Trademarks: Tax implications in the U.S. & Mexico
Approximately 30% of the global market is related to intellectual property. While
intangible goods cannot be touched or seen, they are all too real.
For companies around the world, one of the most important
intangible assets for trading are Trademarks.
In practice, owners of Trademarks often generate income by
licensing their trademarks to other parties. The owner is referred
to as a “licensor.” The other party, referred to as the
“licensee,” pays “royalties” to the licensor
for use of the Trademark.
Investors often come to Mexico seeking out foundational legal
advice concerning the incorporation of a Mexican company. But they
should not overlook tax planning in connection with their
Trademarks. However, the failure to engage in proper tax planning
with respect to intangibles may leave much on the table. Indeed,
royalty payments are often an alternative to repatriating
Trademark royalties paid to a U.S. investor – Mexican tax
Under the Mexican Income Tax Law (IT Law), non-Mexican resident
individuals and legal entities with a permanent establishment (PE)
in Mexico are subject to income tax (“IT”) with respect
to income that is attributable to the PE. U.S. tax residents are
also subject to tax on Mexican source income.
Royalties include payments for, among other things, the
temporary use of trademarks, trade names, patents, certificates of
invention or improvement, copyrights of literary, artistic, or
scientific works under the Federal Fiscal Code (FFC)
Notably, income from royalty payments, technical assistance, or
publicity is deemed to be from Mexican source income if (1) the
goods or rights for which the royalties or technical assistance are
paid are used in Mexico or (2) the amounts are paid by a Mexican
resident or by a foreign resident with a PE in Mexico.
Generally, the tax is calculated by applying the applicable
withholding rate (25% or 35%) to the gross income. The payor is
required to withhold the corresponding amount. Royalties paid for
the use of trademarks are subject to a 35% tax rate
Withholding rates may be reduced under the Mexico-U.S. tax
treaty if certain requirements are met. The withholding party may
apply the reduced tax rate, if it is applicable. However, if the
withholding party applies a higher tax rate, the foreign resident
may request a refund. Additionally, the withholding party is
required to issue a digital tax invoice to the foreign
Under the Mexican Value Added Tax Law (VAT Law), individuals and
legal entities are required to pay VAT at a 16% rate if such
persons carry out the following activities in national territory:
(i) transfer goods; (ii) provide independent services; (iii) grant
temporary use or enjoyment of goods and (iv) import services and/or
The use of intangible goods that are provided by foreign
residents in Mexican territory is deemed to be the import of
In the case of the import of intangible goods, the importer
(taxpayer of the VAT) is entitled to a credit against the import
VAT. In certain cases, the import VAT would not impact the
Additionally, if a Mexican subsidiary is incorporated, certain
restrictions may apply to the royalty payments made to its U.S.
Holding, as new deduction restrictions were included in the Mexican
tax provisions, regarding payments made to tax havens.
Generally, from a Mexican tax perspective, a country with a
corporate tax rate of less than 22.5% may be considered a tax haven
(a country or jurisdiction with low-rate taxes or no corporate
taxes). In such a case, payments made by a Mexican company to a
Company whose tax rate is less than 22.5% or it is a transparent
vehicle, royalty payments may be restricted or would have to comply
with an additional tax burden.
Moreover, transactions carried out between related parties are
required to be at fair market value and supported by a transfer
pricing study from the U.S. and Mexican sides.
As such, a U.S. tax resident licensor (with a corporate tax rate
of 22%) must pay a 35% withholding tax in Mexico on the income
received from royalties for licensing a Trademark to a Mexican
subsidiary at fair market value. However, if the U.S. tax resident
licensor complies with the U.S.-Mexico tax treaty, it would be
subject to a 10% withholding tax. Additionally, Licensee (Mexican
subsidiary) may deduct royalty payments from its taxes if certain
requirements are met. This reflects tax symmetry.
We recommend performing due diligence and a thorough tax
analysis before deciding which vehicle or jurisdiction will own the
Trademarks, and from which vehicle and jurisdiction the licensor
will receive royalty payments, as various tax implications may be
triggered for the licensor in the U.S. and the licensee in Mexico,
respectively. Additionally, the economic tax burden may be reduced
for the taxpayers.
Trademark royalties obtained from Mexico – U.S. tax
Generally, royalties paid for the use of property in the U.S.
are U.S. source income, and royalties for the use of property
outside the U.S. are foreign-source income. The place in which the
intangible property is used is the situs of the economic activity
giving rise to the income, regardless of the place at which the
intangible property was developed. For example, if a Trademark is
used in the U.S., the income is U.S. sourced. Residence or
nationality of the payor or recipient of royalties does not affect
the U.S. sourcing rules.
A royalty payment is related to the use of a valuable right.
Royalty income includes the amounts paid for the use of or for the
privilege of using patents, copyrights, secret processes, formulas,
goodwill, trademarks, trade brands, franchises, and other
Royalties received from a controlled foreign corporation (CFC)
by U.S. shareholders are treated as having the same character as
that of the income from the CFC. Generally, income received by a
U.S. resident is treated as passive income. However, if the
royalties received from a CFC are business income, then they are
treated as general limitation income received by the U.S.
shareholders and not as passive income.
Payments of U.S. source “fixed and determinable annual or
periodic” (FDAP) income, for example, royalties paid to
foreign residents are subject to U.S. withholding tax at a 30%
rate, unless a reduced rate of withholding or exempt rate is
claimed under an income tax treaty. Payment of royalties should be
reported on Form 1042-S.
1. Article 15-B of the Federal Fiscal
2. Article 167 of the IT Law
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.