As part of a multidisciplinary strategy of the Mexican Ministry of Finance and Public Credit (SHCP) and the Mexican Central Bank (Banxico) that is meant to stimulate the financial sector in Mexico, a presidential decree was issued on January 8, 2019, introducing several tax incentives that are effective immediately.

In general, these incentives are intended to incentivize Mexican entities to raise funds at a lower cost and from a wider array of foreign investors, and to encourage Mexican private companies to become public. While these incentives are certainly positive, some of these seem to be ill-conceived and, as currently drafted, raise concerns with respect to their application in practice.

Notes placed amongst the general investing public

Under current legislation, foreign holders of notes issued by Mexican entities are subject to withholding taxes on interest payments thereon. In general, such tax must be withheld by the Mexican person making the payment (although the withholding obligation has been transferred to financial intermediaries that act as custodians, in the case of publicly traded securities). Mexico imposes different rates of withholding tax on interest paid to non-residents, ranging from 4.9% to 40%, depending on (i) the nature and place of residence of the recipient or beneficial owner of the interest payment, (ii) the Mexican person paying the interest, or (iii) the security that the interest payment derives from.

Specifically, a reduced 4.9% withholding tax rate is available on interest paid to nonresidents from debt securities (e.g. notes) “placed amongst the general investing public”. It is relevant to note that this rate exists for the benefit of all non-resident note holders, regardless of their tax nature or place of residence. In general, the market practice is for the issuer to gross up in respect of such 4.9% withholding, so that the holders receive their interest net of any Mexican taxes. Continue reading...