Shelter in Mexico Recent Changes
In the last couple of years, there have been several changes to the Shelter modality in Mexico. They are mainly related to fiscal rules and the term under which a company can operate under a Shelter. The last modifications in January 2020 minimized the fiscal benefits of the Shelter modality. Therefore, it is vital for companies operating under the Shelter structure and new companies exploring setting through this option to be aware of the changes in taxation rules and how it can impact the operational expenses and strategy.
Since its creation and to incentivize manufacturing companies to start operations in Mexico, the Shelter model had special fiscal benefits with the Mexican Tax Authority. This, in addition to its competitiveness and safety, made it even more attractive for Foreign Manufacturers.
The IMMEX or Maquila industry (manufacturing for export) represents 34.5% of Mexico´s exports. It is one of the most important industries in Mexico, with more than six thousand establishments. Out of those +6,000 IMMEX operations, almost half decided to settle in Mexico through the Shelter scheme. Many remain today, as well as others that have become independent.
For more than 40 years, the Shelter scheme has attracted and housed foreign companies, facilitating the entire investment process.
Since the program creation over 40 years ago, Shelter service providers have been supporting foreign manufacturing companies in their investment’s soft-landing. Shelter operators act as integral facilitators for everything related to the operation, including:
- Build work agendas including visits and meetings according to each project´s requirements and locations in Mexico
- Provide advisory of the benefits and implications of each location
- Give peace of mind during the process and the ongoing operation of the manufacturing facilities
In the changes to the Income Tax Law in 2014, the term of Shelter Operations in Mexico was limited to hosting investments for a maximum period of four years. Then foreign capital could decide whether to continue in the shelter operating structure paying ISR (Income Tax) for 4 more years by moving to a wholly-owned maquila.
If you are currently working under a Shelter format, it is critical to analyze your specific case to understand your options for business continuity to decide the best way to achieve operational continuity in the most effective way. The most recent changes are described below, divided into 2 areas, Fiscal Rules and Term:
- Non-deductibility of the full benefits package (47%-53%) creating a small taxable profit.
- New Shelter Operations will pay taxes as a wholly-owned subsidiary. (APA – Safe Harbor)
- By not being a related party, taxes paid in Mexico cannot be accredited abroad.
- Now there is no limit; as mentioned above, it was previously a 4-year term limit.
- A shelter that started before 2020 will have the previous benefits for up to 4 years.
One of the most common topics that are ignored when selecting the Shelter operator, is to have a clear Exit Strategy. This will allow your company to adjust the strategy and operating structure of the Mexican operation to potential corporate strategy changes in the future.
Having an Exit Strategy with your Shelter operator is critical for any manufacturing operation in Mexico, mainly in these times of uncertainty. It will allow companies to have the flexibility of adapting to any future updates of fiscal regulations in Mexico and the US. The Exit Strategy will also be important in the case the parent company switches the strategy for Mexico.
Prodensa is a professional services firm with 35 years of experience and has supported more than 700 manufacturing companies with Startup or Shelter solutions in Mexico.