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Mexican Government Promotes Venture Capital Development
Generally, the Mexican tax system does not have a transparent tax regime for investment vehicles incorporated under Mexican or foreign law. This limitation negatively impacts foreign investors doing business in Mexico with other investors through investment funds, trusts or other legal entities. This is because the tax benefits that they would otherwise have if they invested directly by themselves and not through a collective vehicle are not accessible since such collective investment vehicles generally do not have access to treaty benefits, preferred tax rates or exemptions. Taxand Mexico discusses the benefits for investors.
With this in mind, and considering that Mexico is a very good potential market for venture capitalists, the Mexican Government intends to promote the development of venture capital (both domestic and foreign) and the listing of companies on the Stock Exchange. The Government will achieve this by introducing a special tax regime for Mexican residents and foreign investors who invest in shares issued by Mexican companies that are Mexican tax residents but not listed on the Stock Exchange at the time of investment. This regime would also be available on loans granted to finance such entities through a special purpose trust established in Mexico ("FICAP"), which will be given transparent treatment for tax purposes.
The trustee of the FICAP must be an authorised Mexican resident banking institution. The FICAP deed would serve as the "investor's agreement" or "bylaws" of the collective investment vehicle. The trustee has several formal obligations to comply with to maintain the beneficial tax treatment for the investors.
At least 80% of the FICAP's assets must be invested in the shares of target companies or in loans granted to them, and the remainder must be invested in selected securities issued by the Mexican Federal Government or in shares of debt-instrument mutual funds. Shares of the targeted entities must be held for at least two years as from the date of investment.
The maximum term of the FICAP is 10 years and at least 80% of its income (capital gains, dividends and interest) obtained in each fiscal year must be distributed to the FICAP's investors within two months of the year end. No provisional tax payments will have to be paid by the FICAP on income obtained.
Through this distribution mechanism, the FICAP's investors, and not the FICAP itself, will be subject to income as if they were directly obtaining the income from the shares and securities that comprise the trust property or from the sale thereof, or from the financing granted to the targeted entities. When the FICAP's investors are non-Mexican residents, the trustee must withhold tax at the rate that corresponds to the type of income that the payment is delivered from (i.e., capital gains, dividends and/or interest) in accordance with Mexican income tax law, or, if applicable, in accordance with the Conventions to Avoid Double Taxation entered into by Mexico with the countries in which the foreign residents who receive the income reside.
Based on the above, foreign investors who are resident in a country with which Mexico has signed a tax treaty or whose corporate characteristics provide tax benefits (as in the case of pensions funds) are able to maintain their tax benefits when investing in the aforementioned targeted entities (by way of capital or debt) through a FICAP. As such, both the income derived from the sale of shares and interest income can be subject to lower withholding tax rates or, in some cases, entirely exempt from Mexican taxation. Dividends distributed by Mexican entities are not subject to withholding tax in Mexico, regardless of the residence country of the beneficial owner.
We are certain that the transparency regime of the FICAP will greatly benefit venture capital investment in Mexico, will facilitate the conjunction of capital from diverse investors in a single investment vehicle, and will help to maintain the separate tax status of each investor, so that each may have access to the tax treatment it would have enjoyed if it invested directly in the Mexican target companies.
Non-Mexican investors who are resident of a country with which Mexico has signed a tax treaty or whose corporate characteristics provide tax benefits (e.g., pension funds) are able to maintain their tax benefits when investing in non-listed Mexican entities (by way of capital or debt) through a FICAP.
Your Taxand contacts for further queries are:
Manuel Tamez Zendejas
T. +52 55 5201 7403