limitation is not applicable to the first MXN $20 million (approximately US $1 million) for corporate residents and nonresidents with a PE. Non-deductible interest may be carried forward for the next 3 years.
Other measures
- amendments to the tax treatment of payments made to hybrid entities through the concept of “hybrid mechanism”;
- limitations to Foreign Tax Credit;
- modification of preferred tax regimes; and
- proposed changes to the application of controlled foreign company (CFC) rules.
