The US Internal Revenue Service (IRS) has announced that the United States and Mexico have reached a mutual agreement regarding the eligibility of fiscally transparent entities to claim benefits under the Mexico-United States income tax treaty and amending protocols. The announcement was made in News Release IR-2005-107 dated 19 September 2005.
The Agreement states that the Competent Authorities agree that in applying Para. 2(b) of the Protocol signed on 18 September 1992, dealing with the definition of residence in the case of partnerships, estates and trusts, it is understood that income from sources within one of the contracting states received by an entity that is treated as fiscally transparent under the laws of either contracting state, will be treated as income derived by a resident of the other contracting state to the extent that such income is subject to tax as the income of a resident of the other contracting state.
The Agreement also states that it is understood that Mexican law currently does not provide for fiscally transparent entities, but that if Mexico were to introduce legislation that provided for the creation of fiscally transparent entities, then it is intended that income received by such entities will be treated as income derived by a resident of Mexico to the extent that such income is subject to tax as the income of a resident of Mexico.
Mexico also agrees to apply the Agreement to amounts paid to entities created and subject to the laws of a third state or jurisdiction only where such third state or jurisdiction has in force a comprehensive exchange of information agreement as provided in Mexican tax provisions and such information is effectively exchanged. The Agreement includes a list of the third countries that currently qualify under this provision.
The Agreement also specifies the appropriate procedures to be used by US residents, LLCs and other entities to claim treaty benefits from Mexico.
The Agreement is effective with respect to Mexican source payments made to Mexican or US entities to the extent that the Mexican statute of limitations is open for such payments. The Agreement is effective with respect to Mexican source payments made to entities organized in third countries or jurisdictions identified in the Agreement as of 1 January 2006.