The IBFD has received the English text of the income tax treaty of 12 February 1997 between Finland and Mexico. The treaty was concluded in the Finnish, Spanish and English languages; in the case of divergence of interpretation, the English text prevails. The treaty generally follows the OECD Model Convention.

Under the treaty, there is no withholding tax on dividends. The maximum general withholding tax rate on interest is 15%. A 10% rate applies to (a) interest paid by or to banks, (b) interest from bonds or securities that are regularly and substantially traded on a recognized securities market, and (c) interest related to the sale on credit of machinery and equipment. The usual exemptions for interest paid to public bodies, etc. apply.

The maximum withholding tax on royalties is 10%. The term "royalties" includes payments for the use, or the right to use, industrial, commercial or scientific equipment. It also includes gains from the disposal of a right or property that generates royalty income.

A building site or construction, assembly or installation project, or supervisory activities in connection therewith, constitutes a permanent establishment only if such project or activities last more than 6 months. Capital gains from the sale of shares or other rights in a company may be taxed in the state in which the company is resident if the seller had a participation of at least 25% of the capital of the company during the 12-month period preceding the sale. The tax may not exceed 20%, however.

As to annuities, the treaty allows taxation in the source state at a maximum of 20%. Social security payments may be taxed only in the source state.

In general, both states will use the credit method to eliminate double taxation. In the case of dividends, Mexico will also grant a credit for the underlying corporate tax payable by the Finnish company if the Mexican company owns at least 10% of the Finnish company's capital. Mexican-source dividends will be exempt in Finland if the shareholder is a company that controls directly at least 10% of the voting power in the company paying the dividends.

Finland will grant a tax sparing credit for tax not actually imposed in Mexico on a permanent establishment's income because of incentive legislation. Moreover, Finland will grant a 5% credit above any tax actually paid on qualifying royalties in Mexico. The tax sparing provisions are valid for the first 5 years for which the treaty is effective.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

For further information contact Rodolfo Calvo, Galaz, Gomez, Morfin, Chavero, Yamazaki, Mexico City, Mexico on Fax: +52 5 281 5184