1. CORPORATE EXPATRIATION IN MEXICO RICARDO LEON-SANTACRUZ Washington D. C. APRIL 16, 2009

2. RESIDENCE Persons subject to tax Basis -Residents World-wide income -Permanent Establishments Attributable income -Non-residents without PEMexican Source income -No entity classification for Mexican tax purposes, all entities taxed alike Main type of entities -S.A. Corporation -S.R.L. Limited Liability Co. Entity residence –Place of effective management – deemed to be Mexico if person (s) who decide, manage or administer the day to day control of the entity reside in Mexico Integral tax system: -Profit is taxed only once at a corporate level, no tax on dividends if paid out of pre-taxed earnings No inheritance or gift tax

3. RESIDENCE Resident OECD 2008 -Place of effective management is the place where key management and commercial decisions that are necessary for the conduct of the entity’s business as a whole are in substance made -Only one place of effective management at any one time -Factors to consider: -Place of meetings of board -Place where CEO and other senior executives work -Place where day to day senior management is carried on -Place where headquarters are located -Governing law -Place where accounting records are kept

4. Prior to 2002 -Expatriation used to shift profits out -CFC rules were jurisdiction based, hence expatriation and use of holding regimes in non- blacklisted country’s allowed for deferral of income in Mexico and deduction of expense in Mexico -In practice intellectual property was bundled into IP holding company’s and expatriated without any tax implications. Chargeback of royalty allowed for deduction of expense in Mexico w/reduced withholding tax and extended deferral

5. Today -Comprehensive controlled foreign company legislation, not jurisdiction driven. Advance recognition of income in a segregated regime -Pass-through subsidiaries are deemed CFC’s -Foreign tax credit limitation, two tiers of subsidiaries -Expatriation is by statute deemed a liquidation -Mexican companies are expanding outside of Mexico, so planning ahead makes sense -Corporate legislation allows expatriation, but place of effective management must also be expatriated for tax purposes

6. Expatriation -Expatriation occurs when a legal entity ceases to be resident of Mexico per internal tax law or tax treaty -Deemed liquidation by statute -All assets held by entity in Mexico and abroad are deemed to be sold -Deemed asset sale at market value of assets, if not available, at appraisal value -Asset cost is depreciated tax cost at time of expatriation -Excess between market value and cost basis is taxed at 28% -Tax due must be paid in within 15 days -Legal representative must be designated or independent certified auditor must file certified return -Indirect implication -Limitation on deduction of royalty payments to related parties outside of Mexico if intangibles were created in Mexico and expatriated, unless transferred out of Mexico at arm’s length

7. Expatriation -Expatriation occurs when a legal entity ceases to be resident of Mexico per internal law or tax treaty: -Through corporate resolution and/or -Relocation of place of effective management Mexico Switzerland Corporate domicile Corporate domicile Mexico Switzerland Corporate domicile Place of management -Deemed sale of assets, consider: -Asset base -Tax basis -Fair market value or appraisal value -Real estate transfer tax -Tax attributes (e.g. tax credits or NOL’s)

8. Expatriation: -Expatriation: -Deemed as sale of assets of Holding Co. -Basis in stock at shareholders level? Holding Co. (Mexico) Mexico sub-holding Foreign sub-holding Holding Co. (Mexico) Mexico sub-holdingForeign sub-holding Holding Co. (Foreign) Corporate domicile and/or place of management

9. Expatriation: Alternatives -Cross-border merger: -Mexican holding merges into new foreign holding -Merger taxed as sale of stock at 28% on the gain at shareholder level, if any -Gain determined based on fair market value of merged company’s stock -Loss of tax attributes: In Mexico? In foreign country? Holding Co. (Mexico) Mexico sub- holding Foreign sub-holding Holding Co. (Mexico) Mexico sub- holding Foreign sub- holding Holding Co. (Foreign)

10. Expatriation: Benefits -Expatriation or cross-border merger results in: -Lower effective tax rate -Avoid Mexico’s CFC rules -Avoid limitation on foreign tax credits -Avoid statutory employee profit sharing distribution of foreign dividends received, if any -Enhancement of equity & credit worthiness associated with sovereign country risk -For publicly traded stock, access to tax free capital gain by Mexican resident individuals on the sale of publicly traded stock can be retained if the New Holding Co. lists itself and is traded in the Mexican Stock Exchange

11. www.sanchezdevanny.com Monterrey Tel.: +52 (81) 8153-3900 Fax: +52 (81) 8153-3901 Mexico City Tel.: +52 (55) 9000-2668 Fax: +52 (55) 9000-2667 Contact : Ricardo Leon-Santacruz rls@sanchezdevanny.com