Convention between Argentina and Mexico: Avoidance of Double Taxation

As informed in Marval News Number 156, on November 4, 2015, Argentina and Mexico signed the Convention but its entry into force would take place 30 days from the last notification of the fulfillment of the local procedure to approve an international convention by a contracting state. Argentina received such notification on July 23, 2017. The effects of the Convention will begin:

1. With respect to taxes withheld at source, for payments made after January 1, 2018;
2. With respect to other taxes on income and capital, for fiscal periods beginning on or after January 1, 2018.

The entry into force of the Convention entails that a previous convention between Argentina and Mexico related to income tax over operations of ships and aircraft in international transport has ended.

General terms of the Convention

Corporate profits

The Convention provides a mechanism to determine whether an enterprise of a contracting state has a “permanent establishment” in the other contracting state.  Concerning the hydrocarbons industry, if a resident of one country is developing activities related to hydrocarbons situated in the other country, it will be deemed a “permanent establishment” in the latter country if the following requirement is met: the activities are developed for a period or periods aggregating more than 30 days within any 12-month period. In order to calculate this term, activities made by associated companies must be considered, if these activities are identical or similar or part of the same project.

Dividends

The tax rates for withholding at source have the following limits: (i) 10% of the gross amount of the dividends if the beneficial owner is an entity that holds at least 25% of the equity of the company that pays the dividends or (ii) 15% of the gross amount of the dividends for the remaining cases.

Interests

They may be levied at source but the tax rate must not exceed 12% of their gross amount. The Convention provides cases in which they may only be taxed in the country of residence of the beneficial owner.

Royalties

They are subject to tax in the country in which they arise with the following limits: (i) 10% of the gross amount for copyright (including news according to the Protocol), for the use of equipment, patents, provision of technical assistance (according to the Protocol, registration of contracts is necessary –in Argentina, registration must be carried out at the “INPI”- for the reduction of the tax rate to be applicable); or (ii) 15% for all the remaining cases.

Capital gains

The result derived from the sale of shares or participations in the equity of an entity may be taxed by the country of residency of the entity whose shares are being transferred up to the following limitations: (i) 10% of the gain if the seller holds directly at least 25% of the equity of the company; or (ii) 15% of the gain for other miscellaneous cases. Moreover, if the value of the shares that are being transferred has proceeds of more than 50%, directly or indirectly, that derive from real estate, the sale could be taxable in the country where the real estate is situated, without any limitation.

Assets

The assets from a resident of one country located in the other country may be taxable in both countries, as long as they are not related to ships, boats or aircraft.

Method to avoid double taxation

The Convention provides tax credit as the method to avoid double taxation. In addition, in the case of Mexico, the tax paid on dividends from an Argentine entity which is owned by a Mexican entity at more than 10% could be computed.

Exchange of information

The Convention incorporates a provision regarding the exchange of tax information between the tax authorities from both countries. Neither the Convention nor the protocol mention how such exchange must be carried out.

Limitation on benefits

The Convention also includes an anti-avoidance clause denominated “limitation of benefits” to avoid transactions with the single and principal purpose of enjoying the tax benefits granted by the Convention.