Global Tax Alert (News from Americas Tax Center) | 3 September 2013
Mexican Supreme Court rules certain financial institutions must pay profit sharing on all profits
The Mexican Supreme Court recently ruled, through a binding judicial decision, that a financial institution that is not engaged solely in lending activities must pay profit sharing (PTU by its Spanish acronym) on all of its profits rather than a limited distribution of one month's salary. As a binding decision, this ruling should be followed by lower courts in the future.
As background, Mexican employers are generally subject to mandatory PTU distributions equal to 10% of the adjusted taxable income of the employer. The Federal Labor Law (FLL) provides an exception to the 10% calculation for certain types of businesses. For these exceptions, the profit sharing is limited to one month's salary for each employee. As described below, the controversy in this case relates to whether or not the exception can be applied if a financial institution has activities other than those included in the exception.
Article 127 Section III of the FLL provides that PTU shall not exceed one-month's salary with respect to employers: ...whose income is derived exclusively from the work of personal service employees and for those whose activities are the custody of goods to derive income or the collection of debts and interest.
The controversy is related to the placement of the word “exclusively” in Article 127. Whether this article refers to all of the activities mentioned or whether only to the activities for personal services.
The Sixth Circuit Court construed Section III of Article 127 of the FLL literally. This court ruled that the one-month salary limit is applicable to employers whose activities include the custody of goods to derive income or the collection of debts and interest, regardless of whether or not they have other operations. This is based on the argument that Section III of Article 127 of the FLL sets forth two different scenarios: (i) employers whose income is derived exclusively from the work of personal service employees, and (ii) employers whose activities are the custody of goods to derive income or the collection of debts and interest. Under this interpretation, the term “exclusively” is only related to the first scenario. As a result, an entity that performs activities in the second category may also have other activities and still benefit from this provision.
However, another Circuit Court ruled that Section III of Article 127 of the FLL is applicable only to employers whose income is derived exclusively from the activities mentioned in the article. This position was based on an interpretation of the legislative intent of the provision.
Because of a split in the circuits, this case went to the Supreme Court. The Supreme Court ruled that the intent of the legislators in this provision to cap the PTU payment to one month's salary is applicable when the only source of income for the employers is the custody of goods that derive rental income or the collection of debts and interest. Therefore, all employers that obtain income from any other source, albeit minimal, are excluded from this relief.
For additional information with respect to this Alert, please contact the following:
Mancera, S.C., International Tax Services, Mexico City
- • Koen van´t Hek
+52 55 11 01 6439
- • Eduardo Michan
+52 55 52 83 1308
Ernst & Young LLP, International Tax Services, Miami
- • Terri Grosselin
+1 305 415 1344
EYG no. CM3781