Merger of companies – Tax aspects

By: Andrea Mendoza Molina

For legal purposes, a merger is considered to exist when two or more companies are merged into a single company or when they are merged to create a new company. In legal terms, the company that disappears is known as the merged company and the company that survives and absorbs the previous one or the company that is created, as the case may be, is considered the merging company.

Now, for tax purposes, the merger of companies is considered as an alienation and therefore has the tax effects of a taxable activity, that is, an activity for which taxes must be paid. In this sense, the merged company would have to consider that it disposes of assets for tax purposes and determine, where appropriate, the corresponding tax gain or loss for income tax (ISR). It is important to note that all the rights and obligations of the merged company are also transferred to the merging company by reason of the merger.

Notwithstanding the foregoing, the Federal Tax Code (CFF) establishes that a merger is not considered a transfer when the following requirements are met:

  1. Submit the merger notice referred to in the CFF Regulations (Notice of cancellation and/or registration of companies in the RFC).
  2. Carry out the same activities for one year, that is, after the merger, the merging company continues to carry out the activities that it and the merged company carried out before the merger, for one year after the merger.

This last requirement is not enforceable if the following assumptions are met:


a. When the income from the main activity of the merged company corresponding to the year prior to the merger derives from the leasing of goods that are used in the same activity of the merging company.
b. When in the year prior to the merger, the merged company has received more than 50% of its income from the merging company, or when the merging company has received more than 50% of its income from the merged company. However, when the merging company is liquidated before one year after the merger, this requirement will not be necessary.
c. That the merging company submit the tax returns for the year and the informative returns that correspond to the merged company.

Tax losses in a merger

Article 57 of the Income Tax Law (LISR) establishes that a fiscal loss is obtained when the deductions authorized in a fiscal year (years for fiscal purposes) are greater than the cumulative income of that same fiscal year. The tax loss can be used to reduce the tax profit, that is, reduce the base on which ISR is taxed, for the following 10 years until said loss is exhausted.

The right to reduce tax losses is personal to the person who suffers them and cannot be transferred to another person or as a reason for a merger. Derived from the foregoing, in the event that a merger is carried out between two companies, the right to reduce the pending tax losses of the merged company may not be transferred to the merging company.

However, article 58 of the LISR establishes that, in the event of a merger, the merging company may only reduce the fiscal loss pending use of the merged company, when the merging company carries out activities corresponding to the same line of business as the merged company, i.e. that is, that it is dedicated to the same sector or economic area, in which the fiscal loss occurred.


Source:
https://www.diputados.gob.mx/LeyesBiblio/pdf/LISR.pdf
https://www.diputados.gob.mx/LeyesBiblio/pdf/CFF.pdf

Restructuring

Müggenburg, Gorches and Peñalosa's restructuring practice includes representation of corporate debtors, hedge funds, in various industries, etc., in restructuring proceedings and bankruptcy equivalents (insolvency proceedings).

Mergers & Acquisitions

We provide services in acquisitions, sales, mergers, spin-offs, reorganizations and co-investments, representing national and foreign clients operating in various industrial and commercial sectors.

Corporate /Transactional

At Müggenburg, Gorches y Peñalosa we provide legal services in all aspects of corporate law practice. Our group of professionals in this area has years of experience providing services to both national and international clients, with the most diverse needs and the highest standards of demand and sophistication in the service. Among our clientele are leading companies in their sectors worldwide, such as automotive, cosmetics, hotels and tourism, food industry, aeronautical industry, computer programs and systems, suppliers of the oil industry, technology, among others.

We advise our clients on the constitution of Mexican companies (commercial and civil) and associations, attending to the needs derived from the industry and/or commerce segment in which they focus their activities and their medium and long-term plans, also providing services for compliance with the regulatory requirements that may apply, including those derived from direct foreign investment, economic competition and obtaining the necessary licenses and permits for its operation. Our services also extend to the provision of corporate services within the ordinary course of business of our clients, including advice on the preparation, review and negotiation of all types of civil and commercial contracts, and the custody, updating and maintenance of corporate books. . We also provide services related to the opening and management of branches in Mexico of foreign companies.

We represent national and foreign corporate and/or investment groups in the acquisition of, and/or merger with, Mexican business entities, and on other occasions we also represent acquired Mexican entities. In both cases, we provide legal audit services to foresee possible contingencies of the operation, locate areas of opportunity and help determine the value of the company to be acquired. Likewise, in representing the acquirer, we prepare the legal documentation of the operation (specifically contracts for the sale of shares and/or association, with all its annexes and accessory contracts), and we carry out their negotiation with the counterparty. Likewise, in these cases we participate directly in the processing and obtaining of any authorizations, permits, licenses and concession titles required for the operation of our clients, and we advise on notices and notifications to government entities, including notifications of resolutions and opinions of the Federal Economic Competition Commission.

We provide advisory services for corporate restructuring and reorganization, also including international corporate groups with a presence in Mexico. In these cases we have worked in coordination with groups of financial and accounting advisors both from Mexico and abroad, and we have coordinated legal audits of subsidiaries of entities acquired in several Latin American countries (Argentina, Brazil, Chile, Colombia and Peru, among others, with local legal advisers in each case).

We advise on operations of association in participation, "joint-ventures", preparation and negotiation of agreements between shareholders, merger and spin-off of legal entities, establishment of trusts of any type, constitution of guarantees on any type of property, repurchase of shares by of companies listed on the Mexican Stock Exchange, as well as in the structure of purchase option plans and other types of specialized corporate operations.

We also provide services for the development of mechanisms that allow the efficient and effective anticipation and management of potential conflicts between shareholders; in this regard, we have represented groups of shareholders of Mexican companies in the implementation of corporate actions to defend their interests against the rest of the shareholders and the Company itself on internal corporate control issues, generally in coordination with litigation areas in matters commercial and civil.

Depending on each particular project or operation, we rely on other specialty areas of the Firm, in order to provide comprehensive services, under the highest standards of quality and efficiency.

Mergers & Acquisitions

We provide services in acquisitions, sales, mergers, spin-offs, reorganizations and co-investments, representing national and foreign clients operating in various industrial and commercial sectors.

Restructuring (Corporate and Financial)

Müggenburg, Gorches and Peñalosa's restructuring practice includes representation of corporate debtors, hedge funds, in various industries, etc., in restructuring proceedings and bankruptcy equivalents (insolvency proceedings).