ISDAInternational Swaps and Derivatives Association, Inc.

Derivatives and Risk Management in Mexico

Tax Treatment of Derivatives

José Carlos Silva

Background

• Statutory definition of “derivatives”– Right or obligation to

• Buy or sell

• Pay or collect differences

– Sale of contractual rights

– Includes futures, options, “coberturas”, swaps

Tax vs. Non-Tax Derivatives

• Tax – Underlying asset is publicly traded

– Referred to publicly known indicators

• Non-Tax – all other

Debt vs. Equity

• Debt– Interest rates

– Notes

– CPI

• Equity– Other securities

– Commodities

– Currency

– Other indicators

Hybrid = debt

Debt vs. Equity

• Debt – CPI Warrants under CNBV 10-157 rules

– Interest rate futures – 2019/95 BdeM

– CPI futures 10-231 & 2019/95 BdeM

• Equity– Coberturas, currency futures 2019/95

– Warrants

– Forwards

– MexDer transactions

• OTC – underlying asset rules

Residents

• Cash settled– Gains are ordinary income

– Losses may be deducted

• Physically settled– Capital gains rules

• All amounts updated for inflation

Residents

Tax effects• Equity

– At maturity or when cash differences are paid

– Exception: Currency derivatives – option to accrue December 31

• Debt– Accrual basis

Non Residents

• Equity • Taxed in Mexico if underlying assets are shares

issued by a Mexican corporation AND counterparty is a resident

• 20% on gross income, or

• 40% on net profit (within 3 months)

• If physically settled, capital gain rules apply• Even if sold to non resident

Non Residents

• Equity– Exempt if warrants on publicly traded Mexican shares

– Tax havens taxed at 40% on gross

Non Residents

• Debt• Taxed if counterparty is a resident

• Rate depends on beneficial owner

– OR

• Physical delivery of notes issued by resident• 10%

Non Residents

• Rate applied on cash leaving Mexico– Offset cash differences if possible

• Beneficial owner rates– Banks resident in treaty jurisdictions – 4.9%

• Mandatory registration

– Other registered banks – 10%

– Paid by Mexican banks – 21%

– Other cases – 40%

Tax Treaties

• Broad treaty network• Article 11 may

– refer to interest “as defined in domestic legislation”

• Debt derivatives included

• E.g. USA

– Contain limited definition of interest

• Debt derivatives not included

• E.g. Netherlands, Switzerland

ISDAInternational Swaps and Derivatives Association, Inc.

Derivatives and Risk Management in Mexico

Tax Treatment of Derivatives

José Carlos Silva