Doing Business

Doing Business in Mexico 2015

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173 Doing Business in Mexico 2015 Translation of branch profits Foreign branches of Mexican corporations must keep full accounting records and recognize income or losses for tax purposes on a current basis. In most cases transactions may be translated into pesos when effected (i.e., at that day's exchange rate) or, at the election of the taxpayer, at the exchange rate at the end of each month. Translation of subsidiary earnings Since the earnings of a foreign subsidiary are taxable only as and when formal dividends are remitted, its earnings need not be translated on a current basis. Dividend income is translated at the exchange rate of the day on which it is paid to the shareholder. Different rules apply to PTR investments (the Mexican CFC equivalent). Double taxation relief Foreign tax credit The income tax law allows Mexican corporations and individuals a foreign tax credit on income from foreign sources. The law provides that taxpayers may credit against their Mexican income tax liability the amount of income tax paid in foreign countries on their foreign-source income, as long as such income is subject to income tax in Mexico. In general, credit is available in respect of foreign income taxes directly withheld from foreign-source income or paid with a tax return filed in the foreign country in the name of the Mexican resident or by a foreign branch of a Mexican corporation. However, in the case of dividends or distributions of profits received from corporations resident in a foreign country, when a Mexican corporation owns at least 10% of the capital of the foreign corporation for six months prior to the dividend, a deemed-paid credit can also be taken for the proportionate part of the underlying foreign corporate income tax paid by that corporation, corresponding to the dividend or distribution of profits received. In this regard, the Mexican law provides several formulas to determine the applicable foreign tax credit and its limitations. In calculating the amount of income subject to Mexican tax in these cases, the dividend or distribution must be grossed up to include the proportionate amount of tax paid by the foreign corporation, as illustrated in Table XII. This credit is allowed also on tax paid on a second holding tier, when certain conditions are met. Foreign tax credit limitation The foreign tax credit will be allowed up to the effective Mexican rate of tax on the taxable income (tax result) shown by the annual return, as reflected in Table XII under an "overall" type limitation. Taxpayers who are not in a position to take full credit for the taxes paid to a foreign country on foreign-source income are allowed a ten-year carryforward of such excess foreign taxes, provided certain compliance requirements are met and the credit is limited to the corporate tax rate of 30%. In addition, foreign tax credit should be computed on a country by country basis. And it should be determined for each taxable year in which dividends arise. In addition, specific registries should be recorded and source documentation regarding such registry. 18

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