Deductibility of Payments to REFIPRES.

Section XXIII of Article 28 of the Mexican Income Tax Law is a crucial pillar in regulating the deduction of payments to related parties and structured agreements. Its purpose is to prevent tax evasion and avoidance practices that may arise in transactions between linked companies. On April 4, 2024, the First Chamber of the Supreme Court of Justice of the Nation issued jurisprudence number 1a/J.58/2024 (11a.) in response to a controversy that questioned the legality and applicability of this provision.

Case Background:

The case involved a legal entity that is part of a multinational group and challenged Section XXIII of Article 28 of the Income Tax Law. The company argued that this rule generated legal uncertainty and affected the principle of tax legality by leaving it to the Tax Administration Service (SAT) to issue rules for modulating the restriction. After a legal process, the matter reached the Supreme Court of Justice of the Nation.

Supreme Court Ruling:

The First Chamber of the Supreme Court of Justice of the Nation, in its ruling, determined that the limitation established in Section XXIII of Article 28 of the Income Tax Law respects the principles of legal certainty and tax legality. The court argued that the rule provides clarity on when payments made to related parties subject to preferential tax regimes are deductible, without the need to exhaustively define all involved concepts. Furthermore, it noted that enabling the Tax Administration Service to issue secondary rules for the application of the law does not affect legal certainty, as it is common for operational aspects to be regulated in lower-ranking provisions.

Conclusions and Perspectives:

The analysis of this case underscores the importance of having a clear and precise framework, especially regarding transactions between related parties and the use of structured agreements. It also emphasizes the importance of reviewing and determining whether agreements with related parties can be classified by tax authorities as “structured agreements,” to be able to measure and assess the risks involved.

Mexican entities that are members of international business groups must conduct a thorough analysis of the agreements and transactions they carry out with their related parties, particularly those based in jurisdictions considered as Preferential Tax Regimes, to ensure the deductibility of payments made to these related parties.

At Tax Art, our expert tax consultants and bilingual consultants are ready to advise you on the interpretation and application of this jurisprudence, as well as on other key aspects of fiscal and legal regulations. Contact us to obtain personalized fiscal services and ensure effective compliance with your tax obligations.