In the last couple of years, there have been several changes to the Shelter modality in Mexico, mainly related to fiscal rules and the terms under which a company can operate under a Shelter. The most recent modifications, including the 2022 tax reform, have further reduced fiscal benefits for Shelter companies, leaving Safe Harbor as the only applicable tax methodology.
These changes significantly impact companies operating under the Shelter structure, as well as new companies considering this option. It is essential to understand these modifications in taxation rules and how they can affect operational expenses and long-term business strategies.
Shelter Services in Mexico: a Timeline
Maquila Decree Evolution
- Between 1934 and 1940, Mexico introduced the Free Perimeter Law, establishing a free trade zone.
- In 1942, the Bracero Program was launched, allowing Mexican agricultural workers to stay in the U.S. to address labor shortages due to World War II.
- 1965: The Border Industrialization Program was created, legally allowing the establishment of maquiladora industries in border zones.
- 1966: The first maquiladora company, assembling televisions, was established in Ciudad Juárez.
- 1971: The first official Maquila Decree was published in the Official Gazette (DOF).
- 1998: The Maquiladora Export Industry Promotion and Operation Decree was published.
- 1999: The U.S. and Mexico reached an agreement on transfer pricing for U.S. multinational maquiladoras, known as the Qualified Maquiladora Approach (QMA).
- 2006: The decree was renamed IMMEX (Manufacturing, Maquiladora, and Export Services Industry Promotion Decree).
Fiscal Reforms Impacting Shelter
- 2002: The concept of Permanent Establishment (PE) and Transfer Pricing (TP) was incorporated into Mexico’s Income Tax Law (LISR) based on the U.S.-Mexico treaty.
- 2014: Transfer pricing options were reduced to only Safe Harbor and Advance Pricing Agreements (APA).
- 2016: Mexican and U.S. tax authorities agreed on a streamlined process for unilateral APA resolutions, expanding the 1999 QMA agreement.
- 2020: The IRS announced a bilateral transfer pricing methodology agreement for maquiladoras under APA negotiations.
- 2021: SAT launched an online portal providing information on QMA for 2016-2019 and subsequent resolutions.
- 2022: Reform - APAs were eliminated for maquiladoras, leaving Safe Harbor as the only option.
Benefits of the Shelter Model
Since its inception, the Shelter model has provided special fiscal benefits to manufacturing companies starting operations in Mexico. These benefits, combined with operational competitiveness and reduced risk, made the model particularly attractive for foreign manufacturers.
Facilitating Investment in Mexico
For more than 40 years, the Shelter scheme has been a cornerstone for attracting and supporting foreign companies investing in Mexico. Shelter service providers play a crucial role in facilitating a company’s soft-landing, handling key aspects such as:- Organizing work agendas, site visits, and meetings based on project requirements.
- Advising companies on location selection and the benefits of different industrial regions in Mexico.
- Ensuring a smooth and compliant transition to local operations.
Recent Changes to the Shelter Model
2022: Safe Harbor Becomes the Sole Tax Option for Shelter Companies
The 2022 fiscal reform eliminated the APA (Advance Pricing Agreement) option for maquiladoras, leaving Safe Harbor as the only available method for tax compliance. This means:
- Maquiladoras must determine their taxable income based on the highest of the following:
- 6.9% of the value of total assets used in maquila operations (including foreign-owned assets).
- 6.5% of total costs and expenses.
- Companies that applied for an APA before 2022 can continue using it until 2024, but new applicants must follow Safe Harbor.
- Shelter companies must annually file the DIEMSE report, confirming compliance with Safe Harbor.
2024 Final Fiscal Year to Use APA for Tax Calculation in Mexico
Implementing Safe Harbor this year? Have you analyzed all of your options? You could potentially save millions by switching your operations model. Contact an advisor to learn more.
2020: Removal of the Term Limit and New Fiscal Regulations
In 2020, significant changes were introduced in two areas:
New Tax Treatment for Shelter Operations
- Elimination of APA & new Safe Harbor requirements: As of 2022, companies must follow Safe Harbor rules or transition out of the Shelter model.
- Impact on Foreign Tax Accreditation: As Shelter companies are no longer considered related parties, taxes paid in Mexico may not be accredited abroad, affecting international tax planning.
Term Modifications
- Removal of the 4-Year Limit: Companies can now operate indefinitely under the Shelter model.
- Transition Period for Pre-2020 Shelters: Companies under the Shelter model before 2020 can continue under previous tax rules for four more years before transitioning to new rules.
What these Changes Mean for Foreign Companies
The recent modifications in the Shelter model have brought both opportunities and challenges for foreign companies operating in Mexico. While the elimination of the 4-year limit makes the Shelter model a viable long-term strategy, the tightening of tax regulations—particularly the enforcement of Safe Harbor as the sole fiscal methodology—requires companies to rethink their financial planning and operational structure.
Here’s what foreign companies need to consider:
Increased Tax Burden Under Safe Harbor
With the 2022 fiscal reform, maquiladoras under the Shelter model must now comply with Safe Harbor, which means:
- A taxable profit floor of 6.9% of total assets used in the maquila operation.
- A minimum profit of 6.5% based on total costs and expenses.
- Elimination of the APA option, removing a method that previously allowed for more tailored tax agreements.
This can result in higher taxable profits, particularly for companies with significant foreign-owned assets or high operating costs. Companies that previously benefited from custom APA resolutions will now have to reassess their tax obligations under Safe Harbor, which might increase effective tax rates in Mexico.
Increased Compliance Requirements and Reporting Obligations
- Annual DIEMSE reporting: Shelter companies must file the Declaración Informativa de Empresas Manufactureras, Maquiladoras y de Servicios de Exportación (DIEMSE), ensuring that their tax calculations comply with Safe Harbor.
- Detailed accounting segmentation: Companies generating additional revenue (e.g., renting equipment, scrap sales, or technical services) must ensure these do not exceed 10% of total maquila revenues and maintain proper financial separation.
- Greater scrutiny on transfer pricing: With the elimination of APA, tax authorities will more closely monitor intercompany transactions to prevent profit shifting.
Need for a Strong Exit Strategy
Given the evolving tax landscape, it is more important than ever for companies to plan their long-term presence in Mexico strategically. A well-structured Exit Strategy ensures that:
- Companies can transition smoothly from the Shelter model to a fully owned maquiladora if tax burdens become excessive.
- There is flexibility to adapt to future tax reforms in both Mexico and the U.S.
- Operational continuity is maintained without disrupting supply chains or production timelines.
Comparison of Shelter Model to Other Models
For many companies, the higher tax costs and compliance burdens associated with Safe Harbor may make the Shelter model less attractive compared to other structures, such as contract manufacturing or the toller model.
Unlike maquiladoras under a shelter model:
- Contract manufacturers are not subject to a mandatory taxable profit floor (6.9% of assets of 6.5% of costs), can sell to the domestic market, and are not required to have 30% of foreign-owned machinery
- Toll manufacturers pay less tax than a maquiladora for capital intensive operations, has some flexibility to sell to the domestic market and virtual deliveries
Foreign companies must now weigh the long-term benefits of remaining under the Shelter model versus transitioning to a another operational structure, which may offer a more flexible and tax-efficient solution.
Considering Changing your Operational Structure in Mexico?
You could potentially save millions by switching your operations model. Contact an advisor to learn more.
Key Takeaway for Foreign Companies
The Shelter model is no longer a tax optimization tool—it is now a strategic decision that requires careful evaluation. The removal of APA, the enforcement of Safe Harbor, and the loss of international tax benefits mean that foreign companies must reassess their operations in Mexico.
- To ensure financial and operational efficiency, companies should:
Conduct a cost-benefit analysis comparing the Shelter model vs. contract manufacturing. - Work with experts in Mexican tax law and international taxation to optimize fiscal planning.
- Develop a clear transition plan in case the Shelter model becomes unsustainable.
With Mexico’s manufacturing sector continuing to grow, companies that adapt proactively to these changes will be best positioned to take advantage of nearshoring opportunities while maintaining cost competitiveness.
About Prodensa
Prodensa is a professional services firm with 35 years of experience and has supported more than 700 manufacturing companies with Startup or Shelter solutions in Mexico.
The information in this blog post has been summarized from publications from Deloitte and CPA Associates International, but should not be taken as tax advice. Reach out to speak to an expert.