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Fibra E
Fibra E
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FIBRA E
In the framework of the third government report of Mexico’s Constitutional President, Enrique Peña Nieto, early in September this year, it was announced the implementation of several actions seeking to promote Mexico’s economic development. Among such initiatives, it was announced the creation of “FIBRA E” as a new investment vehicle that will allow private and public participants to monetize assets characterized by having stable and predictable cash flow, under a tax regime that reduces levels of taxation and therefore allows for greater distributions. Mexico’s FIBRA E introduces an investment alternative substantially similar to the MLPs (Master Limited Partnerships) that have been traded in the United States since 1981, which market capitalization in the US, in accordance with the Alerian MLP Index, reaches US$511bn, as of December 31, 2014.
Following the announcement of FIBRA E, the Executive Branch, through the Ministry of Finance and Public Credit (Secretaría de Hacienda y Crédito Público) published on September 17, 2015, the resolutions that amends the current tax framework in order to incorporate the tax regime applicable to FIBRA E, which will contribute to the capital advantage of FIBRA E over other financial instruments. Likewise, even date, the Mexican Banking and Securities Commission (Comisión Nacional Bancaria y de Valores) submitted for public consultation with the Federal Commission on Regulatory Improvement (Comisión Federal de Mejora Regulatoria – “COFEMER”), the draft of proposed amendments to the securities regulations, in order to regulate the FIBRA E as an issuer under the Mexican securities market and to provide for minimum corporate governance requirements for such investment vehicle (the “Proposed Amendments”). Note that the provisions contained in the Proposed Amendments may be modified as a result of the process of public consultation currently undertaken by the COFEMER.
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I. What is FIBRA E?
FIBRA E is a trust created in accordance with the laws of Mexico with a Mexican banking institution acting as trustee, qualified as a FIBRA E for tax purposes, that issues publicly traded securities in the form of trust bonds or certificados bursátiles fiduciarios de inversion en energía e infraestructura (“CBFEs”), registered with the National Securities Registry (Registro Nacional de Valores – the “RNV”) and listed in the Mexican Stock Exchange (Bolsa Mexicana de Valores, S.A.B. de C.V. – the “BMV”), in accordance with Securities Market Law (Ley del Mercado de Valores – the “Securities Law”) and its regulations (Disposiciones de carácter general aplicables a las emisoras de valores y otros participantes del mercado de valores – the “Regulations”). As provided in the Securities Law, the CBFEs shall grant its holders a pro rata property right with respect to trust assets.
A corporate sponsor (the “Sponsor”) typically would form and contribute to the FIBRA E, equity interests (in whole or in part) in Mexican resident legal entities (the so-called “Promoted Companies”) that own the assets and perform the “exclusive activities” (see below) via share transfer or contributions in kind, spin-off or merger, and the Sponsor would typically receive
CBFEs in exchange and other rights to receive a greater portion of the FIBRA E incremental cash flow in the future, subject to the payment of a preferred return to the security holders (“incentive distribution rights” or “IDRs”). Structuring the contribution of such interests will be directly driven by the tax regime applicable to the formation of the FIBRA E and other legal issues, such as contractual prohibitions on asset transfers, consent requirements, licenses and permits, debt covenants, among others.
The ownership of a FIBRA E may be divided into two main groups of security holders: the public and the Sponsor. In accordance with the Proposed Amendments, the FIBRA E may issue different series of CBFEs, including preferred (with limited voting rights) and subordinated CBFEs, the latter typically held by the Sponsor.The Sponsor or any other person generally controlled by the Sponsor (the “Manager”), would manage the assets of the FIBRA E, in accordance with terms and conditions of the relevant Management Agreement and subject to the security holders’ rights provided in the Securities Laws and its Regulations, as described further herein.
Below is a chart summarizing a typical structure for FIBRA E:
Manager
Sponsor
Managment agreement
CBFs/IDRs
Public
FIBRA E Technical comittee
(%) (%)
Promoted Company
Promoted Company
Promoted Company
Assets/Qualified Income
FIBRA E
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II. Tax regime applicable to FIBRA E
In general terms, according to the Proposed Amendment, the FIBRA E tax regime is based on the current regulations applicable to the existing real-estate FIBRA. However, as opposed to the latter, in which the assets (immovable property exclusively intended for leasing) must be owned directly by the issuer trust or by a subsidiary trust, in the case of FIBRA E a legal entity must own the assets. This is due to the nature of the vehicle’s “exclusive activities” (see below). As such, under the FIBRA E regime, the issuer trust must invest in shares issued by one or several Promoted Companies, which in turn own the assets and perform such “exclusive activities”. All investors of the FIBRA E are subject to taxation in Mexico on income obtained through the FIBRA E, according to the regime applicable to each of them.
General requirements of the FIBRA E tax regime
The following requirements apply to the FIBRA E regime, in addition to those established by the Mexican tax legislation with regards to real-estate FIBRAs, if applicable:
• A FIBRA E must be a trust created according to Mexican legal guidelines. A Mexican tax resident banking institution or an authorized brokerage house must act as trustee.
• All shareholders of a Promoted Company must be legal entities that reside in Mexico for tax purposes. This requirement should be met before a FIBRA E acquires shares of a Promoted Company.
• At least 90% of a Promoted Company’s annual taxable income should derive from the following “exclusive activities”:
- The treatment, refining, transportation and storage of oil; the processing, compression, liquefaction, decompression, regasification, transportation, storage and distribution of natural gas; the transportation, storage and distribution of oil products; and the transportation by pipeline and subsequent storage of petrochemicals, among others.
- The generation, transmission and distribution of electricity, in compliance with the Electric Industry Law and its Regulations.- Infrastructure investment projects that include concessions, services or any other contractual arrangement executed between private parties and the government for performing services for the public sector or the final user, provided that such projects are currently in operations and have a remaining term of at least 7 years, in the following areas:
(i) Roads, highways, railways and bridges;(ii) Ports, maritime terminals and port facilities(iii) Civilian airfields, excluding private ones;(iv) The expansion of the country’s telecommunications network;(v) Public safety and social reintegration;(vi) Drinking water, sewerage and wastewater treatment.
- The administration and management of the FIBRA E trusts.
The gains from the sale of land, fixed assets and deferred expenses might be considered as taxable income for purposes of calculating the 90% income threshold, provided that such assets are used in the development of the aforementioned “exclusive activities”. In addition, the taxable annual inflation adjustment and foreign exchange profits might be excluded from the total taxable income in order to calculate the 90% income threshold.
• State Productive Companies and their subsidiaries that are entitled to hydrocarbons exploration and production rights, as well as other legal entities that entered into a contract for hydrocarbons exploration and production with the National Hydrocarbons Commission, are not allowed to qualify as Promoted Companies.
• No more than 25% of the accounting value of a Promoted Company’s non-monetary assets in any given year can be invested in “new” assets (less than 12 months since their acquisition and start of operations).
• At least 70% of the annual average net worth of a FIBRA E trust must be invested in shares of Promoted Companies, which in turn must comply with the “exclusive activities” test. The remainder must be invested in securities issued by Mexico’s Federal Government and registered at the National Securities Registry, or in shares of debt-related mutual funds.
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• A FIBRA E trustee must issue CBFEs amounting to the entire trust’s patrimony. Such CBFEs must be registered at the National Securities Registry.
• A FIBRA E trustee must distribute to CBFEs holders, at least once a year and no later than March 15, at least 95% of a FIBRA E tax result.
• A notice should be filed before the Mexican tax authorities stating under oath that all the requirements of the FIBRA E tax regime are met.
• A FIBRA E must be registered at the FIBRAs registry, which is managed by the Mexican tax authorities.
• Promoted Companies’ shareholders must fulfill a number of formal obligations in order to ensure the payment of income tax on tax profits pertaining to such Promoted Companies (see “Tax regime applicable to the Promoted Companies”).
• All shareholders of a Promoted Company must state in writing, before the Mexican tax authorities, the following: (i) they accept to offset their tax losses from previous years to the first sale of shares to a FIBRA E, only against profits not obtained from the Promoted Company; (ii) they assume a joint liability with respect to the income tax resulting from the FIBRA E tax regime (vis-à-vis their shareholding participation); (iii) they assume a joint liability with regards to all the tax obligations of the Promoted Company, previous to the transfer of its shares to a FIBRA E (vis-à-vis their shareholding participation); and (iv) they accept the primacy of the Promoted Company’s rules of distributions.
• A Promoted Company should not be subject, either before or after the acquisition of its shares by a FIBRA E, to the regimes of “Sociedad Anónima Promotora de Inversión Bursátil” or “Sociedad Anónima Bursátil”, as defined by the Mexican Securities Market Law.
• ►The trust agreement must include distribution rights for managers, the trust settlor or related parties of a FIBRA E. The payment of any compensation, commission, fee, incentive or distribution will be subordinated to the payment of a preferred return to CBFEs holders, excepting those commissions, fees or distributions that are required for the proper functioning of the fund.
Transfer of a Promoted Company to a FIBRA E
A Promoted Company’s shareholders, whose shares are transferred (totally or partially) to a FIBRA E, must determine the taxable gain or loss from the sale of the company’s land, fixed assets and deferred expenses on a proportional basis, as if they were selling assets instead of shares. The sale price of such assets will be that agreed for the share transfer, plus the debt that the Promoted Company may have at such a date, also on a proportional basis. In order to determine the aforementioned gain or loss, the Promoted Company’s shareholders must compare the sale price with the tax-cost basis of such assets.
If a taxable gain is due, shareholders are obliged to pay the applicable income tax without any deferral option. This taxable gain implies a deferred expense for the respective FIBRA E. However, if the result is a tax loss, this will imply that the FIBRA E should have to recognize a deferred gain (see “Tax regime applicable to the FIBRA E”).
The sale of shares issued by a Promoted Company must be audited by a Certified Public Accountant registered before the Mexican tax authorities.
Drop-down rules
a) Contribution of assets
The transfer of land, fixed assets or deferred expenses from legal entity residing in Mexico to another (a Promoted Company) is not considered as a sale of goods for Mexican federal tax purposes, provided that the following requirements are met: (i) assets are only related to the “exclusive activities” described above; (ii) the transfer is made as equity contribution to a Promoted Company, as long as the full consideration for the assets’ contribution is paid with shares issued by the Promoted Company; (iii) at least 2% of the shares issued by the Promoted Company are acquired by a trust that complies with the FIBRA E requirements, within a maximum period of 6 months from the date on which the assets’ contribution is effective; and (iv) the Promoted Company complies with all the requirements to qualify as an investment target of a FIBRA E.
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If any of the applicable requirements are not met, the transfer of the assets will be considered as a taxable sale of goods for Mexican federal tax purposes, and the applicable taxes will have to be paid retroactively.
b) Spin-off
The spin-off of a Mexican resident entity, whereby land, fixed assets and/or deferred expenses are transferred to a Promoted Company, will not be considered as a sale of goods for Mexican federal tax purposes, provided that the following requirements are met: (i) assets are only related to the “exclusive activities” referred to above, (ii) at least 5% of the shares issued by the Promoted Company are acquired by a trust that complies with the FIBRA E requirements, within a maximum period of 6 months from the date on which the spin-off is effective; and (iii) the Promoted Company complies with all the requirements to qualify as an investment target of a FIBRA E.
If any of the applicable requirements are not met, the transfer of the assets will be considered as a taxable sale of goods for Mexican federal tax purposes, and the applicable taxes will have to be paid retroactively.
In order to calculate income tax base (see “Tax regime Applicable to the Promoted Companies”), the original investment value of the assets transferred to a Promoted Company, by either an equity contribution or a spin-off, will be the undepreciated value prior to such transfer (there is no step-up for tax purposes).
Tax regime applicable to a Promoted Company
A Promoted Company is considered as a business trust for tax purposes. This implies that a Promoted Company is not considered a taxpayer per se with regards to income tax. According to the tax regime applicable to business trusts, a Promoted Company must determine its yearly tax result as per Title II (“Legal Entities”) of the Mexican Income Tax Law, and then apportion it among its shareholders on a proportional basis. The latter, in turn, are responsible for settling their respective tax payment. Meanwhile, the FIBRA E must take into account such distribution when determining its own yearly tax result.
A Promoted Company’s tax loss in a given year cannot be apportioned among shareholders. Such loss can only be offset against its future taxable profits. The FIBRA E tax regime does not allow for a step-up with regards to the assets that belong to a Promoted Companies, as opposed to the step-up granted under the real-estate FIBRA regime. Therefore, a Promoted Company must determine its tax result based on the assets’ remaining tax cost. A Promoted Company is not obliged to make income tax advance payments; this is consistent with the regime contained in the Mexican Income Tax Law for real-estate FIBRAs. Finally, a Promoted Company may freely distribute cash flow to its shareholders as dividends or capital reimbursements, without triggering a corporate income tax payment. The 10% dividend tax withholding is not applicable in respect of dividends distributed to the FIBRA E.
Tax regime applicable to FIBRA E
a) Tax result computation
A FIBRA E trustee must determine the yearly tax result of its vehicle in accordance with the provisions of Title II of the Mexican Income Tax Law. To do so, the trustee must take into account the following: (i) all the tax results distributed by a Promoted Company to the FIBRA E; (ii) a tax deduction through the amortization of the deferred expense arising from the acquisition of a Promoted Company shares, or the recognition of the deferred gain at an annual rate of 15% in case of a tax loss triggered upon the transfer of the shares to the FIBRA E, if applicable (see “Transfer of Promoted Companies to FIBRA E”); and (iii) any other deduction that may be required for the proper operation of the FIBRA E trust.
b) Tax result distribution
The distribution of tax results by a FIBRA E follows the same rules applicable to a real-estate FIBRA. In general terms, tax result distributions should be subject to a 30% income tax withholding, except on the portion attributable to exempt CBFEs holders (i.e., Mexican SIEFORES) and legal entities residing in Mexico for tax purposes (see “Tax Regime Applicable to FIBRA E Investors”). Any undistributed tax result is subject to a 30% tax rate and is considered as a final payment. If the amount of the distributions exceeds the tax result, it is considered as a capital reimbursement, lowering in turn the acquisition value of the respective CBFEs.
Fibra E6
Tax regime applicable to FIBRA E investors
a) Tax result distributions
The distribution of tax results by a FIBRA E to CBFEs holders follows the same rules applicable to a real-estate FIBRA. The applicable tax regime depends on the nature of each CBFE holder, as summarized below:
b) Sale of CBFEs
Capital gains obtained by CBFEs holders follow the same rules applicable to real estate FIBRAs. The applicable tax regime depends on the nature of each CBFE holder, as summarized below:
c) Foreign residents
As a general rule, foreign holders of CBFEs are deemed to have a permanent establishment in Mexico. However, foreign investors are not obliged to comply with all the formal obligation related to the creation and maintenance of a permanent establishment in Mexico (i.e., obtaining a tax ID number, filing returns, etc.), provided that all the requirements that apply to the FIBRA E regime are met and that tax result distributions made by such trust are subject to income tax withholding, when applicable. In this case, income tax withheld on FIBRA E tax result distributions is a final payment.
Individuals residing in Mexico should consider the withholding on the distribution of tax results as income from business activities. Such individuals are entitled to offset it with their annual income tax liability, in accordance with the tax rates applicable to each one.
Foreign residents, including pension funds, should consider the withholding on the tax result distribution as a final payment. Unlike real-estate FIBRAs, in the case of FIBRAs E foreign pension funds are not exempt from taxation with regards to income obtained through a FIBRA E. The rationale is that FIBRA E income has an “active” nature. By contrast, foreign pension funds are exempted on real estate investments made in Mexico (i.e. income obtained through real-estate FIBRAs).
Type of holder
Legal entities residing in México
N/A N/A
N/A N/A
Individuals residing in México
Mexican pension funds
Foreign residents
Foreign pension funds
WithholdingExemptDefinitive payment
withholding
Legal entities residing in México
Individuals residing in México
Mexican pension funds
Foreign residents
Foreign pension funds
ExemptType of holder
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III. Securities law regulations applicable to FIBRA E
In view that the FIBRA E undertakes a public offering in Mexico, the issuer trust needs to satisfy all procedures before the CNBV and disclosure requirements contained in the Securities Law and its Regulations, in order to obtain the CNBV’s authorization to carry out the public offering. Such requirements include, without limitation, the preparation and authorization of a prospectus and other documents directly related to the offering, such as financial statements, underwriting agreement, trust bonds certificate, opinions of external counsel and auditors, among other documentation.
After the IPO, the FIBRA E would be required to periodically furnish certain information to the CNBV and the BMV, including unaudited quarterly financial statements and audited annual financial statements, as well as various periodic reports related to material events.
IV. Governance of FIBRA E
In accordance with the Proposed Amendments, the FIBRA E would be subject to certain corporate governance minimum requirements. Below is a brief description of the applicable corporate governance requirements for FIBRA E, pursuant to the Proposed Amendments:
Security Holders Meeting
The security holders meeting has the authority, among others, to approve the following matters: (i) any amendment to the investment policy of the trust estate, (ii) the approval of the financing policy of the FIBRA E or any amendments thereto; and (iii) the removal of the Manager upon the occurrence of the events of default provided in the governing documents of the FIBRA E, with the vote of security holders of 66% of the outstanding CBFEs. The governing documents shall contain, in any case, the following events of default: (a) omission by the Manager to inform the security holders of its management activities; (b) fraud, negligence or willful misconduct by the Manager; and (c) material breach by the Manager to its duties and obligations.
Minority rights
The Regulations provide for the following minority rights of CBFEs holders:
• Security holders having, individually or as a group, 20% or more of the outstanding CBFEs, may judicially oppose to the resolutions of the security holders meeting. The holders representing 20% or more of the outstanding securities shall have not attended the meeting or otherwise voted against the relevant resolution in order to exercise the aforementioned right.
• ►Security holders having, individually or as a group, 15% or more of the outstanding CBFEs, may claim corporate liability against the Manager for any breach of its obligations.
• ►Security holders having, individually or as a group, 10% or more of the outstanding CBFEs, may nominate and appoint one member of the Technical Committee, per each 10% of CBFEs; except in the event that the governing documents of the FIBRA E grant to the Manager the right to appoint all members of the Technical Committee.
• Security holders having, individually or as a group, 10% or more of the outstanding CBFEs, may request the common representative to call for a general security holders meeting or postpone a meeting only once, by three calendar days without need for further call, if they deem to have not been properly informed regarding the items of the agenda.
• All security holders are entitled to receive all information and documentation related to or subject matter of any security holders meeting, with at least 10 days in advance of such meeting.
• Security holders may enter into voting agreements, which shall be disclosed to the public.
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Series of CBFEs
The governing documents of the FIBRA E may provide for different series of security holders, including preferred and subordinated CBFEs. In the case of subordinated CBFEs, any distributions to the holders of such securities would be subordinated to the payment of any agreed distributions in favor of the holders of preferred CBFEs.
The holders of preferred CBFEs, which would typically have limited voting rights, shall be, in any case, entitled to vote with respect to the following matters: (i) any increase to the compensation or commissions of the Manager or the members of the Technical Committee; and (ii) any amendments to the purpose of the issuer trust or the extinction of such trust.
Technical Committee
In accordance with the Proposed Amendments, the FIBRA E’s Technical Committee shall be integrated by a maximum of 21 members of which at least a majority of such members must be independent. Independence shall be qualified with respect to the Promoted Companies, the Sponsor and the Manager. Any auxiliary committees (i.e. Conflicts Committee, Audit Committee, among others) created by the Technical Committee, shall be integrated by independent members only.
The members of the Technical Committee may enter into voting agreements, which shall be disclosed to the public; in the understanding that, if the FIBRA E has issued CBFEs with limited voting rights or its governing documents grant the Manager the right to appoint all members of the Technical Committee, any such agreements shall not contain any provision by which the members of the Technical Committee are required to vote in agreement with the members of such Committee appointed by the Manager.
The Technical Committee would have the following duties:
• ¯Supervise the Manager’s activities.
• Review the quarterly report submitted by the Manager to the Technical Committee.
• Request the Manager any information that the Technical Committee deems necessary to carry out its activities.
• Request the trustee to call for a security holders meeting to discuss specific items, when the Technical Committee deems that the Manager has materially breached its obligations.
• Implement internal control procedures to identify all of the assets held, directly or indirectly, by the FIBRA E or the Promoted Companies, and its current state.
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Conflicts Committee
If the Technical Committee approves the creation of a Conflicts Committee, such Committee shall approve any transactions with related parties or that may represent a conflict of interest, in an amount equal or exceeding 10% the trust estate. Any such transactions, when approved by the Conflicts Committee, shall be disclosed to the public as a material event.
Upon completion of the public consultation process before COFEMER, the Proposed Amendments (including any amendment thereto) shall be published in the Official Gazette of the Federation (Diario Oficial de la Federación), indicating the effective date of such Proposed Amendments.
EYEYEYEY México México 9 México México México México 9
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This material has been prepared for general informational purposes only and is not intended to be relied upon as accounting, tax, or other professional advice. Please refer to your advisors for specific advice.
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ContactsAlfredo Álvarez [email protected] (55) 1101 8422
Rodrigo Ferná[email protected](55) 5283 8666
Francisco [email protected] (52) 1101 7293
Jimena González de [email protected] (55) 1101 7294
Oscar López-Velarde [email protected] (55) 5283 8677
Francisco [email protected] (55) 5283 1489
Oscar [email protected] (55) 52831 468
Enrique Pérez [email protected]+1 212 773 1594
Allen [email protected] (55) 5283 1300
Olivier [email protected] (55) 5283 1310
Rafael Aguirre [email protected] (55) 5283 8650
Loic Le [email protected] (55) 5283 1333
