Legal Update: New Tax Requirements for the Appointment of a Tax Representative for the Sale of Shares

Download Document | February 2022

Derived from the tax reform of the Income Tax Law ("ITL") that entered into force on January 1, 2022, new obligations were included to designate a legal representative in Mexico by a foreign resident in Article 174 of the Income Tax Law.

We believe that the imposition of said obligations may impact the application of the benefits provided under domestic legislation or even the application of treaties to avoid double taxation, for example, in the case of the alienation of shares by residents in a foreign.

The foregoing, since when a foreign resident makes a sale of shares of a Mexican issuer, the general rule is that said resident would be subject to a rate of 25% of ISR on the sale price. However, the resident abroad may choose to apply the 35% rate on the profit obtained or even, under certain treaties, business reorganizations may be exempt if, among other requirements, a legal representative is appointed in the country.

Considering the foregoing, to comply with the requirement to designate a legal representative, the representative will have to voluntarily assume the joint and several liabilities of his clients, in addition to having the necessary solvency to respond as a joint obligor concerning the contributions of said resident abroad.

Likewise, in Annex 1-A of Miscellaneous Tax Resolution 2022 (published on December 30, 2021) the obligation to submit a notice to the tax authorities to inform about the designation as legal representative of the foreign resident is added. The aforementioned notice must be submitted before the expiration of the term to pay the entire income tax to which the foreign resident is obliged to obtain income from a source of wealth in Mexico.

Among the most relevant requirements that must be met to submit the aforementioned notice are the following:

• That power of attorney is granted to the legal representative of the resident abroad for acts of ownership.
• Provide a list of the assets of the foreign resident or representative that may be seized, to guarantee the ISR caused by the foreign resident.

In our opinion, the application of said requirements could have the consequence that the resident abroad is not able to apply the alternative that is most beneficial for him, for example, applying the rate of 35% on the profit obtained in the alienation of the aforementioned shares or apply the benefits of the treaty to avoid the respective double taxation, since to do so it is necessary to comply with all the new requirements to designate a legal representative, an issue that now goes beyond the requirements established in the Income Tax Law before the reform that came into force in 2022.

In the same way, we consider that it leaves residents abroad in a state of legal uncertainty since there are certain edges regarding the amount required to guarantee the assets, whether the amount should be updated, as well as the interpretation that should be given to said requirements to comply with said provisions, among other considerations.

In view of the foregoing, we remain at your service to support you in meeting these requirements, as well as to analyze what alternatives can be implemented for compliance.

**The publication of this note does not constitute a legal consultation, nor is it intended to apply to particular cases.

If you require additional information, please contact the responsible partner for your affairs or one of the lawyers mentioned below:

Mexico City Office

Lic. Mariano Calderón V. (Partner), mcalderon@s-s.mx

Lic. Karina Robledo Y. (Counsel), krobledo@s-s.mx

Tel: +52 55 5279-5400

Monterrey Office

Lic. César Cruz A. (Partner), ccruz@s-s.mx

Tel: +52 81 8133-6000

Queretaro Office

Lic. José Ramón Ayala A. (Partner) jayala@s-s.mx

Tel: +52 442 290-0290