A proposal (that would add new Article 4-A to the income tax law) would tax the income of foreigners that are “transparent entities” in Mexico. Thus, if this measure is enacted, Mexico would not recognize the fiscal transparency of foreign entities for Mexican income tax purposes.
The proposal was included in the tax reform legislative initiative presented to the Mexican Congress earlier in September 2019.
Under the proposal, foreign transparent entities would be subject to tax in Mexico as legal entities and would be required to pay Mexican income tax (impuesto sobre la renta—ISR) even if all or a portion of an entity's partners, shareholders or beneficiaries are taxable on the income earned by the entity in its country or jurisdiction of residence. As drafted, the proposal also refers to foreign trusts, associations, investment funds, and any other similar arrangement that does not have “legal personality.”
In the accompanying explanation for the proposal, it was clearly stated that under the measure, a transparent entity would be considered to be treated as a legal entity for tax purposes in Mexico without recognizing the entity’s fiscal transparency because these types of entities or structures have been used in tax planning and this change in treatment would make it easier to control and analyze the payments made to the entity (without considering the tax treatment applicable to its individual participants).
If the measure is approved and enacted into law without any modification, Mexican payers could no longer consider certain entities—such as limited liability companies (LLCs) of the United States or limited liability partnerships (LLPs) of Ontario—as transparent entities, and would have to pay the withholding tax applicable with regard to the type of income paid.
Interaction with treaty provisions
What would be the effect of the proposal with regard to application of income tax treaty provisions?
Mexico signed the multilateral instrument (MLI) in June 2017. There could be a question as to what effect could the proposal have on “covered treaties” under the MLI.
In the most recent version of the proposal sent to the Mexican Senate, the Mexican government reserved its position with respect to Article 3 of the MLI, stating that Mexico would negotiate with each country a provision similar to that contained in the MLI (unless the current treaties contain a similar provision). Therefore, Mexico's posture would be to reserve the right to apply fiscal transparency, but only if Mexico negotiates a specific provision for such in each treaty.
At present, Mexico has recognized that, in its network of income tax treaties, the following have a provision similar to Article 3 of the MLI:
Read a September 2019 report (Spanish) prepared by the KPMG member firm in Mexico
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