Mexico Tax System: How It Works
Merging into the Mexico tax system can seem as intricate as a Mariachi melody, right? Fear Not! We’ve got your covered!
Our guide is crafted to navigate you through the complexities of taxes in Mexico with the ease of a seasoned expat. Whether you’re settling down or investing in this vibrant country, understanding the local tax landscape is crucial. Let’s unravel the fiscal fiesta, ensuring you stay compliant and savvy about your tax obligations in Mexico.
Let’s dive in!
Federal Taxes
- Income Tax (ISR, acronym in Spanish): The corporate income tax rate is 30%, while individual income tax rates range from 1.92% to 35%.
- Value Added Tax: The regular rate is 16%, with a 0% rate available for specified activities.
- Special Production And Services Tax (IEPS, abbreviated in Spanish): The tax can be represented as a percentage (from 3% to 160%), as a specific tax, or as a compound tax.
- Social Security: Employers must pay social security taxes that might range from 25% to 30% of an employee’s wage.
Local Taxes
- Real-Estate Or Land Taxes: Each state imposes a Property Acquisition Tax. The buyer of a house, land, building, flat, or any other sort of real estate property is liable for the tax. The applicable tax varies by state, but the national average is 2%. However, in some states, the Property Acquisition Tax might reach 6.5% of the sale price.
- Payroll Tax: States levy a payroll tax on wages and other expenses incurred as a result of an employment connection. The tax rate varies by state, but it is typically between 2% and 3% of the wage paid.
Income Tax In Mexico
If you work, operate a business, rent out your property, or have an interest-bearing bank account or security in Mexico, you must pay income tax. In the majority of these circumstances, you will be required to file a Mexican tax return.
The income tax system in Mexico is highly variable. Your tax rate, like in the United States, will be determined by your earnings, deductions, and other considerations. Individual income tax rates in Mexico range from 1.92% to 35%. Non-residents (those in Mexico on a work visa/permit) pay between 15% and 30% of the total. The corporate tax rate in Mexico is a flat 30%.
Tax on employment income is withheld and remitted to the SAT by the employer. Self-assessed income is income that is not subject to withholding; the individual must file a monthly tax return by the 17th of the following month. For instance, in April of the year, an annual tax return must be filed.
Personal Income Tax
The primary factor in setting the tax system for Mexican personal income tax is residence. When a person has a permanent address in Mexico, he or she is considered a resident.
If a person has a house in two countries, the location of his or her significant interests is the most important consideration in determining residence.
Mexican nationals are considered tax residents in general, subject to the permanent home and/or vital-interest criteria. Income is taxed in part through a schedular system, while various income categories can be pooled to determine taxable income.
Individual profits obtained from carrying on a trade or profession are normally taxed in the same way as corporate profits.
Mexican Real Estate Taxes
Over the course of your ownership of a residential property, you will be subject to three types of taxes:
- When you buy the property, you must pay a 2% acquisition tax.
- Predial taxes (annual property taxes)
- When you sell the property, you must pay capital gains tax.
VAT (Value Added Tax)
Most retail goods and services in Mexico are subject to a Value-Added Tax. This tax is 16% in much of the country and 11% near the border. This VAT will be added to the bottom of sales receipts in the same way that sales tax is added north of the border.
Exports and services used overseas are tax-free if negotiated and paid for by a non-resident with a permanent establishment in Mexico. Some goods and services are tax-free.
Federal, State, Local taxes and Business
Individuals and companies doing business in Mexico must pay federal, state, and local taxes. Federal taxes in Mexico include both direct taxes (corporate and personal income) and indirect taxes (VAT, excise taxes, and Customs charges).
The most significant categories of state and municipal taxes are property tax, real estate transfer tax, and payroll taxes.
Tax Policies
The Mexican fiscal system is made up of three parts: revenue, expenditure, and debt. On an annual basis, Congress passes a federal revenue bill that includes a list of federal taxes that will be levied throughout the fiscal year as well as revenue from other governmental agencies.
In 2016, tax revenue, excluding those tied to oil, accounted for around 12.6% of GDP. Total tax collection was 17.44% of GDP in 2015, compared to the OECD average of around 34.27%.
Over the previous two years, the government has worked to increase tax revenue by lowering reliance on oil receipts. In 2016, oil revenue accounted for roughly 21% of Mexico’s total budget revenue.
During the last decade, direct tax policy has focused on eliminating preferential or special tax treatment, such as group tax consolidation, immediate depreciation, and tax breaks for specific industries such as the real estate and mining sectors, as well as limiting certain deductions related to employee fringe benefits.
The VAT legislation has been amended to broaden the tax base by reducing the number of products and services that qualify for reduced rates. Currently, MXN0.75 ($0.05) of every peso collected is spent for current consumption rather than investment.
Mexico Tax Treaties
Mexico now has 55 income tax treaties in force, as well as a number of tax information exchange agreements. To obtain advantages under one of Mexico’s tax treaties, the beneficiary must present a tax residence certificate or a copy of its most recent tax return.
Any applicable treaty conditions must also be met. The SAT may need an affidavit signed by the taxpayer’s legal representative to demonstrate that double taxation would occur in the absence of treaty benefits.
Tax Coordination
The National Tax Coordination System prohibits states from imposing some taxes, like as income tax and VAT, in exchange for a part of federal tax revenue. However, states and municipalities may levy local taxes such as property taxes, real estate transfer taxes, and payroll taxes.
Paperless
With regard to e-commerce, tax administrations have two main goals: ensuring the safety of online transactions and ensuring that the required regulations are in place to preserve the flow of operations inside the tax area.
The Tax Administration Service (Servicio de Administración Tributaria, SAT) in Mexico has been working to ensure that these goals are met.
Tax Announcement
On February 27, 2014, a special commission announced that the federal government would not propose any new changes to the legal framework of the tax system until November 30, 2018.
A “tax certainty agreement” was signed by all branches and offices of the federal government, making it the first of its kind in the country.
Principal Business Frameworks
The variable capital limited liability stock corporation (Sociedad Anónima, SA) and the non-stock variable capital limited liability corporation (Sociedad de Responsabilidad Limitada, SRL) are the two legal forms most usually employed to establish a Mexican company.
In 2016, tax revenue, excluding oil revenue, accounted for around 12.6% of GDP.
The responsibility of such firms’ partners/shareholders is restricted to the amount of their capital contributions, and the company must be formed with at least two partners or shareholders, who might be corporations or individuals.
For an SRL, the capital stock is divided into equity participation and shares for SA. An SRL’s participation can only be transferred with the approval of the other partner(s), whereas stock in a SA can be freely transferred under the company’s bylaws.
An SRL or SA can be administered by one or more managers or directors who are not required to be partners or shareholders.
Taxation In Mexico For Residents And Non-residents
Residents
Individuals who live in Mexico, whether Mexicans or foreigners, are tax residents.
Furthermore, an individual who does not own a residence can still be a tax resident if his or her “place of professional activities” is in Mexico or if more than 50% of his or her annual income is earned in Mexico.
In terms of legal entities, an organization formed in Mexico is a tax resident. When a foreign entity’s main place of business or corporate address is in Mexico, it is considered a tax resident.
Non-Residents
Non-resident individuals or legal organizations may be subject to Mexican taxes in certain circumstances.
For example, if a foreign individual or company has a “permanent establishment” in Mexico or receives income from any source of wealth located in Mexico, he or she is subject to Mexican taxes.
In general, a permanent establishment is any commercial location where activities are partially or completely established or where autonomous personal services are provided.
The following are examples of permanent establishments in Mexico, according to the law:
- Branches;
- Agencies;
- Offices;
- Factories;
- Installations;
- Mines; and
- Any place where exploration, extraction or exploitation of natural resources activities are carried out;
Residence Entities
Residence is the most important criterion in determining the relevant business income tax regime. For tax reasons, an entity is considered a resident of Mexico if it is managed and controlled in Mexico. Residents are taxed on their international income.
A 30% corporate tax is levied on a company’s taxable income. Business and trading income, passive income, and capital gains are all examples of taxable revenue.
Ordinary business expenses can be subtracted when calculating taxable income. Certain forms of revenue and costs are subject to inflationary accounting for tax reasons.
Although not a tax, mandatory profit-sharing rules force a corporation to distribute 10% of its taxed profits to its employees by May of the year following the year in which the profits were earned.
Dividends
Dividends received from another Mexican firm by a Mexican resident company are exempt from corporate tax. Dividends received from a foreign firm are liable to corporation tax, but there is usually a credit for underlying corporate and withholding tax paid.
Dividends from a Mexican corporation must be taxed if they are not paid from an account containing after-tax profits (Cuenta de Utilidad Fiscal Neta, CUFIN).
Capital Gains And Deductions
Mexican corporations are not subject to preferential tax treatment on capital gains, and the utilization of capital losses is limited in particular circumstances.
Business costs are deductible if they are required for the taxpayer’s business activities and are supported by proof.
Certain assets, such as goodwill; a certain amount of fringe benefits paid to employees; entertainment expenses; and other outlays not necessarily required for the company’s commercial activities, are not deductible.
Non-Resident Entities
Non-resident entities are taxed on income derived from Mexico, as defined by Mexican law. The presence or absence of a permanent establishment in Mexico is the most important criterion in establishing the tax status of non-resident entities.
Certain sorts of Mexican-source revenue are taxed on non-resident entities that do not have a permanent establishment in Mexico.
In general, the Mexican payer must withhold a portion of the gross payment made to a non-resident firm, albeit the rate of withholding tax may be decreased under an appropriate tax treaty.
Employment & Labour
- Undefined Profit sharing: While not a tax, mandatory profit-sharing rules force a company to distribute 10% of its taxable profits to its employees by May of the year following the year in which the profits were created.
Social security payments cover work-related accidents and illnesses, non-occupational sicknesses and paid maternity leave, old age and various death benefits, and unemployment insurance.
Conclusion
As we wrap up our journey through the Mexico tax system, remember that staying informed and compliant is key to a hassle-free life in this culturally rich nation. Taxes might not be the most exhilarating part of expat life, but they’re essential for enjoying all that Mexico has to offer without any legal hiccups.
Embrace the process with the knowledge you’ve gained, and you’ll navigate the fiscal waters of Mexico as smoothly as a tranquil sea.
Tax Clarity!
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