Mexico and Kuwait enter into tax treaty

David Cuéllar		Blas Montemayor

The treaty will be valid 30 days after the last exchange of the ratification instruments and will in go into force as of January 1 of the subsequent year.

As with other recent tax treaties signed by Mexico, the Mexican flat tax was added to the article relating to taxes covered.

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

The treaty establishes that the dividends would only be taxable in the country where the shareholder is resident. Note that there is no existing withholding tax obligation under Mexican domestic law for dividends paid.

Withholding tax on interest payments is limited to:

• 4.9% on the gross amount of the interest paid to banks; and

• 10% in all other cases.

There are certain excemptions for loans with government entities, the central bank, government financial entities that promote exports, and other loans. The treaty broadly defines interest to include all items treated as interest in the source country.

The treaty definition of royalties is wide and encompasses (among other things) payments for the use of equipment, as well as gains on disposal of equipment, which are conditional on 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 should be taxable in the source country when they arise from:

• Share disposals of an entity which goods consist (directly or indirectly) of immovable property located in the other treaty country;

• Share disposals (direct sales) of any entity located in the source country regardless the shareholding percentage (there is no portfolio investment exemption or reduced tax rate).

Several requirements must be satisfied before applying certain benefits of the tax treaty, including the limitation of benefits clause of the treaty. Specific treatment is given to students, professors and researchers. The treaty contains non-discrimination mutual agreement procedure and exchange of information provisions.

David Cuéllar (david.cuellar@mx.pwc.com) & Blas Montemayor (blas.montemayor@us.pwc.com), Mexico City and New York

PwC

Tel: +52 55 5263 5816

Fax: +52 55 5263 6010

Website: www.pwc.com