On August 17, 2017, the Protocol amending the Convention for the Avoidance of Double Taxation and the Prevention of Fraud and Fiscal Evasion ("Tax Treaty") between Belgium and Mexico was published in Mexico's Official Journal of the Federation (Belgium publication pending). The Tax Treaty became effective in Belgium on August 19, 2017, and in Mexico on August 18, 2017.
Significant changes include:
- Paragraph 1, Article 3 has added a section (j) clarifying that the rendering of professional services will be considered a "business activity." This is noteworthy from a Mexican perspective as Mexican tax authorities have determined that income derived from the rendering of professional services outside Mexico to recipients within Mexico should not be considered to generate business profits and, absent treaty protection, should be taxable at the standard 25 percent withholding rate.
- Paragraph 2 of Article 10 is replaced by a paragraph establishing a 10 percent withholding tax on dividend payments (mirroring the withholding tax on dividends pursuant to Mexican domestic law). The paragraph also provides an exemption from withholding tax if the dividend's recipient owns at least 10 percent of the equity of the payor or is a pension fund.
- A withholding tax rate of 5 percent on interest payments to financial institutions is introduced by replacing paragraph 2 of Article 11. While a transitory provision of Mexican domestic tax law provides for a 4.9 percent withholding rate for such payments, this new limitation provides certainty if the transitory provision is not reenacted.
- Previously, if the selling shareholder disposed of its entire shareholding and the interest represented less than 25 percent of the company's total equity, paragraph 3 of Article 13 exempted from tax any capital gains from the sale of shares of companies in the source state (in practice, Mexico, because Belgium does not tax capital gains on shares derived by nonresident shareholders). Now, the Protocol replaces that provision with a new paragraph 3, which allows the source state to tax net gains on the transfer of shares, at a maximum rate of 10 percent, regardless of the equity holding percentage.
The changes provide greater certainty to transactions by tax residents of both nations, bring the Tax Treaty closer to the tax treatment applied by the international community, and should incentivize investments in both jurisdictions.