- Protocol amending the Double Taxation Avoidance Agreement between Germany and Mexico (DTAA).
In the evening section of the Official Gazette of the Federation (DOF) of August 4, 2023 DOF - Diario Oficial de la Federación, the Protocol to the DTA entered into by Germany-MX was published, in order to amend said agreement and implement the measures of the Multilateral Convention to prevent tax base erosion and profit shifting derived from regulatory loopholes or omissions used by multinational companies to obtain tax benefits.
Source: https://www.dof.gob.mx/nota_detalle.php?codigo=5697685&fecha=04/08/2023#gsc.tab=0
Among its most relevant aspects, this Protocol modifies the following:
- It is established that the Convention has the objective of eliminating double taxation without creating opportunities for non-taxation or reduced taxation through tax evasion or avoidance (including the practice of treaty shopping that seeks to obtain the benefits provided for in this Agreement for the indirect benefit of residents of third States).
- Permanent establishment (PE): The activities exempted from constituting a PE will be conditioned to be auxiliary or preparatory activities, or activities that are not essential and significant.
- Dividends: A holding period of 365 days is established as a requirement to apply the reduced withholding rate of 5% of the gross amount of dividends, the beneficial owner of which is a company that directly owns at least 10% of the capital stock of the company paying the dividends. It is established that in order to calculate such period or term, changes in ownership due to corporate reorganization (merger or spin-off) of the company paying the dividends will not be taken into account.
- Capital gains: Gains from the disposition of shares or other comparable participation rights, such as partnership interests or trusts, may be subject to taxation in the source State if, at any time within 365 days preceding the disposition, those shares or comparable participation rights derive more than 50% of their value, directly or indirectly, from real property, located in the source State.
- Special Cases: The Convention is established to be applied in specific cases so that it is not interpreted to prevent a Contracting State from applying the provisions of its domestic legislation on the prevention of tax evasion or avoidance, including the provisions on thin capitalization and preferential tax regimes.
- Technical assistance is not a business benefit for purposes of the DTA between the Netherlands and Mexico.
By means of jurisprudence thesis No. IX-J-SS-70, of the Federal Court of Administrative Federal Justice (TFJA), which is visible in the TFJA Magazine of June 2023(Biblioteca CESMDFA | | TFJA), it was resolved that the income obtained by a resident of the Netherlands for technical assistance will not be considered business profits.
In this respect, the thesis indicates that, if the concept of technical assistance is not included in the Convention or within the income regulated separately in the same, it does not mean that such income is business profits and, therefore, in the terms of the Convention itself, the meaning attributed by domestic legislation must be considered and observed.
In this sense, the domestic legislation, on the one hand, defines technical assistance as an independent personal service and, on the other hand, establishes that it is not a business activity; Therefore, according to the case law, for purposes of the Convention, the income derived from such assistance should not be considered business profits, but in addition, the income obtained by a tax resident of the Netherlands, due to technical assistance services, should be directly taxed in Mexico under the terms of article 167 of the Income Tax Law (LISR), that is, as royalties, subject to the withholding of 25%, tacitly establishing that such income will not even be subject to the Convention.
However, we find the tax treatment determined and, in general, the whole thesis debatable, since, among other aspects, in our opinion there is a confusion between the activity that triggers the income, the nature of the income obtained from such activity and the treatment applicable to it, in the sense that if the case law considers that income from technical assistance is not business profits and should be taxed as royalties, the Convention would be applicable and not only the domestic legislation, which, contradictorily to what it intends, is not interpreted accurately at all.