David Cuéllar		José González

An amending protocol to the August 3 1993 income tax treaty between Mexico and Switzerland was signed on September 18 2009.

Based on the information published by the Federal Authorities of the Swiss Confederation, the tax treaty contains an extended administrative assistance clause in accordance with article 26 of the OECD model convention and Mexico has become one of the few countries with which Switzerland has signed an agreement containing this extension of administrative assistance.

In addition to the provisions on exchange of information, the protocol includes the following relevant changes:

Flat tax

As it has occurred in recent treaties signed by Mexico, the Mexican flat tax (IETU) is considered as part of the taxes covered by the convention.

Tax residence

At the moment a dual residence entity may be considered to be resident of the state in which the company's place of effective management is located. The protocol amends the rule stating that both countries should strive to resolve these dual residence cases by means of mutual agreement, taking into consideration the place of effective management, the place where the company is incorporated and any other relevant factors.

Dividends

The protocol establishes that dividends will not be subject to tax at source, as long as the beneficial owner of the dividends controls, directly or indirectly, at least 10% of its subsidiary, instead of the current 5% withholding tax rate and the 25% participation requirement. It is important to mention that Mexican domestic law does not include a withholding tax on dividends paid abroad.

Interest

In order to treat Switzerland like other OECD countries with which Mexico has settled more favourable agreements, a reduction in the withholding rates may be applied. 5% (formerly 10%) of the gross amount of the interest paid, among others, to banks and insurance institutions, and 10% (formerly 15%) in all other cases.

A most favoured nation clause has also been included, provided that Mexico concludes an agreement with an OECD country member if it considers a lower withholding tax rate than the one stated in the Mexican-Swiss tax convention (applicable to interest and royalties).

Capital gains

The Mexico-Switzerland tax treaty is one of the last Mexican treaties that provide a broad tax exemption on capital gains derived from the alienation of shares (other than shares which value mainly derives from real estate). Based on the new protocol, the source State can tax the capital gains from the sale of shares at a maximum rate of 10%.

Additionally, a special tax reorganisation regime has been included for the alienation of shares that takes place between members of the same group of companies. The protocol will enter into force thirty days after the corresponding States notify each other the conclusion of the required procedures and should be applicable as of January 1 of the following year.

David Cuéllar (david.cuellar@mx.pwc.com) and José Antonio González (jose_antonio.gonzalez.herrera@es.landwellglobal.com)
Mexico City