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Limitation on interest deduction for Mexican electricity industry
On 12 August 2013, the Mexican Foreign Investment Law was amended. These modifications redefined the strategic areas for the country. Consequently, companies carrying out activities in the electricity industry in Mexico may be affected due to the application of thin capitalisation rules, that are linked to the Foreign Investment Law. Taxand Mexico discusses how the 2013 reform has affected the industry.
Generally, if a Mexican company’s interest bearing debts exceed the equivalent of 3 times its shareholders' equity, the deduction of interest paid to foreign affiliates will be disallowed. However, interest bearing debts incurred for constructing, operating, or maintaining production infrastructure linked to strategic areas for the country shall not be considered for thin capitalisation purposes.
The definition of strategic areas for the country is contained in article 5 of the Mexican Foreign Investment Law.
Before the 2013 reform, such legislation was pretty broad and included, among others, oil and hydrocarbons, petro chemistry, electricity, nuclear energy generation and radioactive minerals. The 2013 reform amended the Mexican Foreign Investment Law including a modification of the concept of strategic areas for the country.
Electricity itself is no longer considered to be a strategic area for the country and, instead, the following definition was included: “Planning and control of the national electricity system, as well as the public service of transmission and distribution of electricity”.
As a result of the foregoing, ‘electricity’ is no longer considered a strategic area for the country, so interest bearing debts granted to companies of the electricity industry, other than relating to transportation and distribution, by their foreign related parties should be included for purposes of thin capitalisation calculations.
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Due to the 2013 reform, Mexican companies participating in the electricity industry may need to revisit and review their current leverage. Due to these amendments, they may need to reduce the amount of debt contracted with foreign related parties to avoid the disallowance of interest deductions.
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