Payments derived from labor subcontracting will be deductible when, among other requirements, the contractor obtains from the subcontractor (i) copies of the tax receipts for salary payments made to the employees performing the outsourced services, (ii) a copy of the acknowledgement of receipt, and (iii) a copy of the tax return showing that the income tax withholding and contributions to the Mexican Social Security Institute were paid.
Subject to certain limitations, losses incurred in prior years by a business may be carried forward and deducted from income earned over a subsequent ten-year period. Net operating loss carrybacks are not allowed.
Losses carried forward may be increased by the percentage increase in the NCPI between the seventh and 12th months of the fiscal year in which they are incurred and thereafter up to the sixth month of the fiscal year in which they are applied.
In the case of entities engaged in activities related to the exploration and production of hydrocarbons in maritime waters at depths of 500 meters or more, net operating losses (following the same adjustment rules mentioned above) may be used to reduce their taxable income within the following 15 years.
Tax loss carryforwards are non-transferable, not even by virtue of a merger. However, the tax losses the surviving entity had prior to the merger may continue to be used to offset the income derived from the same business activities that originated them and, with certain restrictions, may also be used to offset income that derives from new business activities. In the case of a spin-off, tax loss carryforwards should be divided between the surviving entity and the spun-off entities in accordance with their main business activity, prior to the spin-off, as follows: • Commercial main business activity: In proportion to inventory and accounts receivable. • Other non-commercial entrepreneurial activities: In proportion to fixed assets.
Current tax legislation may limit the offsetting of tax loss carryforwards upon direct or indirect changes in ownership that imply a change in control of the Mexican entity in certain situations (i.e. whenever the revenue of the last three years is less than the tax loss carryforwards updated for inflation balance of the year prior to the change in control, among other situations). The limitation, if applicable, would limit the netting of tax loss carryforwards available prior to the change in control against the income derived from the same business activities that originated them.