The choice of an international structure for your Mexican operations is important. First, the parent company will want to consider the tax treaty advantages, if any, between Mexico and the parent company’s jurisdiction. A tax treaty will serve to reduce or completely eliminate double taxation on withholdings, dividends or capital gains. Second, the parent company will need to consider whether it will be liable for capital gains and taxes on foreign dividends distributed from the foreign subsidiary within Mexico. Finally, whether the foreign holding company or subsidiaries will be taxed on the receipt of dividends and capital gains within the home country of the parent company. Regardless of whether an S.A. de C.V. (Corporation) or S. de R.L. (Limited Liability Company) is formed in Mexico, both are subject to the same corporate tax rate by the Mexican authorities. You are likely getting the point by now that setting up the correct Multinational Subsidiary Structure will likely come down to taxation on the types of activities to be performed and the complexities of the Mexican operations.
Structure I: Basic Foreign Subsidiary
The Basic Foreign Subsidiary Structure is the simplest multinational corporate structure. It is commonly used for import or export operations with a single facility or single line of business. For example, the Mexican subsidiary owns and operates a manufacturing operation that distributes to customers within Mexico or exports to a foreign jurisdiction. In this case, the S.A. de R.L. (Limited Liability Company) may be appropriate because it contemplates limited independence from the parent company. Companies such as BestBuy and Hewlett Packard utilize this structure.
The structure allows for the foreign company to operate freely within Mexico and either export or import products in its own name. Additionally, it may facilitate procurement of clients by reducing costs for export and distribution. This is because without a subsidiary in Mexico, the company will be forced to pay a percentage of the value of each shipment to an import or export broker who imports or exports on behalf of the company in its name.
Under the Basic Foreign Subsidiary Structure, the foreign entity may be established as an S. de R.L., which may be treated as a “check-the-box” or pass through entity for tax purposes in the United States. The home company, for example, a United States parent company, would receive a tax credit for income, dividends, and withholding taxes paid to the Mexican government. The same would be true for most countries that have a comparable tax treaty in place. This may avoid double-taxation.
Structure II: Multilevel Holding Company Structure
Parent companies with multiple subsidiaries in Mexico are advised to establish a holding company in Mexico to exercise direct control over the several subsidiaries. Companies that will engage in multiple lines of business, operate multiple manufacturing facilities or for other reasons wish to establish several different legal entities for operational purposes are advised to choose this structure. Dividends paid from Mexican subsidiary to a Mexican holding company are not taxed. Therefore, it is possible to provide for transfers of cash for investment or operational purposes between subsidiary entities without repatriating profits to the foreign jurisdiction. For example, related-party transactions, royalty payments and operating costs may be reduced by keeping funds within in Mexico and using a holding company to reduce tax exposure.
Here, the holding company may be organized as an S. de R.L. or an S.A. de C.V. and the subsidiaries may be organized with the same structure. However, organizing as an S. de R.L. may provide tax incentives upon repatriation of profits for purposes of avoiding double taxation and applicable tax credits in the home jurisdiction of the parent company. Likewise, if a Mexican subsidiary is sold or liquidated, the earnings of it can be reinvested by way of the Mexican Holding Company without being repatriated to the home jurisdiction thus providing tax benefits.