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