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Malta & Mexcio Conclude DTT Impacting Multinationals
The Convention will enter into force once the legal formalities of each country take place, as well as the corresponding exchange of notes.
The Convention assigns taxing rights to each country depending on the type of income, for example business profits, interest, royalties and capital gains. Likewise, the Convention provides the mechanism by which double taxation will be avoided and an exchange of information provision.
Taxand Malta and Taxand Mexico investigate the main features of this Convention and its likely impact on businesses worldwide.
The Convention will apply to the income tax and the business flat rate tax in Mexico and to the income tax in Malta. Set forth below are the most relevant topics:
- Permanent establishment ("PE")
- A project PE will exist if it continues for a period of more than six months.
- A service PE of an enterprise carried on by a resident of a Contracting State will exist if the services or activities continue for a period of more than 183 days in any twelve-month period (not in a calendar year)
- The same period of time applies to professional services or other activities of an independent character provided by an individual
- Business profits
- Article 7 of the Convention contains a force-of-attraction provision. Thus, income derived from sales of goods or merchandise of the same (or similar) kind as the goods or merchandise sold through the PE, may be taxable in the State in which the PE is situated.
- Dividends, interest and royalties
- No withholding taxes on dividend income considering that neither Malta or Mexico impose a withholding tax on such income (Malta does not impose a withholding tax on interest and royalty income either)
- In the case of Mexico, withholding tax on interest is limited to 5% on interest paid to banks and 10% in any other case provided the recipient is the beneficial owner
- Withholding tax on royalties is limited to 10% of the gross amount of the royalty, provided the recipient is the beneficial owner
- Capital gains
- Gains derived from the sale of immovable property, or from the sale of shares deriving more than 50% of their value directly or indirectly from immovable property may be taxed in the State where the immovable property is situated
- Gains derived from the sale of shares issued by a company which is a resident of the other Contracting State may be taxed in that State only if the seller, together with any related persons at any time during a twelve-month period, held a participation of at least 25% in the capital of that company.
- The Protocol provides some exemptions from taxation at source if:
- The sale takes place between members of the same group - this may be a good planning opportunity for Maltese holding companies if owned, as to more than 80% by persons resident in a tax treaty country and the treaty (with Mexico) contains an article on exchange of information;
- The gains are derived by a pension fund or an insurance company; or
- The sale is carried out through a recognised stock exchange (with a 10% ownership limit in a twelve-month period).
- Other relevant provisions
- Other income may be taxed in the State in which it arises
- Elimination of double taxation is achieved by means of the credit method
- The Convention contains articles on Mutual Agreement Procedure (MAP), exchange of information and assistance in the collection of taxes (the last two articles are not limited to income tax and flat rate business tax).
Your Taxand contacts for further queries are:
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On the one hand, the force-of-attraction provision in Article 7 (Business Profits) may result in additional taxes in the country where the PE of a resident of a Contracting State is located.
On the other hand, a foreign investor may benefit from a zero withholding rate in the case of dividends and reduced withholding rates on interest and royalty income.
Additionally, the capital gains exemption provided in the Protocol of the Convention may favour structures using a Maltese company to take advantage of such country's participation exemption regime.
Overall, the Convention follows the OECD Model Convention and the recent income tax treaties concluded by Malta and Mexico.
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