Double taxation treaty with Mexico published in the Government Gazette

The double taxation treaty for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income between Malta and Mexico signed on 17th December 2012 has been published in the Government Gazette by means of Legal Notice 239 of 2013. Although signed and published, the treaty is not yet in force.

Some of the salient features which caught our attention are the following:

The definition of a permanent establishment (PE) includes the concept of a services PE. The term PE includes the furnishing of services, including consultancy services by an enterprise through employees or other personnel engaged by the enterprise for such purpose, but only where activities of that nature continue (for the same or a connected project) within a contracting state for a period or periods aggregating more than 183 days within any 12 month period.

Article 10 – The country in which the beneficial owner of the dividends is a resident has an exclusive right to tax such income. Thus Mexico will have an exclusive right to tax dividends paid by a Maltese company to a beneficial owner who is resident in Mexico. In view of its imputation system, Malta does not withhold any tax on payments of dividends.

Article 11 – Malta and Mexico share the right to tax interest income. The source country has a primary limited right to tax the interest income (5% in the case of interest on bank loans and 10% in all other cases), while the residence country will have a residual right to tax the interest income with a correlative obligation to grant relief from double taxation in terms of Article 21 of the treaty. In terms of its domestic tax law, Malta does not withhold any tax on payment of interest to non residents, subject to certain conditions being satisfied. The country in which the beneficial owner of the interest is a resident shall have an exclusive right to tax the interest income in special circumstances which are mentioned in the treaty.

Article 12 – Malta and Mexico also share the right to tax royalty income. The source country has a primary limited right to tax the interest income (10%), while the residence country will have a residual right to tax the royalty income with a correlative obligation to grant relief from double taxation in terms of Article 21 of the treaty. In terms of its domestic tax law, Malta does not withhold any tax on payment of royalties to non residents, subject to certain conditions being satisfied.

The treaty also contains non-discrimination and exchange of information articles in Articles 22 and 24 respectively. The treaty also provides that the countries may enter into Mutual Agreement Procedures (Article 23) with a view to avoid taxation which is not in accordance with the Convention. Furthermore the two contracting states agreed to exchange information to carry out the provisions of this Convention (Article 24).

For more information please contact the firms’ tax partner Stephen Balzan at sbalzan@emd.com.mt.