List of Contents

• Translation
• Income Tax Rate and Its Determination
• A) Determination of the Taxable Result
• B) Payment
• C) Legal Entities that Distribute Dividends or Profits
• D) Crediting of Legal Entities that Distribute Dividends or Profits
• E) Dividends by Equalization
• F) Income Tax in the Case of Trusts
• G) Provisional Payments
• H) Provisional Declaration and Payment

Special mention should be made of the Income Tax for legal entities, since although logically more individuals could pay taxes under this tax, it is the legislator who, as we will see in this and future entries, imposed greater instrumental obligations on legal entities in Mexico.

This is not only because a legal entity normally obtains greater income given the collective effort of its members but also because the requirements to constitute it and for its operation imply a series of controls that help the federal treasury collect the contributions it is responsible for.

In this sense, under this entry, I will begin with the study of the legal entity for Income Tax Law, where I will explain the rate and additional rates that companies in Mexico must pay and dealing with what is related to their income, deductions, and other aspects that complement the accounting world of the legal entity.

Translation

This entry is a translation for my post that I wrote on Las personas morales y su determinación del Impuesto Sobre la Renta.

Income Tax Rate and Its Determination

As a general rule, legal entities must calculate the income tax by applying the 30% rate to the taxable result obtained in the year.

A) Determination of the Taxable Result

The taxable result of legal entities shall be determined based on the following rules:

I.- The taxable profit will be obtained by subtracting from the total amount of accumulated income obtained in the year, the deductions authorized by law and the workers’ participation in the profits of the companies paid in the year.

II.- The taxable profit of the year shall be subtracted, if applicable, by the tax losses pending application from previous years.

B) Payment

The tax for the year shall be paid using a declaration that the taxpayers will present to the authorized offices, within 3 months following the date on which the fiscal year ends.

C) Legal Entities that Distribute Dividends or Profits

Legal entities that distribute dividends or profits must calculate and pay the corresponding tax, applying the aforementioned 30% rate. However, for these purposes, the distributed dividends or profits will be added to the Income Tax that must be paid in the following terms:

I.- To determine the tax that must be added to the dividends or profits, these must be multiplied by the factor of 1.4286 and the general rule rate of 30% shall be applied to the result.

II.- In the case of the distribution of dividends or profits through the increase of shares or the delivery of shares of the same legal entity or when they are reinvested in the subscription and payment of the capital increase of the same person within 30 calendar days following their distribution, the dividend or profit shall be deemed to have been received in the calendar year in which the reimbursement for capital reduction or liquidation of the legal entity in question is paid.

III.- There shall be no obligation to pay the additional Income Tax when the dividends or profits come from the net tax profit account.

IV.- The additional tax in question shall be considered a final payment and will be paid at the authorized offices, no later than the 17th of the month immediately following the month in which the dividends or profits were paid.

V.- The workers’ participation in the companies’ profits shall not be considered distributed dividends or profits.

D) Crediting of Legal Entities that Distribute Dividends or Profits

When the taxpayers referred to in the previous section distribute dividends or profits and as a consequence of this pay the additional tax mentioned above, they may credit said tax in accordance with the following:

I.- The crediting may only be made against the Income Tax of the fiscal year that is payable by the legal entity in the fiscal year in which the ‘additional’ tax is paid.

However, the amount of tax that the previous paragraph cannot credit may be credited up to the 2 immediately following fiscal years against the tax for the fiscal year and against the provisional payments thereof. When the tax for the fiscal year is less than the amount credited in the provisional payments, only an amount equal to the latter shall be considered creditable against the tax for the fiscal year.

II.- For article 77 of the Income Tax Law, in the fiscal year in which they credit the tax in accordance with the previous paragraph, taxpayers must reduce the net taxable profit calculated in the terms referred to therein by the amount resulting from dividing the credited tax by the factor 0.4286.

E) Dividends by Equalization

In the case of interest derived from credits granted to legal entities or permanent establishments in the country of residents abroad, by persons resident in Mexico or abroad, who are related parties of the person who pays the credit, taxpayers shall consider that the interest derived from said credits will have the tax treatment of dividends when any of the following assumptions are met:

I.- The debtor makes an unconditional written promise of partial or total payment of the credit received, on a date that the creditor can determine at any time.

II.– The interest is not deductible according to the provisions of section XIII of article 27 of the Income Tax Law^[1].

III.- In case of noncompliance by the debtor, the creditor has the right to intervene in the debtor company’s management or administration.

IV.- The interest to be paid by the debtor is conditional on obtaining profits or its amount is set based on said profits.

V.- The interest comes from backed credits, even when they are granted through a financial institution resident in the country or abroad.

For these purposes, backed credits are considered to be those operations through which a person provides cash, goods or services to another person, who in turn provides directly or indirectly, money, goods or services to the person mentioned in the first place or to a related party of the latter. Also considered backed credits are those operations in which a person grants financing and the credit is guaranteed by cash, cash deposit, shares or debt instruments of any kind, from a related party or from the borrower himself, to the extent that it is guaranteed in this way. Likewise, credit is also considered to be guaranteed when its granting is conditioned on the execution of one or more contracts that grant an option right in favor of the creditor or a related party of the latter, the exercise of which depends on the partial or total non-compliance of the payment of the credit or its accessories by the borrower.

On the other hand, operations in which financing is granted to a person and the credit is guaranteed by shares or debt instruments of any kind, owned by the borrower or by related parties of the latter who are residents in Mexico, will not be considered backed credits, when the borrower cannot legally dispose of them, except in the case in which the borrower fails to comply with any of the obligations agreed in the respective credit contract.

F) Income Tax in the Case of Trusts

When business activities are carried out through a trust, the trustee shall determine, in accordance with the terms set out above, the fiscal result or loss of said activities in each fiscal year and will comply on behalf of all the trustees with the obligations indicated in the Income Tax Law, including that of making provisional payments. In addition, the following special rules must be observed:

I.- The trustee must issue to the trustees or settlors, where applicable, a tax receipt stating the income and withholdings derived from the business activities carried out through the trust in question.

II.- The trustees shall add to their other income for the year the portion of the fiscal result of said year derived from the business activities carried out through the trust that corresponds to them, in accordance with the provisions of the trust agreement and shall credit in that proportion the amount of the provisional payments made by the trustee.

The fiscal loss derived from the business activities carried out through the trust may only be reduced from the fiscal profits of subsequent years derived from the activities carried out through that same trust.

III.- When there are pending fiscal losses to be reduced upon the termination of the trust, the updated balance of said losses shall be distributed among the trustees in the proportion that corresponds to them according to what was agreed in the trust agreement and they may deduct it in the year in which the trust is terminated up to the updated amount of their contributions to the trust that each of the trustees individually does not recover.

IV.- The deliveries of cash or assets from the trust that the trustee makes to the trustees shall be considered reimbursements of contributed capital until said capital is recovered and will decrease the balance of each of the individual accounts of contributed capital that the trustee maintains for each of the trustees until the balance of each of said accounts is exhausted.

V.- For the purposes of determining the fiscal profit or loss for the year derived from the business activities carried out through the trust, the deductions shall include those corresponding to the assets contributed to the trust by the trustor when he is also a trustee and does not receive any consideration in cash or other assets for them, considering as the acquisition cost of the same the original amount of the investment updated not yet deducted or the average cost per share, according to the asset in question, that the trustor has at the time of his contribution to the trust and that same acquisition cost must be recorded in the accounting of the trust and in the contribution capital account of the corresponding person. The trustor who contributes the assets referred to in this section may not make the deduction of said assets in the determination of his fiscal profits or losses derived from his other activities.

VI.- When the assets contributed to the trust referred to in the previous section are returned to the trustors who contributed them, they shall be considered returned at the tax value they have in the trust accounting at the time they are returned and at that same value they will be considered reacquired by the persons who contributed them.

VII.- When one of the trustees is a natural person resident in Mexico, they shall consider as income from business activities the part of the result or the tax profit derived from the business activities carried out through the trust that corresponds to him/her according to what is agreed in the contract.

VIII.- Residents abroad who are trustees are considered to have a permanent establishment in Mexico for the business activities carried out in the country through the trust and must file their annual income tax return for the part that corresponds to them of the result or the tax profit of the year derived from said activities.

IX.- Finally, the trustees or, where applicable, the trustor, shall be liable for failure to comply with the obligations the trustee must fulfill on their behalf.

G) Provisional Payments

Taxpayers shall make monthly provisional payments on account of the tax for the fiscal year, no later than the 17th of the month immediately following the month to which the payment corresponds, in accordance with the bases indicated below:

I.- The profit coefficient corresponding to the last 12-month fiscal year for which a declaration was or should have been filed shall be calculated. For this purpose, the tax profit for the fiscal year for which the coefficient is calculated shall be divided by the nominal income for the same fiscal year.

In the case of the second fiscal year, the first provisional payment shall include the first, second and third months of the fiscal year, and the fiscal profit coefficient for the first fiscal year shall be considered, even if it was not a 12-month fiscal year.

On the other hand, when in the last 12-month fiscal year there is no profit coefficient, the coefficient corresponding to the last 12-month fiscal year for which said coefficient exists shall be applied, without that fiscal year being more than 5 years prior to the one for which the provisional payments must be made.

II.- The taxable profit for the provisional payment shall be determined by multiplying the profit coefficient that corresponds according to the previous numeral, by the nominal income corresponding to the period from the beginning of the fiscal year and until the last day of the month to which the payment refers and, if applicable, the following concepts will be reduced:

A) The amount of the workers’ participation in the companies’ profits paid in the same fiscal year, in the terms of article 123 of the Political Constitution of the United Mexican States. The aforementioned amount of the workers’ participation in the companies’ profits must be reduced, in equal parts, in the provisional payments corresponding to the months of May to December of the fiscal year.

The reduction referred to in this paragraph shall be made in the provisional payments of the fiscal year in a cumulative manner and the amount that is reduced will in no case be deductible from the taxpayer’s cumulative income, in accordance with the provisions of section XXVI of article 28 of the Income Tax Law.

B) Legal entities that distribute advances or returns in accordance with the terms of Section II of Article 94 of the Income Tax Law (members of cooperative production societies, civil societies and associations) shall reduce their taxable profit by the amount of the advances and returns that they distribute to their members in accordance with the terms of the aforementioned section, in the period from the beginning of the fiscal year until the last day of the month to which the payment refers. A tax receipt must be issued stating the amount of the distributed advances and returns, as well as the tax withheld.

C) The tax loss from previous fiscal years pending application against taxable profits, without prejudice to reducing said loss from the fiscal profit of the fiscal year.

III.- The provisional payments shall be the amounts resulting from applying the general rate of 30% on the fiscal profit determined in accordance with the terms of the preceding numeral, and the provisional payments of the same fiscal year made previously may be credited against the tax payable.

H) Provisional Declaration and Payment

Taxpayers must file provisional payment declarations whenever there is tax payable, a balance in their favor, or when it is the first declaration in which they have no tax due.

However, they must not file provisional payment declarations in the year of initiation of operations, when they have filed the notice of suspension of activities provided for in the Regulations of the Federal Tax Code, or in cases where there is no tax due or a balance in their favor and it is not the first declaration with this characteristic.

By Omar Gómez

Mexican Tax, Administrative and Constitutional Attorney

Visit my personal website at ogomezabogado.com

Contact the firm at (656) 271-41-43.

---

^[1] Article 27. The deductions authorized in this Title must meet the following requirements: […]

XIII.- That the declared acquisition cost or the interest derived from credits received by the taxpayer correspond to market prices. When they exceed the market price, the surplus will not be deductible.