MEXICO Law and Practice Contributed by: Edgar Klee and Joel Gonzalez Lopez, Haynes and Boone, S.C.
Interest If a foreign shareholder grants a loan to a Mexican subsidiary, interest is considered sourced in Mexico where the capital is placed or invested in Mexico or where the party paying the interest is a Mexican resi - dent or a non-resident with a permanent establish - ment. Interest paid to a non-resident is subject to withhold - ing tax at rates ranging from 4.9% to 35%: • 4.9% on interest paid to foreign banks registered as banks in Mexico and resident in tax treaty coun - tries, and on interest paid to non-resident financial institutions in which the federal government owns a percentage of the paid-up capital, provided certain conditions are satisfied and they are the beneficial owners of the interest (the 4.9% rate also applies to interest paid in respect of publicly traded securities in Mexico and securities publicly traded abroad through banks and stockbroking firms in a country that has concluded a tax treaty with Mexico; however, if these conditions are not satisfied, the rate is 10%); • 15% on interest paid to reinsurance companies and interest on finance leases; • 21% on interest that is not subject to the 4.9% or 10% rates and interest paid to non-resident sup - pliers financing the acquisition of machinery and equipment that is included in the fixed assets of the acquirer; • 40% on interest paid to a related party located in preferential tax regimes; and • 35% in all other cases. Royalties Payments made for technical assistance, know-how, use of models, plans, formulae and similar technol - ogy transfer, including use of commercial, industrial or scientific information or equipment are considered royalties. Royalties paid to non-Mexican residents are deemed Mexican-sourced when the payer is a Mexican resi - dent for tax purposes. A 25% income tax withholding rate on the gross amount of the transaction would be applicable, unless the rate is reduced under an applicable tax treaty.
Payments carried out by a Mexican subsidiary to for - eign shareholders for the right to use a brand or tech - nology would be considered royalties for income tax purposes, and, generally, the former would have to withhold the corresponding income tax. Since 2022, the definition of royalties has been expanded to include rights relating to an individual’s image. For these purposes, the right to an image is understood as the use or the granting of the right to use a copyright in a literary, artistic, or scientific work associated with that image. Accordingly, the tax treat - ment applicable to royalties also applies to taxable income derived from the exploitation of the copyright inherent in the image itself. Know-How “Know-how” refers to the transfer of confidential infor - mation regarding industrial, commercial or scientific experience. The payments derived from this trans - fer would be considered royalties, subject to a 25% income tax rate. However, a preferential income tax rate provided under the relevant tax treaty could be applied. Technical Assistance “Technical assistance” is defined as the rendering of independent personal services whereby the provider undertakes to provide non-patentable knowledge, which does not involve the transmission of confiden - tial information relating to industrial, commercial or scientific experience, and undertakes to participate with the recipient in the application of this knowledge. Payments for technical assistance are subject to a withholding tax at a rate of 25%. In general, the different tax treaties entered into by Mexico do not specifically address the tax treatment of technical assistance (except in the case of Belgium and Holland), so in general terms it should fall under the concept of business benefits (Article 7 of the trea - ties), independent personal services (Article 14 of the treaties) or other income (generally Article 21 of the treaties). If it is included in Articles 7 or 14, the pay - ments derived from it can only be subject to taxation in the state of residence and not in the state of the source.
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