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Treaty between Mexico and Iceland – details

The first-time income tax treaty between Mexico and Iceland was signed on 11 March 2008 and entered into force on 10 December 2008. The treaty generally applies from 1 January 2009. The treaty was concluded in the Spanish, Icelandic and English languages, each text having equal authenticity; in the case of any divergence, the English text prevails. The treaty generally follows the OECD Model Convention.

The maximum rates of withholding tax are:

-   15% on dividends in general, reduced to 5% if the beneficial owner is a company (other than a partnership) holding directly at least 10% of the capital of the company paying the dividends;
-   10% on interest in general, subject to specific exceptions for, inter alia, (i) interest received by, or paid to, a state, a political subdivision or central bank of a state, (ii) interest paid in respect of (minimum 3-year period) loans granted, guaranteed or insured by specific financial institutions; and
-   10% on royalties.

Deviations from the OECD Model Convention include:

-   Art. 4: Where a person other than an individual is a resident of both states, the competent authorities of the states shall by mutual agreement endeavour to settle its status. In the absence of such agreement, such person shall not be entitled to claim relief or exemption from tax provided by the treaty (Para. 3). A partnership is a resident of a state only to the extent that the income it derives is subject to tax in that state as income of a resident (Para. 4). A pension fund established under the laws of a state is regarded as a resident of such state (protocol).
-   Art. 5: A permanent establishment (PE) includes (Para. 3): (i) a building site or a construction, assembly or installation project, or any connected supervisory activity, only if it lasts for more than 6 months; period of activities carried on by associated enterprises are aggregated if the activities are identical or substantially similar; and (ii) the furnishing of services, including consultancy services, by an enterprise through its employees or other personnel engaged by the enterprise for such purpose, if such activities continue within a state for a period or periods exceeding in the aggregate 6 months within any 12-month period. An insurance enterprise is, except in regard to reinsurance, deemed to have a PE if it collects premiums in the territory of the other state or insures risks situated therein through a person other than an independent agent (Para. 6).
-   Art. 7: The profits of the enterprise may be taxed in the PE state but only so much of them as is attributable to the PE; or sales in that other state of goods or merchandise of the same or similar kind as the goods or merchandise sold through that PE, unless the enterprise demonstrates reasons other than obtaining a benefit under the treaty (Para. 1). In determining the profits of a PE, no deduction for expenses are allowed in respect of specific amounts paid (other than towards reimbursement of actual expenses) by the PE to the head office of the enterprise or any of its other offices, i.e. royalties, fees or other similar payments for the use of patents or other rights, commissions for specific services performed or for management, or (except in the case of banks) interest on money lent (Para. 3).
-   Arts. 8 and 13: Profits from the operation of ships or aircraft in international traffic, or from the alienation of such ships or aircraft or movable property pertaining to such operation, are taxable exclusively in the residence state (Para. 1). Such profits include profits from the rental of ships or aircraft on a full basis, and on a bareboat basis under certain conditions. Profits of a resident of a state from the use or rental of containers used in international traffic, including equipment for the transport of containers, are also taxable only in the residence state if such use or rental is incidental to the operation of ships or aircraft in international traffic.
-   Art. 11: "Interest" includes income that is treated as income from money lent by the laws of the source state (Para. 3). Para. 2, which provides the maximum tax rate applicable by source state, shall not apply to interest derived from back-to-back loans (in such cases the interest remains taxable according to the source state domestic law) (Protocol).

The domestic law of a state regarding characterization of payments as dividends, or limitation of deductibility of payments by reason of thin capitalization rules or because the relevant debt instrument includes an equity interest, may be applied (Protocol).
-   Art. 12: "Royalties" includes payments for the (i) use of, or the right to use, industrial, commercial, or scientific equipment; (ii) reception of, or the right to receive, visual images or sounds, or both, for the purpose of transmission by satellite, cable, optic fibre or similar technology; or (iii) the use of, or the right to use, in connection with television or radio broadcasting, visual images or sounds, or both, for the purpose of transmission to the public by satellite, cable, optic fibre or similar technology. Also included in the definition are payments derived from the alienation of any right or property referred to in the royalties definition, which are contingent on the productivity, use or disposition thereof (Para. 3).
-   Art. 13: Capital gains from stock, participation or other rights in the capital of a company which is a resident of a state may be taxed in that state (Para. 5).
-   Art. 20: Items of income of a resident of a state not dealt with in other articles of the treaty and arising in the other state may be taxed in that other state.
-   Art. 23 on mutual agreement procedure does not contain a provision on arbitration.

Both countries provide for the ordinary credit method to avoid double taxation. Mexico also provides for an underlying credit with respect to the tax paid at source by a distributing company with respect to the profits out of which the dividends are paid, provided that there is a participation of at least 10%.

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