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The proposed Mexican tax reform for 2020 would deny, under a broad set of circumstances, the deductibility of payments made by Mexican residents to foreign-related parties subject to a preferred tax regime, regardless of whether the payment is made on an arm's length basis.

Proposed Article 28, XXIII is a complex rule that requires an analysis of payments by Mexican entities to foreign related parties and, in many cases, an analysis of the payments made by the foreign recipient. Mexican companies should examine the nature of payments made to foreign related parties, the taxable treatment of the foreign recipients in their country of tax residency, the level of substance and activity of the foreign recipient, and the relationship of this substance to the value paid by the Mexican-resident entity.