Residency for tax purposes must be studied in light of the domestic legislation of each country, in relation to international treaties and the Model Double Taxation Avoidance Conventions. For this purpose, residence in Mexico will be studied, as well as the provisions set forth in the Model Convention on Double Taxation of Income and Capital of the Organization for Economic Cooperation and Development (OECD Model Convention).
In most countries, the principle of residence is the guiding principle of taxation and not the source of income.
Mexico is no exception, as domestic legislation states that individuals and corporations that have their residence in Mexico are required to pay the corresponding general tax, regardless of the location of the source of income creation.
However, for individuals, their residence in Mexico does not necessarily depend on their nationality or citizenship, since domestic tax regulations do not establish that residence in Mexico is obtained by nationality or citizenship.
On the contrary, the Federal Tax Code considers the following persons as residents of Mexico:
- To those who have their home in this country;
- In the event that the person has a residence in another country, he/she will be considered to have a residence in Mexico, when his/her vital center of interests is located in Mexico.
On the one hand, the vital center of interests is updated when more than 50% of the total income obtained by the individual in the calendar year is derived from wealth in Mexico or, as the case may be, when the principal center of the individual’s professional activities is located in Mexico.
For legal entities, residence in Mexico is established when they establish the main administration of the business or their place of management, and it is necessary to analyze in detail what should be understood by “administration” and “place of management”.
On the other hand, there is an obligation to file a notice with the tax authority when individuals cease to be residents in Mexico and, in the event that such notice is not filed, the status of resident in Mexico is not lost, which means that the individual is obliged to continue complying with its formal and substantive obligations in the country.
In international matters, specifically in the Model Convention on Double Taxation of Income and Capital of the Organization for Economic Cooperation and Development (OECD Model Convention), to which Mexico is a party, it is stated that “residents of a Contracting State” are all those persons who, by virtue of the legislation of that State, are subject to taxation in that State, based on their address, residence, place of management or any other criterion of a similar nature.
Likewise, it provides that in the event that a person is a resident of both States, his or her situation will be resolved as follows:
a. You will be considered a resident of the State where you have a permanent home;
b. If he has a home in both, he shall be considered a resident of the State in which he has his center of vital interests;
c. If the State in which such person has the center of his vital interests cannot be determined, he shall be deemed to be a resident only of the State where he lives;
d. If he resides in both States, or in neither of them, he shall be considered a resident only of the State of which he is a national.
On the other hand, it is indicated that in the event that the non-individual is a resident of both Contracting States, he/she shall be considered a resident only of the State where his/her effective management headquarters is located.
From the foregoing, it can be considered that Mexican law follows the rules set forth in the OECD Model Convention on Double Taxation of Income and Capital, to determine the assumptions of residence of individuals and corporations.
In the comments to article 4 of the Model, it is stated that the purpose of determining the residence of persons is to identify the subjective scope of a treaty, to resolve cases in which double taxation occurs as a consequence of double residence or to resolve cases in which double taxation results from taxation in the State of residence and in the State of the source of the income.
In conclusion, it could be said that the study of residency is of utmost importance in three cases:
- Determine the formal and substantive tax obligations to which individuals will be subject;
- Be in a position to solve dual residency problems; and
- Resolve cases in which double taxation results from taxation in the State of residence and in the State of source or situation.
Therefore, it is of vital importance for individuals and corporations to know the way in which the authority establishes the obligation to pay taxes through the residence of the economic entity; if you have any doubt about your tax obligations derived from this situation, our legal team will be pleased to support you with specialized advice on the matter, do not hesitate to contact us.
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