Mexican Tax Law: Canada-Mexico Tax Treaty

Canada-Mexico Income Tax Treaty

A bilateral income tax treaty has been in effect between Canada and Mexico since July 17, 1992. Like the U.S.-Mexico Tax Treaty, the Canada-Mexico Tax Treaty provides for avoidance of double taxation, reduction of income taxes applied to foreign residents, and the exchange of information between government authorities to avoid tax fraud.

The Canada-Mexico Tax Treaty is virtually identical to the U.S.-Mexico Tax Treaty, except for the following differences:

Dividends

While the U.S.-Mexico Tax Treaty reduces U.S. taxes on dividends to a rate of 5% or 10% (see above), the rate between Canada and Mexico will be 10% or 15%.

Interest

Canada and Mexico have agreed that the highest tax rate on interest income earned by non-residents will be 15%. Under the U.S.-Mexico Tax Treaty, the tax rates are 4.9%, 10% and 15% depending on the type of loan.

However, according to the Most-Favored-Nation Provision of the Canada-Mexico Tax Treaty, if either country includes a lower tax rate on interest in a tax treaty concluded with another country, that tax rate will apply to the Canada-Mexico Tax Treaty, but under no circumstances shall the rate be lower than 10%. Consequently, when the U.S.-Mexico Tax Treaty is ratified, the same tax rates on interest will apply between Canada and Mexico, except that 10% will be the lowest tax rate—versus 4.9% (see Canada-Mexico Tax Treaty, Protocol).

Royalties

The Canada-Mexico Tax Treaty's maximum tax rate for royalties earned by foreign residents is 15%. The U.S.-Mexico Tax Treaty will apply a maximum 10% rate. However, the protocol described in the preceding paragraph will also apply to royalties, thereby reducing the rate to 10% when the U.S.-Mexico Tax Treaty is ratified.

Dispute Settlement

The "Mutual Agreement Procedure" of the Canada-Mexico Treaty is identical to that of the U.S.-Mexico Tax Treaty, except that Canada and Mexico did not provide for binding arbitration.

Other Provisions

In addition to the foregoing differences, the U.S.-Mexico Tax Treaty has a series of provisions that are not included in the Canada-Mexico Tax Treaty, such as rules regarding the taxation of branches, alimony and child support, and exempt organizations.

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