CORPORATE EXPATRIATION IN MEXICO

RICARDO LEON-SANTACRUZWashington D. C.APRIL 16, 2009

RESIDENCE

Persons subject to tax Basis- Residents World-wide income

- Permanent Establishments Attributable income

- Non-residents without PE Mexican Source income- No entity classification for Mexican tax purposes, all

entities taxed alike

Main type of entities- S.A. Corporation

- S.R.L. Limited Liability Co.

Entity residence – Place of effective management – deemed to be Mexico

if person (s) who decide, manage or administer the day to day control of the entity reside in Mexico

Integral tax system: - Profit is taxed only once at a corporate level, no tax on

dividends if paid out of pre-taxed earnings

No inheritance or gift tax

RESIDENCE

Resident OECD 2008 - Place of effective management is the place where

key management and commercial decisions that are necessary for the conduct of the entity’s business as a whole are in substance made

- Only one place of effective management at any one time

- Factors to consider:

- Place of meetings of board

- Place where CEO and other senior executives work

- Place where day to day senior management is carried on

- Place where headquarters are located

- Governing law

- Place where accounting records are kept

Prior to 2002

- Expatriation used to shift profits out

- CFC rules were jurisdiction based, hence expatriation and use of holding regimes in non-blacklisted country’s allowed for deferral of income in Mexico and deduction of expense in Mexico

- In practice intellectual property was bundled into IP holding company’s and expatriated without any tax implications. Chargeback of royalty allowed for deduction of expense in Mexico w/reduced withholding tax and extended deferral

Today

- Comprehensive controlled foreign company legislation, not jurisdiction driven. Advance recognition of income in a segregated regime

- Pass-through subsidiaries are deemed CFC’s

- Foreign tax credit limitation, two tiers of subsidiaries

- Expatriation is by statute deemed a liquidation

- Mexican companies are expanding outside of Mexico, so planning ahead makes sense

- Corporate legislation allows expatriation, but place of effective management must also be expatriated for tax purposes

Expatriati

on

- Expatriation occurs when a legal entity ceases to be resident of Mexico per internal tax law or tax treaty

- Deemed liquidation by statute- All assets held by entity in Mexico and

abroad are deemed to be sold- Deemed asset sale at market value of assets,

if not available, at appraisal value- Asset cost is depreciated tax cost at time of

expatriation- Excess between market value and cost basis

is taxed at 28%- Tax due must be paid in within 15 days - Legal representative must be designated or

independent certified auditor must file certified return

- Indirect implication- Limitation on deduction of royalty payments

to related parties outside of Mexico if intangibles were created in Mexico and expatriated, unless transferred out of Mexico at arm’s length

Expatriatio

n

- Expatriation occurs when a legal entity ceases to be resident of Mexico per internal law or tax treaty:- Through corporate resolution and/or - Relocation of place of effective management

Mexico Switzerland Corporate domicile Corporate

domicile

Mexico Switzerland Corporate domicile Place of

management

- Deemed sale of assets, consider:- Asset base- Tax basis- Fair market value or appraisal value- Real estate transfer tax- Tax attributes (e.g. tax credits or NOL’s)

Expatriatio

n:

- Expatriation:

- Deemed as sale of assets of Holding Co.

- Basis in stock at shareholders level?

Holding Co.

(Mexico)

Mexico sub-holding Foreign sub-holding

Holding Co.

(Mexico)

Mexico sub-holding Foreign sub-holding

Holding Co.

(Foreign)

Corporate domicile and/or

place of management

Expatriatio

n:Alternative

s

- Cross-border merger: - Mexican holding merges into new foreign

holding- Merger taxed as sale of stock at 28% on the

gain at shareholder level, if any- Gain determined based on fair market value

of merged company’s stock- Loss of tax attributes: In Mexico? In foreign

country?

Holding Co.

(Mexico)

Mexico sub-holding

Foreign sub-holding

Holding Co.

(Mexico)

Mexico sub-holding

Foreign sub-holding

Holding Co.

(Foreign)

Expatriatio

n:Benefits

- Expatriation or cross-border merger results in:

- Lower effective tax rate- Avoid Mexico’s CFC rules- Avoid limitation on foreign tax credits- Avoid statutory employee profit sharing

distribution of foreign dividends received, if any

- Enhancement of equity & credit worthiness associated with sovereign country risk

- For publicly traded stock, access to tax free capital gain by Mexican resident individuals on the sale of publicly traded stock can be retained if the New Holding Co. lists itself and is traded in the Mexican Stock Exchange

www.sanchezdevanny.com

MonterreyTel.: +52 (81) 8153-

3900Fax: +52 (81) 8153-

3901

Mexico CityTel.: +52 (55) 9000-

2668Fax: +52 (55) 9000-

2667

Contact:

Ricardo Leon-Santacruz

rls@sanchezdevanny.com