Statutory rate without a valid treaty claim: 30%.
What sets the U.S.-Mexico treaty apart
The U.S.-Mexico treaty has rate structures unlike any other major treaty. Interest is withheld at 4.9%, 10% or 15% depending on who the lender is and what the debt is, with several exempt categories. Royalties are 10%, and equipment rentals are royalties. Dividends are 10%, 5% or, since 2003, 0% for qualifying parents. Contractors are taxed after 183 days in any 12 months, performers once they earn more than $3,000 in a year, and other income arising in the U.S. stays taxable here.
Common payments at a glance
| Payment | What the U.S. payer does | Article |
|---|---|---|
| Interest on a loan from a Mexican bank or insurance company, or on regularly traded bonds | 4.9% | 11(2)(a) |
| Interest paid by a U.S. bank, or by a buyer to the seller on a credit sale of machinery and equipment | 10% | 11(2)(b) |
| Other interest | 15% | 11(2)(c) |
| Interest to the Mexican government, a Mexican tax-exempt pension plan, or on 3-year-plus Bancomext or Nafin loans | Exempt | 11(4) |
| Dividend to a Mexican company owning directly 10% or more of the voting stock | 5%; 0% if 80% or more held for 12 months and an Art. 10(3)(a) condition is met | 10(2)(a), 10(3)(a) |
| Dividend to anyone else | 10% | 10(2)(b) |
| Software, patent, trademark, know-how or film royalty | 10% | 12(2) |
| Rent for industrial, commercial or scientific equipment | 10%: a royalty under this treaty | 12(3) |
| Mexican individual contractor working in the U.S. | Exempt if no fixed base and not more than 183 days in any 12 months | 14 |
| Performer or athlete | Taxable if gross pay for the year, including reimbursed expenses, exceeds $3,000 | 18(1) |
| U.S. Social Security benefits | Taxable in the U.S.: withheld on | 19(1)(b) |
| Prizes and other income arising in the U.S. | Taxable: no exemption | 23 |
Assumes the payee is the beneficial owner, is resident under the treaty, meets its limitation-on-benefits article and gives a valid W-8BEN, W-8BEN-E or Form 8233. Article references are to the treaty as amended.
Rates on investment and other income
Treaty in effect generally from Jan. 1, 1994. Protocols in effect from: Oct. 26, 1995; Jan. 1, 2004. IRS country code MX.
| Income | 1042-S code | Treaty rate | Article |
|---|---|---|---|
| Interest paid by U.S. obligors, general | 01 | 15%gddhh | 11(2) |
| Dividends paid by U.S. corporations, general | 06 | 10%ddmm | 10(2) / 2PII |
| Dividends qualifying for the direct dividend rate | 07 | 5%ddmmoo | 10(2) / 2PII |
| Royalties: industrial, commercial or scientific equipment | 10 | 10% | 12(2) |
| Royalties: know-how and other industrial royalties | 10 | 10% | 12(2) |
| Royalties: patents | 10 | 10% | 12(2) |
| Royalties: motion picture and television copyrights | 11 | 10% | 12(2) |
| Royalties: copyrights (including software, unless the treaty says otherwise) | 12 | 10% | 12(2) |
| Pensions and annuities | 15 | 0% (exempt) | 19(1)(a) |
| U.S. Social Security benefits (applies to 85% of the payment) | 15 | 30% | 19(1)(b) |
"n/a" means the payment type is not covered by the royalty article: equipment leasing is business profits (no withholding without a permanent establishment) or other income. Superscript letters are the IRS's own conditions, listed at the end of this page.
Pay for personal services performed in the United States
Each row is an exemption the treaty gives, with the limits the IRS lists. All conditions in a row must be met; if any is not, the pay is withheld on at 30% (contractors) or under the wage rules (employees). Services performed entirely outside the United States are foreign-source and need no treaty claim.
| Code | Purpose | Maximum presence in U.S. | Required employer or payer | Maximum amount | Article |
|---|---|---|---|---|---|
| 17 | Independent personal services78 | 182 days | Any contractor | No limit | 14 |
| 18 | Dependent personal services174757 | 183 days | Any foreign resident | No limit | 15 |
| 42 | Public entertainment30 | No limit | Any U.S. or foreign resident | $3,000 p.a. | 18 |
| 20 | Remittances or allowances | No limit | Any foreign resident | No limit | 21 |
Reading the U.S.-Mexico treaty as a payer
Documents and dates
The convention and its protocol were signed in Washington on September 18, 1992 and entered into force on December 28, 1993, effective for most provisions from January 1, 1994. A 1994 protocol rewrote only the exchange of information article. A second additional protocol, dated November 25 or 26, 2002 in the two documents, replaced the dividend article (adding the 0% rate and dropping a 15% transition rate), restated the saving clause, added a branch tax exemption and replaced the rule on re-sourcing income. The IRS tables list it as effective January 1, 2004.
Interest: three rates and several exemptions
After the five-year transition in the original text, Article 11 sets:
- 4.9% on interest on loans granted by banks (including investment and savings banks) and insurance companies, and on bonds or securities regularly and substantially traded on a recognized securities market;
- 10% on interest paid by banks, and interest paid by the buyer of machinery and equipment to the seller on a credit sale, if the beneficial owner is not in the first group;
- 15% on everything else.
The rate follows the current beneficial owner. A bank that buys a loan gets 4.9% even though it did not make it; a non-bank that buys a bank-originated loan does not (TE Art. 11). The supplier-credit rate applies only while the seller holds the claim (1992 Protocol point 10(b)). Back-to-back loans are taxed under domestic law.
Interest is exempt when paid to or by either government or a political subdivision, when beneficially owned by a tax-exempt pension or employee benefit plan, and on loans of at least three years made, guaranteed or insured by Bancomext or Nacional Financiera (for U.S.-source interest) (Art. 11(4)). REMIC excess inclusions get no reduction, and late-payment penalties are other income, not interest.
The treaty rate is only the ceiling. Interest that is portfolio interest or bank deposit interest under the Code is exempt without any treaty claim.
Dividends
The 5% rate needs a company owning directly at least 10% of the voting stock; the 2002 protocol added "directly," and the technical explanation counts a proportionate interest held through a fiscally transparent entity. The 0% rate needs a parent that has owned at least 80% of the voting stock for the 12 months ending on the declaration date and that owned 80% before October 1, 1998, is publicly traded under Article 17(1)(d), qualifies under the NAFTA derivative test of Article 17(1)(g), or has a competent-authority determination (Art. 10(3)(a)). Tax-exempt pension plans get 0% on dividends not derived from a business (Art. 10(3)(b)).
RIC dividends get 10% (0% for pension plans). REIT dividends get 10% only for an individual or pension fund holding 10% or less, a holder of 5% or less of a listed class, or a holder of 10% or less of a diversified REIT; otherwise the domestic rate applies (Art. 10(4)). The branch tax is capped at 5%, and since 2003 is 0% for companies meeting conditions like those for the 0% dividend rate.
Royalties
All royalties are capped at 10% (Art. 12(2)). The definition includes copyrights (the technical explanation counts software and sound recordings), patents, trademarks, designs, secret formulas, know-how, and the use of industrial, commercial or scientific equipment, so equipment rent is a 10% royalty. Agricultural equipment that is immovable property, and containers and certain ship and aircraft leases, fall under other articles. In a financial lease with separately stated interest, the interest is treated as interest.
Permanent establishment and business profits
A building site, construction or installation project, or drilling rig counts as a permanent establishment after more than six months (Art. 5(3)). A dependent agent creates one by habitually concluding contracts or, without that authority, by habitually processing goods of the enterprise using assets the enterprise or an associate supplies (Art. 5(5)(b)), a rule the technical explanation says can apply to a subsidiary but not to an independent contract manufacturer. An insurer collecting premiums through a dependent agent has one too.
Article 7 has a limited force of attraction: once there is a permanent establishment, profits from sales of the same or similar goods in that country are attributable to it unless the enterprise shows the sales were not structured to obtain treaty benefits. A U.S. branch of a Mexican company cannot deduct royalties, commissions, management fees or (except for banks) interest paid to its own head office beyond reimbursing actual costs (Art. 7(3)).
Individuals: contractors, employees, directors and performers
Independent personal services are taxable in the U.S. only if the person regularly uses a fixed base here or is present more than 183 days in any 12-month period (Art. 14); the IRS table states the limit as 182 days. Income is taxed on a net basis. Employees are exempt only if present 183 days or fewer in any 12-month period, paid by a non-U.S. employer and not borne by a U.S. permanent establishment or fixed base (Art. 15). Directors' fees paid by a U.S. company may be taxed by the U.S. for services performed outside the director's country of residence (Art. 16); the technical explanation says the U.S. taxes Mexican directors only on services performed in the U.S.
Performers and athletes are taxable once gross pay for the year, including expenses reimbursed or borne for them, exceeds $3,000; above that, all of it is taxable. The payer may withhold on all gross receipts and refund if no tax is ultimately due (Art. 18(1)). Endorsement income is covered; technicians, managers and coaches are not. Visits substantially supported by public funds are exempt.
Pensions, Social Security, alimony
Private pensions and annuities are taxable only in the country of residence, lump sums included (Art. 19(1)(a), 19(2)). Social Security and public pensions are taxable only in the paying country (Art. 19(1)(b)), so U.S. Social Security paid to a Mexican resident is withheld on, even for U.S. citizens. Alimony and child support are taxable only in the payer's country (Art. 19(3)).
Students, teachers and other income
Students and business apprentices are exempt only on payments from outside the U.S. for maintenance, education or training; local pay and grants are not covered (Art. 21). There is no teacher or researcher article, so a visiting Mexican professor falls under Articles 14 or 15. Other income arising in the U.S., including lottery winnings, punitive damages, cancellation of debt and late-payment penalties, may be taxed by the U.S. (Art. 23).
Limitation on benefits
Article 17 is self-executing: no advance ruling is needed. A Mexican entity qualifies if it is a government, conducts an active trade or business in Mexico connected with the income, is publicly traded or wholly owned by a same-country public company, is a tax-exempt nonprofit or pension fund with more than half its beneficiaries entitled to the treaty, or passes an ownership and base erosion test. For dividends, interest and royalties only, a NAFTA derivative test applies: more than 30% owned by U.S. or Mexican qualified persons, more than 60% by NAFTA-country residents, less than 70% of gross income paid to non-qualified persons and less than 40% to persons outside NAFTA. Recognized exchanges include NASDAQ, SEC-registered exchanges and Mexican exchanges under the securities market law.
Where payers get it wrong
- Withholding a flat rate on interest. It is 4.9%, 10% or 15% depending on the beneficial owner and the debt, with exemptions for government, pension and development-bank-backed loans. Check the Code's portfolio and deposit interest exemptions first.
- Giving 4.9% to a non-bank holder of a bank loan. The rate follows the current beneficial owner.
- Treating equipment rent as business profits. It is a 10% royalty.
- Granting 0% on a parent dividend because ownership is 80%. The 12-month holding and one of the four conditions are required; an active-business parent that acquired after September 1998 needs a competent-authority grant.
- Exempting a performer earning more than $3,000. Once gross pay for the year, including reimbursed expenses, passes $3,000, all of it is taxable.
Read from the treaty documents: Convention and Protocol of Sept. 18, 1992; Additional Protocol of Sept. 8, 1994; Second Additional Protocol of Nov. 2002; Treasury Technical Explanations of the Convention and the Second Additional Protocol. Texts and technical explanations: United States income tax treaties, A to Z.
How the payee claims these rates
- Individuals claim a reduced rate on interest, dividends, royalties or pensions in Part II of Form W-8BEN: treaty country, article, rate and any conditions. Most claims need a U.S. TIN or a foreign TIN on the form.
- Entities claim in Part III of Form W-8BEN-E, which also asks which limitation-on-benefits test the entity meets (the Mexico treaty's LOB provision is Article 17).
- Pay for services performed in the United States by an individual is exempted on Form 8233, not the W-8BEN, one form per tax year and per payer.
- The payer reports the payment on Form 1042-S with the income code shown above and chapter 3 exemption code 04 (exempt or reduced withholding under a tax treaty). From 2026 an exemption code is required whenever less than 30% is withheld.
The rate in a table is the most the United States may withhold under the treaty, not an entitlement. The payee has to be a resident of Mexico under the treaty, the beneficial owner of the income, and (for entities) meet the limitation-on-benefits article, and the payer has to hold a valid certificate before the payment. The IRS tables are a summary: check the article itself when the amount is material.
Questions payers ask
What is the U.S. withholding rate on dividends paid to a resident of Mexico?
10% on dividends generally and 5% on dividends qualifying for the direct dividend rate, under Article 10(2) / 2PII, if the shareholder documents the claim on a W-8BEN or W-8BEN-E. Without a valid claim the rate is 30%.
What is the U.S. withholding rate on royalties paid to a resident of Mexico?
10% on copyright and software royalties (income code 12), 10% on patent royalties and 10% on film and television royalties, under Article 12(2).
What is the U.S. withholding rate on interest paid to a resident of Mexico?
15% under Article 11(2), before considering the Code's own exemptions for portfolio interest and bank deposit interest.
Is a contractor from Mexico working in the United States exempt from U.S. withholding?
Under Article 14, pay for independent personal services is exempt if the contractor is present in the United States for no more than 182 days, subject to the conditions in the article. An individual claims the exemption on Form 8233; without it, withhold 30%.
Do we withhold on a contractor from Mexico who works only outside the United States?
No. Pay for services performed entirely outside the United States is foreign-source income: no withholding and no Form 1042-S. Keep the contractor's W-8BEN or W-8BEN-E on file.
What is the U.S. withholding rate on interest paid to a Mexican bank?
4.9%, under Article 11(2)(a), for interest on loans granted by banks and insurance companies when the bank is the beneficial owner. Interest on regularly traded bonds also gets 4.9%. Other interest is 10% or 15%.
Is equipment rent paid to a Mexican company a royalty?
Yes. The U.S.-Mexico royalty definition includes payments for the use of industrial, commercial or scientific equipment, so the rent is withheld on at 10%.
When is a Mexican performer taxable in the U.S.?
When gross pay from U.S. performances for the year, including expenses reimbursed or borne by others, exceeds $3,000. Then the whole amount is taxable. Visits substantially supported by public funds are exempt.
The IRS notes behind the figures
Notes to the rates (IRS Table 1)
- g Exemption or reduced rate does not apply to an excess inclusion for a residual interest in a real estate mortgage investment conduit (REMIC).
- dd Amounts paid to certain pension funds that are not derived from the carrying on of a business, directly or indirectly, by the fund are exempt. This includes dividends paid by a REIT only if the conditions in footnote mm are met. For Sweden, to be entitled to the exemption, the pension fund must not sell or make a contract to sell the holding from which the dividend is derived within 2 months of the date the pension fund acquired the holding. The United States has competent authority arrangements (MAP) with some treaty jurisdictions (e.g. Netherlands and Switzerland) that describe which pension funds are eligible for the exemption. See the Competent Authority Arrangements page on irs.gov.
- hh The rate is 4.9% for interest derived from (1) loans granted by banks and insurance companies and (2) bonds or securities that are regularly and substantially traded on a recognized securities market. The rate is 10% for interest not described in the preceding sentence and paid (i) by banks or (ii) by the buyer of machinery and equipment to the seller due to a sale on credit. There is a full exemption if the beneficial owner is Mexico, a political subdivision or local authority; is a trust, company, or other organization constituted and operated exclusively to administer or provide benefits under one or more plans established to provide pension, retirement or other employee benefits and its income is generally exempt from tax in Mexico, or if the interest arises in the United States and is paid in respect of a loan for a period of not less than three years made, guaranteed, or insured, or a credit for such period extended, guaranteed, or insured by the Banco Nacional de Comercio Exterior, S.N.C. or the Banco National Financiera, S.N.C. Income Tax Treaties
- mm The rate in column 6 applies to dividends paid by a regulated investment company (RIC) or real estate investment trust (REIT). However, that rate applies to dividends paid by a REIT only if the beneficial owner of the dividends is (a) an individual (or pension fund, in some cases) holding not more than a 10% interest in the REIT, (b) a person holding not more than 5% of any class of the REIT's stock and the dividends are paid on stock that is publicly traded, or (c) a person holding not more than a 10% interest in the REIT and the REIT is diversified.
- oo Dividends received from an 80% owned corporate subsidiary are exempt if certain ownership period and limitation on benefits conditions are met by the recipient. For Japan, greater than 50% ownership is necessary. See specific treaty article to determine other conditions.
Notes to the services table (IRS Table 2)
- 7 Exemption does not apply to the extent income is attributable to the recipient's fixed U.S. base. For residents of Korea and Norway, the fixed base must be maintained for more than 182 days (for Norway, 30 days in the case of the exploration or exploitation of the seabed and sub-soil and their natural resources); for residents of Morocco, the fixed base must be maintained for more than 89 days.
- 8 Does not apply to fees paid to a director of a U.S. corporation.
- 17 The exemption does not apply if the employee's compensation is borne by a permanent establishment (or in some cases a fixed base) that the employer has in the United States.
- 30 Exemption does not apply if gross receipts (or compensation for Portugal and Venezuela), including reimbursements, exceed this amount. Income is fully exempt if visit to the United States is substantially supported by public funds of the treaty country or its political subdivisions or local authorities.
- 47 Fees paid to a resident of the treaty country for services as a director of a U.S. corporation are subject to U.S. tax, unless the services are performed in the country of residence.
- 57 Remuneration for employment exercised aboard a ship or aircraft operated in international traffic by a resident of a contracting State may be taxed in that State. Canada may tax the income from employment if the income is derived by a resident of Canada and the ship or aircraft is operated by a resident of Canada. If operated by a Luxembourg resident and Luxembourg fails to tax the income, such income shall be taxed in the State of which the employee is a resident. The income may be taxed in Tunisia only if the ship or aircraft is operated by an enterprise that is managed and controlled in Tunisia.
Transcribed from the IRS Tax Treaty Tables. Treaty texts and technical explanations: United States income tax treaties, A to Z.
Other treaty countries
Australia · Austria · Bangladesh · Barbados · Belgium · Bulgaria · Canada · Chile · China · Commonwealth of Independent States · Cyprus · Czech Republic · Denmark · Egypt · Estonia · Finland · France · Germany · Greece · Iceland · India · Indonesia · Ireland · Israel · Italy · Jamaica · Japan · Kazakhstan · Latvia · Lithuania · Luxembourg · Malta · Morocco · Netherlands · New Zealand · Norway · Pakistan · Philippines · Poland · Portugal · Romania · Slovak Republic · Slovenia · South Africa · South Korea · Spain · Sri Lanka · Sweden · Switzerland · Thailand · Trinidad and Tobago · Tunisia · Turkey · Ukraine · United Kingdom · Venezuela