Real Estate Tax Incentives under Siege: The 2008 Mexican Tax Reform October 20, 2007 LUIS M. PÉREZ DE ACHA

I. Business Flat Tax (IETU) Overview The IETU will be in full force and effect as of January 1 st, The applicable rate will be as follows: 16% for 2008, 16.5% for 2009, and 17% afterwards. The Asset Tax Statute (IMPAC) will no longer be in force.

I. Business Flat Tax (IETU) Overview The IETU levies income on a cash flow basis derived from the: –Transfer of goods. –Rendering of independent personal services. –Granting of the temporary use or advantage of goods.

I. Business Flat Tax (IETU) Authorized Deductions Taxpayers will be able to deduct the amounts paid as consideration for the: –Transfer of goods. –Rendering of independent personal services. –Granting of the temporary use or advantage of goods.

I. Business Flat Tax (IETU) Authorized Deductions The deductions must be related with the taxable income. Losses in Income Tax (ISR) from previous tax years are not taken into account to determine the IETU base.

I. Business Flat Tax (IETU) Creditable Amounts An specific credit is granted by applying a factor to wages and social security contributions. For 2008 and 2009, respectively, the applicable factors will be: and Such amount only takes into consideration items that are taxable income for the relevant workers.

I. Business Flat Tax (IETU) International Taxation The taxable event under IETU will be closely the same as in the ISR. IETU has almost the same deductions than the ISR. The taxable base in IETU and ISR may be considered a net base. ISR may be credited against the IETU which is allegedly a minimum tax.

II. Cash Deposits Tax (IDE) IDE is levied upon cash deposits that exceed $25, (US$2,300) within a month period. The applicable tax rate is 2% over the excess amounts. This Tax will be creditable against the ISR. The IDE Statute will enter into force as of July 1 st, 2008.

III. Federal Tax Code Directors, managers, and administrators shall be liable when the entities they manage abandon their tax domicile without giving notice to the Mexican tax authorities.

IV. Income Tax Preferential Tax Regimes (REFIPRES) Non-passive (active) income obtained in a country that executed a Broad Information Exchange Agreement, now will be subject to REFIPRES provisions. Royalty payments received by a foreign resident shall not be deemed income subject to REFIPRES under specific circumstances.

IV. Income Tax Preferential Tax Regimes (REFIPRES) A substance over form principle has been incorporated. When simulation takes place, the Mexican tax authorities may tax the underlying transaction. New “passive income”: –Gain derived from the sale of intangible property –The income derived from the sale of goods located in a different country than that of residence of the seller.