TAX and LABOR. Definitive Amendment that prohibits the Labor Subcontracting regime April 26, 2021
On April 23, 2021, the Decree that amends several provisions, among others, of the Federal Labor Law, of the Social Security Law, of the National Institute Housing Fund for Workers Law, of the Federal Tax Code, of the Income Tax Law, and the Value Added Tax Law regarding the labor subcontracting, was published in the Official Gazette of the Federation (OGF).
The most relevant provisions are the following:
- Labor subcontracting is prohibited, except that it will be allowed in cases in which the specialized services or execution of specialized works that are not part of the corporate purpose or the predominant economic activity of the beneficiary, and the contractor is registered before the Ministry of Labor and Social Welfare (MLSW).
- For both labor and tax purposes, it is established that the complementary or shared services or works provided between legal entities that are part of the same business group will be considered as “specialized”, as long as they are not part of the corporate purpose or the predominant economic activity of the legal entity that receives them. In connection with the foregoing, it follows that in certain cases and complying certain requirements, the internalization of labor subcontracting (insourcing) will be allowed.
- The amount of the workers’ profit sharing will have a maximum limit of 3 months of the worker’s wage, or the average of the participation received in the last 3 years. The amount that is most favorable to the worker will be applied.
- The contractors must have to submit certain data and information every 4 months to the Mexican Social Security Institute and to the National Institute Housing Fund for Workers.
- For labor, social security and housing purposes, the beneficiary will be jointly and severally liable in connection to the workers used to execute contracts, when the contractor does not comply with its obligations derived in said matters.
- Labor subcontracting expenses will not have tax effects regarding the income tax (deductions) and the value added tax (credit), when carrying out activities related to corporate purposes or regarding the predominant economic activity of the beneficiary.
- The considerations derived from the aforementioned specialized services or execution of specialized works will have tax effects, as long as the contractor is registered before the MLSW.
- There will be joint and several liabilities for the legal entities or individuals who receive services or contract works derived from illegal labor subcontracting, regardless of the infractions and sanctions that may be imposed to each Party (beneficiary and contractor).
- In those cases, in which the beneficiaries receive the aforementioned specialized services or the execution of specialized works, they must obtain certain information and documentation from the registered contractors, so that the expenses incurred can be deductible for income tax purposes and creditable for value added tax purposes.
- The use of simulated schemes for the provision of specialized services or the execution of specialized works or carrying out an illegal labor subcontracting will be considered an aggravated tax fraud.
- The amendments to the Federal Labor Law, the Social Security Law, and the National Institute Housing Fund for Workers will enter into force the day after their publication in the OGF.
- The amendments to the Federal Tax Code, the Income Tax Law, and the Value Added Tax Law will enter into force on August 1st, 2021.
- No later than May 24, 2021, the MLSW must issue the general rules regarding the registration before her.
- Individuals or legal entities that provide specialized services or execute specialized works must obtain their registration before the MLSW within a 3 months-period from the publication of the general rules issued by said Ministry.
- In connection to the employer substitution due to a labor subcontracting regime, the employers will not be required to transfer the goods of the legal entity or establishment to the substitute employer, as long as the respective workers are transferred to the beneficiary no later than July 23, 2021.
We suggest expediting the pertinent preventive actions and review and analyze the contracting schemes for the provision of services implemented in order to determine how to continue operating said schemes or carry out the necessary modifications or restructures, pursuant the potential contingencies that may be generated.
If you have any questions regarding the foregoing, please do not hesitate to contact us.
Mexico City, April 26, 2021