Doing Business

Doing Business in Mexico 2015

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166 Tax and Legal Services - PwC Mexico Domestic shareholders Dividends As from 2014, the applicable tax regime on dividends changed, and profits distributed from such year to individuals (or to foreign residents) are subject to a 10% tax. This tax should be withheld by the Mexican Corporation paying the dividends. In addition to such withholding tax, the tax treatment of dividends is as follows: Dividends paid by Mexican corporations are not deductible by the corporation distributing them or includable in the gross income of the domestic corporate recipient. No corporate taxes are applied if the dividends are distributed out of earnings on which the regular corporate tax has been paid (CUFIN balance, see Chapter 15) Dividends and other corporate distributions of earnings that for any reason have not been subject to the regular corporate tax are subject to tax at an effective rate of 42.86%. This is a tax on the distributing corporation, not a withholding or other tax on the shareholder. To enable a corporation to determine whether a dividend is distributed out of earnings that have already been subject to the corporate income tax, it must keep a record of such earnings in a special memorandum account called "after tax earnings" (free translation of "Cuenta de Utilidad Fiscal Neta", or CUFIN). In general terms, these accounts would include each year's previously taxed net earnings plus domestic dividend income received by the corporation, minus dividends distributed out of the applicable account. Each year, before adding the current year's previously taxed net earnings, the balance in the CUFIN account at year-end will be adjusted for inflation. Due to the fact that the above-mentioned 10% dividend withholding tax only applies for profits obtained by the Mexican corporation as from 2014, Mexican entities are required to maintain a CUFIN balance with earnings generated up to 2013, and start an additional CUFIN account to record earnings generated as from 2014 (please note that when those two accounts are not handled separately, or when the aforementioned earnings are not identified, the earnings distributed are understood to be generated as from 2014). A detailed set of rules, illustrated in Appendix IV, establishes a procedure for computing the balance of a corporation's previously taxed net income, taking into account the company's taxable earnings since 1975. Appendix IV illustrates both the computation of each year's additions to this account and the restatement for inflation to be made each year. Dividends or distributions of profits from foreign sources received by Mexican shareholders must be included as ordinary income, but a foreign tax credit may be claimed by the taxpayer (see also "Dividends and interest" in Chapter 18). In addition, dividends obtained by individuals are subject to an additional 10% tax paid on the gross amount of the dividend received from foreign sources. Dividends distributed to Mexican resident individuals are taxable to those individuals on a gross-up basis, allowing a domestic deemed-paid credit for income taxes paid at 30% by the Mexican corporation paying the dividends, which will effectively make the dividends taxable at an additional 5% regular income tax, since the maximum tax rate

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