A Mexican group buying a European target has to decide something before it decides anything else, and it is usually decided by default. Where does the debt sit. If the money is raised in Mexico and lent on, the interest is a Mexican deduction and a foreign income stream. If it is raised at the level of the European acquisition vehicle, the interest is a European deduction and the Mexican parent sees only a shareholding. Most groups end up in between, with a shareholder loan from Mexico alongside third party debt in Europe, and with nobody having modeled which deduction survives.
Both jurisdictions cap the deduction, on different measures. Mexico runs two separate limits on the same interest and applies whichever produces the larger disallowance. The Netherlands runs one general limit and a separate anti abuse rule aimed precisely at acquisition debt owed to a related party. The mismatch is where the cost lives.
Where the debt sits decides the answer
The Mexican rules on interest are all in article 28 of the Ley del Impuesto sobre la Renta, which lists what is not deductible. Two of its fracciones deal with interest as a quantum, one with the ratio of debt to capital and one with the ratio of interest to earnings. Article 11 deals separately with interest that is recharacterized entirely, and article 166 governs what has to be withheld when the interest leaves the country. None of these turns on the purpose of the borrowing. A loan taken to buy a Dutch holding company is measured on the same footing as working capital, which is worth stating because acquisition finance is often documented as though the acquisition itself gave it a status.
The three to one limit, and how the excess is measured
Fracción XXVII denies the deduction of interest on the amount of the taxpayer’s debts that exceeds three times its accounting capital, where those debts are owed to foreign related parties within the meaning of article 179. The excess is the average annual balance of all the taxpayer’s interest bearing debts, less three times the figure obtained by adding the accounting capital at the beginning and at the end of the year and dividing by two. If the average annual balance of the debts owed to foreign related parties is lower than that excess, the whole of the interest on those debts is denied. If it is higher, the disallowance is a proportion, obtained by multiplying the interest by the excess divided by that balance.
Debts of members of the financial system in their own line of business are left out of the calculation, as are debts incurred for productive infrastructure linked to strategic areas or, since the reform of 18 November 2015, to electricity generation. The ceiling can be raised where the taxpayer shows that its activity genuinely requires more leverage and obtains a ruling under article 34-A of the Código Fiscal de la Federación. That route is slow and has to be started long before signing.
The option on capital, and what 2021 did to it
Taxpayers may elect to treat as accounting capital, for this purpose only, the average of the opening and closing balances of the contributed capital account and the net after tax profit accounts, an election that carries a five year minimum.
The reform published in the Diario Oficial de la Federación on 12 November 2021 rewrote that election, the five year lock included. Pending tax losses not yet applied against the fiscal result now have to be subtracted from that sum. And the election is unavailable where the resulting figure exceeds 20 per cent of the accounting capital for the year, unless the taxpayer shows during an audit that the difference has a business reason and that the composition of those accounts is supported. The election survives only where the tax accounts and the financial statements tell roughly the same story. Where they diverge, the ratio bites earlier than the model assumed.
Thirty per cent of adjusted taxable profit
Fracción XXXII, added by the decree published on 9 December 2019, denies net interest for the year exceeding 30 per cent of adjusted taxable profit, and applies only to taxpayers whose interest accrued on debts during the year exceeds 20,000,000 pesos. That gate is not per company. It applies jointly to all the legal entities of Title II and to permanent establishments of non residents belonging to the same group or that are related parties, divided among them in proportion to the accumulable income generated in the previous year. A group with several Mexican entities does not get the threshold several times.
Net interest is accrued interest on debts, less interest income, less the apportioned threshold. Adjusted taxable profit is the taxable profit under article 9 fracción I, increased by accrued interest and by everything deducted in the year for fixed assets, deferred expenses, deferred charges and preoperating expenditure. Where it is zero or negative, the whole of the interest is denied, except the part outside the fracción.
Disallowed net interest carries forward for ten years and is then lost. It is added to the following year’s net interest and tested again, oldest first, and only if the taxpayer keeps a register of the pending amounts available to the authorities. Public infrastructure, construction, hydrocarbons, other extractive projects, electricity and water are outside the fracción, as are public debt yields, state productive enterprises and the financial system.
The two fracciones are not cumulative. The statute resolves the overlap in a single sentence at the end of fracción XXXII: it applies only where the non deductible amount it produces is greater than the amount produced by fracción XXVII, in which case fracción XXVII does not apply. The exercise is therefore to run both and take the worse. A group that has satisfied itself on the debt to capital ratio has answered half the question, because the earnings based limit can still disallow interest in a year when the Mexican operating company has a poor result, without any change to the loan.
Interest that the statute calls a dividend
Article 11 sits above both limits. Where interest arises on credits granted to Mexican companies or permanent establishments by related parties, it is treated as a dividend in five listed cases. Two matter in acquisition finance: interest whose payment is conditioned on obtaining profits or whose amount is fixed by reference to them, and interest on back to back credits.
That definition is wide. It covers operations in which one person provides cash, goods or services to another who directly or indirectly provides cash, goods or services back to the first or to a related party of it. It also covers financing secured by cash, a deposit, shares or debt instruments of a related party or of the borrower itself, to the extent so secured. Financing routed through a bank does not escape it: the fracción applies even where the credit is granted through a financial institution resident in Mexico or abroad. The consequence is not merely a lost deduction, since recharacterized interest is treated as a distribution, and fracción XXVII is expressed to operate without prejudice to articles 11 and 179.
Withholding on the way out, and the payments denied outright
Article 166 sets the withholding on interest whose source of wealth is in Mexico. The rate is 10 per cent for foreign state financing entities and foreign banks that are the beneficial owners and supply the information the Servicio de Administración Tributaria requires, and 4.9 per cent for interest on debt instruments placed among the investing public and on certain instruments issued by financial institutions. It is 15 per cent for reinsurers and 21 per cent in the cases listed in fracción IV. For everything else it is the maximum rate of the tariff in article 152, applied to the excess over the lower limit of the top bracket of that tariff. The 10 per cent and 4.9 per cent rates fall away where the beneficial owners receive more than 5 per cent of the interest and either hold more than 10 per cent of the voting shares of the debtor or are more than 20 per cent owned by it.
Two further fracciones deny the deduction outright rather than capping it. Fracción XXIII denies payments to related parties or under a structured arrangement where the counterparty’s income is subject to a preferential tax regime, with a rebuttable presumption where onward deductible payments within the group equal or exceed 20 per cent of the payment made. It does not apply where the payment derives from the recipient’s own business activity and the recipient has the personnel and assets to carry it on, and that relief is itself available only where the recipient is constituted and effectively managed in a jurisdiction with which Mexico has a broad exchange of information agreement, and it falls away where the payment is preferentially taxed through a hybrid mechanism. Whether the regime is preferential at all is decided by article 176, which catches income untaxed abroad or taxed at less than 75 per cent of the tax that would arise in Mexico, a level an ordinary Dutch company on the general corporate rate stays above. Fracción XXIX denies payments that are also deductible for another member of the same group, unless the corresponding income is picked up.
The Dutch side of the same loan, and what has to be settled first
The European leg is capped too. Article 15b of the Wet op de vennootschapsbelasting 1969 denies the balance of interest to the extent it exceeds the higher of 24.5 per cent of corrected profit and 1,000,000 euro, corrected profit being computed before the limitation and adding back depreciation, write downs and the interest balance itself. The Dutch corporate rate for 2026 is 19 per cent on the first 200,000 euro and 25.8 per cent above.
Article 10a is the provision acquisition structures walk into. It denies interest, costs and currency results on debts owed in law or in fact, directly or indirectly, to a related company or individual, where the debt is connected to a profit distribution, a capital repayment, a capital contribution, or the acquisition or extension of an interest in a company that becomes a related company as a result. Buying a European target with a shareholder loan from the Mexican parent is the last of those. The article can be rebutted, but the rebuttal has to be built into the file when the acquisition is documented, not assembled afterwards.
Above the loan sits the shareholding. Article 13 exempts results from a participation of at least 5 per cent, subject to the tests that exclude a participation held as an investment. Outbound dividends carry 15 per cent under article 5 of the Wet op de dividendbelasting 1965, and interest going to a low taxed jurisdiction or through an artificial arrangement carries the conditional withholding tax at the highest corporate rate under article 4.1 of the Wet bronbelasting 2021.
The sequencing follows. The two earnings based limits, one at 30 per cent in Mexico and one at 24.5 per cent in the Netherlands, are measured on different profits, so the same loan can be capped at both ends and relieved at neither. In one mandate we moved the external debt to the level where the operating profit actually was and left the cross border leg as equity, because the modeling showed the interest being disallowed twice. That decision has to be taken before the facility is signed. Afterwards, the only variables left are the ones the statutes have already fixed.
This article is informational and does not constitute tax or legal advice. The treatment of any structure depends on its facts and on the law of each jurisdiction involved. Each engagement is subject to scope and applicable regulation.