The United States and Mexico have agreed on when treaty benefits extend to a fiscally transparent entity formed under the laws of either country. The new competent authority mutual agreement also clarifies the procedure for claiming benefits from Mexico. The agreement is effective with respect to Mexican-source payments to the extent that the Mexican limitation period therefor has not expired; thus, there may be an opportunity to claim refunds.

The Mexico-US treaty, like other treaties, is based on the fundamental principle that benefits enure to persons resident in one or both countries. A contracting state must be satisfied that the recipient is a person and, if so, a resident. The relevant definitions are conceptually different from domestic rules. The definition of "person" is generally not an issue because typically it is broad: like the Canada-US treaty definition, the Mexico-US treaty definition of "person" includes a partnership and an association. The definition of "resident" is potentially problematic in its application to fiscally transparent entities and hybrids: a resident is any person who under the laws of the state is liable to pay tax by reason of domicile, residence, place of management, place of incorporation, or any other criterion of a similar nature. The Canada-US treaty similarly includes in the definition a person who is liable to tax by reason of domicile, residence, etc. A fiscally transparent entity such as a US limited liability company (LLC) is a partnership in the United States and is not liable to US tax at the entity level; the issue thus arises whether US persons who are LLC members are entitled to treaty benefits. The Canada-US treaty does not resolve the issue, and the CRA says that the LLC is not entitled to treaty benefits.

The new Mexico-US agreement provides that for the purposes of residence determinations, a partnership, estate, or trust is a resident of a contracting state only to the extent that the income it derives is subject to tax in that state as the income of a resident, either in the hands of the partnership, estate, or trust or in the hands of its partners or beneficiaries. The Mexican and US competent authorities agree that income from sources within one of the contracting states that is received by an entity that is treated as fiscally transparent under the laws of either state is treated as income derived by a resident of the other contracting state to the extent that such income is subject to tax as income of such a resident.

The agreement provides an example. A US resident who is a member of a US LLC treated for US federal tax purposes as a partnership is afforded treaty benefits on her share of income derived from Mexico through the LLC. Similar rules apply to a US-resident shareholder of a US subchapter S corporation, an LLC that is disregarded as an entity separate from its owner, and a US grantor trust. If a US resident derives income from a fiscally transparent entity that was created under and is subject to the laws of a third jurisdiction, Mexico will apply the agreement if the third jurisdiction has an in-force, effective, and comprehensive exchange-of-information agreement with Mexico, as Canada does. If, for example, a US subchapter S corporation owned an interest in a Canadian partnership with Mexican-source income, it appears that a US citizen-shareholder of the S corp is entitled to treaty benefits with respect to such income. It appears that the same result follows if the Canadian entity is an NSULC, an entity that is fiscally transparent for US federal tax purposes but not for Canadian tax purposes.

Mexican law does not currently provide for fiscally transparent entities. If that law changes, it is intended that income received thereby will be treated as income derived by a Mexican resident to the extent that the income is subject to tax as income of a Mexican resident.