As in most countries, tax losses are an important topic that foreign investors should take into consideration when doing business in Mexico, not only because tax losses could reduce the tax burden of future profits generated by Mexican entities, thus creating a tax asset, but also because the losses could have an important impact to the financial and tax results of the foreign investors. Structuring investments in Mexico and preparing business models and budgets should include an analysis of tax losses, because otherwise important benefits could be lost. The scope of this article is to provide a general overview of the treatment of tax losses in Mexico and to discuss some of the more relevant issues to take into consideration. Although the treatment of tax losses of individuals is similar to the treatment applicable to entities, this article will focus on the rules that apply to the latter.
Taxpayers are entitled to carry forward their tax losses up to ten years after the loss occurred. The tax loss carry forward reduces the tax liability of taxpayers by reducing the taxable income in those years in which profits are generated. One of the most important rules that characterize the Mexican tax losses system is that when a taxpayer fails to apply a tax loss, when the taxpayer was entitled to do so, the right to deduct such amount in subsequent years is forfeited. Provided certain rules are applied, tax losses can be restated for inflation and are not subject to be transferred (not even through a merger). Tax losses can be carried forward not only against the yearly income tax return but also against the monthly income tax returns. It is important to mention that taxpayers are not allowed to carry forward their tax losses against the Mexican flat-tax. The Mexican flat-tax was not designed to create tax losses; instead, taxpayers could generate a tax credit when their deductions exceed their taxable income for flat-tax purposes. The aforementioned tax credit could be carried forward for ten years against flat-tax and against income tax.
In the case of a merger, the tax losses of the entity that disappears will be lost. On the other hand, the surviving entity will only be able to carry forward its tax losses to profits generated in business activities that the entity carried out when the tax losses were generated.