printable version | February 2022
Derived from the tax reform to the Income Tax Law (“ISR”) which came into force on January 1, 2022, new obligations were included to appoint a legal representative in Mexico by a resident abroad in article 174 of the Income Tax Law.
We believe that the imposition of such obligations may have a major impact on the application of the benefits provided under domestic legislation or even on the application of treaties to avoid double taxation, for example, in the case of the sale of shares by residents abroad.
The above is true since when a resident abroad makes a transfer of shares of a Mexican issuer, the general rule is that said resident would be subject to a 25% ISR rate 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 above, in order to comply with the requirement of appointing a legal representative, the representative will have to voluntarily assume joint liability for those he or she represents, in addition to having the necessary solvency to respond as a jointly liable party with respect to the contributions of said resident abroad.
Likewise, Annex 1-A of the Miscellaneous Tax Resolution 2022 (published on December 30, 2021) adds the obligation to file a notice with the tax authorities to report the appointment as legal representative of the resident abroad. The aforementioned notice must be submitted prior to the expiration of the deadline to pay the ISR to which the resident abroad is obliged for obtaining 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 a power of attorney be 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 these requirements could result in the foreign resident not being able to apply the alternative that is most beneficial to him, for example, applying the 35% rate on the profit obtained from the sale of the aforementioned shares or applying the benefits of the treaty to avoid double taxation in question, since in order to do so it is necessary to comply with all the new requirements for appointing 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.
Likewise, we consider that it leaves residents abroad in a state of legal uncertainty, since there are certain issues 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 be in compliance with said provisions, among other considerations.
In light of the above, we remain at your service to support you in meeting these requirements, as well as to analyze what alternatives can be implemented for their compliance.
**The publication of this note does not constitute legal advice, nor is it intended to be applicable to particular cases.
If you require additional information, please contact the partner responsible for your matters or one of the lawyers mentioned below:
Mexico Office
Mr. Mariano Calderon V. (Partner), mcalderon@s-s.mx
Lic. Karina Robledo Y. (Counsel), krobledo@s-s.mx
Phone: +52 55 5279-5400
Monterrey Office
Mr. Cesar Cruz A. (Partner), ccruz@s-s.mx
Phone: +52 81 8133-6000
Queretaro Office
Mr. Jose Ramon Ayala A. (Partner) Jayala@s-s.mx
Phone: +52 442 290-0290
