On January 8, 2019, a Presidential decree was published in the Official Gazette of the Federation in which two tax incentives were granted.
The Decree is part of the Plan to Boost the Financial Sector, announced by the Ministry of Finance and Banco de Mexico on the same day, and its purpose is to promote the Mexican debt and capital securities markets by (i) eliminating the income tax withholding applicable on interest paid to certain non-Mexican resident holders of bonds issued by Mexican resident entities and (ii) reducing the income tax rate applicable to Mexican resident individuals and non-Mexican residents (individuals and legal entities) on gains derived from sales of shares in initial public offerings made through authorized Mexican securities exchanges. Both incentives are effective as of January 9, 2019.
Corporate Bonds Incentive
The first incentive consists in a tax credit equivalent to 100 percent of the income tax that the Mexican withholding agent is required to withhold on interest paid to a non-Mexican resident holder of bonds issued by a Mexican resident entity that is publicly traded on an authorized Mexican stock exchange. The tax credit, which would be utilized by the Mexican withholding agent to completely offset the withholding tax on such interest, is only available if the holder of the bond is a tax resident of a country that has either entered into a treaty with Mexico for the avoidance of double taxation or a tax information exchange agreement with Mexico.
Initial Public Offerings Incentive
The second incentive consists in the option to apply a preferential 10 percent withholding rate, applicable on capital gains from sales of shares by Mexican resident individuals and non-Mexican residents in recognized securities markets, as part of initial public offerings through an authorized Mexican securities exchange.
The incentive shall only apply during fiscal years 2019, 2020 and 2021, if the following conditions are met:
i. the sale must be made as part of an initial public offering of shares by a Mexican entity that has not previously been a public issuer (the "Issuer") in an authorized securities exchange (this excludes sales made outside of a stock exchange, sales carried out as registration operations – those involving a single broker-dealer –protected crosses, or any other sale in a manner that prevents the seller to accept more competitive offers before and after the shares offering period);
ii. the net equity of the Issuer must be of an amount of MX$ 1 million (~US$50,000), which amount may be modified through general rules by the Revenue Service Administration (SAT); and
iii. the sale must not imply a sale of control or a sale of more than 10 percent of the shares of the Issuer by a person or group of persons, in a single or multiple transactions within a 24-month period, except if, a Mexican Private Equity Trust ("FICAP"), which issued certificates are publicly traded in a recognized securities market, has acquired no less than 20 percent of the shares of the Issuer, and the sale is part of a divestiture for purposes of listing the Issuer as a consequence of the IPO.
The Decree further provides that the incentive will also apply when other vehicles incorporated in Mexico similar to FICAPs own shares of the Issuer. In addition to complying with the aforementioned requirements, such vehicle must comply with the following conditions: no less than 80 percent of the vehicle's assets must consist of shares of Mexican resident entities that are not publicly-traded, and the vehicle must have held the shares of the Issuer for at least two years before the initial public offering.
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