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Regulations for energy “REIT” released

Mexico
2 Nov 2015
As announced by President Enrique Peña Nieto during his Third-Year Government Report, new regulations have been put in place to incentivize the investment in energy and infrastructure projects through a new investment vehicle which is being denominated Fibra E. Taxand Mexico examines this new vehicle which will allow public investors to invest in energy and infrastructure projects that already generate stable cash flows and will allow entities within such sectors to monetize their existing assets and invest in new projects.

A Fibra E is a Mexican trust that invests in equity interests (shares or equity quotas) of Mexican companies (the “operating companies”) that carry out specific energy and infrastructure projects.  

The operating companies will be treated as transparent for tax purposes. Such companies will not be obligated to make advance income tax payments nor to file an annual income tax return. Basically, the main obligation of the operating companies will be to distribute its taxable profits to the Fibra E. The 10% income tax withholding on dividend distributions would not apply to the distributions carried out by operating companies.

The Fibra E must issue fiduciary investment certificates in energy and infrastructure (“E&I Notes”) through a public offering. Such vehicle must distribute annually at least 95% of its taxable profits. These distributions would be subject to a 30% income tax withholding and, as in the case of the operating companies, the 10% withholding tax on dividend distributions would not apply. Distributions to foreign pension funds which are exempt in their country of residence will be exempt for Mexican income tax purposes. 

Capital gains derived from the sale of certificates issued by the Fibra E through the Mexican Stock Exchange would also be exempt for income tax purposes, although clarification is needed with respect to the sales carried out by Mexican resident companies. 

As for the requirements established in the tax regulations, the most important of them are:

  • The operating companies must be Mexican resident companies which were incorporated in Mexico.
  • All of the shareholders of the operating companies (except for the Fibra E) must be Mexican resident companies.
  • The operating companies must be engaged in the energy or infrastructure activities described in the regulations.
  • New non-monetary assets cannot represent more than 25% of the total non-monetary assets. 
  • At least 70% of the estate of the Fibra E must be invested in shares of Mexican entities. 
  • Operating companies may not be publicly traded companies. 

There are some other requirements which must be fulfilled either by the Fibra E or the operating companies. Failure to meet any of these requirements would result in the rejection of the application of the special tax regime. 

Other provisions were incorporated into the regulations to facilitate the transfer of assets to the operating companies through capital contributions or spin-offs. 


Your Taxand contacts for further queries are:
Manuel Tamez
T: +52 55 5201 7403
E: mtamez@macf.com.mx

Luis Monroy
T: +52 55 5201 7466
E: lmonroy@macf.com.mx   

Armando Elsharkawy
T: +52 55 5201 7517
E: aelsharkawy@macf.com.mx

Taxand's Take

It seems that the Fibra E will attract the attention of investors to energy and infrastructure projects. The tax regime applicable to a Fibra E and to all of the participants involved seems attractive, although it remains to be seen how it will work in practice. These new regulations require clarification in certain cases but we expect that additional regulations will be published soon. In any case, the future of this new investment vehicle seems promising and hopefully it will have the same success that Mexican real estate investment trusts have enjoyed recently but in a shorter period of time. 

Taxand's Take Author

Manuel Tamez
Mexico

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