How to Repatriate Profits from Your Mexican Subsidiary Legally and Efficiently
Introduction
When foreign companies operate in Mexico through a subsidiary, one of the most common financial challenges is transferring profits abroad while maintaining full compliance with Mexican tax and foreign exchange regulations. Improper profit repatriation can trigger audits, double taxation, or sanctions from the Servicio de Administración Tributaria (SAT) and Banco de México.
This guide outlines the legal mechanisms, tax implications, and practical steps to repatriate profits from your Mexican subsidiary to the parent company efficiently and in accordance with current law.
1. Legal Framework for Profit Repatriation
The repatriation of profits from a Mexican subsidiary is governed by several laws and institutions:
- Ley del Impuesto Sobre la Renta (LISR) – establishes rules for dividend payments and withholding taxes on profits distributed abroad.
- Ley General de Sociedades Mercantiles (LGSM) – regulates how and when companies may declare dividends.
- Banco de México (Banxico) – supervises currency exchange transactions and cross-border transfers.
- Double Taxation Treaties (DTTs) – prevent foreign investors from being taxed twice on the same income.
Foreign investors must ensure that all profit transfers are properly supported by audited financial statements, board resolutions, and proof of tax compliance.
For additional background on establishing compliant structures, see the internal article: Legal requirements for opening a representative office in Mexico.
2. Available Methods to Repatriate Profits
a. Dividend Distribution
The most common method is the distribution of dividends from retained earnings.
Before dividends can be paid:
- The company must have approved financial statements by shareholders.
- Corporate income tax (ISR) must be paid for the fiscal year.
- A dividend withholding tax (10%) must be withheld when profits are distributed to foreign shareholders.
If a Double Taxation Treaty (DTT) exists between Mexico and the parent company’s country (e.g., the U.S., Canada, or EU members), this withholding can often be reduced or exempted.
(External reference: OECD Tax Treaties Database)
b. Payment of Royalties or Service Fees
Subsidiaries can pay their parent company for technical, administrative, or intellectual property services.
However, these transactions must comply with transfer pricing rules and be supported by intercompany agreements to avoid being reclassified as disguised dividends.
For details on structuring legal service agreements, refer to the internal article: How to structure service agreements under Mexico’s specialized services law.
(External reference: SAT – Transfer Pricing Guidelines)
c. Interest on Intercompany Loans
If the parent company has provided loans to the Mexican subsidiary, it can receive interest payments.
This method must comply with thin capitalization rules (Article 28, LISR) to ensure that the subsidiary maintains an adequate debt-to-equity ratio.
Interest payments are tax-deductible for the subsidiary if documented properly, and withholding tax rates depend on treaty provisions.
(External reference: Deloitte Mexico – Cross-border financing)
d. Capital Reduction
Another legitimate form of repatriation is return of capital (reducción de capital).
This involves reducing the company’s paid-in capital and transferring funds back to the parent company.
However, this process must be carefully calculated to separate taxable retained earnings from non-taxable capital returns.
To ensure proper classification, the company must maintain an CUCA account (Cuenta de Capital de Aportación), as defined by the LISR.
(External reference: SAT – Dividend and CUCA regulations)
3. Tax Obligations and Withholding Requirements
When repatriating profits, companies must ensure compliance with:
- 10% withholding tax on dividends paid to non-residents (unless reduced by treaty).
- 16% VAT, applicable only on service or royalty payments if deemed performed in Mexico.
- Transfer pricing documentation for intercompany transactions.
- Proper currency conversion and reporting under Banxico regulations.
To avoid double taxation, companies should verify whether a Tax Information Exchange Agreement (TIEA) or DTT exists with the parent’s jurisdiction.
For more insight on corporate compliance in Mexico, see: Annual corporate obligations for Mexican companies: filings, renewals, and updates.
4. Steps to Repatriate Profits Legally and Efficiently
Step 1: Confirm tax compliance
Ensure that your subsidiary has filed all corporate tax returns, paid ISR, and distributed dividends according to the company’s bylaws.
Step 2: Approve dividend distribution
Hold a shareholders’ meeting to formally approve dividend distribution. Minutes must be notarized and recorded before the Public Registry of Commerce (RPC).
(External reference: Gob.mx – Registro Público de Comercio)
Step 3: Calculate and withhold taxes
Withhold the corresponding ISR and any other applicable taxes before transferring funds abroad.
Step 4: Report to SAT and Banxico
Submit required reports on foreign investment and cross-border transfers to the RNIE (Registro Nacional de Inversiones Extranjeras) and Banxico.
See also: Key tax incentives for manufacturing companies operating under IMMEX programs for cases where repatriation may be tax-beneficial.
Step 5: Execute transfer through authorized channels
Use an authorized bank to make the international transfer, maintaining proper documentation for audit purposes.
5. Strategies for Efficient Profit Repatriation
- Use DTT benefits: Evaluate applicable tax treaties to minimize withholding rates.
- Reinvest before repatriating: Profits reinvested in expansion, R&D, or IMMEX projects may receive tax benefits.
- Implement transfer pricing policies: Prevent reclassification of payments as disguised dividends.
- Document every transaction: Keep all board resolutions, invoices, and payment evidence in case of a SAT audit.
- Plan periodic repatriation: Avoid accumulating excessive retained earnings, which may trigger higher tax exposure.
For companies still evaluating their corporate structure, review: Differences between branch, subsidiary, and joint venture in Mexican law.
6. Common Mistakes to Avoid
- Paying dividends before fulfilling ISR obligations.
- Ignoring CUCA and CUFIN (net after-tax earnings) balances.
- Misreporting royalty or service payments as deductible expenses.
- Failing to comply with foreign exchange reporting to Banxico.
- Using personal or unauthorized accounts for transfers.
These errors can result in tax reassessments, penalties, or criminal liability under Mexican law.
7. External References
- SAT – Dividend Taxation Rules
- Banco de México – Cross-border payments regulation
- OECD – Model Tax Convention on Income and Capital
- World Bank – Doing Business in Mexico Overview
Conclusion
Repatriating profits from a Mexican subsidiary requires meticulous planning and full compliance with corporate, fiscal, and foreign exchange laws. Whether through dividends, royalties, interest, or capital reductions, each method must be properly documented and supported by accounting and legal evidence.
By working with a tax advisor and legal representative experienced in Mexican corporate law, companies can ensure that their profit transfers are not only compliant but also strategically optimized to minimize tax impact and maintain efficient global cash flow.
For businesses in early expansion stages, see: How to obtain the RFC and bank account for a new foreign company in Mexico for initial setup guidance.
