New Withholding Tax on Dividends in Mexico
Up to December 31, 2013, Mexico did not tax dividend payments. However, the Mexican Income Tax Law (“MITL”) that entered into force on January 1, 2014 established a new 10 percent withholding tax on the gross amount of dividend payments made by legal entities resident in Mexico for tax purposes to its shareholders.
The 10 percent withholding tax will be applicable to the following shareholders of the relevant entity paying dividends: individuals who are tax residents in Mexico and foreign shareholders. No withholding tax is triggered when a legal entity resident for tax purposes in Mexico pays dividends to other Mexican resident legal entities.
Most of the 57 tax treaties executed by Mexico include either a reduced withholding tax rate on dividend payments for some qualified shareholders (e.g., 5 percent for the tax treaties with the United States, Germany, Belgium, Spain, Canada, France, Luxembourg, South Africa, Panama, Uruguay, Japan, or China, among others) or a source taxation exemption (e.g., the tax treaties with the U.S., Singapore, Australia, Colombia, Hong Kong, Japan, Kuwait, Qatar, Sweden, Switzerland, or the United Kingdom, among others).
As established in the former income tax law, the MITL provides that all Mexican entities are obligated to keep and calculate the after-tax profit account (“CUFIN,” for its Spanish acronym), in order to identify all profits that were already subject to corporate taxes in Mexico. In this respect, the transitory provisions of the MITL establish that the 10 percent withholding tax on dividends will be applicable only to those dividends paid from the CUFIN generated after 2013.
Finally, in order to avoid distortions when paying dividends between Mexican legal entities, the administrative regulations issued by the tax authorities clarified that dividend payments made by a Mexican tax resident legal entity to another Mexican legal entity from the 2013 CUFIN will be considered as an increase of the 2013 CUFIN of the entity receiving the dividends.
Claiming Tax Treaty Benefits in Mexico as of January 1
The new Mexican Income Tax Law (“MITL”) that entered into force on January 1 modified the so-called procedural provisions concerning the application by multinational companies of benefits set forth under tax treaties negotiated and executed by Mexico.
Accordingly, foreign residents claiming tax treaty benefits (either for a tax exemption or for a reduced withholding tax rate) should comply with the following requirements; otherwise, withholding agents will not apply these benefits and could withhold taxes up to a 35 percent general tax rate for Mexican-source taxation for foreign residents:
- Provide a certificate of tax residency issued by foreign tax authorities or a certification from these authorities that the foreign resident filed its tax return (this is the only requirement that was needed up to 2013).
- Appoint, through a power of attorney (granted before a foreign notary and apostilled or legalized by the Mexican consulate) a Mexican tax resident as its legal representative for tax purposes in Mexico.
- File, through the legal representative for tax purposes, either an informative tax return or a tax report.
For related party transactions, the tax authorities may request that the filer, through the legal representative for tax purposes, file a declaration under oath stating that the income subject to income tax in Mexico is also subject to income tax in the country of its residence. This declaration should expressly indicate the specific legal grounds for such foreign taxation, as well as any other documentation that, to the taxpayers’ criteria, may be useful to prove such circumstance.
According to Article 26, Section V of the Federal Tax Code, and Article 208 of the MITL, Mexican taxpayers that accept the role of legal representative (for tax purposes) of a foreign taxpayer will be jointly and severally liable for the unpaid taxes of the foreign taxpayers and will be obligated to keep, for a period of five years, all documents and information related to Mexican source income of said foreign taxpayers.