Understanding the business purpose test in the Mexican tax system – International Tax Review

by | Aug 2, 2022 | Business

As part of the global trends to try to reduce aggressive tax schemes, in recent years the OECD has suggested adopting the business purpose test as a general anti-abuse rule.In domestic legislation, the business purpose test (Article 5-A of the Federal Tax Code 2020) is a tool against tax avoidance that allows tax authorities to disregard artificial transactions that do not serve a business purpose when taxpayers obtain a tax benefit that is superior to the reasonably expected economic benefit (’economic benefit’).On the one hand a tax benefit is identified as the reduction, elimination, or deferral of a contribution, on the other hand a reasonably expected economic benefit exists when the transactions of a taxpayer intend to generate income, reduce costs, increase value of assets, improve market positioning, among others.Specifically, although Article 5-A of the Federal Tax Code was introduced for the first time in 2020, its scope was broadened with the amendments made to the Federal Tax Code and to the Income Tax Law, in force as of 2022, which included the business purpose test as a mandatory requirement for:Mergers and spin-offs not to be considered as an alienation of assets;Corporate restructuring authorisations to be considered valid; andAvoiding the application of back-to-back loans treatment to financing between related parties.The consequence …

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