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TAX NEWS - October 2009

Mexico tax: New protocol signed to treaty with Switzerland

Mexico and Switzerland signed a protocol to the 1993 tax treaty on 18 September 2021 that includes changes to the tax treatment of dividends and interest, brings the Mexican flat tax within the scope of the treaty and deletes the tiebreaker rule. The protocol will enter into force 30 days after each country has notified the other that the ratification procedures have been completed, and its provisions will apply beginning 1 January of the year following the year the protocol enters into force. Relevant changes are addressed below.

Flat tax

Following Mexico's treaty negotiation policy, the new wording of the taxes covered article now includes the Mexican business flat tax.

Pension funds

Pension funds and other organizations will be considered residents for purposes of the treaty.

Tiebreaker rule

The tiebreaker rule for determining residence is deleted. If a company has dual residence under the residence article, the tax authorities of both countries will need to agree to determine the residence of the company for treaty purposes. If no agreement is reached, treaty benefits will not be available. (This provision may create some uncertainty because it does not specify the status of the company while the tax authorities are making a residence determination.)


The tax treatment of dividend distributions is made more beneficial, with the holding requirement and rate further reduced. Dividends paid to a company or qualifying pension fund that controls directly or indirectly at least 10% (reduced from 25%) will be exempt (currently subject to a 5% withholding tax). The general 15% rate remains unchanged.


The Switzerland treaty was one of four Mexican treaties (the others are Belgium, France and the Netherlands) that contain a "short" definition of interest, under which the interest article does not mention the definition under domestic legislation. The protocol modifies the interest article to include income that is deemed to constitute interest under domestic law to prevent disputes in interpretation. Further, the withholding tax rates on interest are reduced from 10%/15% to 5%/10% (the lower rate being applicable to financial sector entities).

Alienation of shares

Taxation at source on the alienation of shares is limited to 10% on the taxable gain, regardless of whether the shares are represented by immovable property. This provision eliminates the general exemption that was granted for non-immovable property companies. A reorganization clause is included, which provides for the deferral of tax on an alienation within a group, with rules similar to those in Mexico's treaty with the U.S., but with more flexibility. The exemption on the alienation of shares through recognized markets for banks and pension funds will continue to be available.

Permanent establishments

The profits to be attributed to a PE will be based on the functions performed, assets used and risks borne by the PE on the whole operation.

Exchange of information

The exchange of information clause is broadened to increase the level of cooperation between the tax authorities of both states.

Anti-abuse rules

The protocol includes more sophisticated anti-abuse rules. A "conduit arrangement" rule will apply to deny treaty benefits where a "substantial part" of treaty-protected dividend, interest or royalty income is paid to a resident of a third country.

Whether a conduit arrangement exists will be determined under the mutual agreement procedure and there is no definition of what would constitute a substantial part of the income. Under another anti-abuse rule, a subsidiary in State A owned by a company located in State B will not be allowed to invoke the benefits of the treaty for income sourced in State B if it enjoys "favorable" tax status in State A.

Most favored nation clause

A most favored nation clause is included to lower the withholding tax rate on interest and royalties where Mexico agrees on a lower tax rate with another state that is an OECD member state. This clause includes a situation where Mexico agrees to exclude the use or right to use industrial, commercial or scientific equipment from the application of the royalty article.


If Mexico includes arbitration in another tax treaty, it is required to negotiate such a provision in the Switzerland treaty.
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