Introduction

If you are about to sell the shares of your Mexican subsidiary, a material aspect to be faced is the risk of double taxation on the capital gain.

In this article, I want to explain when it is possible to avoid it, if you are an Italian company.

I am Giovanni Braccini, Mexican qualified lawyer. My firm, Braccini&Partners, provides legal, corporate, and tax assistance to both individuals and companies in M&A transactions. If you need further information, feel free to contact me at any time by clicking here.

In international M&A transactions, tax implications are highly sensitive. Among these, the taxation on the capital gain that may arise from the sale of all or part of the shares of a foreign subsidiary, is one of the main concerns.

Italian holding with shares in a Mexican subsidiary

Obviously, each deal has its own variables, and the success of the transaction depends mostly on the correct framing of the specific concrete situation.

However, let’s analyze the generic case of a company resident in Italy that holds shares of a Mexican subsidiary; generally, an SA de CV, an S de RL de CV, or a SAPI de CV. After several years in the market, the Italian company decides, for various reasons, that it is time to sell the shares of its subsidiary in Mexico, generating a capital gain.

Is it possible to avoid being taxed twice (in Mexico and Italy) on the profits derived from such sale?

Italy-Mexico Convention to avoid double taxation

The answer lies in the Convention between Italy and Mexico to avoid double taxation on income.

Although, as mentioned above, each deal has its own peculiarities and the proper ‘use’ of the Convention depends on them, there is one aspect in the Italy-Mexico Convention that is worth checking.

I am referring to the second paragraph of Article 13 of the Convention. I quote it below.

“Gains from the alienation of shares, participations or other rights in a company or other body corporate the assets of which principally, directly or indirectly, consist of immovable property situated in a Contracting State or rights pertaining to such immovable property, may be taxed in that State. For these purposes, immovable property used by such company or body corporate in its industrial, commercial or agricultural activities or in the conduct of professional services shall not be taken into account.”

Be careful with the Italian translation

Before proceeding, it is important to highlight how the Italian translation of the above paragraph is not very precise and can be misleading.

The Spanish and English versions are clearer. Indeed, the Italian states that (those gains) “are taxed in that State”. But in the Spanish and English translations are as follows: “pueden someterse a imposición en este Estado” and “may be taxed in that State.” The correct verb would therefore be “may” and not “are”. That “are” almost seems to admit taxation once; in our example, only in Mexico.

In the Spanish or English version, instead, the use of “may” clarifies better the possibility of double taxation: the profits generated from the sale of shares of a Mexican real estate company “may” be subject to taxation in Mexico. But it does not exclude that they may also be subject to a second taxation in Italy.

Double taxation only for real estate companies

In short, the second paragraph of Article 13 of the Italy-Mexico Convention states that the capital gain obtained from the sale of shares of a Mexican real estate company “may” be subject to double taxation.

And in the case of selling shares of a Mexican subsidiary that is not a real estate company?

In these cases, it is possible to avoid double taxation. Specifically, in our example, it is possible to avoid Mexican taxation on the capital gain and be subject to taxation only in Italy.

This is possible based on both regulatory/interpretive hooks derived from the same Article 13 and the reading of Conventions against double taxation ratified by Mexico with other countries.

Firstly, it is possible to avoid double taxation on the capital gain for non-real estate companies by reading the second paragraph of Article 13 but reasoning by exclusion: if double taxation is expressly provided for real estate companies, outside of this hypothesis, it is possible to avoid it.

Secondly, the last paragraph of Article 13 states that “Gains from the alienation of any property other than that referred to in this Article shall be taxable ONLY in the Contracting State of which the alienator is a resident.” This confirms the contrary interpretation of paragraph 2.

Conventions against double taxation ratified by Mexico with other Countries

Thirdly, to support the above, the reading of Conventions to avoid double taxation that Mexico has in force with other countries is also helpful. Although they all have the same origin in the OECD model, they are not identical. There are many differences, including the rules regarding the treatment of capital gain in case of share transfers. In other Conventions, Mexico has expressly extended the possibility of double taxation on capital gain for the transfer of shares even for non-real estate companies.

With Italy, this extension has not (yet) occurred, and therefore the double taxation can be avoided.

To do so and to implement the Convention, it will be necessary to follow a specific procedure established by Mexican tax legislation, which includes among the various steps, the necessary appointing of a tax representative in Mexico of the Italian company.

If you are about to sell shares of a Mexican subsidiary and need more information, contact me by clicking here.