Mexico-Argentina tax treaty signed Tax Insights from International Tax Services

Tax Insights
from International Tax Services
Mexico-Argentina tax treaty signed
January 11, 2016
In brief
Late last year, Mexico and Argentina signed an Income and Capital Tax Convention (tax treaty), the
provisions of which will take effect on January 1 of the year after which certain formalities and
requirements are satisfied by both countries.
The most salient aspects of the new treaty, which may offer lower rates of income tax withholding on
payments of interest, royalties and certain service payments, between the two countries, are highlighted
below.
In detail
Interest
Both Mexican and Argentine
domestic tax laws generally
apply a 35% income tax
withholding rate on crossborder interest payments to
foreign beneficiaries.
The treaty lowers the domestic
law rates to a maximum of 12%
on interest payments between
Mexican and Argentine tax
residents.
Royalties
Under the treaty, royalties and
technical assistance payments
made to a Mexican beneficial
owner would be subject to an
Argentine income tax
withholding rate of 10% or 15%.
Thus the treaty provides
potentially significant relief
since under domestic Argentine
tax law, royalties and fees for
technical assistance,
engineering or consulting
services paid to non-resident
entities may be subject to
effective withholding tax rates
as high as 31.5%. Similarly,
Mexican domestic law
withholding tax rates range
from 25 to 35% on royalties and
technical assistance paid to
foreign residents.
Under current Mexican
domestic law rules, capital gains
derived from the transfer of
Mexican shares are taxed at 25%
on gross proceeds or 35% on net
gain when the seller/transferor
meets specific requirements.
Capital gains
This capital gains relief would
not apply if more than 50% of
the value of the transferred
shares is derived from real
property.
Capital gains realized in
connection with the sale or
other taxable transfer of shares
would be subject to a maximum
income tax rate of 10% if the
seller directly held at least 25%
of the transferred shares. If the
ownership percentage is less
than 25%, any capital gain
would be subject to a maximum
income tax rate of 15%. The
capital gains treatment may
provide relief to Argentinian
transactions, as current
domestic law subjects foreign
beneficiaries to a 13.5% effective
tax on gross proceeds, or
alternatively to a 15% tax on the
actual capital gain realized.
Dividends
Argentine domestic tax law
subjects dividend payments to a
35% equalization tax to the
extent the payment exceeds the
amount of accumulated taxable
earnings (i.e., 35% of the
amount that exceeds the
accumulated taxable earnings
amount).
Additionally, a 10% domestic
law withholding tax applies on
the gross amount of the
dividend paid.
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Mexican domestic law similarly
provides for a 10% withholding tax on
dividends.
application of treaty benefits should
be reviewed on a case-by-case basis in
view of these rules.
As the treaty subjects dividends to a
maximum 10% income tax
withholding rate, no treaty-based
relief would be available for dividends.
A permanent establishment (PE)
would be deemed to exist in one
contracting state if certain
hydrocarbon activities are conducted
in the other contracting state. These
hydrocarbon activities include or
relate to: extraction, production,
refinery, processing, storage of
hydrocarbons for a period longer than
a month in any period of 12 months,
and others. Similar rules are also
included in the Mexican domestic
hydrocarbon legislation.
Other relevant provisions
The treaty includes a Limitation of
Benefits clause that is consistent with
current global trends, including base
erosion and profit shifting (BEPS)
principles. The clause addresses
treaty abuse practices and double
non-taxation scenarios. The
Delivery of goods or inventories on
behalf of a foreign entity would create
a PE when performed via a dependent
agent. The agent does not need to
have official capacity to bind the
foreign principal for purposes of a PE
determination under the treaty.
The takeaway
MNCs should consider the potential
effects of the Mexico-Argentina tax
treaty on holding company/financing
company structures, IP ownership,
the rendering of cross-border services,
and the overall structuring of current
or future business operations in either
country.
Let’s talk
For a deeper discussion of how this might affect your business, please contact:
International Tax Services, United States
John A. Salerno, US LATAX Leader
+1 (646) 471-2394
[email protected]
Jose Leiman
+1 (305) 381-7616
[email protected]
Carlos Orel Martinez
+1 (646) 471-8416
[email protected]
Maria Bel
+1 (646) 471-1268
[email protected]
Lucia Echenique Fossati
+1 (646) 471-6294
[email protected]
Daniel Landaluce
+1 (646) 471-7762
[email protected]
Camila Silva
+1 (646) 471-8794
[email protected]
International Tax Services, Argentina
Andres Edelstein
Ignacio Rodriguez
Juan Manuel Magadan
+54 11 4850 4651
[email protected]
+54 11 4850 6718
[email protected]
+54 11 4850 6847
[email protected]
Fred Barrett
+01 (55) 5263 6069
[email protected]
David Cuellar
+01 (55) 5263 5816
[email protected]
International Tax Services, Mexico
Mauricio Hurtado
+01 (55) 5263 6045
[email protected]
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