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Taxand Mexico provides an update on the latest tax changes occurring in Mexico

26 Jul 2010

Mexican Senate Approves Convention with South Africa Coinciding with the Football World Cup
Coinciding with the Football World Cup , the Mexican Senate approved the Convention for the Avoidance of Double Taxation entered into between Mexico and South Africa. The text of the Convention is still to be released. However, following the negotiation tendency of the Mexican tax authorities, as it did with the Mexico-Netherlands and Mexico-Germany Tax Treaties, we expect it to be generally in line with the OECD Model.

Mexican Authorities Issue Regulations to Incentivise REITs

The Mexican tax authorities have issued administrative regulations to incentivise the use of Mexican REITs, basically to harmonise the flat rate business tax (the so-called IETU, as per its initials in Spanish) with the income tax rules. We believe that such rules may help in the process of practical application of REITs in the Mexican real estate market. However, the key point to move things forward in this particular field is the elimination of local taxes (each State of Mexico has its own transfer tax rules) triggered when ownership of real estate property is transferred to the REIT, as has been amended in the Mexico City Tax Code.

Mexican Pension Funds Now Able to Invest in Development Equity Certificates
The Mexican Government launched a series of securities amendments in order to encourage and increase infrastructure projects, such as toll roads, hospitals, airports, etc. Mexican Pension Funds will be able to invest in Development Equity Certificates, which are certificates authorised by the Mexican Banking Commission and the Mexican Stock Exchange. The yield on these Certificates is linked to the underlying infrastructure assets, granting the right on their productivity, ownership or disposal, without the obligation to pay principal or interest. These types of projects are attracting a strong interest from foreign pension funds and other investment funds due to the value of such projects, and also because of the large gains potential of a moderate or nil tax burden (i.e. exemption for pension funds or reduced withholding rates for other Tax Treaty country residents).

Amendments to the Maquila regime have not been published yet
Finally, it is worth mentioning that the amendments to the Maquila regime have not been published yet. According to extra official conversations with officers from the Mexican Ministry of Economy, the amendments are still being reviewed as a result of objections from the Manufacturing Sector in Mexico, and their publication in the official gazette is expected to take place by the end of June.

Taxand's Take

The entry into force of new treaties will continue encouraging business between countries. We believe that a full application of the REIT regime in Mexico will detonate major investments in real estate in Mexico, once the local transfer tax issue is solved by each state of Mexico. Development Equity Certificates will attract more investment in those fields, specially if a tax benefit derives from them, as is the case of foreign Pension Funds.

Your Taxand contacts for further queries are:
Manuel Tamez Zendejas
T. +52 55 5201 7403

Raymundo Dominguez

Taxand's Take Author