Talking Expat Taxes #2

Understanding Tax Residency in Mexico: Key Tips for Expats

Are you thinking of moving to Mexico or already living there? Wondering how it impacts your U.S. taxes? Join Alex McGowin and tax expert Juan Antonio in this insightful episode of "Talking Expat Taxes." Juan, with his extensive experience in global mobility, shares practical advice on tax residency, filing requirements, and ensuring you're not overpaying taxes. Whether you're a business owner or an individual, this episode is packed with valuable information to help you navigate the complexities of international tax obligations. Key Points: - Understanding Mexican tax residency - Filing requirements and residency implications - Managing U.S. tax obligations while living in Mexico - Practical advice on owning real estate in Mexico Don’t miss out on this essential guide for expats and international tax professionals!

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Show Notes

It's crucial to ensure you're paying tax to the right jurisdiction and not overpaying in one place or another.


  • Triggering Mexican Tax Residency

    Mexican tax residency is triggered by establishing a long-term home in the country.

  • Tax Implications for Non-Residents

    Non-residents must still consider Mexican-sourced income and its tax implications.

  • US-Mexico Tax Treaty Guidelines

    The US-Mexico tax treaty can help avoid double taxation by providing guidelines on residency and tax obligations.

  • Importance of Professional Advice

    Professional advice is crucial for navigating the complexities of international tax laws and ensuring compliance.

Understanding the source of income is essential for determining tax responsibilities in both the U.S. and Mexico.

Today's Guest
Juan Antonio Bautista Hernandez

Juan Antonio Bautista Hernandez

Juan Antonio Hernández Bautista is a seasoned tax advisor with 23 years of experience, specializing in Global Mobility and International Assignments for the past 18 years. He is a partner at ÍPATI Consultores, S.C., providing tax planning and compliance services for international employees and corporate clients. Previously, he served as Global Mobility Director at PwC for 16 years. Fluent in both Spanish and English, Juan has spoken at international conferences in the USA and Mexico. He holds a degree in Public Accounting from Universidad Nacional Autónoma de México (UNAM).com.mxEmail Juan

Meet Juan Antonio: Professional Tax Advisor


Hi, my name's Alex McGowin, and I'm your host again for Talking Expat Taxes. Are you interested in moving to Mexico or maybe you're already there and you're wondering how that affects your U.S. taxes or what is the tax implication of spending time in Mexico or moving there? Well, today's podcast is specifically for you and for that situation.


We're going to be talking with Juan Antonio. He specializes and has been doing it for a long time in individuals that are moving to Mexico from somewhere else. He obviously does other things too with businesses and local individuals, but he's been working in the mobility sector for a long time. So he's going to be able to give us his insight on practical things.


But yeah, so with Juan, what we're going to talk about is a lot of the practical stuff with filing requirements, residency. What does it mean to own real estate in Mexico, and how does that affect your taxes? So yeah, really looking forward to it. Juan's going to give us some good stuff.


If you haven't listened to this podcast before, again, my name is Alex McGowin. I'm the owner of McGowin Tax LLC, where we help international individuals with their U.S. tax compliance and consulting. You can find me at my website, www.mcgowintax.com, or email me at alex.mcgowin@mcgowintax.com. But enough of all that. Let's jump into the podcast and talk to Juan. Enjoy.


Hey, Juan, good to see you again. And I hope you're doing well. Thanks for being here. Juan is, you know, one of the leaders in Mexico for global mobility taxation, has his own firm and is coming onto our podcast today to give us a little background on tax residency in Mexico.


Hello, Alex. Nice to see you again.


Yeah, good to see you again. Hope everything's going well. Hope the tax world in Mexico is treating you well.


As always, they're the same as they used to be. Basically the same for most of the cases.


Okay, thank you, Alex. Basically, I'm the partner in Hepatic Consultores. We specialize in providing tax, legal, labor, and social security assistance to employees, to foreign employees coming to work in Mexico, as well as Mexican employees transferred to work abroad. In my case, I have 24 years of experience in global mobility issues.


Yeah, you're a former PWC guy, just like myself.


Yeah. Right.


In Mexico City, right?


Yeah, I was in Mexico City, in the office of Mexico City. I was working there for about 16 years. A very good, a very nice experience.


Yeah, understood... So yeah, I thought today we could talk a little bit about on the individual side, you know, a lot of what I deal with in my client base is, you know, Americans, US people. Either with flexible employment situations where they can move abroad and they move to Mexico with a U.S. employer, or they're self-employed and moved to Mexico somewhere. A lot of the questions I get, obviously I get the questions on the U.S. side and we have to deal with the worldwide taxation situation for citizens. But in Mexico, most people, or most Americans at least, don't know where that line is in Mexico or, you know, when do you have to start filing in Mexico and what do you have to include at that point? So maybe if you give us a little background on when are you considered a Mexican tax resident? And what does that mean exactly once you've become that?

Tax Implications of Owning Real Estate in Mexico


Yeah, very good question because we have a bunch of information on the internet on Facebook, on YouTube. And, the more videos that we see, the more quantity of questions are rising. In Mexico, we have two options to be taxed: as a resident or as a non-resident. It is very important to consider that when a foreign individual comes to Mexico, one of the first questions is when you will be working in Mexico, is to know if you will be obligated to pay taxes in Mexico. When you establish a home in Mexico, it is the first requirement stated in the Mexican tax code. When you establish a home in Mexico, you will start tax residency treatment from a Mexican point of view.

The 183 Rule: Tax Obligations & Procedures


Because I think, and maybe we'll drill down into that a little bit, one of the misconceptions that I think a lot of people have is the 183 day rule that a lot of people are familiar with is that in the US, for state taxation, crossing that 183 days state tax residency. And a lot of foreign countries, or non-U.S. countries, have that same rule. And that is a rule of Mexico, right? It's just that they have added an additional rule.


This misunderstanding is alive in Mexico. This rule of the 183 day was in the Mexican income tax law. I think that in 2004, the Mexican tax law was changed. So now the rule since then is that the tax code, the rule or how we determine basic contact residency, is stated in the Mexican tax code. And since then, the rule is that if you establish a home in Mexico, you will be starting as a tax resident. Mexico will not look to the past. They will look to the future. If you established your home in Mexico, say June 20th, you will be treated as a Mexican tax resident from now to the end of the year.


Okay, I understand it doesn't go backwards. So, say you establish a home or a dwelling in Mexico... If you came and established a home on December 30th, even though you only spent two days in Mexico for the year, you'd be a resident for two days because of that rule.


On the law, you are right. Okay, right. It could have some practical problems for a few days, but you're right.

Navigating Tax Obligations as a US Expat in Mexico


Right. Yeah, and that's always the - I don't know if calling it a game is the right way to phrase it - but I mean, what we're talking about here is really the technical rule. And then there's kind of the practical application of those technical rules for sure. Like, if you move on December 31, and you have a home there, December 31, technically, you have a tax residency in Mexico, but practically, who's going to actually file a tax return for one day of tax residency? And how would you even determine what income would be allocated to it? So, I agree, there'd be some practical issues there. But I guess going back to that, the home concept, is like a lot of times in the US, we have terms like that, that are very poorly defined, if at all. Then we have to look at the case law and figure out what that means. I mean, clearly a home, if you purchased a home and moved into it with your family, I think that would clearly be a definition of establishing a home in Mexico. But, what if you're a single person and you have a short-term lease or an AirBnB, a short-term rental agreement in Mexico, and you stay there for the rest of the year, if you moved today, in June, and you just kind of went to short term rentals for the rest of the year... What is the line of attack for a home in Mexico? Or is it a blurry line?


In that the home, or the house that you are living in, is basically 100% at your disposal...


So, if you're renting, then...oh at your disposal, I see what you're saying. So, if you're renting, it's 100 at your disposal.


Correct. If you buy the house, if you are renting, or if your company that sent you to work in Mexico is paying the rent on your behalf. Basically, if you have the home at your disposal, in Mexico, the concept is called Casa Habitación. If it is at your disposal, it is the Casa Habitación. If you are in a hotel, it means that you will be in Mexico for a short period of time. Or, if you are in Mexico two weeks, staying in a hotel, and you go back to the US and you return to Mexico, you will be maybe in another hotel, or in the same hotel, or in another room. In that case, it's not considered as a Casa Habitación.


Right. I guess it's these short term rental places like an Airbnb or VRBO, that confuses that rule a little bit, right? Because technically, you know, they have that house at their disposal, but it may just be for a short-term period of time. In which case, they're probably okay to not call that a home. It's more of these lease agreements. Like, if you have a six month or a year lease, or certainly if you purchase a home and you live there.


Yeah, and also we should consider in the case of an Airbnb, if you come for a short time, let's say, if you come for a month, then you go back to the US and you return to Mexico, you return to another house, it will not be considered as Casa Habitación. But, if you come to Mexico, and you are renting a home on Airbnb for a long period of time, it could be treated as Casa Habitación.

Paying Taxes to the Right Jurisdiction


I see. So, it really comes down to long-term versus short-term at the end of the day, it sounds like. Maybe there's not a specific number of months or weeks that you have to rent it, but subjectively, purchasing a house or a medium to long term lease agreement would be a Casa Habitación as opposed to a shorter term rental where in the same year you may be at different shorter term rentals, in which case, you wouldn't have established that home concept. In that case, you're probably still a non-resident. So in that situation, let's say, you don't cross that line to be a resident but you are spending a couple of airbnb months in mexico and work remotely from those places. So, you're a non-resident, but working in Mexico for a foreign company, or maybe for your own company, what are your technical filing obligations in Mexico, if any? And, I guess we can talk about the practical side of that as well.

In-Depth Discussion on Mexican Tax Residency


We should take care of some other concepts related to how we determine the tax residency in Mexico. If you do not establish a home in Mexico because you have another home in the US, we should review where your center of vital interests are. It means where you will be earning or receiving more than 50% of your annual income in that calendar year. If Mexico is established as your principal center of professional activities. We also have, if you say I have 50% of my income earned in Mexico and 50% of my income received in the US, then where is your main center of activities? It could be, for example, Mexico because you are rendering your services in Mexico. We should be clear of the concept of source of income. For instance, if you are working in the US, it will be considered as US income.


Because that's where you're really providing the services?


Right. If you are working in Mexico, then it will be considered as Mexican income. For example, in the case of real property, or in the case of rental income, if the house is in Mexico, the income will be treated as a Mexican source. It does not matter if you are paid in the US, if you work in Mexico, it will be considered Mexican source income. It does not matter if the US company is paying, or if the money is deposited into your US bank account, or in another country.


Right. So, if you're providing services, the source of income is where you're physically providing it. It doesn't matter who the payor of the services are and where they're paying them from, or where the bank account is. So yeah, this is a good point. I think one thing we've left out at this point, maybe you're about to get to that, is the tax treaty between the US and Mexico, right? Is that we have the technical rules of what is considered a Mexican tax resident and we talked about the taxed home in Mexico triggering residency. But then our fallback is the treaty between the US and Mexico, which has its own test for breaking residency, and it's called the Treaty Tiebreaker Test. And it's basically what you just mentioned. It goes down a list of specific requirements to see which way you break to Mexico or to the US. So even if you fall under the Mexican tax residency rule, we can still look to the treaty to say, all right, where are you actually a resident under the treaty? And like you said, center of vital economic interest is a big one. You may break back to the US, even though the technical rule in Mexico is that you're a resident under the law. So we have some options to keep you as a non-resident of Mexico, even if you're technically breaking over that under the Mexican law perspective.


And it is important to consider, in your example, if an employee, or if an individual is working in Mexico, you have to consider that the income is a Mexican source. This is the first point. The second point is to know you will be taxed as a resident or as a non-resident, either way, you will be taxed.

Income Sources and Tax Obligations


Right. So, in that case, how would a non-resident be taxed? Let's say you are a non-resident either because of the treaty, or because you didn't meet the home test in Mexico, how is a non-resident tax based on Mexican sourced income? So, providing services in Mexico?


It's interesting because the Mexican income tax law is divided into chapters. We have chapters, or titles. We have a title for residents and a title for non-residents. In the specific case of an employee, the income tax rates will be different from the rates applied to a resident. It will be lower. In the specific case of salaries, if you receive other kinds of income such as interest, dividends, rental income, or capital gains, in most of the cases, you will be obligated to pay a 25% income tax rate.


On Mexican source income. Right?


Yes, on the gross income.


But it has to be Mexican sourced, right?




So if you're a non resident of Mexico, and you get a dividend from a US company, that's not going to be taxable in Mexico, but if it's a Mexican company, it's back to the sourcing rule like you said you have to go through it in phases. Are you a resident or non-resident? And then is the income sourced to Mexico? And if it is, as a non-resident, you have to pick up Mexican sourced income, which is really the same rule as in the US. Same concept. There are varying levels of people following that rule. Like, for example, if a Mexican comes to the U.S. and they're not a U.S. citizen or green card holder, and they spend 10 days working in the U.S., and earn over a certain amount of money, then technically that's US sourced income. It could be taxable in the US, but actually the treaty drills down on that under specific articles of the treaty that would exempt that individual from having to pay tax on the US sourced income. I think it could be the same in Mexico in a non-resident perspective, we could fall back on the treaty potentially to help us out with service-based income for a short-term period. We have to look at this specific treaty article, can't quote that here off the top of my head. I think that's the progression, right? That's how I think about it as a progression. Does the law call you a resident or non-resident? If you're a non-resident, do you have any Mexican source income? If you do, technically you're going to need to pick that up and pay tax on it. But then the next rule is, can you get any help from the tax treaty? In a lot of cases, you can. So I think that's kind of the progression I go through, if you agree with that concept...


In the case of salaries, it's also interesting because you could be taxed at 0%, 15% or 30%. Basically, we have brackets of income. And depending on the amount of income that you are receiving as an employee, I'm talking about salary, you could be taxed on 0%, 15% or 30%.


Right, that's what we call marginal tax rates. So depending on your income, there's a progressive rate structure where the rate grows depending on how much income you have.


It is important to consider that you could be paying taxes in Mexico as a non-resident. You should be provided a certificate of the taxes paid in Mexico. And these taxes should be considered as foreign tax credit, for instance, in the US.

The US-Mexico Tax Treaty


For sure. The first step is making sure we're paying tax to the right country. And then the U.S. decides to make everything difficult by not really caring what the residency rules say. And they just tax you anyway, because regardless of where you're actually a resident, they tax you anyway. So, yeah, we have mechanisms here in the U.S. like the foreign tax credit to make sure you're at least not getting paid tax twice on the same income.

Applying the Tax Treaty to Avoid Double Taxation


If you consider that strange, sometimes you can hear - Hey, you should not pay taxes in Mexico because you're not a foreign individual. That's wrong. Sometimes as a foreign employee, you come to Mexico to work and the misunderstanding is thinking that you should not be obligated to remit taxes in your home country, which could be wrong. I don't know if you agree, but in most of the cases you will be filing a return in the US as well as in Mexico. That's why we have the tax treaty, to avoid double taxation using the process of the foreign tax credit.


Right. Exactly. Yeah, I agree. That actually made me think of another question, and this may be a hard one to answer, so feel free to tell me if you don't really know for sure, what is the practical risk to somebody? Like an American that goes down to Mexico for half a year, or a year, and works remotely, depending on their visa restrictions, that's always a question too... but let's say they go down there and work remotely for a company, or for themselves, in Mexico, and technically, they have tripped a taxation requirement in Mexico... How practical, like what is the real risk to them from the concept of the Mexican IRS, they're going to have their own name that I've forgotten, but how aggressive are they for people like that? And what is the kind of the practical risk there for people just not filing tax returns in Mexico when they should?

Practical Examples and Real-World Scenarios


We could have the situation where an employee is working in Mexico and then in order to be allowed to work in Mexico, the employee should get a Mexican visa. If you obtain your Mexican visa, then maybe in the future you would like to have a Mexican bank account. If you transfer money to Mexico, you could open Pandora's box.


I see. That's one difference, like in the U.S., at least in my experience, the IRS and immigration, they don't really talk to each other. So, if you come to the US and you're on a work visa, that doesn't necessarily tell the IRS to look out for a tax return for this guy because he's on a work visa. But I agree with you. It is the same thing. If you start opening bank accounts and earn interest, that gets reported to the IRS and then they're going to start looking for tax returns. It sounds like it's similar in Mexico. If you move to Mexico and you open no bank account, you're on a temporary visa, and you're just flying under the radar completely, yes, technically, there's probably little risk there if you're able to pull that off like the James Bond of tax. But in the practical world, if you stay there long enough, you probably are going to need a real visa that gives you working rights. You might want to open a bank account there, and now they know who you are. And they're going to start expecting to know the income that you earn. So that's really where that line crosses a little bit, I guess.


And I have cases in which the individual came to Mexico, and at the beginning thought, well, nobody knows that I'm working here. But then he had the need to open up a bank account. He knew that investments in Mexico are paying interest rates. Then he started transferring money down to Mexico. Then that's when we told him, well, you are opening a gate.


Right. Understood. Okay, well... Honestly, I think we may leave it at that. That's a good place to stop. I think, to understand the risks associated with not filing correctly in Mexico. But, just to summarize, Mexican tax residency can get triggered when you have a home in Mexico. And that home, an easy way to think about it would be based on it being a long-term situation, long-term lease, long-term home. Temporary things where you could be at different places during a single year probably aren't going to trip that. But then once you do trip that, or even if you don't, and you're a non-resident and you have Mexican source income, you need to look at the US Mexican treaty and really at that point, it's worth talking to a professional that has experience looking at the treaty documents because it's not written in normal English or Spanish, depending on your language, but it's its own language, I guess.

Importance of Professional Tax Advice


Yeah, this session is just educational, a conversation on tax advice. And it is important to consider that this tax assistance should be on a case by case basis. Probably in your experience, maybe you could think that you have two individuals with the same cases, the same age, have a similar job, they are earning basically the same amount of money... We could have a breaking point. One of them could be married, the other could be single. And one of them has a home in Mexico as well as in the US. The other one may only have a Mexican home... When you think that you are talking about the same situation, in most of the cases, the tax treatment will be changing.


Right. Yeah, our favorite answer, right? It depends. It depends on the information at the end of the day.


Yes, it depends.


All right, Juan, this is really good information. Appreciate you coming on, giving us some insight into these residency rules. Yeah, I look forward to having you back on in the future and we can talk about some other Mexican tax stuff. I appreciate it.


Thank you. Thank you. Talk to you later. Bye now.


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