On April 5^th, 2024, two binding case laws [i] [ii] from the Mexican Supreme Court of Justice (SCJN, per its acronym in Spanish) were published in the Mexican Judicial Weekly Publication. These resolutions are based on the indirect protection trial 483/2021, filed by an individual who argued that the deduction limitation on the non-deductibility provision for payments made to related parties or through a structured agreement violates constitutional principles when the recipient’s income is located in a Low Tax Jurisdiction (REFIPRES, per its acronym in Spanish), as established in section XXIII of article 28 of the Mexican Income Tax Law.

The claimant argued that this restriction infringes on constitutional principles of legal certainty, legality, and proportionality, presenting the following arguments:

1. The deduction limitation causes the company to contribute based on an unrealistic base, which affects the principle of tax proportionality.
    
2. The provision creates legal uncertainty and infringes upon the principle of legality, since it allows the Mexican Tax Authorities (SAT, per its Spanish acronym) to issue rules that modify the scope of the limitation.

In response, the binding case laws establish that the claimant’s arguments do not violate these constitutional principles because:

1. The deduction limitation aligns with the principle of tax proportionality, as it reflects the true taxable capacity of taxpayers.
    
2. This limitation is in accordance with the principles of legal certainty and tax legality, as it provides taxpayers with a clear understanding of its regulatory content. Additionally, it is permissible for the secondary aspects of the regulation’s application to be specified in provisions of lower hierarchy, such as the Mexican General Tax Rules issued by the SAT.

This resolution is significant because it establishes a binding precedent mandating compliance and relates to a tax provision introduced as part of the 2020 Tax Reform. This reform aligns Mexico with measures from the Base Erosion and Profit Shifting (BEPS) project of the Organization for Economic Co-operation and Developments (OECD), aimed at combating and neutralizing hybrid mechanisms. A&M will monitor for any general tax rules issued by the SAT that pertain to this non-deductibility provision.

Our tax team is available for any questions or comments you may have on the contents of this Tax Alert.

Subscribe to our bulletin to stay updated on all tax matters in Mexico

[i]  Binding case law 58/2024 (11a.). Approved by the First Chamber of the SCJN in a private session on March 20, 2024.

[ii] Binding case law 59/2024 (11a.). Approved by the First Chamber of the SCJN in a private session on March 20, 2024.