Double Taxation Agreement between Argentina and Mexico

There are different standards to narrow the scope of tax authorities’ power to tax.

Argentina has, like most countries, adopted the “worldwide income” criterion based on “residence”, instead of following the source criterion.

According to the “worldwide income” criterion, residents are taxed on their worldwide income, whereas non-residents are only taxed in the country where the income is generated (source taxation).

Therefore, on some occasions, there is a “double taxation” which means the same taxable event (income or assets) is being levied in two different countries and taxes must be paid in both.

Double Taxation Agreements resolve this problem by the following means: (i) they impose limits on the taxation in the source country; (ii) they determine in which cases the taxpayer is established permanently; (iii) they incorporate methods to avoid double taxation. 

One of these agreements is the Double Taxation Agreement on Income and on Capital Taxes between Mexico and Argentina (hereinafter, “DTT”), signed on November 4, 2015.

In general terms, the DTT establishes the following regulations:

a. Corporate profits: a maximum withholding is not established but a mechanism for the determination of a “permanent establishment” is provided.  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 shall be considered, if these activities are identical or similar or part of the same project.

b. Dividend payments: 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.

c. Interest payments: they may be levied at source but the tax rate shall not exceed 12% of their gross amount. The DTT provides cases in which they may only be taxed in the country of residence of the beneficial owner.

d. 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, the 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.

e. Capital gains: the result derived from the sale of shares or participations in the equity of an entity could 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.

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

g. Method to avoid double taxation: the DTT 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 in more than 10% could be computed.

Moreover, the DTT incorporates a provision regarding the exchange of tax information between the tax authorities from both countries. Neither the DTT nor the Protocol to the DTT mentions how such exchange must be carried out.

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

The DTT will enter into force after the compliance of the following:

“each country shall notify to the other, through the diplomatic channel, the completion of the process of ratification required by its legislation. The Agreement shall enter into force thirty (30) days after the date of receipt of the latter of these notifications, and its provisions shall have effects as it follows:

a) for taxes withheld at source, over the payments made as from the 1st of January of the following calendar year in which the Agreement enters into force;

b) for other taxes on income and on capital, for the fiscal years that begin as from the 1st of January of the following calendar year in which the Agreement enters into force”.

It is our understanding that it would be unlikely that the DTT would be ratified by both countries this year. Therefore, if the notifications take place in 2016, the DTT will have effects as from the January 1, 2017.

Meanwhile, Argentine legislation and the agreement signed by both countries on November 26, 1997 related to income tax over operations related to ships and aircraft in international transport is applicable. This agreement will be definitively ended as from the time the DTT is in force.