Interest Deduction at 30%: Outstanding Issues According to César Gámez

Outstanding Issues and Effects of the 30% Limit on Interest Deductibility
Article by César Gámez in Puntos Finos

The rule that limits the deduction of net interest to 30% of the Adjusted Taxable Income (UFIA)—adopted in Mexico since 2020 in line with Action 4 of the OECD’s BEPS Plan—still presents gaps that affect corporate tax planning. In his article for Puntos Finos magazine, our partner César Gámez reviews the unresolved issues and proposes courses of action.

1. Rule of carry forward: is it enough?

The Mexican provision allows the deduction of interest exceeding the limit over the following 10 tax years; however, it does not provide for a carryback or an unlimited carryforward period as is the case in several OECD jurisdictions, which limits taxpayers' financial flexibility.

OImprovement opportunities

• Extender el carry forward a un plazo ilimitado.

• Implement a carryback mechanism to leverage unused debt capacity.

2. Impact on VAT: a regulatory gray zone

When interest exceeds the 30% threshold and becomes “frozen” for income tax (ISR) purposes, the question arises as to whether the corresponding VAT is creditable. The current regulation does not clarify the treatment, and it could limit VAT recovery for up to ten years.

Proposal: Issue a miscellaneous tax rule or amend the VAT Law (LIVA) to confirm that the limitation established in Article 28 of the Income Tax Law (LISR) does not affect the immediate creditability of VAT.

3. CUFIN Recognition

There is uncertainty regarding when to consider non-deductible interest for purposes of the Net Tax Profit Account (CUFIN): should it be in the fiscal year in which the interest exceeds the limit, or at the end of the carryforward period? The author suggests clarifying the timing through a legal amendment or regulatory guidance.

4. Consolidated calculation without clear rules

The law allows for a consolidated determination for corporate groups, neutralizing high and low leverage positions. However, the absence of specific administrative rules has led to conflicting interpretations regarding its application.

Conclusions by César Gámez

Mexico has made progress in aligning its tax regime with OECD recommendations, but further refinement is needed to ensure legal certainty and fiscal competitiveness.

Key Recommendations

1. Adjust the carryforward period and introduce a carryback mechanism.

2. Clarify the effects on VAT and CUFIN.

3. Issue administrative rules for consolidated calculation.

4. Periodically review the Adjusted Taxable Profit (UFIA) to reflect the taxpayer’s economic reality.

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