U.S.-Mexico Dual Taxation: Residency Rules, Filing Requirements, Planning Opportunities

Description

The proximity between the U.S. and Mexico have resulted in significant economic migration between the two countries. Many Mexican nationals have well-established tax presence in the United States, and increasingly U.S. citizens have property interests in Mexico. Tax advisers serving clients with ties in both countries need to understand the critical differences between the two countries' tax regimes to avoid dual taxation on income and gains.

The U.S. and Canada have a tax treaty system that helps define proper tax payment in dual taxation scenarios. Mexican rules for tax residence tie into whether the taxpayer maintains a "center of vital interest" within Mexico. Mexico imposes global income tax on all individuals with Mexican tax residence and treats unearned income such as dividends and capital gains differently than the United States.

Mexican law also imposes restrictions on direct ownership of real property by non-Mexicans in specified locations, known as "restricted zones," requiring foreign taxpayers to structure purchases through either Mexican corporations or bank trusts (fideicomisos). Additionally, in many cases, transfer of Mexico-situs property to non-Mexican taxpayers is a taxable transaction requiring Mexican tax withholding.

Looming over Mexico's tax treatment of American taxpayers with cross-border activities is the extensive U.S. income and information reporting requirements. Mexico is a participant in global bank and asset disclosure programs, and U.S. taxpayers with presence in Mexico must coordinate their U.S. disclosures with required Mexican tax filings.

Listen as our expert panel provides practical guidance on navigating U.S.-Mexico cross-border tax planning and reporting issues.