On February 27, 2013, the Tax Treaty signed between Mexico and Latvia and its Protocol were published in the Mexican Official Gazette. According to its Article 27, the Treaty will enter in force on January 1, 2014. With this new tax treaty, Mexico will have a tax treaty network with 52 countries.
This new Treaty follows the Mexican common practice in negotiating tax treaties, i.e., using the OECD Model Tax Convention on Income and on Capital but incorporating some features from the UN Model Tax Convention. These include, for example, Article 5 (six-month period for converting a construction site into a permanent establishment), Article 15 (independent personal services), and Article 21 (other income taxed in the source country).
In addition, Article IX of the Protocol of this new Tax Treaty provides that published commentaries of the OECD Model Tax Convention on Income and on Capital will apply only to those provisions of the Treaty that correspond to the above-mentioned provisions of the UN Model Tax Convention.
The withholding rates and special source taxation features of this new Treaty are as follows:
Dividends. A 5 percent rate is imposed when the beneficial owner of the dividends is a company (other than a partnership) and has direct ownership of at least 10 percent of the legal entity distributing the dividends. A 10 percent rate is imposed in every other scenario; however, this rate will be applicable only for dividends paid from Latvia to Mexico, since Mexican income tax law does not impose a withholding tax on dividends.
Interest. No withholding tax is imposed when the beneficial owner is the government, a political subdivision, a governmental bank, or export banks, or if those entities pay the interest. A 5 percent tax is imposed, paid by or to banks, when said banks are the beneficial owners of the interest payments. A 10 percent rate applies in every other scenario. In addition, Mexican tax law has in force a 4.9 percent withholding tax rate for interest payments made from Mexico to registered foreign banks and financial institutions.
Royalties. A 10 percent rate.
Capital Gains on the Sale of Shares. The withholding tax in the source country should not be greater than a 20 percent tax on the capital gains. No taxation in the source country is imposed if a restructuring between entities of the same group takes place and some requirements are met.