Mexico Said to Consider Tax Cut for Private Equity Investors

  • Nation may reduce tax on private equity Bolsa sales to 10%
  • Tax agency may change treatment for unprofitable investments

Mexico is evaluating ways to aid private equity investors and spur growth in the industry, including a reduction in the tax that funds pay to list companies on the stock exchange, according to four people with knowledge of the proposals.

The government may give funds incentive to take companies public by reducing the tax on sales through initial public offerings to 10 percent, in line with the capital gains rate, from the 35 percent regular income tax rate, according to the people, who asked not to be named discussing proposals that haven’t been made public. That change would need to be included in the 2017 budget plan that the Finance Ministry will send to Congress by Sept. 8 because it affects government revenue, according to two of the people.

The nation’s tax agency also may lower the fiscal burden for funds by allowing them to use losses from unprofitable investments to offset the taxes that they pay on profitable ones. That would only require changes to existing regulations rather than passage by lawmakers, two of the people said. The changes are being sought by Mexico’s private equity association, known as Amexcap, to boost an asset class that they say faces less favorable treatment in Mexico than in the U.S. and to encourage IPOs.

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"We need to eliminate the restrictions and the barriers that prevent the healthy development of private equity compared with other countries," Alonso Diaz, chairman of Amexcap and a founding partner of venture capital and real estate firm Gerbera Capital, said in an interview in Mexico City.

Mexico has had just two IPOs this year, down from five over the same period in 2015. Opening a window for private equity firms to sell assets at a lower tax rate could bring hundreds of millions of dollars in deals to market, Diaz said.

The Finance Ministry is also considering ways to boost the fintech industry by reducing the tax paperwork and administrative burden for startups and clarifying rules for the nascent sector, two of the people said.

The press office for Mexico’s Finance Ministry declined to comment on whether changes are being considered for the private equity industry.

Regional Context

The growth is helping Mexico catch up to Brazil in private equity investment. While Brazil represented 63 percent of private capital fundraising in Latin America in 2008, dwarfing Mexico’s 3 percent, Mexico overtook Brazil for the first time last year, representing 29 percent of investment, compared with 26 percent for the region’s largest economy, according to Emerging Markets Private Equity Association, an industry group.

At the same time, Mexico’s industry has room for expansion, if other markets are a barometer. Private equity investment equaled just 0.03 percent of gross domestic product last year, on par with Nigeria, a third of Brazil and behind 1.95 percent for the U.K., 1.41 percent in the U.S., 0.31 percent in India and 0.1 percent in China.

Mexico used its annual budget process last year to create CerPIs, or certificates of investment for projects, to help Afores invest in private equity. The nation also created Fibra E -- tax-advantaged master-limited partnerships -- to encourage more investment in the nation’s energy industry and infrastructure under rules similar to the Mexican version of REITs. Those products were added to the already-existent FICAPs, or investment trusts for private equity.

Mexico’s private equity industry has grown dramatically, with accumulated capital commitments more than doubling in the past five years to $37.1 billion in 2015, according to Amexcap, which has more than 100 members, including BlackRock Inc., Advent International Corp. and Southern Cross Group. The private equity industry has been spurred by Mexico’s 2009 decision to allow pension funds, known as Afores, to invest in private equity.