Located at the southern end of North America, Mexico is one of the most important economic partners to the United States and Canada. Mexico’s rich history and its ever growing economy has turned the country into an appealing destination for digital nomads. The country’s strong university system also makes Mexico one of the best places to recruit developers, marketers, and other knowledge workers.
If you’re planning to either set up a business in Mexico or move there as a foreigner, you’ll want to understand double taxation treaties in Mexico works for investments and income. Mexico has double taxation treaties with 60 countries throughout the world so that businesses and foreigners can avoid paying taxes in both their home country and Mexico.
For help with understanding double taxation, a EOR in Mexico (employer-of-record) may be your best solution to avoid having to hire an entire legal team and set up a costly entity.
In this guide, we’ll explain exactly what double taxation treaties are in Mexico for businesses and foreigners who want to become more established in the country from places like the United States, but also want to make sure they avoid any tax liability
Double taxation treaties (also known as tax treaties or tax conventions) are agreements between two or more countries that aim to eliminate or reduce the effects of double taxation on individuals and businesses. This occurs when the same income or profits are taxed twice in different countries. This can happen when an individual or business earns income in one country and is then taxed on that income in another country where they are also subject to tax on their worldwide income.
Double taxation treaties also often include provisions for the exchange of information between the tax authorities of the countries involved. This helps to ensure that taxpayers comply with the applicable tax laws and regulations and prevent tax evasion.
It’s common for most tax treaties to include provisions that inform and credit the other country for tax paid. Certain countries have used tax treaties as a way to support and open up trade on an international level to boost their economies.
Mexican tax laws can be confusing to understand at first. Mexico has signed double taxation treaties with 60 countries in order to avoid double taxation on taxable income and assets. These treaties provide rules for how taxes are to be applied when a taxpayer's income or assets are subject to taxation in two countries.
Under Mexico's double taxation treaties, taxpayers may be able to claim relief from taxation in Mexico on income and assets that have already been taxed in the other country, or vice versa. This relief can take the form of exemptions, deductions, or credits. So, if you’re living in Mexico as a resident but have citizenship in Spain, you’ll be exempt from having to pay taxes in Spain because you’ve already paid them in Mexico.
The terms of these treaties vary, but generally they establish rules for the allocation of taxing rights between the two countries, allow for the elimination of double taxation, and provide for the exchange of information between the two countries' tax authorities. Without these treaties, Mexico probably wouldn’t have a lot of expats and digital nomads wanting to live in the country.
The double tax treaty between Mexico and the United States, also known as the United States-Mexico Income Tax Treaty, was first signed in 1992 and has been updated several times since then.
The treaty sets out the laws for how taxes are to be applied when a taxpayer's income or assets are subject to taxation in both countries.
The treaty allocates the taxing rights between the two countries.
For example, certain types of income from employment or business activities are generally taxed in the country where the activities are carried out, while dividends, interest, royalties, and capital gains are generally taxed in the main country of residence for the individual.
The treaty provides for the elimination of double taxation. A person is able to claim the credit they paid in the other country to avoid double-taxation on the same income. Under this treaty, your Mexican income or US income will be taxed depending on your residency status.
In general, this is achieved through a credit mechanism, where taxes paid in one country can be offset against taxes owed in the other country. Tax rates and the amount you’ll owe will depend on which country you’re considered a resident.
Under the Savings Clause of this Mexican tax treaty, each country is allowed to tax the person as they would in their home country.
So, if the person is going to have to pay income or social security taxes in Mexico, the Mexican government's regulations for taxes would apply.
The treaty provides rules for the taxation of income earned through a permanent establishment (PE) in one of the countries by a resident of the other country. The treaty defines what constitutes a PE, and sets out the rules for how income attributable to a PE should be taxed.
Permanent establishment is defined as the place where a business conducts their services. If you have a permanent establishment in one country, but you’re partially conducting operations in another, you’ll usually have to pay your taxable corporate income where your main headquarters is located for tax purposes.
Social security is excluded from the Saving Clause, meaning that if you’re a resident of the United States, but you’re receiving social security benefits in Mexico, when you file your tax return your income taxes will be generated and paid to the Mexican government.
Under Article 20, when a person is performing services for one country’s government, then that country will have the exclusive right to tax that person on their income.
This clause only applies to those who are not considered citizens and are working under some form of visa in either country.
The treaty provides for the exchange of information between the tax authorities of the two countries out of respect for the other and to avoid tax evasion. This allows each country to verify the tax compliance of taxpayers who are subject to taxation in both countries.
It is important to note that the rules under the treaty can be complex, and their application may depend on the specific circumstances of each case. If you are a taxpayer who is subject to taxation in both Mexico and the United States, it is recommended that you seek professional tax advice or work with an employer-of-record service like Via to avoid any liabilities.
Other key countries that have tax treaties with Mexico include:
Spain: The treaty between Spain and Mexico states that you are considered a tax resident in either country if you reside in a fixed place for more than 183 days or your main economic activities are there.
Colombia: This treaty helps those who pay income taxes in Mexico and for companies that own at least 10% of capital in a company in either country avoids double taxation.
Costa Rica: Costa Rica’s taxation treaty with Mexico eliminates double taxation by sharing information between countries to determine which country is credited when a person pays their taxes to avoid paying twice.
Canada: Under the Canada and Mexico treaty, an individual is deemed a resident of either country when they have a permanent residence and most of their economic activity is done there. The country they pay withholding taxes will credit these payments to the other to avoid double taxation. Via acts as a Canadian EOR, so you can seamlessly hire employees in either country.
Brazil: The treaty between Brazil and Mexico generally favors tax payments to Brazil, but if a Brazilian national is mostly located in Mexico, then they are credited by the Brazilian government for income tax withholdings made in Mexico.
The UK: Between the UK and Mexico, the main point in this tax treaty is that either country will credit the other for those who pay income tax.
Germany: This treaty helps workers avoid double taxation in either country, but its main focus is sharing information in order to avoid those who commit tax evasion.
The terms of these treaties vary, but generally they establish tax rules for the allocation of taxing rights between the two countries, provide for the elimination of double taxation, and provide for the exchange of information between the two countries' tax authorities.
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