After the completion of the negotiations for the North American Free Trade Agreement (Nafta), the Mexican authorities started to negotiate international treaties around the world to avoid double taxation, as well as treaties for the exchange of tax information. Under the constitutional principles, these treaties when ratified and approved by the Mexican senate will become the highest laws of the land, together with the Mexican Constitution.
Any foreign investor interested in pursuing a direct or indirect investment in Mexico should keep them in mind. The treaties to avoid double taxation are mostly applicable to the income tax arising from any Mexican source income received by a foreign tax resident.
Today, Mexico has 24 treaties to avoid double taxation with the following nations: Belgium, Canada, Chile, Denmark, Ecuador, Finland, France, Germany, Ireland, Israel, Italy, Japan, Korea, Luxembourg, Netherlands, Norway, Portugal, Romania, Singapore, Spain, Sweden, Switzerland, the UK and the US.
In addition, there are three nations with which the Mexican government has already finished its negotiations, but the execution of these treaties is still pending. These nations are: Greece, India and Indonesia.
Mexico also has agreements with three nations that have already been executed, but final approval is still pending in one or both of the contracting states; these nations are: the Czech Republic, Poland and Venezuela.
Eight other nations are in negotiations with the Mexican government to conclude these agreements; they are: Australia, Austria, Brazil, China, Hungary, Malaysia, Nicaragua and Russia.
Only two nations have negotiated an independent treaty for the exchange of tax information with Mexico, they are Canada and the US. The scope of these agreements (as stated under article 1 of the agreement with the US) is to prevent tax fraud and evasion, and governs the terms and conditions under which any request for information must be treated by the contracting parties.
The applicable rules, taxable rates or exemptions incorporated in these treaties carry higher legal status than the provisions, rules and rates imposed by the federal income tax law (Ley del Impuesto sobre la Rents). These treaties are quite comprehensive and incorporate rules on different areas, such as residency requirements, permanent establishment, real estate, dividends, interest, royalties, capital gains, independent professional services, employee's wages and compensations, pensions, annuities and alimony, rules affecting artists and sports people, as well as students, among others.
The analysis of the corporate structure of any foreign tax resident wishing to make an investment in Mexico is becoming more crucial these days in the light of all these provisions. This can mean a significant tax saving to any potential investor coming into Mexico and Mexican tax residents now have another tool when investing abroad that can minimize their tax exposure when investing in or through jurisdictions with which these treaties are in effect.
Alberto J Morales