For Americans and other foreign residents, Mexico is a very attractive country to live and work, because of its weather, rich culture, delicious food, friendly locals, and cost of living. And in an increasingly global society, foreign residents are not only coming to work in Mexico, but Mexicans are also moving to the U.S. or other countries abroad. Foreign residents planning to work or invest in Mexico, as well as Mexican residents leaving Mexico, may face tax implications.
An individual qualifies as a Mexican tax resident if the following requirements are met:
- The individual has a home in Mexico, or
- If the individual has a home in another country, they are nonetheless a Mexican resident if their center of vital interests is in Mexico.
The individual’s center of vital interests is in Mexico if (1) more than 50% of their income is derived from a Mexican source in a calendar year, or (2) Mexico is the primary place of their professional activities.
- Government officials or employees are deemed to be residents of Mexico even though their center of vital interest is located abroad.
A Mexican citizen is assumed to be a Mexican tax resident unless it is evidenced otherwise.
Additionally, it is important to note that an individual coming to Mexico that has a dwelling for tourism purposes, it is not deemed to create a permanent home in Mexico, unless they stay in Mexico for an extended period.
A legal entity is considered a Mexican resident if the entity’s effective place of management or main administration is in Mexico. A legal entity’s main administration or place of effective management is in Mexico if the place where the person or persons who take or carry out the decisions in connection with the legal entity’s control, direction, operation, or management, as well as those regarding the activities it performs, are located in Mexico.
Mexican tax residents are taxed on their worldwide income. As such, a Mexican taxpayer is subject to Mexican Income Tax on all income received (notwithstanding the source).
Individuals are required to file their tax return by April 30th following the tax year in question. Legal entities are required to file their tax return by March 31st of the following year. Mexican regular tax years are based on the calendar year, from January 1st to December 31st.
Additionally, note that U.S. citizens may face additional tax compliance and reporting obligations in the U.S.
Mexican residents moving abroad
The Mexican Federal Tax Code (FTC or Código Fiscal de la Federación) was amended in 2022. One of the most relevant amendments made was to article 9 of the FTC.
In general terms, the amendments provide that a Mexican resident (individual or legal entity) who changes their tax residency to a Country that is a tax haven (régimen fiscal preferente), or if such residents do not evidence their change of residency, they will continue to be treated as a Mexican resident for tax purposes.
In other words, taxpayers must comply with the Mexican tax requirements even if they change their residency. For example, taxpayers are required to continue to pay Mexican taxes and file Mexican tax returns. This rule will not apply, however, if the tax haven jurisdiction maintains an information exchange agreement with Mexico, which enables mutual administrative assistance.
Additionally, individuals and legal entities who change their Mexican tax residency status are required to file a notice with the Mexican tax authorities within 15 days of changing their residency. If the individual or legal entity fails to file such notice, they will remain a Mexican resident for tax purposes.
In practice, this may result in double taxation for the taxpayer that changed their residency. Tax Treaty, however, may provide relief.
Taxpayers planning to change their Mexican residency status should seek tax advice in order to comply with the requirements set forth in the tax provisions, such as filing the applicable notices and paying exit taxes to avoid unnecessary tax compliance.
Tax Residency Status modification: U.S. Tax implications
Under the Internal Revenue Code (I.R.C.), an individual may be a U.S. resident or a non-resident for tax purposes. A non-resident is defined as any individual that is not a U.S. citizen nor a resident for tax purposes (I.R.C. § 7701(b)(1)(B)).
A U.S. citizen is any person born or naturalized in the U.S. and subject to its jurisdiction. An individual is a resident for tax purposes if such person meets any of the following tests: (i) the lawful permanent residence test – so-called “green card test”; (ii) the substantial presence test, or (iii) elects to be treated as a resident making a first-year election. The U.S. residence tests are generally applied on an annual calendar year basis.
Green Card Test
The U.S. Citizenship and Immigration Services (USCIS) (or its predecessor organization) shall grant an alien individual the right to permanently reside in the U.S. as an immigrant. An alien individual will generally have this status if he or she has been issued an alien registration card — a so-called “green card.”
The individual meets the green card test if he or she is a lawful permanent resident (LPR) of the U.S. under the U.S. immigration law at any time during the calendar year (12 months). An individual will continue to be treated as a U.S. resident under the green card test unless his or her LPR status is revoked, or it is administratively or judicially determined to have been abandoned (except a special rule for dual residents applies). It is important to note, the expiration of the green card document does not terminate residence for tax purposes.
Substantial Presence Test
An alien individual meets the substantial presence test if the individual is physically present in the U.S. for at least: (1) 31 days during the current calendar year; and (2) 183 days during the 3-year period that includes the current calendar year, and the 2 calendar years immediately preceding counting:
- All days of physical presence in the U.S. during the current calendar year, and
- 1/3 of the days the individual was present in 1st preceding year; and
- 1/6 of the days the individual was present in 2nd preceding year.
Generally, an individual is treated as present in the United States on any day he or she is physically present in the country at any time during the day. However, some exceptions apply.
First-Year Choice Election
Under the substantial presence test, a non-resident alien individual may elect to be treated as a U.S. tax resident for part of the immediately preceding calendar year by making a special election.
U.S. tax residents may be residents of a foreign jurisdiction with which the U.S. has a tax treaty. The dual tax resident may apply a tie-breaker rule under the tax treaty to determine which of both jurisdictions has the authority to tax the latter. Taxpayers under this scenario shall notify the U.S. tax authority that they should be treated as non-resident aliens for tax purposes. If they fail to notify the U.S. tax authority, they will continue to be treated as U.S. residents to compute their U.S. tax liability. Additional requirements shall be met to claim the benefits under the tax treaties.
Entities that Qualify as U.S. Tax Residents
A corporation is treated as a domestic corporation if it is (1) created or (2) organized under the laws of the United States, any State, or the District of Columbia. Domestic corporations are U.S. tax residents, notwithstanding they are tax residents in a foreign jurisdiction. A dual resident corporation of the U.S. may apply a tiebreaker rule under a tax treaty to determine which of both jurisdictions has the authority to tax the latter. Dual corporation tax residence does not affect the status of the company as a U.S. corporation.
Certain entities may elect to be treated as corporations for U.S. federal tax purposes. The regulations to be elected as corporations include corporations or domestic entities incorporated under Federal or State legislation, and insurance companies. Additionally, any entity chartered in the U.S. and a foreign jurisdiction, if the foreign chartered entity is on the list of foreign entities that are corporations or on the list of domestic entities that are corporations. Limited liability companies are partnerships and not corporations if they have 2 or more owners, and they are disregarded if they only have one owner.
Partnerships and disregarded entities for U.S. purposes are treated as fiscally transparent. However, if certain requirements are met both entities may elect to change their status from fiscally transparent to a corporation and vice versa. In practice, this election is known as “checking the box.” Changing the status may trigger various tax implications.
Other entities may be treated as corporations if certain requirements are met, such as publicly traded partnerships, charitable or other tax-exempt organizations, trusts, real estate investment trusts (formed as a corporation, trust, or association), estates, and real estate mortgage investment conduit (REMIC).
Entities that are not considered as tax residents
An entity classified as a partnership (other than publicly traded partnerships), generally is fiscally transparent. The tax is imposed on each partner of a partnership depending on each partner’s distributive share of partnership income, and each partner’s status as a non-resident or resident of the U.S.
Additionally, S corporations, grantor trusts, simple trusts, and common trust funds under section 584 of the Code are fiscally transparent entities for purposes of U.S. federal tax law. Disregarded entities are also fiscally transparent. The tax is imposed on the disregarded entity’s sole owner in the state in which the owner is resident.
A domestic business entity that is not a corporation may be treated as disregarded entity status (one owner) or a partnership (more than one owner) unless it elects to be treated as a corporation. If it makes the election to be a corporation, it will be liable to tax as a resident for treaty purposes.
A foreign business entity that is not a corporation under the list for foreign corporations under the I.R.C., may elect to be treated as a disregarded entity or partnership. The owner or owners of the entity separately take(s) into account on a current basis their share of such entity’s income (whether distributed or not), and the character and source of the income to the owner are determined as if the income was directly realized by the owner or owners.
A fiscally transparent or flow-through entity may be a U.S. tax resident, which is eligible to apply for a benefit under a tax treaty.
Expert Tax Attorneys
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