There are several types of corporate forms in Mexico. The most common is the Sociedad Anónima (commonly referred to as an S.A.). There is also a Sociedad de Responsabilidad Limitada, also referred to as S. de R.L., which is analogous to a US limited liability company. Both structures limit the liability of their shareholders and members.

A more sophisticated form of S.A. is a Sociedad Anónima Promotora de Inversiones (S.A.P.I.). The S.A.P.I. has a more modern corporate governance framework than an S.A. and offers more flexibility to set up differentiated rights related to dividend distribution among categories of shareholders.

From a Mexican tax perspective, these entities are treated as a separate taxpayer, distinct from their members and shareholders, and generally have the same tax regime (30% corporate income tax on profits) and have identical income recognition, applicable deductions and foreign tax credit rules.

There are no Mexican legal entities that are treated as tax transparent. However, there are certain “agreements”, such as the Fideicomisos (which shares similarities with the common law trust), that may receive such treatment.

Fideicomisos provide a flexible and efficient way to hold a separate patrimony from the settlor and the beneficiaries and represent an efficient form of administration of assets. They are often used in real estate and investment transactions.

From a tax perspective, Fideicomisos that primarily generate passive income are fully transparent. However, those which carry out business activities (active income – ie, asset sales) must calculate the taxable profits and allocate them to the beneficiaries.

Specific examples of Fideicomisos are:

• Fideicomisos de Inversión en Bienes Raíces (FIBRAs), which are real estate investment vehicles that offer a tax-efficient way to invest in income-generating real estate; they distribute most of their income to shareholders and benefit from tax transparency; and
• Fondos de Inversión (investment funds), which are investment vehicles providing a pooling mechanism for investors, allowing them to create diversified portfolios; they are often used by private equity and hedge funds because of the flexibility and tax advantages derived from their tax transparency.

Mexican income tax law recognises tax transparency for foreign entities solely for the purposes of determining the taxable income generated by Mexican residents abroad through these entities.

Mexican law applies the “place of effective management” criterion to determine the Mexican tax residency of an entity. This involves considering factors such as the location where the individuals who make decisions, or execute decisions relating to the control, management, and operation of the entity are situated, as well as where the entity’s activities are carried out.

A foreign entity will be considered a Mexican taxpayer if its place of effective management is located in Mexico.

With respect to foreign transparent entities, their tax transparency is not recognised under Mexican law and they are therefore taxed in the same manner as any other legal entity, without taking into account that the tax consequences would ordinarily fall on their members or shareholders. This applies except for the exception described in 1.2 Transparent Entities.

Under most of the tax treaties entered into by Mexico, tax residence is likewise determined by reference to the place from which the company or entity is effectively managed. Tax transparency is generally not recognised in most of these treaties, although there are certain exceptions, such as the tax treaty with Germany. In relation to the Mexico–US tax treaty, a limited degree of transparency is recognised for LLCs, provided that their members are US tax residents.

In the case of a dual-resident company, most tax treaties entered into by Mexico require the competent authorities to resolve the issue through a mutual agreement procedure (MAP). By contrast, the Mexico–US tax treaty directly denies treaty benefits in such circumstances.

Incorporated businesses are subject to corporate income tax at a rate of 30%.

According to Article 4-B of the Income Tax Law, Mexican entities must treat the income generated abroad by tax-transparent entities or legal vehicles as taxable income (in certain cases, only the profits), in proportion to the Mexican resident’s participation, even if such entities or legal vehicles do not distribute the income. The applicable tax triggered in these circumstances may amount to 35%, plus an additional 10% upon dividend distribution.

If taxpayers have operations through these entities or legal vehicles (whether transparent or not) they will have to file a tax report with the Tax Administration Service. The income will be directly attributed to the Mexican taxpayer, and any tax paid abroad by these entities or vehicles will be considered as having been paid by the Mexican resident, but only in respect of the taxable income that was recognised.

The tax paid abroad will generate a tax credit for the Mexican resident in proportion to the income received by the entity or legal vehicle that was treated as taxable income by the taxpayer.

Taxable profits are calculated by considering all taxable income (on an accrual and worldwide basis) and reduced by authorised deductions (including the profit-sharing payment made in the last year).

Income includes any positive modification to a taxpayer’s patrimony and encompasses amounts received in the form of credit, goods, or services. Entities must also take into account inflationary gains. Dividends distributed by a Mexican entity are not treated as taxable income.

Normal deductions or business expenses are allowed (depreciation and amortisation of assets, cost of goods, interest payments, other expenses, etc). To qualify for these deductions, there are general requirements that must be fulfilled. These include ensuring that the expenses are properly documented, that they are strictly necessary for the business’s operation, and are supported by relevant invoices. Additionally, each type of deduction has specific requirements that must be met. For example, there are particular criteria for deductions related to bad debts, charitable contributions, and interest expenses.

Taxpayers are required to make advance income tax payments on the 17th of each month. These advance payments must be made on the basis of an estimated annual taxable income. Advance payments are not required during the first year of operation of a business.

Mexico does not have specific incentives such as a patent box or special tax treatment exclusively designed for technology investments. However, like many jurisdictions, Mexico has a general framework of tax incentives and deductions that may indirectly benefit technology‑related investments and research and development (R&D) activities.

Some of the general incentives that could be relevant to technology investments in Mexico include deductions for R&D expenses incurred by businesses. Eligible expenses may include costs related to technological innovation and development.

• Accelerated Depreciation: Businesses in Mexico may benefit from accelerated depreciation for certain assets, including technology‑related equipment and machinery.
• Maquila Programme: Although not specific to technology, Mexico’s Maquila programme allows companies to conduct manufacturing activities with certain tax advantages. This programme is frequently used by industries with significant technological components.
• Investment Promotion Programmes: Mexico has various investment promotion programmes that provide general incentives for companies making investments in the country. While not technology-specific, these programmes may indirectly benefit technology-related investments.
• Tax Credit Regularisation Incentive: Taxpayers with outstanding tax credits may benefit from a regularisation programme that allows for a reduction of up to 100% of surcharges, penalties, and enforcement costs, subject to certain conditions. Benefits include:
1. a reduction of up to 100% of surcharges (recargos) accumulated on unpaid taxes;
2. waiver of up to 100% of penalties (multas) imposed for non-compliance; and
3. elimination or reduction of enforcement costs (gastos de ejecución) incurred by Mexican tax authorities in collection efforts (certain taxpayers may be excluded, such as those under criminal tax investigation or those with debts arising from acts of tax fraud).
• Capital Repatriation: A preferential income tax rate of 15% is available on the repatriation of capital held abroad, subject to specific rules regarding deposit, investment, and permanence of the repatriated funds in Mexico. Repatriated funds must be deposited in a Mexican financial institution within a specified timeframe. Also, the funds must remain invested or deposited in Mexico for a minimum period (typically at least two years or as specified by the applicable decree). Funds may generally be used for: (i) investments in fixed assets, or debt repayment of the taxpayer; (ii) investments in securities or financial instruments issued by Mexican residents; or (iii) capital contributions to Mexican companies. Taxpayers must carefully document the source and destination of repatriated funds to comply with anti-money laundering regulations.

When authorised deductions, in addition to the participation of employees in profits (PTU) paid, exceed the accumulable income in a fiscal year, the difference is considered a fiscal loss for that year. This fiscal loss can be offset against the fiscal income of the following ten fiscal years until it is exhausted.

Additionally, if a company fails to offset the fiscal loss from previous years in a given fiscal period, when it had the opportunity to do so, it will forfeit the right to offset it in subsequent fiscal years, up to the amount that could have been utilised previously.

The right to offset tax losses exists provided that there is taxable profit and none of the circumstances restricting their use apply. Such restrictions may arise, for example, where there is a change of shareholders or partners holding more than 51% of the voting rights of the entity, or where losses may only be offset against profits derived from the same line of business in cases of mergers where the loss-making company acts as the merging entity. In addition, tax losses may not be transferred in the case of a merger if the loss-making company acts as the merged entity. In the context of a corporate split, however, the right to transfer losses may be granted exceptionally, depending on the specific form and proportion of the restructuring.

The tax authority may presume an improper transfer of the right to amortise tax losses when a taxpayer is involved in corporate restructuring or changes of shareholders, resulting in a significant decrease in its material capacity to operate.

This presumption is triggered if certain conditions are met, such as obtaining greater tax losses than the value of assets or a sudden increase in deductions from related-party transactions, among others. The taxpayer will be notified of this presumption and will have the opportunity to defend itself. If the taxpayer fails to rebut the allegations, a list of affected taxpayers will be published confirming the improper transfer of tax losses and the inadmissibility of their deduction. Taxpayers are granted a period in which to regularise their situation before the tax authority may exercise its verification powers and impose penalties.

Taxpayers under the general regime can benefit from deductions such as accrued interest during the tax year without adjustment. To qualify for the deductibility of interest payments, taxpayers must adhere to several conditions:

• The principal amount must be invested in the primary activity of the borrower (directly associated with their business).
• If the interest comes from abroad, the corresponding withholding tax must be applied.
• A digital tax receipt detailing payment amounts and the tax withheld from the lender must be issued.
• An informative return, known as the multiple informative declaration (DIM), must be submitted by 15 February of each tax year, disclosing loan-related information and the interest paid to the foreign tax resident.

The Income Tax Law imposes a limitation on interest deductibility, applying to the net interest amount (taxable accrued interest less deductible interest) exceeding 30% of adjusted taxable profit. This limitation only applies to taxpayers whose interest accrued from debt in the fiscal year exceeds MXP20 million.

This limitation does not apply to members of the financial system. Any non-deductible net interest will be able to be carried forward for up to ten years until the outstanding amount has been paid.

Under thin capitalisation rules, interest paid by a Mexican resident to a non-resident related party is non-deductible for income tax purposes to the extent the amount of debt exceeds three times the equity of the Mexican subsidiary (the thin capitalisation rules only apply in transactions between related parties).

Limited tax grouping rules exist and enable Mexican entities holding 80% directly or indirectly of equity to apply for an authorisation for the benefit of offsetting losses against profits of other entities of the group for a period of three years, considering the deferred income payable at the end of the period.

Capital gains from the sale of shares or other assets are generally considered part of the company’s taxable income. The basic rules for calculating capital gains on the sale of shares include deducting the cost of acquisition from the selling price. The resulting amount is then subject to the corporate income tax rate.

There are no specific exemptions or reliefs for capital gains from the sale of shares under Mexican law. Specific tax treaties might offer certain reliefs.

Besides income tax, there are several other taxes that may be payable by an incorporated business. Some of the notable ones include the following:

• Value Added Tax (VAT): This is a consumption tax that is levied on the sale of goods, the provision of services, use of goods, and the importation of goods into Mexico. The standard rate is 16%, but there are reduced rates and exemptions for certain goods and services.
• Special Tax on Production and Services (IEPS): This is an excise tax on the production and sale of specific goods and services. It applies to items such as gasoline, diesel, tobacco, alcoholic beverages, and certain energy products and services.
• Local Transfer Tax (ISAI): This tax is levied on the acquisition of real estate and is typically paid by the buyer.

Social Security Quotas

Employers are required to contribute to social security and other employee-related taxes, including contributions to retirement funds and housing funds.

Payroll Tax

The payroll tax is a local tax that is currently effective in the 32 states of Mexico and represents one of their principal sources of income. It is levied on all employers for the payment of payroll or salaries – ie, it is imposed on employers for the employment relationship they maintain, including the payment of salaries and other items corresponding to their obligations with their employees.

Environmental Taxes

Environmental taxes are imposed at the state level. These taxes aim to regulate and discourage greenhouse gas emissions by establishing financial obligations based on the volume of pollutants released into the atmosphere. Local governments often determine the taxable emissions threshold and applicable rates, aligning their regulations with broader environmental policies and international commitments. Compliance with these local tax obligations typically requires entities to register their emissions and fulfil reporting requirements to ensure proper enforcement.

Refer to the answer in 2.8 Other Taxes.

Closely held local businesses owned by individuals normally operate in a corporate form. In certain transactions, the use of a non-corporate form such as the Mexican trust or fideicomiso is common. The fideicomiso is particularly useful in cases involving foreign ownership restrictions, estate planning, asset protection, or structured financing arrangements. For example, in the real estate sector, foreign investors often acquire property in restricted zones through a fideicomiso to comply with Mexican legal requirements. Similarly, business owners may use a fideicomiso to manage assets, facilitate succession planning, or structure investment vehicles in a tax-efficient manner.

Additionally, closely held businesses may also consider hybrid structures, such as joint ventures or contractual arrangements, to achieve specific commercial or regulatory objectives. The choice of structure depends on factors like tax implications, liability concerns, governance preferences, and the nature of the business activities.

The corporate rate is 30% plus 10% for employee profit-sharing. Individual professionals will be taxed at a maximum 35% tax rate (in certain cases a 2.5% special regime applies for individuals, if their annual profits are lower than MXN3 million). Any dividend distribution will be subject to an extra 10%.

There are no specific rules that prevent closely held local corporations from accumulating earnings for investment purposes.

Capital gains are taxable by subtracting the tax basis adjusted by inflation from the purchase price and reducing it with certain adjustments that consider net retained earnings. There are certain variations on how to calculate the basis if the shares have been owned for less than 12 months.

Dividends are taxable for individuals at the applicable tax rate (maximum of 35%). The corporate tax rate paid (30%) at the level of the entity can be credited. An extra 10% has to be withheld by the entity paying the dividend.

A 10% on the net gain is applicable for the sale of shares in the Mexican Stock Exchange and other similar publicly traded markets.

Mexican entities that make payments to foreign entities or individuals are required to withhold and pay the tax before the tax authorities on behalf of the recipient.

Dividend Distribution for a Mexican Subsidiary

If the dividend is paid to foreign residents it will be subject to an additional 10% withholding rate.

Capital Gains

The eventual sale of the shares of a Mexican subsidiary will trigger a tax of 25% on the gross amount or 35% on the net profit if the non-resident has a representative in Mexico. A tax return related to the sale must be filed and a fiscal opinion obtained from a Mexican public accountant certifying that the reported profit has been calculated correctly.

Interest

If a foreign shareholder grants a loan to a Mexican subsidiary, interest is considered sourced in Mexico where the capital is placed or invested in Mexico or where the party paying the interest is a Mexican resident or a non-resident with a permanent establishment.

Interest paid to a non-resident is subject to withholding tax at rates ranging from 4.9% to 35%:

• 4.9% on interest paid to foreign banks registered as banks in Mexico and resident in tax treaty countries, and on interest paid to non-resident financial institutions in which the federal government owns a percentage of the paid-up capital, provided certain conditions are satisfied and they are the beneficial owners of the interest (the 4.9% rate also applies to interest paid in respect of publicly traded securities in Mexico and securities publicly traded abroad through banks and stockbroking firms in a country that has concluded a tax treaty with Mexico; however, if these conditions are not satisfied, the rate is 10%);
• 15% on interest paid to reinsurance companies and interest on finance leases;
• 21% on interest that is not subject to the 4.9% or 10% rates and interest paid to non-resident suppliers financing the acquisition of machinery and equipment that is included in the fixed assets of the acquirer;
• 40% on interest paid to a related party located in preferential tax regimes; and
• 35% in all other cases.

Royalties

Payments made for technical assistance, know-how, use of models, plans, formulae and similar technology transfer, including use of commercial, industrial or scientific information or equipment are considered royalties.

Royalties paid to non-Mexican residents are deemed Mexican-sourced when the payer is a Mexican resident for tax purposes. A 25% income tax withholding rate on the gross amount of the transaction would be applicable, unless the rate is reduced under an applicable tax treaty.

Payments carried out by a Mexican subsidiary to foreign shareholders for the right to use a brand or technology would be considered royalties for income tax purposes, and, generally, the former would have to withhold the corresponding income tax.

Since 2022, the definition of royalties has been expanded to include rights relating to an individual’s image. For these purposes, the right to an image is understood as the use or the granting of the right to use a copyright in a literary, artistic, or scientific work associated with that image. Accordingly, the tax treatment applicable to royalties also applies to taxable income derived from the exploitation of the copyright inherent in the image itself.

Know-How

“Know-how” refers to the transfer of confidential information regarding industrial, commercial or scientific experience. The payments derived from this transfer would be considered royalties, subject to a 25% income tax rate. However, a preferential income tax rate provided under the relevant tax treaty could be applied.

Technical Assistance

“Technical assistance” is defined as the rendering of independent personal services whereby the provider undertakes to provide non-patentable knowledge, which does not involve the transmission of confidential information relating to industrial, commercial or scientific experience, and undertakes to participate with the recipient in the application of this knowledge.

Payments for technical assistance are subject to a withholding tax at a rate of 25%.

In general, the different tax treaties entered into by Mexico do not specifically address the tax treatment of technical assistance (except in the case of Belgium and Holland), so in general terms it should fall under the concept of business benefits (Article 7 of the treaties), independent personal services (Article 14 of the treaties) or other income (generally Article 21 of the treaties). If it is included in Articles 7 or 14, the payments derived from it can only be subject to taxation in the state of residence and not in the state of the source.

Recent rulings by the Tax Court have, however, denied access to treaty benefits in certain cases on the basis that technical assistance should not be regarded as a commercial activity for the purposes of the Tax Code, but rather as a service of a civil nature. This reasoning is based on the fact that the Commercial Code does not expressly list technical assistance among commercial acts, even though the list of commercial acts contained in the Commercial Code is not exhaustive.

Mexico has entered into several tax treaties with other countries to avoid double taxation and promote cross-border investments. The choice of tax treaty countries for foreign investors depends on various factors, including the investor’s home country, the nature of the investment, and the specific provisions of each treaty. Some countries with which Mexico has tax treaties commonly used by foreign investors include the United States of America, Canada, Spain, the United Kingdom, Germany and the Netherlands.

The use of entities in treaty countries by non-treaty country residents, often known as “treaty shopping”, can sometimes be subject to scrutiny by Mexican tax authorities.

Mexican law contains certain general anti-avoidance rules that allow tax authorities to challenge transactions or arrangements that have the primary purpose of obtaining a tax benefit in violation of the principles of the tax laws.

Mexican authorities may scrutinise the substance and purpose of the arrangements to determine whether they comply with the intended purpose of tax treaties. If they find that the primary motive of the structure is tax avoidance rather than a genuine business purpose, they may challenge the arrangement and deny the treaty benefits.

For inbound investors operating through a local corporation in Mexico, several significant transfer pricing issues may arise. It is crucial for investors to be aware of these issues to ensure compliance with Mexican transfer pricing regulations. Some of the key transfer pricing issues are outlined below.

Documentation Requirements

Mexico has stringent documentation requirements for transfer pricing. Inbound investors need to maintain comprehensive documentation to support the pricing of transactions with related parties. This includes documentation on the selection of the transfer pricing method, comparability analysis, and financial information.

Comparability Analysis

Performing a robust comparability analysis is crucial to determining the appropriate transfer pricing method. The challenge lies in finding reliable and comparable data for benchmarking purposes. Differences in industry practices and economic conditions between Mexico and other countries can complicate the analysis.

Use of Profit Level Indicators (PLIs)

Determining the appropriate profit level indicator (PLI) for benchmarking can be complex.

In Mexico, the choice of PLI depends on the nature of the transaction, and identifying the most suitable indicator can be challenging for certain industries.

Intangibles and Royalties

Transfers of intangible assets and the calculation of royalties present specific transfer pricing challenges. Establishing the arm’s length pricing for the use of intangibles requires careful analysis, and ensuring alignment with the OECD Guidelines is crucial.

Management and Service Fees

Determining the appropriate pricing for management and service fees charged by a foreign parent to its Mexican subsidiary is a common challenge. It requires demonstrating that the services provided add value and are consistent with arm’s length principles.

Profit Attribution to Permanent Establishments (PEs)

For multinational corporations with a presence in Mexico, attributing profits to a permanent establishment can be complex. It involves evaluating the functions performed, risks assumed, and assets employed by the PE within the overall business structure.

Advance Pricing Agreements (APAs)

Inbound investors may consider seeking APAs with the Mexican tax authorities to provide certainty on transfer pricing matters. However, the APA process can be time-consuming, and negotiating terms that satisfy both parties can be challenging.

APAs offer a viable mechanism for taxpayers and authorities. They allow taxpayers to request a transfer pricing ruling regarding the sale of intangible assets and related transactions, such as royalty payments for licences. These agreements can be unilateral, involving only the Mexican tax authority, or bilateral, negotiated between the authorities of Mexico and the related entity’s jurisdiction.

While APAs provide technical support and tax certainty, unilateral APAs often face scrutiny and potential challenges from authorities regarding valuation variables and royalty payments. Bilateral APAs offer greater balance but can take two to three years to resolve. Recent amendments to the Mexican Federal Tax Code have introduced a suspension of audit timelines during the APA process, allowing authorities to initiate audits post-APA if deemed necessary.

Country-by-Country Reporting (CbCR)

In line with international standards, Mexico requires the filing of country-by-country reports for multinational groups exceeding certain revenue thresholds. Ensuring alignment with global reporting requirements and addressing potential discrepancies is essential.

Limited risk distribution arrangements are valid agreements in which supply chains have been structured and restructured. This type of transaction is normally reviewed and scrutinised by the tax authorities.

Mexico follows OECD standards with minimum variations.

Transfer pricing audits in Mexico have become significantly more aggressive and thorough in recent years. It is now common for the Tax Administration Service to initiate transfer pricing audits and, where new information becomes available, to reopen audits relating to earlier fiscal years. Although Mexico has a robust legal framework governing MAPs, in practice it can be difficult to obtain the tax authorities’ agreement to initiate such procedures.

Compensation adjustments are valid in Mexico following certain rules and steps. Proper documentation is also a must in these cases.

In Mexico, there are no substantial differences between the taxation regimes applicable to local branches and those applicable to local subsidiaries of non-local corporations.

Capital gains derived from the sale of shares in a Mexican corporation by a non-resident are generally subject to tax at a rate of 25% on the gross proceeds (ie, the purchase price). Alternatively, taxpayers may elect to be taxed at a rate of 35% on the net gain, provided that certain requirements are satisfied, such as appointing a local legal representative and obtaining an auditor’s opinion confirming the calculation of the net taxable amount.

Indirect transfers may also be subject to taxation where the accounting value of the foreign entity being sold is composed of more than 50% immovable property located in Mexico.

Certain tax treaties may eliminate taxation on direct or indirect capital gains, depending on the level of ownership (normally more than 50%) and the length of time of ownership (normally more than 12 months).

When there is a change of control in a foreign holding company that owns a subsidiary in Mexico, taxation in Mexico can apply to the sale of shares. This tax is applicable if more than 50% of the foreign holding’s accounting value is represented by immovable property located in Mexico. However, certain tax treaties may provide relief in these scenarios.

There are no specific rules governing how to determine the taxable income of foreign-owned local affiliates. Transfer pricing provisions will apply. There are certain rules applicable to Mexican entities with an IMMEX authorisation (manufacturers) where the annual profit must be determined based on a percentage of the cost or assets used in the manufacturing process.

Deductions for payments by local affiliates for management and administrative expenses incurred by a non-local affiliate are allowed as long as transfer pricing rules are complied with. A withholding tax is applied in these cases. These payments are normally considered business profits under a tax treaty.

The expense must be considered strictly indispensable for business operations and sufficiently documented to prove that the service was rendered.

Specific rules govern the allocation of expenses incurred by the non-local affiliate. These rules dictate how the expenses are distributed between the foreign entity and its Mexican subsidiary.

Related-party borrowing will be subject to transfer pricing rules and to the income deduction limitations stated in 2.5 Deduction of Interest. Payments made to a related party or derived from a structured agreement will not be deductible items if the income for the counterparty is subject to a preferential tax regime (REFIPRE) or if the party that directly or indirectly receives the payment uses such payment to make other deductible payments to other members of the same group or under a structured agreement subject to a REFIPRE.

The foreign income of local corporations is not exempt from corporate tax. A tax credit is available if certain requirements are satisfied. Monthly advance tax payments do not take foreign income into account, as such income is only included in the annual tax return.

Foreign income from local corporations is not exempt. Local expenses shall follow the general rules for its deduction (strict indispensability, proper registration, materiality, etc) and the specific rules applicable to interest, royalties, etc.

Foreign dividends received by Mexican entities are treated as ordinary income and subject to the 30% tax rate. Income tax paid by the non-local subsidiary can be credited (some limitations apply). There is a second-tier indirect tax credit.

The use of intangibles developed by local corporations by non-local subsidiaries is subject to transfer pricing regulations and the arm’s length principle in Mexico. Thus, consideration for the use or the transfer will be required.

The tax authorities have issued non-binding criteria addressing the transfer of intangible assets abroad. According to this criterion, the deduction of royalties for licensing intangible assets that were transferred out of Mexico at a price below their arm’s length value is considered an improper tax practice.

This might qualify as a business restructuring subject to further scrutiny under recent OECD Transfer Pricing Guidelines. Tax authorities, exercising their audit powers, scrutinise intercompany transactions, with a particular focus on intangible assets. The significance of functional and comparability analyses is emphasised in addressing such transactions.

Additionally, since 2020, the Mexican tax code has included a business purpose test. This empowers tax authorities to disregard artificial transactions lacking a business purpose when taxpayers derive a tax benefit greater than the reasonably expected economic benefit. Therefore, transactions involving the use of intangibles between local corporations and non-local subsidiaries should comply with transfer pricing regulations, ensuring that the pricing aligns with the arm’s length principle and serves a legitimate business purpose to avoid potential challenges from tax authorities.

A local entity will be taxed on the income (in some cases only the profits) generated abroad by a controlled non-local subsidiary, according to the participation of the Mexican resident, even if the entities do not distribute this income. The tax triggered will be 35% + 10% for the distribution of dividends.

These CFC rules are applicable if there is control and if the revenue obtained is not subject to tax or subject to a tax rate of less than 22.5% in the foreign country. Active business income will not be considered subject to these rules.

If taxpayers have operations through these entities, they will have to file a tax report with the Tax Administration Service.

The income will be attributed directly to the Mexican taxpayer and the tax paid abroad by these entities will be considered paid by the Mexican resident only for the taxable income taken into account.

The tax paid will generate a tax credit for the Mexican resident in the proportion that the income received by the entity or legal vehicle was considered taxable income by the taxpayer.

The exception of being considered a CFC when the taxpayer does not have “effective control” over the foreign entity still applies. Nevertheless, the rules to determine if there is “effective control” are substantially modified. Under these new rules there is “effective control” over the foreign entity if the taxpayer holds more than 50% of the shares or rights, which allows the taxpayer to obtain the profits or the assets in the case of a capital reduction or liquidation.

To determine if the participation exceeds the 50% threshold, and therefore if “effective control” over the foreign entity exists, all rights owned by any related party or linked individuals will be taken into account.

General anti-avoidance rules (GAAR) apply to transactions that lack a genuine business purpose and are primarily aimed at achieving a tax benefit. Under the GAAR, if certain transactions with non-local affiliates are deemed to lack a substantive business purpose, they may be subject to a recalculation of their tax effects.

Local corporations are taxed on the gain on the sale of shares in non-local affiliates. The taxable income is determined by subtracting the average cost per share from the sale price per share. The average cost per share for shares issued by foreign resident entities is calculated based on the adjusted original amount of the shares, which includes the verified acquisition cost reduced by any reimbursements paid, with adjustments for inflation.

Reimbursements paid include amortisation and capital reductions. However, taxpayers should only consider amortisation, reimbursements or capital reductions applicable to shares that have not been cancelled due to these operations.

Tax authorities, in the exercise of their audit authority, are entitled to recharacterise any transaction that does not have a legitimate business purpose and results in a tax benefit for the taxpayer. In these cases, the authorities can attribute the tax effects that would have been expected had they been carried out to achieve a reasonable economic benefit to these transactions.

For the application of the anti-avoidance rule, a “favourable opinion” of a committee (officials of the Ministry of Finance and Public Credit and the Tax Administration Service) must be issued. If the opinion is not issued within a two-month period, it will be considered a negative resolution.

It is legally assumed, unless the taxpayer proves otherwise, that a transaction does not have a legitimate business purpose when:

• the measurable economic benefit is a smaller amount than the tax benefit obtained; or
• the reasonably expected economic benefit could have been achieved with fewer transactions, resulting in a higher tax effect (referred to as the fragmentation of operations).

Any reduction, elimination or temporary deferral is considered a tax benefit.

Tax authorities in Mexico are investing heavily in technological solutions to improve their ability to automatically access taxpayers’ information and gain a better understanding of their transactions.

Among the technological measures that have allowed for greater oversight of taxpayers are: (i) the obligation of taxpayers to maintain electronic accounting, which is uploaded monthly to the tax authority’s portal; (ii) the use of the Taxpayer Mailbox for efficient communication; and (iii) the mandatory issuance of electronic invoices (CFDI).

Utilising this advanced data analysis, tax authorities can efficiently detect inconsistencies within the electronic systems, prompting the issuance of “invitations” for further clarification. These “invitations” are not formal audits but serve as initial inquiries to address potential irregularities.

The Tax Administration Service has also identified specific sectors which are routinely audited (such as large taxpayers, retail, automotive, export-import activities, real estate, pharma and oil and gas).

Additionally, for the 2026 fiscal year, a new “express” procedure was introduced to streamline processes related to the materiality of transactions covered by invoices with tax implications. These procedures must be completed within a maximum of 24 days. This accelerated procedure represents a significant development in Mexico’s efforts to combat simulated transactions and improper deductions.

The express materiality procedure, introduced through the 2026 amendments to the Federal Tax Code, establishes a fast-track mechanism allowing the Tax Administration Service to challenge the economic substance of invoiced transactions where indicators of simulation are detected. The procedure may be triggered when a taxpayer appears on the EFOS list, when inconsistencies arise from third-party information or database cross-checks, or when a supplier has been definitively listed as issuing simulated invoices. Upon notification, the taxpayer has ten business days to submit supporting evidence, and the SAT must issue a resolution within fourteen business days thereafter.

If the taxpayer fails to rebut the presumption, the Tax Administration Service may definitively determine that the transactions lack materiality, resulting in the disallowance of income tax deductions, denial of related VAT credits, potential inclusion in the EFOS list, and possible criminal exposure in serious cases. Given the compressed timeline, taxpayers should maintain robust documentation evidencing the actual provision of goods or services, traceable payments, contractual support, and a clear business rationale to mitigate exposure under this accelerated review framework.

As a member of the OECD, Mexico has been actively involved in the design and development of BEPS and has been implementing many of the following recommended actions since 2014:

• taxation of the digital economy (Action 1);
• anti-hybrid rules (Action 2);
• limiting base erosion involving interest deductions and other financial payments (Action 4);
• preventing the artificial avoidance of permanent establishment status (Action 7);
• a form of mandatory disclosure requirement for taxpayers (Form 76) (Action 12);
• an obligation for taxpayers to present a country-by-country report, master file and local file (Action 13); and
• new OECD transfer pricing guidelines (Actions 8–10).

The Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (MLI) entered into force in Mexico on 1 January 2024. As of 2026, Mexico has notified its covered tax agreements under the MLI, and the convention’s provisions are now applicable to modify bilateral tax treaties without requiring separate renegotiations. As a result, the MLI introduced significant changes to Mexico’s tax treaty network, primarily aimed at preventing treaty abuse and aggressive tax planning. The PPT now serves as a general anti-abuse rule, denying treaty benefits if one of the principal purposes of an arrangement or transaction is to obtain a tax advantage that contradicts the intention of the treaty. Additionally, the simplified LOB provision imposes specific eligibility criteria for claiming treaty benefits, further restricting access to reduced withholding tax rates and other treaty protections. These modifications increase scrutiny on cross-border transactions, requiring multinational entities operating in Mexico to reassess their tax structures and ensure compliance with the new anti-abuse standards set out by the MLI.

Mexico has shown a strong commitment to addressing base erosion and profit shifting (BEPS) issues. The government aims to prevent multinational companies from shifting profits to low-tax jurisdictions and to ensure that they pay their fair share of taxes in Mexico.

With respect to Pillar One, Mexico has participated in the Inclusive Framework discussions and endorsed the agreement in principle. However, Pillar One faces a de facto global standstill following the United States’ withdrawal from the multilateral agreement in January 2025. Since the Multilateral Convention (MLC) underpinning Pillar One requires a critical mass of participating jurisdictions, including the United States, to enter into force, implementation of Pillar One is not currently viable at a multilateral level. As a result, Mexico, like most jurisdictions, is not in a position to give domestic effect to Pillar One in the near term, and no legislative steps have been taken in this regard.

With respect to Pillar Two, Mexico has endorsed the GloBE Model Rules and expressed its intention to implement the global minimum tax of 15%. However, as of early 2026, Mexico has not yet enacted the necessary domestic legislation to give effect to these rules. Implementation would require amendments to the Federal Tax Code and the Income Tax Law, and while such reforms have been anticipated, they have not yet been approved.

The impact of implementing Pillar Two would be significant, particularly for multinational enterprises operating in Mexico. It is estimated that approximately 100 organisations in Mexico would fall within the scope of Pillar Two. Implementation could result in increased tax revenues for the Mexican government, greater tax transparency, and a more level playing field for domestic companies. However, it would also bring additional compliance burdens for multinationals and may prompt changes in their tax planning strategies. Mexico’s existing tax treaty network, which often includes provisions to prevent double taxation or the application of reduced rates to certain types of income, would also need to be considered in the context of any future implementation.

International tax has garnered increasing attention in Mexico, especially with the implementation of BEPS recommendations. The actions taken by Mexico, such as amending various articles of the Tax Code and Income Tax Law to address issues like VAT for non-resident taxpayers, hybrid mechanisms, base erosion through financing operations, and aggressive tax planning, demonstrate a commitment to aligning with international standards. Additionally, the adoption of the Multilateral Instrument in 2022 further underscores Mexico’s commitment to enhancing tax transparency and preventing treaty abuse, which aligns with the broader goals of the BEPS initiative. Overall, the high public profile of international tax in Mexico is likely to drive continued efforts to implement BEPS recommendations effectively.

Balancing competitive tax policy objectives with the pressures of base erosion and profit shifting (BEPS) is a major challenge for any jurisdiction, including Mexico. As expressed throughout the responses here, Mexico, as a member of the OECD, is a major driver of BEPS action. The main challenge for Mexico is to remain competitive in the global market to attract investment and promote economic growth, which must go hand in hand with the implementation of BEPS measures, as such measures ensure tax equity/equality, protect the tax base and prevent tax evasion by multinational companies, which obviously has a positive impact on tax collection in Mexico.

The IMMEX or maquila regime can be considered a key feature of the Mexican competitive tax system that might be more vulnerable than other areas of the Mexican Tax regime.

Several amendments were introduced through the Mexican tax reform of 2020 in line with the objectives of the BEPS Action Plan, particularly Action 2. These amendments introduced new anti-hybrid rules aimed at situations involving entities or legal arrangements that are treated as fiscally transparent under foreign tax regulations.

Mexico applies a worldwide taxation system rather than a territorial one. Limitations on the deductibility of interest may discourage investment by increasing financing costs and potentially affecting the availability and structure of loans.

Mexico applies a worldwide taxation system and has been applying CFC rules for more than 25 years.

The limitations on benefits and anti-avoidance rules outlined by the authorities, particularly regarding presumptions of transactions lacking a business rationale and generating direct or indirect tax benefits, are likely to impact both inbound and outbound investors by adding an extra layer of compliance – ie, the need to have documents/information to prove that the economic benefit of a transaction exceeds its possible tax benefit.

In Mexico, the transfer pricing changes recommended by BEPS have been adopted, including those proposed under Action 13 (ie, the local file, master file, and country-by-country report). These changes were challenged by taxpayers, but the Mexican Supreme Court ruled in favour of the Tax Authorities.

While provisions for transparency and country-by-country reporting are valuable in principle, the resulting regulations should be streamlined to ensure they are non-invasive and do not represent a burden to taxpayers.

Since 2020, the Income Tax Law has incorporated a regime applicable to individuals with business activities carried out through digital platforms, imposing withholding obligations on intermediaries, including non-residents, who must register before the Federal Taxpayer Registry (RFC) as withholding agents and issue the corresponding CFDI. That same year, a 16% VAT was introduced on digital services provided by non-residents, covering the downloading or accessing of digital content, online clubs and dating pages, digital intermediation services, and distance learning.

The regime has since been significantly expanded. Starting 1 January 2026, Mexico extended VAT and income tax withholding rules on digital platforms to include business-to-business (B2B) transactions, an obligation that previously applied only to individual sellers. Platforms must now withhold 50% of VAT and 2.5% of income tax from Mexican business sellers that provide a valid RFC; if no RFC is provided, withholding rises to 100% of VAT and 20% of income tax. The income tax withholding rate for individual sellers also increased from 1% to 2.5%. Additionally, platforms are now required to withhold 100% of VAT on sales by foreign sellers and on transactions where proceeds are paid to foreign bank accounts.

As explained in 9.12 Digital Economy Businesses,Mexico has imposed VAT rules related to digital taxation and an incipient regulation for certain activities performed using digital platforms. There are currently no proposals to implement new reforms.

As explained in 6.4 Taxation of Intangibles Developed by Local Corporations, the use of intangibles developed by local corporations by non-local subsidiaries is subject to transfer pricing regulations and the arm’s length principle in Mexico.