Argentina: Argentina and Mexico sign double tax treaty
Argentina and Mexico signed a new double tax treaty (DTT) on November 4 in Mexico City. The subsequent exchange of ratification instruments is expected to occur soon and will make the DTT effective as from January 1 following such ratification process.
The tax treatment of Argentine transactions under the newly signed tax treaty with regard to (i) interest, (ii) royalties, (iii) dividends and (iv) capital gains would be as follows:
Domestic Argentinean tax law generally subjects interest payments on related-party loans to a foreign beneficial owner to a 35% withholding tax rate. However, under the tax treaty, interest payments on such loans paid to Mexican beneficiaries should be subject to a maximum withholding tax rate of 12%.
Although the treaty contains non-discrimination provisions, these do not override domestic thin capitalisation rules that establish a 2:1 debt-to-equity ratio.
Under the tax treaty, royalties and technical assistance payments made to a Mexican beneficial owner should be subject to Argentine income tax withholding at a 10% or 15% rate, as the case may be. Note that under domestic Argentine tax law royalties may be subject to withholding tax rates as high as 31.5%.
The DTT generally follows the OECD model. However, there are some deviations from that model, such as listing technical assistance services in article 12 on royalties, considering those renderings of independent services consisting of the provision of non-registrable knowledge through any mean as a royalty payment.
Under Argentine domestic law, dividend payments are subject to 35% withholding tax to the extent the payment exceeds the amount of accumulated tax earnings. On top of this, a flat 10% withholding on the gross amount of the dividend applies. The treaty does not provide any relief in this regard.
Under this treaty taxation on capital gains derived from the sale of shares would be limited to a 10% tax on the gain to the extent that the seller held more than a 25% stake. If shareholding is lower than that, taxation would be limited to a 15% tax. This may imply a relief from an Argentine perspective since under domestic law foreign beneficiaries are subject to a 13.5% effective tax on gross proceeds or, alternatively, 15% tax on the actual capital gain duly supported.
Please note that the above potential relief will not apply if more than 50% of the value of the relevant shares is derived from real estate property.
Limitation of benefits and other clauses
Some other particular features the treaty provides are as follows:
As Argentina recently agreed with Chile for the very first time, the treaty with Mexico includes a limitation of benefits (LOB) clause. Although these LOBs may be relaxed and some relief may be provided by the relevant contracting state under certain specific facts and circumstances, they are clearly aligned with global trends (for example, BEPS) mainly aimed at avoiding treaty-abuse practices and instances of double non-taxation.
It is stated that a permanent establishment is deemed to exist in the other contracting state in the case of developing hydrocarbon activities consisting or related to, among others, extraction, production, refinery, processing, storage of hydrocarbons for a period longer than a month in any period of 12 months.
Treaty network expansion
The new tax treaty will enter into force after instruments of ratification have been exchanged, which is expected to occur soon.
This development gives hope that the Argentine authorities are willing to continue expanding the country's tax treaty network, which had remained unchanged since the 2001 treaty with Norway and even narrowed in 2012 after the unilateral repeal of certain agreements. The Mexico DTT adds to the network's expansion after Argentina concluded new treaties with Spain, Switzerland (both already in force) and Chile during the last three years.
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