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Mexico interest deduction limits: the 3 to 1 thin capitalization rule, the 30 percent of adjusted tax profit cap and loans treated as dividends

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Last verified: 2026-10-26 · Status: Changing

Interest on debt owed to foreign related parties is not deductible to the extent total interest bearing debt exceeds three times average equity; financial institutions and debt for strategic infrastructure or power generation are excluded, and an advance ruling can allow more leverage. Separately, net interest above 30 percent of adjusted tax profit (a tax EBITDA) is not deductible, after a MXN 20 million allowance shared by the group; disallowed amounts carry forward ten years, and only the larger of the two disallowances applies. Interest on related party loans with equity like features, such as profit linked interest, demand notes or back to back structures, is treated as a dividend.

USD conversions use MXN 18.5026 per US dollar, the US Federal Reserve H.10 noon buying rate in New York for 16 October 2026 (FRED series DEXMXUS), the latest observation available when this page was verified. Mexican tax law uses the Banxico FIX for foreign currency amounts, which differs slightly. Conversions are for orientation only.

Key facts

Thin capitalization limit (debt with foreign related parties)	3:1 ratioLISR art. 28, section XXVII, as of 2026-10-26 · in force
Net interest deduction cap as a share of adjusted tax profit	30 %LISR art. 28, section XXXII, as of 2026-10-26 · in force
Interest expense above which the 30 percent cap applies, and allowance deducted from net interest (shared by the group)	20000000 MXNLISR art. 28, section XXXII, as of 2026-10-26 · in force
Carryforward of interest disallowed under the 30 percent cap	10 yearsLISR art. 28, section XXXII, as of 2026-10-26 · in force
Minimum years to keep the tax capital accounts option for measuring equity	5 yearsLISR art. 28, section XXVII, as of 2026-10-26 · in force

The rule

1. Thin capitalization: 3 to 1 for foreign related party debt. Interest is not deductible to the extent it arises on debts that exceed three times the taxpayer's equity (capital contable) and come from related parties resident abroad. The excess is the average annual balance of all interest bearing debts (sum of month end balances divided by the months of the year) less three times average equity (opening plus closing equity divided by two). If foreign related party debt is smaller than the excess, all interest on that debt is non deductible; if larger, the non deductible part is that interest times the excess divided by the foreign related party debt.
Cost to do it: Every MXN 1,000,000 of disallowed interest costs MXN 300,000 of income tax at 30 percent.
Example: Average equity is MXN 100,000,000 and average debt is MXN 450,000,000, of which MXN 300,000,000 is owed to the foreign parent with interest of MXN 27,000,000. The excess is MXN 150,000,000 (450 less 300), so MXN 13,500,000 of the parent interest (27,000,000 x 150/300) is non deductible, costing MXN 4,050,000 of tax. / Excess debt of about USD 8,106,969; disallowed interest of about USD 729,627 and extra tax of about USD 218,888 at 18.5026.Ley del Impuesto sobre la Renta (LISR), DOF 11 December 2013 (Chamber of Deputies consolidated text, last reform DOF 1 April 2024), Art. 28, section XXVII, 2013-12-11 official text · verified 2026-10-26

2. Exclusions, equity option and higher ratios. Debts of financial system members incurred in their own operations, and debts for building, operating or maintaining productive infrastructure linked to strategic areas or for electricity generation (for the holder of the relevant permit or title), are excluded from the calculation, except for unregulated multiple purpose finance companies (sofomes) that lend mainly to related parties. Taxpayers may instead measure equity as the average of their contributed capital account (CUCA), CUFIN and reinvested CUFIN less pending tax losses, but not if that differs by more than 20 percent from book equity (unless they show a business reason and support in an audit), and once chosen the option must be kept for at least five years. The 3 to 1 limit can be raised by an advance ruling under CFF art. 34-A when the activity itself requires more leverage.
Cost to do it: An advance ruling costs the federal duty for transfer pricing rulings and professional fees; see the transfer pricing page.
Example: A solar developer finances a power plant with parent loans. Debt incurred for electricity generation by the permit holder is excluded from the 3 to 1 test, so its interest is not limited by section XXVII (the 30 percent cap still has its own exclusions). / Excluded debt removes the thin capitalization disallowance entirely for that financing.Ley del Impuesto sobre la Renta (LISR), DOF 11 December 2013 (Chamber of Deputies consolidated text, last reform DOF 1 April 2024), Art. 28, section XXVII, 2013-12-11 official text · verified 2026-10-26

3. 30 percent of adjusted tax profit cap. Net interest (interest expense less taxable interest income, less MXN 20,000,000) that exceeds 30 percent of adjusted tax profit is not deductible. Adjusted tax profit is taxable profit plus interest expense plus tax depreciation and amortization of fixed assets, deferred charges and pre operating expenses; if it is zero or negative, all interest subject to the rule is disallowed. The rule applies only when interest expense exceeds MXN 20,000,000, and that amount is shared by all Mexican companies and permanent establishments of the same group or related parties in proportion to prior year income. Exchange gains and losses are not interest unless from an interest bearing instrument. Excluded are interest on debt for public infrastructure, construction in Mexico (including land), oil and gas, other extractive projects and electricity or water generation, transmission or storage, public debt, state productive companies and financial institutions in their own operations.
Cost to do it: 30 percent tax on the disallowed amount in the year, recoverable only by using the carryforward.
Example: A manufacturer has taxable profit of MXN 20,000,000, interest expense of MXN 60,000,000, no interest income and tax depreciation of MXN 20,000,000. Adjusted tax profit is MXN 100,000,000 and the cap is MXN 30,000,000. Net interest is MXN 40,000,000 (60 less the MXN 20,000,000 allowance), so MXN 10,000,000 is non deductible this year. / Adjusted tax profit of about USD 5,404,646; disallowed interest of about USD 540,465 and extra tax of about USD 162,139 this year at 18.5026.Ley del Impuesto sobre la Renta (LISR), DOF 11 December 2013 (Chamber of Deputies consolidated text, last reform DOF 1 April 2024), Art. 28, section XXXII, 2013-12-11 official text · verified 2026-10-26

4. Carryforward and interaction with the 3 to 1 rule. Net interest disallowed under the 30 percent cap may be deducted in the following ten years, provided the taxpayer keeps a register of pending interest; it is added to the next year's net interest and must pass the same test, and older amounts are used first. Any amount not used within ten years is lost. The 30 percent cap applies only when the interest it disallows is greater than the amount disallowed under the 3 to 1 rule of section XXVII, in which case section XXVII does not apply; so each year only the larger disallowance applies. Groups may compute the cap on a consolidated basis under SAT rules.
Cost to do it: Timing cost only if the carried forward interest is used within ten years.
Example: Continuing the example, the MXN 10,000,000 disallowed in 2026 is carried forward. In 2027, if net interest is well below the cap, the company can deduct it then, recovering the MXN 3,000,000 tax effect. / Carryforward of about USD 540,465; tax effect of about USD 162,139 at 18.5026.Ley del Impuesto sobre la Renta (LISR), DOF 11 December 2013 (Chamber of Deputies consolidated text, last reform DOF 1 April 2024), Art. 28, section XXXII, 2013-12-11 official text · verified 2026-10-26

5. Related party loans treated as dividends. Interest on credits granted by related parties, resident in Mexico or abroad, is treated as a dividend for tax purposes when, among other cases: the debtor gives a written unconditional promise to pay on a date the creditor can determine at any time; the interest is not deductible because the rate exceeds market (art. 27, section XIII); the creditor can intervene in the debtor's management if it defaults; the interest depends on profits; or the interest comes from back to back loans, including loans through a financial institution and loans secured by cash, deposits, shares or debt instruments of a related party or of the borrower.
Cost to do it: Interest recharacterized as a dividend is not deductible and may trigger the dividend rules, including the 10 percent withholding and, if not from CUFIN, the corporate level dividend tax.
Example: A Mexican subsidiary borrows MXN 50,000,000 from a bank that is secured by a cash deposit of the foreign parent. The arrangement is a back to back loan; the MXN 5,000,000 of annual interest is treated as a dividend, so the deduction worth MXN 1,500,000 of tax is lost. / Loan of about USD 2,702,323; interest of about USD 270,232; lost tax saving of about USD 81,070 at 18.5026.Ley del Impuesto sobre la Renta (LISR), DOF 11 December 2013 (Chamber of Deputies consolidated text, last reform DOF 1 April 2024), Art. 11, 2013-12-11 official text · verified 2026-10-26

Feature	3 to 1 thin capitalization	30 percent of adjusted tax profit
Debt covered	Debt owed to foreign related parties	All debt, related or not
Measure	Average debt over three times average equity	Net interest above 30 percent of adjusted tax profit
Threshold	None	Applies only when interest exceeds MXN 20 million, which is also deducted from net interest
Carryforward	None	Ten years
Main exclusions	Financial institutions; strategic infrastructure and power generation	Public infrastructure, construction in Mexico, extractive, power and water, public debt, financial institutions
Interaction	Applies unless the 30 percent cap disallows more	Applies only if it disallows more than the 3 to 1 rule

The two Mexican interest limits compared, verified 26 October 2026

Worked example

A foreign group funds a new Mexican plant. With equity of MXN 100,000,000 (about USD 5.4 million) it can borrow up to MXN 300,000,000 (about USD 16.2 million) in total interest bearing debt before parent loan interest starts to be disallowed under the 3 to 1 rule.
If its group interest expense exceeds MXN 20,000,000, it must also compare net interest less MXN 20,000,000 with 30 percent of adjusted tax profit; whichever rule disallows more is the one that applies, and amounts disallowed by the 30 percent cap can be used over the next ten years.
Interest on the parent loans also bears withholding (35 percent domestic rate for most related party loans, lower under many treaties) and must be priced at arm's length; see the withholding taxes and transfer pricing pages.

Step by step

1. Model month end debt and opening and closing equity for the year to test the 3 to 1 ratio before signing parent loans.
2. Identify any debt that qualifies for the infrastructure, energy or financial institution exclusions and keep the supporting permits.
3. If group interest exceeds MXN 20,000,000, compute adjusted tax profit and allocate the MXN 20,000,000 allowance among Mexican group companies by prior year income.
4. Keep the register of pending non deductible interest to preserve the ten year carryforward.
5. Review loan terms for the art. 11 features (demand notes, profit linked interest, guarantees or deposits by related parties) that turn interest into dividends.
6. Recheck the rules for 2027: a bill amending the income tax law was pending in the Senate when this page was verified.

Common traps

Counting only parent loans. The 3 to 1 test uses all interest bearing debt, including bank debt, to compute the excess (LISR art. 28, section XXVII).
Treating the MXN 20 million as per company. It is shared across all Mexican group companies and related parties (LISR art. 28, section XXXII).
Losing the carryforward. Without a register of pending interest the ten year carryforward is not available (LISR art. 28, section XXXII).
Back to back financing. A bank loan secured with a related party's cash deposit is treated as a related party loan whose interest is a dividend (LISR art. 11).
Ignoring a losses year. If adjusted tax profit is zero or negative, all interest subject to the 30 percent rule is disallowed for that year (LISR art. 28, section XXXII).

Sources

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