Income Tax: Anti-avoidance Amendment for Personnel Service Companies - International Law Office

Personnel service companies have been used in Mexico for many years as a legal and effective means of managing labour-related risks, protecting assets and optimizing compensation schemes. Unfortunately, in some cases this practice has given rise to abusive schemes in which the real nature of an employment relationship is concealed or misrepresented in order to avoid payroll-related taxes, including income tax. The use of abusive schemes has grown dramatically in recent years and the tax authorities have responded by:

• informing taxpayers that such schemes are illegal in a series of press bulletins and through administrative regulations and guidance;
• instigating audits of abusive personnel service companies, as well as taxpayers that use such schemes and tax advisers that design and recommend them; and
• suggesting legal amendments in order to clarify that such schemes are illegal.

Among the legislative changes published so far, the amendments to the Income Tax Law are particularly significant. Although many different abusive outsourcing schemes have been created, most are based on a structure whereby:

• a company formally terminates certain employees;
• the former employees become partners of a different entity;(1)
• the company contracts for services from the personnel service company in exchange for payment; and
• the former employees receive compensation as partners of the personnel service company, rather than salaries and benefits as employees, thereby avoiding tax.

Such schemes claim to offer a number of tax benefits to the parties involved. Among other things, it has been wrongly stated that income received by partners of a personnel service company is tax exempt in the hands of the partners. The amendments to the law simply state that such companies are not entitled to a full deduction of amounts paid to their partners; nor are such amounts always tax exempt in the hands of such partners.

For further information on this topic please contact Christian R Natera at Natera y Espinosa SC by telephone (+52 55 5249 4400), fax (+52 55 5249 4401) or email (cnatera@natera.com.mx).

Endnotes

(1) The most commonly used forms of company are cooperative companies or unlimited partnerships.