Copyright 1996
InterAm Database
National Law Center for Inter-American Free Trade


November 2, 1992

Mexico - U.S.A. tax treaty signed

TEXT:
Further to TNS-88, 126 and 294 (1992), a comprehensive tax treaty
(covering taxes on income) and protocol between Mexico and the
United States was signed in Washington on 18 September 1992. The
Mexican tax on capital (asset tax) will not be applied to U.S.
residents who do not operate through a permanent establishment in
or derive business profits from Mexico. The treaty will enter into
force upon the exchange of the instruments of ratification. The
provisions of the treaty will apply:
- in respect of taxes withheld at source on dividends, interest
and royalties, as from the first day of the second month
following the date of the entry into force, if such a date is
prior to 1 July (otherwise as from 1 January of the year
following the entry into force); and
- in respect of all other taxes, to taxable periods beginning
on or after 1 January of the year following the entry into
force.
The official texts of the treaty are Spanish and English.
Highlights of the treaty include:
- the maximum tax rates in the source country will be as
follows:
- dividends: generally 15% for the first five years of
application of the treaty and 10% thereafter (reduced to
5% if the recipient is a company holding at least 10% of
the voting rights in the paying company (but excluding a
U.S. regulated investment company or real estate
investment trust);
- interest: generally 15%. However, the rate is
reduced to (i) 10% during the first five years of
application of the treaty (4.9% thereafter) for interest
on loans from banks and insurance companies and on bonds
or securities regularly quoted on a stock market and
(ii) 15% during the first five years of application of
the treaty (10% thereafter) if the recipient is not a
bank or insurance company and the payer is either a bank
or the purchaser paying directly to the seller under
sale on credit of machinery or equipment. An exemption
in the source country is granted in respect of certain
interest; and
- royalties: 10%.
To avoid double taxation, both countries generally grant a full

credit for tax paid and an additional underlying tax credit for
resident corporate shareholders owning at least 10% of the paying
company. Mexico will apply an exemption with progression in
respect of U.S.-source income which is exempt in the United
States.
Article 17 of the treaty (dealing with the limitation of benefits)
provides very detailed anti-avoidance (mainly anti-treaty
shopping) measures.