Mexican Tax Authority provides clarification on non-residents’ capital gains tax

Tuesday, 15 July 2014
The Mexican Tax Administration Service (SAT) has issued proposed regulations for non-residents’ capital gains tax

The regulations provide clarification on certain aspects of the 2014 Mexican tax reform, which repealed the capital gains exemption for holdings of less than 10 percent applicable to foreign residents in relation to the sale of publicly traded shares.

The proposed regulations affect the 2014 Temporary Tax Regulations, which includes rules for non-residents’ capital gains, including the determination of the tax basis, the withholding of tax responsibility and taxation of American Depositary Receipts (ADRs).

A proposed rule would clarify that non-residents or foreign entities trading in recognized market securities that represent the ownership of Mexican publicly traded shares will be subject to the same rules applicable to non-residents trading publicly traded Mexican shares contained in Article 161 of the Mexican Income Tax Law (MITL), which contains an exemption for treaty resident investors from Mexican capital gains tax.

Another proposed rule would clarify that Mexican broker dealers acting as intermediaries are required to compute the gain and withhold the tax, to the extent the account holder does not provide the treaty resident declaration.

In addition, Mexican broker dealers who are not custodians of the shares being transferred could obtain a sworn statement from the account holder affirming the average tax basis of the shares for each of the trades made during the day.

Mexican broker dealers acting as intermediaries who do not obtain information on the average tax basis would be required to apply the 10 percent withholding tax on the gross proceeds of the transaction.

The proposed changes would also clarify that when publicly traded shares in a Mexican company are not issued in a single series, the gain or loss should be determined for each of the series of the issuing company.

Finally, for purposes of withholding tax on capital gains, a proposed rule would exempt non-residents that obtain gains from the transfer of shares issued by Mexican-resident mutual funds from Mexican withholding tax when the account holder resides in a treaty country, provided that the assets subject to investment are Mexican publicly traded shares and that the account holder delivers a treaty declaration to the mutual fund distributor, as well as a taxpayer identification number.

These proposed regulations need to be published in the Official Gazette in order to enter into force and may be modified.


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