MEXICO Law and Practice Contributed by: Ángel Escalante, Gabriel Rojas, Daniel Colunga and Brenda Favela, Escalante & Asociados
This constitutional framework must be read together with the principle of tax legality, derived from Arti - cle 31, section IV of the Federal Constitution, which requires that taxes be established by law. Under this principle, only a formal legislative act may determine the essential elements of taxation, including the tax - able event, the tax base and the applicable rate. As a result, tax treaties cannot create taxes or estab - lish new taxable events, since this would exceed the limits imposed by the principle of legality. Instead, they operate as instruments that allocate and limit taxing rights between jurisdictions, thereby prevent - ing double taxation and reducing instances of double non-taxation. Accordingly, in the national legal system, the interac - tion between domestic law and tax treaties follows a structured approach: • domestic tax law determines the existence of a taxable event and the applicable tax liability; • tax treaties subsequently operate to restrict or allo - cate taxing rights between contracting states; and • where applicable, treaties may provide relief mech - anisms, such as reduced withholding tax rates or exemption methods. This reflects the dual function of tax treaties in the Mexican system: they form part of domestic law but operate primarily as co-ordination instruments rather than independent sources of taxation. 1.3 OECD Model/United Nations Influence on Treaty Practice Mexico generally follows the OECD Model Tax Con - vention, although its treaty practice also incorporates elements of the United Nations Model Double Taxa - tion Convention, particularly in areas where source- based taxation is emphasised. This is reflected, for example, in provisions relating to to: (i) PE definition; (ii) taxation of services; and (iii) certain categories of income where broader source taxing rights are preserved. Mexican courts have also recognised that the OECD Model Commentary constitutes soft law. While it is not
legally binding, it is frequently used as an interpreta - tive tool when applying tax treaties, particularly where treaty language aligns with the OECD Model. 1.4 Multilateral Instrument Mexico is a signatory to the Multilateral Instrument (MLI), adopted as part of the OECD/G20 BEPS Pro - ject, which was designed to simultaneously modify multiple bilateral tax treaties, incorporating provisions intended to combat base erosion and profit shifting (BEPS). The MLI was approved by the Mexican Senate on 12 October 2022 and published in the Official Gazette on 22 November 2022. Mexico deposited its instrument of ratification before the OECD on 15 March 2023 and the MLI came into force in Mexico on 1 July 2023. However, its provisions only became effective as of 1 January 2024.
2. Territoriality, Residence and Permanent Establishment
2.1 General Principle of Territorial Taxation The Mexican tax system is based on a combination of residence and source principles, which determine the territorial scope of the state’s taxing power. Mexican tax residents are subject to taxation on a worldwide income basis, meaning that all income is taxable regardless of where it is generated. This prin - ciple is established in Article 1 of the MITL. To mitigate potential situations of international dou - ble taxation, Article 5 of the MITL allows taxpayers to credit foreign taxes paid against their domestic income tax liability, subject to certain limitations. By contrast, non-residents are taxed only on Mexican- source income, in accordance with Title V of the MITL. In this context, the existence of a PE in Mexico is a key factor in determining the applicable tax regime. 2.2 Tax Residence of Individuals According to Article 9 of the FFC, an individual is con - sidered tax resident when: (i) they have a permanent
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