Changes to tax law and regulation in Mexico stayed at a minimum for 2024 with minor amendments to federal regulation and some local legislation. However, this 2024 welcomes significant tax changes for Mexico in the international arena impacting taxation on capital repatriation from and to Mexico with different jurisdictions.
Although provisions deriving these changes were subject to different entry into force and effect rules, its entry into effect coincided as of January 1, 2024.
Broadly, tax treaties aim to prevent double international taxation due to overlaps on the scope of source taxation rules and worldwide income taxation rules of two different jurisdictions applicable to the same taxpayer on a single income. Thus, reducing the taxpayer overall tax burden on such income. This is achieved through different taxing rights allocation schemes on specific items of income (a combination of enablements or prohibitions, maximum source rates, thresholds and frame double tax relief mechanisms).
This new year most of Mexico’s tax treaty network was modified by different bilateral and multilateral international instruments.
Multilateral Instrument
Broadly, the Multilateral Instrument or MLI is a multilateral tax protocol aim to add anti abuse and cooperation provisions in the global tax treaty network. The MLI does not aim to modify global allocation of taxing rights. MLI provisions are structured in a manner so for signatory jurisdictions to elect how to apply them in their tax treaties (MLI positions). Thus, notwithstanding relevant minimums, signatory jurisdictions can modify their treaty network with other signatory jurisdictions in accordance with their MLI positions compatibility.
Although Mexico is a member of the G20 and the OECD, the international organizations that pushed for the MLI and other actions to prevent global base erosion and profit shifting after the 2008 crisis, it wasn´t until March 15, 2023 that Mexico ratified and deposited the MLI. Thus, derived from MLI rules and Mexico´s positions, from a Mexican perspective the MLI entered into force on July 1, 2023 and all applicable provisions entered into effect on January 1, 2024. This means that tax residents of countries in which the MLI has partially or fully entered into effect (e.g. not Italy) expecting income from Mexico, or Mexican tax residents expecting income from such countries, should now consider the MLI provisions under the relevant positions´ compatibility, to apply for relevant tax treaty benefits. On this regard, if MLI compatibility is met, among others:
- Dividends
Foreign or national investors that should met qualifying participation requirements to apply reduced or nil source treaty rates for Mexican or foreign dividends (respectively) should now met those requirements during a qualifying holding period (if they previously didn´t have to) that does not result from a reorganization. - Capital Gains
Foreign or national investors should now be liable to source capital gains taxation for Mexican or foreign capital gains (respectively) on real estate shares or interests if applicable qualifying real estate value is met at any time during a qualifying period.
The latter is particularly important for corporate reorganizations and acquisitions. On this regard, the US is not an MLI signatory and Germany has not included Mexico under its MLI scope.
Tax Convention with the Pacific Alliance
To counteract Mercosur a South American integration block, in 2011 Mexico, Colombia, Peru and Chile created the Pacific Alliance. As part of its integration agenda, members of the Pacific Alliance signed in 2017 a tax convention aimed to modify their mutual tax treaties to incentive reciprocal pension fund investment. However, it wasn´t until May 2023 that the last signatory ratified and deposited the convention. Thus, its provisions entered into force on July 2, 2023 and into effect last January 1, 2024 pursuant relevant rules.
Broadly, to apply tax treaty benefits (i) general, (ii) special, and (iii) domestic treaty requirements should be met. Among other general requirements, those seeking to apply treaty benefits should fall under the personal scope of the relevant tax treaty. This is achieved when a qualifying person is liable to qualifying taxation in one of the contracting jurisdictions. This is usually the case for legal entities (for domestic tax purposes) liable to income tax in one contracting jurisdiction.
Pursuant Mexican social legislation employee´s mandatory savings and correlative employer’s and State´s contributions, are managed by Afores in an individual employee´s account comprised of different sub accounts. Resources on such account are invested in legally allowed portfolios by the Afore’s investment subsidiaries known as Siefores.
Although Siefores are legal entities under Mexican tax law they are also tax transparent under the latter. Thus, unless provided otherwise in the relevant tax treaty, Siefores are not eligible to treaty benefits (as they are not liable to income tax in Mexico). This was the case for tax treaties Mexico had with the other members of the Pacific Alliance. However, derived from the referred tax convention, Siefores and other specific entities are recognized as eligible to treaty benefits regardless of their tax liability in their tax residence jurisdiction.
Although flow of capital in the Pacific Alliance is minimum, the latter is relevant for (i) Siefores and other in scope pension funds (ii) entities paying investment returns to the latter within the Pacific Alliance, and (iii) investment managers with Siefores tax tailored vehicles investing in the Pacific Alliance.
It shall be noted that some confusion has arisen regarding the scope of the convention in connection to private pension funds and other entities eligibility.
Protocol with Germany
As referred above, Germany has not considered Mexico under its MLI scope. However, to catch up with certain MLI provisions in 2021 Mexico and Germany entered into an amendment protocol of their 2008 tax agreement (which forms part of their 2008 tax treaty). However, it wasn´t until July 7, 2023 that Mexico ratified and deposited the amendment protocol. Thus, its provisions entered into force on August 6, 2023 and into effect last January 1, 2024 pursuant relevant rules. At a glance:
- Tax provisions should now be interpreted as to avoid treaty abuse.
- All qualifying activities exempted of a permanent establishment status should now have an ancillary and preparatory nature for them to avoid triggering a permanent establishment.
- A qualifying direct holding period should now be met to apply for the 5% dividends source rate.
- Disposals of real state shares or similar interests are now subject to source capital gains taxation if minimum direct or indirect 51% state value is met in the source jurisdiction at any time during a 365 day period.
- Mutual agreements reached by Mexico and Germany derived from a tax resident claim, are no longer subject to an application period.
- If applicable a triangular permanent establishment test should now be met.
- A principal purpose test should now be met to apply tax treaty benefits.
The latter is relevant for individuals and entities expecting to apply benefits under the Mexico-Germany tax treaty.
