Recently when reviewing the advance payments of returns to the partners, we found that there is some confusion in the form it should take from the perspective of complying with the tax obligations, so we prepared the following note for all our clients who are part of a civil partnership. the following note for all our clients who are part of a civil partnership.
ARE PAYMENTS SIMILAR TO SALARIES
Article 94 of the Income Tax Law states that the income and advances received by the members of civil societies have the character of a payment "Assimilable to Salaries".
Salaries and other benefits derived from an employment relationship, including the participation of the workers in the profits of the companies and the benefits received as a consequence of the termination of the employment relationship, are considered as income for the rendering of a subordinated personal service.
profits of the companies and the benefits received as a consequence of the termination of the labor relationship. For the purposes of this tax, the following are assimilated to this income:
- I. Remunerations and other benefits obtained by officials and workers of the Federation, of the federal entities and of the municipalities, even when they are for expenses not subject to verification, as well as those obtained by members of the armed forces.
- II. Income and advances obtained by members of cooperative production societies, as well as advances received by members of civil societies and associations.
- III. Fees to members of boards of directors, supervisory, advisory or of any other nature, as well as fees to administrators, statutory auditors and general managers.
These payments have the characteristic that they are deductible items for the company and the treatment for the withholding of the corresponding tax is indicated in the same ordinance.
ADVANCES PAID TO MEMBERS AND PARTNERS ARE DEDUCTIBLE.
LISR Article 25. Taxpayers may make the following deductions:
...
IX. Advances and yields paid by production cooperative societies, as well asadvances given by civil societies and associations to their members, when distributed under the terms of Section II of Article 94 of this Law.
However, in the event that the partners of the SCs provide other services or benefits to their companies, they are not limited to obtain a consideration for the same. An example would be if the Company leases a property owned by a partner, in which case, it would be a lease payment, or a loan has been obtained by means of a Mutual with interest, and the Mutual Partner obtains interest as a product of the same.
These examples are very clear and there is no room for interpretation, however, we have been asked if it would be possible that a partner could also provide professional services to the Company and receive the same professional fees.
In this case, there could be a lack of clarity to distinguish whether it is indeed a payment for a professional service to society and not the participation in its income derived through the civil society.
It would be unconvincing for a public accountant, or an architect, or a lawyer to provide accounting, design or architectural or legal services to a partnership where he is a partner and the partnership provides accounting, architectural or legal services and this partner charges such services to the partnership. It is evident that what this partner is charging is not an independent professional service that derives in a fee for services to the partnership, but rather, it is a way to pay him advances of his profits or remainders, depending on the structure and way of agreeing the distribution that corresponds to such partners.
TAX CONSEQUENCES
Not duly agreeing the payments to the partners of the Civil Partnerships, can lead to several consequences, but, we are going to focus on the fiscal ones:
NO INCOME TAX DEDUCTION
The legal system requires that several requirements be met in order to admit a deductible expense. Among these we can simply point out problems in the following:
It is NOT an indispensable expense, since it is a payment of its yields or profits.
It is NOT covered with the correct tax receipt, since the payments for fees are covered with a "Fees" CFDI and suffer from deductions determined at 10% withholding for the same ISR and 10.666% for VAT, in addition to the 16% VAT.
The person who receives them also has a tax problem, since he/she must consider the total amount paid as an income "Assimilable to salary" including the VAT charged and could not credit the withholding of such tax. Furthermore, it will be difficult to credit the income tax withheld.
EFFECTS ON VAT
The VAT law indicates that payments that are considered "Asimilable to Wages" are not taxable acts, therefore, the amounts charged for VAT do not have such nature, but should also be considered as part of the person's income.
This is indicated in the penultimate paragraph of article 14 of said law:
"The rendering of independent services is not considered to be that which is performed in a subordinate manner through the payment of remuneration, nor services for which income is received that the Income Tax Law assimilates to such remuneration."
As a consequence of the above, the amount that would have been added in the voucher for VAT and the withholding of the same tax would have been undue, and therefore there would be no creditable VAT for the borrower.
CAN BE EMPLOYED
In the event that the size and structure of the company requires "Workers", understood as subordinate personnel with a salary, the partners, in addition to receiving what corresponds to them from their advances of income and profits, may receive a salary, and must also comply with all the obligations that correspond to an employer and a worker.
We hope that the above will help to clarify the tax treatment that corresponds to the partners of civil partnerships with respect to the payments that are made to them and in case you require further information in this regard, we are at your service.
we are at your service.
