Mexico-Controlled Foreign Corporation Tax Might be Triggered by U.S. Tax Reform Law

The reduced corporate tax rate under the U.S. Tax Cuts and Jobs Act (TCJA) may inadvertently cause some U.S. companies with Mexican ownership to be treated as controlled foreign corporations under Mexico’s tax law.

The Mexican tax law includes, as do many foreign tax systems, a low-tax rule aimed at offshore preferential tax regimes, which are called “Regimen Fiscal Preferente.” The law defines them as jurisdictions with an effective tax rate lower than 75% of the Mexican rate.

Under the TCJA, the U.S. corporate tax rate was reduced from 35% to 21%. The Mexican corporate tax rate is 30%, 75% of which would be 22.5%. This has caused some to ask whether some U.S. companies owned by Mexican entities could be classified as controlled foreign corporations under Mexico’s tax law. This would lead to additional tax liability for the owner(s).

However, a simple comparison of statutory rates probably is not the correct measure. Rather, it is likely that an analysis of the actual effective tax rate being paid by the U.S. entity would be necessary, and possibly including both U.S. and state taxes. Consequently, although the U.S. statutory rate is now low enough to trigger questions about the status of Mexican-owned U.S. companies, those questions may not have simple answers.

Consequently, Mexican companies with control of U.S. corporations may face questions as to the tax status of those companies, and possibly additional tax liability.

Related: Denmark Overhauls Maligned Tax Administration

How This Impacts Mobility

Worldwide ERC® member companies could be affected by higher taxes on companies with which they do business, either in Mexico or the U.S., depending on the CFC status of those companies.

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