(function(w,d,s,l,i){w[l]=w[l]||[];w[l].push({'gtm.start': new Date().getTime(),event:'gtm.js'});var f=d.getElementsByTagName(s)[0], j=d.createElement(s),dl=l!='dataLayer'?'&l='+l:'';j.async=true;j.src= 'https://www.googletagmanager.com/gtm.js?id='+i+dl;f.parentNode.insertBefore(j,f); })(window,document,'script','dataLayer','GTM-N7VG7GQ');Taxation In Mexico
A Guide to Taxation in Mexico
Taxation in Mexico
As noted in our introduction: Why Invest in Mexico?, Mexico is a Federation made up of 32 States, and each State, in turn, is made up of municipalities. The Mexican constitution establishes the jurisdiction for each level of government and, thus, different taxes apply. Federal taxes are the primary level of taxation in Mexico, while state and municipal (local) taxes are more limited. Needless to say, States and municipalities, to a great extent, receive budget allocations from federal taxes that are collected within their borders.
The Tax Administration Service (SAT, acronym in Spanish) is the relevant government body or agency in charge of collecting federal taxes as well as surveilling compliance. At a local level, States and Municipalities have their own treasuries that enforce their local Tax Law. However, the Federal government and a State government may enter into tax coordination agreements, whereby the State is entitled to audit and collect federal taxes.
Main Taxes in Mexico: An Overview
Federal Taxes
Income Tax
The Income Tax, or ISR for its acronym in Spanish, is broken down into the corporate tax rate of 30%, while individuals are subject to rates ranging from 1.92% to 35%.
Value Added Tax
The Value Added Tax, or IVA, acronym in Spanish, has a standard rate of 16%, a 0% rate is applicable in certain activities..
Tariffs
For more information about Tariffs or Customs Duties, visit our International Trade Policy Guide.
Special Tax
The Special Tax on Production and Services, or IEPS for its Spanish acronym, can be expressed as a percentage, ranging from 3% to 160%, specific, or a compound tax.
Social Security
An employer is subject to social security taxes that can represent between 25% and 30% of the employee’s salary.
Local Taxes
Real-Estate or Land Taxes
The States have in place a Property Acquisition Tax. The buyer of a house, land, building, apartment, or any type of real-estate property is responsible for paying said tax. The applicable tax may vary from State to State, but the average is a 2% rate. However, the Property Acquisition Tax may reach 6.5% on the sale price in some states.
Payroll Tax
The States have in place the Payroll Tax on wages and other expenditures that derives from an employment relationship. The tax rate may vary from State to State, but such tax normally amounts to 2% and 3% on the wage paid.
Tax Residents in Mexico
Who are residents for tax purposes in Mexico?
Foreigners are individuals or entities that are normally subject to the tax law legislation of another country for reasons such as nationality, address, place of residence, or business, among other criteria. Mexican Tax Law, however, establishes a set of rules whereby a foreign individual or entity is considered as a resident –for tax purposes– in Mexico (hereon referred to as “tax resident”).
Foreigners as Individuals
The individuals, whether Mexicans or foreigners, that have their home in Mexico are tax residents. Furthermore, an individual without a home can still be a tax resident when, for instance, his or her “place of professional activities” is located in Mexico or more than 50% of his or her annual income comes from Mexico.
Legal Entities and Foreign Legal Entities
As for legal entities, a company incorporated in Mexico is a tax resident. Foreign entities are tax residents when their main place of business or corporate address is in Mexico.
Non-Tax Residents in Mexico
Who are non-tax residents in Mexico?
Individuals or legal entities that are non-residents may, under certain circumstances, be subject to Mexican taxes. For instance, a foreign individual or foreign entity is subject to Mexican taxes when he or she has a “permanent establishment” in Mexico or obtains income from any source of wealth located in Mexico.
Permanent Establishment in Mexico
A permanent establishment, in general terms, is any business place where activities are partially or totally developed or where independent personal services are offered. The law lists examples of permanent establishments in Mexico, including the following:
- Branches;
- Agencies;
- Offices;
- Factories;
- Installations;
- Mines; and
- Any place where exploration, extraction, or exploitation of natural resources activities are carried out;
We highlight that the previous list is non-exhaustive. A foreign resident may, nevertheless, establish a permanent establishment when it has a representative or non-independent agent in Mexico.
The Income Tax
Depending on the “tax-residency” status, the income tax may apply to all the income or the income attributable to the permanent establishment or source of wealth as follows:
- Residents in Mexico’s income is subject to the income tax in its entirety, regardless of its origin or source.
- If a non-resident has a permanent establishment in Mexico, the income attributable to the permanent establishment is subject to the income tax.
- If a non-resident has a source of wealth in Mexico, the income attributable to that source of wealth is subject to the income tax.
Individuals and Income Tax
Individuals that are tax residents are subject to the income tax, which varies between 1.92% and 35% on the annual income. The income gained from wages, business and professional activities, real estate leasing, property sales, interests, dividends, lottery prizes, among others, are subject to the income tax rate.
Companies and Income Tax
Companies that are residents in Mexico or foreign entities that have a permanent establishment determine their income tax considering the 30% rate on the profit obtained in the tax year. We highlight that dividends are subject to a withholding tax in Mexico and, therefore, the effective tax rate for the shareholder may be more than 40%.
Income Tax Incentives
The Income Tax Law provides the existence of tax incentives. In general terms, the incentives allow companies that meet the requirements to pay less Income Tax or defer the payment date. For example, a company may receive a tax credit of 30% due to the total spending on research and development activities. A company that performs any of the following acts or activities may benefit from tax incentives:
- Hiring individuals with different or special abilities;
- National Film production investment;
- Theater production investment;
- Edition and publication of literary work;
- Visual Arts
- Research and development of technology;
- High-performance sports;
- Real estate developments;
- Installation of power equipment for electric vehicles.
Tax Trends in Mexico
A special tax regime is available to “pure” IMMEX or maquiladora companies, i.e. foreign-owned maquiladoras. As noted in the Trade Policy in Mexico and the IMMEX program guide, a foreign investor that seeks to establish a maquiladora (or IMMEX company) may avoid creating a permanent establishment in Mexico and, thus, benefit from a special tax “regime”. If the conditions are met, the Income Tax law provides two alternatives to calculate the income tax of a “pure” maquiladora that are the “safe harbor” rules or an Advance Pricing Agreement (APA). IMMEX companies normally opt for the safe harbor rule.
Safe Harbor for an IMMEX Company
The “safe harbor” rule entails that an IMMEX/maquiladora company must calculate its taxable income per the following two methodologies and pay the highest result:
- The IMMEX company will apply a 6.9% rate on the value of its assets. The assets include all fixed assets and raw materials employed in the maquila operations, as well as the inventory, including foreign-owned assets or goods.
- The IMMEX company will apply a 6.5% rate on its costs and expenses, which includes operating costs and expenses as calculated under the Mexican GAAP.
Advance Pricing Agreement
One option that IMMEX or maquiladoras companies can take, instead of applying the Safe Harbor rule, is requesting the tax authorities to authorize a profit margin on their specific operation, determined through a transfer pricing study.
The IMMEX company will have to submit information, data, and the necessary documentation regarding the methodology used for determining transaction prices with related parties to the tax authorities. If the submission is complete, the tax authorities will issue its ruling. These rulings may stem from an agreement with the competent tax authorities of a country that has a Bilateral Tax Treaty with Mexico.
These ruling are valid in the tax year when the request was submitted or the immediately preceding year, and for up to the following three tax years. Needless to say, COVID-19 poses serious challenges to obtain an advance price agreement.
Since the new Mexican government took office in 2018, a program with tax incentives for certain taxpayers that have their tax address in the Northern Border Region of Mexico, adjacent to the United States of America. The program concludes on December 31, 2020, unless its validity is extended. Needless to say, the “pure” IMMEX/maquiladora companies, i.e. foreign-owned entities, cannot benefit from this program because they already benefit from tax incentives in the calculation of their income tax.
Benefits
Requirements
Income Tax
VAT
Income Tax for companies is determined by applying the 20% rate on profit, instead of the 30% rate.
The Value Added Tax is determined by applying an 8% rate instead of the 16% rate on the value of operations.
- The company must have its tax address in the northern border region of Mexico.
- The company must obtain at least 90% of their income from operations carried out in the border region.
- The Company must have evidence that it timely fulfills its tax obligations.
- The company that applies for this incentive may not apply for another tax incentive.
Foreign Residents Earning Income from Mexican Sources of Wealth
A foreign resident who earns income in cash, kind, services, or credit shall pay income tax when it arises from sources of wealth located in Mexico, even if he or she does not have a permanent establishment in Mexico or when the income is not attributable to the permanent establishment.
In this case, the income tax payment is considered as “definitive”, which shall be paid when filing the tax return.
Trusts
When foreign residents earn income as beneficiaries of a Trust, created in accordance with Mexican law, the trustee shall calculate the taxable income for each foreign resident and withhold the tax that would have been applicable as if they had earned said income directly.
Examples of a Mexican Source of Wealth
Salary in Mexico
When the service is rendered by a foreign resident in Mexico, his salary is subject to the income tax. Exceptions may apply.
Professional Services Fees in Mexico
When the service is rendered by a foreign resident in Mexico, it is presumed to be rendered totally in Mexico unless proved otherwise. Exceptions may apply.
Sale of Mexican Real Estate
The sale of a real estate located in Mexico is subject to a 25% income tax rate. Withholding tax obligations may apply.
Lease of Mexican Real Estate
The lease of a Mexican real estate is subject to the income tax. In some cases, the lessee may have withholding tax obligations.
Leasing Movable Goods in Mexico
The payment of leased goods, used for economic activities, is subject to the income tax. A withholding tax may apply.
Dividends and Profits
Dividends or profits distributed to shareholders by a legal person with Mexican residency are subject to income tax. A withholding tax applies.
Sale of Shares and Securities
The income obtained by a foreign resident from a sale of shares or securities is subject to the income tax, when the shares or securities are issued by a legal entity that is a Mexican resident or when 50% of its accounting value derives directly or indirectly from a real estate located in Mexico.
Members of Management or Surveillance Board in Mexico
A Mexican company or a foreign company with a permanent establishment in Mexico has to withhold the applicable tax resulting from the payment to their managers, directors, or commissionaires that are foreign residents.
Interests
Interests earned by a foreign resident are subject to the income tax, when the capital is placed or invested in Mexico; or when a Mexican resident or a foreign resident with a permanent establishment pays the interest. A withholding tax applies.
Royalties, Technical Assistance, and Publicity
The payment to a foreign resident is subject to the income tax when the goods or rights subject to the royalty payments or technical assistance are used in Mexico; or, when such payment is made by a Mexican resident or foreign resident with a permanent establishment in Mexico.
Dividends and Profits
As noted above, foreign resident has a Mexican source of wealth when dividends and profits are distributed by a Mexican company or a legal entity with a Mexican tax residency .
Foreign Shareholders in Mexican Companies
Must Foreign Shareholders have a Tax ID in Mexico?
When the shareholder or partner of a Mexican company is a foreign resident, he or she may avoid registering in the Federal Taxpayer Registry (or RFC) provided that such company carries out the following:
- Within the first three months following the end of each tax year, provide a list of shareholders that are foreign residents.
- Indicate the address, tax residence, and foreign tax identification number of the shareholders that are foreign residents.
In turn, the foreign shareholder or partner will have a generic Mexican Tax Id number.
In the event that the Mexican company does not comply with the aforementioned requirements, the foreign shareholder has the legal obligation to have his or her Mexican Tax Id number or RFC.
As of 2020, a company must file a notice to the SAT, informing the name and shareholder’s RFC, when a new or old shareholder has either entered or exited, respectively, from the company.
Must Foreign Shareholders File Tax Returns in Mexico?
If the company submits the relevant information of the foreign shareholder for the use of the generic Mexican Tax Id number, he or she shareholder does not have to file tax returns.
Despite this tax facilitation measure, foreign shareholders must be aware that dividends or profits are subject to a 10% withholding income tax in Mexico.
The Value Added Tax (VAT)
When Does VAT apply in Mexico?
A company or individual, either tax residents or non-residents, must normally pay VAT when performing the following activities in Mexico:
- Purchasing goods.
- Enjoying the provision of services.
- Using or enjoying temporary assets of another individual or entity, such as in a lease.
- Importing goods or services.
VAT Tax rate
The VAT rate is normally 16% throughout the Mexican territory, which is payable by the buyer, beneficiary, or consumer. However, the seller or service provider normally is responsible to calculate as well as to withhold the VAT per the invoice and make monthly VAT payments. Needless to say, some goods or services are subject to a 0% VAT rate, for instance, non-processed foods, medicines, etc.
Mexican Northern Border and VAT
As noted above, taxpayers that have their tax address in the northern border region of Mexico may apply the 8% rate, instead of the 16% rate, when sell and deliver the goods or provide their services in that region, provided that they meet certain requirements.
VAT: Exported Goods and Services
Exports are subject to a 0% tax rate on the sales value of the exported goods or services.
The maquila (or tolling) services, for instance, are also taxed at a 0% VAT rate provided that the goods are exported by the IMMEX/maquiladora company.
Mexican entities with export-oriented activities can normally request VAT refunds because they pay more VAT than what they collect.
VAT Refunds
If a company’s VAT balance is favorable, the taxpayer may request a VAT refund. As noted above, this occurs when a company has paid more VAT than what it has collected or withheld from its clients.
Per the Tax Code, the SAT must refund within 40 working days after the date the refund request is filed. However, the SAT may request the company to submit any additional data, reports, or documents to verify the merits of the refund request. In such an event, the taxpayer shall have 20 working days term to respond to SAT’s information request. VAT refunds are normally obtained in approximately 60 business days, provided that the request and response are clear and well supported.
As noted in the International Trade Policy and the IMMEX program guides, VAT is applicable to all imported goods and services, including goods subject to the temporary importation regime.
VAT Exception to Imported Goods
A company may apply for a VAT / IEPS Certification and, thus, not pay VAT upon importation when the goods are subject to the following customs regimes:
- temporary imports;
- goods subject to the manufacturing and assembly of vehicles in an in-bond facility; or,
- goods subject to the strategic in-bond facility.
VAT: Imported Goods and Services
Tax Treaties
Mexico has about 75 tax treaties in force to avoid double taxation (or Double Taxation Treaties). The SAT has published the list of Mexican Tax Treaties.
Who can benefit from a Tax Treaty?
A tax treaty benefits only the taxpayers of the States, say US-Mexico or Netherlands-Mexico. An individual or company seeking to apply a tax treaty in Mexico must, therefore, demonstrate that he or she is a tax-resident in a State that has a Tax Treaty with Mexico.
The individual or company must also comply with the provisions of the relevant Tax Treaty as well as the procedural provisions set forth in the Mexican Income Tax Law.
Mexican Tax Authorities and a Tax Treaty
The SAT may request a foreign taxpayer, who intends to apply a tax Treaty, to prove the existence of double taxation when having a transaction with a related party that is a Mexican Taxpayer. In such cases, the foreign taxpayer has to provide a statement that describes that the income (e.g. interests, royalties), which is taxable in Mexico, is also subject to tax in his or her country of residence.
Moreover, the SAT may further request to prove the existence of a “legal” double taxation in cases of transactions entered into with related parties.
Why Investing in Mexico?
What is the current political and economic environment in Mexico?
Competitiveness Ranking
A summary regarding Mexico's positive and negative indicators according to the World Bank and the World Economic Forum.
Land for Industry
What you need to know when purchasing or leasing land for industrial purposes in Mexico.
Security in Mexico
An honest review of the security situation for businesses in Mexico.
How to do business in Mexico?
The Mexican Legal Guide
How to create a company in Mexico?
Under this section, Doing Business Mexico explains the 12 steps to create a company in Mexico, including the basic legal features of the two most relevant types of companies as well as other possible business structures.
Visit our guide: How to create a company in Mexico?
Do Foreign Investment Restrictions Apply in Mexico?
As a general rule, all sectors of the economy are open to foreign investors unless otherwise provided in Mexico’s Foreign Investment Law. Although through the years sectors have been liberalized, Mexico has still foreign investment restrictions in place that are applicable to specific activities as well as restrictions on land ownership.
Visit our guide: Foreign Investment in Mexico.
International Trade in Mexico
Being a WTO member and having 13 Free Trade Agreements, Mexico is a country that is open to international trade. In this guide, topics such as tariffs, preferential tariffs, import restrictions, customs procedures, Free Trade Agreements like USMCA, among other matters, are reviewed.
Visit our guide: International Trade in Mexico.
The IMMEX Program and the Mexican Manufacturing Industry
The export-oriented manufacturing industry, also known as the maquiladora industry, represents one of the most important pillars of the Mexican economy. The IMMEX program is, to a great extent, used by companies within the manufacturing industry. In this guide, Doing Business in Mexico provides a general overview on the IMMEX program.
Visit our Guide: The IMMEX Program.
Taxation in Mexico
What are Mexico’s main taxes? What is the corporate income tax rate or Mexico’s VAT? When a foreigner creates a permanent establishment in Mexico, or is considered a resident for Mexican tax purposes? In this guide, Doing Business in Mexico explores the common questions that a foreigner has about Mexican Taxes.
Visit our Guide: Taxation in Mexico.
Labor in Mexico
What is Mexico’s labor environment? What is the minimum wage? What about the effects of the United States-Mexico-Canada Agreements (USMCA) on unions and collective bargaining? In this guide, Doing Business in Mexico explores the common employment topics that a foreigner has about Labor in Mexico .
Visit our Guide: Labor in Mexico.
International Trade Guide
Tariffs, FTAs, Duty Deferral Instruments, Taxes Affecting Imports, Non-Tariff Barriers, Customs, and more!
Foreign Investment Guide
When Do Foreign Investment Restrictions Apply?
IMMEX / Manufacturing Guide
The IMMEX program explained, plus the VAT / IEPS certification and the Authorized Economic Operator.
Get In Touch With Us!
Phone
+ 52 55 1683 2289
Address
Rio Churubusco 601, Col. Xoco, Benito Juarez, Mexico City.