The Mexico Spain Tax Treaty has finally come into force. In this post we will address three novelties regarding the taxation of dividends, interest, capital gains and income from technical assistance.
Mexico Spain Tax Treaty: overview
The Tax Treaty between Mexico and Spain basically follows the OCDE model so we will focus on the key issues which deserve a comment.
Until now, the existing withholding tax on dividends was 5% when the beneficial owner was a company that directly owned at least 25% of the shares of the paying company and 15% in all other cases. With the new regulation, the tax at source is set at 10% in all cases – regardless of whether the recipient is a company individual.
However, no withholding tax at source will be imposed when the recipient of the dividends is a company that holds at least 10% of the shares of the paying company or pension fund of the other Contracting State.
Through the new amending Protocol the withholding tax rate is reduced to 10 %, except when the interests are paid to banks or any financial institution of the other Contracting State, or derived from Public Debt. In the latter cases, the withholding tax is reduced to 4,9 %.
So far, article 11 of the Convention established a withholding tax of 10% when the recipient was a bank and 15% in the other cases. However, based on the More Favored Nation clause contained in the Tax Treaty, the tax at source had, in practice, already been reduced to 5% when interest was paid to a bank of the other State or derived from Sovereign Debt, by virtue of the Agreements concluded by Mexico with the Kingdom of the Netherlands (1994), the United Kingdom (1997) and Denmark (1997), which had that 5 % limitation, which was therefore applicable to Spain.
There will be no taxation at source for interest on loans for the promotion of exports, and where the interest is paid to States, their subdivisions or the local authorities or when he recipient is a pension fund of the other Contracting State.
Before the new amendment, capital gains on the sale of share of companies was only taxable if the shareholdings exceeded 25% in the 12 months prior to sale. This rule, has been removed, and now all capital gains derived from the sale of shares will be taxable at source, but the tax cannot exceed 10% of the profit.
On the other hand, a new exemption from taxation in the State of Source has been introduced when the seller of the shares is a financial institution, insurer, a pension fund, or for stocks traded in a stock exchange, except in the case of Reits.
Finally, it is noteworthy saying that the Protocol expressly state that income from technical assistance it to be treated as business income, rather than a royalty.