Technical Explanation PDF

TREASURY DEPARTMENT TECHNICAL EXPLANATION OF THE CONVENTION AND
PROTOCOL BETWEEN THE GOVERNMENT OF THE UNITED STATES OF AMERICA
AND THE GOVERNMENT OF THE UNITED MEXICAN STATES
FOR THE AVOIDANCE OF DOUBLE TAXATION AND THE PREVENTION OF
FISCAL EVASION WITH RESPECT TO TAXES ON INCOME,
SIGNED AT WASHINGTON ON SEPTEMBER 18, 1992
GENERAL EFFECTIVE DATE UNDER ARTICLE 29: 1 JANUARY 1994
INTRODUCTION
This is a technical explanation of the Convention and Protocol between the United States
and Mexico signed on September 18, 1992 ("the Convention"). The Convention is based on the
U.S. Treasury Department's draft Model Income Tax Convention, published on June 16, 1981
("the U.S. Model"), the Model Double Taxation Convention on Income and Capital, published
by the OECD in 1977 ("the OECD Model"), the Model Double Taxation Convention published
by the United Nations in 1980 (the "U.N. Model") and recent income tax treaty negotiations of
both countries.
The Technical Explanation is an official guide to the Convention. It reflects the policies
behind particular Convention provisions, as well as understandings reached with respect to the
application and interpretation of the Convention.
The explanations of each Article include explanations of any Protocol provisions relating
to that Article.
TABLE OF ARTICLES
Article 1---------------------------------General Scope
Article 2---------------------------------Taxes Covered by the Convention
Article 3---------------------------------General Definitions
Article 4---------------------------------Residence
Article 5---------------------------------Permanent Establishment
Article 6---------------------------------Income from Immovable Property (Real Property)
Article 7---------------------------------Business Profits
Article 8---------------------------------Shipping and Air Transport
Article 9---------------------------------Associated Enterprises
Article 10-------------------------------Dividends
Article 11-------------------------------Interest
Article 11A-----------------------------Branch Tax
Article 12-------------------------------Royalties
Article 13-------------------------------Capital Gains
Article 14-------------------------------Independent Personal Services
Article 15-------------------------------Dependent Personal Services
Article 16-------------------------------Directors' Fees
Article 17-------------------------------Limitation on Benefits
Article 18-------------------------------Artistes and Athletes

Article 19-------------------------------Pensions, Annuities, Alimony, and Child Support
Article 20-------------------------------Government Service
Article 21-------------------------------Students
Article 22-------------------------------Exempt Organizations
Article 23-------------------------------Other Income
Article 24-------------------------------Relief from Double Taxation
Article 25-------------------------------Non-Discrimination
Article 26-------------------------------Mutual Agreement Procedure
Article 27-------------------------------Exchange of Information
Article 28-------------------------------Diplomatic Agents and Consular Officers
Article 29-------------------------------Entry into Force
Article 30-------------------------------Termination
Protocol 1-------------------------------of 18 September, 1992
Protocol 2-------------------------------of 8 September, 1994
ARTICLE 1
General Scope
Paragraph 1 provides that the Convention applies to residents of the United States or
Mexico, and in some cases may apply to residents of third States. Article 4 defines residents of
the United States and Mexico for the purposes of the Convention. Examples of cases where the
Convention may affect residents of third States include the Articles on non-discrimination
(Article 25) and the exchange of information (Article 27).
Paragraph 2 is the same as the corresponding provision in the U.S. Model. The
Convention may not increase the tax burden of residents of either country compared to what it
would be under the respective domestic law provisions or under any other agreement between
the two States. Thus, for example, a right to tax given by the Convention cannot be exercised
unless domestic law also provides for such a tax; and this Convention will not restrict the
benefits provided by another U.S.- Mexico agreement, whether concluded previously or
subsequently. This does not mean, however, that a taxpayer may pick and choose among Internal
Revenue Code (hereinafter "Code") and Convention provisions in an inconsistent manner in
order to minimize tax. For example, assume a resident of Mexico has three separate businesses in
the United States. One is a profitable permanent establishment. The other two are trades or
businesses that would earn income taxable in the United States under the Code but that do not
meet the permanent establishment threshold tests of the Convention; one of these is profitable,
and the other incurs a loss. Under the Convention the income of the permanent establishment is
taxable, and both the profit and loss of the other two businesses are ignored. Under the Code all
three would be taxable. The loss would be offset against the profits of the two profitable
ventures. The taxpayer may not invoke the Convention to exclude the profits of the profitable
trade or business and invoke the Code to claim the loss of the loss trade or business against the
profit of the permanent establishment. (See Rev. Rul. 84-17, 1984-1 C.B.10.) If the taxpayer
invokes the Code for the taxation of all three ventures, he would not be precluded from invoking
the Convention with respect, for example, to any dividend income he may receive from the
United States which is not effectively connected with any of his business activities in the United
States.

Paragraph 3 contains the traditional "saving" clause, which provides that each country
may tax in accordance with its domestic law, without regard to the Convention, its residents,
citizens, and former citizens whose loss of citizenship had tax avoidance as one of its principal
purposes. Although the paragraph is drafted reciprocally, Mexico does not now tax the income
on the basis of citizenship. The taxation of former citizens is limited to a period of ten years, as
provided in section 877 of the Code. "Residence", for the purpose of the saving clause, is
determined under Article 4 (Residence). Thus, for example, if an individual who is not a U.S.
citizen is a resident of the United States under the Code, e.g., a “green card” holder, and is also a
resident of Mexico under Mexican law, and the tie-breaker rules of paragraph 2 of Article 4
determine that he is a resident of Mexico, he will be entitled to U.S. benefits under the
Convention.
As a consequence of the saving clause, each Article should be read as not providing
benefits with respect to the U.S. taxation of U.S. citizens (wherever resident) or residents or with
respect to Mexico's taxation of Mexican citizens or residents. However, paragraph 4 provides
certain exceptions to the saving clause. Under subparagraph (a), for example, U.S. residents and
citizens are entitled to certain U.S. benefits provided under the Convention. Those benefits are:
the correlative adjustments authorized by paragraph 2 of Article 9; the exemption of social
security benefits paid by the other State and of child support and alimony paid by residents of the
other State, that are provided in paragraphs 1(b) and 3 of Article 19; the deductibility of certain
contributions to Mexican charities and the relief from expenditure responsibilities provided in
Article 22; the guarantee of a foreign tax credit provided in Article 24; the non-discrimination
protection of Article 25; and the competent authority procedures of Article 26. Mexican residents
are entitled to the benefits provided by Mexico under the same Articles (and Mexican citizens or
former citizens would be entitled to the same benefits, if relevant).
Under subparagraph (b) certain additional benefits are available to U.S. residents who are
neither U.S. citizens nor "green card" holders; these are the U.S. benefits extended to employees
of the Mexican Government under Article 20, to visiting students, under Article 21, and to
members of diplomatic and consular missions under Article 28. This subparagraph also applies
reciprocally.
ARTICLE 2
Taxes Covered by the Convention
This Article identifies the taxes to which the Convention applies. Paragraphs 1 and 2 are
based on the OECD model and explain that the Convention applies to taxes on income; this
covers taxes on total income or any part of income and includes tax on gains derived from the
alienation of property. The Convention does not apply to payroll taxes. Nor does it apply to
property taxes; however, the Convention does affect the imposition of Mexico's asset tax in some
instances, as explained in the Protocol.
In the case of the United States, the existing taxes to which the Convention applies are
the Federal income taxes imposed by the Internal Revenue Code, but not including the
accumulated earnings tax or personal holding company tax (which are considered penalty taxes)

or social security contributions. It also applies to certain excise taxes. The excise taxes with
respect to private foundations are covered to the extent necessary to implement paragraph 4 of
Article 22 (Exempt Organizations). The Convention also applies to the Federal excise taxes
imposed on insurance premiums paid to foreign insurers, in the case of Mexican insurers, but
only to the extent that the Mexican insurer does not reinsure those risks with a person not exempt
from such taxes. As we have discussed in prior consultations with the staff of this Committee
and of the tax-writing Committees, our review of Mexico's taxation of the income of Mexican
insurance companies indicated that it results in a burden that is substantial in relation to the U.S.
tax on U.S. insurance companies. It is, therefore, appropriate to waive the insurance excise tax in
the case of Mexico, as in the recent Conventions ratified with Germany, Spain, Finland, India,
and other countries. In addition, Article 25 (Non-Discrimination) applies to all taxes imposed at
all levels of government. The exchange of information provisions of Article 27 apply to all
Federal level taxes, e.g. including estate and gift and excise taxes, to the extent that such
information is relevant to enforcement of the Convention or of any covered tax as long as the tax
in question is applied in a manner consistent with the Convention.
In the case of Mexico, the Convention applies to the income tax imposed by the Income
Tax Law, amplified in the case of Articles 25 (Non-Discrimination) and 27 (Exchange of
Information) to include all taxes and all national level taxes, respectively. The assets tax is not a
covered tax. However, the Protocol limits application of the assets tax in certain cases where
there would be no Mexican income tax liability because of the Convention (e.g., where there is
no permanent establishment), and it preserves the benefits of the Convention in cases where the
tax does apply. Thus, Point 3 of the Protocol generally limits application of the assets tax to
cases where a U.S. resident either
(i) has a permanent establishment in Mexico under Article 5,
(ii) has real property in Mexico, or
(iii) leases or otherwise permits a resident of Mexico to use property for
which a "royalty" (as defined in Article 12) is paid.
Point 6 of the Protocol also makes clear that the assets tax may not be applied to property used to
produce profits that are exempt from Mexican income tax under Article 8 (Shipping and Air
Transport).
Under paragraph 4, the Convention will apply to any taxes which are substantially similar
to those enumerated in paragraph 3, and which are imposed in addition to, or in place of, the
existing taxes after September 18, 1992, the date of signature of the Convention. Paragraph 4
also provides that the U.S. and Mexican competent authorities will notify each other of
significant changes in their taxation laws that are relevant to the operation of the Convention, and
of official published materials that concern the application of the Convention.
ARTICLE 3
General Definitions
Paragraph 1 defines a number of basic terms used in the Convention. Certain others are
defined in other articles of the Convention. For example, the term "resident of a Contracting
State" is defined in Article 4 (Residence). The term "permanent establishment" is defined in

Article 5 (Permanent Establishment). The terms “dividends”, "interest" and "royalties" are
defined in Articles 10, 11 and 12, which deal with the taxation of those classes of income,
respectively.
Subparagraph (a) defines the term "person" to include an individual or legal person. The
latter includes a company, a corporation, a trust, a partnership, an association, an estate and any
other body of persons. Any "person" may be a "resident" of a Contracting State for purposes of
Article 4 and thus entitled to the benefits of the Convention. This list is somewhat more
expansive than the definition in the U.S. Model, but if is intended to have the same meaning.
The term "company" is defined in subparagraph (b) as any entity treated as a body
corporate for tax purposes. For U.S. tax purposes, the rules of reg. § 301.7701-2 generally will be
applied to determine whether an entity is a body corporate.
An "enterprise of a Contracting State" is defined, as in the U.S. and OECD Models, to
mean an enterprise carried on by a resident of Mexico or the United States, as appropriate.
(Although there is no explicit definition of the term "Contracting State", it refers to Mexico or
the United States according to the context.)
Subparagraph (d) defines the term “international traffic”. The term means any transport
by a ship or aircraft except when such transport is solely between places within a Contracting
State. The exclusion from international traffic of transport solely between places within a
Contracting State means, for example, that the transport of goods or passengers solely between
Miami and New York by a Mexican carrier (if it were permitted) would not be treated as
international traffic, and the resulting income would not be exempt from U.S. tax under Article
8. It would be treated as business profits under Article 7 and would, therefore, be taxable in the
United States if attributable to a U.S. permanent establishment. If, however, goods or passengers
are carried by a Mexican plane from Mexico City to Miami and then to New York the trip would
be international transport for those that continued to New York as well as for those that
disembarked in Miami.
The "competent authority" is the Government official charged with administering the
provisions of the Convention and with attempting to resolve any differences or difficulties which
may arise in interpreting its provisions. The U.S. competent authority is the Secretary of the
Treasury or his authorized representative. The Secretary of the Treasury has delegated the
competent authority function to the Commissioner of Internal Revenue, who has, in turn,
redelegated the authority to the Assistant Commissioner (International). With respect to
interpretive issues, the Assistant Commissioner acts with the concurrence of the Associate Chief
Counsel (International). In Mexico, the competent authority resides in the Ministry of Finance
and Public Credit. In general, that function is delegated to the General Directorate of Revenue
Policy and International Fiscal Affairs.
The terms "United States" and "Mexico" are defined in subparagraphs 1(f) and (g),
respectively. The term "United States" means the United States as defined in the Code (section
7701 (a)(9)). Accordingly, the term does not include Puerto Rico, the U.S. Virgin Islands, Guam
or any other U.S. possession or territory. It includes the fifty states, the District of Columbia, and
the territorial sea. When used geographically, the "United States" also includes the continental

shelf. (See Point 1 of the Protocol.) It is understood that the continental shelf is covered only to
the extent that any U.S. taxation therein is in accordance with international law and U.S. tax law.
Currently, U.S. tax law applies on the continental shelf only with respect to the exploration for
and exploitation of mineral resources under section 638 of the Code.
The term "Mexico" means Mexico as defined in the Federal Fiscal Code. When used
geographically, "Mexico" includes the states thereof and the Federal District, the territorial sea
and the continental shelf. As in the case of the United States, it is understood that any Mexican
taxation on its continental shelf must be in accordance with international law and Mexican tax
law.
The term "national" is defined in subparagraph (h) to include both individuals and legal
persons. This term is relevant, in particular, to Articles 20 (Government Service), 25 (Non-
Discrimination), and 26 (Mutual Agreement Procedure).
Paragraph 2 provides that, in the application of the Convention, any term used but not
defined in the Convention will have the meaning which it has under the law of the Contracting
State whose tax is being applied, unless the context requires a different interpretation.
ARTICLE 4
Residence
This Article sets forth rules for determining whether a person is a resident of a
Contracting State for purposes of the Convention. Determination of residence is important
because, as noted in the explanation to Article 1 (General Scope), as a general matter only
residents of the Contracting States may claim the benefits of the Convention. The treaty
definition of residence is used for all purposes of the Convention, including the saving clause of
paragraph 3 of Article 1 (General Scope), but it is used only for purposes of the Convention.
The determination of residence for purposes of the Convention looks first to domestic
law criteria. A person subject to tax as a resident or domestic entity under the law of one of the
Contracting States is a resident of that State. If that person is not a resident of the other
Contracting State for tax purposes under its domestic law criteria, he or it need look no further. If
such a person is a dual resident, paragraph 2 provides a series of tests for assigning a single
residence to an individual. Dual resident companies are not considered to be residents of either
country for treaty purposes (paragraph 3).
It is understood that the reference in paragraph 1 to persons "liable to tax" refers to those
subject to the taxation laws applicable to residents, and is not meant to exclude tax-exempt
organizations. Article 22 (Exempt Organizations) provides some special rules with respect to
tax-exempt organizations that are residents of one of the Contracting States and entitled to the
benefits of the Convention under Article 17 (Limitation on Benefits).
A person that is liable to tax in a Contracting State only in respect of income from
sources within that State will not be treated as a resident of that Contracting State for purposes of
the Convention. Thus, for example, a Mexican Embassy official in the United States, who may

be subject to U.S. tax on U.S. source investment income but not on his non-U.S. income, would
not be considered a resident of the United States for purposes of the Convention. (In most cases
such an individual also would not be a U.S. resident under the Code.)
Even though a United States citizen, wherever resident, is liable to tax in the United
States on worldwide income, U.S. citizenships alone does not automatically render the person a
resident of the United States for purposes of the Convention. Thus, Mexico is not required to
provide benefits of the Convention to a U.S. citizen resident in a third country. Point 2 of the
Protocol explains that a U.S. citizen or an individual who is a U.S. resident by virtue of holding a
"green" card for immigration purposes will be considered a resident of the United States for
purposes of Mexican tax benefits only if the individual has a substantial presence in the United
States as defined in Code section 7701(b) or if his permanent home, personal and economic
relations, or habitual abode are in the United States and not in another country. The reference to
"another" country means a third country; a U.S. citizen or green card holder who is also, under
paragraph 1 of this Article, a resident of Mexico, will have his residence for treaty purposes
determined under paragraph 2, which includes, in subparagraph (c), citizenship as one of the tie-
breakers. A U.S. citizen who is determined under paragraph 2 to be a resident of Mexico would
continue to be subject to U.S. taxation under the saving clause of paragraph 3 of Article 1
(General Scope), but a green card holder determined under paragraph 2 to be a Mexican resident
would not be subject to the saving clause.
Point 2 of the Protocol also explains that a partnership, estate or trust will be treated as a
resident of a Contracting State only to the extent that the income derived by the partnership,
estate, or trust is taxed as the income of a resident, whether in the hands of the person deriving
the income or in the hands of its partners or beneficiaries. Under U.S. law, a partnership is never,
and an estate or trust is often not, a taxable entity. Thus, for treaty purposes, the question of
whether income received by a partnership is received by a U.S. resident will be determined by
the residence of its partners (looking through any partnerships which are themselves partners)
rather than by the residence of the partnership itself. In Mexico, most partnerships are taxable
entities. The treatment under the Convention of income received by a trust or estate will be
determined by the residence of the person subject to tax or, such income, which may be the
grantor, the beneficiaries, or the estate or trust itself, depending on the particular circumstances.
This rule regarding the residence of partnerships, estate or trusts is applied to determine the
extent to which that person is entitled to treaty benefits with respect to income which it receives
from the other Contracting State.
Finally, Point 2 of the Protocol clarifies that the two Contracting States and their political
subdivisions are to be treated as residents of those States for purposes of treaty benefits.
If, under the laws of the two Contracting States, and thus under paragraph 1, an
individual is deemed to be a resident of both Contracting States, a series of tie-breaker rules is
provided in paragraph 2 to determine a single State of residence for that individual. These rules
come from the OECD Model. The first test is where the individual has a permanent home. If that
test is inconclusive because the individual has a permanent home available to him in both States,
he will be considered to be a resident of the Contracting State where his personal and economic
relations are closer, i.e., the location of his "center of vital interests". If that test is also
inconclusive, or if he does not have a permanent home available to him in either State, he will be

treated as a resident of the Contracting State where he maintains an habitual abode. If he has an
habitual abode in both States or in neither of them, he will be treated as a resident of his
Contracting State of nationality. In any other case, the competent authorities are instructed to
resolve his residence by mutual agreement. This could be the case, for example, where the
individual is not a national of either Contracting State.
The tie-breaker rules of paragraph 2 apply only to individuals. Paragraph 3 provides that,
where a person other than an individual is a dual resident under paragraph 1, such person will not
be treated as a resident of either State for purposes of the Convention. Under U.S. law, a
corporation that is created or organized under the laws of the United States or a state or the
District of Columbia is liable to U.S. tax by reason of that incorporation and therefore is a
resident of the United States under paragraph 1. A corporation that has its place of effective
management in Mexico is liable to Mexican tax by reason of that activity and therefore is a
resident of Mexico under paragraph 1. Thus, if a corporation organized under U.S. law had its
place of effective management in Mexico, it would be a resident of both countries under their
respective domestic laws. One possibility considered for resolving dual residency in such cases
was to permit the competent authorities to determine a single residence in such cases. However,
it was considered unlikely that either competent authority would concede to the other on this
Point. Thus, it was decided to exclude such persons from treaty coverage and to rely on the
companies themselves not to get into the situation of dual residence.
ARTICLE 5
Permanent Establishment
This Article defines the term "permanent establishment", which is relevant to several
articles of the Convention. The existence of a current or former permanent establishment in a
Contracting State is necessary under Article 7 (Business Profits) for that State to tax the business
profits of a resident of the other Contracting State. Articles 10, 11 and 12 (dealing with
dividends, interest, and royalties, respectively) provide for reduced rates of tax at source on
payments of these items of income to a resident of the other State only when the income is not
attributable to a permanent establishment or fixed base that the recipient has in the source State;
if the income is or was attributable to a permanent establishment, Article 7 applies, and if the
income is or was attributable to a fixed base, the principles of Article 7 apply. The term
"permanent establishment" is also relevant to the application of the Mexican assets tax. As
provided in Point 3 of the Protocol, the assets tax in general may only be applied to the assets of,
a U.S. resident if that resident has a Mexican permanent establishment.
This Article is similar in most respects to the corresponding Articles of the U.S. and
OECD Models, but includes some departures from those Models.
Paragraph 1 provides the basic definition of the term "permanent establishment". As used
in the Convention, the term means a fixed place of business through which a resident of one
Contracting State carries on business activities in the other Contracting State.
Paragraph 2 contains a list of examples of fixed places of business that constitute a
permanent establishment: a place of management, a branch, an office, a factory, a workshop, and

a mine, well, quarry or other place of extraction of natural resources. The use of singular nouns
in this illustrative list is not meant to imply that each such place necessarily represents a separate
permanent establishment. In the case of mines or wells, for example, several such places of
business could constitute a single permanent establishment if the project is a whole commercially
and geographically. (See the following discussion under construction sites and drilling
operations.)
Paragraph 3 adds that a building or construction site or installation project, or an
installation or drilling rig or ship used to explore for or exploit natural resources also constitutes
a permanent establishment, but only if it lasts more than 6-months. This is a shorter period than
the 12 months provided for in the U.S. and OECD Models. This paragraph follows instead the
UN Model. The 6-month test has been accepted in some other U.S. tax treaties, e.g., with Spain
and Tunisia, and has been reduced further in the treaties with Indonesia and India.
The furnishing of supervisory activities at such a site or installation may also constitute a
permanent establishment and is taken into account in measuring the 6-month period. The
addition of the reference to supervisory services is not considered a substantive difference from
the U.S. or OECD Models. The commentary to paragraph 3 of Article 5 of the OECD Model,
which constitutes the generally accepted international interpretation of the language in that
paragraph, points out that activities of planning and supervision are taken into account, as is time
spent by subcontractors at the site or project, in determining whether the general contractor has a
permanent establishment. Supervisory services that do not themselves last for more than 6-
months may nonetheless be an interrelated part of a construction, installation, building, or
drilling project; in that case, the period of time during which supervisory services were carried
on will be added to the time during which the construction, installation, building, or drilling is
carried on for purposes of meeting the 6-month test.
The 6-month period applies separately to each site or project. The period begins when
work (including preparatory work carried on by the resident) physically begins in a Contracting
State. A site should not be regarded as ceasing to exist when work is temporarily discontinued. A
series of contracts or projects which are interdependent both commercially and geographically
are to be treated as a single project. For example, the construction of a housing development
would be considered a single project even though each house may be constructed for a different
purchaser. If the 6-month threshold is exceeded, the site or project constitutes a permanent
establishment from the first day. Drilling rigs, both onshore and offshore, are covered by the
construction site rule, and must, therefore, be present in a Contracting State for 6-months to
constitute a permanent establishment. The drilling of several wells within the same geographic
area and as part of the same commercial operation will be considered a single permanent
establishment.
Paragraph 4 contains exceptions to the general rule of paragraph 1. The paragraph lists a
number of activities which may be carried on through a fixed place of business, but that,
nevertheless, will not give rise to a permanent establishment. Using facilities or maintaining a
supply of goods or merchandise solely to store, display, or deliver goods or merchandise
belonging to an enterprise will not constitute a permanent establishment of that enterprise.
Similarly, maintaining a supply of goods or merchandise solely for the purpose of processing by
another enterprise will not give rise to a permanent establishment of the enterprise owning the

goods or merchandise. (See, however, the discussion below about paragraph 5 and its treatment
of certain dependent agents that process goods on behalf of an enterprise using assets furnished
by the enterprise.) The maintenance of a fixed place of business solely for purchasing goods or
collecting information for the enterprise, or for carrying out any other activity of a preparatory or
auxiliary character for the enterprise, such as advertising, supplying information, conducting
scientific research, or placing loans will not constitute a permanent establishment of the
enterprise. A combination of such activities will not constitute a permanent establishment,
provided that the aggregate activity is of a preparatory or auxiliary character for the enterprise.
The exclusion of an office used for preparations relating to the placement of loans is not
in the U.S. or OECD Models. It refers to representative offices in Mexico of U.S. banks, which
generally are not allowed under current Mexican banking law to accept deposits or otherwise
conduct a banking business in Mexico. In such cases, loans from the U.S. home office to
Mexican borrowers will not be attributable to a permanent establishment in Mexico, and the
interest paid will be subject to Mexican tax in accordance with Article 11 (Interest). It is
expected that U.S. banks may be able to establish branches in Mexico that will be permanent
establishments taxable in accordance with Article 7 (Business Profits).
Paragraphs 5, 6 and 7 specify when the use of an agent will constitute a permanent
establishment. Under subparagraph (a) of paragraph 5, a dependent agent of an enterprise will be
deemed to be a permanent establishment of the enterprise if the agent has and habitually
exercises an authority to conclude contracts in the name of that enterprise. If, however, the
agent's activities are limited to those activities specified in paragraph 4 which would not
constitute a permanent establishment if carried on directly by the enterprise through a fixed place
of business, the agent will not be a permanent establishment of the enterprise. Under
subparagraph (b) of paragraph 5, a dependent agent who does not have the authority to conclude
contracts in the name of the enterprise will nevertheless be a permanent establishment of the
enterprise if the agent habitually processes on behalf of the enterprise goods or merchandise
owned by the enterprise using assets furnished, directly or indirectly, by the enterprise or an
associated enterprise. This subparagraph is meant to clarify that a dependent agent that processes
inventory of its principal using assets of the principal (or a related enterprise) without itself
having ownership of either the inventory or the assets used in the processing, represents a
permanent establishment of the principal. This is the case whether or not the dependent agent is a
subsidiary of the U.S. enterprise. Because such an agent represents a permanent establishment,
the income and assets attributable to its activity are subject to income and assets tax in Mexico.
As mentioned above, this subparagraph is intended simply as a clarification. It is not meant to
create a permanent establishment where one would not exist without this language. It does not
apply to the use of an independent agent, such as a contract manufacturer. In such a case the
contract manufacturer would be subject to tax by Mexico, but the person on whose behalf the
processing is undertaken would not have a permanent establishment, and pursuant to Point 3 of
the Protocol, Mexico's assets tax would not apply to the assets of such person.
Paragraph 6 inserts a special rule for insurance companies, similar to the rule found in the
U.S. treaties with Belgium and France. Mexico does not have a tax comparable to the U.S.
insurance excise tax. Although foreign insurers are not now permitted to operate in Mexico,
Mexico anticipates a greater opening of its financial sector in this regard. The Mexican
delegation wished to clarify the rules that will apply when U.S. insurers are permitted to insure

risks in Mexico by specifying in the Convention that a dependent agent who collects premiums
or insures risks in Mexico on behalf of a U.S. insurer is a permanent establishment of the U.S.
insurer in Mexico. There is an exception for reinsurance. This rule applies reciprocally. Thus,
although the United States (by covering it in Article 2 (Taxes Covered)) agrees not to apply the
insurance excise tax to Mexican companies that do not reinsure with persons subject to those
taxes, if the Mexican company maintains a dependent agent in the United States who collects
premiums or insures risks on its behalf, the United States may impose its net income tax.
Consistently with the rule of paragraph 2 of Article 1 (General Scope) that prevents the
imposition of tax by the Convention, the tax so imposed could not exceed the tax that would
apply under U.S. law.
Under paragraph 7, an enterprise will not be deemed to have a permanent establishment
in a Contracting State merely because it carries on business in that State through an independent
agent, including a broker or general commission agent, if the agent is acting in the ordinary
course of his business as such and if their relationship is at arm's length; both conditions must be
satisfied.
Paragraph 8 clarifies that a company that is a resident of a Contracting State will not be
deemed to have a permanent establishment in the other Contracting State merely because it
controls, or is controlled by, a company that is a resident of that other Contracting State, or that
carries on business in that other Contracting State. The determination of whether or not a
permanent establishment exists will be made solely on the basis of the factors described in
paragraphs 1 through 6 of the Article. Whether or not a company is a permanent establishment of
a related company, therefore, is based solely on those factors and not on the ownership or control
relationship between the companies.
ARTICLE 6
Income from Immovable Property (Real Property)
Paragraph 1 provides the standard income tax treaty rule that income derived from real
property (here referred to as immovable property, as in the OECD Model and Mexican usage)
may be taxed in the Contracting State where the property is located. This includes income from
agriculture or forestry. Since paragraph 5 of this Article permits net basis taxation, it should have
the same result in principle as Article 7 (Business Profits) in the case of an agricultural or
forestry enterprise that makes the election to be taxed on a net basis.
Paragraph 2 defines real property in accordance with the laws of the Contracting States,
but provides that it includes, in any case, immovable property as described in the OECD Model,
which includes references to accessory property, livestock and equipment used in agriculture and
forestry, and rights to receive payments in exchange for the right to extract natural resources.
Boats, ships, aircraft and containers are not immovable property.
Paragraph 3 clarifies that the Article covers income from the use of real property, without
regard to the form of exploitation, and paragraph 4 clarifies that it also covers immovable
property used in a business or for performing independent personal services;

Paragraph 5 provides that the taxpayer (whether an individual or a legal entity) may make
a binding election to be taxed on a net basis. The election is based on the 1981 U.S. model
provision. However, it does not require the consent of both competent authorities to terminate the
election; only the agreement of the competent authority of the State in which the property is
located is required. Under Mexican law, income from the leasing of real property is taxed on a
net basis when derived by resident corporations. Resident individuals may elect to be taxed on a
presumed net income equal to 50 percent of the gross income. Nonresidents are taxed at 21
percent of the gross amount. When the Mexican corporate tax rate was 42 percent, this
represented a 50 percent presumed expense allowance. At a rate of 35 percent, it amounts to a 40
percent deduction for expenses. And if the Mexican rate is reduced to 34 percent, as has been
proposed, the 21 percent tax on gross income will reflect presumed expenses of 38 percent. This
paragraph will permit U.S. residents to be taxed on a net basis, like Mexican corporations. If they
so elect, they must be able to document expenses, and must forego the presumed expense
deduction.
Point 3 of the Protocol provides that, in applying its asset tax to immovable property,
Mexico shall allow a credit for the gross income tax which would have applied under its
statutory rules (21 percent at the time the treaty was signed), even if the U.S. owner elects to pay
tax on the net income. This credit is available only if less than 50 percent of the U.S. owner's
gross income from the property is used, directly or indirectly, to meet liabilities to persons who
are not United States residents; otherwise Mexican (or third country) owners of Mexican
immovable property could avoid the asset tax by making the U.S. resident the nominal owner of
the property, while remaining beneficial ownership in Mexico (or in the third country).
ARTICLE 7
Profits Business
This Article provides the rules for the taxation by a Contracting State of the business
profits of a resident of the other Contracting State. The general rule is found in paragraph 1, that
business profits of a resident of one Contracting State may not be taxed by the other Contracting
State unless the resident carries on or has carried on business in that other Contracting State
through a permanent establishment (as defined in Article 5 (Permanent Establishment)) situated
in the latter State. Where that condition is met, the State in which the permanent establishment is
situated may tax the business profits attributable to the assets or activity of that permanent
establishment. That State may also tax the business profits derived from the sales of goods or
merchandise of the same or similar kind as those sold through the permanent establishment. The
latter rule, which comes from the U.N. Model, amounts to a partial "force of attraction", by
attributing to the permanent establishment home office sales of the same or similar goods as
those sold through the permanent establishment, even if, under paragraph 5 of this Article, the
assets and activities of the permanent establishment were not involved in the sale. This limited
"force of attraction" rule is frequently requested by developing countries to prevent avoidance of
their tax at source. It has been agreed to in some other U.S. income tax treaties, such as those
with India and Indonesia, although it is not in the U.S. Model and does not represent the
preferred U.S. policy. In this Convention it is subject to the significant qualification that the
limited force of attraction will not apply if the enterprise demonstrates that the sales were not
made from the home office to avoid the tax on profits attributable to a permanent establishment.

For example, it may be more efficient for a U.S. company based in San Diego and having a
permanent establishment in Mexico City to sell goods to Tijuana directly from San Diego,
whereas that may not be the case with respect to sales to Mexico City.
Paragraph 2 provides that the Contracting States will attribute to a permanent
establishment the profits that it would be expected to make if it were an independent entity,
engaged in the same or similar activities under the same or similar conditions. Profits so
attributable to a permanent establishment are taxable in the State where the permanent
establishment is situated or was situated at the time the profits were made. This rule incorporates
the rule of section 864(c)(6) of the Internal Revenue Code with respect to deferred payments. If
the income was attributable to the assets or activities of a permanent establishment when earned,
it is taxable by the State where the permanent establishment was located, even if receipt of the
income is deferred until the permanent establishment has ceased to exist.
The profits attributable to a permanent establishment may be from sources within or
without a Contracting State. Thus, certain items of foreign source income described in section
864(c)(4)(B) or (C) of the Code may be attributed to a U.S. permanent establishment of a
Mexican resident and subject to tax in the United States. The concept of “attributable to” in the
Convention is narrower than the concept of "effectively connected" in section 864(c) of the
Code. The limited "force of attraction" rule in Code section 864(c)(3), therefore, is not applicable
under the Convention to the extent that it is broader than the rule of subparagraph (b) of
paragraph 1 of this Article.
Paragraph 3 provides that the tax base must be reduced by deductions for expenses
incurred for the purposes of the permanent establishment. These include expenses directly
incurred by the permanent establishment and a reasonable allocation of expenses incurred by the
home office, as long as the expenses were incurred on behalf of the company as a whole, or a
part of it which includes the permanent establishment. Allocable expenses would include
executive and general administrative expenses, research and development expenses, interest, and
charges for management, consultancy, or technical assistance, wherever incurred and without
regard to whether they are actually reimbursed by the permanent establishment. However, as
clarified in Point 5 of the Protocol, no double deduction is allowed, i.e., expenses included in the
cost of goods sold or reflected in other charges deductible by the permanent establishment may
not be included in the amount of expenses to be allocated in part to the permanent establishment.
Paragraph 3 also clarifies, as does the U.N. Model and the commentary to the OECD
Model, that a permanent establishment may not take deductions for royalties, fees, commissions,
or Service fees paid to its home office other than amounts which represent reimbursement of
actual expenses incurred by the home office. Since the permanent establishment and home office
are parts of a single entity, there should be no profit element in such intra-company transfers.
The same rule applies to interest on an intra-company loan, with the exception that a Contracting
State may permit a branch bank to deduct an interest payment to its home office or another
branch in excess of reimbursement of costs incurred. The exception in the case of banks is
included in the U.N. Model and in the OECD commentary to take into account that it is common
practice for parts of the same international financial institution to make advances to each other
and charge interest on those amounts. It is included in this Convention to address a problem
under Mexican law.

Mexico does not currently have in place a mechanism analogous to United States
Treasury Regulation §-l.882-5 for allocating an enterprise's interest expense to a permanent
establishment. Mexico generally permits a branch to deduct interest only when it borrows money
directly. The treaty confirms that in the event Mexico in the future permits a U.S. bank to
establish a branch in Mexico, that branch will be able to deduct interest initially incurred by the
home office or another branch. Paragraph 3 enables Mexico to consider actual transactions
between the home office and its branch to determine the appropriate interest expense deductible
by the branch.
The exception in paragraph 3 for bank interest was not intended to override § 1.882-5 in
the context of a U.S. permanent establishment of a Mexican bank. Paragraph 3 does not prescribe
or preclude any particular method for allocating interest expense to a branch. Thus, Mexico may
consider actual intra-branch transactions, and the U.S. may approximate the appropriate interest
expense of the branch under section 882. The exception for bank interest is written in a way that
permits but does not require a deduction for an intra-company transaction. The general rule in the
second sentence of paragraph 3 is that a Contracting State may not permit deductions for certain
intra-company payments. Intra-company bank interest is an exception to this mandatory
disallowance of deductions. Thus, a Contracting State may but is not required to grant a
deduction for interest paid on actual intra-company transactions. If the actual amount of interest
payable with respect to liabilities on the books of a U.S. branch of a Mexican bank (including
amounts due to other offices) exceed the amount of interest allocated to the branch under Treas.
Reg. § 1.882-5, the regulatory formula will prevail, and any such excess will not be considered
incurred for the purposes of the branch under this Article (and will not be subject to a branch
level interest tax under section 884).
Point 4 of the Protocol provides that nothing in Article 7 prevents a Contracting State
from applying its internal law to estimate the profits of a permanent establishment where the
information available is inadequate to determine those profits, or prevent Mexico from applying
Article 23 of its Income Tax Law, that apportions the worldwide net income of international
transportation companies on the basis of the ratio of Mexican to worldwide gross receipts. In any
case in which internal law is thus applied, the determination of the profits of the permanent
establishment must be consistent, on the basis of the available information, with the principles of
Article 7. Article 23 of Mexico's Income Tax Law, by recognizing that there may be cases where
there is no taxable income, satisfies this condition.
Paragraph 4 provides that no business profits will be attributed to a permanent
establishment because it purchases goods or merchandise for the enterprise of which it is a
permanent establishment. This rule refers to a permanent establishment that performs at least one
function for the enterprise in addition to purchasing. For example, the permanent establishment
may purchase raw materials for the enterprise's manufacturing operation and sell the
manufactured output. While business profits may be attributable to the permanent establishment
with respect to its sales activities, no profits are attributable with respect to its purchasing
activities. If the sole activity were the purchasing of goods or merchandise for the enterprise, the
issue of the attribution of income would not arise, because, under subparagraph 4(d) of Article 5
(Permanent Establishment), there would be no permanent establishment.

Paragraph 5 provides that the business profits to be "attributed" to a permanent
establishment include only the profits (or losses) derived from the assets or activities of the
permanent establishment. Thus, for example, a U.S. company may have a construction site in
Mexico that constitutes a permanent establishment and may also export merchandise directly
from the U.S. home office to independent distributors in Mexico; it would not attribute any of the
profit from the merchandise sales to the Mexican permanent establishment if the assets and
personnel of that permanent establishment were not involved in the sales activity. Note, however,
that paragraph 1(b) provides an exception to this rule. Where it is applicable, paragraph 1(b)
takes precedence over paragraph 5.
To ensure continuous and consistent tax treatment, paragraph 5 also requires that the
method for calculating the profits and losses of a permanent establishment be the same from year
to year unless there is a good and sufficient reason to change the method. A taxpayer may not
vary the method from year to year simply because a different method achieves a more favorable
tax result.
Paragraph 6 explains the relationship between the provisions of Article 7 and other
provisions of the Convention. Under paragraph 6, where business profits include items of income
that are dealt with separately under other articles of the Convention, the provisions of those other
articles will, except where they specifically provide to the contrary, take precedence over the
provisions of Article 7. Thus, for example, the taxation of interest will be determined by the rules
of Article 11 (Interest), and not by Article 7, except where, as provided in paragraph 3 of Article
11, the interest is attributable to a permanent establishment, in which case the provisions of
Article 7 apply.
ARTICLE 8
Shipping and Air Transport
This Article provides the rules that govern the taxation of income from the operation of
ships and aircraft in international traffic. "International traffic" is defined in subparagraph 1(d) of
Article 3 (General Definitions). Such income, when derived by a resident of either Contracting
State, may be taxed only by that State, the country of residence. If the other Contracting State is
the c6untry where the income arises, it must exempt the income from tax, even if attributable to a
permanent establishment in that State.
Income from the rental of ships or planes on a full basis for use in international traffic is
considered operating income and is covered under paragraph 1. Income from the bare-boat
leasing of ships or planes is also exempt from tax at source if the ships or aircraft are used in
international traffic by the lessee and if the rental income to the lessor is accessory to income
derived by the lessor from operating ships or planes in international traffic. The profits referred
to in paragraph 1 do not, however, include accessory profits derived from the furnishing of
overnight accommodations by an international shipping or airline enterprise. Nor does paragraph
1 apply to profits derived by such an enterprise from furnishing other means of transport, such as
inland transport by truck or rail, that the international operating company provides directly. If
inland transport from the port of entry to the final destination is subcontracted by the
international carrier to a domestic enterprise, no profit will be attributed to the international

carrier for that portion of the transport. (The domestic carrier will, of course, be subject to tax on
its profit.) Mexico was not prepared to permit a U.S. company to provide such inland transport
without incurring tax in the same manner as a domestic company. Similarly, Mexico was not
willing to extend the exemption provided by this Article to include income from international
transport by truck or rail, as is done in the U.S. treaty with Canada.
Paragraph 3 provides that income from the use of containers in international traffic and
from the use of related equipment for the transport of such containers is exempt from tax at
source under this Article, whether derived by an operating company or by a leasing company.
The use of containers and related equipment includes charges for the rental of the equipment and
charges for its delayed return.
Paragraph 4 clarifies that the exemptions provided by paragraphs 1 and 3 apply to profits
from participation in a pool, joint business, or international transportation operating agency. For
example, if a Mexican airline were to form a consortium with other national airlines, the share of
the income derived from U.S. sources accruing to the Mexican participant would be covered by
this Article.
Point 6 of the Protocol provides that the Mexican assets tax will not apply to assets used
by residents of the United States to produce profits that are exempt from Mexican income tax
under this Article.
When this Article takes effect, the provisions of the exchange of notes of August 7, 1989,
concerning reciprocal exemption of international shipping and airline income will cease to apply.
It was the request of Mexico that the Convention replace the 1989 note rather than having both
documents apply simultaneously.
ARTICLE 9
Associated Enterprises
This Article provides that, when residents of the two Contracting States that are related
persons engage in transactions that are not at arm's length, the Contracting States may make
appropriate adjustments to the taxable income and tax liability of such persons to reflect the
income or tax with respect to such transactions that each would have had if the transaction
between them had been at arm's length.
Paragraph 1 deals with the circumstance where an enterprise of a Contracting State is
associated with an enterprise of the other Contracting State and those associated enterprises
make arrangements or impose conditions in their commercial or financial relations that differ
from those that would be made at arm's length. Paragraph 1 provides that, under those
circumstances, either Contracting State may adjust the income (or loss) of the enterprise that is a
resident of that State to reflect the income that would have been taken into account in the
absence of such a relationship. The paragraph specifies what the term “associated enterprises”
means in this context. An enterprise of one Contracting State is associated with an enterprise of
the other Contracting State if either participates directly or indirectly in the management, control,
or capital of the other. The two enterprises are also associated if there is a "brother-sister" type

connection between them in that a third person or persons participate directly or indirectly in the
management, control, or capital of both. The term "control" includes any kind of control,
whether or not legally enforceable and however exercised or exercisable.
Paragraph 2 provides that, where a Contracting State has made an adjustment that is
consistent with the provisions of paragraph 1, and the other Contracting State agrees that the
amount of the adjustment is appropriate to reflect arm’s length conditions, that other State is
obligated to make a corresponding adjustment to the tax liability of the related person in that
other State in accordance with the provisions of paragraph 2 of Article 26 (Mutual Agreement
Procedure). That paragraph imposes certain time limits within which the competent authority
must be notified of the case and within which agreement on the adjustment must be reached. The
Contracting State making the correlative adjustment will take into account the other provisions
of the Convention, where relevant.
The saving clause of paragraph 3 of Article 1 (General Scope) does not apply to this
paragraph. (See Article 1(4)(a).) Thus, even if the statute of limitations has run, or there is a
closing agreement between the Internal Revenue Service and the taxpayer, a refund of tax may
be required to implement a correlative adjustment. Statutory or procedural limitations, however,
cannot be overridden to impose additional tax, because, under paragraph 2 of Article 1 (General
Scope), the Convention cannot restrict any statutory benefit.
Point 7 of the Protocol provides that the benefits of the correlative adjustment required by
paragraph 2 shall not apply if the misstatement of profits which gave rise to the initial adjustment
was the result of fraud, gross negligence, or willful default.
Paragraph 3 preserves the rights of the Contracting States to apply internal law provisions
relating to adjustments between related parties. Such adjustments - the distribution,
apportionment, or allocation of income, deductions, credits or allowances - are permitted even if
they are different from, or go beyond, those authorized by paragraph 1 of the Article, so long as
they accord with the general principles of paragraph 1, i.e., that the adjustment reflects what
would have transpired had the related parties been acting at arm's length.
ARTICLE 10
Dividends
This Article provides rules limiting the taxation at source of dividends paid by a company
that is a resident of one Contracting State to a shareholder who is a resident of the other
Contracting State.
Paragraph 1 preserves the residence country's general right to tax its residents on
dividends paid by a company that is a resident of the other Contracting State. The same result is
achieved by the saving clause of paragraph 3 of Article 1.
Paragraphs 2 and 3 limit the right of the source State to tax dividends paid to a resident of
the other State. The tax at source must not exceed 5 percent of the gross amount of a "direct

investment" dividend - that is a dividend to a beneficial owner that is a company owning at least
10 percent of the voting stock of the paying corporation; in other cases it must not exceed 15
percent. After the provisions of this Article have been in effect for five years (see Article 29
(Entry Into Force)), the 15 percent rate will decrease to 10 percent. The limitation of the tax at
source to 10 percent on portfolio dividends is not part of the U.S. Model, which sets a 15 percent
maximum rate on such dividends. It was accepted in this case as part of a package of concessions
involving the withholding rates applicable to dividends, interest, and royalties and the treatment
of the Mexican assets tax. Under current Mexican law, there is no shareholder level tax on
dividends.
Point 8(b) of the Protocol further provides that, if the United States should agree in a
treaty with any other country to reduce its tax on direct investment dividends to a rate lower than
5 percent, that rate shall also apply to direct investment dividends paid to residents of Mexico
and the United States under paragraph 2(a) of this Article, in place of the 5 percent rate provided
for in that subparagraph. Such reduction is expected to take effect at the same time as it takes
effect in the U.S. treaty with the third country. In reviewing the treaty with the third country, the
U.S. Senate would have the opportunity to consider the effects of the lowered rate with Mexico
and take that effect into account in offering its consent to ratification.
Point 8(a) of the Protocol modifies the limitations on source country taxation for
dividends paid by U.S. Regulated Investment Companies (RICs) and Real Estate Investment
Trusts (REITs). Dividends paid by RICs are subjected to the l5 (or, after five years, 10) percent
portfolio dividend rate regardless of the percentage of voting shares of the RIC held by the owner
of the dividend. The 5 percent rate, is intended to relieve multiple levels of corporate taxation.
Since RIBS do not pay corporate tax with respect to amounts distributed, the only tax imposed
on their distributions is the shareholder level tax. Moreover, a foreign shareholder could own a
10 percent interest in a RIC without owning a 10 percent interest in the companies in which the
RIC invests. In the case of dividends paid by a REIT, the 15 (after five years, 10) percent rate
will apply if the beneficial owner of the dividends is an individual and holds less than 10 percent
interest in the REIT. In other cases the rate of domestic law applies to dividends paid by REITs;
that rate is currently 30 percent, which approximates the applicable tax if the shareholder had
invested directly in U.S. real estate.
The rate limitations provided by paragraphs 2 and 3 do not affect the taxation by either
Contracting State of the profits out of which the dividends are paid. (The current rates of profits
tax are generally 35 percent in both the United States and Mexico, although there is a proposal in
Mexico to reduce its rate to 34 percent.) Under Mexican law there is no shareholder level tax on
profits distributed as dividends, provided that the full corporate level tax has been paid. Where
the corporate tax has been reduced by tax preferences, a compensatory tax is imposed on the
corporation at the time of distribution to recapture those preferences. Imposition of this tax is not
affected by the limitations of paragraphs 2 and 3.
Paragraph 4 defines the term "dividends" as used in this Article. It is a broad definition,
encompassing income from any shares or rights that are not debt claims and that participate in
profits, and income from other corporate rights treated for domestic law tax purposes as
dividends in the country of residence of the distributing company. Point 9 of the Protocol
provides that each Contracting State may also apply its statutory rules for distinguishing debt and
equity or for preventing thin capitalization in defining dividends for purposes of this Article. In

the case of the United States, these rules include Code section 163(f) as modified by section
13228 of the Omnibus Budget Reconciliation Act of 1993.
Paragraph 5 provides that, where dividends are attributable to a permanent establishment
or fixed based that the beneficial owner maintains or maintained in the past in the country of
source, they are not subject to the provisions of paragraphs 1, 2 and 3 of this Article, but are
taxable under Article 7 (Business Profits) or Article 14 (Independent Personal Services), as
appropriate.
Paragraph 6 provides that neither Contracting State may impose a tax on dividends paid
by residents of the other State, or of a third State, except to the extent paid to a resident of the
first State or attributable to a permanent establishment or fixed base in that first State. This
paragraph precludes the U.S. from imposing its so-called “second-level withholding” tax, which
generally accomplishes the same objective as the branch tax (which the treaty preserves).
Paragraph 6 is drafted in such a way as to exempt not only Mexican corporations but also third-
country corporations with U.S. permanent establishments from second-level withholding. Such
third-country corporations may not be subject to the branch tax. However, those corporations
will only be exempt from second-level withholding under this treaty to the extent their dividends
are paid to Mexican shareholders who are entitled to treaty benefits. In any event, third-country
corporations would be used to "shop" this treaty only in rare circumstances where the third-
country company is itself exempt from the branch tax and where the rate of withholding on
dividends paid from the corporation to Mexican shareholders is less than the 5 percent branch tax
permitted by the treaty.
ARTICLE 11
Interest
This Article limits the taxation at source of interest paid by a resident of one Contracting
State to a resident of the other Contracting State.
Paragraph 1 preserves the residence country's general right to tax its residents on interest
arising in the other State. The same result is achieved by the saving clause of paragraph 3 of
Article 1 (General Scope).
Paragraphs 2, 3, and 4 limit the right of the source State to tax interest beneficially owned
by a resident of the other State. However, the reduced rates do not apply to interest paid with
respect to back-to-back loans. Such interest will continue to be taxed in accordance with the
domestic law of the source State.
Paragraph 3 specifies the rates that may be imposed at source during the first five years
from the date on which this Article takes effect (see Article 29 (Entry Into Force)). During that
period, interest on loans from banks and insurance companies, and interest on bonds or other
securities that are regularly and substantially traded on a recognized securities market may be
taxed at 10 percent of the gross amount of interest paid. (A recognized securities market for this
purpose is defined in Point 15(b) of the Protocol.) This rate applies to a bank or insurance
company that is the beneficial owner of the interest, whether or not the bank or insurance

company was the original creditor on the loan; it does not apply to interest beneficially owned by
another person even if the loan was originally granted by a bank or insurance company.
During the first five years other interest, except that exempt from tax at source under
paragraph 4, is subject to a maximum tax at source of 15 percent of the gross interest.
At the end of five years, the rates specified in paragraph 2 will apply. The 10 percent rate
applicable to interest on loans by banks and insurance companies (except back-to-back loans)
and interest on publicly traded securities will drop to 4.9 percent. The effect of the 4.9 percent is
to ensure that the interest is not "high withholding tax interest" for purposes of the U.S. foreign
tax credit limitation but rather financial services income or passive income, as applicable. The 15
percent rate will drop to 10 percent for interest paid by banks and interest paid to a seller to
finance the purchase of machinery and equipment, but will remain at 15 percent for all other
categories of interest. In the case of suppliers' credits, the 10 percent rate only applies to the
original seller of the goods. If the loan is transferred, the rate will be either 4.9 percent, if the
loan is acquired by a bank or insurance company, or 15 percent, if acquired by another person.
(See Point 10(b) of the Protocol.)
Paragraph 4 specifies certain categories of interest that, notwithstanding the provisions of
paragraphs 2 and 3, are exempt from tax at source when the beneficial owner is a resident of the
other Contracting State. Those categories are:
(i) interest paid to or by either Contracting State or a political subdivision
or local authority thereof,
(ii) interest beneficially owned by a tax exempt pension plan, provided
that such pension plan is generally exempt from income taxation in its residence
State and more than half of its beneficiaries are entitled to benefits of the
Convention (see paragraph 1(e) of Article 17 (Limitation on Benefits)), and
(iii) interest on loans of three years or longer that are made, guaranteed, or
insured by a specified public lending institution.
The specified Mexican institutions are the Banco Nacional de Comercio Exterior, S.N.C., and the
Nacional Financiera, S.N.C. The specified U.S. institutions are the Export-Import Bank and the
Overseas Private Investment Corporation.
In the absence of the Convention, Mexico's withholding rates on interest paid to
nonresidents are currently 35 percent, 21 percent, and 15 percent, depending upon the type of
debt involved and on the identity of its holder. Mexico also exempts certain Interest from income
taxation. In general the treaty exemptions correspond to the statutory exemptions of Mexican
law, and the categories of debt to which the reduced rates apply reflect the Mexican statutory
categories. The general U.S. statutory rate is 30 percent, with an exemption for portfolio interest.
The reduced rates of paragraphs 2, 3 and 4 do not apply to an excess inclusion with
respect to a residual Interest in a U.S. Real Estate Mortgage Investment Conduit ("REMIC"),
which will be taxed at the rate provided by U.S. domestic law. Point 10(a) of the Protocol is
drafted to also permit Mexico to apply its domestic law if it in future develops a product identical
to a REMIC. Further, the Protocol provides for consultations by the competent authorities as to
the desirability of extending this rule to substantially similar entity or instrument developed in

future by either or both Contracting States.
Paragraph 5 defines the term "interest", as used in the Convention, to include income
from debt claims of every kind, as well as income treated as income from money lent by the
taxation law of the source State. In particular, income from government securities, income from
bonds or debentures, and any premiums or prizes attaching to such securities, bonds or
debentures are considered interest. Interest on bank deposits and on loans secured by mortgages
is also covered. Point 9 of the Protocol clarifies that this definition does not override any
domestic law distinction between debt and equity. The definition does not refer to penalties and
fines for late payment. Thus, such amounts will be imposed in accordance with domestic law and
may be taxed in at source under Article 23 (Other Income).
Paragraph 6 provides an exception from the rules of paragraphs 1, 2, and 3 in cases where
the beneficial owner of the interest, who is a resident of one Contracting State, carries on
business through a permanent establishment in the other Contracting State or performs
independent personal services through a fixed base situated in that other State and the interest
arises in that other State and is attributable to that permanent establishment or fixed base. In such
a case, the income is taxable to the permanent establishment or fixed base in accordance with the
provisions of Article 7 (Business Profits) or Article 14 (Independent Personal Services). This
rule applies even if the permanent establishment or fixed base no longer exists when the interest
is received, as long as the interest was attributable to the permanent establishment or fixed base
when earned.
This paragraph does not affect the exemptions provided in paragraph 4. The interest
described in paragraph 4 is exempt from tax at source even if attributable to a permanent
establishment or fixed base that the beneficial owner has in the State where the interest arises.
Paragraph 7 provides a source rule. Interest is considered to arise in a Contracting State if
paid by a resident of that State (including the State itself). As an exception, interest paid by any
person which is borne by a permanent establishment or fixed base in one of the Contracting
States is considered to arise in that State. For this purpose, interest is considered to be borne by a
permanent establishment or fixed base if it is allocable to taxable income of that permanent
establishment or fixed base. If the actual amount of interest on the books of a U.S. branch of a
Mexican company exceeds the amount of interest allocated to the branch under Treas. Reg. §
1.882-5, any such interest will not be considered U.S. source interest for purposes of this Article.
Paragraph 8 provides that if, as a result of a special relationship between persons, the
interest paid is excessive, Article 11 applies only to the amount of interest payments that would
have been made absent such special relationship (i.e., an arm's length interest payment). Any
excess amount of interest paid remains taxable according to the laws of the source State, with
due regard to the other provisions of the Convention. Thus, for example, if the excess amount
would be treated as a distribution of profits, such amount could be taxed as a dividend rather than
as interest, but the tax would be subject to the rate limitations of paragraphs 2 and 3 of Article 10
(Dividends).
ARTICLE 11A

Branch Tax
Article 11A permits the U.S. to impose its branch taxes on the dividend equivalent
amount and the excess interest of a Mexican company which derives business profits attributable
to a U.S. permanent establishment or which derives income subject to tax on a net basis in the
U.S. under Articles 6 (Income from Immovable Property (Real Property)) or 13 (Capital Gains).
These branch taxes are imposed under Code section 884. The tax on the dividend equivalent
amount is limited to 5%, the same rate that applies to direct investment dividends.
Excess interest is generally the portion of the entire enterprise's interest expense that is
allocated to the branch over the amount of interest paid by the branch to third parties. The excess
amount is deemed to be paid to the head office, and a tax is applied to the amount of that deemed
payment. Excess interest is treated as U.S. source under Article 11 because it is borne by the
permanent establishment. The rate of tax is limited to 10 percent, the rate generally applicable to
interest payments to residents of the other Contracting State. After five years, the rate drops to
4.9 percent if the excess interest is deemed paid to a bank or insurance company branch, the
same rate that will then apply to interest on loans made by banks or insurance companies. The
formula for calculating excess interest in paragraph 2 (b) does not require that interest be fully
deductible in one year. Rather, interest may be "excess interest," even though not "deductible" in
a particular year, if it is "allocable" to the U.S. income under U.S. domestic law rules.
Just as, under Mexico's current system, there is no shareholder level tax on dividends,
there also is no comparable Mexican tax on the dividend equivalent amount of branch profits or
on excess interest of branches of foreign companies. Nevertheless, this Article is drafted
reciprocally. Thus, if in future Mexico should adopt such branch taxes, it may apply them to U.S.
companies, subject to the same rate limitations that this Article imposes on the United States. In
that event the term "trade or business" in reference to Mexico will have the same meaning that
the term "permanent establishment has under Mexican tax law. (See Point 15(a) of the Protocol.)
(Mexico uses the concept of a "permanent establishment" in its domestic law to determine when
a foreign resident's income is subject to Mexican tax. The definition of "permanent
establishment" for these purposes, contained in Articles 2 and 3 of the Income Tax Law of
Mexico, is similar but not identical to the definition for treaty purposes and, where it differs, is
generally broader than the meaning for treaty purposes.)
ARTICLE 12
Royalties
This Article limits the taxation at source by each Contracting State of royalties paid to a
resident of the other Contracting State.
Paragraph 1 preserves the residence country's general right to tax its residents on royalties
arising in the other Contracting State. The same result is achieved by the saving clause of
paragraph 3 of Article 1 (General Scope).
Paragraph 2 limits the tax imposed by the source State to not more than 10 percent of the
gross amount of royalties beneficially owned by residents of the other State. In the absence of a

treaty, the U.S. rate is 30 percent, and the Mexican rates are 15 percent on literary copyrights and
films and drawings and 35 percent on other royalties. The Mexican rate on equipment rentals is
21 percent in general and 5 percent on container rentals. (In this Convention, equipment rentals
are treated as giving rise to royalties and container rentals are dealt with in Article 8 (Shipping
and Air Transport).)
In applying the assets tax to income covered by this Article, Mexico agrees to credit the
amount of income tax that would have been due at the statutory rates, rather than at the reduced
treaty rates. The resulting credit, generally of 21 percent of the gross income, is expected to
eliminate any asset tax liability in such cases. If no royalty is paid on account of the use of the
property, then there would be an asset tax liability because there would be no income from the
property ???? income tax to credit.
Paragraph 3 defines the term "royalties", as used in the Convention, to mean payments of
any kind received as a consideration for the use of, or the right to use, any copyright of a literary,
artistic, or scientific work, including films, tapes and other means of reproduction for use in
connection with television. The term "copyright" is understood to include the use or right to use
computer software programs and sound recordings. Royalties also include payments for the use
of, or right to use, any patent, trademark, design or model, plan, secret formula or process, or
other like right or property, for information concerning industrial, commercial, or scientific
experience, and for the use of or right to use industrial, commercial or scientific, equipment.
However, payments for the use of equipment covered by Article 6 (Income from Immovable
Property (Real Property)), such as equipment used in agriculture or forestry, are covered by that
Article. Payments for the leasing of containers used in international transport and payments for
certain leasing of ships and aircraft used in international transport are covered by Article 8
(Shipping and Air Transport). In financial leases, if the interest component is identified
separately in the contract, Mexico taxes only the interest component and applies the relevant rate
from Article 11 (Interest).
Point 11 of the Protocol clarifies that the reference to "information concerning industrial,
commercial or scientific experience" is to be interpreted in accordance with paragraph 12 of the
Commentary on Article 12 of the OECD Model, which distinguishes between information as
embodied in know-how and the performance of technical services.
The definition of royalties also includes gains from the alienation of any royalty-
producing right or property that are contingent on the productivity, use, or disposition of the
property; as a consequence, such amounts may be taxed at source in accordance with this Article
rather than being exempt from tax at source under Article 13 (Capital Gains).
Paragraph 4 provides an exception to paragraphs 1 and 2 in cases where the beneficial
owner of the royalties, who is a resident of one Contracting State, carries on business through a
permanent establishment in the other Contracting State or performs independent personal
services through a fixed base in that other State and the royalties arise in that other State and are
attributable to that permanent establishment or fixed base. In such a case, the royalties are
taxable to the permanent establishment or fixed base in accordance with the provisions of Article
7 (Business Profits) or Article 14 (Independent Personal Services). This rule applies even if the
permanent establishment or fixed base no longer exists when the royalties are received, as long

as the royalties were attributable to the permanent establishment or fixed base when earned.
Paragraph 5 provides that, if, as a result of a special relationship between persons, the
amount paid is excessive, Article12 applies only to the amount that would have been paid absent
such special relationship (i.e., an arm's length royalty payment). Any excess amount of royalties
paid remains taxable according to the laws of the source State, with due regard to the other
provisions of the Convention. If, for example, the excess amount is treated as a distribution of
profits under the source State's law, such excess amount will be taxed as a dividend rather than
as a royalty payment, but the tax imposed on the dividend payment will be subject to the rate
limitations of paragraphs 2 and 3 of Article 10 (Dividends).
Paragraph 6 provides a source rule. Royalties are, in the first instance, deemed to arise in
a Contracting State if paid by a resident of that State, including the State itself, unless the
royalties are borne by a permanent establishment or a fixed base in the other Contracting State,
in which case the source is that other State. Royalties in general are considered borne by a
permanent establishment or fixed base if deductible in computing the taxable income of that
permanent establishment or fixed base. If royalties are neither paid by a resident of either State
nor borne by a permanent establishment or fixed base in either State, but they relate to the use of
a right or property in one of the Contracting States, the source will be in the State where the right
or property is used. For example, if a Mexican resident were to license a patent to a resident of
Panama for use in the United States, the royalty paid by the Panamanian licensee to the Mexican
owner of the patent would be U.S. source income under this Article, subject to the 10 percent
rate provided in paragraph 2.
ARTICLE 13
Capital Gains
This Article provides rules governing when a Contracting State may tax capital gains
derived by a resident of the other Contracting State.
Paragraph 1 provides that each State may tax gains on the alienation of immovable
property situated in that State. The Convention does not interfere with the domestic law rules on
the taxation of such gains, other than to require non-discriminatory treatment under Article 25
(Non-Discrimination).
Paragraph 2 elaborates on the rule of paragraph 1 by explaining that "immovable
property" includes not only such property held directly, but also an interest in a partnership, trust
or estate to the extent that its assets consist of real property, shares or comparable interests in a
legal person if at least 50 percent by value of the assets of that legal person consist (or consisted)
or immovable property, and any other right that confers the use or enjoyment of immovable
property. Thus, for example, the sale of time shares for the use of vacation property in a
Contracting State could give rise to a gain taxable by that State under this Article. Point 12 of the
Protocol confirms that, in the case of the United States, immovable property includes a U.S. real
property interest.
Paragraph 3 provides that gain from the alienation of personal property comprising part

of the assets of a permanent establishment or fixed base that a resident of one Contracting State
has or had in the other Contracting State may be taxed by the State where the permanent
establishment or fixed base is or was located. This rule preserves the U.S. tax imposed by Code
section 864(c)(7) with respect to gain from the subsequent disposition of assets that were
formerly used in a U.S. trade or business, except that the treaty substitutes a permanent
establishment threshold.
Paragraph 4 provides a rule that, together with Point 13 of the Protocol, is similar to the
corresponding provision in the U.S.-Spain income tax treaty. It permits Mexico to continue to
impose its tax on the gain derived by U.S. residents on the alienation of shares in Mexican
companies or other legal entities, but limits that tax to cases where the person disposing of the
shares had a direct or indirect participation of at least 25 percent in the capital of the Mexican
company or other legal entity at any time during the 12 months preceding the disposition. Point
13 of the Protocol further limits imposition of this tax in certain corporate reorganizations. The
tax permitted by paragraph 4 may not be assessed in cases of transfers within a consolidated
group when
(i) both transferor and transferee are residents of the same State,
(ii) there is an 80 percent or more ownership interest (direct or indirect)
between the transferor and transferee or of the transferor and the transferee by
another resident company before and after the transfer,
(iii) the transferee carries over the transferor's basis, and (iv) the transferor
receives an equity interest in the transferee or in another company that owns at
least 80 percent of the transferee.
In such cases the tax on the gain is deferred until the shares or other property are transferred
outside the group. These rules do not perfectly parallel the U.S. rules for tax-free reorganizations.
Rather, they establish standards, solely for purposes of the Convention, for limiting tax on inter-
company transfers.
The United States will treat gain taxed by Mexico under this paragraph as of Mexican
source to the extent necessary to permit a credit for the Mexican tax, subject to the limitations of
U.S. law (Code section 904). Thus, if the Mexican tax does not exceed the U.S. tax, there will be
a full offset. Under Mexican law, the taxable gain is measured as the difference between
(1) the sale price of the shares and
(2) the original cost of the shares, adjusted for inflation, plus reinvested profits, also
adjusted for inflation, less any losses.
Any excess of the sale price over that adjusted basis is considered gain attributable to untaxed
profits and is subject to Mexican tax.
Paragraph 4 is reciprocal. If the United States were to introduce such a tax, it could be
imposed in accordance with the rules of this paragraph.
Paragraph 5 provides that gains derived by an enterprise carried on by a resident of one of
the Contracting States from the alienation of ships, aircraft, containers or related equipment used
principally in international traffic may be taxed only by that State. This is intended to achieve the
same result as the corresponding language in the 1981 U.S. Model. The reference to property

used "principally" in international traffic simply clarifies that an occasional use in domestic
traffic does not cause the disposition to fall outside the scope of this provision.
Paragraph 6 confirms that contingent gains, described in paragraph 3 of Article 12,
(Royalties), are covered in that Article and not in this one.
Paragraph 7, like the corresponding provision in the 1981 Model, reserves the exclusive
right to tax gains with respect to any other property to the State of which the alienator is a
resident.
ARTICLE 14
Independent Personal Services
This Article deals with income from self-employment services and Article 15 deals with
the compensation of employees. Articles 16, 18, 20 and 21 provide exceptions to the general
rules of Articles 14 and 15 in the case of personal service income derived by directors of
companies (Article 16), entertainers and athletes (Article 18), government employees (Article
20), and students and business apprentices (Article 21). Like the U.S. and OECD Models, the
Convention does not provide a separate rule for the remuneration of teachers. The compensation
of teachers and researchers is taxable under this Article or Article 15 (Dependent Personal
Services), as appropriate.
Income derived by an individual who is a resident of one Contracting State from the
performance of personal services in an independent capacity in the other Contracting State is
exempt from tax in that other State unless one of two conditions is satisfied. The income may be
taxed in that other State if the income is for services performed there and is attributable to a fixed
base that the individual regularly uses in that other State and in performing the services.
Alternatively, if the individual is present in that other State for more than an aggregate of 183
days in twelve consecutive months, that other State may tax the income attributable to the
activities performed there, whether or not there is a fixed base. It is understood that the concept
of a fixed base is to be interpreted consistently with the concept of a permanent establishment, as
defined in Article 5 (Permanent Establishment). Under either the fixed base or 183 day presence
test, it is understood that the taxation of income from independent personal services is to be
governed by the principles set forth in Article 7 for the taxation of business profits. Thus, for
example, it is understood that income may be attributed to a fixed base even after the fixed base
has ceased to exist or to personal services in a year after the year in which they were performed.
In addition, in accordance with the principles of paragraph 3 of Article 7, the tax base is net of
expenses incurred in earning the income.
There is a rebuttable presumption in Mexican law that, when services are paid for by a
resident of Mexico and were partly performed in Mexico, the entire payment is for services
performed in Mexico. If part of the services were performed outside Mexico, it is the taxpayer's
responsibility to so demonstrate.
Paragraph 2 notes that the term "independent personal services” is primarily concerned
with professional services. It includes independent scientific, literary, artistic, educational or

teaching activities, as well as the independent activities of physicians, lawyers, engineers,
architects, dentists, and accountants. This list, which is derived from the OECD Model, is not
exhaustive. The term includes all personal services performed by an individual for his own
account where he receives the income and bears the risk of loss arising from the services.
Point 14 of the Protocol further provides that Article 14 also applies to independent
services furnished in Mexico by a U.S. company, in which case the income will be taxed as if it
were attributable to a permanent establishment in Mexico. In the converse case, the United States
will apply Article 7 (Business Profits) directly. However, under Mexican rules, a personal
service company is not considered to earn "business" profits, so it is taxed under Article 14. The
Protocol confirms that the tax will be imposed on a net basis.
ARTICLE 15
Dependent Personal Services
This Article deals with the taxation of remuneration derived by a resident of a
Contracting State from the performance of personal services as an employee in the other
Contracting State.
Under paragraph 1, remuneration derived by an employee who is a resident of a
Contracting State may be taxed only by his State of residence except to the extent that it is
derived from an employment exercised in the other Contracting State. Remuneration derived
from employment in the other State may also be taxed by that other State, subject to the
conditions specified in paragraph 2.
Under paragraph 2, a Contracting State may tax remuneration derived by a resident of the
other State from services performed in the first State unless three conditions are satisfied:
(1) the individual is present in that State for a period or periods not exceeding 183 days in
twelve months;
(2) the remuneration is paid by, or on behalf of, an employer who is not a resident of that
Contracting State; and
(3) the remuneration is not borne as a deductible expense by a permanent establishment
or fixed base that the employer has in that State.
The twelve-month period must include the period in which the income was earned. All three
conditions must be satisfied for the remuneration to be exempt from tax in the source State. If a
foreign employer pays the salary of an employee, but a host country corporation or permanent
establishment reimburses the foreign employer and deducts such reimbursement, neither
condition (2) nor (3), as the case may be, will be considered to have been fulfilled. Conditions
(2) and (3) are intended to assure that a Contracting State will not be required both to allow a
deduction to the payor for the amount paid and to exempt the employee on the amount received.
Unlike the U.S. and OECD Models, this Convention does not provide a special rule for
the taxation of members of the crew of international airlines and shipping companies. They are
taxable in accordance with the provisions of paragraphs 1 and 2.

ARTICLE 16
Directors' Fees
This Article provides that a Contracting State may tax the fees paid by a company that is
a resident of that State to a resident of the other Contracting State for services as a director or
overseer of the company, if the services are performed in the first State or in any third State. The
reference to an "overseer" is meant to include persons who are not directors but who oversee,
i.e., look out for, the shareholders' interests without engaging in day to day management
functions. Mexican corporations frequently hire such persons.
This rule is a compromise between the positions of the OECD Model, which permits the
taxation of such fees in accordance with domestic law, and the U.S. Model, which treats such
fees as employment income under Articles 14 (Independent Personal Services) or 15 (Dependent
Personal Services). In this case, Mexico is permitted to tax such fees paid by a Mexican company
to its U.S. resident directors or overseers, provided that the services are performed outside the
United States. As a consequence, the director or overseer will have foreign source income
against which to credit the Mexican tax. Notwithstanding this Article, the United States will tax
directors' fees for personal services rendered by Mexican resident directors of U.S. corporations
only to the extent that the services are performed in the United States (and the remuneration is
therefore sourced in the United States). Mexico generally taxes such fees whenever the paying
company is a resident of Mexico.
ARTICLE 17
Limitation on Benefits
Article 17 assures that source basis tax benefits granted by a Contracting State pursuant
to the Convention are limited to the intended beneficiaries - residents of the other Contracting
State who have a substantial presence in, or business nexus with, that State. Absent this Article,
if a resident of a third State were to organize a corporation in a Contracting State for the purpose
of deriving treaty-benefited income from the other Contracting State, the entity would generally
be entitled to benefits as a resident of a Contracting State, subject to any limitations imposed by
the domestic law of the source State (e.g., business purpose, substance-over-form, step
transaction or conduit principles).
The structure of the Article is as follows: Paragraph 1 lists a series of attributes of a
resident of a Contracting State the presence of any one of which will entitle that person to
benefits of the Convention in the other Contracting State. Subparagraphs (d) (iii) and (g) of
paragraph 1 expand the usual list of such attributes to extend benefits of the Convention to
residents of any country that is a party to the North American Free Trade Agreement ("NAFTA";
currently, the parties are the United States, Mexico, and Canada) once that agreement enters into
force. Paragraph 2 further provides that benefits may be granted to a person not entitled to
benefits under the tests of paragraph 1 if the competent authority of the source State determines
that it is appropriate to provide benefits in that case. Point 15 of the Protocol defines certain
terms and conditions of the Article.

The first category of residents of a Contracting State eligible for treaty benefits from the
other Contracting State consists of individuals. It is unlikely that individuals can be used to
derive treaty-benefited income on behalf of a third-country person, because the Articles of the
Convention providing such benefits require that the beneficial owner of the income, not just the
recipient, be a resident of a Contracting State.
The second category of qualifying residents is comprised of the Contracting States
themselves or political subdivisions or local authorities thereof.
The third category consists of businesses that are engaged in the active conduct of a trade
or business in the residence State and derive income from the other Contracting State in
connection with, or incidental to, that trade or business. For this purpose, the business of making
or managing investments is not considered an active business unless carried on by a bank or
insurance company as part of its banking or insurance activities. Point 15(a) of the Protocol
explains that the term "trade or business," in the case of Mexico, refers to a permanent
establishment as defined in Mexico's Income Tax Law. As described in the discussion of Article
1lA (Branch Tax), Mexican domestic law uses the term "permanent establishment" in a way that
is analogous to the use of the term "trade or business" under U.S. tax law and that differs from
the meaning of that term under the Convention.
The fourth category consists of companies whose shares are regularly traded in
substantial volume on an officially recognized securities exchange (hereafter referred to as
"publicly traded"). Point 15(b) of the Protocol defines "recognized securities exchange". It
currently covers U.S. and Mexican exchanges, but permits the competent authorities to agree on
additional exchanges. It would be appropriate, for example, to add Canada's exchanges to
implement the provisions of part (iii) of subparagraph (d).
Three subcategories of publicly traded corporations are provided in subparagraph (d).
Under the first, a company qualifies as a resident entitled to benefits of the Convention if its
principal class of shares is publicly traded on a recognized securities exchange in either Mexico
or the U.S. Second, it will qualify if, although its own shares are not publicly traded, it is the
wholly owned subsidiary (through direct or indirect ownership) of a company that is a resident of
the same State and whose shares are so traded. Thus, for example, a Mexican company not
publicly traded but wholly owned by a holding company that is a resident of Mexico whose
shares are publicly traded on a recognized exchange in the United States or Mexico and is
publicly traded, will qualify under subparagraph (d)(ii). The third alternative permits a company
that is not publicly traded to qualify if it is more than 50 percent owned, directly or indirectly, by
one or more companies that are residents of the United States and/or Mexico and the remainder
of its ownership is by publicly traded companies that are residents of any country that is a party
to the ("NAFTA") (i.e., currently Canada). Thus, for example, a Mexican company will qualify if
it is owned 51 percent by publicly traded U.S. and/or Mexican companies and 49 percent by a
publicly traded Canadian company. This alternative does not take effect until the NAFTA is in
force. (Protocol, Point 15(d)).
The fifth category covers tax exempt organizations, if more than half of the beneficiaries,
members, or participants, if any, are individual residents of either Contracting State or other
persons who qualify for the benefits of this Convention under the terms of this Article.

Subparagraphs (f) and (g) establish a sixth category of residents that are entitled to
benefits of the Convention if they satisfy one of two alternative two part tests regarding
ownership and "base erosion." The rationale for these tests is that, while substantial ownership of
the equity of the resident entity by qualifying persons tends to demonstrate an entitlement to
benefits of the Convention, it is not sufficient to prevent treaty benefits from inuring
substantially to third-country residents. It is also necessary to ensure that the earnings of such
entity not be "stripped" out in substantial part to non-qualifying persons, for example by
financing the entity largely through third-country debt. In most U.S. Conventions, only one such
provision is included. In this case, a second alternative is provided in recognition that one of the
expected results of the NAFTA is to encourage joint ventures among residents of the three
member countries.
Under the ownership requirement of the first alternative, benefits will be granted to a
resident of a Contracting State if more than 50 percent of the beneficial interest in the person (or,
in the case of a company, more than 50 percent of each class of its shares) is owned, directly or
indirectly, by persons who are themselves entitled to benefits under the tests of paragraph 1 other
than subparagraph (c). Subparagraph (c) refers to active businesses and the "safe harbor" it
provides is meant to be limited to income earned by the active trade or business, not to cover
other income earned by a subsidiary of such a business. In addition, the "base erosion" standard
must be satisfied. Less than 50 percent of the person's gross income may be used, directly or
indirectly, to make deductible payments, including interest and royalties, to persons not eligible
for benefits under the tests of paragraph 1 other than subparagraph (c)). For this purpose gross
income means gross receipts or, in the case of a manufacturing or producing activity, gross
receipts less the direct costs of labor and materials. (See paragraph 15 (c) of the Protocol.)
Alternatively, once NAFTA is in force the benefits of the reduced rates on dividends,
interest, branch profits and excess interest, and royalties provided, respectively, in Articles 10,
11, 11A, and 12, will also be available to an entity which is
(i) more than 30 percent beneficially owned by residents of either Mexico
or the United States who are themselves entitled to benefits under the tests of
paragraph 1 (other than those who qualify only under the active business test of
subparagraph (c)) and
(ii) more than 60 percent beneficially owned by residents of NAFTA
member states, provided that,
iii) less than 70 percent of the gross income of such person is used to meet
liabilities to persons other than those described under (i) above and less than 40
percent of the gross income is used to meet liabilities to persons other than those
described under (i) or (ii) above.
It is understood that the definition of "gross income in paragraph 15(c) of the Protocol applies for
this provision also. For this purpose, ownership by residents of a NAFTA State other than the
United States and Mexico (currently Canada) will be taken into account only if
(i) that other NAFTA State has a comprehensive income tax treaty with
the country of source of the dividend, interest, branch profit or excess interest, or
royalty;
(ii) such treaty provides for a rate of tax no less favorable than that

provided by this Convention with respect to the same item of income; and
(iii) the resident of the NAFTA State qualifies for the benefits of that
treaty under its terms (e.g., its limitation on benefits provision).
For example, assume a Mexican company is beneficially owned 40 percent by residents of
Mexico and 60 percent by residents of Canada, and meets the base erosion test of this provision.
If such a company derives dividends from the United States, it will not be entitled to the benefits
of Article 10 of this Convention, because the current U.S.- Canada treaty provides for higher
rates on both portfolio and direct investment dividends. If, however, that company derives
interest on credit sales of equipment to unrelated U.S. persons, or royalties of any kind from U.S.
sources, it will be entitled to the benefits of this treaty, because it could have obtained at least as
favorable a tax rate under the U.S.-Canada income tax treaty. As in the case of subparagraph (d),
concerning the publicly traded test, this partial "derivative" benefits rule of subparagraph (g)
only takes effect when the NAFTA is in force. (Protocol, Point 15(d).)
It is intended that the provisions of paragraph 1 will be self-executing. Unlike the
provisions of paragraph 2, discussed below, claiming benefits under this paragraph does not
require advance competent authority ruling or approval. The tax authorities may, of course, on
review, determine that the taxpayer has improperly interpreted a particular subparagraph and is
not entitled to the benefits claimed.
Paragraph 2 permits the competent authority of the State in which income arises to grant
treaty benefits in additional cases, even if they do not meet the safe harbor standards of
paragraph 1 (or the information is not available to make such a determination). This
discretionary provision is included in recognition that, with the increasing scope and diversity of
international economic relations, there may be cases where significant participation by third
country residents in an enterprise of a Contracting State is warranted by sound business practice
and does not indicate a motive of attempting to derive unintended treaty benefits.
ARTICLE 18
Artistes and Athletes
This Article deals with the taxation of remuneration derived by artistes (i.e., performing
artists and entertainers) and athletes who are residents of a Contracting State from the
performance of their services as such in the other Contracting State. As explained in Point 16 of
the Protocol, such remuneration includes remuneration for personal activities relating to the
individual's reputation as an entertainer or athlete, such as compensation for services performed
in personal endorsements of commercial products. This Article does not apply to the
remuneration of other persons involved in a performance or athletic event, such as technicians,
managers, or coaches.
Paragraph 1 overrides the provisions of Articles 14 (Independent Personal Services) and
15 (Dependent Personal Services) to provide that an individual covered by this Article who
would be exempt from tax in the State where the services are performed under the terms of
Articles 14 or 15 may, nevertheless, be taxed in that State if the gross remuneration, including
reimbursed expenses, exceeds U.S. $3,000 or its equivalent in Mexican currency during the

taxable year. Anyone receiving more than the $3,000 gross income amount is subject to tax on
the full amount, in accordance with the provisions of domestic law of the source country. Since it
is often difficult to determine the annual amount of remuneration until the year has ended, the
paragraph explicitly authorizes a tentative withholding of tax. Individuals entitled to exemption
under this paragraph may claim a refund, and those subject to tax may apply the withholding
against their final tax liability.
This represents a compromise between the position of the OECD and U.N. Models,
which provide for immediate taxation at source of entertainers and athletes, and the 1981 U.S.
Model, which seeks to preserve a threshold of gross income below which modestly paid
entertainers and athletes will be treated the same as persons performing other services covered
solely under Articles 14 or 15. In this case, the threshold is lower than in the 1981 U.S. Model.
However, paragraph 3 of this Article provides a special exemption at source of the remuneration
of entertainers or athletes whose visit is substantially supported by public funds of their State of
residence or a political subdivision or local authority thereof. It is understood that the competent
authorities may consult as to which visits meet this standard.
Paragraph 2 is intended to deal with the potential for abuse when income from a
performance accrues to a person other than the performer. For example, an entertainer
performing as an "employee" of a closely held company not having a permanent establishment in
the source State may be able to avoid tax at source by taking a salary below the threshold amount
and diverting the remainder to a company of which he is the sole or principal owner. Paragraph 2
provides that, when an entertainer or athlete retains a beneficial interest in income that derives
from his personal activities but accrues to another person, that other person may be subject to
taxation on such income by the State of source, notwithstanding the provisions of Articles 7
(Business Profits), 14 (Independent Personal Services), and 15 (Dependent Personal Services).
For purposes of this paragraph, an entertainer or athlete is considered to retain a beneficial
interest in performance income accruing to another person unless the individual can establish
that neither he nor any person related to him participates, directly or indirectly, profits of such
other person in any manner.
As mentioned above, paragraph 3 provides an independent exemption from taxation at
source of the remuneration of entertainers and athletes whose visits are substantially supported
by public funds of their country of residence or a political subdivision or local authority thereof.
ARTICLE 19
Pensions, Annuities, Alimony, and Child Support
Except as provided in Article 20 (Government Service), pensions and similar
remuneration in consideration of past employment may be taxed only by the Contracting State of
which the beneficial owner is, at the time of receipt, a resident. It is understood that the services
need not have been performed by the beneficial owner of the pension; for example, a pension
paid to a surviving spouse who is a resident of Mexico would be exempt from tax by the United
States on the same basis as if the right to the pension had been earned directly by the surviving
spouse. A pension may be paid in installments or in a lump sum.

In contrast, except as provided in Article 20 (Government Service), social security
benefits and other public pensions paid by a Contracting State may be taxed only in the paying
State. This rule is an exception to the saving clause of paragraph 3 of Article 1 (General Scope).
Thus, a Mexican social security benefit will be exempt from U.S. tax even if the beneficiary is a
U.S. resident or a U.S. citizen (whether resident in the United States, Mexico, or a third country).
Annuities derived and beneficially owned by an individual resident of a Contracting State
may be taxed only by that State. This provision is intended to cover traditional annuity
arrangements which provide retirement benefits to individuals. It is not intended to exempt from
tax at source income from arrangements that are a variation of traditional annuities and that
accrues to corporations or other legal persons.
Alimony and child support payments made by a resident of one Contracting State to a
resident of the in the other State may be taxed only in the State of which the payor is a resident.
This rule is an exception to the saving clause of paragraph 3 of Article 1 (General Scope). Thus,
a U.S. resident deriving alimony or child support payments from a resident of Mexico will be
exempt from U.S. tax on such payments. Under U.S. law, child support payments are not taxable
to the recipient (and not deductible to the payer), while alimony payments are taxable to the
recipient (and deductible by the payer). Under Mexican law, neither alimony nor child support
payments are deductible to the payer or taxable to the recipient. Thus, under the Convention,
child support payments by a resident of one Contracting State to a resident of the other State will
be taxable to the payer (in the form of no deduction) and exempt from tat to the owner in both
countries. Alimony paid by a resident of Mexico to a resident of the United States will be taxed
in Mexico (again by disallowing a deduction to the payer). In the converse case, alimony that is
deductible by the U.S. payer under U.S. law will be subject to U.S. tax to the recipient, and
exempt from tax in Mexico.
ARTICLE 20
Government Service
This Article follows the corresponding provisions of the OECD Model.
Paragraph 1 provides that payments by a Contracting State or political subdivision or
local authority thereof to compensate an individual for performing governmental services may be
taxed only in that State, provided that the individual is not a resident and national of the other
Contracting State and was not a resident of the other Contracting State prior to performing the
services. Under subparagraph (b), if the individual is either a resident and national of the other
State or a locally hired resident of that other State, the compensation may be taxed only by that
other State. It is understood, however, that the rule of subparagraph (b) does not apply to the
spouse of a government employee described in paragraph 1 if the spouse becomes employed by
the sending State after taking up residence in the host State.
Paragraph 2 provides rules for the taxation of pensions paid from public funds in respect
of governmental services. Such pensions may be taxed only by the paying State unless the
individual recipient is a resident and citizen of the other State, in which case only the other
(residence) State may tax the pension. This rule does not apply to social security benefits and

other public pensions which are not in respect of services rendered to the paying government or a
political Subdivision or local authority thereof; such amounts may be taxed only by the paying
State under Article 19. However, this rule does apply to social security payments to U.S.
Government employees for whom the social security system is the retirement plan related to their
government service; i.e., in the unusual case where an individual who is a citizen and resident of
Mexico derives a pension for U.S. Government employment that is paid under the social security
system, only Mexico may tax that pension. This could happen, for example, if a locally hired
driver for the U.S. Embassy in Mexico City were to retire in Mexico and receive U.S. social
security benefits.
The rules of paragraphs 1 and 2 are an exception to the saving clause of paragraph 3 of
Article 1 (General Scope) for individuals who are neither citizens nor permanent residents of the
State where the services are performed. Thus, for example, payments by Mexico to its employees
at the Mexican Embassy in Washington are exempt from U.S. tax if the employees are not U.S.
citizens or green card holders and were not residents of the United States at the time they became
employed by Mexico, even if they would otherwise be considered U.S. residents for tax
purposes. (Under the 1984 modification to the definition of a U.S. resident in Code section 7701,
this exception to the saving clause is of less relevance, since time spent in the United States as a
foreign government employee does not count in applying the physical presence test of
residence.)
Paragraph 3 provides that remuneration and pensions paid in respect of services
performed for a government in the conduct of a business are covered by Articles 14 (Independent
Personal Services), 15 (Dependent Personal Services), 16 (Directors' Fees), 18 (Artistes and
Athletes), or 19 (Pensions, Annuities, Alimony, and Child Support), as appropriate. It is
understood by both sides that this Article applies only to remuneration and pensions in respect of
services rendered in the discharge of functions of a governmental nature.
ARTICLE 21
Students
This Article deals with visiting students and business apprentices and corresponds to the
provision of the OECD model. An individual who is a resident of one of the Contracting States
and who visits the other Contracting State solely for the purpose of acquiring education or
training, will not be taxed by that other State on amounts received from abroad to cover his
expenses. The reference to "solely" for the purpose of education or training is meant to describe
individuals participating in a full-time program of study or training. It is not intended to exclude
full-time students who, in accordance with their visas, may hold part-time jobs. The exemption,
however, does not extend to any amounts received as compensation for services rendered, which
are covered under Article 14 (Independent Personal Services) or Article 15 (Dependent Personal
Services). The exemption also does not apply to any grant provided from within the host State,
which is taxable in accordance with the domestic law of that State.
This Article is an exception to the saving clause of paragraph 3 of Article 1 (General
Scope) for individuals who are not citizens of the United States or green card holders but are
residents of the United States under the physical presence tests of Code section 7701(b).

ARTICLE 22
Exempt Organizations
This Article provides for reciprocal recognition of tax-exempt, charitable organizations
resident in a Contracting State and qualifying for benefits of the Convention under Article 17,
paragraph 1(e) or 2. The effect of the reciprocal recognition is to exempt from source taxation
income earned by a charitable organization resident in the other Contracting State and to permit
deductions for cross-border charitable donations. In addition, the U.S. will recognize qualifying
Mexican charities as "public charities." Thus, for example, a contribution to those charities by a
U.S. private foundation will not constitute a "taxable expenditure" under section 4945 of the
Code; as a result, the U.S. private foundation will not be required to exercise so-called
“expenditure responsibilities” with respect to such contributions.
The provisions of this Article are exceptions to the saving clause of paragraph 3 of
Article 1 (General Scope) in that they call for certain treatment by a Contracting State of its own
citizens or residents. Thus, both States are required, even when domestic law would not do so, to
permit a deduction to their citizens or residents for contributions to the 0ther State's exempt
organizations that are recognized as charitable under the Convention.
The provisions of Article 22 were considered a desirable way to encourage contributions
by U.S. residents to small Mexican charities that would have difficulty in organizing a U.S.
entity through which contributions could be directed, or in satisfying the administrative
requirements for recognition as a foreign corporation eligible for treatment as a "public charity"
in the United States. Article 22 also enables taxpayers living and operating at the border to
support organizations across the border from which they derive benefits. The physical, proximity
of Mexico and the United States provides a unique circumstance for the reciprocal recognition of
tax-exempt organizations.
Paragraph 1 provides that a tax-exempt organization resident in a Contracting State that is
operated exclusively for religious, scientific, literary, educational, or other charitable purposes
will be exempt from income tax in the other Contracting State on items of income that would be
exempt from tax in the other Contracting State, under its laws, if the organization were
recognized by that other State as being entitled to exemption from tax. Under paragraph (a) of
Point 17 of the Protocol, the competent authorities of each Contracting State will accept the
certification of the other State as to the status of a resident of that other State as an organization
exempt from tax.
Paragraph 2 sets the standards for deductibility of contributions by a resident of the U.S.
to a charitable organization resident in Mexico. It provides that if the Contracting States agree
that Mexico's standards for organizations authorized to receive deductible contributions are
essentially equivalent to the United States' standards for status as a public charity, then an
organization that Mexico determines has met its standards shall be treated as a public charity in
the United States for two purposes:
(1) receiving grants from United States private foundations and
(2) receiving deductible charitable contributions from residents or citizens of the United

States.
In 1992, Mexico adopted standards for the tax-exemption of charitable organizations that are
modeled on United States tax laws governing exempt organizations. Paragraph (b) of Point 17 of
the Protocol reflects that the United States has examined Mexico's new standards for
organizations authorized to receive deductible contributions, contained in Article 70-B of the
Mexican Income Tax Law, and determined that those standards are essentially equivalent to the
United States standards for public charities. Thus, although paragraph 2 is not itself self-
executing, the Protocol brings its provisions into effect immediately upon entry into force of the
Convention. However, the United States competent authority retains the right, after consultation
with the competent authority of Mexico, to deny the benefits of paragraph 2 to an organization
resident in Mexico even though the tax authorities of Mexico have found that the organization
qualifies under Article 70-B, if the circumstances of a case or cases warrant. Mexican and U.S.
tax administration also expect to continue to cooperate to provide common guidance for
taxpayers and common enforcement standards.
The deductibility of a contribution by a U.S. taxpayer to a Mexican charitable
organization is subject to the limitations under U.S. law applicable to contributions to U.S. public
charities. These limitations include, in particular, the percentage and other limitations under
Code section 170 and the overall limitation on itemized deductions under Code section 68. The
amount of the deduction for a U.S. taxpayer's contributions to Mexican charities is limited to the
U.S. taxpayer's Mexican source income, as determined under the Convention, and the general
limitations under U.S. law (for example, the percentage limitations of section 170) are applied to
this amount. Any amounts, treated as charitable contributions under this paragraph that are in
excess of the amounts deductible in a taxable year may be carried over and deducted in
subsequent taxable years subject to the limitations of this paragraph.
Paragraph b) of Point 17 of the Protocol also reflects that Mexico has reviewed the U.S.
standards for publicly supported organizations under sections 509(a)(1) and (2) of the Code and
determined that they are essentially equivalent to Mexico's standards for organizations
authorized to receive deductible contributions. This conclusion does not, however, pertain to
religious organizations, which, although eligible for charitable status in the U.S., are not entitled
to receive deductible contributions under Mexican law.
Paragraph 3 provides rules for purposes of Mexican taxation with respect to the
deductibility of gifts to a U.S. resident organization by a resident of Mexico. The rules of
paragraph 3 parallel the rules of paragraph 2.
Paragraph 4 provides an exemption from U.S. excise taxes on private foundations in the
case of religious, scientific, literary, educational or other charitable organization that is a resident
of Mexico and which has received substantially all its support from persons other than citizens or
residents of the United States. These excise taxes are generally imposed by Chapter 42 of subtitle
D of the Code. To claim benefits under this paragraph a Mexican non-profit organization must
also meet the requirements of paragraph 1(e) or 2 of Article 17 (Limitation on Benefits).
ARTICLE 23

Other Income
This Article provides the rules for the taxation of items of income derived by a resident of
a Contracting State from sources in the other Contracting State that are not dealt with in the other
articles of the Convention, such as lottery winnings, punitive damages, cancellation of
indebtedness income, [income from financial products such as swaps, and forward and futures
contracts]. Such income may be taxed in the State in which it arises. Income arising in a third
State is not dealt with in this Article. These domestic laws apply, unless the income constitutes
business profits of a permanent establishment or fixed base of a resident of the other Contracting
State, in which case Article 7 (Business Profits) or 14 (Independent Personal Services) applies.
Article 24
Relief from Double Taxation
In this Article each Contracting State undertakes to relieve double taxation by granting a
credit against its income tax for the income tax paid to the other country. It also provides a credit
to a parent company (one owning at least 10 percent of the voting stock of a company which is a
resident of the other State) for tax "indirectly" paid to that other State on the portion of the profits
distributed as dividends to its parent company. The credit is subject to the limitations of domestic
law, such as Code section 904 in the case of the United States.
For purposes of paragraph 1, the taxes referred to in paragraphs 3 and 4 of Article 2
(Taxes Covered) shall be treated as income taxes, and therefore eligible for the credit. However,
Mexico's tax on distributed profits is considered to be an income tax only to the extent that it is
imposed on previously untaxed earnings and profits as calculated under U.S. tax accounting
rules. The distributed profits tax is imposed by Mexico to ensure that the full tax has been paid at
the corporate level, since no further tax is collected from the shareholder on profits distributed as
dividends. The tax is imposed on the corporation, at the regular corporate rate, on the amount of
a distribution that exceeds the corporate income previously subject to tax. By agreeing to credit
the tax only to the extent it is imposed on earnings and profits as calculated for U.S. purposes,
the U.S. seeks to ensure that creditability is consistent with prevailing U.S. principles, which
only permit credits for those foreign taxes that reach net income. Because Mexico's tax on
distributed profits is imposed on the corporation, not the shareholder, it is creditable as an
"indirect" or "deemed paid" tax under the principles of Code section 902. The amount of the
distributed profits tax deemed paid and credited in accordance with this Article will be treated as
a dividend for purposes of the Code section 78 "gross-up."
Paragraph 2 provides that, to the extent that the provisions of the Convention require
Mexico to exempt from tax income derived by its residents, it will use the exemption rather than
the credit method of avoiding double taxation. In such cases Mexico may take into account the
residents' entire income, including the exempt amount, in calculating the applicable tax rate to be
applied to the taxable portion. Thus, the exemption is calculated at the average rate of tax on
total income, rather than at the rate applicable to the lowest or highest applicable bracket of
income. This approach is Sometimes referred to as "exemption with progression" and is
commonly used by countries that avoid double taxation by exempting foreign source income.

Paragraph 3 provides that, for purposes of this Article, income which may be taxed in a
Contracting State under the terms of this Convention will be considered to have its source in that
State. However, domestic law source rules that apply for purposes of limiting the foreign tax
credit will govern if they differ from the rules resulting from the treaty source rules. This permits
the United States to apply the anti-abuse rules of Code section 904(g), for example. An exception
is made in the case of capital gains; to the extent that gains that would be U.S. source under the
Code are resourced as Mexican source income under the Convention, the Convention source rule
prevails, subject to the separate basket requirement of Code section 904(g)(l). Paragraph 4 of
Article 13 (Capital Gains) resources domestic source capital gains as foreign source to the extent
necessary to avoid double taxation under the taxing rules of that paragraph.
Paragraph 4 provides a special rule to avoid double taxation of residents of Mexico who
are U.S. citizens. The United States, in such cases, is entitled to tax under its statutory rules,
without respect to the treaty limitations that apply to residents of Mexico who are not U.S.
citizens. In such cases, the United States agrees that Mexico, in imposing its tax based on
residence, is required to credit only the U.S. tax that would have applied to the U.S. source
income of a resident of Mexico who is not a U.S. citizen. The United States agrees to credit
Mexico's tax (net of that credit) against its residual tax imposed on the basis of citizenship, and
to resource enough U.S. source income as Mexican source to prevent double taxation of that
income. For example, assume a U.S. citizen resident in Mexico has $700 of Mexican income and
$300 of U.S. dividends. Assume that the U.S. tax rate is 30 percent and the Mexican tax rate is
35 percent. The U.S. tax is 300 less a credit of 210 (70% of 300), a net tax of 90. The Mexican
tax is 350, less a credit for U.S. tax at the 15 percent treaty rate on dividends, or 45, a net tax of
305. The total tax will be 390, higher than either country's tax, indicating some double taxation
of the U.S. dividends. To remove that double taxation, the U.S. will allow an additional credit for
the Mexican tax, but the additional credit may not reduce the U.S. tax after credit below 45 (15%
of 300). Thus, the additional credit in this case is 45. The total tax is reduced to 350, the higher
of the two countries' taxes. (A similar example can be constructed for cases where there is
income from taxes in the other countries result in excess limitation in Mexico, that may absorb
some or all of the additional U.S. tax and reduce or eliminate the need for the additional U.S.
credit.)
ARTICLE 25
Non-Discrimination
This Article assures non-discriminatory taxation of similarly situated persons. Paragraph
1 provides that a national of one Contracting State may not be subject to taxation or connected
requirements in the other Contracting State which are different from or more burdensome than
the taxes and connected requirements imposed upon a national of that other State in the same
circumstances. A national of a Contracting State is afforded protection under this paragraph even
if the national is not a resident of either Contracting State. Thus, a U.S. citizen who is resident in
a third country is entitled, under this paragraph, to the same tax treatment in Mexico as a
Mexican national resident in that third country. It is acknowledged; however, that a national of a
Contracting State who is subject to taxation of his worldwide income in that State and a national
of the other State who is not subject to taxation of his worldwide income in the first-mentioned
State are not in the same circumstances. Thus, the United States is not required to provide equal

income tax treatment of a U.S. citizen resident in a third country and a Mexican citizen resident
in the same third country.
Paragraph 2 of the Article provides that a permanent establishment in a Contracting State
of a resident of the other Contracting State may not be less favorably taxed in the first-mentioned
State than an enterprise of that first-mentioned State carrying on the same activities. Neither
Contracting State is required to provide to residents of the other Contracting State the same
personal exemptions and deductions that it provides to its own residents to take account of
marital status or family responsibilities.
Section 1446 of the Code imposes on any partnership with income which is effectively
connected with a U.S. trade or business the obligation to withhold tax on amounts allocable
to a foreign partner. In the context of the Convention, this obligation applies with respect to a
Mexican resident partner's share of the partnership income attributable to a U.S. permanent
establishment. There is no similar obligation with respect to the distributive shares of U.S.
resident partners. It is understood, however, that this distinction is not a form of discrimination
within the meaning of paragraphs 1 and 2 of the Article. No distinction is made between U.S.
and Mexican partnerships. The requirement to withhold on the Mexican and not the U.S.
partner's share is not discriminatory taxation, but, like other withholding on non-resident aliens,
is a reasonable method for the collection of tax from persons who are not continually present in
the United States, and as to whom it may otherwise be difficult for the United States to enforce
its tax jurisdiction. If tax has been over-withheld. the partner can, as in other cases of over-
withholding, file for a refund.
Paragraph 3 specifies that no provision of the Article will prevent either Contracting
State from imposing the branch taxes described in Article 11A (Branch Tax). Nor does the
Article prevent Mexico from denying a deduction for presumed expenses related to income from
real property to an individual resident of the United States who elects to deduct actual expenses
in computing the Mexican tax on such income, as provided for in paragraph 5 of Article 6
(Income from Immovable Property (Real Property)).
Paragraph 4 prohibits discrimination in the allowance of deductions. When a resident of a
Contracting State pays interest or royalties or makes other disbursements to a resident of the
other Contracting State, the first-mentioned Contracting State must allow a deduction for those
payments in computing the taxable profits of the enterprise under the same conditions as if the
payment had been made to a resident of the first-mentioned State. An exception to this rule is
provided in cases where the payment is excessive, as described in paragraph 1 of Article 9
(Associated Enterprises), paragraph 8 of Article 11 (Interest), or paragraph 5 of Article 12
(Royalties). The term "other disbursements" is understood to include a reasonable allocation of
executive and general administrative expenses, research and development expenses and other
expenses incurred for the benefit of a group of related persons which includes the person
incurring the expense.
Paragraph 5 requires that a Contracting State not impose other or more burdensome
taxation or connected requirements on a company that is a resident of that State but that is
wholly or partly owned or controlled, directly or indirectly, by one or more residents of the other
Contracting State, than the taxation or connected requirements that it imposes on similar resident

companies owned by residents of the first-mentioned State or of a third State. It is understood
that the U.S. rules that impose tax on a liquidating distribution of a U.S. subsidiary of a Mexican
company and the rule restricting the use of small business corporations to U.S. citizens and
resident alien shareholders do not violate the provisions of this Article.
Paragraph 6 provides that, notwithstanding the specification of taxes covered by the
Convention in Article 2 (Taxes Covered), the non-discrimination protection provided by this
Article applies to taxes of every kind and description imposed at all levels of government.
Customs duties are not considered taxes for this purpose.
The saving clause of paragraph 3 of Article 1 (General Scope) does not apply to this
Article, by virtue of the exceptions in paragraph 4(a) of Article 1. Thus, for example, a U.S.
citizen who is resident in Mexico may claim benefits in the United States under this Article.
ARTICLE 26
Mutual Agreement Procedure
This Article provides for cooperation between the competent authorities of the
Contracting States to resolve disputes that may arise under the Convention and to resolve cases
of double taxation not provided for in the Convention.
Paragraph 1 provides that, where a person considers that the actions of one or both
Contracting States will result for him in taxation which is not in accordance with the Convention,
he may present his case to the competent authority of his State of residence or citizenship. It is
not necessary for a person first to have exhausted the remedies provided under the national laws
of the Contracting States before presenting a case to the competent authorities.
Paragraph 2 provides that, if the competent authority of the Contracting State to which
the case is presented considers the case to have merit, and if it cannot reach a unilateral solution,
it will seek agreement with the competent authority of the other Contracting State to avoid
taxation not in accordance with the Convention. However, the case must be brought to the
attention of the competent authority of the other State within four and a half years from the due
date or the date of filing of the return in that other State, whichever is later. This time limit was
introduced to accommodate Mexico's five year limit in which to exercise its audit powers. In
order to keep open a case beyond that time, Mexico must be notified in time to have initiated an
audit within five years of the later of the due date or the filing date. The treaty ensures that
Mexico will be given at least six months advance notice before expiration of the five year period.
If a case is brought within that time period and an agreement is reached by the competent
authorities, the agreement will be implemented, and any agreed refund made, within 10 years
from the later of the due date of filing of the return in that other State, or the time within which
the statute of limitations remains open within that other State for applying such treaty
agreements. Thus, if domestic law, either currently or in future, permits holding the statute open
longer than ten years, the taxpayer will be granted relief within that longer period. Because, as
specified in paragraph 2 of Article 1 (General Scope), the Convention cannot operate to increase
a taxpayer's liability, time or other procedural limitations can be overridden only for the purpose
of making refunds and not to impose additional tax.

Paragraph 3 authorizes the competent authorities to seek to resolve difficulties or doubts
that may arise as to the application or interpretation of the Convention. Mexico does not wish to
include in this paragraph the list of examples found in the U.S. model of the kinds of matters
about which the competent authorities may reach agreement. Mexico thought that some of those
examples, such as the ability to adjust dollar amounts for inflation or to vary domestic penalties
in international cases, would exceed the authority of its competent authority. Nevertheless, it is
understood that the competent authorities will attempt to resolve difficulties or doubts about
implementing the Convention to the maximum extent permitted.
Paragraph 4 authorizes the competent authorities to communicate with each other directly
for these purposes. It is not necessary to communicate through diplomatic channels.
Paragraph 5 provides for an arbitration procedure, to be implemented subsequently by an
exchange of diplomatic notes. Point 18 of the accompanying Protocol provides that the
competent authorities will consult after the Convention has been in force for three years to
decide whether it is appropriate to exchange the notes. One of the key factors for the U.S.
competent authority in making that decision will be the U.S. experience under the arbitration
provision of the U.S.-Germany treaty, that entered into force in 1991 and contains the first
arbitration provision of any U.S. income tax treaty. Subparagraph (b) of Point 18 of the Protocol
provides rules to be followed in the eventual implementation of the arbitration procedure. The
competent authorities may supplement and/or modify those provisions, but must conform to their
general principles.
This Article represents another exception to the saving clause of paragraph 3 of Article 1;
the benefits of this Article are thus available to residents of both Contracting States. (See
paragraph 4(a) of Article 1 (General Scope).)
ARTICLE 27
Exchange of Information
This Article typically provides for the exchange of tax information between the
competent authorities of the Contracting States. However, in this case such exchanges of
information are authorized in the Tax Information Exchange Agreement ("TIEA") between the
U.S. and Mexico that was signed on November 9, 1989 and is currently in effect. The terms of
that Agreement will apply for purposes of this Convention also.
If for any reason the TIEA should be terminated, paragraph 2 provides that the competent
authorities shall exchange such information as is necessary for carrying out the provisions of the
Convention or for administering and enforcing the domestic laws of the Contracting States
referred to in Article 2 (Taxes Covered), as long as the taxation under those domestic laws is not
contrary to the Convention. Point 19 of the Protocol further provides that, in that case, the
Contracting States shall endeavor to promptly conclude a Protocol governing the exchange of
information.
The information exchange is not restricted by Article 1 (General Scope). This means that

information may be requested and provided under this Article with respect to persons who are
not residents of either Contracting State. For example, if a third-country resident has a permanent
establishment in Mexico that engages in transactions with a U.S. resident, the United States
could request information with respect to that permanent establishment, even though it is not a
resident of either Contracting State. Such information would not be routinely exchanged, but
may be requested in specific cases.
Any information received in accordance with this Article will be treated as secret, subject
to the same disclosure constraints that apply to information obtained under the laws of the
requesting State. Information received may be disclosed only to persons, including courts and
administrative bodies, concerned with the assessment, collection, enforcement or prosecution in
respect of the taxes to which the information relates, or to persons concerned with the
administration of these taxes. The information must be used by these persons in connection with
these designated functions. Persons concerned with the administration of taxes, in the United
States, include the lax-writing committees of Congress and the General Accounting Office.
Information received by these bodies is for use in the performance of their role in overseeing the
administration of U.S. tax laws. Information received under this Article may be disclosed in
public court proceedings or in judicial decisions.
This Article applies to all national level taxes. Thus, for example, information relating to
an estate subject to national level tax or to a national tax on sales or assets could be exchanged
for purposes of implementing the Convention or the domestic income tax laws, even if the
transaction in question was purely domestic.
ARTICLE 28
Diplomatic Agents and Consular Officers
This Article confirms that any fiscal privileges to which diplomatic agents or consular
officers are entitled under the general provisions of international law or under special agreements
will apply notwithstanding any provisions of this Convention. This provision also applies to
residents of both Contracting States, provided that they are not citizens of the other State and, if
the United States is the other State, are not green card holders. (See paragraph 4(b) of Article 1
(General Scope).)
ARTICLE 29
Entry into Force
This Article provides the rules for bringing the Convention into force and giving effect to
its provisions. Paragraph 1 provides that each State will notify the other when its constitutional
requirements for the entry into force of the Convention have been completed. The Convention
will enter into force on the date of the later of such notifications.
The effective date of the provisions of the Convention concerning taxes on dividends,
interest, and royalties imposed in accordance with Articles 10, 11, or 12, depend on whether the
Convention enters into force during the first or second half of the calendar year. If it enters into

force during the first six months, the effective date of those provisions is with respect to amounts
paid or credited on or after the first day of the second month after the entry into force. If the
Convention enters into force later than June 30 of any calendar year, the effective date of those
provisions is with respect to amounts paid or credited on or after the first day of the following
January.
With respect to all other taxes, the provisions of the Convention will take effect for
taxable periods beginning on or after the first of January of the year following the year in which
the Convention enters into force.
Once the provisions of this Convention take effect, as provided in paragraph 2 (b), the
provisions of the exchange of notes of August 7, 1989 on reciprocal exemption of income from
the international operation of ships or aircraft shall cease to apply. It was Mexico's preference not
to have two outstanding agreements on the same subject matter, and to rely on the treaty
provisions once they are in effect.
ARTICLE 30
Termination
The Convention is to remain in effect indefinitely, unless terminated by one of the
Contracting States in accordance with the provisions of this Article. The Convention may be
terminated at any time after 5 years from the date of its entry into force, provided that written
notice has been given through diplomatic channels at least six months in advance. If such notice
is given, the Convention will cease to apply in respect of taxes withheld on dividends, interest
and royalties paid or credited on or after the first day of the second month following the six
month period and with respect to other taxes for taxable periods beginning on or after the first of
January following the six month period. Thus, for example, if notice of termination is given after
June 30 of a given year, the termination will not generally be effective as of the following
January 1, since the notice period must last for at least six months.
Point 30 of the Protocol relates to unilateral termination of the Convention by a
Contracting State before the expiration of the five year minimum period provided for in
paragraph 1 of Article 30. This provision was included at the request of Mexico to address the
possibility of future U.S. legislative provisions overriding one or more treaty provisions. If that
occurs in either Contracting State, and if the effect is to significantly limit a benefit provided by
the Convention, the other State may request consultations with a view to modifying the
Convention to restore the balance of benefits. The first State shall accede to such request by
beginning consultations within three months of the request. If the States are unable to agree on
how to modify the Convention to restore the balance of benefits, the affected State may terminate
the Convention in accordance with Article 30 even if it has not been in force for five years.
Neither this provision nor Article 30 prevents the Contracting States from entering into a
new bilateral agreement that supersedes, amends, or terminates provisions of the Convention
either prior to the expiration of the five year period or without the six month notification period.

PROTOCOL
The provisions of the Protocol are an integral part of the Convention. Each has been
described in the discussion of the Article to which it refers.
PROTOCOL 1
TREASURY DEPARTMENT
TECHNICAL EXPLANATION OF THE ADDITIONAL PROTOCOL
SIGNED AT MEXICO CITY, ON SEPTEMBER 8, 1994 AND
MODIFYING THE CONVENTION BETWEEN THE GOVERNMENT OF THE UNITED
STATES OF AMERICA AND THE GOVERNMENT OF THE UNITED MEXICAN STATES
FOR THE AVOIDANCE OF DOUBLE TAXATION AND THE PREVENTION
OF FISCAL EVASION WITH RESPECT TO TAXES ON INCOME
SIGNED AT WASHINGTON, D.C., ON SEPTEMBER 18, 1992
INTRODUCTION
This is a technical explanation of the Additional Protocol, signed at Mexico City on
September 8, 1994 ("the Protocol") that Modifies the Convention between the United States of
America and the United Mexican States for the Avoidance of Double Taxation and the
Prevention of Fiscal Evasion with Respect to Taxes on Income, signed on September 18, 1992
("the Convention").
The Technical Explanation is an official guide to the Protocol. It reflects the policies
behind particular Protocol provisions, as wall as understandings reached with respect to the
application and interpretation of the Protocol.
ARTICLE I
Article 1 of the proposed Protocol replaces the text of Article 27 (Exchange of
Information) of the Convention. Under the new text of paragraph 1 of Article 27, the Competent
Authorities are authorized to exchange information with respect to any tax covered by, and in
accordance with, the provisions of any agreement between the Contracting States for the
exchange of information with respect to taxes. The prior text referred to a particular agreement --
the Agreement Between the United States of America and the United Mexican States for the
Exchange of Information with Respect to Taxes signed on November 9, 1989 ("the TIEA"). The
effect of the new text is to broaden the reference, authorizing information exchange under the
TIEA, under a revised version of the existing agreement, or under any new agreement or
agreements.
The broadening of the authorization under paragraph 1 of Article 27 will have an
immediate effect as follows. Under a protocol to the TIEA, which is attached as Appendix I,
information exchange under the TIEA will apply to taxes imposed by a state, municipality, or
other political subdivision or local authority of a Contracting State. However, this agreement

shall not apply to taxes imposed by a possession of a Contracting State. This change to the TIEA
will mean that information exchange with Mexico can be used to administer and enforce these
sub-federal taxes. The Treasury Technical Explanation to the TIEA protocol is attached as
Appendix II.
Under the new text of paragraph 2 of Article 27, information will be exchanged under the
provisions of that paragraph in the event there is no agreement in effect between the Contracting
States for the exchange of information with respect to taxes. Thus, if the TIEA is terminated and
replaced by another information exchange agreement, information will be exchanged under the
provisions of that other agreement rather than under the provisions of paragraph 2.
Under the new text of paragraph 3 of Article 27, information exchange under Article 27
will apply to all taxes imposed by a Contracting State, including taxes imposed by a state,
municipality, or other political subdivision or local authority thereof. As the possessions are not
covered by the convention, this change will not involve taxes imposed by possessions. Under the
prior text of paragraph 3, information exchange was limited to all federal taxes.
The proposed Protocol does not contain a provision concerning the relationship of the
Convention to other international agreements, including the General Agreement on Trade in
Services (GATS). Such a provision is not necessary.
Article XXII (3) of GATS provides that a Member of the World Trade Organization may
not invoke the obligation of national treatment under Article XVII of GATS with respect to a
measure of another Member that falls within the scope of an international agreement between
then relating to the avoidance of double taxation. In the case of a dispute between Members as to
whether a measure falls within the scope of such an agreement between them, Article XXII (3),
footnote 11, of GATS provides that, with respect to agreements on the avoidance of double
taxation which exist on the date of entry into force of the WTO Agreement, the dispute may be
brought before the Council for Trade in Services only with the consent of both parties to the
agreement-on double taxation.
Both Parties agree that a protocol to a convention that is grandfathered under Article
XXII (3), footnote 11, of the GATS is also grandfathered. Further, without regard to the
grandfather provision, it is clear under the GATS and its interpretative documents that neither
national treatment nor most-favored-nation obligations of GATS extend to mutual administrative
or judicial assistance.
ARTICLE II
Article II provides the requirements for entry into force of the proposed Protocol, which are that
the Contracting States will notify each other when their respective statutory and legal
requirements for the entry into force of this protocol have been satisfied. The protocol will enter
into force when the later of the two notifications is received.
ARTICLE III

Article III provides that the proposed Protocol shall remain in force-as long as the
Convention and Protocol of September 18, 1992, remain in force.
PROTOCOL II (APPENDIX II)
May 16, 1995
TREASURY DEPARTMENT
TECHNICAL EXPLANATION OF THE PROTOCOL
SIGNED AT MEXICO CITY ON SEPTEMBER 8, 1994
AMENDING THE AGREEMENT BETWEEN THE UNITED STATES OF AMERICA
AND THE UNITED MEXICAN STATES
FOR THE EXCHANGE OF INFORMATION WITH RESPECT TO TAXES
INTRODUCTION
This is a technical explanation of the Protocol to the Agreement between the United
States and the United Mexican States for the Exchange of Information With Respect to Taxes
signed on November 9, 1989 ("the Protocol"). References are made to the Agreement ("the
TIEA") and to the Convention between the United States of America and the United Mexican
States for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect
to Taxes on Income, signed on September 18, 1992 ("the Convention").
The Technical Explanation is an official guide to the Protocol. It reflects the policies
behind particular Protocol provisions, as well as understandings reached with respect to the
application and interpretation of the Protocol.
PARAGRAPH 1
Paragraph 1 of the proposed Protocol amends the text of paragraph 4 of Article 2 (Taxes
Covered), of the TIEA. Under the amended text of paragraph 1, the TIEA applies to taxes
imposed by a state, municipality, or other political subdivision or local authority of a Contracting
State, but not to taxes imposed by a possession of a Contracting State. The prior text provided
that the TIEA shall not apply to taxes imposed by states, municipalities or other political
subdivisions, or possessions of a Contracting State.
It is contemplated that information exchange under the TIEA as amended also will be the
basis for exchange of information under the Convention. Article 27 (Exchange of Information) of
the Convention currently requires exchange of information to take place in accordance with the
TIEA unless the TIEA has been terminated. A protocol to the Convention is proposed to
eliminate the cross-reference in Article 27 to the TIEA and replace it with a reference to
exchange of information under any agreement between the Contracting States for exchange of
information with respect to taxes. The prior text of the Convention authorized the exchange of
information under a particular agreement -- the Agreement Between the United States of
America and the United Mexican States for the Exchange of Information with Respect to Taxes
signed on November 9, 1989 ("the TIEA”). The effect of the proposed protocol to the

Convention is to broaden the authorization for exchanging information under the terms of an
agreement between the Contracting States, extending it beyond the TIEA in its current form to an
amended version of the TIEA or to any new agreement or agreements.
The competent authorities under the TIEA will develop procedures and understandings to
ensure the effective and efficient administration of the exchange of information for sub-federal
tax purposes. Such competent authorities will also meet periodically to review the administration
of the exchange of information under this proposed Protocol, as they currently do in the
administration of the TIEA.
PARAGRAPH 2
Paragraph 2 of the proposed Protocol amends paragraph 4(b) of Article 4 (Exchange of
Information) of the TIEA. Paragraph 4(b) of Article 4 of the TIEA prescribes the statutory
provisions of a State that are to be utilized by one State in obtaining certain financial information
at the request of the other State.
The current text of paragraph 4(b) provides that, if the United States is requested to
obtain the types of information covered by section 3402 of the Right of Financial Privacy Act of
1978 (12 USCA 3402) as in effect at the time of signing of this agreement, it shall obtain the
requested information pursuant to that provision. In the case of the United States, 12 USC
§3413(c) of the Bank Secrecy Act permits the disclosure of information pursuant to procedures
authorized by Title 26 (Internal Revenue Code).
The current text of paragraph 4(b) also provides that, if Mexico is requested to obtain the
types of information covered by Article 93 of the Regulatory Law of Banking and Credit 'Public
Service as in effect at the time of signing this agreement, it shall obtain the requested information
pursuant to that provision.
Paragraph 4(b) also provides that laws or practices of the requested State do not prevent
or otherwise affect the authority of the competent authority of the requested State to obtain and
provide the types of information covered by the above-cited provisions pursuant to the
Agreement.
The proposed Protocol replaces the reference in paragraph 4(b) to the banking regulations
of Mexico. Whereas the TIEA refers to Article 93 of the Regulatory Law of Banking and Credit
Public Service as in effect at the time of signing the TIEA, the proposed Protocol refers to
Article 117 of the Credit Institutions Law as in effect at the time of signing the Protocol. The
sole effect of this amendment is to replace an outdated statutory reference with the current one.
In addition, the proposed Protocol would allow certain financial information that is
obtained pursuant to a provision of U.S. or Mexican law identified in the TIEA to be obtained
under any similar or equivalent provision that may be added to or substituted for the provision
cited in the TIEA. This change will eliminate the need to amend the TIEA if the relevant banking
law is subsequently renumbered or revised.

The proposed Protocol shall enter into force upon an exchange of notes by the duly
authorized representatives of the Contracting States confirming their mutual agreement that both
sides have met all constitutional and statutory requirements necessary to effectuate this Protocol.
The Protocol will remain in force as long as the TIEA remains in force.