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Sale of shares through the Mexican Stock Exchange – opportunity knocks

Mexico
Generally, income derived from the sale of shares issued by a Mexican company is subject to income tax at the 25% rate on the gross income, or at the 30% rate on the gain provided that certain requirements are fulfilled.

However, income derived from the sale of shares through the Mexican Stock Exchange may be exempt from taxation in Mexico. This exemption may be achieved either through domestic law or an income tax treaty. In each case, specific formal requirements must be met to be entitled to the exemption. Taxand Mexico explores the exemption alternatives for foreign investors that intend to sell their participation in a publicly traded Mexican company.

Domestic law exemption
Foreign investors, regardless of their residence for tax purposes, may be exempt from income tax in Mexico if they sell shares of a publicly traded company through the Mexican Stock Exchange. The exemption will not apply if:

  • A person or group of persons that directly or indirectly holds 10% or more of the shares representing the capital stock of a Mexican company, sell 10% or more of such shares within a 24 month period, and through one or more than one simultaneous or successive transactions; or
  • A person or group of persons who control the Mexican company and sell their control through one or more than one simultaneous or successive transactions within a 24-month period

If the exemption does not apply, the financial intermediary will be obligated to withhold income tax at the 5% rate on the total income, without any deductions. Alternatively, the foreign investor can elect for the financial intermediary to withhold income tax at the 20% rate on the gain from the transfer of the shares.

Under a recent criterion issued by the Mexican tax authorities, financial intermediaries must withhold income tax if they know that the seller is not entitled to the above exemption, even if they obtained this information through the public domain.

It is relatively easy for the exemption to apply to a foreign investor; however, it is necessary to demonstrate to the financial intermediary that the foreign investor is in fact entitled to the exemption.

Income tax treaty exemption
Even if the sale of shares is subject to taxation under domestic law, the gain may still be exempt by virtue of an income tax treaty. In some cases, an income tax treaty may exempt gains from the sale of shares whether they are sold through a stock exchange or not (eg the French treaty provides for an exemption if the value of the shares is not represented by real estate situated in Mexico). 

In other cases, the treaty may eliminate taxation at source if the seller held less than 25% of the shares of the Mexican company during the 12 months preceding the sale (which is the case of the Canadian and the UK tax treaty), or if the seller is transferring less than 25% of the shares of the Mexican company (eg the Luxembourg tax treaty).

Finally, the foreign investor may be exempt if the income tax treaty provides for an exemption on income derived from the sale of shares through a recognised stock exchange (as is the case of the Swiss treaty). However, in certain cases, the domestic law limitation for the exemption on the sale of shares has been transferred to the treaty. That would be the case of the income tax treaty with the Netherlands, which exempts from taxation at source any gains from the sale of shares through a recognised stock exchange, only if the seller transfers less than 10% of the shares of a company within a 24-month period in one or more simultaneous or successive transactions.

According to the Mexican Income Tax Law, the seller is obliged to obtain a certificate of tax residence to support that he/she is entitled to tax treaty benefits.

The foreign investor should contact the financial intermediary in advance to support that income derived from the sale will be exempt under the provisions of an income tax treaty. 


Your Taxand contacts for further queries are:
Manuel Tamez
T. 52 55 5201 74 03
E. mtamez@macf.com.mx

Luis Monroy
T. 52 55 5201 74 66
E. lmonroy@macf.com.mx

Taxand's Take

As explained above, a foreign investor may be exempt for income tax in Mexico on the sale of shares issued by a Mexican publicly traded company through the Mexican Stock Exchange. The investor may be exempt either under domestic law or under an income tax treaty. However, it is important to make sure that formal requirements are fulfilled and more importantly, due to the recent criterion adopted by the Mexican tax authorities, to support to the financial intermediary that income derived from the sale should be exempt. Otherwise, the financial intermediary may be obligated to withhold income tax. 

Taxand's Take Author

Manuel Tamez
Mexico

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