In accordance with the Mexican Income Tax Law (ISR), legal entities, individuals with business or professional activities, and foreign residents with a permanent establishment in Mexico are required to demonstrate that transactions conducted with domestic or foreign related parties were carried out at arm\u2019s length, following the OECD Transfer Pricing Guidelines.<\/p>\n
Additionally, they must file the Annual Information Return for related party transactions.<\/p>\n
Definition of Related Parties<\/strong><\/span><\/p>\n According to Article 90 of the Income Tax Law, two or more persons are considered related parties when:<\/p>\n For joint ventures (Asociaciones en Participaci\u00f3n), the members are considered related parties, as well as persons who, under this paragraph, are considered related parties of such members.<\/p>\n In relation to individuals, the customs law definition of linkage must also be considered. It establishes the following as linked:<\/p>\n I.\u00a0 \u00a0 \u00a0One person holds a management or responsibility position in the other\u2019s business. Individuals are considered linked through family if there is a civil relationship; a blood relationship with no limitation in direct line, or collateral relationship within the fourth degree; affinity relationship (by marriage) in a direct or collateral line up to the second degree, as well as between spouses.<\/p>\n Supporting Documentation \u2013 Related Party Transactions<\/span><\/strong><\/p>\n In accordance with Articles 76, Section IX and 110, Section XI of the Income Tax Law, individuals (with business and\/or professional activities), legal entities, and foreign residents with permanent establishments in Mexico must obtain and retain supporting documentation for income and deduction transactions carried out with related parties. The documentation must demonstrate that the prices or profit margins used in such transactions are consistent with those that would have been used with independent third parties\u2014commonly referred to as \u201carm\u2019s length\u201d pricing. The documentation must include:<\/p>\n To prove that the operations were conducted at arm\u2019s length, is important to mention that taxpayers must use data, methodology, and comparability elements based on Articles 179 and 180 of the Income Tax Law\u2014commonly known as a \u201ctransfer pricing study.\u201d<\/p>\n\n
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II.\u00a0 \u00a0 \u00a0They are legally recognized as business associates.
III.\u00a0 \u00a0 They have an employer-employee relationship.
IV.\u00a0 \u00a0 A person directly or indirectly owns, controls, or possesses 5% or more of the shares, equity interest, contributions, or outstanding voting rights in both.
V.\u00a0 \u00a0 \u00a0One person directly or indirectly controls the other.
VI.\u00a0 \u00a0 Both are directly or indirectly controlled by a third party.
VII.\u00a0 \u00a0Together, they directly or indirectly control a third party.
VIII.\u00a0 They are family members.<\/p>\n\n
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