In view of the current macroeconomic conditions worldwide (specifically the uncertainty in certain economic regions such as Europe and Asia) it is possible to imagine that international investors might turn their interest to a country like Mexico, as one of the most stable developing countries in the present time.

It has been said for many years now that the Mexican private equity industry has a lot of potential and the Mexican government has made some efforts for more than ten years to implement legal mechanisms with the goal of incentivizing this industry and bringing more foreign direct investment to the country.

Unfortunately, (and for reasons that this author does not know) this has not necessarily been the case, for although there has been an increase of private equity investments in Mexico, it has not grown as planned or at least not according to its potential or in comparison to other countries.

Since the year 2006, a tax incentive for private equity investments in Mexico was included in the Mexican Income Tax Law (“MITL”). By means of said tax incentive, the figure of “FICAP” or “Fideicomiso de Inversión en Capital de Riesgo” was created.

The FICAP is a Mexican trust or “fideicomiso” which was created with the intention of providing its members or beneficiaries a tax transparent or “pass through” treatment, which is indispensable for the correct implementation of a private equity fund.

However, this interesting figure contained certain additional and very industry specific requirements, which made it difficult to be used by any type of fund. A clear example of this was the former requirement that in order to be eligible as a FICAP the latter should have a maximum duration of 10 years.

There is no doubt that a private equity fund must have a finite life, and that after said term it is in its best interest to disinvest, but not all funds operate in the same way and consequently the FICAP did not have the versatility that the funds needed for their structuring. A clear prove of that is that currently, more than 80% of the private equity funds that invest in Mexico are structured by means of a foreign Limited Partnership and not a FICAP.

But finally, as of 2016, certain provisions regulating the FICAP were modified, and hence this vehicle has been made more flexible and therefore more attractive for a bigger number of private equity funds and investors. We believe this should come to the attention of investors and tax advisors worldwide.

Therefore, it is the intention of this article to set forth the current tax treatment for foreign tax residents investing by means of a FICAP, in order for the reader to be able to analyze and compare the benefits of this vehicle against any other vehicle or structure for making private equity investments in Mexico.[1]

Requirements to qualify as a FICAP for Mexican tax purposes

In order for a “fideicomiso” to be deemed as a FICAP, the following requirements shall be met:

  1. That the FICAP is created in accordance with Mexican law and the trustee is a credit institution or brokerage firm residing in Mexico.
  2. The primary objective of the FICAP shall be to invest in the equity of Mexican resident legal entities not listed on the Stock Exchange at the time of the investment (“Promoted Companies”) and to promote their development by taking part in their boards of directors, as well as to grant financing to Promoted Companies[2].
  3. That at least 80% of the assets of the FICAP are invested in the shares comprising the investment in the capital or in the finance granted to Promoted Companies and the remaining portion is invested in Federal governmental securities entered in the National Securities Registry or in shares of investment funds in debt instruments.
  4. The shares of the Promoted Companies that are acquired shall not be sold before at least two years have elapsed as of the date of their acquisition.
  5. That at least 80% of the income earned by the FICAP in the year is distributed not later than two months after the end of the year.

If these requirements are not met, the FICAP will be considered as a business trust or “fideicomiso empresarial” for purposes of the MITL, and among other tax consequences, it shall stop being deemed as tax transparent.

Tax treatment of the FICAP

The FICAP will be transparent for Mexican tax purposes, and therefore the final beneficiaries of the FICAP (the investors) shall be the ones subject to the MITL with respect to the income obtained indirectly through the FICAP. Therefore, the tax consequences for each investor will depend on whether the final beneficiary of the FICAP is a Mexican tax resident individual or company, or a foreign resident.

The investors shall be deemed as the ones obtaining income from either dividends, interest or capital gains. In the case of foreign tax resident investors, they will be deemed as having Mexican sourced income for purposes of Title V of the MITL or the applicable Tax Treaty.

For such purposes, the trustee of the FICAP shall keep accounts for each type of income that it receives (the dividends it receives; the interest that it receives for the securities and the gains obtained from the disposition thereof; the interest that it receives for the financing granted to the Promoted Companies; and the gains obtained for the sale of shares).  The balance of each of said accounts shall be increased by the corresponding income received by the trustee and shall be reduced by the income that trustee delivers to the FICAP beneficiaries from said account.

The trustee shall also keep an account for each of the investors who participate as beneficiaries in the FICAP and record the contributions made by each one of them individually to the FICAP.

In case the investors are foreign tax residents, the trustee shall withhold the corresponding tax according to the type of income delivered to them in accordance with Title V of the MITL or, if applicable, in accordance with the Tax Treaty entered into between Mexico and the countries in which the investor is resident. In this sense, a FICAP structure would allow the investors to preserve their respective tax treaty benefits, such as reduced rates on dividends and interests, the right to take a credit on taxes paid abroad, as well as benefits available to tax exempt entities, such as pension funds.

For purposes of the abovementioned, the trustee shall provide a certificate of income delivered and, as applicable, of the tax withheld, and/or the reimbursement of contributions to the investors who receive said income or reimbursements as beneficiaries of the FICAP.

It is important to mention that the trustee will be able to deduct from the income received by the FICAP, all expenses that are effectively paid during the tax year, and as long as they are strictly indispensable for the purpose of the FICAP. In this sense, the FICAP may deduct, among other expenses, any Management Fees paid to the managers, preventing tax leakages within the structure (in a foreign Limited Partnership, those fees could be deemed as non-deductible items for the Mexican resident investors).

On the other hand, in order to structure the Carried Interest rights in favor of the manager of the fund, said manager may act as a beneficiary of the FICAP.


The FICAP is a vehicle that provides investors with a simple and tax efficient alternative for structuring a private equity fund for investments in Promoted Companies located in Mexico.

This vehicle works in a very efficient matter regardless of the investors´ tax residency, and depending on the specific needs, it could be an interesting option for the incorporation of future funds, instead of having to incorporate a complicated structure with additional foreign feeders, that could also imply certain foreign tax reporting obligations for some investors.

Notwithstanding the abovementioned, we believe there is still room for improvement in the regulation of this type of vehicle, since there are no specific rules for subjects like (for example) the allocation of expenses against the different types of income, as well as the credit of the income tax for dividends distributed by the Promoted Companies.

[1] Please note that we are not implying that the FICAP is better for the implementation of any type of private equity investment in Mexico, but only that it should be analyzed on a case by case basis.

[1] In addition to the abovementioned primary objective, and subject to the compliance or certain requirements, the FICAP ´s objective may include the provision of independent services in favor of the Promoted Companies.

Published at Euromoney´s Tax Expert Guide