Continuing with the Federal Tax Code study, I began with the Pro-Taxpayer Series. Generalities of Federal Tax Law in Mexico, it’s now time to discuss how Mexican taxpayers, at the federal level, should apply incentives and subsidies and who the tax withholding agents are, if applicable.

This notwithstanding, the fact that the incentives are contemplated in the Income Tax Law, which I will discuss in subsequent posts, is not an obstacle. For now, it’s enough just to mention them:

I.- Incentive for personal savings accounts.

II.- Incentive for employers who hire people with disabilities and senior citizens.

III.- Incentive for trusts dedicated to acquiring or constructing real estate.

IV.- Incentive for national film and theater production and distribution.

V.- Incentive for taxpayers engaged in constructing and selling real estate developments.

VI.- Incentive for promoting venture capital investment in the country.

VII.- Incentive for cooperative production companies.

VIII.- Incentive for technology research and development.

IX.- Tax incentive for high-performance sports.

X.- Incentive for electric vehicle power supplies.

Without further ado, let’s begin:

List of Contents

• 1) Difference Between Incentive and Subsidy
• 2) Crediting of Tax Incentives
• A) Deadline for Crediting Incentives
• 3) Duty to Repay Subsidies
• A) Improper Crediting of Subsidies
• B) Crediting Limit
• C) Refund of Credit Balance on Tax Incentives
• 4) Jointly and Severally Liable Parties
• A) Concept
• B) Withholding Agents
• C) Provisional Payment Obligees
• D) Liquidators and Trustees
• E) Business Acquirers
• F) Representatives of Foreign Persons
• G) Representatives of Minors or Incapacitated Persons
• H) Heirs
• I) By Express Consent
• J) Interested Third Parties
• K) Partners or Shareholders
• L) Legal Entities
• M) Spin-off Companies
• N) Companies With a Permanent Establishment in Mexico
• Ñ) Employers or Beneficiaries of Residents Abroad
• O) For the Timeshare Service
• P) Beneficiaries of Subcontracting
• Q) Partners in the Joint Venture
• R) Representatives of the Estate
• S) Companies Linked to Related Parties

1) Difference Between Incentive and Subsidy

Although the Federal Tax Code, like other tax regulations, was drafted under the auspices of lawyers, mathematicians, economists, and accountants, it continues to create confusion and errors due to inadequate legislative techniques. This, for the subject at hand, is evident because tax legislators often refer to incentives as what, in economic theory, is a subsidy and vice versa.

Therefore, it’s pertinent to understand this difference for now, even if it is simple. In this sense, a subsidy is understood as the expenditure made by the State in a priority area for its development, while an incentive is a mechanism of tax law intended to reduce the taxable base and, ultimately, pay less tax, even if the taxable event has occurred.

Finally, both concepts are supported by articles 25 to 28 of the Political Constitution of the United Mexican States, which grant the Mexican State the economic leadership of the country and national development, predominantly to the Legislative and Executive branches. This requires free legislative configuration for the former and fiscal policy freedom for the latter. See, for illustration, FISCAL INCENTIVES. THEY ARE IN THE NATURE OF SUBSIDIES BUT NOT TAXABLE INCOME, EXCEPT IN CASES EXPRESSLY ESTABLISHED BY THE LEGISLATOR^[1].

2) Crediting of Tax Incentives

Taxpayers required to pay through periodic tax returns may credit the amount of the tax incentives to which they are entitled against the tax accrued or payable, as appropriate, provided that they submit the notification to the competent authorities in matters of tax incentives and, where applicable, comply with the other formal requirements established in the provisions granting the incentives, including the presentation of tax promotion or tax refund certificates.

In other cases, the presentation of tax promotion or tax refund certificates will always be required, in addition to compliance with the different requirements established by the decrees or laws granting the incentives.

A) Deadline for Crediting Incentives

Taxpayers may credit the amount of the incentives to which they are entitled within a period of 5 years, counting from the last day of the fiscal year in which the right to apply the incentive arose.

On the other hand, in cases where the provisions granting tax incentives, such as laws or decrees, establish the obligation to comply with formal requirements in addition to the notice provided in the previous section, the right to receive the incentive shall be deemed to arise from the day the authorization or the respective document is obtained.

3) Duty to Repay Subsidies

When individuals, through their own acts or omissions, improperly receive subsidies, they must repay the improperly received amount, update accordingly, and pay surcharges, according to the terms set forth, on the updated amounts improperly received. These surcharges will be calculated from the date they received the subsidy until the date the amount duly received is returned to the federal treasury.

A) Improper Crediting of Subsidies

When a person improperly provides a subsidy whose amount has been credited by that person against the payment of federal taxes, such crediting shall be improper.

Furthermore, when a tax incentive or subsidy is credited against federal taxes without entitlement or is credited in an amount greater than the amount to which the person is entitled, the tax authorities shall require payment of updated omitted taxes and any applicable additional contributions.

B) Crediting Limit

Tax incentives or subsidies may only be credited up to the amount of the taxes actually owed. If the incentive or subsidy is greater than the amount of the tax payable, the incentive or subsidy shall only be credited up to the payment amount.

C) Refund of Credit Balance on Tax Incentives

When a supplementary return is filed for a contribution paid through crediting a tax incentive or subsidy, reducing the amount of the contribution owed by the taxpayer, a refund of credit amounts will only be applicable when these amounts arise from an actual payment.

4) Jointly and Severally Liable Parties

A) Concept

Those jointly and severally liable in tax matters are those subjects who, without carrying out the taxable purpose of a contribution, bear said obligation jointly and severally due to their relationship with the taxpayer, resulting in assistance to the treasury for more straightforward and more streamlined tax collection. Furthermore, joint and several liability shall include accessories, except fines, although this does not prevent those jointly and severally liable from being sanctioned for their own acts or omissions.

Jointly liable parties, essentially and in accordance with our Federal Tax Code, are recognized as:

B) Withholding Agents

Withholding agents and persons who are legally required to collect contributions from taxpayers up to the amount of said contributions.

C) Provisional Payment Obligees

Persons who are required to make provisional payments on behalf of the taxpayer up to the amount of said contributions.

D) Liquidators and Trustees

Liquidators and trustees for contributions they were required to pay on behalf of the company in liquidation or bankruptcy, as well as for those accrued during their administration.

The person or persons, regardless of the name by which they are designated, who have been entrusted with the general direction, the general management, or the sole administration of legal entities, shall be jointly liable for the contributions caused or not withheld by said legal entities during their management, as well as for those that should have been paid or entered during the same, in the part of the fiscal interest that cannot be guaranteed with the assets of the legal entity that they direct, when said legal entity incurs in any of the assumptions referred to in numerals 1, 2, 3, 4, 5, 6, 7, 8 and 9 of subsection K) of this section.

E) Business Acquirers

Business acquirers, with respect to contributions incurred in connection with the activities carried out in the business when it belonged to another person, without the liability exceeding the value of the business.

On the other hand, a business acquisition shall also be considered to exist, unless proven otherwise, when the tax authority detects that the transferor and the acquirer of the assets, rights, or obligations fall into any of the following situations:

I.- Partial or total transfer of assets or liabilities between said persons through any legal act.

II.- Partial or total identity of the persons comprising its governing body, as well as of its partners or shareholders with effective control. For such purposes, said partners or shareholders shall be considered to have effective control when they can carry out any of the acts indicated in subsection K) in sections a), b), and c) of that section.

III.- Partial or total identity of their legal representatives.

IV.- Partial or complete identity of their suppliers.

V.- Identity of their tax domicile; the location of their branches, facilities, factories, or warehouses; or the delivery or reception locations for the merchandise they sell.

VI.- Partial or complete identity of Mexican Social Security Institute employees.

VII.- Identity of the trademarks, patents, copyrights, or commercial notices under which they manufacture or provide services.

VIII.- Identity of the industrial property rights that allow them to carry out their activities.

IX.- Partial or complete identity of the fixed assets, facilities, or infrastructure they use to carry out their activities.

F) Representatives of Foreign Persons

Representatives, regardless of their name, of persons not residing in Mexico or residing abroad with whose intervention they carry out activities for which taxes must be paid, up to the amount of said taxes, as well as those designated in compliance with tax provisions and those designated for tax purposes, up to the amount of the contributions or benefits to which the applicable provisions refer.

G) Representatives of Minors or Incapacitated Persons

That is, those exercising parental authority or guardianship for the taxes owed by their representative.

H) Heirs

Legatees and donees in a private capacity with respect to tax obligations incurred in relation to bequeathed or donated assets, up to the amount of these.

I) By Express Consent

Regarding those who express their willingness to assume this joint liability in accordance with the forms or formats established for this purpose by the Tax Administration Service through the general rules for compliance with tax obligations.

J) Interested Third Parties

Regarding those third parties who, in order to guarantee the tax interest, constitute a deposit, pledge, or mortgage or allow the seizure of assets (colloquially known as embargo in Spanish), up to the value of the assets pledged as collateral, without in any case their liability exceeding the amount of the guaranteed interest.

K) Partners or Shareholders

Consisting of partners and shareholders concerning contributions accrued in connection with the company’s activities when it held such status, for the portion of the tax interest that cannot be guaranteed by the company’s assets without the liability exceeding the participation it held in the company’s capital stock during the period or on the date in question when said legal entity incurs in any of the following situations:

I.- Failure to apply for registration in the Federal Taxpayers Registry.

II.- Changes its tax domicile without submitting the corresponding notice, provided that said change is made after it has been notified of the commencement of the exercise of the audit powers provided for in the Federal Tax Code and before notification of the resolution issued for said exercise has been issued, or when the change is made after it has been notified of a tax credit and before it has become or has become ineffective.

III.- Failure to keep, conceal, or destroy accounting records.

IV.- Vacate the premises where your tax domicile is located without filing a change of address notice.

V.- Fail to appear at the tax domicile registered with the Federal Taxpayer Registry.

VI.- Fail to report to the tax authorities, within the time period established by law, the amounts withheld or collected in taxes.

VII.- Be listed in the list referred to in Article 69-B, fourth paragraph, of the Federal Tax Code for having definitively been presumed to have issued receipts covering non-existent transactions referred to in the said article.

VIII.- Be found in the situation referred to in Article 69-B, paragraph eight, of the Federal Tax Code for not having proven the effective acquisition of the goods or receipt of services, nor corrected its tax status, when in a fiscal year said legal entity has received tax receipts from one or more taxpayers who fall into the situation referred to in the fourth paragraph of Article 69-B of the Code for an amount exceeding $9,736,810 pesos (NINE MILLION SEVEN HUNDRED THIRTY-SIX THOUSAND EIGHT HUNDRED TEN 00/100 NATIONAL CURRENCY).

IX.- Be found on the list referred to in Article 69-B Bis, paragraph nine, of the Federal Tax Code for having definitively been placed in the presumption of having improperly transferred tax losses referred to in the said article. When the improper transfer of tax losses is a consequence of the situation referred to in Section III of the aforementioned article, the partners or shareholders of the company that improperly acquired and reduced the tax losses shall also be considered jointly and severally liable, provided that, due to a restructuring, spin-off, or merger of companies, or a change of partners or shareholders, the company ceases to be part of the group to which it once belonged.

On the other hand, the joint and several liabilities referred to for shareholders or partners in question shall be calculated by multiplying the percentage of participation held by the partner or shareholder in the subscribed share capital at the time of the accrual by the omitted contribution, in the portion that the company’s assets cannot cover.

In turn, the liability referred to in this section shall only apply to partners or shareholders who have or have had effective control of the company concerning contributions that would have been accrued in connection with the activities carried out by the company when they held such status.

For these purposes, effective control by a person or group of persons shall be understood to mean any of the following acts:

A) Imposing decisions at general meetings of shareholders, partners, or equivalent bodies or appointing or removing the majority of the directors, administrators, or their equivalents of a legal entity.

B) Maintaining ownership of voting rights over more than 50% of the share capital of a legal entity.

C) Directing a legal entity’s administration, strategy, or main policies, whether through ownership of securities, by contract, or in any other manner. In this sense, effective control to direct a legal entity’s administration, strategy, or main policies may be granted expressly or impliedly.

L) Legal Entities

Companies that are required to register their partners or shareholders in the registry or book of shares or corporate interests but register individuals or legal entities that do not prove that they have withheld and paid, where applicable, the income tax due by the transferor of such shares or corporate interests, or that they have not received a copy of the respective ruling and, where applicable, a copy of the declaration evidencing payment of the corresponding tax; or that they have not submitted the information referred to in Article 76, Section XX of the Income Tax Law.

On the other hand, companies that register in the share register or book of shares or corporate shares partners or shareholders who do not provide the necessary documentation to carry out the verification referred to in this section will not be considered jointly liable, provided that they keep a copy of the certificate issued by the Tax Administration Service at the request of the partner or shareholder in question, indicating that the documentation proving compliance with the obligation to withhold and pay the income tax accrued by the transferor of the shares or corporate shares was delivered to the said decentralized body, or, where applicable, a copy of the respective tax opinion.

M) Spin-off Companies

Spin-off companies, for contributions incurred in connection with the transfer of assets, liabilities, and capital transferred by the spinning company, as well as for contributions incurred by the latter prior to the spin-off, without the liability exceeding the value of the capital of each of them at the time of the spin-off.

The liability limit will not apply when, as a result of the transfer of all or part of the assets, liabilities, and capital, a concept or item arises in the stockholders’ equity of the spinning company, the spin-off company, or the spin-offs, regardless of its name, the amount of which was not recorded or recognized in any of the stockholders’ equity accounts in the statement of financial position prepared, presented, and approved at the general meeting of partners or shareholders that approved the spin-off of the company in question.

N) Companies With a Permanent Establishment in Mexico

Companies resident in Mexico or residents abroad that have a permanent establishment in the country, for the tax incurred by granting temporary use or enjoyment of assets and by maintaining inventories in national territory to be transformed or that have already been transformed under the terms of Article 1 of the Asset Tax Law, up to the amount of said contribution.

Ñ) Employers or Beneficiaries of Residents Abroad

Persons to whom residents abroad provide subordinate or independent personal services when these are paid by residents abroad, up to the amount of the tax incurred.

Persons to whom foreign residents provide subordinate or independent personal services covered by foreign residents will not be considered for this section, provided that they submit a notice stating the name and address of the foreign resident providing the services and declare under penalty of perjury that they are unaware of the amount of the income paid to said foreign resident. This notice is accompanied by a statement signed by said foreign resident stating that they are aware of their responsibility to pay the tax derived from the receipt of said income.

The notice referred to in the preceding paragraph must be submitted to the tax authority within 15 days following the date the foreign resident begins providing their services and must comply with the requirements established by the Tax Administration Service through general rules.

O) For the Timeshare Service

The company that manages or the owners of the properties used for the timeshare tourism service provided by foreign residents, when they are related parties under Articles 90 and 179 of the Income Tax Law, up to the amount of the omitted contributions.

P) Beneficiaries of Subcontracting

Legal entities or individuals who receive services or contract works referred to in Article 15-D of the Federal Tax Code for the contributions incurred by the workers with whom the service is provided.

Q) Partners in the Joint Venture

The partners, concerning contributions accrued in connection with the activities carried out through the joint venture when they held such status, for the portion of the tax interest not guaranteed by the joint venture’s assets, provided that the joint venture incurs any of the assumptions referred to in paragraphs 1, 2, 3, 4, 5, 6, 7, 8, and 9 of section K) of this entry, without liability exceeding the contribution made to the joint venture during the period or date in question.

R) Representatives of the Estate

The executors or representatives of the estate, for contributions accrued or due during the period of their appointment.

S) Companies Linked to Related Parties

Companies resident in Mexico or foreign residents with a permanent establishment in the country that carry out transactions with related parties resident abroad, over which there is adequate control or which are effectively controlled by the associated parties resident abroad, in accordance with the provisions of Article 176 of the Income Tax Law, when the foreign residents establish, by virtue of such transactions, a permanent establishment in Mexico in accordance with the tax provisions.

This liability shall not exceed the contributions that, in relation to such transactions, the resident in the former would have incurred.

On the other hand, and for the purposes of this joint liability, the assumptions for determining effective control provided for in Article 176 of the Income Tax Law will also be applicable to entities in Mexico controlled by a resident abroad, without prejudice to the application of the provisions contained in Chapter I of Title VI of said Law.

By Omar Gómez

Mexican Tax, Administrative and Constitutional Attorney

Visit my personal website at ogomezabogado.com

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^[1] Thesis: 1a. CCXXX/2011 (9a.) First Chamber of the Mexican Supreme Court of Justice. Tenth Judicial Epoch. Digital Registration: 160687.