1E9Ct5D

includes a limitation on the deductibility of interest for excess debts known as thincapital or undercapitalization.We consider it important to give special mention to deductions based on investmentsof the sale cost and to the limit on the deduction of interest for excess debt (thin capitalization).The deduction of investments in fixed assets, charges, and deferred expenses is carriedout by depreciation, for which the ISR Law establishes the percentages that must be usedfor such deductions, depending on the good involved.With regard to the sale cost, raw materials and semifinished and finished products arededucted when they are alienated (transferred). In order to determine the amount of thecorresponding deduction, it is necessary to use the absorbent cost system on a historicalor predetermined basis or the system of direct cost, but only on a historical basis.Thin capitalization or undercapitalization was introduced in the ISR Law as of 2005 onthe theory that companies must keep their debt below a reasonable level, which for purposesof the ISR Law is three times the capital of the company. In the event that debtssurpass this amount, the company cannot deduct the payment of interest derived fromthe debts that exceed this amount and that arise from debts contracted with related partiesresiding abroad.2.2.3. LossesTax loss is the difference between the income accrued in the fiscal year and the allowabledeductions, when the amount of the latter is greater than income. The tax loss in a fiscalyear can be subtracted from the tax profit of the following ten fiscal years until it iseliminated.Tax losses cannot be transferred, not even through a merger. Furthermore, when in amerger the surviving company (the purchaser) has losses, these can only be subtracted fromfuture tax profit resulting from the exploitation of the same activities that produced the loss.In the case of a change of partners or shareholders that have control of a company, itmay also be the case that the application of the tax loss of said company will be limitedand that the mentioned loss can only be subtracted from future tax profit resulting fromthe exploitation of the same activities that produced the loss.115Tax Regime2.2.4. ConsolidationThe ISR Law allows for the possibility of consolidating the losses and earnings of Mexicancompanies belonging to the same group. In order to consolidate it is necessary tocomply with certain requisites established by the ISR Law, among which is the priorauthorization of the tax authorities.The minimum consolidation period is five years and in the event that this option ischosen, all Mexican companies belonging to said group must be included.