Mexican tax incentive for capital repatriation 2017
As part of a joint action by the Federal Government, the business sector, trade unions, and primary sector organization to support the economy of Mexican families, an Agreement for the Economic Strengthening and Protection of the Family Economy was signed on January 9, 2017
One of the actions mentioned in the agreement was to grant a tax incentive to promote capital repatriation of foreign assets kept outside of Mexico up to December 2016, with the purpose of boosting investments in the country.
As a result of this agreement, on January 18th, 2017 a Decree for repatriation of funds maintained outside Mexico by Mexican companies, individuals and permanent establishments in Mexico (the “Decree”), was published in the Federal Official Gazette.
THE FOLLOWING IS A SUMMARY OF THE CONTENT OF THE KEY ASPECTS OF THE DECREE:
- (i) Allows individuals, entities and permanent establishments in Mexico who directly or indirectly obtained and/or hold income abroad as of December 31, 2016, to comply with their income tax obligations applying a lower income tax rate of 8% with respect to the total amounts repatriated in to Mexico, without any deduction.
Therefore, this fiscal ease could also be applied if foreign assets of the Mexican companies, individuals and permanent establishments in Mexico are held by a foreign structure (Trust, Investment Funds, etc.)
- (ii) The applicable exchange rate for the calculation of the 8% tax rate will be the official exchange rate of the date in which the tax is paid.
- (iii) Allows taxpayers to claim foreign tax credits, the foreign tax credit shall not surpass the amount that results from applying the 8% tax rate to the total amount of the repatriated funds.
- (iv) Compliance tax obligations related to the repatriated resources (payment of the income and filing of informative tax returns) will be considered as complied with. Therefore, taxpayers will avoid incurring in tax penalties and surcharges.
- (v) The resources should be repatriated during the following six months from the date of entry into force of the Decree, thus from January 19, 2017 until July 19, 2017.
INDIVIDUALS, ENTITIES OR INCOME EXCLUDED FROM THE DECREE BENEFITS:
- When the Tax Administration Service (SAT) has exercised a tax audit concerning the resources subject to repatriation prior to the application of the Decree;
- If the individuals or entities have filed a judicial or administrative action related to the resources subject to repatriation. In such a case, the individual or entity could desist its action to apply the Decree benefits;
- If the income received abroad originates from illegal activities or is used to finance such; and
- If the income to be repatriated has been previously deducted in Mexico.
The resources should be repatriated into Mexico through Mexican financial institutions and taxpayers using the tax incentive would have to pay the corresponding tax within 15 days from the repatriation of funds.
Entities and permanent establishment in Mexico would be required to invest repatriated resources in:
- (i) Fixed assets or real estate located in Mexico for commercial purposes and must not be sold or transferred for a minimum of two years after their acquisition.
- (ii) Research and development for scientific or technological purposes for their business.
- (iii) Repayment of loans to independent parties. Such payments have to be made through Mexican financial institutions or Mexican broker dealers. Moreover, it is important to point out that repatriation payments can be made in any currency, however, for some foreign currency accounts located in Mexico, the currency must be the US dollar and these accounts may be held only by companies and not individuals. Also, these repayments include payment of contributions, as well as salaries paid to employees that render their services within the Mexican territory.
- (iv) Investments in Mexico through Mexican Financial Institutions or Mexican Broker Dealers for a minimum of two years.
Individuals must invest the repatriated resources in Mexico under any of the alternatives above mentioned excluding repayment of loans or contributions or in financial instruments issued by Mexican residents through Mexican financial institutions or in shares issued by Mexican companies resident in Mexico.
Keep in mind that under alternatives (i), (ii) or (iv) listed above, in order to apply to this benefit, the repatriated resources must remain in Mexico for at least 2 years.
We consider some Mexican residents will be interested in this new repatriation scheme because unlike the repatriation scheme for 2016, this year the tax program grants the tax incentive to apply a lower tax rate (8%, instead of 30% or 35%) of the repatriated amounts.
Remember that as from August 15th 2016, Mexican residents with investments in countries listed in the Mexican Black list (regardless if such blacklisted jurisdictions have a Broad Exchange of Information Agreement in place with Mexico or not) have to file the Informative Tax Return as of Fiscal Year 2016 to report the income generated by such legal entity or vehicles no later than February 28, 2017.
As a result, if they report an income they will have to file the corresponding Annual Tax Return of Fiscal Year 2016 and pay an income tax rate of 30% if the taxpayer is a corporation or 35% if the taxpayer is an individual. The Annual Tax Return has to be filed no later than March 31 for corporations, or on April 30 for individuals.
If taxpayers apply the advantages of the Decree they will benefit of a lower tax rate, no penalties and although it is not explicitly mentioned on the Decree, an indirect benefit of such would be the elimination of any criminal liability arising from the noncompliance with the filing of informative tax returns.
We strongly advise clients together with their tax advisors and in collaboration with Amicorp to re-evaluate their current structures, how they have been using these structures and whether application of this tax benefit is recommended.
AMICORP CAN ASSIST CLIENTS OR THEIR TAX ADVISORS WITH THE FOLLOWING:
- Request of all relevant data such as relevant bank data or other documents (documents of trusts, foundations, companies, funds);
- Processing of all relevant data (such as list of assets, incoming and outgoing payments in order to check the source of funds, etc.) in close cooperation with the local partner;
- Arranging the legal certification procedure and the issuance of apostils, if required; and
- Support the clients, together with their tax advisors, in restructuring and optimizing any offshore vehicles after repatriation.
For any clarification related to this matter please contact your account manager, Amicorp Mexico or the Private Clients Unit which can analyze case by case, in order to provide a potential solution together with the tax advisor.