David Cuéllar		Blas Montemayor

On August 14 2009, a tax treaty was signed between Mexico and Uruguay. The treaty will be valid 30 days from the last exchange of the instruments of ratification and in force from January 1 of the subsequent year.

Particularly notable clauses of the treaty include the following.

Taxes covered

The treaty will cover Mexican income tax and flat tax and Uruguayan income taxes, social security tax and net wealth tax.

Residence

If an individual's country of tax residence remains unclear, the competent authorities of the two countries should come to an agreement. In the case of double tax residence for entities, the competent authorities of the two countries should come to an agreement, taking into account the territory of incorporation, effective place of management or similar criteria (otherwise, the treaty provisions will not be available to these entities). A specific provision in the treaty states that a partnership (Sociedad de Personas) or a trust (Fideicomiso) would be considered tax resident of the treaty country, in which the income is subject to tax.

Permanent establishment (PE)

In line with the OECD guidelines, the PE definition includes the provision of professional services rendered (by individuals or by entities) for more than 183 days in a 12 month period, as well as construction or installation projects lasting longer than six months.

Dividends

While Mexico's current domestic law does not impose withholding tax on dividends, the treaty caps withholding tax at 5%.

Interest payments

Withholding tax on interest payments is limited to 10%. The treaty definition of interest is broad.

Royalties

The treaty definition of royalties is wide and encompasses (among others) payments for the use of equipment, as well as gains on disposal of the latter, which are conditioned to the productivity, use, or disposition thereof. Withholding tax on royalties is limited to 10%. Royalties (and interest) which exceed arm's length rates will not fall within the benefits of the treaty.

Capital gains

Capital gains should be taxable in the source country when they arise from:

• Share disposals with more than 50% of their value (directly or indirectly) deriving from real estate located in the other treaty country;
• Share disposals of any entity located in the source country when the shareholder has held, jointly with other related parties, at least 25% of the capital of the disposed entity at any point in the 12 months preceding the disposal. However, in this last case, the tax rate applied to the gain is limited to 20%.

Exchange of information

Each territory should respond to information requests from the other territory using all methods of information acquisition, regardless of whether the former has an interest in such information and of the source of the information.

David Cuéllar (david.cuellar@mx.pwc.com) and Blas Montemayor (blas.montemayor.lozano@mx.pwc.com), Mexico City