by Orlando Gotay, Tax Attorney
Orlando Gotay is a California licensed tax attorney (with a Master of Laws in Taxation) admitted to practice before the IRS, the U.S. Tax Court and other taxing agencies. His love of things Mexican has led him to devote part of his practice to the tax matters of U.S. expats in Mexico. He can be reached at email@example.com.
Listen long enough to any conversation between expats in Mexico, and sooner or later the conversation will turn to the subject of residency… Residente Permanente versus Temporal, and the quite generous 180 days allowed by Mexican immigration for an FMM card, at 295 pesos. That works out to 1 peso, 63 cents per day. Cheaper than tortillas.
Let’s talk instead of residency for Mexican tax purposes. Yes, Conchita, if you are a Mexico resident for tax purposes, we are not talking tortillas anymore.
Immigration “residency” has no direct bearing to tax residency. You may be in Mexico on an FMM, your 17th one in a row, and even though you are on paper a “tourist”, the SAT (the Mexican IRS) may consider you more Mexican than you ever thought possible.
Residency is a concept that exists in most tax systems. Why? Residents get taxed differently than others.
Residents derive more benefits, requiring more resources than the casual visitor. Non-residents are expected to pay tax on wealth that has some connection with the State. Most Americans have the privilege of being saddled with two overlapping tax systems. The United States imposes responsibility for taxes solely because we are citizens or nationals. We call that citizenship-based taxation. The United States is the only industrialized country that imposes taxes this way.
States employ more traditional residency concepts. One can be a resident or a nonresident. For clarity, states often have “safe harbors” or bright line tests that are easy to figure. Either you lived in the state for, say, 181 days, or you did not. It is just a matter of keeping track.
The Mexico Tax Code does not quite do it that way. It’s fuzzy.
Here’s my translation of part of Article 9 of the Federal Tax Code:
“The following shall be considered residents[…]:
In the case of individuals…
a) those who have established their place of abode [casa habitación] in Mexico. When individuals also have a place of abode in another country, such individuals shall be considered residents of Mexico if their center of economic interests is within national territory, when, among other situations, they fit within any of the following situations:
1. When more than 50% of the total income obtained by such person is from Mexican sources.
2. When the principal center of professional activities lies in Mexico. [my italics, my translation]
If your only place of abode is in Mexico, guess what? You are a tax resident of Mexico. If you sold everything north and the only connection you have to the U.S. is your passport and that South
Dakota plate, well, the Mexico IRS could be waiting to welcome you with open arms.
Notice carefully the “among other situations” bit. So this list is not exclusive. Mexico may assert you are a resident for other reasons, too.
You still have a home up north?
You may not be off the hook. The second home elsewhere just allows the second prong of the inquiry, an analysis of your economic activity. Is your income or source of wealth more in Mexico than elsewhere? You’re in.
What about #2, the “principal center of your professional activities”? It could give some food for thought.
What’s the big deal? I’ll tell you. Mexican residents get taxed on their worldwide income, even that which did not come from Mexican sources.
Non residents only get taxed on what’s sourced in Mexico…like rents, wages in Mexico, self employment there, that sort of thing.
Before you drop your cup of coffee in shock and despair, we need to talk about the U.S.-Mexico tax treaty (the “Convention”), an important agreement that trumps some important aspects of taxation between residents of either country.
Here’s what the convention says about residence [For clarity, I’ll add the word “Mexico” here and there. The convention refers to “this State” and “that State”…the terms can lead to a state of confusion]:
“1. For the purposes of this Convention, the term “resident of [Mexico]” means any person who, under the laws of that State [Mexico], is liable to tax therein by reason of his domicile, residence […], or any other criterion of a similar nature.
However, this term does not include any person who is liable to tax in [Mexico] in respect only of income from sources in that State [remember that nonresidents are only subject to Mexico tax on Mexico sourced income].
2. [A “tie breaker”:] Where by reason of the provisions of paragraph 1, an individual is a resident of both Contracting States [this is the case of U.S. citizens who are also resident in Mexico (remember, citizenship based taxation)], then his residence shall be determined as follows:
a) he shall be deemed to be a resident of the State in which he has a permanent home available to him; if he has a permanent home available to him in both Contracting States, he shall be deemed to be a resident of the State with which his personal and economic relations are closer (center of vital interests);
b) if the State in which he has his center of vital interests cannot be determined, or if he does not have a permanent home available to him in either State, he shall be deemed to be a resident of the State in which he has an habitual abode;
c) if he has an habitual abode in both States or in neither of them, he shall be deemed to be a resident of the State of which he is a national […]
The Convention has a method to sort out residence. Tie-breakers are applied in order.
First, Mexico has to deem you a resident. Because the U.S. already deems you a “resident” (by virtue of citizenship), we move to the other tie breakers, in order: Permanent home, personal and economic relations, habitual place of abode, and finally, nationality.
Check your passport…pour yourself another cup of coffee and smile…non-resident?