The Convention for the Standardisation of the Tax Treatment
of the Conventions for the Avoidance of Double Taxation between
States of the Framework Agreement of the Pacific Alliance (the
Convention) was published this year.
It aims to standardise the applicable tax treatment on
interest income and capital gains received by foreign pension
funds in order to eliminate double taxation and the heavy tax
burden regarding commercial and financial transactions.
The Pacific Alliance was formed following the Lima
Declaration of April 28 2011, executed by Chile, Colombia,
Mexico and Peru. The Pacific Alliance is an economic and trade
bloc, legally incorporated as of June 6 2012 through its
Framework Agreement, which aims for progressive development
towards the free movement of goods, services, capital and
people, and the incorporation of a common trading platform.
Chile, Colombia, Mexico and Peru are the only members of the
Pacific Alliance, but there are many other countries that are
evaluating the possibility of affiliating with the alliance
(e.g. Australia, Canada, China, Costa Rica, France, Germany,
Guatemala, Japan, New Zealand, Panama, Singapore, Spain,
Sweden, Switzerland, UK and US).
As a result of multiple negotiations, the Pacific Alliance
executed the Convention on October 14 2017 to maintain a
financial and economic consolidation.
The Convention amends the bilateral agreements for the
avoidance of double taxation (DTAs_ between the states of the
Framework Agreement of the Pacific Alliance in order to
- Shared taxation up to a maximum rate of 10% of the gross
amount of interest amongst the country of residence of the
foreign pension fund and the country from which the interest
is originated; and
- Exclusive taxation on capital gains received by foreign
pension funds from the sale of shares representing equity of
an entity resident in a state party, through a stock exchange
that is part of the Latin American Integrated Market
(Mercado Integrado Latinoamericano or MILA per its
acronym in Spanish), in accordance with the domestic law of
the country of residence of such fund.
Unlike other treaties executed by Mexico, such as the one
with the Netherlands, which imposes limitations regarding
taxation in the other state party on capital gains from the
sale of shares through a recognised stock exchange (i.e. direct
or indirect shareholding of at least 10% in a two-year holding
period prior to its sale or sale through a recognised stock
exchange that prevents the acceptance of more offers), the
treaties with Chile, Colombia and Peru will impose no
limitations whatsoever as to the taxation on such capital
It is worth noting that in the case of Mexico the amended
DTAs will enable taxpayers, which are entitled to the benefits
of the agreements, to apply either the provisions set forth
under such amended DTAs or the provisions included in Title V
(Non-Mexican residents with Mexican source income) of the
Mexican Income Tax Law and any other provisions regarding
income obtained by non-Mexican residents or non-Mexican
residents with Mexican source income.
As it relates to income from a Mexican source of wealth
derived from investments made by foreign pension funds, the
Mexican Income Tax Law provides an interest exemption to
foreign pension funds. However, the reduced 10% rate becomes
relevant as such exemption is not granted in other
jurisdictions and will provide certain tax benefits to
investments made by Mexican pension funds abroad, specifically
now that certificados bursátiles fiduciaries de
proyectos de inversion (CERPIs) are allowed to invest
outside of Mexico.
CERPIs are public securities issued by trust vehicles in
which sociedades de inversion especializada en fondos para
el retiro (SIEFOREs) are also permitted to invest. This is
relevant as trusts issuing CERPIs are now allowed to invest
outside of Mexico and international fund managers seek to raise
Mexican capital for such investments. Thus, from a tax
perspective, the Convention will provide benefits for
investments in private projects in Chile, Colombia and
This article was written by Oscar A. López
Velarde and Daniela A. Iñigo Arroyo of Ritch, Mueller,
Heather y Nicolau, S.C.
Oscar A. López Velarde (firstname.lastname@example.org)
Daniela A. Iñigo Arroyo (email@example.com)
Ritch, Mueller, Heather y Nicolau, S.C.