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Belgium and Mexico renegotiate income tax treaty
On 26 August 2013 the Belgian and Mexican governments signed a protocol which modifies the convention between the two countries for the ‘Avoidance of Double Taxation and the Prevention of Fiscal Evasion’ with respect to taxes on income. Taxand Belgium and Taxand Mexico take a look at the main features of the renegotiated convention.
The renegotiated convention has updated relevant provisions including those related to permanent establishments, dividends, interest and capital gains.
In the case of dual-resident companies, the tax authorities of each Contracting State will have to determine the State of residence of such companies through a mutual agreement procedure which should be concluded within 4 years following a formal request.
Permanent establishment (PE)
- A project PE will exist if it continues for a period of more than 6 months
- A service PE of an enterprise carried out by a resident of a Contracting State through employees or other personnel will exist if the services or activities continue for a period of more than 183 days in any 12 month period starting or ending in a fiscal year
- The same period of time applies to professional services or other activities of an independent character provided by an individual
- Dividend income can be taxed in the State of Source but the income tax due may not exceed 10% of the gross amount of the dividends (same rate as in Mexican domestic law). However, such dividends will not be subject to withholding if the beneficial owner is:
- An entity which is resident in the other Contracting State and maintains for an uninterrupted period of at least 12 months, shares that represent directly at least 10% of the capital of the payer
- A pension fund resident of the other Contracting State
- Withholding tax on interest is limited to 5% on interest paid to banks and insurers, as well as securities which are traded substantially and regularly in a recognised stock exchange
- A 10% withholding will apply in any other case provided the recipient is the beneficial owner
- Gains derived from the sale of shares issued by a company which is a resident of a Contracting State may be taxed in that State but the tax due may not exceed 10% of the taxable gain
- However, gains from the sale of shares deriving more than 50% of their value from real estate property situated in a Contracting State may be taxed in that Contracting State, without any limitation
- The protocol provides some exemptions from taxation at source if:
- The sale takes place between members of the same group and provided certain conditions are fulfilled
- The gain is obtained by an insurance company, a bank or a pension fund
- The sale is carried out through a recognised stock exchange (with a 10% ownership limit within a 12month period)
Other relevant provisions
The renegotiated convention includes certain anti-abuse measures to avoid double (non-taxation). For Belgian corporate investors it may be interesting to note that the protocol provides that dividends received from Mexican companies can benefit not only from the Belgian dividends received deduction (ie a 95% tax exemption) when the conditions provided in the Belgian Income Tax Code are met, but also when the Taxation Condition under Belgian law would not be met - but the distributing Mexican company is effectively involved in the active performance of a business in Mexico and the dividends stem from this business.
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Multinationals affected by the Belgium-Mexico income tax treaty should investigate the convention further in order to keep abreast of all developments and to ascertain how this update could impact their operations.
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