Capital Gains Tax Between India and Mexico Under DTAA

Quick answer: Article 13 of the India-Mexico DTAA does not set a single capital-gains rate. Instead it allocates taxing rights by asset type across six paragraphs: immovable property and land-rich company shares are taxable in the property's location (paragraphs 1 and 4); PE-connected movable property is taxable where the PE sits (paragraph 2); ships and aircraft are taxable only in the alienator's residence state (paragraph 3); shares of a company resident in either state, other than the land-rich shares in paragraph 4, may be taxed in the company's state of residence (paragraph 5) — a notably broad source-taxation right, with no minimum shareholding or period requirement; and every other gain is taxable only in the alienator's residence state (paragraph 6). India applies its ordinary domestic capital-gains rates to whichever gains it has the right to tax, and Mexico relieves double taxation through a foreign tax credit.

Key takeaways:

• Article 13 allocates taxing rights across six paragraphs by asset type — there is no single treaty capital-gains rate.
• Immovable property gains (paragraph 1) and land-rich company-share gains (paragraph 4) are taxable where the property sits.
• Paragraph 5 lets either state tax gains on shares of a company resident there generally — broader than treaties that limit source taxation to land-rich companies or a minimum shareholding.
• Ships and aircraft gains (paragraph 3) are taxable only in the alienator's residence state — not the place of effective management.
• Contingent-productivity payments from selling royalty-type IP rights are royalties under the Protocol, not capital gains, notwithstanding Article 13.

Capital Gains Tax Between India and Mexico

The India-Mexico Double Taxation Avoidance Agreement, signed 10 September 2007 and in force since 1 February 2010, addresses capital gains in Article 13. Unlike the treaty's flat-rate approach to dividends, interest, royalties and fees for technical services, Article 13 does not prescribe a percentage — it decides which country may tax a given gain, leaving that country's own domestic rate to apply once the right to tax is established.

Article 13 divides gains into six categories across as many paragraphs, each with its own rule. The most commercially significant is paragraph 5, which gives either state a broad right to tax gains on shares of a company resident there — a materially wider source-taxation right than the OECD Model's typical land-rich-company test alone, and wider than treaties that require a minimum shareholding percentage before source taxation applies. Beacon Filing's tax advisory services can help structure share transfers and disposals between India and Mexico with this framework in view. See also India-Mexico DTAA complete guide and withholding tax rates page.

Article 13, Paragraph by Paragraph

Paragraph 1: Immovable Property

"Gains derived by a resident of a Contracting State from the alienation of immovable property referred to in Article 6 and situated in the other Contracting State may be taxed in that other State." A Mexican resident selling Indian real estate is taxable in India; an Indian resident selling Mexican real estate is taxable in Mexico. India applies its domestic long-term or short-term capital-gains rates depending on the holding period.

Paragraph 2: Movable Property Connected to a PE or Fixed Base

Gains from alienating movable property forming part of the business property of a permanent establishment, or of a fixed base used for independent personal services, "may be taxed in that other State" — the state where the PE or fixed base is situated — including gains from alienating the PE or fixed base itself, alone or with the whole enterprise. Such gains are taxed as part of the enterprise's business profits at the ordinary corporate rate for foreign companies (35%, with an effective rate of roughly 38.22% above INR 10 crore total income and roughly 37.13% between INR 1 crore and INR 10 crore, once surcharge and cess are added).

Paragraph 3: Ships and Aircraft — Residence State Only

"Gains from the alienation of ships or aircraft operated in international traffic, or movable property pertaining to the operation of such ships or aircraft shall be taxable only in the Contracting State of which the alienator is a resident." Notably, this ties taxing rights to the alienator's residence, not to the place of effective management of the shipping or airline enterprise as some other treaties do — a distinction that matters for structuring aircraft and shipping-asset disposals in this corridor.

Paragraph 4: Shares of Land-Rich Companies

"Gains from the alienation of shares of the capital stock of a company the property of which consists directly or indirectly principally of immovable property situated in a Contracting State may be taxed in that State." This prevents indirect transfers of real estate through corporate wrappers — selling shares of a company that is principally a vehicle for Indian (or Mexican) land achieves the same tax result as selling the land directly.

Paragraph 5: All Other Shares of a Resident Company — the Broadest Provision

"Gains from the alienation of shares other than those mentioned in paragraph 4 in a company which is a resident of a Contracting State may be taxed in that State." This is the treaty's most far-reaching capital-gains rule: India may tax a Mexican resident's gain from selling shares of any Indian company (not just land-rich ones), and Mexico may equally tax an Indian resident's gain on shares of any Mexican company. There is no minimum shareholding threshold and no substantial-participation carve-out of the kind found in some UN Model-based treaties — the mere fact that the company is resident in the source state is enough to found source taxation.

Paragraph 6: Residual Clause — Residence State Only

"Gains from the alienation of any property other than that referred to in paragraphs 1, 2, 3, 4 and 5, shall be taxable only in the Contracting State of which the alienator is a resident." This exclusive residence-state right covers gains not caught by the five specific categories above — for example, intangible assets or partnership interests that are not "shares" within paragraphs 4 or 5.

Interaction with the Royalty Article: Contingent-Productivity Payments

The Protocol carves out one category of disposal gain from Article 13 entirely: "the term 'royalties' also includes payments derived from the alienation of any such right or property which are contingent on the productivity, use or disposition thereof." A payment for transferring a patent, trademark or other royalty-generating right, priced by reference to the buyer's future use of it, is taxed as a royalty at 10% under Article 12 rather than under Article 13's capital-gains rules — an important structuring point when the sale price of IP is earn-out or royalty-linked.

Domestic Indian Rates Applied to Treaty-Allocated Gains

Once Article 13 establishes that India has the right to tax a gain, India's own domestic rates determine the actual liability. For non-resident sellers of Indian securities: listed-share long-term gains (holding period over 12 months) are taxed at 12.5% on gains exceeding INR 1.25 lakh in the year, under section 198 of the Income-tax Act, 2025 (section 112A of the Income-tax Act, 1961); listed-share short-term gains (12 months or less) are taxed at 20% under section 196 of the Income-tax Act, 2025 (section 111A of the Income-tax Act, 1961); and unlisted-share long-term gains (holding period over 24 months) are taxed at 12.5% without indexation under section 197 of the Income-tax Act, 2025 (section 112 of the Income-tax Act, 1961). Gains on Indian immovable property held by non-residents follow the same 12.5% long-term threshold once the 24-month holding period is met.

Who Can Rely on the Treaty's Allocation

Tax Residency

Article 13's allocation rules apply only to a person who is a resident of Mexico (or India) under Article 4, generally evidenced by a Tax Residency Certificate from Mexico's Servicio de Administración Tributaria (SAT).

Anti-Abuse: Article 28 Limitation of Benefits Plus MLI PPT, and Domestic GAAR

Article 13 carries no separate beneficial-ownership test of its own, but the treaty's Article 28 Limitation of Benefits article — a qualified-person test with a base-erosion proviso, an active-business escape that operates only where the other state’s competent authority so determines under Article 28(3), and the standalone main-purpose denial rule in Article 28(6) — applies across the whole treaty, including capital gains. Both India and Mexico have ratified the MLI and listed each other as Covered Tax Agreements, so the Principal Purpose Test now supplements the LoB article. Separately, India's domestic General Anti-Avoidance Rule under Chapter XI (sections 178 to 184) of the Income-tax Act, 2025 (Chapter X-A of the Income-tax Act, 1961) can override treaty protection, including the paragraph 5 and paragraph 6 allocations, where an arrangement is found to be an impermissible avoidance arrangement lacking commercial substance: section 159(6) of the Income-tax Act, 2025 (section 90(2A) of the Income-tax Act, 1961) makes GAAR apply notwithstanding the taxpayer-favourable treaty-override rule in section 159(4) (section 90(2) of the Income-tax Act, 1961). Genuine commercial substance in the Mexican holding structure is essential.

Documentation and Procedure

Tax Residency Certificate and Form 41

A TRC from SAT is required under section 159(8) of the Income-tax Act, 2025 (section 90(4) of the Income-tax Act, 1961); if it lacks prescribed details, Form 41 (formerly Form 10F) must be filed electronically, capturing name, status, nationality, RFC number, and period of residential status.

Withholding on Share Transfers: Section 393(2)

Where an Indian buyer purchases shares from a Mexican non-resident seller, section 393(2) of the Income-tax Act, 2025 (Table, Sl. No. 17; section 195 of the Income-tax Act, 1961) requires tax deduction at source on the capital-gains component at the rates in force. The buyer must file Form 145 electronically before remitting sale proceeds, and obtain a Chartered Accountant's Form 146 for remittances exceeding INR 5 lakh.

Lower Withholding Certificate

Where the actual gain is small relative to the gross sale consideration — common when TDS would otherwise apply to the full proceeds rather than the net gain — the Mexican seller can apply to the Assessing Officer under section 395(1) of the Income-tax Act, 2025 (section 197 of the Income-tax Act, 1961) for a certificate specifying a lower withholding rate. Where the Indian buyer itself considers only part of the remittance chargeable, its own route is an application under section 395(2) of the Income-tax Act, 2025 (section 195(2) of the Income-tax Act, 1961).

Common Disputes and Practical Considerations

Distinguishing Paragraph 4 from Paragraph 5

Whether a company is "principally" invested in immovable property (paragraph 4) or falls under the general share rule (paragraph 5) affects only which paragraph applies — both give India the right to tax — but the distinction matters for Mexican domestic-law characterisation and for identifying which valuation test (asset-composition versus general shareholding) governs the analysis.

Indirect Transfers of Indian Assets

Separately from Article 13, India's indirect-transfer provisions can tax a foreign company's share sale where those shares derive substantial value from Indian assets, even if the foreign company itself is not Indian or Mexican. Where a third-country company holding Indian assets is sold by a Mexican resident, paragraph 5 only applies if the company sold is itself resident in India or Mexico; a third-country company falls instead into the residual paragraph 6, which the Indian domestic indirect-transfer rules may still reach independently of the treaty.

Surcharge and Cess

As with the treaty's withholding-rate articles, whether surcharge and health & education cess apply on top of the domestic capital-gains rates applied under Article 13's allocation remains a live area for judicial guidance, since Article 13 does not itself cap the total tax the way Articles 10 to 12 do.

Practical Examples and Calculations

Example 1: Mexican Company Selling Shares of an Indian Subsidiary

Grupo Manufacturero de Guadalajara, S.A. sells its 100% shareholding in an unlisted Indian manufacturing subsidiary for INR 12 crore, against an original cost of INR 5 crore, after a four-year holding period. The gain of INR 7 crore is long-term. Under Article 13(5), India may tax this gain because the company sold is an Indian resident; the domestic rate is 12.5% under section 197 of the Income-tax Act, 2025 (section 112 of the Income-tax Act, 1961), giving Indian tax of INR 87.5 lakh (plus surcharge and cess). The Mexican seller then claims a credit in Mexico under Article 23 for the Indian tax paid.

Example 2: Indian Resident Selling Listed Shares on the Bolsa Mexicana de Valores

An Indian resident individual sells listed shares of a Mexican company on the BMV for a gain equivalent to INR 40 lakh, held for 18 months. Under Article 13(5), Mexico may tax this gain because the company is Mexican-resident. The Indian resident separately includes the full gain in Indian taxable income and claims a foreign tax credit under section 159 of the Income-tax Act, 2025 (section 90 of the Income-tax Act, 1961) for any Mexican tax actually paid, avoiding double taxation on the same gain.

Example 3: Sale of an Indian Land-Rich Company

A Mexican investment vehicle sells its shares in an Indian company whose balance sheet consists principally of a commercial real-estate portfolio in Mumbai. Because the company's property consists principally, directly or indirectly, of Indian immovable property, the gain falls under Article 13(4) rather than the general paragraph 5 rule — but the practical result is the same: India has the right to tax the gain at its domestic long-term or short-term capital-gains rate, depending on the holding period.

Frequently Asked Questions

How are capital gains taxed under the India-Mexico DTAA?

Article 13 allocates taxing rights by asset type across six paragraphs rather than fixing a single rate. Immovable property and land-rich company shares are taxable where the property sits; PE-connected property where the PE is; ships and aircraft only in the alienator's residence state; general company shares in the company's state of residence; and everything else only in the alienator's residence state. Domestic rates of the taxing state then apply.

Can India tax a Mexican resident on gains from selling any Indian company's shares?

Yes, under Article 13(5), and without a minimum shareholding threshold. India may tax gains on shares of any Indian-resident company sold by a Mexican resident, not only companies that are principally invested in Indian immovable property (which fall under the narrower paragraph 4 instead).

Are gains from selling ships or aircraft taxed where the airline is managed?

No. Article 13(3) taxes such gains only in the state of which the alienator is a resident, regardless of where the shipping or aircraft enterprise is effectively managed — a distinction from treaties that use a place-of-effective-management test for this category.

Are payments for selling IP rights treated as capital gains?

Not always. Where the sale price of a royalty-generating right is contingent on its future productivity, use or disposition, the Protocol treats the payment as a royalty under Article 12 at 10%, not as a capital gain under Article 13.

What documentation does a Mexican investor need to claim treaty protection on a capital gain?

A Tax Residency Certificate from SAT, Form 41 (formerly Form 10F) filed electronically if the TRC lacks prescribed details, and a self-declaration of beneficial ownership. The Indian buyer must file Form 145, and Form 146 for remittances exceeding INR 5 lakh, and may need to withhold tax at source on the gain under section 393(2).

Can India's GAAR override the capital-gains allocation in Article 13?

Yes. Section 159(6) of the Income-tax Act, 2025 (section 90(2A) of the Income-tax Act, 1961) makes India's domestic GAAR apply notwithstanding the treaty-override rule, so an arrangement lacking commercial substance and structured mainly to access Article 13's protections can still be denied treaty benefit.