Let us remember from our last article that the sale or disposition of shares and securities whose origin of wealth is in Mexico is subject to income tax. In the case of reorganizations of corporations, the income tax payment has important differences and particularities to consider as a corporation. In the following, we will review article 161 from the Income Tax Law, as well as few tax rules regarding the subject.
Income Tax payment
In the case of reorganizations of corporations that belong to a group, the tax authorities may authorize the deferral of the tax payment for the net gain on the disposition of shares within said group.
The deferred tax shall be paid within 15 days following the date on which a subsequent disposition is conducted resulting in the exclusion from the group of the shares referred to in the corresponding authorization, and the payment shall be updated from the time it was incurred until it is made.
The disposition value of the shares that must be considered to calculate the net gain shall be the value that would have been used between independent parties in comparable transactions or the value indicated by an appraisal practiced by the tax authorities.
For purposes of the provisions of this paragraph, the shares must be deemed to be excluded from the group when the issuing company and the acquiring company stop consolidated financial statements in accordance with the financial and accounting rules governing the taxpayer or those it is required to apply.
Authorizations referred to in article 161 may only be granted before the reorganization, and provided that the consideration received from the disposition consists solely of an exchange of shares issued by the corporation that purchases the shares being transferred, and provided that the purchaser and transferor are not subject to a preferential tax regime and do not reside in a country with which Mexico does not have a broad exchange of tax information agreement.
If the transferor or purchaser resides in a country with which Mexico does not have a broad exchange of tax information agreement, the aforementioned authorization may be awarded provided that the taxpayer submits a document in writing, evidencing that he has authorized the foreign tax authorities to give the Mexican authorities information on the transaction for tax purposes.
An authorization issued in accordance with the precedent paragraphs will become ineffective whenever the aforementioned information is requested from the country in question and is not effectively exchanged; or the tax authorities find out, while exercising their review powers, that a reorganization or the relevant transactions in connection therewith, carried out within the last 5 years along with those executed within 5 years next to the issuance of the relevant authorization do not have business reasons; or the exchange of shares generated income subject to a preferential tax regime.
Reorganizations executing a relevant transaction
Whenever a relevant transaction is executed within five years next to a reorganization, the company acquiring the shares or the legal representative appointed for such purpose must file the information related to corporate reorganizations, restructurings, as well as the relevant operations (set forth in article 31-A, first paragraph (d) of the Federal Fiscal Code), under the conditions set forth therein.
Relevant transactions
For tax purposes, according to article 24 of the Income Tax Law, relevant transactions will be understood as any act, regardless of the legal form used, by which:
- The ownership, enjoyment, or use of the shares or of the voting or veto rights in the decisions of the issuing company, the acquiring company or the alienating company is transferred or, of the necessary favorable vote for making the decisions in these companies.
- The right over the assets or profits of the issuing company, the acquiring company or the alienating company is granted, in case of any type of capital reduction or liquidation, at any time.
- The book value of the issuing company’s shares is decreased or increased by more than 30%, in relation to the book value determined on the date of the authorization request, which was recorded in the opinion act.
- The issuing company, the acquiring company and the alienating company cease to consolidate their financial statements in accordance with the provisions that regulate them in accounting and financial matters, or that they are obliged to apply.
- The capital stock of the issuing company, the acquiring company or the alienating company is decreased or increased, based on the capital stock stated in the opinion.
- A partner or shareholder increases or decreases his percentage of direct or indirect participation in the capital stock of the issuing company, the acquiring company or the alienating company, which intervened in the restructuring and, as a consequence, increases or decreases the percentage of participation of another partner or shareholder of the issuing company, based on the percentages of participation in the capital stock of said partners or shareholders consigned in the opinion.
- The fiscal residence of the issuing company, the acquiring company or the alienating company has changed.
- One or more segments of the business of the issuing company, or of the acquiring or alienating company related to one or more segments of the business of the issuer, consigned in the opinion, is transferred.
In the case of the aforementioned reorganizations, taxpayers shall appoint a legal representative and submit to the tax authorities a report prepared by a public accountant registered with said authorities in accordance with the Regulations and the general rules issued by the Tax Administration Service, indicating that the tax was calculated according to tax provisions as well as the business lines and activity of the issuing entity and the acquiring entity, and certifying that such companies consolidate financial statements in accordance with the financial and accounting rules governing them or those they are required to apply.
Definition of Group
For the purposes of the preceding paragraphs, a group is a group of corporations in which at least 51% of the voting shares representing the capital stock are directly or indirectly owned by a single legal entity.
Submission of documentation to the authority
The authorized taxpayer must also submit to the competent authorities supporting documentation demonstrating that the shares covered by the authorization have not left the group of corporations. Said information must be submitted in the first 15 days of March of each year following the date on which the disposition was made, for all the years during which said shares remain within the group. If a taxpayer fails to comply with this article by the required date, the shares will be presumed to have left the group.
Gains from disposition of shares, tax exempt under a tax treaty
Whenever in accordance with treaties entered into by Mexico to avoid double taxation, the gain obtained on a disposition of shares as a result of a reorganization, restructuring, merger, spin-off, or similar transactions cannot be taxed; and the foreign resident taxpayer does not comply with the requirements set forth by article 161 of this Law, this benefit will be granted through a refund.
Learn more about Income tax and VAT in Mexico
Contact us for questions or more information,
Tax Partner CPA Mario Enrique Morales mario.morales@bmtc-dfk.com
Senior Tax Comunications CPA Carla Torres carla.torres@bmtc-dfk.com
The purpose of this article is merely informative. BMTC-DFK nor any of the firms affiliated with DFK International is responsible for the decisions made based on what is described in it.
