Rev. Rul. 73-106

Advice has been requested whether the tax upon gross royalties imposed by the Government of Mexico and paid by taxpayers subject to tax under Article 3, paragraph II of its Income Tax Law of December 31, 1964 (Ley del impuesto sobre la renta), as amended through April 1, 1969, is an income tax for which credit is allowable under section 901 of the Internal Revenue Code of 1954.

Article 1 of the Mexican Income Tax Law imposes a tax on any receipts which change the net worth of the taxpayer and which are derived from capital, from labor, or from a combination of both. Article 3 describes the persons subject to the tax. Paragraph I of Article 3 provides that Mexican individuals and entities and resident individuals and entities established in Mexico are taxable with respect to all their taxable income from whatever source. Paragraph II of Article 3 provides that nonresident aliens and foreign legal entities, not included in paragraph I of Article 3, are taxable on their taxable income derived from sources of wealth in Mexico. Article 18 provides that the base of the tax for "major" taxpayers is the aggregate income less authorized deductions. Aggregate income includes the income described in Articles 1 and 3. Paragraph Id of Article 31 establishes as a tax base in the case of the taxpayers described in Paragraph II, Article 3 (ie., nonresident aliens and foreign legal entities not established in Mexico) receiving royalties from the exploitation of patents, trademarks, and trade names, the gross amount obtained without any deductions.

In order for a tax paid to a foreign country to be recognized as a creditable income tax under section 901 of the Code, it must be shown that the tax imposed by the foreign law is an income tax within the United States concept, of that term. See Mary Duke Biddle v. Commissioner, 302 U.S. 573 (1938), Ct. D. 1303, 1938-1 C.B. 309.

The Mexican tax on gross royalties paid to foreigners and foreign legal entities not established in Mexico is similar to the tax on gross income imposed under United States income tax law on income received from sources within the United States by nonresident aliens and certain foreign corporations when the amount so received is not effectively connected with the conduct of a trade or business in the United States. See sections 871 and 881 of the Code.

The tax on gross royalties imposed by the Government of Mexico and paid by taxpayers subject to tax under Article 3, paragraph II of its Income Tax Law of December 31, 1964, as amended through April 1, 1969, is an income tax within the meaning of section 901 of the Code and, accordingly, is allowable as a credit against United States income tax, subject to the applicable limitation of section 904 of the Code.