EY Energy Alert - FIBRA E Tax Regulation

September 18, 2015
ENERGY
ALERT
Mexico’s FIBRA E
Tax Regulations
Following the opening of Mexico’s energy sector in late 2013, the
need to devise efficient ways to finance infrastructure projects
became a pressing issue. A possibility was to replicate the Master
Limited Partnerships (“MLPs”) that have been traded in the United
States since the early 1980s. MLPs allow companies to raise capital
at a lower cost—when compared to more traditional sources of
financing—by grouping qualifying assets that generate stable cash
flows; investors, in turn, receive higher-than-average yields.
In early September, Mexico’s MLP-like vehicle, the FIBRA E, was
launched. On September 17, 2015, the country’s Finance Ministry
announced the tax rules that will govern it. In general terms,
according to the amendments of the Miscellaneous Tax Resolution,
the FIBRA E tax regime is based on the current regulations applicable
to the existing real-estate FIBRA.
However, as opposed to the latter, in which the assets (immovable
property exclusively intended for leasing) must be owned directly by
the issuer trust or by a subsidiary trust, in the case of FIBRA E a legal
entity must own the assets. This is due to the nature of the vehicle’s
“exclusive activities” (see below). As such, under the FIBRA E
regime, the issuer trust must invest in shares issued by one or several
Mexican legal entities (the so-called “Promoted Companies”), which
in turn own the assets and perform such “exclusive activities”. All
investors of the FIBRA E are subject to taxation in Mexico on income
obtained through the FIBRA E, according to the regime applicable to
each of them.
General Requirements of the FIBRA E Regime
The following requirements apply to the FIBRA E regime, in addition
to those established by the Mexican tax legislation with regards to
real-estate FIBRAs, if applicable:
• A FIBRA E must be a trust created according to Mexican legal
guidelines. A Mexican tax resident banking institution or an
authorized brokerage house must act as trustee.
• All shareholders of a Promoted Company must be legal entities
that reside in Mexico for tax purposes. This requirement should be
met before a FIBRA E acquires shares of a Promoted Company.
• At least 90% of a Promoted Company’s annual taxable income
should derive from the following “exclusive activities”:
- The treatment, refining, transportation and storage of oil; the
processing, compression, liquefaction, decompression, regasification, transportation, storage and distribution of natural gas; the transportation, storage and distribution of oil products; and the transportation by pipeline and subsequent storage of petrochemicals, among others.
- The generation, transmission and distribution of electricity, in compliance with the Electric Industry Law and its Regulations.
- Infrastructure investment projects that include concessions, services or any other contractual arrangement executed
between private parties and the government for performing services for the public sector or the final user, provided that such projects are currently in operations and have a remaining term of at least 7 years, in the following areas:
(i) Roads, highways, railways and bridges;
(ii) Ports, maritime terminals and port facilities
(iii)Civilian airfields, excluding private ones;
(iv)The expansion of the country’s telecommunications network;
(v) Public safety and social reintegration;
(vi)Drinking water, sewerage and wastewater treatment.
- The administration and management of the FIBRA E trusts.
The gains from the sale of land, fixed assets and deferred expenses
might be considered as taxable income for purposes of calculating
the 90% income threshold, provided that such assets are used in the
development of the aforementioned “exclusive activities”. In addition,
the taxable annual inflation adjustment and foreign exchange profits
might be excluded from the total taxable income in order to calculate
the 90% income threshold.
EY-Mexico
• State Productive Companies and their subsidiaries that are
entitled to hydrocarbons exploration and production rights,
as well as other legal entities that entered into a contract for
hydrocarbons exploration and production with the National
Hydrocarbons Commission, are not allowed to qualify as
Promoted Companies.
• N
► o more than 25% of the accounting value of a Promoted Company’s non-monetary assets in any given year can be invested in “new” assets (less than 12 months since their acquisition and start of operations).
• At least 70% of the annual average net worth of a FIBRA E
trust must be invested in shares of Promoted Companies, which
in turn must comply with the “exclusive activities” test. The
remainder must be invested in securities issued by Mexico’s
Federal Government and registered at the National Securities
Registry, or in shares of debt-related mutual funds.
• A FIBRA E trustee must issue trust certificates (certificados
bursátiles fiduciarios or CBFEs) amounting to the entire
trust’s patrimony. Such CBFEs must be registered at the
National Securities Registry.
• A FIBRA E trustee must distribute to CBFEs holders, at least
once a year and no later than March 15, at least 95% of a
FIBRA E tax result.
• A notice should be filed before the Mexican tax authorities stating
under oath that all the requirements of the FIBRA E tax regime
are met.
• A FIBRA E must be registered at the FIBRAs registry, which is
managed by the Mexican tax authorities.
• Promoted Companies’ shareholders must fulfill a number of
formal obligations in order to ensure the payment of income tax
on tax profits pertaining to such Promoted Companies (see
“Tax regime applicable to the Promoted Companies”).
• All shareholders of a Promoted Company must state in writing,
before the Mexican tax authorities, the following: (i) they accept
to offset their tax losses from previous years to the first sale of
shares to a FIBRA E, only against profits not obtained from the
Promoted Company; (ii) they assume a joint liability with respect
to the income tax resulting from the FIBRA E tax regime (vis-
à-vis their shareholding participation); (iii) they assume a joint liability with regards to all the tax obligations of the Promoted Company, previous to the transfer of its shares to a FIBRA E (vis-à-vis their shareholding participation); and (iv) they accept the primacy of the Promoted Company’s rules of distributions.
• A Promoted Company should not be subject, either before or
after the acquisition of its shares by a FIBRA E, to the regimes
of “Sociedad Anónima Promotora de Inversión Bursátil” or
“Sociedad Anónima Bursátil”, as defined by the Mexican
Securities Market Law.
• The trust agreement must include distribution rights for
managers, the trust settlor or related parties of a FIBRA E.
The payment of any compensation, commission, fee, incentive
or distribution will be subordinated to the payment of a
preferred return to CBFEs holders, excepting those
commissions, fees or distributions that are required for the
proper functioning of the fund.
Transfer of a Promoted Company to a FIBRA E
A Promoted Company’s shareholders, whose shares are transferred
(totally or partially) to a FIBRA E, must determine the taxable
gain or loss from the sale of the company’s land, fixed assets and
deferred expenses on a proportional basis, as if they were selling
assets instead of shares. The sale price of such assets will be that
agreed for the share transfer, plus the debt that the Promoted
Company may have at such a date, also on a proportional basis. In
order to determine the aforementioned gain or loss, the Promoted
Company’s shareholders must compare the sale price with the taxcost basis of such assets.
If a taxable gain is due, shareholders are obliged to pay the
applicable income tax without any deferral option. This taxable gain
implies a deferred expense for the respective FIBRA E. However, if
the result is a tax loss, this will imply that the FIBRA E should have
to recognize a deferred gain (see “Tax regime applicable to the
FIBRA E”). The sale of shares issued by a Promoted Company
must be audited by a Certified Public Accountant registered before
the Mexican tax authorities.
- Drop-down rules
a)Contribution of assets
The transfer of land, fixed assets or deferred expenses from legal
entity residing in Mexico to another (a Promoted Company) is not
considered as a sale of goods for Mexican federal tax purposes,
provided that the following requirements are met: (i) assets are
only related to the “exclusive activities” described above; (ii) the
transfer is made as equity contribution to a Promoted Company,
as long as the full consideration for the assets’ contribution is paid
with shares issued by the Promoted Company; (iii) at least 2% of
the shares issued by the Promoted Company are acquired by a trust
that complies with the FIBRA E requirements, within a maximum
period of 6 months from the date on which the assets’ contribution
is effective; and (iv) the Promoted Company complies with all the
requirements to qualify as an investment target of a FIBRA E.
If any of the applicable requirements are not met, the transfer of
the assets will be considered as a taxable sale of goods for Mexican
federal tax purposes, and the applicable taxes will have to be paid
retroactively.
b)Spin-off
The spin-off of a Mexican resident entity, whereby land, fixed
assets and/or deferred expenses are transferred to a Promoted
Company, will not be considered as a sale of goods for Mexican
federal tax purposes, provided that the following requirements are
met: (i) assets are only related to the “exclusive activities” referred
to above, (ii) at least 5% of the shares issued by the Promoted
Company are acquired by a trust that complies with the FIBRA E
requirements, within a maximum period of 6 months from the date
on which the spin-off is effective; and (iii) the Promoted Company
complies with all the requirements to qualify as an investment
target of a FIBRA E.
If any of the applicable requirements are not met, the transfer of
the assets will be considered as a taxable sale of goods for Mexican
federal tax purposes, and the applicable taxes will have to be paid
retroactively.
real-estate FIBRA regime. Therefore, a Promoted Company must
determine its tax result based on the assets’ remaining tax cost.
A Promoted Company is not obliged to make income tax advance
payments; this is consistent with the regime contained in the
Mexican Income Tax Law for real-estate FIBRAs. Finally, a Promoted
Company may freely distribute cash flow to its shareholders as
dividends or capital reimbursements, without triggering a corporate
income tax payment. The 10% dividend tax withholding is not
applicable in respect of dividends distributed to the FIBRA E.
Tax Regime Applicable to the FIBRA E
- Tax Result Computation
A FIBRA E trustee must determine the yearly tax result of its
vehicle in accordance with the provisions of Title II of the Mexican
Income Tax Law. To do so, the trustee must take into account the
following: (i) all the tax results distributed by a Promoted Company
to the FIBRA E; (ii) a tax deduction through the amortization of
the deferred expense arising from the acquisition of a Promoted
Company shares, or the recognition of the deferred gain at an
annual rate of 15% in case of a tax loss triggered upon the transfer
of the shares to the FIBRA E, if applicable (see “Transfer of
Promoted Companies to FIBRA E”); and (iii) any other deduction
that may be required for the proper operation of the FIBRA E trust.
- Tax Result Distribution
In order to calculate income tax base (see “Tax regime Applicable
to the Promoted Companies”), the original investment value of
the assets transferred to a Promoted Company, by either an equity
contribution or a spin-off, will be the undepreciated value prior to
such transfer (there is no step-up for tax purposes).
Tax Regime Applicable to a Promoted Company
A Promoted Company is considered as a business trust for tax
purposes. This implies that a Promoted Company is not considered
a taxpayer per se with regards to income tax. According to the tax
regime applicable to business trusts, a Promoted Company must
determine its yearly tax result as per Title II (“Legal Entities”)
of the Mexican Income Tax Law, and then apportion it among
its shareholders on a proportional basis. The latter, in turn, are
responsible for settling their respective tax payment. Meanwhile,
the FIBRA E must take into account such distribution when
determining its own yearly tax result.
A Promoted Company’s tax loss in a given year cannot be
apportioned among shareholders. Such loss can only be offset
against its future taxable profits. The FIBRA E tax regime does
not allow for a step-up with regards to the assets that belong to a
Promoted Companies, as opposed to the step-up granted under the
The distribution of tax results by a FIBRA E follows the same rules
applicable to a real-estate FIBRA. In general terms, tax result
distributions should be subject to a 30% income tax withholding,
except on the portion attributable to exempt CBFEs holders (i.e.,
Mexican SIEFORES) and legal entities residing in Mexico for tax
purposes (see “Tax Regime Applicable to FIBRA E Investors”).
Any undistributed tax result is subject to a 30% tax rate and is
considered as a final payment. If the amount of the distributions
exceeds the tax result, it is considered as a capital
reimbursement, lowering in turn the acquisition value of
the respective CBFEs.
Tax Regime Applicable to FIBRA E Investors
- Tax Result distributions
The distribution of tax results by a FIBRA E to CBFEs holders
follows the same rules applicable to a real-estate FIBRA. The
applicable tax regime depends on the nature of each CBFE
holder, as summarized below:
- Non-Residents
As a general rule, foreign holders of CBFEs are deemed to have a
permanent establishment in Mexico. However, foreign investors are
not obliged to comply with all the formal obligation related to the
creation and maintenance of a permanent establishment in Mexico
(i.e., obtaining a tax ID number, filing returns, etc.), provided that
all the requirements that apply to the FIBRA E regime are met
and that tax result distributions made by such trust are subject to
income tax withholding, when applicable. In this case, income tax
withheld on FIBRA E tax result distributions is a final payment.
Individuals residing in Mexico should consider the withholding on
the distribution of tax results as income from business activities.
Such individuals are entitled to offset it with their annual income tax
liability, in accordance with the tax rates applicable to each one.
Foreign residents, including pension funds, should consider the
withholding on the tax result distribution as a final payment. Unlike
real-estate FIBRAs, in the case of FIBRAs E foreign pension funds
are not exempt from taxation with regards to income obtained
through a FIBRA E. The rationale is that FIBRA E income has an
“active” nature. By contrast, foreign pension funds are exempted
on real estate investments made in Mexico (i.e. income obtained
through real-estate FIBRAs).
- Sale of CBFEs
Capital gains obtained by CBFEs holders follow the same rules
applicable to real estate FIBRAs. The applicable tax regime depends
on the nature of each CBFE holder, as summarized below:
Contacts:
Alfredo Álvarez
alfredo.alvarez@ey.com
52 (55) 1101-8422
Francisco Olivares
francisco.olivares@mx.ey.com
52 (55) 5283-1489
Óscar López Velarde
oscar.lopezvelardeperez@ey.com
52 (55) 5283-8677
Mario Karim
mario.karim@mx.ey.com
52 (55) 1101-7226