Corporate Borrowings - Inflation Adjustments And Debt-To-Equity Rules

If a Mexican resident company obtains loans or credits from its parent company or from a financial entity abroad, interest on the debt (including foreign exchange losses) must be reduced by an inflation adjustment with respect to all debts (including non-interest-bearing debts). This adjustment may exceed the interest expense and create a corresponding taxable gain.

Although there are currently no specific debt-to-equity rules in Mexican tax law, Mexican tax provisions that have been in effect since 1 January 1997 require that loan transactions between related parties be on an arm's length basis. Under these provisions, interest charged at an excessive rate and interest on back-to-back loans may be treated as a dividend.