Mexico tax reform: Fiscally transparent entities

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January 2020

Overview

The recently enacted 2020 Mexico tax reform (‘the Reform’) significantly modifies the taxation of income earned through foreign fiscally transparent vehicles, legal structures that are common in the private equity space.  Investment funds often consolidate investments through a foreign fiscally transparent vehicle that does not have legal personality in its jurisdiction of formation (‘Foreign Transparent Vehicle’), which, in turn, invests in Mexican entities. The Reform affects the tax treatment of Mexican-source income received by the Foreign Transparent Vehicle, as well as the deductibility of the cross-border payments made by the Mexican entity.  In contrast to the Reform´s general effective date of January 1, 2020, the changes to Foreign Transparent Vehicles are effective January 1, 2021.

The takeaway

Mexican investments structured through a Foreign Transparent Vehicle no longer may benefit from fiscal transparency effective January 1, 2021. The statutory exception provided for private equity funds requires that controls be put in place to gather and file with the Mexican government information regarding the individual fund members.  Furthermore, the fund structure should be assessed before and after the change to fiscal transparency under the Article 28 non-deductibility rule to understand any impact to the effective tax rate of the Mexican entities. For new investments into Mexico, funds should consider structures that meet the new requirements for fiscal transparency and the deductibility of payments by the underlying Mexican entities.

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Doug McHoney

International Tax Services Leader, PwC US

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