25/ 09 / 26
Beneficial Ownership under Tax Treaties: How Far Can the Mexican Tax Authority Go?
MEXICO CITY, MEXICO, August 25th, 2026 – Three recent precedents issued by the TFJA concerning dividend payments between Mexico and Spain have reopened the debate over the requirements for accessing the benefits of a double taxation treaty. The interpretation of “beneficial ownership” raises a fundamental question: when do the facts and circumstances establish an obligation to pass on dividends, and when do they effectively create requirements that the treaty itself does not contemplate?
The application of a double taxation treaty should begin with a simple premise: taxpayers should be able to know the requirements they must satisfy to access its benefits. The problem arises when, as a result of the tax authority’s interpretation, additional elements are required that do not derive from the treaty itself, but emerge only when the authority challenges its application.
This issue is reflected in precedents IX-P-2aS-614, IX-P-2aS-615 and IX-P-2aS-616, recently issued by the Second Section of the Superior Chamber of Mexico’s Federal Court of Administrative Justice (Tribunal Federal de Justicia Administrativa, or TFJA) in connection with the “beneficial ownership” of dividends.
The case arose from a dividend distribution by a Mexican company to a company resident in Spain, whose sole shareholder, in turn, is a company resident in the United Kingdom. Pursuant to Article 164 of the Mexican Income Tax Law, the Mexican company withheld tax at a rate of 10%, and the Spanish company subsequently requested a refund on the basis that the exemption provided under the Convention between the United Mexican States and the Kingdom of Spain for the Avoidance of Double Taxation (the Convention), as supplemented by its Protocol, was applicable.
The TFJA upheld the denial of the refund on the grounds that the Spanish company had failed to establish its status as the beneficial owner.
What Does the Concept of Beneficial Ownership Actually Require?
The Convention does not define this concept. Accordingly, in precedent IX-P-2aS-615, the TFJA considered it appropriate to refer to the Commentaries on the Organization for Economic Co-operation and Development’s Model Tax Convention.
Under the Commentaries, the recipient of a dividend will not be its beneficial owner where its right to use and enjoy the dividend is constrained by a contractual or legal obligation to pass it on to another person. Although such an obligation will ordinarily arise from legal documents, it may also be inferred from facts and circumstances.
The concern underlying this approach is understandable. If the Spanish company had operated solely as a vehicle to receive the dividends and pass them on to its shareholder resident in the United Kingdom, the beneficial ownership analysis would be relevant in determining whether its interposition allowed access to a treaty benefit that would not have been available had the payment been made directly to the shareholder.
The issue, therefore, does not lie in examining the facts and circumstances, but rather in determining which facts and circumstances are sufficient to conclude that the recipient lacks the freedom to dispose of the dividend.
Beneficial Owner or Ultimate Shareholder?
In precedent IX-P-2aS-614, the TFJA considered relevant the fact that a UK company owned 100% of the Spanish company, the corporate powers arising from that ownership interest, and the lack of information regarding the structure. On that basis, it concluded that the Spanish company was required to distribute the dividends it received to its shareholder and, therefore, that its right to dispose of those dividends was restricted.
This conclusion is open to question: a shareholder’s exercise of the rights inherent in its ownership interest is part of the ordinary functioning of a company. The ability to appoint directors, adopt corporate resolutions or approve a dividend distribution does not necessarily imply an obligation to pass on to the shareholder every item of income received.
For precisely this reason, the analysis should focus on determining what the Spanish company could actually do with the funds. For example, the existence of obligations to employees, suppliers, creditors or other third parties, the making of investments, or the allocation of funds to its operations could demonstrate that the dividends were not subject to an obligation to be passed on to the shareholder. More importantly, the Convention requires the beneficial owner to be a company resident in Spain that directly owns at least 10% of the capital of the Mexican company; it does not require its shareholders to be resident in Spain, nor does it require the Spanish company to be the ultimate entity in the ownership chain.
The identity and residence of the shareholder may be relevant if they help establish the existence of an obligation to pass on the dividends. However, the mere existence of a controlling relationship does not demonstrate that the recipient company lacks the freedom to dispose of them. Taken to its logical conclusion, the opposite position could effectively add requirements to the Convention that the Contracting States never agreed upon.
The Limits of “Facts and Circumstances”
In precedent IX-P-2aS-616, the TFJA determined that establishing beneficial owner status constitutes a prior and indispensable requirement for accessing the exemption provided under the Protocol.
It is reasonable that a taxpayer seeking to access a treaty benefit should be required to establish that the relevant requirements have been satisfied. In this particular case, moreover, the Spanish company failed to provide certain information that the TFJA considered necessary to demonstrate its freedom to dispose of the dividends.
It is worth asking whether the outcome would have been different had it been established that the recipient company had obligations of its own to third parties, conducted business activities and incurred operating expenses, or had genuine alternatives for using the funds other than subsequently distributing them to its shareholder.
The issue is significant because evidentiary shortcomings in a particular case may give rise to a precedent that is subsequently applied to structures involving different facts. Facts and circumstances should serve to demonstrate the existence of an obligation to pass on the dividend. The mere existence of circumstances inherent in a corporate relationship should not be sufficient to conclude that such an obligation exists. Otherwise, the concept of beneficial ownership risks becoming an open-ended standard, compliance with which depends on the elements the tax authority considers relevant. This broadens the scope for administrative discretion and raises a legal certainty concern: taxpayers should be able to know, before applying the exemption, what requirements they must satisfy and substantiate.
Implications for Tax Practice
These precedents make it necessary to strengthen the documentation supporting the application of treaty benefits, not only with respect to the ownership structure, but also regarding the activities of the recipient entity, its obligations and its effective ability to determine how the income it receives will be used.
However, this practical necessity does not resolve the underlying legal issue: the ability to infer an obligation from the facts and circumstances should not become the ability to presume that such an obligation exists.
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The full article was made in collaboration with Lexlatin, and you can find the original article in Spanish herein:
https://lexlatin.com/opinion/beneficiario-efectivo-tratados-fiscales-autoridad-tributaria-hechos-circunstancias-mexico
All the information placed in this article and the rights of distribution belongs to @Lexlatin.
