CORPORATE EXPATRIATION

IN MEXICO

RICARDO LEON-SANTACRUZ
Washington D. C.
APRIL 16, 2009
 Persons subject to tax Basis
- Residents World-wide income
RESIDENCE - 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
 Resident OECD 2008
- Place of effective management is the place where key
RESIDENCE 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
 - Expatriation used to shift profits out
Prior to
2002 - 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
 - Comprehensive controlled foreign company
legislation, not jurisdiction driven. Advance
recognition of income in a segregated regime
Today
- 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
 - Expatriation occurs when a legal entity
ceases to be resident of Mexico per
internal tax law or tax treaty
Expatriation - 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
 - Expatriation occurs when a legal entity ceases to
be resident of Mexico per internal law or tax
treaty:
- Through corporate resolution and/or
Expatriation - 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)
 - Expatriation:
Holding Co.
(Mexico)
Expatriation:
Mexico sub-holding Foreign sub-holding

- Deemed as sale of assets of Holding Co.

Holding Co. Holding Co.

Corporate domicile
and/or
place of management
(Mexico) (Foreign)

Mexico sub-holding Foreign sub-holding

- Basis in stock at shareholders level?

 - Cross-border merger:
- Mexican holding merges into new foreign holding
- Merger taxed as sale of stock at 28% on the gain at
Expatriation: shareholder level, if any
Alternatives - Gain determined based on fair market value of
merged company’s stock
- Loss of tax attributes: In Mexico? In foreign
country?

Holding Co. Holding Co. Holding Co.

(Mexico) (Mexico) (Foreign)

Mexico sub- Foreign Mexico sub- Foreign sub-

holding sub-holding holding holding
 - Expatriation or cross-border merger results in:

- Lower effective tax rate

Expatriation:
- Avoid Mexico’s CFC rules
Benefits - 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
 Contact:
Ricardo Leon-Santacruz
rls@sanchezdevanny.com

Mexico City
Tel.: +52 (55) 9000-2668
Fax: +52 (55) 9000-2667

Monterrey
Tel.: +52 (81) 8153-3900
Fax: +52 (81) 8153-3901

www.sanchezdevanny.com