On 18 April 2018, the Mexican Senate approved a bill that would, among other things, allow the Mexican tax authorities to assume that a taxpayer made an unlawful transfer of net operating losses (NOLs). The assumption will only apply, however, if the tax authorities determine that the taxpayer: (1) was involved in a restructure, spin-off or merger; or (2) changed shareholders and, as a consequence, exited the corporate group to which it belonged. In addition, a taxpayer must fall within one of the six scenarios discussed below, for the assumption to apply. The Senate's approval sends the bill to President Nieto for his signature.

The bill lists the following six scenarios:

• The taxpayer generates NOLs that are higher than its total assets within the first three years of its incorporation and derives more than half of its deductions from transactions between related parties.
• The taxpayer incurs NOLs after its first three years of incorporation because more than half of its deductions resulted from transactions between related parties, and those deductions increased from the previous fiscal year by more than 50%.
• In fiscal years before the fiscal year in which NOLs were generated, the taxpayer decreases by more than 50% its capacity to perform its main business activities, as a result of the transfer of all or part of its assets through: (1) a restructure, spin-off or merger, or (2) a transfer to a related party.
• The NOLs result from a transfer of assets in which the property elements are segregated (i.e., in the case of usufruct) and that segregation is not taken into account when calculating the asset acquisition cost.
• The taxpayer incurs NOLs and the Mexican tax authorities determine that the taxpayer modified the tax treatment of the investment deductions under the Mexican Income Tax Law before applying less than 50% of the deduction.
• The taxpayer incurs NOLs and the Mexican tax authorities determine that the taxpayer considered taking deductions for the subscription of debt instruments and extinguished the acquired obligation through a payment method other than those allowed under the Mexican Income Tax Law.

If the Mexican tax authorities determine that a taxpayer falls within any of the six scenarios, they will notify the taxpayer through the electronic tax inbox that the "Unlawful Transfer of NOLs" is being assumed. The taxpayer will have 20 days to file all the information and documentation required to prove that no unlawful transfer took place. After this 20-day period, the tax authorities will have six months to resolve the issue and notify the taxpayer through the electronic tax inbox.

The Mexican tax authorities will publish, through both their website and the Official Federal Gazette, a list of the taxpayers that could not prove that an "Unlawful Transfer of NOLs" did not take place. Those taxpayers will lose the right to apply the NOLs.

According to a Senate Treasury Commission opinion, this measure is intended to prevent practices that tend to erode the income tax base through the unlawful transfer of NOLs.

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CONTACTS

For additional information with respect to this Alert, please contact the following:

Ernst & Young, LLP, Latin America Business Center, New York

• Ana Mingramm
  ana.mingramm@ey.com
• Enrique Perez Grovas
  enrique.perezgrovas@ey.com
• Calafia Franco
  calafia.francojaramillo@ey.com
• Pablo Wejcman
  pablo.wejcman@ey.com

Ernst & Young LLP, Latin America Business Center, Chicago

• Alejandra Sanchez
  alejandra.sanchez@ey.com

Ernst & Young LLP, Latin America Business Center, Miami

• Terri Grosselin
  terri.grosselin@ey.com

Ernst & Young LLP, Latin America Business Center, San Diego

• Ernesto Ocampo
  ernesto.ocampo@ey.com

Ernst & Young LLP (United Kingdom), Latin American Business Center, London

• Jose Padilla
  jpadilla@uk.ey.com

Ernst & Young Tax Co., Latin America Business Center, Tokyo

• Raul Moreno
  raul.moreno@jp.ey.com

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ATTACHMENT

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