Mexican Tax Court issues ruling on back to back
loans
Background
The Mexican Federal Tax and Administrative-Law Court (TFJFA for its acronym in Spanish) has ruled on
back to bank loans related to a transaction between related parties. The ruling upholds the Mexican Tax
Administrative Service’s (SAT for its acronym in Spanish) position that a loan arising from the transfer of
shares to a related party falls within the definition of a back to back loan as provided in the Mexican income
tax law. The ruling further provides that even though the interest on the back to back loan should be treated
as a non deductible dividend, the loan itself must still be included in the calculation of the inflation adjustment
on monetary liabilities resulting in taxable income to the taxpayer. Furthermore, the ruling provides that the
interest should be considered interest income to the nonresident, even though it is treated as a dividend for
the Mexican payer.
It is important to note that rulings issued by the TFJFA may be subject to appeal to a higher court and, as such,
this case is likely not final, this ruling gives an indication of how the courts are interpreting the back to back
rules in Mexico as well as the current position of the Mexican tax authorities.
The transaction challenged by the SAT and further analyzed by the TFJFA, refers the following
“Transaction”:
Ernst & Young
Aseguramiento | Asesoría | Fiscal | Transacciones
• Holding companies A and B transferred their shares held in a related party, C, to another related party D,
in exchange for shares of D;
• Subsequently, D transferred C’s shares to a related party Company E, in exchange for a combination of
shares and debt, secured with an interest bearing promissory note.
• Company E deducted the interest on the note payable to D. Comments
The challenge by the tax authorities was made for the 2003 tax year. The SAT challenged the deduction of
the interest on the loan taken by Company E under the argument that the loan was a back to back loan as
defined in article 92, Section V of the Mexican Income Tax Law. In this respect, article 92 provides that interest
on a back to back loan should be considered a non deductible dividend. Section V, of article 92 defines a back
to back loan as one in which “a person provides cash, goods or services to another person; that goes on to
provide cash, goods or services to the first party or to a related party.”
The analysis provided in support of the Court’s ruling in this case included the following:
• The Transaction in which company D transferred C’s shares to a related party, Company E, in exchange
for equity and a loan when previously D had received C’s shares from A and B, fell exactly within the
definition of the statutory provisions of article 92, Section V of the MITL. That the transfer of the shares,
first to D from a related party and then to Company E, a related party was sufficient to be considered a
back to back loan. Thus, the interest is derived from a back to back loan and should be deemed to be
dividends for purposes of the income tax law. As a dividend, the interest is non-deductible.
• The court further ruled that the fact that there might be a business purpose for the reorganization and
therefore for the origination of the loan, does not affect the determination of whether or not the loan is
considered a back to back loan. The fact that the Transaction had been carried out as part of a corporate
restructuring, is irrelevant for the reclassification of the interest on the back to back loan to a deemed
dividend, since the law does not refer to business purpose.
Acerca de los Servicios Fiscales
de Ernst & Young
Su negocio sólo alcanzará su verdadero
potencial si lo construye sobre sólidos
cimientos y lo acrecienta de manera
sostenible. En Ernst & Young creemos que
cumplir con sus obligaciones fiscales de
manera responsable y proactiva puede
marcar una diferencia fundamental. Por
lo tanto, nuestros 25,000 talentosos
profesionales de impuestos, en más de 135
países, le ofrecen conocimiento técnico,
experiencia en negocios, metodologías
congruentes y un firme compromiso de
brindar un servicio de calidad, en el lugar del
mundo dondequiera usted se encuentre y sin
importar el servicio fiscal que necesite. Así es
como Ernst & Young marca la diferencia.
Para mayor información visite
www.ey.com/mx
© 2011 Mancera, S.C.
Integrante de Ernst & Young Global
Derechos reservados
Ernst & Young se refiere a la organización global de
firmas miembro conocida como Ernst & Young Global
Limited, en la que cada una de ellas actúa como una
entidad legal separada. Ernst & Young Global Limited no
provee servicios a clientes.
• Further, the reclassification of interest to dividends is applicable to the resident in Mexico for purposes of
its deductions, and not to the income obtained by the resident abroad. Thus, the provisions of a Double
Tax Treaty which could be interpreted to limit the ability to deny the deduction are not applicable to the
resident in Mexico regarding its tax obligations. Moreover, certain provisions of Article 11 of a tax treaty
are not applicable. Article 11 allows the adjustment of interests paid in excess of an arm’s length amount.
However, in the case at hand, the transfer pricing was not questioned. This argument is also important as withholding tax would still be due on interest paid to a non resident.
Dividend income is generally not subject to withholding tax rather dividends are taxed at the distributing
company level when the payment is in excess of previously taxed earnings.
• Finally, it was ruled that the fact that the interest deduction was denied and the inflationary gain on the
loan was not reduced from taxable income as part of the inflationary adjustment for the debt does not
imply that the interest has an ambivalent component, given that the taxable income was not challenged
by the tax authority. In this regard, the interest is reclassified, however, the loan is still considered as debt,
which is subject to inflationary gain calculations. The foreign exchange gain or loss on the debt was also
not challenged, since again this related to the classification of the debt and not the interest payment.
This case is likely not completely through the courts and it remains to be seen how the appeal process will
terminate.
Document
Ernst
& Young
title -Additional
México text
Este boletín ha sido preparado cuidadosamente por los
profesionales de Ernst & Young, contiene comentarios
de carácter general sobre la aplicación de las normas
fiscales, sin que en ningún momento, deba considerarse
como asesoría profesional sobre el caso concreto. Por
tal motivo, no se recomienda tomar medidas basadas
en dicha información sin que exista la debida asesoría
profesional previa. Asímismo, aunque procuramos
brindarle información veráz y oportuna, no garantizamos
que la contenida en este documento sea vigente y
correcta al momento que se reciba o consulte, o que
continuará siendo válida en el futuro; por lo que
Ernst & Young no se responsabiliza de eventuales
errores o inexactitudes que este documento pudiera
contener. Derechos reservados en trámite.