Mexican Federal District Courts, with the assistance of directive given by the Supreme Court of Justice of Mexico, have established that asubstitution of employer takes place when the party acting as the employer transfers directly or indirectly its business to a third party.According to the concept of employment substitution, the transferring employer is jointly responsible with the transferee employer regardingall labor and Social Security obligations for a term of six months with respect to any acts or obligations arising prior to the transfer. Withrespect to housing benefits, the joint liability has a term of two years. Various causes may lead to a substitution of employer, including someof the most common: i) when a company or individual acquires the labor force being used by a third party; ii) when a third party acquires amajority or totality of the productive assets of a company and continues using them in the same business, and iii) when a company, underthe same corporate scheme, manages its employees, assets and production capacity and desires to separate its employees into a differentcompany distinct from the one that maintains its assets and production capacity.
Potential deductibility of employment benefits confirmed. The Supreme Court of Justice of Mexico has ruled that Article 31,Paragraph XII of the Income Tax Law (Ley de Impuestos Sobre la Renta), which limits and conditions the possibility of deductingemployee benefit expenses if the employees are unionized or not, and according to the amount of contributions or payments toSocial Security, is unconstitutional and violates the principle of tax fairness, in view of the fact that taxpayers that are in the sameposition for purposes of Mexican income tax receive different treatment in accordance with how they classify their employees.This decision is important because it not only resolves the constitutionality of Article 31, Paragraph XII of the Income Tax Lawmentioned above, but it also establishes a criterion for determining whether a tax fairness principle has been violated when theavailability of a tax provision depends on the exercise of a deduction in situations outside of the scope of the tax involved.Decision CXXIX/2006. Income. Article 31, Paragraph XII, of the related tax law limiting deductions for employment expenses asviolative of the tax fairness principle (legislation in force as of January 1, 2003).
Mexico and Brazil enter into treaty to avoid double taxation. On January 1, 2007. the Decree Promulgating a Treaty between theGovernments of the United Mexican States and Federal Republic of Brazil to Avoid Double Income Taxation and Prevent TaxEvasion was published in the Official Journal of the Federation, along with its protocol, signed in Mexico City on September 25,2003. With this, Mexico will allow its tax residents to credit against Mexican income tax owed those taxes that have been paid inBrazil. This is the same treatment provided under similar treaties entered into by Mexico, in which the treaty attempts tostandardize various tax definitions in both jurisdictions, promote the exchange of fiscal information, establish guidelines foravoiding abuses in the use and interpretation of the treaty and, particularly, alleviate the double imposition of taxes between thecontracting states. With this agreement, Brazil joins a group of countries with which Mexico currently has treaties to avoid doubletaxation including, among others, the United States, Canada, China, Russia, Indonesia, Portugal, Austria, Israel, Chile, Germany,Japan, Greece, Luxembourg, Romania, Poland, the Czech Republic, Australia and Argentina. Strategic Alliance Agreement reached between Mexico and Chile. A Strategic Alliance Agreement between Mexico and Chilewas published in the Official Journal of the Federation on December 19, 2006 and entered into force on December 27, 2006. Theagreement seeks to strengthen the bilateral relationship through a strategic alliance in political, economic, commercial andcooperation areas between Mexico and Chile. In the political arena, it seeks to strengthen dialogue in furtherance of the bilateralrelationship, as well as to encourage acting jointly in regional and multilateral forums for the defense and promotion ofdemocracy and human rights. With respect to commercial and investment matters, such items will continue to be governed by theprovisions of the Free Trade Agreement entered into by the United Mexican States and the Republic of Chile, signed on April 17,1998. In regard to government cooperation, these efforts will be focused on political, institutional, democracy and human rights,as well as economic and environmental themes.
Precautions for sublessees. In recent years it has been common practice in the Mexican real estate industry for a lessor to grantuse of real property through a sublease, which allows for various tax and legal strategies of developers. In this respect, one mustkeep in mind that a sublease agreement is a contract that is subordinated to the lease agreement on which the sublease is based.The general nature of the state civil codes in force throughout the Mexican Republic establishes that a lessee may not subleaseproperty or assign its rights without the consent of the lessor/owner. With this in mind, if the lessor/owner expressly approves thesublease agreement, unless agreed otherwise, the sublessee assumes all the rights and obligations of the lessee/sublessor, whichmay not be known by the sublessee, much less desired by the sublessee. Based on the foregoing, sublessees must obtain a releasefrom the lessor/owner from any assumption by the sublessee of the rights and obligations of the lessee/sublessor, as well asrecognition on the part of the lessor/owner that the sublease agreement will continue in force in case the original lease agreementis terminated for any reason.