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Wealth Management Webinar Series│August 11, 2020
Life Insurance for Mexican Residents in COVID-19 Times
Jorge Narváez-HasfuraPrincipal, Mexico City
+52 55 5279 [email protected]
Javier Ordóñez NamihiraPartner, Mexico City
+52 55 5279 [email protected]
Speakers
María Casas-LópezCounsel, Mexico City
+52 55 5279 [email protected]
Welcome | Quick Country Update
COVID-19 Cases
Source: Reforma / COVID-19 Dashboard by the Center for Systems Science and Engineering (CSSE) at Johns Hopkins University (JHU) 6
* La tasa reducida aplica solo en ciertos casos por 2019 y 2020
Source: Reforma
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Economic Contraction
Source: INEGI 8
Reopening Playbook
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Travel Bans and Border Shutdown
Is travel outside Mexico
restricted?
Is US-Mexico border closed?
South border?
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2 Buying a Life Insurance Policy
Regulatory Aspects2.1
Solicitation Rules
“Rules of the Road”
Mexican law prohibits foreign insurers and any other non-admitted entity or
individual to engage in solicitation activities in Mexico.
No express definition in MX Law of what constitutes solicitation activities.
Examples of solicitation:
Activities (any) tending to the sale of the insurance products in Mexico?
Obtain consent from life insured?
Medical exams?
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Prohibitions in terms of Mexican Insurance Law
Are Mexican residents allowed to obtain insurance policies from foreign insurers? As a general a rule, no.
How can an individual residing in Mexico validly purchase life insurance from a foreign insurer?
"It is prohibited to contract insurance policies with foreign insurers“.
Exemptions for Personal Insurance:a) when the contracting party is an individual, if the latter is within national territory at the time
the insurance contract is executed; or
b) when the contracting party is an entity, if the insured resides within national territory.”
Acquiring the policy through a legal representative outside of Mexico?
Sanctions for Offering Insurance Products from Non-licensed Insurance Companies?
Sanctions for Acquiring Offshore Life Insurance Policies?
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LIP
Typical LIP Structure
LIP
Investment PortfolioInvestment Portfolio
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Tax Implications2.2
General Tax Treatment
Indemnity (i.e. death benefit) payments received by Mexican
residents from insurance institutions not authorized to operate
as such in Mexico are ineligible for the Article 93 benefit.
No income taxes while the investments grow inside the policy
until withdrawals or distributions are made.
When withdrawals or distributions are made, the client or
beneficiaries would have to recognize the amount received
for Mexican income tax purposes, compute and pay their
taxes in accordance with their specific tax regime considering
that the highest marginal tax rate is 35%.
Investment Portfolio
PPLI
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Holding LIP through a foreign legal entity or vehicle
PPLI
Investment Portfolio
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Specific Tax Treatment when Holding LIP through a foreign legal entity or vehicle
Depending on the investment characteristics and the tax benefits of such policy, a re-characterization risk exists for the policy to be deemed an investment as opposed to life insurance.
The risk exists that the Mexican tax authorities could consider that the life assured should be subject to the provisions contained in new Article 4-B or Preferential Tax Regime rules (i.e. anti-deferral rules) of the Mexican Income Tax Law (MITL) triggering the obligations to anticipate income even if not actually distributed by the policy and to report the structure.
Income derived by the foreign trust or entity upon a surrender from the policy would be subject to Mexico’s anti-deferral provisions triggering the obligations for the Mexican resident to anticipate income and to report the structure.
If the trust is fiscally transparent, income from the surrender payment would have to be recognized by the Mexican life insured as interest income subject to Article 133 of the MITL.
Funds from the policy may be accessed tax-free by the Mexican resident by way of a loan, that is, if he as the life insured may be entitled in terms of the insurance contract to borrow certain amounts against the insurance component. Reporting would apply in the FY in which the loan is received, if the loan amount exceeds MXP$600,000.
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3 General Anti-Avoidance Rule (GAAR) / Business Reasons
Qualification as LIP in light of New GAAR: Article 5-A
Tax authorities’ power to inquire about Business Reasons.
During the course of a formal audit process.
Resolution by a supreme body comprised by Hacienda + SAT.
Lack of business reasons + direct or indirect Tax Benefit = reclassification of acts and different tax treatment.
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Qualification as LIP in light of New GAAR: Article 5-A
Tax benefitEconomic benefit
Rebuttable presumptions:
1. Lack of Business Reasons based on facts and circumstances known during audit process.
2. Quantifiable & expected EB < TB = Lack of business reasons.
3. Multi-step Transaction lacks business reasons.
??
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Qualification as LIP in light of New GAAR: Article 5-A
Decision for Mexican resident clients to acquire foreign LIP should be based on business/personal reasons (instead of tax reasons) and pursue objectives such as asset protection, estate and succession planning purposes.
If the policy has a borrowing capacity, Mexican taxpayers must memorialize all the business reasons that lead to such borrowing either to him or any of his beneficiaries.
Contracting parties of these type of life insurance policies should memorialize to the greatest extent possible all of the business (i.e. personal) reasons (other than tax reasons) leading to the election of such solution and execution of the policy as an asset protection solution for estate planning purposes.
Quantify the expected policy’s economic benefit vis-à-vis the tax benefit (i.e. tax deferral). Consider taxable death benefit.
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4 Mandatory Disclosure Rules -Reportable Schemes
Reportable Schemes
Along the lines of the OECD Gudileines regarding Mandatory Disclousure contained in BEPS Action 12.
Starting January 1st 2021, tax advisors or, alternatively, taxpayers need to disclose information about “reportable schemes” (defined) to the SAT in cases where such schemes, when entered into by taxpayers, directly or indirectly, result in a tax benefit in Mexico.
The obligation will lie solely on taxpayers in the case of transactions and/or structures entered into and/or implemented by the taxpayer before 2020, provided that they represent a continuous tax benefit during 2020 and onwards.
SAT is yet to issue administrative guidelines and certain exception thresholds that should shed light to taxpayers and help determine whether or not a given scheme is reportable or not in terms of this new reporting obligation.
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Reportable Schemes
Key terms defined
Tax Advisor
Tax Benefit
Taxpayer
Scheme
Generic
Personalized
Reportable. A “catch-all” provision is also included to consider any mechanism avoiding theapplication of the expressly listed schemes as reportable.
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Reportable Schemes
https://f.datasrvr.com/fr1/720/13706/Client_Alert_-_New_Mandatory_Disclosure_Rules_in_Mexico_-_July_2020.pdf 27
Questions?
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