Mexico adopted its own version of master limited partnerships.
New regulations issued in mid-September by the Mexican tax authorities authorize use of an entity called a Fibra E to raise equity on the Mexican stock exchange. A Fibra E is a Mexican trust with a bank or broker-dealer acting as the trustee. The trust invests in shares of Mexican companies that are active in the Mexican energy or infrastructure sector.
The attraction is no income tax at the level of the Fibra E and a liquid market in the shares. The structure should make it possible to raise equity more cheaply.
At least 70% of the average annual value of total assets must be in shares in companies in the targeted sectors, and at least 90% of the income earned by portfolio companies in which the Fibra E invests must come from targeted sectors.
The targeted sectors are electricity (generation, transmission, distribution), various types of private-private partnerships to undertake infrastructure implemented through concession agreements with terms of at least seven years (roads, highways, railways, bridges, inter-city transportation, ports, terminals, marinas, airports, prisons, potable water, drainage, sewage treatment plants, expansion of the main telecommunications network) and downstream oil and natural gas (treatment, processing, refining, transportation, storage, distribution, but not exploration and production or retail sales).
The trust issues certificates that are listed on the Mexican stock exchange.
It must distribute at least 95% of its income to shareholders each year by the following March 15. There is generally no income tax at the Fibra E level. Tax is collected from the shareholders through a 30% withholding tax on distributions. Mexican shareholders can claim credit for the tax withheld. Foreign shareholders can treat the withheld tax as their final tax. The trustee must pay tax on any income that is not distributed.
Earnings at the level of the portfolio companies are also less heavily taxed. They can be distributed to the Fibra E without a 10% withholding tax that would normally be collected on dividends.
The first Fibra E could list as early as the second quarter of 2016. Pemex is expected to be an early adopter. The sponsors of the $13 billion new Mexico City airport are also reportedly studying the structure. Mexican pension funds may be early investors. The pension funds control $148 billion in capital.
Energy stocks are underrepresented on the Mexican stock exchange compared to the US. They are 1% of market valuation currently compared to 6% in the US. The only publicly-traded Mexican energy company currently is IEnova, a Sempra energy subsidiary. Its stock is up 88% over the initial launch price in 2013.
Meanwhile, the Mexican government submitted a series of tax proposals to the Mexican Congress in September that are expected to be enacted before year end and to take effect on January 1, 2016.
Companies that generate electricity from renewable energy or at cogeneration facilities will be able to pay dividends to shareholders free of the 10% withholding tax on dividends. The companies would keep special after-tax profit accounts from which to pay dividends out of earnings from such electricity generation. In addition, debt borrowed to finance such projects will be exempted from thin-capitalization rules that limit the debt to no more than three times equity.