Control beneficiaries – Comply with new obligations under Mexican law
Effective January 1, 2022, Mexico joined the list of countries that require companies (including those owned by foreigners), trusts, other legal vehicles, financial institutions and the like to collect, maintain, update and, at the request of the Mexican Tax Administration Service (SAT), provide information about controlling beneficiaries (also referred to as beneficial owners or ultimate beneficiaries). As currently in effect, these new requirements are very broad, but they are unclear as to their application and scope. We had hoped that the Mexican government would issue new guidelines, but so far they have not and there is no indication that they will; those bound by these requirements must determine how to comply now with the new rules as they currently exist.
Who is covered?
The new requirements apply to all legal entities, trusts and other legal vehicles in Mexico. The law does not provide for any exceptions (for example, legal persons owned by public companies, private equity funds or other institutional investors are not exempted). For ease of reading, in the future this article will only refer to legal persons, but the discussion applies to trusts and other legal vehicles. In addition, with respect to trusts, the regulations consider trustees, settlors and beneficiaries as controlling beneficiaries and impose all new legal obligations on them.
In addition, notaries public and others involved in the formation of legal persons and financial institutions (with respect to financial account information) have an obligation to obtain information to identify controlling beneficiaries. They must also take reasonable steps to prove their identity and provide this information to the SAT upon request.
What is required?
Each legal entity must collect and maintain more than thirty pieces of information on each of its controlling beneficiaries. Information includes full name, pseudonyms, date of birth, gender, nationality(ies), tax residency, tax identification number, marital status (including spouse’s identity card and matrimonial), the full contact details and detailed information of each controlling beneficiary on their participation in the legal entity.
If the controlling beneficiary exercises indirect control (for example, through legal entities or by means other than ownership), the entity must also obtain and maintain information about the chain of custody used by the controlling beneficiary. In the event of a change in the identity or participation of the controlling beneficiaries, the legal person must update the information within 15 days of the change.
This information shall be maintained as part of the entity’s accounting records and, upon SAT’s request, provided to SAT. Mexican legal entities must maintain their accounting records electronically and the SAT has access to them. It is unclear how new information and documents regarding controlling beneficiaries will be incorporated into the accounting records. The Mexican government may share this information with foreign governments that request information under applicable international treaties.
The legal entity must maintain documentation supporting information on controlling beneficiaries and chain of custody (if applicable). Corporations, notaries public and other persons bound by these requirements must create and implement reasonable and necessary documented internal control procedures to obtain, maintain and update information about controlling beneficiaries. These procedures will form part of their accounting records, which the SAT may request.
Who are the “controlling beneficiaries”?
Section 32-B Trimester Mexico’s Federal Tax Code (CFF) defines “controlling beneficiary” as the individual or group of individuals:
1. Who, directly or through others or any legal instrument (for example, by contract), obtains the benefit arising from their participation in a legal entity or who ultimately exercises the rights to use, enjoy, operate or dispose of a good or service or on whose behalf a transaction is carried out.
2. directly or indirectly exercises control over the legal person. The individual or group of individuals has control when, through securities, contracts or other instruments, they can, directly or indirectly:
(a) dictate decisions at meetings of shareholders (or equivalent) or appoint or remove the majority of directors (or equivalent);
(b) retain voting rights over more than 15% of the share capital; or
(c) direct the administration, strategy or major policies of the legal entity.
Determining who the controlling beneficiaries are is not straightforward. The CFF specifies that to interpret these provisions, legal persons may use the recommendations issued by the Financial Action Task Force or by the Global Forum on Transparency and Exchange of Information for Tax Purposes organized by the Organization for Cooperation and economic development, when their application “is not contrary to the nature of the Mexican tax provisions. However, the provisions of the CFF and the provisions interpreted by these international organizations are different.
In addition, the Mexican government has issued regulations on CFF provisions that do not comply with the recommendations of the aforementioned international organizations. Under the Regulations, corporations must apply all sections and subsections listed above, in sequential order, such that where no controlling beneficiary is identified under Section 1, Section 2 and its subsections (a), (b) and (c) shall apply. This could lead to different interpretations, including that while sections 1 and 2 are to be read independently, anyone who derives a direct or indirect benefit from the legal entity will be considered a controlling beneficiary, regardless of the level of control or person’s participation.
If no one is identified after going through all of the sections and subsections, the members of the board of directors (or equivalent) will be considered the controlling beneficiaries.
Penalties for non-compliance
The CFF provides monetary penalties for non-compliance with the new requirements, ranging from 500,000 to 2,000,000 Mexican pesos (currently around $25,000 to $100,000) per controlling beneficiary and, potentially, per violation. In addition, non-compliant legal persons will receive a negative (non-compliant) opinion regarding their tax obligations. This may give SAT the right to suspend or cancel the non-compliant legal entity’s digital seals, which would prevent that entity from issuing invoices, thereby potentially interrupting or impeding its operations.
The SAT has the power to ask the public registers, the financial intelligence unit of the Ministry of Finance and Public Credit, the National Banking and Credit Commission, the National Commission for the Retirement Savings System or the Commission Nationale des Assurances et des Cautions files to corroborate the information provided by legal persons.
While there are questions about how to comply with these new requirements, all Mexican legal entities must act now to achieve compliance. SAT may begin auditing legal entities at any time to verify compliance. Failure to comply will likely result in penalties, which can be substantial. In some situations, this may also lead to other consequences which may make the operations of the legal entity considerably more difficult.
The first task is to determine who the beneficiaries of control are. This requires a review of the business structure and company documents. The difficulty of this task will depend on the complexity of the corporate structure of the Mexican legal entity and that of the entities that overcome it. In complex structures, a legal opinion (or other similar professional document) may be recommended as support for any future request from the SAT to explain how the legal entity has concluded who its majority beneficiaries are.
Once the controlling beneficiaries have been identified, the legal entity must gather all required information about all controlling beneficiaries and, if applicable, the chain of custody, as well as the appropriate documentation to support this information. Since the information required is extensive and some of it may be very sensitive, it is likely that collecting all of this information may take some time. Legal entities should therefore start the process as soon as possible.
While legal entities perform the above tasks, they should also design and document internal control procedures to obtain, maintain and update information about controlling beneficiaries. If properly designed and followed, these procedures should help legal entities demonstrate to authorities that they are complying with these new requirements.
Following the above steps can be difficult and time consuming. However, legal persons must comply with the new requirements. There are no exceptions and SAT is unlikely to favor legal entities that do not comply, for whatever reason.