Mexico Witholding Tax

[thodge78]

Doe's anyone know that if I have an agency based in Mexico of my UK company, whether witholding tax would be witheld on management fees back to the UK. I think it may be 10% but can find no confirmation eithr way.

[maths]

Not sure whether a local w/tax would apply but, re mgt fees, the UK/Mexico DTA makes no provision for a reduction thereof if a w/tax applies.

Thus, it will produce adverse cash flow; relief will only be available as a credit against any UK tax thereon.

[Michael I. Atlas, CA]

Sorry, Maths, but I do not understand that comment -normally "management fees" would be considered to be governed by the Business Profits article of a tax treaty where that source of income is not specificaly mentioned.

So, if the tax treaty does not mention management fees, no tax should be levied if there is no PE in the paying country; if tax is withheld, it should be recoverable by filing, so I would not think that UK tax authorities would allow a credit? No?

What is not totally clear in the question is what is meant by "agency"-I am assuming that it means a local (i.e. Mexican) subsidiary) and it would pay fees to the UK parent.

If so, the comments above should apply. The UK parent presumably would not have a PE in Mexico, so no tax should be levied.

If "agency" actually means a branch, I do not think you can have a "management fee" as such, since a person cannot pay fees to itself. However, it can be a matter for determinig branch profits.

[maths]

Michael

I had i think implicitly assumed that the presence in Mexico did in fact constitute a p/e (ie not an independent entity) of the UK entity as the query strangely refers to management fees; i assumed that the mgt fees were in effect charges levied on the Mexican entity for work etc done back in the UK presumably in part for the benefit of the Mexican entity (whether such fees are tax deductible is another matter, but levying mgt fees i believe is possible; certainly if the Mexican presence is a subsidiary).

Thus to the extent that a local w/tax is leviable under local law I could not see any relief proffered under the DTA.

I agree that the above makes perhaps unacceptable assumptions which should have been clarified first.

[Michael I. Atlas, CA]

Thanks Maths-

I am not sure where you are getting the Mexican p/e from?

If we assume that the charge is from a UK parent to a Mexican sub, then the recipient (i.e. the parent) would not have a Mexican p/e. Having a subsidiary in Mexico would not normally consistute a p/e in Mexico of the parent, so the management fees should be treaty protected. (That is, the p/e of the sub is not a p/e of the parent).

In addition, if we asssume that the relevant work is done back in the UK, as you have done, then even if the UK parent did have a p/e in Mexico, which I doubt that it does, the income should still be treaty protected, because normally (I am not going back to this treaty to check) the presence of a p/e in the country only exposes the recipient to taxation on business profits ATTRIBUTABLE to that p/e, which clearly could not be the case if work done in UK.

[maths]

Depending upon the precise activities of the Mexican sub it may well constitute a p/e of the UK parent (eg concludes contracts as agent only acting for the UK parent) and thus profits are then allocable thereto (eg equal to say a commission for sales concluded/generated) although without more facts it is not possible to know.

Even if UK parent has no p/e in Mexico and thus no liability to Mexican tax on profits this may not preclude the levying of any local w/tax on remittances back to the UK of mgt fees unless (possibly) a prior clearance could be obtained for payment gross (agree that the lack of p/e would mean that a full reclaim from the Mexicans could be obtained under the DTA terms; failure to lodge any such reclaim would preclude any tax credit in the UK).

[thodge78]

Hi all, sorry if the initial question was a little vague, the Mexico company is an Agency (Sub) of the UK Company, and has a permanent Establishment in Mexico. We were under the impression that as the Mexico Company was owned 100% by the UK Company that this would indicate that the UK Company also had a PE in Mexico. Is this not the case? What are the rules in relation to this, is there somewhere that I can find these?

The management fees are due from the Mexico Sub to the UK Company.