Mexico – Bahamas or…
How to mix Tequila & Rum
Abel Mejía Cosenza
Mexico- Bahamas:the potential for a new
relationship
In the beginning of times… Tequila and Rum did not get along very well:
Bahamas generally considered a tax haven.
Bahamas (and the Caribbean in general) had a misunderstood reputation
in Mexico.
Competing jurisdiction for private equity.
Little or no exchange of information.
Any offshore investment was frowned upon by Mexican society and
government.
Mexico- Bahamas:the potential for a new
relationship
However times have changed… we have learned that Tequila and Rum can
and should mix!
Bahamas no longer a tax haven for Mexican tax purposes.
Bahamas and Mexico have signed an information exchange treaty.
Mexico recognizes the use of offshore financial centers for private equity
and fund investment both inbound and outbound.
Mexico now counts with many information exchange mechanisms (FATCA
Agreements, OECD Multilateral Agreements, 50+ double taxation treaties
and 40+ information exchange agreements).
The Caipirinha factor: We like Brasil doing progress… but we don´t want
to fall too far behind!
Mexico- Bahamas:the potential for a new
relationship
Major cultural and legal changes in Mexico:
Mexico recognizes tax transparency in certain scenarios.
Mexico recognizes and allows legitimate income tax deferral in certain
scenarios.
There is a growing culture of private wealth planning and family wealth
management and succession planning.
There is a higher mobility of high-net worth individuals and families that
require more flexible vehicles and instruments.
There is a higher perception for tax compliance, largely derived from the
more efficient tools now available to the Mexican tax authorities.
Mexico- Bahamas:the potential for a new
relationship
Potential areas of opportunities:
Mexico recognizes tax transparency in certain scenarios.
Mexico recognizes and allows legitimate income tax deferral in certain
scenarios.
There is a growing culture of private wealth planning and family wealth
management and succession planning.
There is a higher mobility of high-net worth individuals and families that
require more flexible vehicles and instruments.
There is a higher perception for tax compliance, largely derived from the
more efficient tools now available to the Mexican tax authorities.
Mexico- Bahamas:the potential for a new
relationship
Specific areas of opportunities for Mexico and Bahamas:
Private Wealth Investment, Management and Conservation structures:
-
Bahamas
Bahamas
Bahamas
Bahamas
Trusts.
Private Trust Companies.
Foundations.
life insurance.
Primary Objectives:
- Confidentiality and efficient taxation.
- Legitimate tax deferral: Lack of effective control by beneficiaries to
determine timing of distributions.
- Flexibility of investment choices and management.
- Simple and comprehensive succession planning.
- Compliance with Mexican (and many times U.S. tax laws).
Mexico- Bahamas:the potential for a new
relationship
Specific areas of opportunities for Mexico and Bahamas:
Private Equity Investment:
- ICON fund.
- SMART fund.
Primary Objectives:
- Transparency for tax purposes.
- Avoidance of second level of tax (new Mexican dividends tax).
- Reasonable costs for setup and maintenance.
- Clear identification of initial capital and of future income (including by
timing and type).
- Clear corporate governance rules and solid judicial system for
controversies.
- Confidentiality.
Mexico- Bahamas:the potential for a new
relationship
Specific areas of opportunities for Mexico and Bahamas:
Energy Driven New Opportunities:
- Captive Insurance.
- Intellectual Property Regimes.
- Private Equity.
Primary Objectives:
- Tax efficiency in Mexican source income.
- Platform for big energy players to participate in Mexico.
- Vehicles that allow joint Mexico/foreign investment.
- Holding and treasury structures for use of resources and assets in Mexico
and Latam.
Tax information exchange, structuring for a new normal for Mexican individuals
Traditional deferral structures used by Mexicans
Split trust / PIC
Canadian Partnership
Benefi
ciaries
Settlor
$
Individual
$
Revocable
Trust/
preferred
equity
$
Irrevocable
Trust/
ordinary
equity
stock
stock
PIC
(Singapore, Scottish
Partnership, etc.
Canadian
Partnership
(U.S. Check the Box)
dividend
Mexican Stock
Exchange
Mexican Issuers or SIC
Others
Tax information exchange, structuring for a new normal for Mexican individuals
Traditional deferral structures used by Mexicans
Unit Trust / Forward
Mutual Fund / Umbrella Fund
Individual
Individual
Forward
Mutual Fund /
Umbrella Fund
(U.S. Check the Box)
Segregated cel
Segregated cel
Segregated cel
Segregated cel
Unit Trust
Tax information exchange, structuring for a new normal for Mexican individuals
Traditional deferral structures used by Mexicans
Insurance Wrapper
Policy
Individual
Beneficiaries
multiple lives
assured
Insurance Company
Segregated cel
Segregated cel
Segregated cel
Segregated cel
Tax information exchange, structuring for a new normal for Mexican individuals
Traditional deferral structures used by Mexicans
Tailored Structure: personalized to address client’s needs
Beneficiaries
Settlor
$ & assets
Mexican
Fideicomiso
Deferral
structure?
Mexican Stock
Exchange
Mexican Issuers or SIC
Others
Mexican Entity
(U.S. Check the Box
eligible, if required )
Tax information exchange, structuring for a new normal for Mexican individuals
SDE Decision making matrix©
Key concern
/Product
Insurance
wrapper / w or
w/o trust
Canadian or
other
Partnership
Split Trust / PIC
Trust / PIC / PTC
Unit Trust w/
Forward
Mutual Funds /
Umbrella Fund
Tailored
structure
Financial Adv.
Client
Financial Adv.
Financial Adv.
Financial Adv.
Client
@35%
@35%
Mexican
fund 10% if
BMV
Estate security
(inheritance plan)
Confidentiality
Estate Tax
Protection
Simplicity /
investment agility
10% capital gain
MXSE (aka BMV)
Deduction of
expenses
Control
Tax deferral
35%
10% BMV
& SIC
or 30% CFC
Dividend
35%
+ 10% dividend
10% BMV
& SIC
30% CFC
35% other
GENERAL FACTS ON
MEXICO
Mexico Macroeconomics
-Population 113 million
- GDP 1,274 USD billions
-Banked Population 30% (Low)
-Economically Active population 42% (Moderate)
-Main banks Bancomer, Banamex, Santander, Banorte, HSBC.
- Mexico’s banking sector is mainly dominated by foreign banks.
Mexico Macroeconomics
There are approximately $145,000 millionaires in Mexico.
-Their consolidated fortune is around $736 billion USD.
-This equals around 50% of the Mexico´s total wealth.
-There are 2,540 multimillionaires with assets over $30 million USD.
- There are 16 billionaires.
-Manufacturing is the most important industry for multi-millionaires in
Mexico, with 17.4% of them having this as their primary source for wealth.
70% of Mexican exports are driven by manufacturing followed by fuel and
mining (15%). The US is Mexico's main export partner.
MEXICAN LEGAL
FRAMEWORK
Mexican Legal Framework
- Federal Constitutional System.
-Three levels of government: Federal, State and Local.
-Three branches of government : Executive, Legislative and Judicial.
- Three levels of laws: Federal, State and Local.
-Commercial entities regulated at federal level for the most part.
-There is a robust and sophisticated legal framework.
- Fairly modern tax, financial and regulatory laws and government
bodies.
- Part of major trade and tax treaties.
- High integration in worldwide economy.
- Major trading partners: U.S., Canada and China.
Mexican Legal Framework
- Hierarchy of Laws.
-
Federal Constitution and International Treaties.
Federal laws.
State laws.
Local laws.
- Primary taxes:
-
Federal income tax.
Federal dividends tax.
Federal value added tax.
Federal special products and services tax.
Federal social security dues.
Import duties.
State payroll tax.
Overview of Mexico, a global contender
Mexico’s recent reform packages
Since 2013, a series of key reforms were approved in order to promote
Foreign Investment and provide economic stability.
The major reforms were the following:
Financial reform
Labor reform
Education reform
Energy reform
Tax Reform
Telecommunications reform
Overview of Mexico, a global contender
A quick view to the Energy reform
This reform constitutes the opening up of the energy sector to private
capital and private companies, including in the oil and natural gas fields.
Mexico’s oil was nationalized on 1938, crating the national oil company
PEMEX.
The oil production in Mexico has been behind world standards due to the
lack of development of new sources of oil, including shale.
The introduction of foreign capital and enterprise should improve the
underperforming sector that could greatly raises Mexico’s production of oil
and natural gas.
Overview of Mexico, a global contender
A quick view to the Tax reform
BEPS-type legislation for related parties.
New dividends tax.
Amendments to the Maquila Regime.
Additional formal requirements for the application of Tax Treaty Benefits.
Elimination of Diverse Tax Incentives
Overview of Mexico, a global contender
A quick view to the Labor reform
The Labor reform permits employers to enter into limited duration
contracts with employees for seasonal work and for initial training
agreement.
The amended Federal Labor Law regulates the outsourcing of jobs. The
major outsourcing regulation indicates that outsourced employees must
only perform work of a specialized character and not a general kind of
labor.
The recent reform permits employers to terminate employment at any
time for "just cause”, prior notice of termination.
The reform outlaws discrimination based on ethnicity, national origin,
age, disability, socioeconomic status, health, religion, immigration status,
political opinion, sexual orientation, or marital status
Overview of Mexico, a global contender
Critical factors influencing a decision to invest in Mexico
Political risk.
Currency risk.
Foreign regulation and tax policy.
Clear regulatory framework.
Local experts and lobbying.
Infrastructure (Transportation, technology, resources, etc).
Overview of Mexico, a global contender
Critical factors influencing a decision to invest in Mexico
Permits and authorizations.
Performing due diligence.
Corporate regime and corporate culture.
Integration.
Retaining qualified management.
Overview of Mexico, a global contender
Energy Reform
The Hydrocarbons Reform
 . Underground hydrocarbons located in national territory continue to be national property, and the
granting of concessions on them is still prohibited. (Art. 28 designates the exploration and
extraction of petroleum and other hydrocarbons as strategic areas).
 . However, the Federal Government will have the ability to engage in hydrocarbon exploration and
extraction activities through assignments to “for-profit State companies” (for-profit within market
terms enterprises owned by the state) or through agreements with those enterprises or with
private parties. The model agreements will include:
Services agreements.
Shared profit agreements.
Shared production agreements.
Licenses.
 . For the above purposes, Petróleos Mexicanos (Pemex) will be transformed into a for-profit State
company within two years, with the capability to enter into agreements with private parties to
explore and exploit. In any case, Pemex will have preference to carry out certain projects known
as “Round Zero.”
Overview of Mexico, a global contender
Energy Reform

The Energy Secretariat (SENER) will be in charge of establishing, conducting, and coordinating
energy policy, the adjudication of assignments and the selection of the areas subject to contract,
the design of the contracts, and the technical guidelines of the bidding processes, as well as the
granting of permits for the treatment and refining of oil and the processing of natural gas.

The National Hydrocarbons Commission (CNH) will be in charge of activities including the
carrying out of the bidding processes, the appointment of winners and the entering into the
exploration and extraction contracts, the technical administration of assignations and contracts,
and the supervision of the extraction plans to maximize productivity.

The Energy Regulation Commission (CRE) will be in charge of granting permits for the storage,
transportation, and distribution through oil, gas, and petrochemical pipelines; of regulating
access to the ducts by third parties; and of regulating the first hand sale of such products.

The Union of Oil Workers of the Mexican Republic will not have any seats in the Board of Pemex
anymore, and the Board will now be formed by five members of the Federal Administration and
five independent members.
Overview of Mexico, a global contender
Energy Reform
Electricity Reform:
1. The Federal Electricity Commission (CFE) will be transformed into a for-profit State
company.
2. The National Electricity System, the transmission and distribution networks, will continue
to be controlled by the State through a National Center for the Control of Energy (CENACE),
which will be a decentralized public body (Art. 28 designates the areas of plannig and control
of the national electrical system, as well as the public service of electricity transmission and
distribution, as strategic areas). The government will have 12 months from the effectiveness
of the secondary legislation to decentralize the CENACE.
3. Private parties will be able to generate and commercialize electricity, and to enter into
agreements for the transmission and distribution with CENACE.
4. The CRE will be in charge of the regulation and granting of the permits for the generation
of electricity and the establishment of the tariffs for the transmission and distribution of
electricity.
Overview of Mexico, a global contender
Energy Reform
Business Opportunities for Foreign Investors:
1.
During a first phase, the Electric Energy Sector because it is now open and more developed.
2.
Obviously, the Exploration and Production of Petroleum, although this will be in later years.
3.
Providers of Services Ancillary to the industry (including food, uniforms, platforms, legal,
accounting, financial, machinery and equipment, etc.)
4.
Mergers and Acquistions: Many of the players will enter Mexico through the acquistion of, or
association with, Mexican companies.
5.
Financial Sector: All transactions will require financing. Financing will have to come from Mexico
and abroad.
ESSENTIAL LABOR
ISSUES WHEN
DOING BUSINESS IN
MEXICO
Mexico
General Overview
 Federal Labor Law was reformed late 2012;
 Outsourcing services need to meet several requirements, sending
obligations to the beneficiaries of the services;
 Inclusion of probation periods, initial training, payment by the hour, etc.
Mexico
Collective Matters
 In most parts of Mexico, it is
necessary to be unionized.
 Radical
Electricity,
others.
unions:
Railway,
Mining,
amongst
ESSENTIAL TAX ISSUES
WHEN
DOING BUSINESS IN
MEXICO
Overview of Mexico, a global contender
Mexican federal tax overview
Taxes at the Federal Level:
 Corporate Income Tax 30%, plus 10% tax on dividends
 Resident individual’s Income Tax, progressive up to 35%
 Value Added Tax (exempt, 0% or 16%, repeal reduced border rate)
 Federal Duties Law, applies to mining operations among others
 Special Goods & Services Tax (range from exempt up to 110% of
the value of the merchandise sold or service provided)
Overview of Mexico, a global contender
Mexican local tax overview
Taxes at Local and State :
 Payroll Tax (generally 2% to 3%)
 Real Estate Acquisition Tax (range from 1% to 3%)
 Real Estate Property Tax
 Local Income Tax on Individual’s income from professional and
business activities, leasing income and capital gain (2% to 5%)
Overview of Mexico, a global contender
Taxes eliminated in 2014
The Tax Reform of 2014 contained several amendments to the most
important tax laws including the elimination of the following taxes:
 Flat Business Tax (Impuesto Empresarial a Tasa Unica);
 Tax on Cash Deposits (Impuesto a los Depositos en Efectivo).
Overview of Mexico, a global contender
Investing in Mexico through a Branch
 Unless
business
establishment.
activities
are
limited,
deemed
permanent
 Subject to corporate income tax & branch profits tax (dividends
equivalent) as well as ordinary informative tax returns
 Can deduct general administrative expenses incurred by home office.
 Can not deduct payments made to home office for royalties,
commissions or interest. Tax treaties allow for deduction, but only when
they constitute reimbursements.
 Force of attraction concern, tax liability exposure for principal.
Overview of Mexico, a global contender
Investing in Mexico through a Subsidiary
 All legal entities are taxed alike (30% corporate rate). Except for S.A.
entities (including S.A.PI.) all other types of legal entities are check-thebox eligible for U.S. pass through treatment.
 For 2014 and future profits, classical double taxation system for
dividend income (10% on net distributed dividends).
 Due regard must be given to tax treaties (Netherlands/England)
 Dividends paid from CUFIN (pre-taxed earning account) to other
Mexican companies are not taxed.
 Income determined on accrual basis (exception AC and SC, cash basis).
Overview of Mexico, a global contender
Mexican income tax highlights
 Interest is subject to withholding if (i) paid by Mexican borrowers or (ii)
principal was invested in Mexico.
 Applicable rates are: 4.9%, 10%, 15%, 21%, 30% and 40%. They
vary per nature of loan, payor, beneficiary, treaty, guarantor, etc.
 Thin capitalization/earning stripping rules apply to related party
financing.
 Royalty licensing and technical assistance are subject to rates from 5%
to 25%.
 Applicable rates depend on the type of royalty or assistance.
 Tax treaties typically provide reduced rates.
 10% tax on dividends introduced in the 2014 tax reform.
 Does not apply to e&p from prior years.
 Does not apply to intercompany dividends.
Overview of Mexico, a global contender
International Treaties
Mexico has a very large tax treaty network.
In order to apply the benefits of the treaty foreign taxpayers must comply
with the following:
 Prove being a resident of a the country of which seeking the
benefits of the treaty;
 Prove the existence of prove the existence of double taxation in
case of operations between related parties;
 Comply with the filling of applicable informative tax return
(declaración informativa);
 Comply with the additional requirements stated on the treaty, if
any.
 The withholding tax certificate issued by the paying entity may be tax
creditable for the beneficiary entity.
Overview of Mexico, a global contender
BEPS The Tequila Version
 BEPS: Base Erosion and Profit Sharing.
 With the tax reform of 2014 Mexico accelerated the implementation of
BEPS.
 Limitation of tax treaty benefits: The tax authority reserves the right to
request that foreign residents prove the existence of double taxation
when claiming treaty benefits.
 Interest, technical assistance and royalty payments to a related party
will be not deductible if either party has control over the other and:
 Foreign party recipient is a pass-through entity (exception if
partners of the pass through accrue income and pay tax thereon)
 Payment is disregarded in the foreign jurisdiction
 Payment is not considered as taxable income
 Payment is also deductible for a related party, unless it accrues
such income
Overview of Mexico, a global contender
Maquila regime
 Maquila: Special manufacturing regime that allows foreign companies to
manufacture goods in Mexico for their future export with special
customs and income tax treatment.
 The Maquila Regime provides permanent establishment relief for the
manufacturing operations, if they comply with Mexican transfer pricing
provisions.
 Permanent establishment exemption benefit is limited to foreign
principals that reside in a country that has Tax Treaty with Mexico.
 New regime for VAT caused on temporary import of raw materials and
parts.
 Automatic exemption has been eliminated.
 New certification procedure is required to access a VAT credit.
Overview of Mexico, a global contender
Maquila regime
 Maquiladora companies comply with Mexico’s transfer pricing statutes if
any of the options below are met:
 Safe harbor alternatives require reporting a tax profit of not less
than the higher of the following:
 6.9% of the value of the assets used in the IMMEX operation
(whether owned by the IMMEX, its related parties or by
foreign residents); or
 6.5% of the costs and expenses associated with IMMEX
operation
 An advanced transfer pricing agreement is requested and
obtained.
 New requirements were introduced to avoid permament establishment
in Mexico.
 100% of the income of Maquila company must come from
“maquila” operations.
 Minimum percentage of assets used by Maquila company must be
the property of the foreign principal.
ESSENTIAL DISPUTE
RESOLUTION
CHALLENGES WHEN
DOING BUSINESS IN
MEXICO
Overview of Mexico, a global contender
Dispute resolution issues faced by foreign investors
In general terms, foreign companies that execute commercial agreements
and/or do business in Mexico, are commonly involved in different kinds of
disputes, among which, the most frequent derive from the following:




Payment defaults / non-compliance of commercial agreements.
Delays in delivery of goods or defective performance of services.
Enforcement of guarantees.
Enforcement in Mexico of judgments issued abroad.
Overview of Mexico, a global contender
Delays in delivery and defective performance
 In case of facing delays in the delivery of purchased goods or defective
performance of services, the affected party may bring an action before
the Court, seeking for:
 (i) a judicial resolution that orders the immediate delivery of the
purchased goods or the compliance of the services agreed, if
possible;
 (ii) an indemnification for the impossibility to deliver the goods or
to perform the services as agreed; or
 (iii) the rescission of the purchase and/or services agreement, with
the corresponding refund of the price paid for such goods or
services.
Overview of Mexico, a global contender
Enforcement of Guarantees
In Mexico the instruments most commonly used to guarantee obligations
are:
Surety Bond.- The creditor is entitled to be paid by the Surety
Company instead of the debtor, if the latter does not pay the
secured amount. This sort of guaranty is frequently used in judicial
and/or administrative matters (i.e. public works).
Pledge.- It constitutes a preferential right on debtor’s movable assets
over other creditors, in order to guarantee compliance of particular
obligations and a better position for collection. (i.e. machinery,
shares, merchandise, etc.)
Mortgage.- The guarantor may be the same debtor or a third party,
and grants a right in rem, generally on real estate properties,
boats, aircrafts or industrial plants, which will remain under
debtor’s possession. The enforcement of such guaranty may be
commenced, regardless whom is in possession of the assets.
Overview of Mexico, a global contender
Enforcement of Guarantees
Guaranty Trust.- By executing a trust agreement, the trustor
(regularly the debtor) transfers the ownership of an asset or right
in favor of the trustee (generally a financial institution), for the
purpose of guarantee the compliance of an obligation to the
beneficiary under the trust. It is frequently used in infrastructure
projects.
Personal guarantees.- Promissory notes, joint obligations, etc.
Overview of Mexico, a global contender
Enforcement in Mexico of judgments issued abroad
Judgments issued abroad are recognized and are legally effective in
Mexico, and are subject to enforcement procedures, provided that:
 They were issued by competent courts of the country of origin.
 The defendant was properly served and could oppose a defense in
trial.
 That the resolution is irrevocable and final.
 That the resolution is not contrary to public order provisions under
Mexican Law.
Overview of Mexico, a global contender
Other recommendations for foreign companies
1.
It is highly advisable to run a search of real estate assets of the
debtor before the Public Registry of Property, as well as before the
Guaranties Registry (RUG), prior to commencing judicial actions,
since the final collection will always depend on the existence of assets
on the debtor’s patrimony.
2.
Under Mexican Commercial Laws, each party must prove their
statements in trial, thus, judicial procedures are based on evidences,
and one of the most important is the documentary evidence.
Therefore, it is highly recommended to foreign companies to consult a
local lawyer before starting business in Mexico, in order to gather all
the necessary information for the documentation of agreements,
certify delivery of goods, performance of services, and granting of
guaranties.
Overview of Mexico, a global contender
Other recommendations for foreign companies
3.
It is also important to investigate the backgrounds and reputation of
the company or individual with whom business will be conducted, due
to in some cases, such companies have no assets to respond in an
eventual dispute or against which a final judgment could be enforced.
4.
According to Mexican Legislation, it is expressly forbidden to run
general searches of movable assets or to have access to general
accounting records of debtor companies, because it is necessary that
the creditor appoints with all accuracy which documents will be
subject to a review and it must be ordered by a judicial authority.
Overview of Mexico, a global contender
Other recommendations for foreign companies
5.
Election of jurisdiction in agreements to be interpreted or enforced in
Mexico should be made in accordance with the applicable Law
established in the agreement, since Mexican Courts are not used to
applying foreign legal provisions instead of Mexican Law. In such
cases, the plaintiff must prove the existence and validity of the
foreign provisions that intend to be applied in trial.
6.
When a foreign company opens a branch in Mexico, it is important
that a lawyer or Law Firm reviews the compliance to State and
Municipal administrative regulations, in order to start operations as a
commercial establishment, and avoid the risk of closings or the
imposition of fines.
7.
An important preventive measure that foreign companies must take
into consideration, is to limit the credit line of debtors and to avoid
increasing the principal beyond the economic capacities of the debtor.
amejia@sanchezdevanny.com