Mexico’s General Foreign Trade Rules For 2025
On Dec. 30, 2024, the Mexican Tax Administration Service (SAT) published in the Official Gazette of the Federation (DOF) the General Foreign Trade Rules for 2025, which seek to implement certain measures in order to optimize tax collection in Mexico and expand compliance standards. These rules will be in effect from Jan. 1 to Dec. 31, 2025.
This GT Alert highlights the most relevant changes to the General Foreign Trade Rules. Companies involved in Mexican foreign trade should timely review these provisions to enhance compliance. Adherence to the rules may also impact companies’ strategic planning, operating costs, and risk management activities.
General Considerations
ANAM Portal
Various guidelines that were previously released through the SAT Portal must now be managed through the National Customs Agency of Mexico (ANAM) Portal. Users should verify and follow the specific requirements stipulated in this new portal.Reference to Rules 1.6.28, 1.7.1, 1.7.7, 1.8.2, 1.9.4, 1.9.5, 1.9.6, 1.9.9, 1.9.11, 1.9.20, 1.9.21, 2.3.4, 2.3.8, 2.3.10, and 2.4.12 for 2025.
Changes of forms or procedure files
Various forms and/or files corresponding to foreign trade procedures were modified, so companies may need to carefully review their updated versions and ensure they comply with the requirements established in each case.Reference to Rules 1.1.10., 1.4.14., 2.2.6., 2.3.8., 3.1.26., 3.5.7., 4.2.2., 7.3.3. for 2025.
Considerations by Title, Chapter, and Rule
Title 1. General Provisions and Acts Prior to Dispatch
Chapter 1.2. Filing Promotions, Statements, Notices, and Forms
Submission of promotions, applications, or notices without format (Annex 2)
The 2025 rules explicitly specify the requirements that must be met by promotions, applications, or notices submitted in writing to the customs authority, in accordance with articles 18 and 18-A of the Federal Tax Code (CFF), strengthening clarity in their application.
The procedures established in Annex 2 (formats for foreign trade procedures) may continue to be presented via traditional means that were used before these documents had to be submitted to the authority’s digital platform or the tax mailbox.
However, new procedures must be submitted in writing to the competent authority, complying with the corresponding provisions. This situation will be maintained until the corresponding authority publishes the specific formats that must be used to carry out these procedures electronically.Reference to Rule 1.2.2. for 2025.
Chapter 1.6. Determination, Payment, Deferral, and Compensation of Contributions and Guarantees
Transfer and change of fixed asset regime, companies in the IMMEX Program
Neither the physical presentation nor the payment of the General Import Tax (IGI) is required for the transfer of goods classified as fixed assets between companies in the IMMEX Program (Manufacturing, Maquiladora, and Export Services Program), provided that certain requirements are met.
The section of the regulatory provision that allowed companies to offset the IGI payment made when transferring fixed asset goods temporarily imported before Jan. 1, 2001, was deleted. This rule applied only when the IGI had been paid at the time of the transfer, allowing its crediting on future imports.
The 2025 rules also establish that, when changing the regime from temporary to definitive importation of fixed asset goods under the IMMEX Program, the customs value declared in the temporary import declaration must be considered. This value can be reduced in proportion to the number of days in which the goods were deducted. If there are no authorized deduction percentages, it is assumed that the asset was deducted for 3,650 days.
The 2025 rules eliminate the portion that expressly referred to the possibility of applying the preferential rate of an authorized Sectoral Promotion Program (PROSEC) when changing the import regime from temporary to definitive, even for goods imported before Jan. 1, 2001, provided that the importer was registered in said program.Reference to Rule 1.6.10. for 2025.
Title 2. Entry, Exit, and Control of Goods
Chapter 2.3. Authorized Customs Facilities, Strategic Customs Facilities, and Operations within the Customs Facility
Obligations of strategic authorized customs facilities
Legal entities managing or operating a strategic authorized customs facility must henceforth comply with the “Guidelines for Infrastructure, Control, Surveillance, and Security, as well as Technological Recommendations regarding Closed-Circuit Television Cameras, Installations, and Systems, for Administrators and Operators of Strategic Authorized Customs Facilities.”Reference to Rule 2.3.4. for 2025.
Title 3. Customs Clearance of Goods
Chapter 3.7. Simplified Administrative Procedures
Obligations of courier and parcel companies
From now on, companies registered as courier and parcel services with ANAM must provide access to their risk analysis system through a written document submitted to the corresponding customs office, as well as to the General Directorate of Customs Investigation (DGIA) and the General Administration of Foreign Trade Audits (AGACE).
This document must be submitted within the month following registration or renewal in the Courier and Parcel Companies Registry. The document will be valid for six months and must be resubmitted whenever there is any modification related to system access.
According to the transitional provisions published in the DOF, companies currently operating under this scheme must submit the document no later than Jan. 31, 2025.Reference to Rule 3.7.4 for 2025.
Assessment of contributions for the import of goods through the simplified procedure carried out by courier and parcel companies
There are significant changes in the assessment of import contributions made by courier and parcel companies:
In general, the new regulations establish that the contributions caused by the importation of goods made through courier and parcel using the simplified procedure will be determined by applying a global rate of 19% to the goods’ value.
It should be noted that the 2024 rules allowed exemption from VAT and IGI when the imported goods did not exceed $50 USD, as long as they were not subject to non-tariff regulations and that the corresponding quota of the Customs Processing Fee (DTA) was covered.
However, the new 2025 provision limits the exemption from such taxes to goods whose value does not exceed $1 USD and that come from countries party to international instruments such as the FTA, PAAP, and TIPAT (a different scheme from the USMCA that will be specifically addressed), maintaining the same general requirements that were addressed in the previous paragraph. This amendment represents a tightening of the criteria for exemption, reducing the threshold for application of the facility.
Under the USMCA, goods whose value does not exceed $50 USD will not be subject to IGI and VAT payments and must comply with the general requirements referred to above. Merchandise with a value that exceeds that amount and does not exceed $117 USD will be subject to a preferential rate of 17%.Reference to Rule 3.7.35. for 2025.
Title 4. Customs Regimes
Chapter 4.2. Temporary Import Procedure to Return Abroad in the Same State
Return of foreign vehicles whose permit for entry or temporary importation of vehicles has expired
The 2025 rules include a change to the process of returning foreign vehicles whose temporary import permit has expired. Now, in addition to transmitting the B17 form, a folio must be generated after the transmission of the notice. Once done, the transfer of the vehicle to the border strip or region or to the customs office of departure for its return abroad may be carried out within a period of five days beginning the next business day after the notice is submitted.Reference to Rule 4.2.20. for 2025.
Chapter 4.5. Fiscal Warehouse
Destruction of bonded warehousing goods for display and sale
According to the 2025 rules, authorized legal entities must comply with the requirements established in the procedure sheet 111/LA “Notice for the destruction of goods from the tax warehouse for the exhibition and sale of goods,” contained in Annex 2, before being able to proceed with destruction. This change introduces an additional condition, as the notice is no longer sufficient on its own to authorize the destruction of goods—its presentation is subject to prior compliance with the specific requirements set out in the procedure sheet 111/LA.Reference to Rule 4.5.22. for 2025.
Chapter 4.6. Transit of Goods
Internal and international transits between customs, authorized customs sections, and international airports
The 2025 rules designate the transfer of goods in both directions between the customs section of the General Mariano Escobedo International Airport and the customs section of Salinas Victoria B (Interpuerto) as an international internal transit route.Reference to Rule 4.6.1. for 2025.
Obligations in international transits (Annex 16)
The 2025 rules account for the possibility of allowing the untimely arrival of goods, on a one-off occasion, when circumstances of force majeure or a fortuitous event arises that prevents compliance with the established deadlines. In these cases, the customs broker, customs agency, or person responsible for international transit must submit a written notice to the customs authorities explaining the reasons for the delay.Reference to Rule 4.6.20. for 2025.
Provisions Removed
Chapter 4.3. Temporary Import for Processing, Transformation, or Repair
Guarantee of the payment of taxes for the temporary importation of goods indicated in Annex II of the IMMEX Decree
The 2025 rules eliminate the stipulation that companies in the IMMEX Program, when temporarily importing sensitive goods referred to in Annex II of the Decree, had to guarantee the payment of contributions through bond policies issued by authorized institutions. These bonds had to meet specific requirements and be submitted electronically to the tax authorities.
This modification is related to the decree published in the DOF Dec. 19, 2024, through which the government made significant modifications to the IMMEX Decree, transferring various tariff items corresponding to textile products from Annex II (which includes sensitive goods) to Annex I, which lists those goods whose temporary importation under the IMMEX Decree is prohibited.
Notwithstanding the foregoing, goods such as sugar and steel continue to be included in Annex II, so companies importing these goods and others listed in Annex II should be aware of the implications of this modification.Reference to Rule 4.3.2. for 2024 eliminated.
Chapter 4.4. Temporary Export
Temporary export of livestock and research goods
The 2025 rules eliminate the explicit mention of the procedures and requirements for the temporary export of livestock and goods used in scientific research.Reference to Rule 4.4.4. for 2024 eliminated.
Additional Considerations
Chapter 1.10. Direct Firm and Legal Representative
Authorization for the transmission of customs declarations through the SEA, accreditation of legal representative, auxiliaries, and customs
Following the constitutional reform published Oct. 31, 2024, which modifies articles 25, 27, and 28 of the Political Constitution of the United Mexican States, the productive companies of the state are now considered state-owned public enterprises, losing their operational independence.
The 2025 rules incorporate this change.Reference to Rule 1.10.1. for 2025.
Publication of annexes
As a complement to the publication of the General Foreign Trade Rules for 2025, on Jan. 6, 2025, Annexes 3–9, 11, 12, 14–21, 23–26, and 28–30 were released in the DOF. These annexes contain key information on the classification of goods, valuation criteria, official formats, applicable tariffs, and operating procedures, among other aspects relevant to compliance with customs regulations.
Annex 13 was published together with the General Foreign Trade Rules for 2025 Dec. 30, 2024. Annexes 1, 2, 10, 22, and 27 are expected to be disseminated in the future.
These annexes establish guidelines and requirements applicable to foreign trade operations and companies should review their content in detail to assess their impact and comply with the 2025 provisions.
Provisions Removed
Chapter 1.4. Customs Brokers and Authorized Representatives
Authorization and extension of customs agents
The 2025 rules remove the provision that allowed individuals obtaining a customs broker license to designate authorized representatives in cases of the original broker’s death, permanent disability, or voluntary withdrawal. This change may restrict the continuity of customs operations by eliminating this right of action in exceptional situations.Reference to Rule 1.4.2. by 2025.
Authorization to amend the designation, ratification, and publication of customs broker patent by replacement
The 2025 rules remove the procedure that allowed a customs broker who ratified their retirement in a timely manner and received the Voluntary Retirement Agreement to access the benefit of obtaining the “Agreement for the granting of a customs broker patent by substitution.” The last date a customs broker could obtain this benefit was July 21, 2021.Reference to Rules 1.4.11. for 2024 eliminated.
Notice of incorporation of substitute customs broker to entities previously constituted by the customs agents they replace
Related to the removal of the above procedure, the 2025 rules also eliminate specific procedures for the incorporation of substitute customs agents to previously constituted entities.Reference to Rules 1.4.13. for 2024 eliminated.
Read in Spanish/Leer en español.
Weekly IRS Roundup December 30, 2024 – January 3, 2025
Check out our summary of significant Internal Revenue Service (IRS) guidance and relevant tax matters for the week of December 30, 2024 – January 3, 2025.
December 30, 2024: The IRS released Internal Revenue Bulletin 2025-1, which includes the following:
Revenue Procedure 2025-1, which contains the revised procedures for letter rulings and information letters issued by the different associate chief counsel offices. This revenue procedure also contains the revised procedures for determination letters issued by the Large Business and International Division, the Small Business/Self-Employed Division, the Wage and Investment Division, and the Tax Exempt and Government Entities (TE/GE) Division.
Revenue Procedure 2025-2, which explains when and how associate chief counsel offices should provide advice in technical advice memoranda (TAM) as well as taxpayers’ rights when a field office requests a TAM.
Revenue Procedure 2025-3, which provides a revised list of Internal Revenue Code (Code) areas under the jurisdiction of the following associate chief counsel offices: Corporate; Financial Institutions and Products; Income Tax and Accounting; Passthroughs and Special Industries; Procedure and Administration; and Employee Benefits, Exempt Organizations, and Employment Taxes. These relate to matters in which the IRS will not issue letter rulings or determination letters.
Revenue Procedure 2025-4, which provides guidance on the types of advice the IRS offers to taxpayers on issues under the jurisdiction of the IRS Commissioner, TE/GE Division, and Employee Plans Rulings and Agreements. It also details the procedures that apply to requests for determination letters and private letter rulings.
Revenue Procedure 2025-5, which provides the procedures for issuing determination letters on issues under the jurisdiction of the Exempt Organizations Rulings and Agreements. It also explains the procedures for issuing determination letters on tax-exempt statuses for organizations applying under Code Section 501 or 521, private foundation status, and other determinations related to tax-exempt organizations. Additionally, the revenue procedure applies to revocation or modification of determination letters and provides guidance on the exhaustion of administrative remedies for purposes of declaratory judgment under Code Section 7428.
Revenue Procedure 2025-7, which provides the areas under the jurisdiction of the associate chief counsel (international) in which letter rulings and determination letters will not be issued.
December 30, 2024: The IRS published Treasury Decision 10018, which contains final regulations regarding the filing of consolidated returns by affiliated corporations. They modify the consolidated return regulations to reflect statutory changes, update language to remove antiquated or regressive terminology, and enhance clarity. The IRS separately issued proposed regulations under which a transferee’s assumption of certain liabilities from a member of the same consolidated group will not reduce the transferor’s basis in the transferee’s stock received in the transfer.
December 30, 2024: The IRS published final regulations clarifying when tax-exempt bonds are considered retired for federal income tax purposes under Code Section 103. The regulations affect state and local governments issuing tax-exempt bonds and address significant modifications to bond terms or the acquisition and resale of bonds.
December 30, 2024: The IRS published final regulations on information reporting by brokers who regularly provide services for digital asset sales and exchanges. The regulations require brokers to file information returns and furnish payee statements reporting gross proceeds from digital asset transactions. The regulations also provide transitional penalty relief for brokers adapting to these new requirements. The regulations take effect February 28, 2025.
January 2, 2025: The IRS issued proposed regulations pertaining to the Code Section 5000D excise tax on the sales of certain drugs. The proposed regulations outline the imposition and calculation of the excise tax and would affect manufacturers, producers, and importers of designated drugs. The IRS also issued Revenue Procedure 2025-9, which provides a safe harbor and safe harbor percentage that a manufacturer, producer, or importer may use to identify applicable sales of a designated drug described in Section 5000D(b).
January 3, 2025: The IRS announced that on January 10, 2025, it will release final regulations for the Clean Hydrogen Production Tax Credit under Code Section 45V. The regulations will provide rules for:
Determining lifecycle greenhouse gas emissions rates resulting from hydrogen production processes
Petitioning for provisional emissions rates
Verifying the production and sale or use of clean hydrogen
Modifying or retrofitting existing qualified clean hydrogen production facilities
Using electricity from certain renewable or zero-emissions sources to produce qualified clean hydrogen
Electing to treat part of a specified clean hydrogen production facility as property eligible for the energy credit.
These regulations will affect all taxpayers who produce qualified clean hydrogen and claim the Clean Hydrogen Production Tax Credit, elect to treat part of a specified clean hydrogen production facility as property eligible for the energy credit, or produce electricity from certain renewable or zero emissions sources used by taxpayers or related persons to produce qualified clean hydrogen.
January 3, 2025: The IRS reminded disaster-area taxpayers who received extensions to file their 2023 returns that, depending upon their location, their returns are either due by February 3 or May 1, 2025:
Taxpayers in Louisiana, Vermont, Puerto Rico, and the Virgin Islands and parts of Arizona, Connecticut, Illinois, Kentucky, Minnesota, Missouri, Montana, New York, Pennsylvania, South Dakota, Texas, and Washington have until February 3, 2025, to file their 2023 returns.
Taxpayers in Alabama, Florida, Georgia, North Carolina, and South Carolina and parts of Alaska, New Mexico, Tennessee, Virginia, and West Virginia have until May 1, 2025, to file their 2023 returns. For these taxpayers, May 1 will also be the deadline for filing their 2024 returns and paying any tax due.
Eligible taxpayers include individuals and businesses affected by various disasters that occurred during the late spring through the end of 2024. The filing deadline extension for 2023 returns does not apply to payments.
Taxpayers who live or have a business in Israel, Gaza, or the West Bank and certain other taxpayers affected by the attacks in Israel have until September 30, 2025, to file and pay. This includes all 2023 and 2024 returns.
Final Reissuance Regulations Released (Finally)
On December 30, 2024, the IRS and Treasury Department released final regulations regarding the reissuance analysis of tax-exempt bonds which finalize proposed regulations issued in 2018 (with some technical corrections). The final regulations are significant in that, firstly, they are intended to coordinate prior guidance in Notices 88-130 and 2008-41 regarding qualified tender bonds with Treasury Regulations § 1.1001-3 to determine when a tax-exempt bond is retired; and secondly, Notice 88-130 first promised these final regulations in July 1988—over 36 years ago (when hairstyles and tender bonds needed regulating). The final regulations amend § 1.1001-3 to incorporate and reference newly added § 1.150-3 which provides three general rules for when a tax-exempt bond is retired:
(1) a significant modification occurs under § 1.1001-3,
(2) the issuer or its agent acquires the bond in a manner that extinguishes the bond, or
(3) the bond is otherwise redeemed.
The final regulations set forth three exceptions to retirement or reissuance treatment (the first two exceptions apply to qualified tender bonds[1], and the third applies to all tax-exempt bonds:
(1) a qualified tender right[2] is disregarded in applying § 1.1001-3 to determine whether a change to the interest rate or interest rate mode (pursuant to the terms of the qualified tender bond) is a modification,
(2) an acquisition of a qualified tender bond by the issuer or its agent does not extinguish the bond if done pursuant to the operation of a qualified tender right and neither the issuer nor its agent holds the bond after the close of the 90-day period starting from the tender date.
(3) an acquisition of a tax-exempt bond by a guarantor or liquidity facility provider acting on the issuer’s behalf does not extinguish the bond if done pursuant to the terms of the guarantee or liquidity facility and the acquirer is not a related party to the issuer of the bond.
Consistent with Notice 2008-41, the final regulations permit a qualified tender bond to be resold at a premium or discount when the qualified tender right is exercised in connection with a conversion of the interest rate mode to a fixed rate for the remaining term of the bond. However, the final regulations, do not retain some rules from the prior guidance, including (i) that modifications to collateral or credit enhancement are significant only if there is a change in payment expectations, (ii) a specific exception for corrective changes, and (iii) permitting a conduit borrower under certain circumstances to purchase bonds that financed its conduit loan. The stated reasons for discontinuing these rules are that § 1.1001-3 is sufficient or that the rules were specific to the extraordinary circumstances of the 2008 financial crisis and no longer necessary.
Issuers may continue to apply Notice 88-130 or Notice 2008-41 until December 30, 2025 at which point such Notices will become obsolete and § 1.150-3 will govern the reissuance analysis in all instances.
And finally, the final regulations authorize the publication of further guidance in the Internal Revenue Bulletin to address “appropriate, tailored circumstances” where flexibility may be needed in determining when retirement and reissuance has occurred. So hold your breath (or don’t) for possibly final final guidance at which point we will likely all be retired (and hopefully not extinguished).
[1] Section 1.150-3 defines qualified tender bond as “a tax-exempt bond that, pursuant to the terms of the bond, has all of the following features: (1) during each authorized rate mode, the bond bears interest at a fixed interest rate, a qualified floating rate under § 1.1275‑5(b), or an objective rate for a tax-exempt bond under § 1.1275‑5(c)(5); (2) interest on the bond is unconditionally payable (as defined in § 1.1273‑1(c)(1)(ii)) at periodic intervals of no more than one year; (3) the bond has a stated maturity date that is not later than 40 years after the issue date of the bond; and (4) the bond includes a qualified tender right.”
[2] Section 1.150-3 defines a qualified tender right as “a right or obligation of a holder of a tax-exempt bond pursuant to the terms of the bond to tender the bond for purchase as described [herein]. The purchaser under the tender may be the issuer, its agent, or another party. The tender right is available on at least one date before the stated maturity date. For each such tender, the purchase price of the bond is equal to par (plus any accrued interest). Following each such tender, the issuer, its agent, or another party either redeems the bond or uses reasonable best efforts to resell the bond within the 90-day period beginning on the date of the tender. Upon any such resale, the resale price of the bond is equal to the par amount of the bond (plus any accrued interest), except that, if the tender right is exercised in connection with a conversion of the interest rate mode on the bond to a fixed rate for the remaining term of the bond, the bond may be resold at any price, including a premium price above the par amount of the bond or a discount price below the par amount of the bond (plus any accrued interest). Any premium received by the issuer pursuant to such a resale is treated solely for purposes of the arbitrage investment restrictions under section 148 of the Code as additional sale proceeds of the bonds.”
Several More Companies Propose Move From Delaware To Nevada
As 2024 closed and 2025 began, four additional publicly traded companies proposed reincorporating from Delaware into the “sweet promised land”* of Nevada. These companies include:
Revelation Biosciences, Inc.
Eightco Holdings Inc.
Gaxos.ai Inc.
Remark Holdings, Inc.
In general, these companies cite tax savings, the enhanced ability to attract and retain management, greater liability protection, and flexibility as the reasons for proposing the move to Nevada. It remains to be seen whether the stockholders favor a move. Moreover, the proxy season is only just beginning and it will be interesting to see whether 2025 will be go down in history books as the “Year of the Great Move”.
__________________________*”Sweet Promised Land” is the title of a wonderful book by Robert Laxalt that tells the story of a Basque immigrant and his son’s return visit from Nevada to the father’s ancestral homeland. I’ve never been sure whether the title refers to Nevada, the Basque homeland, or both. The phrase also makes it appearance in the chorus of a song recorded in Walter Van Tilburg Clark’s semi-autobiographical novel about growing up in Reno, Nevada, The City of Trembling Leaves:
“Oh, this is the land that old Moses shall see;Oh, this is the land of the vine and the tree;Oh, this is the land for My children and Me,The sweet promised land of Nevada.”
The Outlook for US Private Equity in 2025
As we launch into the next quarter century, there is much speculation about what the future holds for private equity (PE) as an asset class and driver in dealmaking. Momentum started to pick up in 2024 with the Fed announcing a series of interest rate cuts, and there was a sense of increasing certainty with the Presidential election now behind us. Now, everyone is eager to see what the new year will hold.
PitchBook analysts have released their 2025 US Private Equity Outlook, examining the trends that could redefine the market. One of the most interesting is the significant shift they are expecting in the IPO landscape this year. Their analysts are looking at the potential for PE-backed companies to capture 40% of all the IPO capital raised on major US exchanges this year. That would be a nearly 10% jump from the decade average, as well as a change in investor preferences.
Their data shows that since 2000, PE-backed companies averaged about 30.6% of IPO capital raised on major exchanges within the past decade, with a high of 54.2% in 2016 and a low of 3% in 2022. PE-backed companies reached approximately a one-third share of all IPOs in 2024, and Pitchbook is expecting that to be even greater in 2025.
In looking at the gains, they point to the focus on growth and profitability for PE-backed companies, as well as stable cash flows and successful capital allocation. They also tend to operate within sectors that have rational pricing and competition, providing predictable returns that make them appealing candidates for IPO investors. Coupled with the impressive stock performance of PE-backed companies recently, this puts them in a prime position for success this year.
There has also been recent coverage indicating that Wall Street banks are preparing for a rebound as bankers and analysts are anticipating a great deal of IPO announcements in the first half of 2025. With several PE-backed firms already filing IPO paperwork, all the speculation might actually come to fruition as PE firms are more eager to begin offloading some of their assets.
We see some risk if major US public market indexes encounter some kind of significant correction, leading to a more negative market sentiment. If this were to occur, the IPO window could close for a period of time until investor confidence returned, meaning PE-backed companies would again have to alter their IPO plans.
There are many factors at play here and a lot of moving parts. Everyone is closely watching to see if the new Presidential administration will loosen regulations, whether punitive tariffs will be imposed, the impact on inflation and interest rates, and what will happen with taxes. But cautious optimism definitely exists, and there does seem to be an opportunity to build on momentum here. We have all been waiting for a real return to IPOs, and 2025 could be the year that finally happens.
Big Law Redefined: Immigration Insights Episode 2 | Navigating US Immigration Law and Tax Complexities for High-Net-Worth Individuals [Podcast]
In this episode of Greenberg Traurig’s Immigration Insights series, host Kate Kalmykov is joined by GT colleague and Tax Practice Shareholder, Erez Tucner, to explore the intersection of U.S. immigration and tax considerations for high-net-worth individuals. They discuss the implications of U.S. tax residency, strategies for tax planning before moving to the United States, and the complexities of the exit tax for those relinquishing U.S. residency. They address the impact of estate taxes and the importance of aligning immigration and tax objectives. Lastly, Kate and Erez talk about individuals navigating the U.S. immigration process and while managing global tax obligations.
Tax Court Reaffirms Soroban Holding that “Active” Limited Partners are Subject to Self-Employment Tax
On December 23, 2024, the Tax Court ruled in Denham Capital Management LP v. Commissioner (T.C. Memo. 2024-114)[1], that limited partners that actively participated in the activities of a fund manager formed as a state law limited partnership were subject to self-employment tax on all of their distributive share of income from the partnership. The Tax Court found that, consistent with its earlier ruling in Soroban Capital Partners LP v. Commissioner, 161 T.C. 310 (2023), limited partners of a state law limited partnership are not automatically entitled to the “limited partner exception” to self-employment tax under Section 1402(a)(13).[2] Rather, a functional analysis test must be applied to determine whether any state law limited partner should be considered a “limited partner, as such”[3] for purposes of the limited partner exception. The Tax Court applied the functional analysis test and found that each of the Denham limited partners’ activities, roles, and responsibilities rose to the level of those of an “active partner,” and therefore the limited partners did not qualify for the limited partner exception.
A similar case challenging the Soroban interpretation of the term “limited partner” in Section 1402(a)(13), Sirius Solutions LLLP v. Commissioner (Docket No. 30118-21), is pending in the Fifth Circuit Court of Appeals. In the meantime, however, the Denham and Soroban rulings have further entrenched the IRS’ position that a limited partner actively participating in a partnership will be subject to self-employment tax.
Our prior summary of Soroban is linked here.
[1] Denham Capital Management LP v. Commissioner (T.C. Memo. 2024-114)
[2] All Section references are to the Internal Revenue Code of 1986, as amended.
[3] Section 1402(a)(13) (which excludes from the definition of “self-employment income” the “distributive share of any item of income or loss of a limited partner, as such, other than guaranteed payments described in Section 707(c) to that partner for services actually rendered to or on behalf of the partnership to the extent that those payments are established to be in the nature of remuneration for those services. . .” (emphasis added)).
EU Taxonomy Developments: EU Platform on Sustainable Finance Call for Feedback on Draft Report on New Activities and Updated Technical Screening Criteria
On 8 January 2025, the EU Platform on Sustainable Finance (PSF) published a draft report and launched a call for feedback on proposed updates to the EU taxonomy. This includes revisions to the Climate Delegated Act and new technical screening criteria. Stakeholders are invited to submit feedback by 5 February 2025.
Key areas sought for feedback include:
Technical Screening Criteria (TSC): Updates to the criteria and Do No Significant Harm (DNSH) requirements to improve usability.
Revised Energy-Related Thresholds: Adjustments to support ensuring consistency and relevance.
Harmonization Efforts: Aligning activity titles and descriptions between Mitigation and Adaptation Annexes.
New Activities and Criteria: Proposals for activities in mining and smelting.
The PSF has noted that the most useful and valuable feedback that can be incorporated should be evidence-based and substantiated, concrete, and explain usability issues or provide recommendations for criteria or usability improvement.
Whilst this is not an official European Commission consultation, part of the PSF’s mandate is to provide recommendations to the European Commission on simplifying the EU Taxonomy and the wider sustainable finance framework. The review of this legislation fulfils the legal requirement to revisit criteria for transitional activities every three years, while continuing to develop technical screening criteria for new activities. The PSF’s Technical Working Group is said to have incorporated usability feedback from targeted stakeholder consultations, but this public consultation is aimed to obtain additional feedback and to further enhance the EU Taxonomy’s usability.
The Tax Court Recently Decides Two Research Credit Cases – One Favorable on Funding (Smith) and One Unfavorable on the Four-Part Test (Phoenix Design Group)
Taxpayers had mixed success in two recent research credit cases in the United States Tax Court.
In Smith v. Commissioner,[1] the taxpayer was an architectural firm. The Tax Court denied the Commissioner’s motion for summary judgment, allowing the case to proceed to trial on the issue of whether the taxpayer’s clients funded its research activities.
In Phoenix Design Group, Inc. v. Commissioner,[2] disputed questions of fact proceeded to trial. Based on its findings, the court concluded that the taxpayer, a firm employing professional engineers, had not engaged in qualified research, and was not entitled to research credits.
Smith: The Architectural Case: In Smith, the IRS continued to apply the “funding exception” to disallow federal income tax credits for a taxpayer’s qualified research activities. The “funding exception excludes from credit-eligible qualified research “any research to the extent funded by … contract…by another person….”[3]
Research is funded if the client’s payment to the taxpayer is not contingent on the success of the taxpayer’s research activities.[4] Research is also funded if the taxpayer does not retain substantial rights in the research.[5]
The taxpayer was a member in a limited liability partnership that sold its “innovative architectural design services” worldwide to its clients.[6] The taxpayer asserted that it conducted credit-eligible research to formulate architectural designs as required by contract with its clients. The IRS denied the credits on the theory that the clients funded the taxpayer’s research activities.
Relying on selective provisions in contracts between the taxpayer and its clients, the IRS moved for summary judgment on the theory that the taxpayer was contractually required to perform its architectural services in accordance with professional standards, which alone did not put the taxpayer at risk if its research to effectuate the designs failed. The court ruled, however, that the contracts tended to provide that the clients were obligated to pay the taxpayer only if the taxpayer satisfied design milestones, which raised an issue about whether payment to the taxpayer was contingent on success of the research.
The court also ruled that local law provisions appeared to vest copyright protection for the designs in the taxpayer, which tended to rebut the IRS argument that the taxpayer did not retain substantial rights in the research, and thus preserved for trial the issue of retention of substantial rights in its research.[7]
Phoenix Design: The Engineering Case: In Phoenix Design, the IRS successfully argued that the taxpayer, a firm employing professional engineers, failed to prove that it engaged in qualified research to design mechanical (air handling), electrical, plumbing, and fire protection systems (“MEPF Systems”) for laboratory and hospital building projects.
Research is qualified if it passes a “four-part test.”[8] At issue in Phoenix Design are only Test One – the Section 174 Test – and Test Four – the Process of Experimentation Test. The Section 174 Test requires a taxpayer to (i) identify uncertainty in the development or improvement of a product, process, technique, or formula and (ii) show that this uncertainty exists because the information objectively available does not establish the capability or method to develop or improve the product, process, technique, or formula or its appropriate design. The Process of Experimentation Test requires a taxpayer to use a process that is capable of evaluating one or more alternatives, for example, modeling, simulation, or a systematic trial and error methodology.
In Phoenix Design, the taxpayer argued that its professional engineers met the Section 174 Test by eliminating uncertainty in the design of the MEPF Systems. The taxpayer explained that, at the outset of the projects, it was uncertain about the specifications and designs that would achieve the air handling and other attributes of the systems, and that it intended to eliminate the uncertainty by performing sophisticated and iterative engineering calculations.
The court rejected the argument. The Section 174 Test requires investigatory activity, that is, the attempted acquisition of information. The court cited e-mails and meetings as examples of processes of acquiring information, but only if there is uncertainty about developing or improving the product. However, “basic calculations on available data is [sic] not an investigative activity because the taxpayer already has all the information necessary to address that unknown.” Moreover, the taxpayer “failed to identify the specific information that was not available to PDG [the taxpayer’s] engineers at the start of the project.”
For the Process of Experimentation Test, the taxpayer argued that it performed iterative calculations to determine the appropriate designs of the MEPF Systems, but the court rejected the argument because “performing calculations and communicating the results to the architect is not an evaluative process that mirrors the scientific method.”[9]
Comment: An architectural or engineering service is not intrinsically precluded from qualifying for research credits. The service may constitute a “business component,” which includes a process, technique, or formula. [10] The business component need not be a tangible product to quality for tax credits.
Care should be taken to ensure that the agreement between a service provider and its client does not inadvertently use terminology that, from the IRS perspective, mistakenly appears to disqualify the research – as could have occurred in Smith. Also, activities intended to eliminate technological uncertainty through a rigorous engineering process should be carefully documented when they occur or soon thereafter to avoid the documentation deficiency that occurred in Phoenix Design. And note that a showing of the brilliance of a scientist or engineer will not qualify the research for tax credits. The taxpayer must still work through the statutory provisions and clearly show the IRS and court how the activities satisfy these provisions.
[1] No. 13382-17 (U.S. Tax Ct. Dec. 18, 2024).
[2] T.C. Memo. 2024-113 (Dec. 23, 2024).
[3] I.R.C. §41(d)(4)(H).
[4] The rationale is that the taxpayer is not the researcher because the taxpayer is not at economic risk for the success of the research.
[5] The rationale is dubious. See “Tax Court Denies Research Credits for Research Activities,” https://natlawreview.com/article/tax-court-denies-research-credits-research-activities (Feb. 9, 2021).
[6] The architectural services at issue were for six projects located in Dubai, UAE, and Saudi Arabia.
[7] Retention of “other intellectual property rights” was an additional basis to deny the IRS’s motion for the Kingdom Tower, one of the architectural projects.
[8] (i) The expenditures may be deductible under I.R.C. §174. The deduction is available if the taxpayer’s activities are of an investigative nature that are intended to discover information that would eliminate uncertainty in development or improvement of a product, process, technique, or formula. The Tax Cuts and Jobs Act, Pub. L. 115-97, now requires that the expenditures be specified research and experimental expenditures, which are amortizable rather than currently deductible.
(ii) The expenditure is intended to discover information that is technological.
(iii) The information to be discovered is intended to develop or improve a product, process, technique, or formula.
(iv) Substantially all the research activities constitute elements of a process of experimentation for the purpose of developing or improving new or improved function, performance, reliability, or quality of the product, process, technique, or formula.
[9] The taxpayer’s failing was primarily one of documentation of its engineers’ activities. The fault may lie, however, not with the taxpayer’s trial preparation but with a flaw in the Congressional design of the credit. Congress intended the credit be available to businesses that “apply” scientific principles to develop or improve products. Congress did not require taxpayers to discover basic scientific principles to claim the credit. However, Congress left the door open to the IRS to require a taxpayer to document its applied research as it the research were “basic research.” Businesses that apply research often do not think of documenting their applied research as if it were basic research.
[10] I.R.C. §41(d)(2)(B)
Weekly IRS Roundup December 23 – December 27, 2024
Check out our summary of significant Internal Revenue Service (IRS) guidance and relevant tax matters for the week of December 23, 2024 – December 27, 2024.
December 23, 2024: The IRS released Internal Revenue Bulletin 2024-52, which includes the following:
Treasury Decision 10015: These final regulations update the previous regulations under Section 48 of the Internal Revenue Code (Code), which provides for an investment tax credit for energy property (energy credit), and respond to changes made by the Inflation Reduction Act of 2022 (IRA).
The final regulations update the types of energy property eligible for the energy credit, including additional types of energy property added by the IRA; clarify the application of new credit transfer rules to recapture because of failure to satisfy the prevailing wage requirements, including notification requirements for eligible taxpayers; and include qualified interconnection costs in the basis of certain lower-output energy properties.
The final regulations also provide rules generally applicable to energy property, such as rules regarding functionally interdependent components, property that is an integral part of an energy property, application of the “80/20 rule” to retrofitted energy property, dual use property, ownership of components of an energy property, energy property that may be eligible for multiple federal income tax credits, and the election to treat qualified facilities eligible for the renewable electricity production credit under Code Section 45 as property eligible for the energy credit.
Notice 2024-82, which sets forth the 2024 Required Amendments List. The list applies to both individually designed plans under Code Section 401(a) and individually designed plans that satisfy the requirements of Code Section 403(b).
Notice 2024-86, which announces the extension of certain timeframes under the Employee Retirement Income Security Act of 1974 and the Code for group health plans; disability and other welfare plans; pension plans; and participants, beneficiaries, qualified beneficiaries, and claimants of these plans affected by Hurricane Helene, Tropical Storm Helene, or Hurricane Milton.
Revenue Procedure 2024-42, which updates the list of jurisdictions with which the United States has in effect a relevant information exchange agreement or an automatic exchange relationship under Treasury Regulation §§ 1.6049-4(b)(5) and 1.6049-8(a).
Announcement 2024-42, which provides a copy of the competent authority arrangement entered into by the competent authorities of the US and the Kingdom of Norway under paragraph 2 of Article 27 (Mutual Agreement Procedure) of the Convention between the US and Norway for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income and Property, signed on December 3, 1971.
The IRS issued a notice of proposed rulemaking, setting forth proposed regulations related to the definition of “qualified nonpersonal use vehicles.” Qualified nonpersonal use vehicles are excepted from the substantiation requirements that apply to certain listed property. The proposed regulations add unmarked vehicles used by firefighters or members of a rescue squad or ambulance crew as a new type of qualified nonpersonal use vehicle. The regulations affect governmental units that provide firefighter or rescue squad or ambulance crew member employees with unmarked qualified nonpersonal use vehicles and the employees who use those vehicles. Comments on the proposed regulations are due by March 3, 2025.
The IRS acquiesced to Green Rock LLC v. Internal Revenue Serv., 104 F.4th 220 (11th Cir. 2024). In that case, the US Court of Appeals for the Eleventh Circuit held that notices identifying certain conservation easement arrangements as reportable transactions are invalid under the Administrative Procedure Act because they failed to follow notice-and-comment rulemaking procedures.
December 23, 2024: The US Department of the Treasury and the IRS released final regulations regarding supervisory approval of penalties assessed pursuant to Code Section 6751(b). Section 6751(b) provides that no penalty “shall be assessed unless the initial determination of such assessment is personally approved (in writing) by the immediate supervisor of the individual making such determination….” The final regulations clarify the application of Section 6751(b) as to the timing of supervisory approval, the identities of the individual who first proposes the penalty and their supervisor, the requirement that the approval be “personally approved (in writing)” by the supervisor, and other aspects of the statute.
December 27, 2024: The IRS announced via Notice 2025-3 transitional relief with respect to the reporting of information and backup withholding on digital assets for digital asset brokers providing trading front-end services.
HUD’s Proposed ORCA Program – A New Option for Earlier Mortgagee Reimbursement
On December 19, 2024, the Fair Housing Administration (FHA) and the U.S. Department of Housing and Urban Development (HUD) published a draft Mortgagee Letter proposing a new Optional Reimbursement Claim Alternative (ORCA) program. ORCA is intended to allow mortgagees to seek reimbursement for property tax and insurance payments the mortgagee advances on behalf of forward mortgage borrowers before the final claim payment.
Overview of ORCA
As outlined in the draft Mortgagee Letter, ORCA enables mortgagees to file early claims for reimbursement of advances made toward property taxes, hazard insurance, and flood insurance on defaulted forward mortgages. Currently, these costs are reimbursed only after the final resolution of a claim to HUD, meaning mortgagees are required to incur significant upfront costs for an uncertain period of time. The draft Mortgagee Letter recognizes that in the current higher interest rate environment these upfront costs are potentially exacerbating mortgagee liquidity issues.
If enacted, ORCA will allow mortgagees to make multiple claims during a single default episode. The term “single default episode” is not defined, but given FHA’s definition of “default,” a “single default episode” would likely encompass the period in which a borrower is at least 30 days delinquent under the mortgage until the borrower cures the delinquency. For a single default episode, mortgagees can claim up to 48 months of payments for eligible expenses, provided they meet the following eligibility requirements:
All property taxes and insurance obligations are paid before the due date;
The escrow funds intended for these expenses “were exhausted and were inadequate to meet these obligations;”
The delinquency/default code accurately reflects that the relevant mortgage has been in default for at least six months; and
The maximum allowable ORCA claims have not already been filed for a particular default.
In addition to the eligibility requirements above, mortgagees should be aware that initial ORCA claims can be submitted six months from the initial date of default, with subsequent claims allowed “no less than six months from the date the previous ORCA was filed.” Additionally, mortgagees will be required to maintain copies of all ORCA claims, as well as detailed servicing and transaction histories supporting the amounts claimed. Mortgagees should be sure to review the draft Mortgagee Letter to get a better understanding of the detailed proposed changes to the FHA Single Family Housing Policy Handbook related to the implementation of the ORCA program.
Takeaways
ORCA appears to offer mortgagees a positive new avenue for FHA claims that will likely ease liquidity pressures during the mortgage servicing process. By facilitating earlier reimbursement, HUD seems to recognize the need to mitigate the financial burdens mortgagees face and better position them to effectively service FHA mortgages. In light of the potential impact ORCA could have, we encourage mortgagees and other industry participants to review the draft Mortgagee Letter announcement and to provide feedback by the response deadline of March 3, 2025.
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The Tax Court Recently Decides Two Research Credit Cases One Favorable on Funding (Smith) and One Unfavorable on the Four-Part Test (Phoenix Design Group)
Taxpayers had mixed success in two recent research credit cases in the United States Tax Court.
In Smith v. Commissioner,[1] the taxpayer was an architectural firm. The Tax Court denied the Commissioner’s motion for summary judgment, allowing the case to proceed to trial on the issue of whether the taxpayer’s clients funded its research activities.
In Phoenix Design Group, Inc. v. Commissioner,[2] disputed questions of fact proceeded to trial. Based on its findings, the court concluded that the taxpayer, a firm employing professional engineers, had not engaged in qualified research, and was not entitled to research credits.
Smith: The Architectural Case: In Smith, the IRS continued to apply the “funding exception” to disallow federal income tax credits for a taxpayer’s qualified research activities. The “funding exception excludes from credit-eligible qualified research “any research to the extent funded by … contract…by another person….”[3]
Research is funded if the client’s payment to the taxpayer is not contingent on the success of the taxpayer’s research activities.[4] Research is also funded if the taxpayer does not retain substantial rights in the research.[5]
The taxpayer was a member in a limited liability partnership that sold its “innovative architectural design services” worldwide to its clients.[6] The taxpayer asserted that it conducted credit-eligible research to formulate architectural designs as required by contract with its clients. The IRS denied the credits on the theory that the clients funded the taxpayer’s research activities.
Relying on selective provisions in contracts between the taxpayer and its clients, the IRS moved for summary judgment on the theory that the taxpayer was contractually required to perform its architectural services in accordance with professional standards, which alone did not put the taxpayer at risk if its research to effectuate the designs failed. The court ruled, however, that the contracts tended to provide that the clients were obligated to pay the taxpayer only if the taxpayer satisfied design milestones, which raised an issue about whether payment to the taxpayer was contingent on success of the research.
The court also ruled that local law provisions appeared to vest copyright protection for the designs in the taxpayer, which tended to rebut the IRS argument that the taxpayer did not retain substantial rights in the research, and thus preserved for trial the issue of retention of substantial rights in its research.[7]
Phoenix Design: The Engineering Case: In Phoenix Design, the IRS successfully argued that the taxpayer, a firm employing professional engineers, failed to prove that it engaged in qualified research to design mechanical (air handling), electrical, plumbing, and fire protection systems (“MEPF Systems”) for laboratory and hospital building projects.
Research is qualified if it passes a “four-part test.”[8] At issue in Phoenix Design are only Test One – the Section 174 Test – and Test Four – the Process of Experimentation Test. The Section 174 Test requires a taxpayer to (i) identify uncertainty in the development or improvement of a product, process, technique, or formula and (ii) show that this uncertainty exists because the information objectively available does not establish the capability or method to develop or improve the product, process, technique, or formula or its appropriate design. The Process of Experimentation Test requires a taxpayer to use a process that is capable of evaluating one or more alternatives, for example, modeling, simulation, or a systematic trial and error methodology.
In Phoenix Design, the taxpayer argued that its professional engineers met the Section 174 Test by eliminating uncertainty in the design of the MEPF Systems. The taxpayer explained that, at the outset of the projects, it was uncertain about the specifications and designs that would achieve the air handling and other attributes of the systems, and that it intended to eliminate the uncertainty by performing sophisticated and iterative engineering calculations.
The court rejected the argument. The Section 174 Test requires investigatory activity, that is, the attempted acquisition of information. The court cited e-mails and meetings as examples of processes of acquiring information, but only if there is uncertainty about developing or improving the product. However, “basic calculations on available data is [sic] not an investigative activity because the taxpayer already has all the information necessary to address that unknown.” Moreover, the taxpayer “failed to identify the specific information that was not available to PDG [the taxpayer’s] engineers at the start of the project.”
For the Process of Experimentation Test, the taxpayer argued that it performed iterative calculations to determine the appropriate designs of the MEPF Systems, but the court rejected the argument because “performing calculations and communicating the results to the architect is not an evaluative process that mirrors the scientific method.”[9]
Comment: An architectural or engineering service is not intrinsically precluded from qualifying for research credits. The service may constitute a “business component,” which includes a process, technique, or formula. [10] The business component need not be a tangible product to quality for tax credits.
Care should be taken to ensure that the agreement between a service provider and its client does not inadvertently use terminology that, from the IRS perspective, mistakenly appears to disqualify the research – as could have occurred in Smith. Also, activities intended to eliminate technological uncertainty through a rigorous engineering process should be carefully documented when they occur or soon thereafter to avoid the documentation deficiency that occurred in Phoenix Design. And note that a showing of the brilliance of a scientist or engineer will not qualify the research for tax credits. The taxpayer must still work through the statutory provisions and clearly show the IRS and court how the activities satisfy these provisions.
[1] No. 13382-17 (U.S. Tax Ct. Dec. 18, 2024).
[2] T.C. Memo. 2024-113 (Dec. 23, 2024).
[3] I.R.C. §41(d)(4)(H).
[4] The rationale is that the taxpayer is not the researcher because the taxpayer is not at economic risk for the success of the research.
[5] The rationale is dubious. See “Tax Court Denies Research Credits for Research Activities,” https://www.millercanfield.com/resources-Tax-Court-Tangel-Commissioner.html (Feb. 9, 2021).
[6] The architectural services at issue were for six projects located in Dubai, UAE, and Saudi Arabia.
[7] Retention of “other intellectual property rights” was an additional basis to deny the IRS’s motion for the Kingdom Tower, one of the architectural projects.
[8] (i) The expenditures may be deductible under I.R.C. §174. The deduction is available if the taxpayer’s activities are of an investigative nature that are intended to discover information that would eliminate uncertainty in development or improvement of a product, process, technique, or formula. The Tax Cuts and Jobs Act, Pub. L. 115-97, now requires that the expenditures be specified research and experimental expenditures, which are amortizable rather than currently deductible.
(ii) The expenditure is intended to discover information that is technological.
(iii) The information to be discovered is intended to develop or improve a product, process, technique, or formula.
(iv) Substantially all the research activities constitute elements of a process of experimentation for the purpose of developing or improving new or improved function, performance, reliability, or quality of the product, process, technique, or formula.
[9] The taxpayer’s failing was primarily one of documentation of its engineers’ activities. The fault may lie, however, not with the taxpayer’s trial preparation but with a flaw in the Congressional design of the credit. Congress intended the credit be available to businesses that “apply” scientific principles to develop or improve products. Congress did not require taxpayers to discover basic scientific principles to claim the credit. However, Congress left the door open to the IRS to require a taxpayer to document its applied research as it the research were “basic research.” Businesses that apply research often do not think of documenting their applied research as if it were basic research.
[10] I.R.C. §41(d)(2)(B).