When expanding into Mexico or relocating as an individual, one of the most important considerations is tax residency. The Mexican Federal Tax Code (Código Fiscal de la Federación, “CFF”) establishes clear criteria for when a person or company is considered a resident in Mexico for tax purposes. Understanding these rules is crucial, as residency determines the scope of tax obligations—whether on Mexican-sourced income only or on worldwide income.
Who Qualifies as a Tax Resident in Mexico?
1. Individuals (Persons)
The law sets two primary tests:
- Primary Home Test: Individuals who establish their household in Mexico are considered residents.
- Center of Vital Interests Test: If someone also has a home abroad, Mexico applies the “center of vital interests” standard. This means a person is considered a Mexican tax resident if:
- More than 50% of their annual income comes from Mexican sources; or
- Their principal professional activities are carried out in Mexico.
Additionally, Mexican nationals working as public officials or government employees abroad are considered Mexican tax residents, even if their primary activities occur outside the country. By default, Mexican nationals are presumed to be residents unless proven otherwise.
2. Legal Entities (Companies)
Corporations and other legal entities are deemed residents in Mexico if:
- Their principal place of business administration is located in Mexico; or
- Their place of effective management is exercised from Mexico.
This means that even if a company is incorporated abroad, if strategic management decisions are effectively made in Mexico, it may be considered a resident for tax purposes.
Change of Residency and Its Implications
Mexico has strict rules on change of tax residency:
- Individuals and companies must file a formal notice to the tax authorities at least 15 days before relocating their tax residence abroad.
- Failure to present this notice means they retain Mexican tax residency.
- Even if the change is filed, entities that move to a jurisdiction with a preferential tax regime (low-tax jurisdictions) will continue to be treated as Mexican residents for the year of the move and for the following five fiscal years, unless certain treaty and information exchange conditions are met.
Why This Matters for CFOs and Investors
For multinational CFOs, private investors, and expats:
- Worldwide taxation: Mexican tax residents (both individuals and companies) are taxed on their global income, not just income generated in Mexico.
- Double taxation risks: While Mexico has an extensive network of tax treaties, failure to plan properly can result in double taxation if residency status is not managed.
- Corporate structuring: Companies should carefully consider where management functions are exercised, since “effective management” in Mexico could trigger tax obligations even if the entity is legally foreign.
- Exit strategies: If you plan to shift your tax residency, the five-year rule for preferential regimes must be factored into long-term tax planning.
Key Takeaways
- Residency in Mexico is not only about where you live—it’s about where your income and professional activities are centered.
- Mexican nationals face a presumption of residency unless they provide proof otherwise.
- Multinational companies with management functions exercised in Mexico can be considered Mexican residents for tax purposes.
- Exiting Mexico’s tax regime requires careful compliance with notification rules, and moves to low-tax jurisdictions trigger additional restrictions.
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