On June 23, 2023, the Federal Executive published in the Official Gazette of the Federation the “Decree approving the Protocol Amending the Agreement dated July 9, 2008, between the United Mexican States and the Federal Republic of Germany for the Avoidance of Double Taxation and Tax Evasion concerning Taxes on Income and Capital, executed at Mexico City on the eighth day of October, two thousand twenty-one.”

In line with the provisions of the Multilateral Convention to implement measures related to tax treaties aimed at preventing base erosion and profit shifting (MLI), both countries considered it appropriate to incorporate such actions through the protocol.

Please find our general comments on the relevant modifications; however, the Protocol should be reviewed thoroughly for a thorough analysis.

Comments

1. Preamble – The text of the Preamble is modified to provide that one of the intentions of the Agreement is to eliminate double taxation concerning taxes included therein without creating opportunities for non-taxation or for reduced taxation through tax evasion or avoidance, including the practice of seeking the most favorable treaty to obtain the benefits provided in this Agreement for an indirect use of residents of third States.
2. Dividends (Article 10) – Article 10, paragraph 2 (a), of the Agreement is amended to provide that the tax which may not exceed 5% of the amount of such income in the State in which the company paying the dividends is resident, shall be applicable provided that the beneficial owner of the dividends is a resident of the other Contracting State and a legal person (excluding partnerships) that directly owns at least 10% of the capital of the company paying the dividends for a period of 365 days including the day of payment of the dividends. For calculating the period indicated in the preceding paragraph, changes in ownership that directly result from a corporate reorganization, such as a merger or spin-off of the company that owns the shares or pays dividends, shall not be considered.
3. Capital gains (Article 13) – Article 13, paragraph 2, of the Agreement is amended to provide that gains earned by a resident of a Contracting State on the alienation of shares or other comparable participation rights, such as interests in a partnership or trust, may be taxed in the other Contracting State if, at any time within 365 days before the alienation, more than 50% of the value of such shares or comparable participation rights derives, directly or indirectly, from immovable property situated in that other State.
4. Application of the Agreement in Special Cases (Article 28) – The text of Article 28 of the Agreement is amended to provide several assumptions to incorporate specific cases in which competent authorities may consult each other to avoid double taxation or abuse of the Agreement. In each case, it is recommended to review the text of the Protocol amending Article 28.

In addition, the provision establishes that a benefit granted by the Agreement shall not be applicable concerning an element of income or capital when it is reasonable to conclude that obtaining that benefit was one of the principal purposes of any arrangement or transaction that resulted directly or indirectly in that benefit.

Entering in force

On August 4, 2023, the Federal Executive published in the Official Gazette of the Federation the “Decree enacting the Protocol Amending the Agreement dated July 9, 2008, between the United Mexican States and the Federal Republic of Germany for the Avoidance of Double Taxation and Tax Evasion concerning Taxes on Income and Capital, executed at Mexico City on the eighth day of October, two thousand twenty-one.”

The Official Gazette publication specifies that the notifications of the completion of the procedures required by the legislation of each of the Contracting States for the entry into force of the Protocol above were received in Berlin on October 31, 2022, and July 7, 2023. Therefore, the Protocol entered into force on August 6, 2023.

In addition, the Protocol shall apply as follows:

1. In the case of withholding taxes at source, concerning amounts paid on or after the first day of January of the calendar year immediately following the date of entry into force of the Protocol.
2. In the case of other taxes, concerning taxes levied for periods beginning on or after the first day of January of the calendar year immediately following the year the Protocol enters into force. Based on the preceding, the Protocol amending the Agreement between Mexico and Germany to Avoid Double Taxation and Prevent Tax Evasion related to Income Tax Matters will be applicable as of January 1, 2024.

Author:

Oscar Villagomez
International Taxes