Income from dividends or profits and in general from gains distributed by legal entities, the source of wealth is considered to be in Mexican territory when the person that distributes such items resides in Mexico. In the case of dividend payments to shareholders abroad, it must be submitted to the process defined in article 164 of the Income Tax Law (ITL), which leads us to a particular system, both for the case of payment to individuals (article 140 of the ITL), as well as legal persons (article 10 of the ITL).
Distributed dividends and profits
In the case of dividends paid to individuals, the legal entity making the payments should follow the provisions in article 10 of the ITL.
In cases of reductions of capital of legal entities, the calculation of the distributed per-share profit determined pursuant to article 78 of the ITL shall be performed by reducing from such profit, the balances of the net tax profit account. Such balances shall be determined by dividing the legal entity’s balances of such accounts through the moment of the reduction by the number of shares of the same entity through the date of the reimbursement, including the shares corresponding to re-investments, capitalization of profits or any other items that is part of the equity thereof.
In cases of distributed profits, determined pursuant to article 78 of the ITL, the tax shall be calculated and paid pursuant to the provisions of such article.
Legal entities that distribute dividends or profits as described must withhold the tax at the 10% rate, which must be applied over the dividends or profits; and provide to the taxpayers a certificate evidencing the amount of the dividend or profits that is distributed and the tax withheld, which is considered a definitive payment.
The tax described above shall be paid along with the estimated payment for the relevant month.
Profits delivered to head offices
Profits in cash or in kind sent by permanent establishments of foreign resident legal entities to the corporation’s main office or to another permanent establishment thereof abroad not derived from the balance of the net tax profit account or the foreign entity’s Capital Remittances Account [cuenta de remesas de capital], respectively. In this case, the permanent establishment shall pay, as its own tax owed, the amount resulting from applying the 30% rate indicated in the first paragraph of article 9 of the ITL. For such purposes, distributed dividends or profits must be added to the tax due in accordance with abovementioned. To determine the income tax to be added to distributed dividends or profits, such profits or remittances shall be multiplied by 1.4286, and the 30% rate must be applied to the resulting amount.
Net Tax Profit account
For the purposes of the preceding paragraph, the net tax profit of each year calculated in accordance with the provisions of article 77 of the ITL (regarding the Net tax profit account), and the dividends or profits received from Mexican resident legal entities for shares that are part of the estate related to the permanent establishment must be added to the foreign resident’s net tax profit account; and the profits in cash or in kind sent by the permanent establishment to its main office or to another of its foreign establishments as well as the distributed profits must be reduced from said net tax profit account, when, in either case, the profits come from the balance of said account.
For this purposes, dividends or profits in the form of shares or reinvested in the subscription and capital increase of the same legal entity that distributes them within 30 calendar days following their distribution are not to be included. The foreign resident’s net tax profit account shall be calculated in accordance with article 77 of this Law, except for paragraph one.
Capital Remittances Account
The capital remittances received from the corporation’s main office or from any of its foreign establishments shall be added to the Capital Remittances Account mentioned above; and the capital remittances reimbursed to said establishments in cash or in kind shall be reduced from it. The balance of this account through the last day of each year shall be updated for inflation for the period from the month of the last update through the last month of the year in question. When remittances are reimbursed or sent after the update set forth in this paragraph, the balance of the account through the date of the capital remittance or receipt of the remittances must be updated for inflation for the period from the month of the last update until the month in which the remittance was reimbursed or received.
Reimbursements to head offices
Permanent establishments that make reimbursements to their main office or to any of their foreign establishments must consider said capital reimbursements, including those derived from the termination of their activities, to be distributed profits, following the provisions of article 78 of the ITL. For such purposes, a share is considered to be the value of the remittances contributed by the main office or any of its foreign permanent establishments in the ratio that this value is to the total value of the permanent establishment’s remittances account, and the Capital Contribution Account shall be considered to be Capital Remittances Account.
Permanent establishments must calculate and pay the tax corresponding to the result obtained pursuant to the provisions of this section, applying the 30%, according to the first paragraph of article 9 of the ITL, to the amount resulting from multiplying said result by 1.4286. Payment of this tax shall not be required when the profit derives from the foreign resident’s net tax profit account, described above. The tax resulting in accordance with this section shall be paid in conjunction with any tax, determined pursuant to the preceding section.
Additional tax on dividends and gains distributed by permanent establishments
Dividends and, in general, profits distributed by permanent establishments, will be subject to an additional tax at the 10% rate over the amount of profits or reimbursements. Permanent establishments shall pay the tax described in this section along with the previously mentioned tax, if any, which will be considered a definitive payment.
It will be considered that the last item that a permanent establishment sends abroad is a reimbursement of capital.
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.
