Washington D. C. APRIL 16, 2009

Persons subject to tax Residents Permanent Establishments Basis World-wide income Attributable income RESIDENCE - Non-residents without PE Mexican Source income No entity classification for Mexican tax purposes.A. Main type of entities - Entity residence ² Place of effective management ² 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. all entities taxed alike S.R. no tax on dividends if paid out of pre-taxed earnings No inheritance or gift tax . Corporation Limited Liability Co. S.L.

Place where headquarters are located .Place of meetings of board .Resident OECD 2008 RESIDENCE Place of effective management is the place where key 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 where day to day senior management is carried on .Place where CEO and other senior executives work .Place where accounting records are kept - .Governing law .

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 .CFC rules were jurisdiction based.Expatriation used to shift profits out Prior to 2002 . hence expatriation and use of holding regimes in nonblacklisted country·s allowed for deferral of income in Mexico and deduction of expense in Mexico .

Today . not jurisdiction driven.Pass-through subsidiaries are deemed CFC·s .Comprehensive controlled foreign company legislation. Advance recognition of income in a segregated regime .Corporate legislation allows expatriation. but place of effective management must also be expatriated for tax purposes .Foreign tax credit limitation. two tiers of subsidiaries . so planning ahead makes sense .Mexican companies are expanding outside of Mexico.Expatriation is by statute deemed a liquidation .

Deemed liquidation by statute .Excess between market value and cost basis is taxed at 28% .Expatriation occurs when a legal entity ceases to be resident of Mexico per internal tax law or tax treaty .All assets held by entity in Mexico and abroad are deemed to be sold .Tax due must be paid in within 15 days .Expatriation . unless transferred out of Mexico at arm·s length .Limitation on deduction of royalty payments to related parties outside of Mexico if intangibles were created in Mexico and expatriated.Indirect implication . at appraisal value .Asset cost is depreciated tax cost at time of expatriation .Deemed asset sale at market value of assets. if not available.Legal representative must be designated or independent certified auditor must file certified return .

consider: Asset base Tax basis Fair market value or appraisal value Real estate transfer tax Tax attributes (e.Deemed sale of assets. tax credits or NOL·s) .g.Expatriation occurs when a legal entity ceases to be resident of Mexico per internal law or tax treaty: Expatriation - Through corporate resolution and/or Relocation of place of effective management Mexico Corporate domicile Mexico Corporate domicile Switzerland Corporate domicile Switzerland Place of management ..

Expatriation: Holding Co. Holding Co. (Foreign) Mexico sub-holding - Foreign sub-holding Basis in stock at shareholders level? . (Mexico) Expatriation: Mexico sub-holding Foreign sub-holding Deemed as sale of assets of Holding Co.. (Mexico) Corporate domicile and/or place of management Holding Co.

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

. 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.Expatriation or cross-border merger results in: Expatriation: Benefits - Lower effective tax rate Avoid Mexico·s CFC rules Avoid limitation on foreign tax credits Avoid statutory employee profit sharing distribution of foreign dividends received.For publicly traded stock. if any .Enhancement of equity & credit worthiness associated with sovereign country risk . lists itself and is traded in the Mexican Stock Exchange .

Contact: Ricardo Leon-Santacruz rls@sanchezdevanny.: +52 (81) 8153-3900 Fax: +52 (81) 8153-3901 www.: +52 (55) 9000-2668 Fax: +52 (55) 9000-2667 Monterrey Mexico City .