Typical due diligence issues

In Mexico, various issues typically arise during the due diligence process, depending on the type of transaction, the industry in question and other factors. Compliance with relevant Mexican laws and regulations is particularly important for tax, customs, environmental and labor matters, as well as real estate and data privacy. Any pending litigation or other proceedings should be reviewed carefully, as well as possible nonpayment of taxes or other fees. A careful review of the seller's corporate records should be conducted, checking to make sure that government filings are up to date and that required corporate procedures have been followed. Compliance and anti-corruption practices should be a focus of any due diligence investigation, particularly any bribery and kickbacks, as well as possible fraud in the workplace.

These types of due diligence issues often mean additional costs post-closing. Because such costs can decrease the value of the transaction, the buyer may seek protection through a purchase price reduction or other means. In addition, asking the seller to respond to issues raised during the due diligence process would be considered standard.

Pricing and payment

The parties to the transaction can freely negotiate the price and payment conditions. However, it is important that the parties are cautious concerning the antitrust rules regarding information exchange during any negotiations to avoid the appearance of collusion. The parties are also free to agree the currency in which the purchase price will be paid. Nonetheless, where the agreement setting out the payment terms: (i) specifies that the payment will be made in a foreign currency: and (ii) the agreement is entered into by the parties in Mexico, or is entered into outside of Mexico but the payment obligations are to be fulfilled in Mexico, the payor (usually the buyer) will be able to settle the payment obligation by delivering to the payee (usually the seller) the equivalent of the foreign currency amount specified in the relevant agreement in local currency (based on the exchange rate in effect at the place and date on which the payment is made).

Signing/closing

There is no deposit required. Signing and closing are frequently independent of one another. Between the signing and the closing date, it is common to obtain authorizations or complete closing conditions. In some instances, the buyer may undertake additional due diligence, particularly involving legal and financial matters.

Foreign investment restrictions

Mexico has a mandatory foreign investment screening procedure and, in some cases, that screening procedure is suspensory. Where that applies, transactions that meet the relevant criteria need to be notified to the relevant authority and cleared before they can be completed.

The foreign investment review (FIR) regime applies to all sectors, but there are specific rules for certain sectors. For further information, see the more detailed section on "Foreign investment restrictions".

Antitrust/merger control

Mexico has a mandatory and suspensory merger control regime, which means that any merger, acquisition or any other action by means of which companies, associations, shares, equity quotas, trusts or assets in general are accumulated, that meet the applicable asset-accumulation-based threshold need to notify the competition authority and cleared before they can close the deal. Cofece may authorize the transaction as reported, or either block the notified transaction or condition its approval on its restructuring to avoid anti-competitive effects. In addition, Cofece is empowered through an investigation process to order the partial or full unwinding of a prohibited concentration. Finally, it is important to mention that Cofece conducts a pre-merger control process for transactions taking place in all industries and sectors, except for those related to the telecommunications and broadcasting industries. For further information, see the more detailed section on "Antitrust/merger control".

Other regulatory or government approvals

M&A transactions in regulated industries, such as in the telecommunications and financial services sectors, need to follow special approval procedures.

Share sale: When a business is transferred through a stock purchase, the transaction will not involve a change of employer. Therefore, labor conditions, as well as employee benefits and compensation, are unaffected. Consent from employees or labor unions, if applicable, is not required, except in those cases where the applicable collective bargaining agreement establish consultation obligations, which is uncommon. In addition, there is no need to notify employees.

Asset sale: If the transaction is structured as an asset purchase that entails the transfer of personnel, it would be considered an employer substitution. The substitute employer and substituted employer will be jointly liable for a period of six months regarding labor obligations generated before the effective date of the employer substitution. The six month term starts as of the date of when the employees or the union, if applicable, have been notified of the employer substitution.

Spin-offs are considered a transfer of assets for tax purposes. However, no taxation would be triggered by the transfer of assets through a spin-off process if certain formal requirements are properly and timely met (the shareholders that also own at least 51% of the voting stock of the companies involved remain the same for one year prior to the spin-off and two years after said process is finished).

In the case of an asset deal, corporate income tax (CIT) applies to the net profits derived by sellers that are Mexican entities. The base of the tax is equal to the income subject to tax minus allowable deductions and carryforward losses (net operating losses (NOLs)). Some expenses, such as certain taxes, conventional penalties and goodwill, are not allowed as deductions. Gains realized by legal entities in Mexico upon the transfer of assets are taxed as ordinary income at a 30% general CIT rate. The gains realized can be fully offset by carryforward losses without any limitation, and tax losses can be carried forward for up to 10 years.

Value-added tax (VAT) at a rate of 16% also applies on all transfers of assets carried out within Mexican territory. Transfer taxes may be triggered on the transfer of certain assets; for instance, Impuesto sobre Adquisicion de Inmuebles (ISAI) is a local tax due on the transfer of the real estate. This tax (ranging from 2% to 4.5%) may be charged on an asset deal that involves real estate acquisition.

The gains derived by a nonresident shareholder upon the transfer of shares are treated as Mexican source income in one of the following cases where:

(i) The issuer of the shares is a legal entity resident in Mexico for tax purposes

(ii) The book value of the shares (regardless of the tax residency of the issuer of such shares) consists of over 50% from immovable property located in Mexico

As such, foreign residents that sell shares of Mexican companies are subject to a 25% tax on the gross proceeds from the sale or, at the option of the foreign resident if it has a local representative in Mexico, to a 35% tax on the net gain derived from the sale. This option is not available to foreign sellers domiciled in tax haven jurisdictions. Under certain conditions, tax rulings may be available to defer paying taxes when transferring shares in reorganizations between members of the same group of companies.

Finally, although a merger is generally regarded as a taxable event, it will qualify as a tax-free transaction if the following formal requirements are properly and timely met: (i) notice must be filed by the surviving entity within the month following the merger ("Tax ID Cancellation Notice"); (ii) during a minimum one-year period following the date of the merger, the surviving entity must continue carrying out the activities in which it and the disappearing entity were engaged before the merger; and (iii) the surviving entity, or the newly created entity, must timely file the income tax return and tax informative return corresponding to the disappearing entity for the tax year of the merger. A tax notice would have to be filed before the merger date if any entity participating in the merger participated in any merger or spin-off during the last five years.

Before filing the referred Tax ID Cancellation Notice, the merged entity must file a notice to verify that the following conditions are met (“Pre-review Notice”):

• The merged entity must not be subject to the SAT's auditing powers, nor have omitted taxes.
• The merged entity must not be listed in terms of articles 69, 69-B and 69-B Bis of the Federal Tax Code.
• The declared income, as well as the tax withheld by the taxpayer, stated in the returns of monthly pre-payments, withholdings, definitive or annual, must match with those indicated in the digital tax invoices ("CFDIs" by its acronym in Spanish). If there are differences, it should be clarified that they are temporary or, if they are non-temporary differences, make the corresponding amendments in the monthly or annual returns.

Amendments to Article 14-B of the Federal Tax Code have been introduced in order to prevent taxpayers transferring tax losses within the context of mergers and spin-offs in circumstances where they are unable to demonstrate sufficient business reasons for the relevant transaction. As of 2022, tax inspectors are allowed to question the tax-free treatment of mergers and spin-offs in cases where such transactions appear to lack adequate business reasons. In order to determine whether a merger or a spin-off has sufficient business reasons in order to qualify for the preferential tax treatment applicable to mergers and spin-offs (as described above), tax inspectors may take into consideration all "relevant transactions" (a defined term for these purposes) related to mergers or spin-offs that have taken place within the five years immediately preceding the current transaction's completion, and the subsequent five years.

The transfer of assets is not exempt (within the context of a merger or spin-off) in cases where, as a consequence of the transfer of the assets, liabilities and capital, there appears in the accounting capital of any of them, an account or item (regardless of the name given to it) that was not registered or recognized in any of the stockholders' equity accounts of the financial statements approved at the general shareholders meeting where the merger or spin-off was approved. The financial statements prepared for the merger or spin-off need to be signed and approved by a registered public accountant.

For a merger that has taken place to continue to qualify as a tax free merger, the surviving entity needs to comply with additional requirements and filing obligations (supplemental to those described above). The most important of these are: (i) the disclosure of any "relevant transaction" after the merger takes place; and (ii) to ensure the merger has adequate business reasons. Given that, going forwards Mexican taxpayers are likely to experience more scrutiny from the Mexican tax authorities within the context of mergers.

OECD's Two Pillar Solution

The OECD/G20 Inclusive Framework on Base Erosion and Profit Shifting has put forward a so-called Two-Pillar Solution to address the tax challenges arising from the digitalization of the economy. Pillar Two is intended to introduce a global minimum effective rate of tax of 15% for large businesses in each jurisdiction where they operate and will lead to fundamental changes in the international tax system. It is currently being implemented in a large number of jurisdictions.

Groups will need to consider how the Pillar Two rules could impact on the life cycle of M&A transactions from the pre-acquisition phase (including transaction planning (such as the choice of acquisition structure and financing) and due diligence of the target group), the acquisition phase (such as contractual risk allocation around Pillar Two) to the post-acquisition phase and the impact of Pillar Two on any post-acquisition integration.

For information on post-acquisition integration matters, please see our Post-acquisition Integration Handbook.