Mexican Tax Law: US-Mexican Tax Treaty

US-Mexico Income Tax Treaty

The US-Mexico Tax Treaty reduces the taxation of investment income flowing between the two countries. The treaty includes provisions designed to prevent double taxation and to reduce each country's tax rates on various types of income earned by non-residents. Note that the treaty applies only to income taxes and does not cover sales taxes (e.g. the Mexican value-added tax), social security taxes, etc. The following is a summary of the key provisions of the treaty.

Residence/Permanent Establishment

The US-Mexico Tax Treaty provides extensive definitions of the terms "residence" and "permanent establishment" to clarify each country's rules for the taxation of non-residents (mentioned above).

Royalties

The US-Mexico Tax Treaty has lowered Mexico's withholding tax on royalties to a flat rate of 10%.

Dividends

The treaty has also lowered the US withholding tax (equivalent to the ITL) on dividends paid by US companies to Mexican residents to 5% or 10% depending on the interest in the company.

Related Parties (Transfer Pricing)

In order to avoid tax evasion through transactions between related parties (e.g. a US parent corporation with a Mexican subsidiary), the treaty authorizes the contracting states to tax such enterprises on any profits that would have been obtained if the transaction were conducted between non-related parties in an arm's length transaction.

Asset Tax

Although the US-Mexico Tax Treaty does not apply to the Mexican Asset Tax, it assures that US companies will not lose the benefits of the treaty through application of the asset tax. Mexico will apply the asset tax to US companies only on income from royalties, real estate, or a permanent establishment in Mexico. In those cases, Mexico will grant a tax credit to compensate for any benefits lost from the treaty (see US-Mexico Tax Treaty, Protocol No. 3).

Charitable Organizations

Mexico and the US have agreed not to tax religious, scientific, literary, educational, or other charitable organizations that are residents of the other country if such organizations are exempt from taxation in that other country. In addition, both countries will allow the deduction of charitable contributions made to qualifying organizations of the other country.

Dispute Resolution

Under the US-Mexico Tax Treaty, residents of the US and Mexico are be able to challenge violations of the treaty through each country's legal system or the treaty's "Mutual Agreement Procedure," which provides for consultation between the competent authorities of each country to resolve the dispute. If the competent authorities cannot resolve the dispute, the treaty provides for binding arbitration upon the consent of both the taxpayer and the government authorities.

Other Provisions

The treaty clarifies ambiguities with regard to shipping and air transportation, income from real property, visiting artists and athletes, government employees, students, and income from pensions, annuities, alimony, and child support.

The treaty also contains a special provision which extends the benefits of the treaty to entities owned by residents of the NAFTA parties, even if the particular entity does not satisfy the tax treaty's residency requirements.

Finally, the treaty provides for the exchange of information and cooperation between the tax authorities of Mexico and the US for the purpose of preventing tax evasion. These provisions incorporate and expand upon a prior treaty concluded between the US and Mexico for the exchange of tax information (Convention between the US and the United Mexican States for the Exchange of Information with Respect to Taxes, signed on November 9, 1989, effective January 18, 1990, reprinted in "Highlights and Documents," H&D International Tax, November 15, 1989, at 1635).

Return to top