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OECD's Multilateral Instrument to amend Mexico’s double tax agreements


On June 7 2017, 68 jurisdictions – including Mexico – signed an unprecedented Multilateral Convention to implement tax treaty related measures to prevent base erosion and profit shifting (MLI), which may affect current double tax agreements (DTAs).


It is the result of a five-year effort by the OECD, aimed at implementing anti-avoidance provisions through existing DTAs to prevent multinationals from artificially shifting profits into low or no tax jurisdictions.

The MLI is designed to only modify DTAs considered as “covered tax agreements” (CTAs), without requiring separate bilateral negotiations between each contracting jurisdictions. In general, a CTA encompasses DTAs in force between two parties to the MLI that have made reciprocal notifications expressing their intention to either adopt or reserve their position with regards to the applicability of the MLI provisions.

Mexico has effectively notified 61 jurisdictions about its adoptions and reservations, including the Netherlands, Luxemburg, Spain and the UK, most of which have corresponded with reciprocal notifications intended to adopt/reserve certain provisions under their corresponding CTAs. Notably, the US has not signed the MLI as yet.

Although the precise date is yet unknown, modifications to Mexican DTAs are not expected to become effective until 2018, following the MLI’s approval process before the Mexican Senate and its international ratification.  

Hybrid mismatches

Provisions included in Articles 3 through to 5 of the MLI are intended to neutralise the effects of hybrid mismatch arrangements, which may take advantage of the different tax treatment applicable in different jurisdictions to achieve double-non taxation or long-term tax deferrals.

Mexico did not make a reservation with regards to the application of Article 3 (transparent entities) of the MLI, which states that income derived by arrangements treated as wholly or partially transparent under the tax laws of a contracting state shall be considered as income of a resident thereof when the income is treated for tax purposes as income of a resident of such contracting state.

We believe this provision will bring further clarity with regards to the application of treaty benefits in cases where Mexican tax authorities formerly challenged the application of a DTA regarding arrangements that involved the use of entities considered as fiscally transparent for Mexican tax purposes. However, it may also impact some structures that were put in place considering the existing regulations issued by the Mexican tax authorities related to transparent vehicles, mainly when claiming benefits under the Dutch treaty.

Treaty abuse

As a minimum standard provision (MSP), Article 6 (purpose of a covered tax agreement) of the MLI shall be covered by all of Mexico´s CTAs and implies the inclusion of a preamble describing the intent of the contracting states to eliminate double taxation without creating opportunities for non-taxation or reduced taxation. Mexico additionally opted to include a preamble stating that it is the contracting states’ desire to further develop their economic relationship and to enhance their cooperation in tax matters.

In relation to Article 7 (prevention of treaty abuse), which is also a MSP, Mexico opted to adopt by default the principal purpose test (PPT) provision, supplemented with a simplified limitation of benefits (LOB) provision for cases in which counterparties reciprocated (only a few).

In general, the PPT provision establishes that a benefit under the CTA shall not be granted if it is reasonable to conclude that obtaining that benefit was one of the principal purposes of any arrangement or transaction while the simplified LOB provision establishes precise substance requirements that shall be met in order to apply a benefit under a CTA.

Avoidance of PE status

Article 12 of the MLI is intended to counter the artificial avoidance of PE status through commissionaire arrangements and similar strategies by tightening the thresholds commonly used to determine the independent status of an agent. Along with jurisdictions like Chile, Spain and the Netherlands, Mexico has opted to apply such provision in its CTAs.

With regards to Article 13 (artificial avoidance of PE status through specific activity exemptions), Mexico has opted to apply a broad threshold of activities that will not be deemed to construe a PE, such that activities previously covered in CTAs remain as non-PE activities regardless of them being considered as having a preparatory or auxiliary nature. However, an anti-fragmentation rule will be introduced to cover “overall” activities carried through fixed places of business as a threshold to determine whether, in conjunction, they have an auxiliary or preparatory nature. Jurisdictions that have also opted to apply this provision are the Netherlands, Spain, Italy and Colombia.

Lastly, pursuant to Article 14 (splitting-up contracts), Mexico reserved the right for the entirety of such provision not to apply to its CTAs.

Other considerations

It is rather unfortunate that Mexico did not opt for the application of the mandatory arbitration provisions included in the MLI. Over the past years, mutual procedure agreements in Mexico have regularly been left unsolved, a situation that perhaps could have been mitigated through the implementation of such provisions.

There are other relevant provisions regarding the tax treatment of, among others, dividends and capital gains, which companies should carefully review to determine the impact they will have on their current investment structures. 

This article was written by Oscar A. López Velarde and Juan José Paullada Eguirao of Ritch, Mueller, Heather y Nicolau, S.C.

Oscar A. López Velarde (

Juan José Paullada Eguirao (

Ritch, Mueller, Heather y Nicolau, S.C.

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