Mexico: Limitation of benefits and anti-abuse rules in Mexico’s tax agreements
In recent years Mexico has signed new agreements for the avoidance of double taxation and the prevention of fiscal evasion (tax treaties) which came into force during 2012 (Hungary), 2013 (Bahrain, Lithuania and Ukraine), 2014 (Colombia, Estonia, Hong Kong, Kuwait, Latvia and Qatar) and 2015 (United Arab Emirates, Malta and Peru). It is important to highlight that in these agreements Mexico negotiated the inclusion of anti-abuse rules focused on the limitation of benefits (LoB) provided that certain conditions are met.
Note that the tax treaties' provisions do not limit domestic rules regarding thin capitalisation (Ukraine) and controlled foreign corporations (Hungary, Bahrain, Estonia, Kuwait, Qatar, UAE, Malta and Peru) and in the specific case of Hong Kong does not limit domestic back-to-back rules.
It is worth noting that the benefits established in the tax treaties would not be granted if it is determined that the taxpayer carries activities or acquired tax residence in the other state with the sole purpose of obtaining the benefits from such agreement. In the specific case of Peru this provision is limited to tax treaty benefits related to dividends, interest and royalties (the latter in the case of Hungary, Bahrain, Lithuania, Kuwait, Qatar and Ukraine).
In some of these new tax treaties, the LoB provision establishes that the benefits would be granted if:
The resident is an entity whose shares are traded in a recognised stock market or the resident is property of an entity whose shares are traded in a recognised stock market;
More than 50% of the resident stockholding is the property of an entity or individual with the right to apply the agreement benefits;
Not more than 50% of the gross revenues are used for paying interest or royalties to an entity that is not entitled to the benefits of the agreement; or
More than 50% of the resident stockholding is the property of a state, state agencies or local authorities.
In the case of Hong Kong, when paying dividends, interest and royalties (only interest and royalties for Malta) benefits would not be granted on transactions in which 50% or more of the payments received are transferred to another entity which is not resident in any of the contracting states and which would not receive equivalent or higher treaty benefits for this revenue if the payment was received directly by virtue of an agreement signed by the other state and its residence state.
For Lithuania the benefits of the agreement are not applicable to entities or individuals totally or partially tax exempt due to a special tax regime according to the domestic laws or recurrent practices of any state.
This puts Mexico in the line for meeting with the OECD BEPS action 6 which intends to develop model treaty provisions and recommendations regarding the design of domestic rules to prevent the granting of treaty benefits in inappropriate circumstances.
David Cuellar (email@example.com) and Nidia Sanchez (firstname.lastname@example.org)
Tel: +52 (55) 5263 6693