Residency under the new U.S.-Mexico treaty.

• Author: Dominguez, Daniel

All countries have their own definitions of residence for income tax purposes and, generally, there is no consistency from country to country. The United States and Mexico are no exceptions. The United States defines residency for individual income tax purposes under the following alternative tests: * Green card test: A resident is any person who has the legal right to reside in the United States (such as a citizen or a permanent resident), regardless of where the person lives; or * Substantial presence test: Under this test, an individual is a U.S. resident if he is present in the United States at least 31 days during the current tax year and a total of 183 days during the current year and two preceding years, based on the following formula: The number of days spent in the United States ("days") in the current year is weighted by 1, days in the first preceding year by 1/3 and days in the second preceding year by 1/6. Days as a teacher, trainee or student generally are not counted.

According to this formula, if an individual is never present in the United States for more than 121 days a year, he cannot be a U.S. resident under the substantial presence test. (See the Tax Clinic item, "Recent Reporting and Disclosure Requirements May Apply to Certain Nonresidents After 1991," TTA, May 1993, at 311.)

Mexico defines residency with reference to the place where the individual has his home, but also treats those who spend more than 183 days in Mexico as residents. There are special rules for high-level management and certain other professionals in the Maquiladora program.

However, both countries tax their residents on worldwide income.

One of the benefits of the new U.S.-Mexico treaty is that Article 4 provides for tie-breaker rules that allow individuals, such as U.S. business people, who spend more than 183 days during any 12-month period in Mexico, to avoid being taxed on worldwide income in both countries.

Under the treaty, if an individual meets each country's definition of resident, he is deemed a resident for income tax purposes of the country in which he has a permanent home available to him. If he has a permanent home in both countries (or in neither), he is considered a resident of the country that is the center of his vital interests - where his personal and economic relations are closer.

If this question cannot be resolved under these rules, the individual is deemed a resident of the country in which he has his "habitual abode." If...