M exico deposits its instrument of ratification of the OECD multilateral instrument (“MLI”)

As reported in prior communications, Mexico has completed its internal procedures to adopt the OECD´s MLI. The MLI was approved by the Mexican Senate on October 12, 2022 and published in the Official Gazette on November 22, 2022. On March 15, 2023, Mexico deposited its ratification instrument with the OECD. As such, the MLI will […]

As reported in prior communications, Mexico has completed its internal procedures to adopt the OECD´s MLI. The MLI was approved by the Mexican Senate on October 12, 2022 and published in the Official Gazette on November 22, 2022.

On March 15, 2023, Mexico deposited its ratification instrument with the OECD. As such, the MLI will enter into force with respect to Mexico on July 1, 2023. However, it should be noted that generally MLI provisions will only be effective as of January 1, 2024; thus, any applicable changes will only apply with respect to transactions taking place on or after January, 2024.

It is important to mention that Mexico selected all of its treaty network as Covered Tax Agreements; therefore, unless a treaty partner did not select its treaty with Mexico as a Covered Tax Agreement, all tax treaties that Mexico has in force will be modified to a certain extent. Notably, it should be mentioned that the US and the German tax treaties will not be treated as a Covered Tax Agreement.

Once the MLI is in force, any non-Mexican residents relying on treaty benefits to exempt or reduce withholding taxes on Mexican source income, or to mitigate permanent establishment (“PE”) exposure, should consider prospective changes next year.

Specifically, some of the most relevant items could be summarized as follows:

a) Adoption of a principal purpose test (“PPT”). Under the PPT, treaty benefits may be denied if: (i) it is reasonable to conclude that obtaining treaty benefits was one of the principal purposes of a transaction, and (ii) it cannot be established that granting benefits would be in accordance with the object and purpose of the treaty. At a high-level, the PPT will impose an additional substance requirement for treaty entitlement.

b) Inclusion of a preamble stating the purpose of the convention is the elimination of double taxation without creating opportunities for non-taxation or reduced taxation through evasion or avoidance. The preamble may be considered when interpreting the object and purpose of a treaty and, thus, could be used to deny treaty benefits in abusive situations.

c) Adoption of a simplified limitation on benefits provision (“LOB”) which will require complying with a series of tests in order to claim treaty benefits. While most of Mexico’s European treaty partners did not elect to adopt a simplified LOB, a handful of treaties will adopt such clause.

d) Mexico adopted certain anti-abuse measures to prevent avoidance of PE status. Specifically, certain Covered Tax Agreements: will (i) include language to expand the agency PE construct to cover situations where a person habitually concludes contracts or plays the principal role leading to the conclusions of contracts, and (ii) include language to ensure that certain exclusion under treaties only apply to activities which are preparatory or auxiliary in character. At a high-level, these changes will expand the PE concept significantly and will require further analysis for taxpayers who rely on a treaty to mitigate PE exposure.

Finally, it should be noted that despite of the elections made by Mexico, the application of Covered Tax Agreements will only be modified to the extent Mexico and its treaty partners are matching pairs. Therefore, this analysis should be done considering specific facts and circumstances of each structure.

For more information, please feel free to contact:

Alejandro Santoyo
Tel: +52 (55) 4748-0617
Email: alejandro.santoyo@creel.mx

Omar Zúñiga
Tel: +52 (55) 4748-0665
Email: omar.zuniga@creel.mx

Jorge Correa
Tel: +52 (55) 4748-0625
Email: jorge.correa@creel.mx

Luis Vázquez
Tel: +52 (55) 4748-0677
Email: luis.vazquez@creel.mx

Eduardo Brandt
Tel: +52 (55) 4748-0623
Email: eduardo.brandt@creel.mx