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Changes to treaty between the Netherlands and Mexico - action may be necessary this year
The tax treaty between the Netherlands and Mexico will be amended based on the new protocol which was signed on December 11, 2008. The protocol has been approved by Parliament of both countries and the ratification procedure is now taking place. It is therefore expected that the changes to the treaty will come into effect as of January 1, 2010.
The protocol changes a number of important features which are expected to have a significant impact on investments into Mexico and the Netherlands when it enters into force. The interest and royalty withholding tax rates will for example be decreased. In general the Netherlands will remain one of the best holding companies to invest into Mexico. There are however important changes to the capital gains article in the treaty which should be reviewed by companies who now use a Dutch holding structure to invest into Mexico.
The current treaty allows for a capital gains taxation at source at a maximum rate of 20%. Tax planning structures to eliminate the capital gains source taxation on the sale of shares in Mexico are however available through limiting the shareholding percentage of a Dutch parent company to less than 25% of the capital in the Mexican company. The current capital gains article also includes an exemption for gains realized in connection with a reorganization. Investments into Mexico were therefore frequently structured through Dutch holding companies.
Based on the new protocol, the maximum source country rate for capital gains realized upon the sale of shares in a company will be reduced from 20% to 10% irrespective of the shareholding percentage held in the capital of the company. The reorganization exemption will also change and become more strict. These changes will have a significant impact on the sale of shares of Mexican companies after January 1, 2010 (assuming that the ratification procedures are finalized). It will become much more difficult to avoid the source taxation in Mexico on the sale of shares. Please note that the tax rate on the future capital gain will however be lower.
The changes in the treaty will have a significant impact on current Dutch holding structures for investments into Mexico. Companies should act fast and review this year whether changes to their structure are necessary. Possible solutions may be to create a step-up of the (Mexican) tax basis of the shares or creating a double-tier (Dutch) holding structure.
Your Taxand contact for further queries is:
T. +31 207 570 905