Executive answer
Mexico’s net-interest limitation and the arm’s-length principle are cumulative tests, not alternatives. Transfer pricing first determines whether debt exists, how much an independent lender would provide, and which rate and conditions are appropriate. Section XXXII of Article 28 of the Mexican Income Tax Law then limits, under its own definitions, net interest exceeding 30% of adjusted taxable profit when its conditions apply.
An arm’s-length rate does not assure full deduction. Conversely, remaining below the quantitative limit does not validate excessive principal, an unsupported rate or a transaction without substance. The file should preserve both outcomes and show the sequence: characterization, pricing, general requirements, thin capitalization, net-interest limitation and other applicable provisions.
The largest operational error is calculating Section XXXII from an accounting account without filtering which items are deductible interest or taxable interest income for that provision. The second is changing the rate simply to fit the limit. That confuses an annual tax consequence with the price that should have been determined when the transaction began.
Sequential bridge
| Step | Question | Outcome | Main evidence |
|---|---|---|---|
| 1. Delineation | Does debt exist and who controls risk? | debt, equity or another transaction | approvals, capacity, agreement, conduct |
| 2. Principal | How much would an independent lender advance? | supported amount | cash flow, coverage, alternatives, covenants |
| 3. Pricing | Which rate and fees are comparable? | range and point | rating, currency, term, comparables |
| 4. Accrual | Which interest belongs to the year? | accounting and tax interest | calendar, balance, rate, ledgers |
| 5. Requirements | Are withholding, evidence and other conditions met? | potentially deductible interest | invoices/support, payments, returns |
| 6. Section XXVII | Does thin capitalization apply? | specific nondeductible amount | average debt and equity |
| 7. Section XXXII | Does net interest exceed the limit? | current deduction and carryforward | adjusted profit, income and interest |
| 8. Reconciliation | Do return, records and study agree? | traceable file | tax-to-book bridge |
Do not erase one column when producing the next. Each test may be audited independently.
What Section XXXII provides
As of this article’s cutoff, Section XXXII of Article 28 treats as nondeductible the fiscal-year net interest exceeding 30% of adjusted taxable profit. It applies only to taxpayers whose accrued interest derived from debt exceeds MXN 20 million during the year. That threshold applies jointly to legal entities and permanent establishments in the same group or that are related parties and is allocated through the statutory mechanism.
“Net interest” is not simply accounting finance expense minus finance income. The statute begins with accrued interest from debt that is deductible under the Law, subtracts taxable accrued interest income and accounts for the threshold as prescribed. Where interest income equals or exceeds accrued interest expense, the section does not apply under that paragraph.
Adjusted taxable profit adds to taxable profit the debt interest accrued and the specified tax deductions for fixed assets, deferred expenses, deferred charges and pre-operating expenditures. The statute also governs losses, foreign-source components and excluded concepts. If adjusted taxable profit is zero or negative, deduction of interest subject to the section can be denied, except for the amount outside its scope under the text.
Do not substitute accounting EBITDA. It can be a management indicator, but it does not reproduce the tax definitions.
Threshold and group perimeter
The MXN 20 million threshold requires a defined perimeter. Prepare a list of Mexican legal entities and permanent establishments that belong to the group or are related parties for this rule. Obtain prior-year taxable revenue, accrued interest, data owners and sources.
Document threshold allocation. Each entity must not independently assume that it owns MXN 20 million. An acquisition, demerger, new group member or short fiscal year requires review of the facts and applicable text. Preserve the allocation approved by corporate tax and reconciled to each entity’s return.
Distinguish corporate group, related parties under the provision and accounting consolidation. They are not interchangeable labels. If the perimeter is uncertain, document legal reasoning rather than a spreadsheet flag.
Building net interest
Start with an instrument inventory rather than a total account. Include bank debt, intercompany loans, bonds, cash pools, financed balances and other instruments whose return is treated as interest. For each record principal, currency, rate, dates, counterparty, relationship, accrual and tax treatment.
Then produce bridges from:
- accounting finance expense to interest derived from debt;
- debt interest to amounts satisfying deduction requirements;
- finance income to taxable interest income;
- functional currency to Mexican tax pesos;
- monthly figures to the annual return.
The section states that foreign-exchange gains or losses from currency fluctuations are not treated as interest for this computation unless they derive from an instrument whose return is considered interest. It also addresses consideration for accepting a guarantee. Classify every item with a reason and source; do not combine FX, guarantee fees, bank commissions and interest in one category.
Review interest capitalized into inventory or assets, fees integrated into yield, derivatives and reversals. An account named “interest” does not determine tax character.
Adjusted taxable profit
Begin with taxable profit from the annual computation and trace every adjustment. Add only concepts permitted by the statute, supported by schedules for each asset or deduction. Do not copy accounting depreciation. Reconcile tax deductions for investments, deferred expenses, deferred charges and pre-operating periods.
Where there is a tax loss, model the effect under the provision. A budget showing positive EBITDA can produce low or negative adjusted taxable profit because tax differences matter. Monthly forecasting should therefore separate accounting and tax data.
For foreign-source components, apply the statutory proportion after foreign tax credits. Maintain country and income-level detail where needed. Income and deductions from specific regimes mentioned by the section should be analyzed outside the ordinary bridge.
Prepare base, profit-downside and rate-or-balance-increase scenarios. Include acquisitions, currency movements and commercial delays when plausible. The purpose is not to guarantee deduction but to anticipate cash tax and legitimate capital decisions.
Zugzwang can review the benchmark, debt capacity and tax limitation in one workstream while preserving separate conclusions and a reproducible reconciliation.
Interaction with thin capitalization
Section XXXII specifies its interaction with Section XXVII. Under the current text, Section XXXII applies when the nondeductible amount determined under it exceeds the amount determined under thin capitalization; Section XXVII then does not apply. Both results must therefore be calculated rather than assumed.
Prepare two complete workpapers and a comparison table. Do not automatically subtract one result from the other or impose both as a double disallowance. Identify which items and debts feed each test. Thin capitalization focuses on its foreign-related-party debt and equity conditions; Section XXXII has its own scope and definitions.
The comparison follows the arm’s-length filter. If part of the interest is already rejected because the rate is outside the arm’s-length range, document its treatment in the statutory bases. Do not count the same adjustment twice without legal support.
Interest carryforwards
Net interest disallowed under the section can be deducted over the following ten fiscal years until exhausted, subject to the statutory mechanism. Prior-year balances are added to the next year’s net interest and receive priority as described in the text. Failure to keep a register available to the tax authority threatens the treatment.
The register should show year of origin, amount, relevant treatment, annual utilization, balance, expiration and return reconciliation. Separate balances arising under other limitations. Obtain legal review before moving data through a reorganization, merger or system migration.
A recoverability forecast must use adjusted taxable profit, not accounting profit alone. Highlight balances at risk of expiration and the owner of any capitalization or refinancing decision.
Exclusions and activities
The section contains exclusions for certain interest connected with public infrastructure, construction in Mexico, oil and hydrocarbon projects, extractive activities, electricity or water, as well as public debt and specified taxpayers. Each exclusion requires evidence of purpose, activity, debt and associated income.
Do not mark an entire company exempt because one division performs an eligible project. Trace funds, contracts, accounts and assets. The statute requires adjustments to adjusted taxable profit for stated activities. A memorandum should explain the exact boundary.
Members of the financial system receive the treatment stated for operations proper to their purpose. Verify both the entity and the operation rather than relying on the group’s ownership of a finance company.
Illustrative case
A Mexican entity records MXN 34 million of accrued interest expense and MXN 4 million of interest income. After reviewing deductibility and the allocated threshold, it constructs net interest under the section. Its adjusted taxable profit is MXN 70 million, so 30% is MXN 21 million. The workpaper determines the excess through the legal formula.
Before concluding, the team finds that MXN 3 million recorded in the same expense account related to a guarantee and did not have the treatment initially assumed. Another MXN 2 million exceeded the arm’s-length range. It also calculates thin capitalization. The final answer is not simply “34 minus 21”; it depends on classification, pricing, definitions and statutory interaction.
The example illustrates why every figure needs a label, source and owner.
Year-end controls
Forecast interest, interest income, taxable profit, tax deductions and the shared threshold monthly. Reconcile agreements, ledgers, cash flow and benchmarks quarterly. At year-end freeze versions and document later adjustments.
The CFO should receive four figures: contractual interest, arm’s-length adjustment, potentially deductible interest before limitations, and deduction after limitations. Add the carryforward and cash-tax effect. This prevents “market rate” from being heard as “assured deduction.”
An adversarial review should ask: is the perimeter complete; was the threshold allocated; is the interest derived from debt and otherwise deductible; is income taxable; does profit use tax concepts; were both sections calculated; are exclusions traceable; does the ten-year register reconcile?
Minimum file
Retain the organization chart and perimeter, debt inventory, agreements, capacity and benchmark, accrual computation, tax-to-book reconciliation, threshold allocation, adjusted taxable profit, Sections XXVII and XXXII workpapers, exclusions, carryforward register, withholding, returns, approvals and version control.
Assign an owner to each input. Treasury owns balances and payments; accounting owns ledgers; tax owns bases and returns; transfer pricing owns delineation and range; legal owns obligations. The final file should demonstrate that all teams used the same universe.
Sources and cutoff
This article was verified as of August 2, 2026. Consult the current Mexican Income Tax Law, particularly Article 28 Sections XXVII and XXXII, the OECD Guidelines 2022, Chapter X, the OECD financial transactions guidance and the OECD Mexico profile. Check later amendments and rules before applying amounts.
Zugzwang’s Interest Limitation & TP Review connects principal, rate, accrual, thin capitalization, adjusted taxable profit and carryforwards without confusing the tests.