Background

In the alcoholic beverages sector, commercial and financial structures often rely on the use of trademarks, formulas, distillation processes, logistical models, distribution schemes, and other essential intangible assets that contribute to product differentiation.

As a result, there is a need to make payments for royalties, trademark licenses, or services related to intellectual property.

Following the 2020 tax reform, the tax treatment of payments made abroad was amended to establish that payments to related parties, or through structured arrangements, are non-deductible when the corresponding income is subject to Preferential Tax Regimes (hereinafter, “REFIPRES”). Likewise, the exception that allowed the restriction not to apply when consideration was paid at arm’s length was eliminated; notwithstanding, transactions between related parties must still be conducted at arm’s length.

What Does Section XXIII of Article 28 of the LISR Provide?

This provision establishes that the following payments are non-deductible:

I. Payments made to related parties whose income is subject to REFIPRES, or payments to related parties through hybrid arrangements.

II. Payments made to related parties through structured arrangements.

This limitation applies to any type of payment, including, among others:

• Royalties
• License fees
• Services
• Interest
• Inventory purchases

However, certain exceptions allow these payments to be treated as deductible. The primary exception applies when the related party receiving the payment carries out demonstrable business activities, meaning it has the necessary assets and personnel to perform the activity for which it receives such income. This exception applies only if the recipient of the payment is incorporated and has its effective place of management in a country with which Mexico has a broad information exchange agreement.

It should be noted that these exceptions do not apply when payments are made through hybrid arrangements. Under the LISR, a hybrid arrangement exists when domestic and foreign tax legislation characterize differently a legal entity, legal arrangement, income, asset ownership, or a payment, resulting in a deduction in Mexico while all or part of the payment is not subject to taxation abroad.

Additionally, the provision restricts the deductibility of payments to related parties when made through structured arrangements. The LISR defines a structured payment as any arrangement in which the taxpayer or one of its related parties participates, and where the consideration is linked to payments made to preferential tax regimes that benefit the taxpayer or one of its related parties.

Taxpayers engaged in such transactions must conduct a thorough and proactive analysis and documentation of their payment structures with related parties—and even with third parties—when the income of such parties is subject to REFIPRES. This includes a detailed review of payment concepts and payment chains to identify subsequent transfers.

Regarding intangible assets, the OECD’s Actions 8–10 Report, published in October 2015, establishes that the arm’s length principle requires that all group members receive appropriate compensation for the functions performed, assets used, and risks assumed in relation to the Development, Enhancement, Maintenance, Protection, and Exploitation (DEMPE) of intangibles. Accordingly, it is essential to prepare a robust DEMPE analysis to clearly identify which entity is responsible for developing, enhancing, maintaining, protecting, and exploiting the intangibles.

Relevance for Alcoholic Beverage Companies

In multinational alcoholic beverage groups, intellectual property is often centralized in European jurisdictions where preferential tax rates may apply.

Consequently, it is critical to assess whether, in the jurisdiction where such payments are taxed, the consideration is subject to an income tax rate lower than 75% of the rate that would be incurred in Mexico.

Additionally, companies in the alcoholic beverages sector should consider the following factors:

a. Agricultural product prices tend to fluctuate due to climate conditions, pests, seasonality, and other factors, making it difficult to establish stable market prices for transactions with related parties.

b. The agricultural value chain typically involves multiple stages—production, processing, distribution, and commercialization—often carried out by entities within the same multinational group. A detailed economic analysis is required for each stage, considering the functions performed, assets used, and risks assumed by each participating entity. In practice, identifying truly comparable companies with similar functions, assets, and risks for each stage of the value chain can be challenging.

c. Transaction comparability factors (such as purchase and sales volumes, planting and harvesting cycles, and use of intangibles) must also be considered in economic analyses. Preliminary analyses are therefore advisable to identify risks, support decision-making, and prevent post-year-end transfer pricing adjustments.

d. Logistics costs associated with transporting products vary significantly depending on geographic location and should be incorporated into transfer pricing economic analyses.

Conclusions

As discussed herein, a highly competitive industry such as the alcoholic beverages sector requires significant differentiation in the marketplace, a need that has largely been met through the exploitation of intellectual property.

However, the trend toward housing intellectual property outside Mexico has resulted in increased scrutiny by tax authorities. In this context, JA del Rio can support companies in designing, evaluating, and documenting multidisciplinary strategies for the remuneration of intellectual property use, ensuring compliance with applicable tax and transfer pricing regulations.

J.A. DEL RÍO offers a wide array of specialized consulting services to assist you with these and other matters, in order to ensure that your project complies with the applicable characteristics  contained in this agreement.

If you have any questions, J.A. DEL RÍO can provide you with our experts to advise in matters concerning compliance with your legal and tax obligations. Once again, please let us know if we may be of any further assistance to you at: contacto@jadelrio.com.