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November 4, 2021

Mexico and Germany sign new protocol to tax treaty

The protocol establishes a holding period for dividends, limitation of benefits provisions for payments to permanent establishments (PEs) and a new requirement for activities that are not deemed to create a permanent establishment. The Contracting States still have to ratify the protocol.

Mexico and Germany signed the “Protocol Amending the Agreement Between the Federal Republic of Germany and the United Mexican States for the Avoidance of Double Taxation and Tax Evasion with respect to Taxes on Income and Capital” (the Protocol).

The purpose of the Protocol is to implement measures to prevent the base erosion and profit shifting derived from the Multilateral Instrument (MLI), in accordance with the positions taken by Mexico and Germany. Although Mexico included the treaty in its notification upon signing the MLI, Germany did not include it. Consequently, upon ratification of the MLI, the treaty would not be a Covered Tax Agreement under the MLI.

The Protocol is pending ratification by both Contracting States. EY will continue to monitor any developments.


The Protocol modifies the preamble of the treaty to specify that its purpose is to prevent double taxation, without creating opportunities for non-taxation or reduced taxation through tax evasion or avoidance, including treaty-shopping arrangements for the indirect benefit of residents of non-contracting states.

Permanent establishments

The Protocol also establishes a new requirement for activities that are not deemed to create a permanent establishment. Under the Protocol, those activities must be of a “preparatory or auxiliary character.”


The Protocol establishes a holding period of 365 days for the 5% withholding tax rate on dividends to apply whenever the beneficial owner holds directly at least 10% of the capital of the company.

Capital gains

Regarding capital gains tax applied to companies or investment vehicles with significant real estate, the Protocol (i) incorporates rights in partnerships or trusts as examples of “similar rights” to shares and (ii) specifies that the value of shares or similar rights may be determined for immovable property at any time within 365 days before the transfer of the property takes place.

Mutual agreements

The Protocol eliminates the 10-year limit for implementing mutual agreements reached by the competent authorities and establishes that the agreements should be implemented regardless of any time limits included in the domestic law of the countries.

Limitation of benefits

The Protocol includes new general limitation of benefits provisions for payments to a PE in a non-Contracting State if the PE’s income is not taxed in the country of residence. Benefits will also be limited when the competent authorities consider it reasonable to conclude that obtaining the treaty benefits was one of the principal purposes of any arrangement or transaction giving rise to the benefits (i.e., the principal purpose test clause).

Effective date

The Protocol will enter into force 30 days after the Contracting States notify each other that their internal approval requirements have been fulfilled. The Protocol will apply: (i) for taxes withheld at source, on 1 January of the calendar year following the entry into force of the Protocol; and (ii) for other taxes, on or after 1 January of the calendar year following the year in which the Protocol entered into force.


For additional information with respect to this Alert, please contact the following:

Ernst & Young, LLP (United States), Latin America Business Center, New York

Ernst & Young LLP (United States), Latin America Business Center, Chicago

Ernst & Young LLP (United States), Latin America Business Center, Miami

Ernst & Young, LLP (United States), Latin America Business Center, San Diego

Ernst & Young LLP (United Kingdom), Latin American Business Center, London

Ernst & Young Tax Co., Latin America Tax Desk, Japan & Asia Pacific


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