🇲🇽 Mexico — 🇺🇸 United States

Tax Treaty / Double Tax Avoidance Agreement detail

The Mexico–United States income tax treaty was signed on 18 September 1992, replacing the earlier 1989 protocol-amended framework, and entered into force on 1 January 1994 — the same date as NAFTA, reflecting the deep economic integration between the two neighbours. The treaty was further modernised by a 2002 protocol that became effective in 2003, updating key provisions on withholding rates and anti-avoidance measures. Dividend withholding is tiered: 0% for qualified pension funds, 5% where the beneficial owner holds at least 10% of the voting stock of the paying company, and 10% for portfolio holdings. Interest withholding is notably favourable at 4.9% for banks and financial institutions dealing at arm's length, 10% for unrelated-party interest generally, and 15% for related-party non-bank interest. Royalty withholding is set at a flat 10% across most categories. The treaty contains a Limitation on Benefits (LOB) clause to prevent treaty shopping, and a saving clause that preserves the United States' right to tax its citizens and residents on worldwide income — a provision of particular significance given that approximately 700,000 American citizens reside in Mexico, representing the largest population of Americans living abroad. Dual US-Mexican citizens face especially complex compliance obligations, as both countries may assert worldwide taxation rights subject to the treaty's relief mechanisms. A long-standing diplomatic gap is the absence of a US-Mexico totalization agreement. Despite periodic negotiation attempts, no agreement has been concluded, meaning workers and employers may face dual social security contributions. This remains a significant practical burden for cross-border workers and US expatriates operating in Mexico. Both countries have signed the OECD Multilateral Instrument (MLI); Mexico ratified it in 2023, but the United States has not ratified the MLI, meaning MLI-based modifications — including arbitration provisions — are not yet in force between the two countries. A FATCA Model 1 IGA is in force, facilitating automatic financial account information exchange. Transfer pricing rules are aligned with OECD arm's-length principles. A recurring compliance issue for US buyers of Mexican real estate involves fideicomisos (bank trust arrangements required for foreign ownership in restricted coastal and border zones), which carry distinct US reporting requirements under FBAR and Form 3520 rules.