Mexico–Germany Trade Relations: A Strategic Partner on the American Continent

Mexico may become Germany’s partner of choice in the American market, and a strategic ally for its future. Thanks to the 2000 EU–Mexico Free Trade Agreement and the 2009 Double Taxation Treaty with Germany, it provides tariff-free access to the U.S. market when origin rules are met, cost-competitive skilled labor, a network of 14 free-trade agreements, and favorable tax provisions to German Groups.

Strategic Overview

Germany plays a critical role in strategic sectors of the Mexican economy—particularly automotive, chemical, pharmaceutical, and electronics. This partnership is backed by the Free Trade Agreement between Mexico and the European Union (EU-Mexico FTA), in force since 2000 and currently undergoing modernization.

German companies establishing operations in Mexico must consider not only the Mexican tax framework, but also how these revenues and financial flows will be treated by the German tax administration. Fortunately, the Double Taxation Avoidance Treaty ("DTA") between Mexico and Germany (in force since 2009)

The following table summarizes the DTA treaty rules:

In recent years, U.S. tariff policies—especially targeting China and the EU—have created a volatile global trade environment. Beyond economic efficiency, companies must now consider geopolitical exposure, labor costs in the U.S., regulatory constraints, and political risks when making supply chain decisions. In this setting, Mexico stands out as a strategic production and export platform.

Why Mexico is a Strategic Global Manufacturing Platform

• Preferential access to the U.S. market under USMCA (T-MEC), eliminating tariffs when origin rules are met.
• Extensive global trade network: 14 Free Trade Agreements with 52 countries including the EU, Japan, South America, and Asia.
• Cost-competitive skilled labor, offering savings of 30–40% versus the U.S. or Europe in strategic sectors.
• Logistics and proximity to the U.S. allow fast and cost-efficient delivery, vital for time-sensitive industries.

Opportunities for German Companies

Mexico provides an ideal location for German companies to establish or reorganize operations. For U.S.-bound products, manufacturing in Mexico (T-MEC compliant) avoids tariffs. For goods destined for Europe, Asia, or Latin America, Mexico’s trade network and tax incentives make it a powerful export hub.

Key Tax Considerations

• Mexico–Germany Double Taxation Agreement (DTA) allows companies to avoid double taxation and structure cross-border operations more efficiently.
• Withholding taxes on royalties and interest are typically capped at 10%, and dividends at 5% (if 10% ownership exists).
• Payments for services from abroad may be exempt from withholding, if properly documented and compliant with treaty conditions.
• Use of intangibles (e.g., trademarks, software) for profit allocation is permitted if economic substance and contractual support are provided.
• Thin capitalization: Under Mexican law (Article 28, LISR), interest is non-deductible when the debt-to-equity ratio exceeds 3:1. This rule is rigorously enforced and may substantially increase the tax base.

Transfer Pricing Compliance in Mexico and Germany

Both countries are OECD members and apply the arm’s length principle strictly. Related-party transactions must mirror independent market behavior.

Strategic Recommendations

• Redesign supply chains regionally: Adopt nearshoring strategies to reduce exposure to trade risks
• Establish production operations in Mexico: Invest in facilities or partner with maquiladoras (low risk contract – manufacturers) to leverage USMCA and trade treaties.
• Optimize global tax planning: Develop structures with real functions, documented intangibles, and proper intercompany contracts.
• Monitor geopolitical shifts: Set up internal alerts for trade policy changes in the U.S., EU, or Asia to mitigate disruption.

This article was written in co-operation with L.C.P.F. Rodrigo Mendoza Romano and L.C.P.F Luis Arturo Trigos Rodriguez of CLA Mexico.

L.C.P.F. Rodrigo Mendoza Romano is the partner responsible for transfer pricing at CLA Mexico. He is an expert in international tax consulting and transfer pricing and has more than 17 years of experience in this field. He specializes in the design and implementation of intercompany policies for multinational corporations with operations in Mexico, the United States, Europe, Asia and Latin America.

L.C.P.F. Luis Arturo Rodriguez is an expert in transfer pricing in Mexico and Latin America and has more than eleven years of experience in this field. He performs valuations on intangible assets and corporate restructurings in the context of transfer pricing according to OECD guidelines.