Transferring tax residence to Territorial country (Mexico City)

Most countries around the world have one of two types of taxation systems: a tax residence tax system or a territorial tax system.

In a tax residence tax system, individuals of the country or jurisdiction in question must declare and pay income tax by virtue of being residents of that country or jurisdiction.

Mexico has a tax residence taxation system, which means that individuals that are tax residents of Mexico are required to declare and pay income tax in Mexico.

Mexico also applies the worldwide income taxation principle, meaning that Mexican tax residents are taxed on all the income that they earn in any country around the world.

Consequently, individuals that are Mexican tax residents must pay income tax on (i) all income they earn in Mexico and (ii) all their foreign source income.

The tax rate applicable to individual Mexican tax residents is 35% of their net taxable income, with certain types of deductions available under certain tax regimes.

Tax residents of countries with territorial taxation systems pay income tax only on the income or capital gains that they earn within that territory.

Panama has a territorial taxation system, meaning that Panamanian tax residents only pay taxes on the income that they earn in Panama and hence, they do not pay any income tax on income that they earn in other countries.

In such context, countries with territorial tax systems have become attractive tax jurisdictions for many pensioners, retirees, digital nomads, and expatriates who meet certain conditions.

Individuals who are interested in transferring their tax residence to a country with a territorial tax system first need to verify their compliance with the related legal requirements set forth in Mexican law and the laws of the foreign country in question.