What is CUFIN and its tax relevance?
A Net Tax Profit Account (CUFIN) is an account that every company with tax residence in Mexico is required to establish in order to comply with the Federal Income Tax Law (ITL). In general, CUFINs show the aggregate amount of profits for which the company has paid corporate income tax and the employees' statutory profit sharing.
The main use of CUFINs is to allow companies to distribute dividends to their shareholders free from income tax otherwise applicable to such distributions. The balance of CUFIN also increases the cost of shares, hence it reduces the taxable profit in case of sale.
Green CUFINs were established in the ITL in 2016 as a double tax incentive formed by the accelerated depreciation of machinery and equipment and the application of a theoretical, more favourable CUFIN instead of the regular CUFIN.
Accelerated depreciation of machinery and equipment
The general rules stated by the ITL allow companies that acquire machinery and equipment for energy generation to deduct only a portion (usually between 5% and 10%) of their investment in each fiscal year. The natural response to these rules is to increase the companies' tax basis and anticipate the income tax accordingly during the initial years of the projects.
The first tax incentive allows companies to apply an accelerated depreciation of the machinery and equipment acquired for renewable energy and cogeneration systems – namely, to deduct 100% of these investments in the fiscal year in which they were made. In this way, companies will not anticipate the payment of income tax as mandated by the general rule.
Application of Green CUFIN
Once a company has applied the accelerated depreciation of machinery and equipment, it can determine its tax profit and its CUFIN as follows:
- To determine its real tax profit, the company will deduct 100% of the specialised machinery and equipment in the first year. Consequently, the company will reduce its tax basis for income tax purposes and defer the payment of its income tax.
- Simultaneously, the company will be allowed to determine a theoretical tax profit as if it had applied a regular depreciation of the machinery and equipment. If the former results in an income tax, the latter will be deemed paid. For CUFIN purposes, the company will be deemed to have anticipated its tax profit and the payment of the resulting income tax. In this way, it will be allowed to distribute tax-free dividends to its shareholders before any income tax is effectively paid.
These tax incentives cease to apply once the company starts generating tax profits considering the accelerated depreciation of the machinery and equipment as from the moment when the regular CUFIN applies instead.
Conditions to apply Green CUFIN
Companies willing to apply the tax incentives must comply with the following requirements:
- At least 90% of the gross income of the company must come from the generation of renewable energy.
- The company must use the machinery and equipment for at least five years.
- The company must distribute dividends up to the full amount of its Green CUFIN every year.
The effect of a Green CUFIN is deferral of income tax payment at the corporate level while the shareholders anticipate the benefits of their participation in the entity. This is a valuable incentive for power generation companies and its requirements can be easily complied with through an adequate corporate structure.
The overall effect of a Green CUFIN incentive is explained in the following chart.
