The double taxation agreement between Malta and Mexico came into effect on 1 January 2015 and provides interesting conditions for the optimisation of investments in this market.
The treaty follows the same lines as the majority of such agreements entered into nowadays, incorporating the basic elements of the OECD’s Model Convention on Income and on Capital. However, like other treaties entered into with Mexico and as established in the United Nations Model Convention, it includes some provisions that grant the source State more rights to tax income that is generated there (as is the case with dividends, interest, royalties and capital gains), as well as a broad concept of permanent establishment.
The residence criterion established by the Convention is that of domicile, residence, place of management or any other criterion of a similar nature applicable in light of the legislation of the relevant contracting State.
The rule used to settle cases involving companies is the alternative provision set forth in paragraph 24.1. of the comments on Article 4 of the OECD’s Model Convention. This establishes that any disputes in determining residence are to be resolved by an amicable procedure to reach a mutual agreement, taking into account the place of effective management, the place of incorporation or any other factors deemed to be relevant.
In addition to the criterion used in Article 4 of the Model Convention, it is established that an association of individuals can only be considered resident for the purposes of this Convention if the income obtained is subject to tax as income of a resident of the State in question, whether as the association’s income or as the income of the individual members.
The convention entered into between Malta and Mexico includes a broad definition of permanent establishment, which encompasses service provision (including consultancy) by a company through its employees or other type of personnel contracted by the foreign company, whenever the duration of the activities in the other country exceeds 183 days in each 12-month period.
Under the convention, profits earned from the exploitation of ships or aircraft in international traffic will only be taxed in the State of residence of the company that earned the profits in question.
The definition of the concept of “international transport” is similar to that established in other agreements signed by Mexico. Under the wording of the Convention, the profits earned by a resident of a contracting State that are obtained from the exploitation of ships or aircraft in international traffic can only be subject to taxation in that State. The concept of profits includes earnings from the exploitation of ships or aircraft (on a full-time or per journey basis) as well as bareboat ship or aircraft charters when they are being operated in international traffic by the charterer and the profits are obtained by a resident of one of the contracting States, and whose business is the exploitation of ships or aircraft in international traffic.
Under this treaty, the profits derived from the use or hire of containers in international traffic (including tugs, barges and equipment related to the transport of containers) will also be treated as “international transport” whenever said use or charter is an inherent part of the exploitation of ships or aircraft in international traffic.
Normally, when Mexican companies distribute dividends to their non-resident shareholders, a withholding tax of 10% is applicable.
In Malta, dividends are not generally subject to withholding tax when the shareholders are not resident in Malta.
The Convention under analysis provides that dividends paid by a company that is resident in a contracting State to a resident of another contracting State will be taxed in the latter. The concept of dividends includes income from shares, jouissance shares or jouissance rights, mining shares, founders’ shares or other rights, with the exception of credits that allow participation in profits, as well as income subject to the same tax regime as income from shares under the laws of the State in which the company distributing the dividends is resident.
Taking this rule into account, and bearing in mind its very comprehensive and flexible Participation Exemption regime, Malta may be an excellent option in which to set up a holding that has investments in Mexico.
Under this Convention, interest earned in a Contracting State and paid to a resident of the other Contracting State may be taxed in that other State. However, this interest may also be taxed in the Contracting State where it was earned and in accordance with that State’s legislation. However, if the effective beneficiary of the interest is a resident of the other Contracting State, the tax thus applicable may not exceed:
– 5% of the gross sum of the interest paid by a banking institution;
– 10% of the gross sum of the interest in all other cases.
In Mexico, the payment of interest to residents in another country is usually subject to the general withholding tax of 30%. In some cases, special taxes apply, such as 4.9% on interest paid to (or by) registered financial institutions, or 40% on payments made to tax havens, with a few exceptions.
In Malta, no withholding tax is payable on interest paid to residents in another country.
Royalties and Technical Assistance:
In Mexico, royalties paid to residents in another country are generally subject to a withholding tax of 25%. Furthermore, the use or fruition of brands and patents is subject to a withholding tax of 30%, while payment to some tax havens can involve a withholding tax of 40%. Under this treaty, a reduced tax of 10% applies to the payment of royalties to residents in Malta.
Technical assistance is not included in the definition of royalties described in this convention so, in principle, payments deriving from this type of service will be exempt in the source State, if they are considered business income, except in cases where there is a permanent establishment in that State.
Many double taxation agreements give the source State the right to tax capital gains obtained from the sale of shares in resident companies.
However, the double taxation agreement between Mexico and Malta provides for the right to tax to be shared with the source State in cases where the stake is at least 25% and has been held for at least 12 months, as well as when more than 50% of the gains obtained from the disposal of the shares derive from property assets located in the source State.
Gains obtained from the disposal of moveable goods which belong to the assets of a permanent establishment that a company from one Contracting State has in the other Contracting State, or moveable goods assigned to a fixed facility that a resident in a Contracting State has at its disposal in the other Contracting State for the purpose of exercising an independent profession, including gains derived from the disposal of said permanent establishment (either in isolation or as part of the company as a whole) or said fixed facility, may be taxed in that other State.
It is also established that gains deriving from the disposal of ships or aircraft used in international traffic, or of moveable goods assigned to the exploitation of said ships or aircraft, can only be taxed in the Contracting State in which the company’s effective place of management is located.
Limitation of benefits and anti-abuse rules
As a rule, Mexico includes anti-abuse provisions and limits on the granting of benefits in the treaties it enters into. This is done to protect its interests and safeguard against improper use of the conventions.
Thus, the treaty with Malta establishes that in order to qualify for benefits the income must be “subject to tax”. In cases where the income benefits from partial or total exemption, based on some special regime or administrative practices on the part of either of the States, the benefits provided for in the convention will be denied. To this end, a special regime is deemed to exist when the two Contracting States have so determined by mutual agreement.
The convention entered into between Mexico and Malta also includes another provision to guard against base erosion. Thus, if such income is paid under the scope of a transaction or series of transactions structured in such a way that the recipient of the income who is entitled to the benefits provided by the treaty receives such dividends and pays at least 50% of them, directly or indirectly, to another person who is not resident in the Contracting State in question and who, consequently, would not normally be entitled to the benefits or to benefits equivalent to those provided for in the convention, the articles relating to interest and royalties will not apply.
With modern legislation that protects the interests of investors, and an Administration and regulatory bodies that are not only rigorous and competent but also highly sensitive to business issues, Malta has become the ideal jurisdiction in which to develop businesses in international markets, including countries such as Mexico.
Download our Brochure Why Malta and learn more about the advantages of investing in Mexico through this jurisdiction.