In order to understand the issues that may arise of having dual nationality, it is necessary to refer to the way in which individuals are subject to tax in Mexico and in the United States.

 

Legislation of different countries bases its tax jurisdiction on several items, mainly residence, citizenship and nationality. Thus, while some countries tax income of their nationals, that is, by the mere fact of being born in their territory, others feel that they must comply with the requirement of being citizens and for some others, it is enough to be a resident thereof, for which, in most cases this will depend on where the person has a permanent residence or primarily develop the activities for which derives most of its revenue.

 

In the case of Mexico, the right of taxation (on income) is governed under the concept of residence. An individual shall be a resident of Mexico if he sets his home in this country, while if he has a home also in another country, it will depend on where he has his center of vital interests, for which it must determine where he gets most of his income, or where he develops his professional activities.

 

Concluded that he is resident of Mexico, this individual will be required to pay income tax on all income, regardless of its source.

 

In the United States, tax law is governed by the concept of citizenship, which does not mean that the concept of residence is irrelevant, since the alien residents in the United States are taxed the same way as a citizen, while nonresident aliens are taxed according to special rules. Thus, in principle, an American citizen is obliged to pay income tax on all income regardless of its source. For these purposes, in general, an individual is a U.S. citizen by birth or naturalization.

 

In addition, for tax purposes, if an individual is not a citizen of the United States it is necessary to determine whether he is an alien resident or alien nonresident. If an individual is an alien he shall be considered nonresident unless he meets one of the two burdens of proofs of residence provided by law for that purpose or if he chooses to be considered a resident alien for tax purposes. A separated mention deserves the case of experts, which because of its importance in this new business world, demands a study of its own.

 

Therefore, non-residents pay tax only on income from a source of wealth located in the United States, besides being subject to special tax rates and able to apply the exemptions and benefits of international treaties to avoid double taxation; on the other hand, a resident for tax purposes in the United States, will be under the same rules as an American citizen, which means he will pay taxes on all income regardless from where it derives.

 

In this sense, we can conclude that both countries set their tax base on a global basis (worldwide income), which means that once a person becomes a resident of one of the two countries must report the total income regardless of its source. Now, while not being a resident, he would only be required to pay taxes on income obtained from source of wealth located in said country, (source income).

 

As indicated previously, having dual nationality can occur automatically this is, without the person having voluntarily chosen to do so, for example, a person born in the United States of  Mexican parents by birth, which by the way, was a very common practice in the 1970´s by Mexican nationals. The person would have U.S. citizenship by being born on U.S. soil (Amendment XIV, Section 1 of the US Constitution) and the Mexican citizenship derived of being born abroad as son / daughter of Mexican parents (Section II of Article 30 of the Mexican Constitution). Immigration laws provide that when in this case, the person will have to decide to have both nationalities once he reaches legal age. Under this scenario, dual nationality may be a result of the choice made by the individual (under certain conditions), for example, a Mexican by birth who has always resided in Mexico, and is the son of US parents. Under these conditions, and complying with certain requirements contained in the Immigration and Nationality Act, a person may obtain U.S. citizenship and get "by choice" dual nationality, Mexican by birth and American by blood right. This choice, in many cases (if not all), attends to social, cultural, family, work issues, among others. Thus, individuals with dual citizenship could be acquiring tax obligations in both countries without knowing it, such as tax returns to file, notices to the tax authorities, and further, pay taxes on all income.

 

This is, the individual from our first example who acquired dual nationality automatically by being born in the United States and having Mexican parents may have well resided all his life in Mexico and reach adulthood without ever being again in the U.S.; however, derived from the fact that he was born in the US, he would be subject to the laws of both countries. Said person would be taxed in both countries for all his income, regardless of where he got it (worldwide income); in Mexico, for being a citizen and a resident for tax purposes, and in the U.S. for being an American citizen since he was born in that country. Such situation could get so far as to have obtained an exempt income in Mexico and, by virtue of having dual nationality, be required to pay taxes on that income in the United States.

 

Similarly, many Mexicans do not foresee that when acquiring the "green card", they become U.S. residents for tax purposes, which means that annual tax returns must be filed in the United States reporting the total amount of income earned in the year regardless its source, including the one obtained in Mexico, his country of residence.

 

The above derives from the fact that in Mexico an individual is liable to pay income tax if one is a resident, while in the United States it is enough to be a citizen or resident alien to be liable to pay tax on all income (in addition to other tax obligations that should be enforced), without the need to live or be in the latter country.

 

Some of these issues are dealt by Articles 4 and 24 of the Convention for the avoidance of double taxation concluded between Mexico and the United States, in said articles both countries set mechanisms that intended to give legal certainty to taxpayers who are in one of these cases.

 

Nevertheless, since each case provides different situations, both in nature and on its circumstances, it is not possible to regulate them more than in a general manner. Therefore the Convention itself provides, in Article 26 a mutual agreement procedure to be applied when an individual considers that the actions taken by one or both States result or will result in taxation not in accordance with the provisions of the Convention itself.

 

Finally an individual should carefully review the facts of each particular case, when facing dual nationality/citizenship and, if so, whether the income obtained is taxed by the two States and in any case, seeking access to the benefits of the agreement to avoid double taxation. Finally, if a conclusion is not reached by having used the procedures set out in each country or the mechanisms established by the Convention itself, recourse to the mutual agreement procedure so that each country´s competent authority try to reach an appropriate solution.

 

In conclusion, while the domestic law of Mexico and the United States allows dual nationality/citizenship status, when electing such status should be taken into consideration not only the social, cultural, labor, immigration, issues, etc., but also the tax implications, since, as noted, having dual citizenship implies being subject to all their laws, tax included, which in the case as the two countries under analysis, could lead to unexpected situations.