KNOWLEDGE BASE

INTERNATIONAL INVESTMENT

Investing in South America: Mexico

Overview Tax Treaties Salient Features Case Studies

OVERVIEW

Dividends paid by Mexican companies are not subject to withholding tax, regardless the place of residency of the recipient.

Interest is subject to a 4.9% withholding tax if paid on negotiable instruments to foreign recipients of a treaty country or 10% for non-treaty countries. Payments to tax havens are usually subject to a 40% withholding tax.

Royalties paid to foreign licenser are subject to a 30% withholding tax (25% for know-how and technical assistance). Like interest, payments made to tax havens are subject to a 40% withholding tax.

No debt-to-equity ratio is applied in Mexico. Loan granted by related parties are deductible without limitation.

Mexico has very interesting double tax treaties with the Netherlands, Luxembourg, Sweden and Spain which allow use of these jurisdictions as a tax platform for foreign investments.

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TAX TREATIES

Mexico has concluded double tax treaties with the following countries:

Dividends (k) % Interest % Patent & Know-how Royalties %
Belgium 5/15 (a) 10/15 (s) 10
Canada 10/15 (a) 10/15 (b) 10/15 (b) (g)
Chile 5/10 (t) 15 (b) 15 (b)
Denmark 0/15 (a) 5/15 (m) 10
Ecuador 5 10/15 (l) 10
Finland 0 10/15 (h) 10
France 0/5 (c) 5/10/15 (b) (h) 10/15 (b)
Germany 5/15 (d) 10/15 (e) 10
Ireland 5/10 (d) 5/10 (m) 10
Israel 5/10 (f) 10 10
Italy 15 10/15 (b) 10
Japan 0/5/15 (n) 10/15 (e) 10
Korea 0/15 (j) 5/15 (m) 10
Luxembourg 5/15 10 10
Netherlands 0/5/15 (d) (r) 5/10/15 (0) 10
Norway 0/15 (a) 10/15 (s) 10
Poland 5/15 (a) 10/15 (e) 10
Portugal 10 10 10
Romania 10 (d) 15 10
Singapore 0 5/15 (m) 10
Spain 5/15 (a) 5/10/15 (b) (h) (s) 10 (b) (g)
Sweden 5/15 (d) 10/15 (p) 10
Switzerland 5/15 (a) 10/15 (s) 10
UK 0 5/10/15 (i) 10
US 5/10 (d) 4,9/10/15 (r) 10
Non Treaty Countries 0 4,9/10/21/33 25/33

(a) The lower rate applies if the recipient is a corporation owning at least 25% of the shares of the payer.

(b) These treaties have a most favourable nation (MFN) clause with respect to interest and/or royalties. Under the MFN clause in the Canada treaty, the 15% rate for interest or royalties may be reduced to as low as 10% if Mexico enters into a tax treaty with a member of the Organization for Economic Cooperation (OECD) that provides for a withholding tax rate of less than 15% for interest or royalties. Under the MFN clause in the Chile treaty, the withholding tax rate for interest may be reduced to 5% for banks or 10% for other recipients and the withholding tax rate for royalties may be reduced to 10%, if Chile enters into a tax treaty with another country that provides fro a lower withholding tax rate than 15% for such payments. Under the MFN clause in the France treaty, the withholding tax rate for interest and royalties is reduced if Mexico enters into a tax treaty with an OECD member that provides for withholding tax rates that are lower than the rates under the Mexico – France treaty. However, the rate may not be lower than 10% if the OECD member country is not a member of the European Union (EU). Under the Italy treaty, the MFN clause applies only to interest. It may reduce the withholding tax rate for interest to as low as 10% only if Mexico enters into a treaty with an EU country that provides for a withholding tax rate for interest of less than 15%. Under the MFN clause, the Spain treaty, the withholding tax rates for interest and royalties may be reduced if Mexico enters into a tax treaty with an EU country that provides for withholding tax rates that are lower than the rates under the Mexico-Spain treaty. The standard rate of interest and for patent and know-how royalties under all of the above treaties is generally 15%. However, as a result of the operation of the MFN clause, the lower rates listed in the table may apply in certain circumstances.

(c) The 0% rate applies if the recipient of the dividends is the effective beneficiary of dividends. The 5% rate applies if the recipient is owned by residents of countries other than France or Mexico.

(d) The 5% rate applies if the recipient is a corporation owing at least 10% of the shares of the payer.

(e) The 10% rate applies to interest derived from loans granted by banks and insurance companies. Under the Germany treaty, the 10% rate also applies to interest paid on bonds or with respect to sales by suppliers of machinery and equipment. Under the Poland treaty, the 10% rate also applies to interest paid on publicly traded securities.

(f) The 5% rate applies if the recipient is a corporation that owns at least 10% of the shares of the payer and if the tax levied in Israel is not less than the corporate tax rate.

(g) The effective beneficiary of royalties is subject to withholding tax on the gross payments. Royalties on cultural works (literature, music and artistic works other than films for movies or television) are not subject to withholding tax if they are taxed in the recipient’s country.

(h) A 10% rate applies to interest paid on bank loans or publicly traded bonds, as well as to interest paid with respect to sales by suppliers of machinery and equipment.

(i) The 5% rate applies if the beneficial owner of the interest is a bank or insurance company or if the interest is derived from bonds or securities that are regularly and substantially traded on a recognised securities market. The 10% rate applies to interest paid by a bank or by a purchaser with respect to a sale on credit of machinery if the seller is the beneficial owner of the interest. The 15% rate applies to other interest.

(j) The 0% rate applies if the recipient is a corporation owning at least 10% of the shares of the payer.

(k) Dividends are not subject to withholding tax under Mexican domestic law.

(l) Beginning in the sixth year the treaty is in effect, the 15% rate is reduced to 10% if the beneficial owner of the interest is a bank. For the first five years, however, the 15% rate applies to such interest.

(m) The 5% rate applies if the beneficial owner of the interest is a bank.

(n) The 5% rate applies if the recipient is a corporation owning at least 25% of the shares of the payer. The 0% rate applies if the condition described in the preceding sentence is satisfied and if both of the following conditions are satisfied:

  • The recipient’s shares are shares are regularly traded on a recognised Stock exchange
  • More than 50% of the recipient’s shares are owned by one or any combination of the following;
  • The state of residence of the recipient;
  • Individuals resident in the state of residence of the Recipient; and
  • Corporations resident in the state of residence of the recipient if their shares are owned by individuals, Resident in the state of residence of the recipient.

(o) The 5% rate applies if the interest is derived from loans granted by banks or insurance companies or if the interest is derived from bonds or securities that are regularly and substantially traded on a recognised securities market. The 10% rate applies to interest paid by banks or by purchasers with respect to sales on credit of machinery or equipment. The 15% rate applies too other interest.

(p) The 10% rate applies to interest derived from loans granted by banks.

(q) The 4.9% rate applies if the beneficial owner of the interest is a bank or insurance company or if the interest is derived from bonds or securities that are regularly and substantially traded on a recognised securities market. The 10% rate applies to interest paid by banks or by purchasers with respect to sales on credit of machinery and equipment. The 15% rate applies to other interest.

(r) Under a protocol to the treaty with the Netherlands, the 5% rate is reduced to 0% if the dividends are paid on a shareholding that qualifies for the participation exemption under the corporate tax law of the Netherlands.

(s) The 10% rate applies if the beneficial owner of the interest is a bank.

(t) the 5% rate applies if the recipient is a corporation owning at least 20% of the shares of the payer.

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SALIENT FEATURES

Corporate Income Tax For 2005, the resident companies are subject to income tax at the rate of 30% (29% in 2006 and 28% in future years).
Dividends Dividends distributed by Mexican corporations are not taxable to the extent they are paid from previously taxed earning.
Interest Interest expense that satisfies the strictly indispensable standard should be deductible by Mexican corporate taxpayers in the period in which it is accrued. Interest on loans granted by foreign non resident entities is normally subject to a 30% (40% for tax-haven entities) withholding tax on the amount paid abroad.
Royalties Royalties are subject to a 30% withholding tax.
Loss Relief Corporate taxpayer may carry losses forward against tax liabilities for ten years. Loss carry back is not available.
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CASE STUDIES

Offshore Investing Into Mexico
EU Company Investing Into Mexico
Mexican Individual Investing Into Mexico
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