On September 8, 2026, the Federal Executive Branch of Mexico submitted the 2027 Economic Package to the Congress of the Union, which includes a bill to reform the Income Tax Law (LISR, by its Spanish acronym). Among the proposed measures are changes that could have significant implications for companies engaged in transactions with related parties, particularly about financing, royalties, services, and other payments to foreign residents.
Two proposals deserve special attention from a Transfer Pricing perspective: the reduction of the limit on the deduction of net interest and the tightening of requirements for deducting payments made to foreign residents.
Even if a transaction complies with the arm’s-length principle, this alone does not guarantee its tax deductibility. If the reform is approved, this distinction will become even more relevant when analyzing intra-group transactions.
The net interest limit would be decreased from 30% to 20%
Currently, Article 28, Section XXXII, of the LISR limits the deduction of net interest that exceeds 30% of adjusted earnings/profit. The proposed legislation for 2027 proposes reducing that percentage to 20%.
In principle, the proposal does not modify other relevant aspects of this mechanism. The threshold of MXN 20 million in accrued interest on debts for applying the limitation remains in place, as does the option to deduct unused net interest during the following 10 fiscal years, subject to compliance with the corresponding requirements.
This means that a company could have an intercompany loan with an interest rate properly supported by a Transfer Pricing analysis and yet still face a temporary limitation on its interest deduction if the rule applies and the proposed new limit is exceeded.
It is important to note that the limitation in Section XXXII is not limited exclusively to financing between related parties. Its calculation takes into account the interest covered by the mechanism established by the LISR itself.
The proposal is in line with the approach of Action 4 of the OECD’s BEPS project, which recommends linking the deduction of net interest to the entity’s economic capacity, typically through an EBITDA-based ratio. The OECD contemplates a reference range of between 10% and 30%.
Payments to foreign countries would also be subject to new conditions
Another important change relates to the deduction of payments made to foreign residents.
The bill proposes to expressly establish that these payments are deductible in Mexico in the fiscal year in which the consideration is paid, the corresponding withholding tax is remitted, and the information required by the LISR is provided.
Likewise, it is proposed to modify the timing of the obligation to withhold income tax, taking into account when the obligation becomes due, when the amount accrues, or when payment is made, as applicable, depending on the text that is ultimately approved.
This modification would be particularly relevant for multinational groups that record intra-group charges at the end of the fiscal year and make the payment at a later date.
For example, while a royalty payable to a non-resident entity may be set at arm’s length and supported by Transfer Pricing documentation, its deduction could be deferred if the payment has not been settled by the fiscal year-end or if other tax deductibility requirements remain unmet.
The same analysis could apply to certain intra-group services and other cross-border payments.
Transfer Pricing and Deductibility: Two Analyses That Must Be Kept Separate
The proposed rules demonstrate why the transfer pricing analysis and the tax deductibility analysis, despite being related, address different questions.
The transfer pricing analysis seeks to determine whether the price, margin, interest rate, or consideration agreed upon between related parties corresponds to terms that independent parties would have agreed upon.
Meanwhile, the deductibility rules determine whether that expense is tax-deductible, in what amount, and in which tax year.
Therefore, both assessments must be coordinated.
For example, an intercompany loan could have an interest rate that is fully supported under the arm’s-length principle and, at the same time, generate interest whose deductibility is temporarily limited by the application of Article 28, Section XXXII.
What happens with thin capitalization?
In addition to these rules, there is the limitation set forth in Article 28, Section XXVII, commonly known as the thin capitalization rule, which applies to certain interest arising from debts owed to related parties residing abroad when the level of indebtedness exceeds the established ratio relative to shareholders’ equity.
This rule coexists with the net interest limitation under Section XXXII. The LISR establishes the interaction between these two provisions in order to determine the applicable limitation.
If the percentage in Section XXXII is reduced from 30% to 20%, it will become even more important to model both rules to determine their effect on intragroup financing structures.
From a Transfer Pricing perspective, this does not eliminate the need to demonstrate that the debt is on economically reasonable terms and that the agreed-upon rate complies with the arm’s-length principle.
Which intragroup transactions might require closer attention?
| Transaction with a Related Party Abroad | Proposal that meets her needs | Possible outcome if approved |
| Intercompany Loans | 20% cap on adjusted earnings/profit and, where applicable, rules regarding payments abroad. | A larger portion of the interest may remain undeducted for the fiscal year. |
| Royalties for the Use of Intangible Assets | Cash payment, withholding, and other applicable requirements. | The deduction may be deferred if the consideration remains unpaid at the end of the period. |
| Intragroup Services | Requirements Applicable to Payments to Overseas Residents. | Charges posted at the close of the day may require you to carefully review their payment and withholding dates. |
| Year-End Transfer Pricing Adjustments | Rules for payments abroad when the adjustment results in an actual payment. | The timing of the deduction could be adjusted depending on the nature and method of implementing the adjustment. |
Special Attention to Year-End Adjustments
Transfer pricing adjustments made at the end of the fiscal year warrant special analysis.
In some multinational groups, these adjustments aim to bring a Mexican entity’s profit to the arm’s-length level or range determined through economic analysis.
However, not all Transfer Pricing adjustments are of the same nature. Some may involve actual consideration or an account payable to a related party resident abroad, while others may be purely tax-related or virtual adjustments.
Therefore, it would be incorrect to assert that any adjustment that increases an expense will automatically be subject to the actual payment requirement.
If the reform is approved, it will be necessary to determine on a case-by-case basis whether the adjustment actually gives rise to consideration payable to a foreign resident and, if so, to analyze its interaction with the requirements for payment, withholding, and deductibility.
Intra-group financing should also be reviewed
The proposed reduction in the net interest limit may make it necessary to review existing financing structures.
A Mexican company with a significant level of intra-group debt should evaluate, overall, aspects such as:
- the amount and term of the financing;
- the debt-to-equity ratio;
- agreed-upon interest rates;
- the debtor’s financial capacity;
- the net interest limit;
- reduced capitalization; and
- the terms that would have been agreed upon by independent parties under comparable circumstances.
The fact that an interest rate falls within a market range does not necessarily mean that the entire amount of financial expense can be deducted in the same fiscal year.
What is the status of the proposal?
As of September 28, 2026, these measures remain part of the initiatives presented by the Executive Branch and are subject to the legislative process. Therefore, they may still be amended before their eventual approval and publication.
The Federal Budget and Fiscal Responsibility Law establishes that the Revenue Law must be approved by the Chamber of Deputies no later than October 20 and by the Senate no later than October 31. These deadlines apply specifically to the Revenue Law; the amendments to LISR are part of the fiscal package and are reviewed by lawmakers during this same period.
As the process continues, companies can begin to identify the operations that would be most affected by the proposed changes.
What Should Companies Review?
From a Transfer Pricing perspective, it would be advisable to review in advance any intragroup financing, royalties, services, and year-end adjustments involving related parties residing abroad.
In particular, companies should verify that the agreed-upon terms continue to comply with the arm’s-length principle and analyze how proposed deductibility rules could alter the tax effect or the timing of recognition for these transactions.
Transfer pricing analysis will continue to be necessary to demonstrate that transactions between related parties are conducted at arm’s-length values. What the reform could add is a second layer of analysis regarding how much can be deducted and in which tax year.
At TPC Group, we assist multinational groups in analyzing and documenting their transactions with related parties—including financing, services, royalties, and Transfer Pricing adjustments—with the goal of providing technical support for compliance with the arm’s-length principle and anticipating the effects that regulatory changes may have on their intragroup policies.