Already on 11 December 2008 a new Protocol was signed by the representatives of Mexico and The Netherlands for a change of the tax treaty between these two countries. The protocol has been approved by Dutch Parliament on 1 November 2009 and the final text of the new protocol has now been published.
The main purpose of the new protocol was the wish of Mexico to repair a leak relating to the avoidance of taxation in Mexico through “unrealistic” transfer of shares in group companies, by means through intra-group mergers, reorganizations and spin offs.
Entry into force:
The provisions of the new protocol will apply to tax years which start on or after 1 January 2010. The extension of the scope of the treaty to include the “el impuesto empresarial a tasa única” (see below under 1) will however have retroactive effect and apply as from 1 January 2008.
The new protocol provides amongst others for:
- extension of the scope of the treaty to include the fictitious corporation tax (el impuesto empresarial a tasa única or “IETU” – see also below);
- exclusion of wholly or partly exempt entities from treaty application;
- interpretation of treaty terms on the basis of the legislation of the source state (general OECD rule);
- replacement of the tie breaker rule for dual resident companies by the obligation for the treaty states to come to a mutual agreement with regard to the tax residence of dual residence companies in individual cases (see also below);
- change of the residence criteria for corporations: the country where the most senior management for the group is established and the daily management decisions are being taken thereby ignoring the presence of management members at periodical board meetings where such decisions are only formalized in the other state (see also below);
- the extension of the term permanent establishment to agents who have no formal signing authority but who do negotiate contracts;
- With regard to profits of a permanent establishment arising from survey, supply, installation or construction activities, only the part of the profits derived from functions performed, assets used and risk assumed by, or through, the permanent establishment may be attributed to that permanent establishment.
- reduction of the withholding tax on interest for qualifying interest payments on loans from financial institutions and stock listed bonds to 5% (in all other cases 10%). The current rate is 5% to 15%;
- the term interest shall include (briefly summarized);
- commissions with respect to funds borrowed;
- compensations for placing securities or warranties for loans;
- compensations for factoring;
- income from the alienation of loans;
- income from financial instruments if there is an underlying debt
- income from the alienation of securities after deduction which represent a debt instrument.
- the withholding tax on royalties is reduced from 15% to 10%;
- the introduction of the right to levy 10% tax for the source state on the gain realized with the alienation of shares and limitation of the exception for capital gains arising from share for share transfers in the context of mergers, reorganizations and spin-offs;
- new provision for the exchange of information and assistance with the collection of taxes;
- introduction of an arbitration clause.
Re 1) The IETU is for Dutch tax purposes characterized as a tax on profits. This implies that the treaty rules which allocate and divide the right to taxation now also apply to the IETU (with retroactive effect as from 1 January 2008).
Definition tax residence:
Re 4) and 5) Under the new protocol “flyin – flyout” management is explicitly not sufficient to establish tax residence; the emphasize will be on the place were the day to day management decisions are actually taken.
Taxation capital gains on shares:
Re 11) The current treaty allows the source state to levy 20% tax on the capital gain realised with the transfer of shares representing at least 25% of the share capital of a company residing in the source state, unless this capital gain is realized with a merger, reorganization or splin off.
Under the new protocol the rate is reduced from 20% to 10%, but will now apply to all percentages of shareholding (so including percentages of less than 25%).
Furthermore, the exception for capital gains realized with a merger, reorganization or spin off will be limited to the following three situations (applied to the situation that shares in a Mexican corporation are alienated):
A. in case of the alienation of shares in a Mexican corporation to the extent the transfer price is settled through the issuance of shares in the buying company which owns at least 80% of the voting rights and shares of the Mexican company or through the issuance of shares in a third company which indirectly owns at least 80% of the voting rights and shares of the Mexican company and which is established in a country that has a tax treaty with Mexico with a qualifying exchange of information clause, provided that (main points briefly summarised),
- the buyer is established in a country that has a tax treaty with Mexico with a qualifying exchange of information clause,
- before and just after the transfer buyer and seller hold (directly or indirectly) at least 80% of the voting rights and the value of the Mexican company,
- the cost price for a subsequent alienation is determined at the cost price for the original seller increased with possible cash payments and other remunerations received other than shares and similar rights.
Mexico retains the right to tax that part of the purchase price which is settled by cash payments or remunerations other than shares or similar rights.
B. The alienation takes place on a recognizes stock exchange, unless
- it concerns shareholdings representing at least 10% of the shares of the Mexican company and before a two year holding period has expired at least 10% of the shares are alienated, or
- the shares are alienated in the context of a forced take over.
C. The shares are being acquired by a qualifying pension fund or insurance company.