NEW US TAX LAW MAY CAUSE YOU TO PAY ADDITIONAL TAX ON INCOME ACCUMULATED IN YOUR MEXICAN CORPORATION

Under pre-Act law, U.S. citizens, resident individuals, and domestic corporations generally are taxed on all income, whether earned in the U.S. or abroad. Foreign income earned by a foreign subsidiary of a U.S. corporation generally is not subject to U.S. tax until the income is distributed as a dividend to the U.S. corporation.

New law. Under the Act, U.S. shareholders owning at least 10% of a foreign subsidiary generally must include in income, for the subsidiary’s last tax year beginning before 2018, the shareholder’s pro rata share of the accumulated post-’86 historical E&P of the foreign subsidiary as of the ‘‘measurement date’’ to the extent such E&P has not been previously subject to U.S. tax. The ‘‘measurement date’’ is Nov. 2, 2017, or Dec. 31, 2017, whichever date produces a greater result.

The portion of the E&P comprising cash or cash equivalents is taxed at a reduced rate of 15.5%, while any remaining E&P is taxed at a reduced rate of 8%.

At the election of the U.S. shareholder, the tax liability is payable over a period of up to eight years The payments for each of the first five years equals 8% of the net tax liability. The amount of the sixth installment is 15% of the net tax liability, increasing to 20% for the seventh installment and the remaining balance of 25% in the eighth year.

The Act provides a special rule for S corporations. Their shareholders are allowed to elect to maintain deferral on such foreign income until the S corporation changes its status, sells substantially all its assets, ceases to conduct business, or the electing shareholder transfers its S corporation stock.

The Act excludes the post-’86 historical E&P from the REIT gross income tests. In addition, REITs are permitted to elect to meet their distribution requirement to REIT shareholders with respect to the accumulated deferred foreign income over an 8-year period under the same installment percentages as apply to U.S. shareholders who elect to pay the net tax liability resulting from the mandatory inclusion of pre-effective-date undistributed CFC earnings in eight installments. (Code Sec. 965, as amended by Act Sec. 14103)

Legal Aspects of Establishing a Business in Mexico

When you start a business in Mexico, you have decide whether you incorporate; what type of corporation or set up a branch of your US corporation.  If you are a permanent resident you can also set up a sole proprietorship. Below is a great article of the subject written in 2017 (so it is current).

Everything you need to know about forming entities to do busienss in Mexico and operating a business there from Westlaw (click here)

If you wish to review the US tax and legal ramifications of doing business in Mexico with a US attorney who has hundred of clients in Mexico and has been assisting them for over 25 years you should email Don D. Nelson , Attorney at Law at ddnelson@gmail.com     The proper legal and tax guidance will save you not only money but untold problems.

Mexico introduces tax amnesty program – U.S. businesses with pending tax disputes in Mexico should consider immediate action

2013 Mexican Tax Reform Law

Mexico introduced a comprehensive tax amnesty as part of the 2013 tax reform published in the Mexican official gazette on December 17, 2013. Under the program 80 to 100 percent of federal tax debt and related penalties incurred by companies and individuals are forgiven upon request of the taxpayers. Tax penalties for 2012 and 2013, other than penalties for failure to pay the tax, are also reduced by 60 percent.

General conditions. Under the tax amnesty program initiated by the Mexican tax authority (Servicio de Administración Tributaria - SAT) 80 to 100 percent of tax debt of individuals and entities will be forgiven based on the taxpayer's request to the extent the tax debt originated from tax obligations incurred before January 1, 2007.

The amnesty program also allows for a 60 percent reduction of penalties, other than penalties for failure to pay the tax, for the years 2012 and 2013 to the extent such penalties are paid within 30 days of receiving the tax authorities' notification about the penalties.

The amnesty program is part of the 2013 tax reform law (Ley de Ingresos) that was approved by the Mexican parliament on December 13, 2012.

Scope of the amnesty. The tax debt that is covered by the amnesty may be due to omission of income; failure to pay federal income tax or trade import duties (cuotas compensatorias); inflationary interest and penalties regarding either the federal tax or trade import duties; and penalties due to the failure to comply with federal tax obligations other than the payment of the tax (e.g. reporting obligations).

Taxpayers, that have been under SAT audit for tax years 2009, 2010 and 2011 and where the SAT determined as a result of the audit that there had been no tax deficiency or where the taxpayer paid the tax deficiency found by the SAT, will be granted a 100 percent forgiveness of the pre-2007 tax debt.

Mechanics for requesting tax forgiveness. Taxpayers may request the forgiveness of their tax debt by submitting a written application to local office of the SAT corresponding to the taxpayer's domicile or corporate seat.

U.S. corporations or owners of Mexican corporations with operations in Mexico should carefully review their federal tax and trade import duty situation in Mexico for the years involved. Applying for the tax amnesty may result in significant tax savings. The tax amnesty seems to also apply to tax amounts that are under dispute with the Mexican tax authority including amounts that are being litigated in court. Obtaining forgiveness for disputed amounts may bring further savings as it would eliminate dispute and litigation costs.