Taxation in Mexico: A Guide

agosto 24, 2020

Our sixth chapter of Doing Business in Mexico, Taxation in Mexico, will provide a general overview of the main Mexican taxes focused on foreign individuals and/or legal entities, including rules on permanent establishment, tax withholding, among other tax obligations.

This chapter includes the following sections:

Overview: Main Taxes in Mexico
Residents and non-residents in Mexico for tax purposes
1. Tax Residents in Mexico
2. Non-Tax Residents in Mexico
Income Tax in Mexico
1. Individuals and the Income Tax
2. Companies and the Income Tax
  1. Tax incentives
    1. IMMEX
    2. Tax Incentives for the Northern Border Region
3. Foreign Residents Earning Income from Mexican Sources of Wealth
Value-Added Tax in Mexico
1. VAT and Exported Goods and Services
2. VAT and Imported Goods and Services
3. VAT refunds
Obligations of Foreign Shareholders in Mexican Companies to Register in the Federal Taxpayer Registry
Tax Treaty

Taxation in Mexico

As noted in Chapter 1 – 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 States 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.

Overview: Main Taxes in Mexico

The main federal and local taxes in Mexico are the following:

Federal taxes

Income Tax (ISR, acronym in Spanish): The corporate income tax rate is 30%, individuals are subject to income tax rates ranging from 1.92% to 35%.
Value Added Tax (IVA, acronym in Spanish): The standard rate is 16%, and 0% rate is applicable in certain activities.
Tariffs or Import duties (See Chapter 3 – International Trade Policy)
Special Tax on Production and Services (IEPS, acronym in Spanish): The tax may 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

Taxes on Real-Estate or Land: 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: 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.

Taxation in Mexico For Residents and Non-residents.

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”).

Residents in Mexico

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.

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-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 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. 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.

Income Tax in Mexico

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 the source of wealth is subject to the income tax. In Section 6.3.3, we will discuss this aspect in greater detail.

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