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THE FEDERAL INCOME TAX CODE WAS CHANGED JANUARY 1, 2014, - PLEASE CONSULT YOUR TAX EXPERT.
Choose one or more: Federal Laws , State Laws , Federal Level Taxation/ Federal Income Tax Rules , Legal Entities (Residing in Mexico), Non-Profit Organizations (Residing in Mexico), Individuals (Residing in Mexico), Non-Residency of Mexico , Permanent Establishment , Federal ID Number , Withholding , Federal Audits , Value Added Tax (IVA) , Social Security Tax , Retirement Savings Tax , Employee Housing Tax , Local Payroll Taxes , Customs Duties , Federal Asset Tax , Dividends , No Capital Gains Tax , Vehicles Ownership (tenencia) Tax , Other Federal Taxes , State Level Taxation/ ( No State Income Tax , Real Estate Transfer Tax , Real Estate Holding Taxes ) , Specific Cases / Specific Taxes , Special Tax Incentives , Weblink and Contact , Tax Treaty US-Mexico , U.S. Aspects
Changes in Mexico City for 2009 go here
For Fiscal Changes on a federal level for 2009 go here
Contributing Editor: Sergio Santinelli of Santinelli & Asociados, S.C. - Mexico City.
Last Update February 2014
Federal Taxation: To mention but a few of the federal laws, there is a Federal Mexican Income Tax Law, a Federal Sales Tax (Value Added) Law, a Federal Social Security Tax Law, and a Federal Worker Housing Tax Law (known by the letters INFONAVIT).
State Laws: On state level, although there are taxation laws, there are no state income tax laws or value added tax laws. Howeveer there is a local payroll tax (2.5% in moist states)
Federal Level Taxation differentiates between non-profit companies and for profit earners, larger earners vs. lesser earners, residents of Mexico vs. non-residents of Mexico. The main income taxes are those on legal entities, those on non-profit organizations, those on individuals and those on the Mexican source of income of nonresidents. Certain deductions, carry-over losses, special reductions, and certain taxation paid abroad are permitted to be applied against income and/or tax liability. There are certain deductions that are not permitted.
(*)The Federal Income Tax rate uis 30% (corporate level). However it could change, so you should verify the rate with an independent source before conculding on the applicable rate.
The Federal Income Tax Rules ("Ley Federal del Impuesto Sobre la Renta") differentiates between non-profit companies and for profit earners, larger earners vs. lesser earners, residents of Mexico vs. non-residents of Mexico. The main income taxes are those on legal entities, those on non-profit organizations, those on individuals and those on the Mexican source of income of nonresidents. Certain deductions, carry-over losses, special reductions, and certain taxation paid abroad are permitted to be applied against income and/or tax liability. There are certain deductions that are not permitted.
Legal Entities (Residing in Mexico). The income tax rate on business legal entity resident income earners is 30% (companies) and individuals) is up to 35%(*) of the net income. Net income is determined by means of subtracting from gross income those items that are deductible per the tax code, minus the fiscal loses from prior fiscal years. Additional reduction is permitted if the legal entity is solely in the agriculture, livestock or fishing activities (30% reduction), if it is in the preceding businesses but also in the industrialization thereof or it combines them, where the commercial or industrial activities do not exceed 10% of its gross income.
Non-Profit Organizations (Residing in Mexico). Here it is understood that there will be no income that is taxable. However, if there is, then the tax payer is the party that owns the organization.
Individuals (Residing in Mexico). The federal Income Tax Law classifies income received by individuals in basis of the activity that produces the income, as follows: i. income from personal services, ii. leasing of real property, iii. sale of property, iv acquisition of property, v. business activities, v. dividends (and similar profits), vi. interest, vii. prizes, and viii. other income. The income tax rate is from 3% to 35%(*) of taxable income, after deductions. Deductions can include minimum wage salaries, certain dental and medical expenses, funeral expenses, certain donations to certain public service or charity organizations. As well, certain of the rules on legal entities are applicable to individuals, so that section must also be consulted.
Non-Residency of Mexico. If a party earns income in Mexico without being a resident thereof, they will fall under the title of the Federal Income Tax Code (with some exceptions) that deals with non-residents. The consequences of non-residency in Mexico in the paying of income taxes shows itself by being charged a flat tax on the gross income without deductibles or credits, except in a very few cases (where there is the alternative to apply the normal (resident) tax rate to the net income).
The non-residents of Mexico that own real estate there and sell it may opt to use the residence section and permit deductions. However, to do this the non-resident must appoint a tax domicile and representative in Mexico, with whom he will leave all records corresponding, in the event that the Mexican IRS ("Hacienda" or SAT) were to do an audit of the tax declaration/return. If it is the flat tax choice that is made on the sale of the real estate, then there is a 25% income tax on the gross income (sale price received). Whereas, if the normal (resident) tax is used, then there is an approximate 35% rate income tax on the net income.
If the non-resident receives rental income in Mexico, he is to pay a 25% tax on the gross income form the rental.
Permanent Establishment. The concept of "permanent establishment" is " a fixed place of business through which an enterprise carries on its business in whole or part". This concept is used in Mexico to assist in determining whether a business is subject to income taxation. It is also used to determine whether income taxation will be applied as a resident or non-resident.
The Federal Income Tax Identification Number. All income tax payers in Mexico are required to obtain an federal income tax payer I.D. no. This number is usually a combination of the payer's birth date, name and sum of prior accounts that he/she or it may have. Even so, it possible that extra numbers may be needed, since there are many people with the same name (and possibly the same birth date). This number is used similarly to the way the social security number of U.S. residents is used in the U.S. The number is an essential part of the receipts used for deductibles.
Withholding. The concept of withholding is applied in several cases in which a tax is incurred in Mexico. Examples are: in the sale of real estate, the notary is to withhold on the profit that the U.S. resident seller makes on the sale; the payer of a royalty is to withhold an income tax on the amount paid to the U.S. business; and the payer of interest in Mexico is to withhold income tax on the interest paid. Dividends are not subject to 10%`withholding ewhen paid to U.S. residents.
Federal Audits. The Federal Income Tax Law of Mexico foresees the possibility of performing audits on federal income tax returns. However, once the taxpayer is audited ("dictaminado") when permitted by a public accountant, then "Hacienda" (Federal Income Tax Authority of Mexico) will most probably not perform a direct review (audit) but rather special reviews of the auditors' work papers. "Hacienda" has the legal authority to perform the audit in these cases, but it has agreed with the Mexican Institute of Public Accountants ("Instituto Mexicano de Contadores Públicos, A.C.) to first perform a review of the work papers of the public account before proceeding to a direct review of the taxpayers papers.
Value Added Tax. There is a value-added tax on the sale of goods, rendering of services, granting the use or enjoyment of goods and importation of goods or services, which is normally 16%. Note: The (non-residential) buildings are considered subject to this tax but the land on which the buildings sit is not.
Use of Receipts as Deductibles. In order to use a receipt in Mexico as a deduction (for whatever justified reason), the receipt must have the seller's information (including his Income Tax payer ID Number), the buyer's Income Tax payer ID Number and the Valued Added Tax must be set in the receipt as a separate amount, which added to the fee or other cost therein stated, then totals a grand total. (There are other rules applicable to use of a certain expense as a deduction). The receipts must be issued and signed electronically.
Social Security Tax. Employers must make monthly payments to IMSS (Mexican Social Security Institute) for the medical services to registered workers.
Retirement Savings Tax. In actuality this is a part of the social security payment, but is deposited bi-monthly (every two months) in a special bank account. (payment equal to 2% of the employee's salary including benefits)
Employee Housing Tax. Employers are required by law to furnish housing to their employees. This is accomplished by contributing to the INFONAVIT (Mexican Federal Government agency) bi-monthly (every two months). This agency then in turn finances the purchase of housing by the workers. The payment is equal to 5% of the employee's salary including benefits.
Local Payroll Taxes. Most cities in Mexico have a payroll tax. The rate varies but as average it is 2.5%
Customs Duties. There are duties charged by the Federal Mexican government on items that are imported into Mexico. There are exceptions such as: NAFTA, PITEX or if the Customs law identifies it as not having a duty.
Federal Asset Tax. (deleted)
Dividends. The income produced by Mexican companies up to 2013 is not normally double taxed (at the corporate and dividend level). If the income is paid out in the form of dividend prior to any income tax thereon on the corporate level, then there is a federal income tax placed on the dividend. Nevertyheless, from 2014 the dividende paid from 2014 profits will be subject to a withholding tax at a 10% rate when paid to an individualk or foreigners.
Note: if the income tax is paid on the corporate level and not the dividend level, then the U.S. resident stockholder did not technically pay any income tax in Mexico on this amount and therefore will have no deduction (credit) against that income when filing back in the U.S. It may be best to pay at the dividend level to have a deduction (credit) back in the U.S. (or perhaps take the income under another concept). (do Tax Planning)
No Capital Gains Tax. The concept of capital gains in Mexico does not exist. The earnings that one receives from the sale of a item (i.e., a residence) is known as normal income and treated as such. The following items may be deducted form the earnings from the sale of a residence (if you do not fall under the Non-Residency flat tax regime):1. The original purchase price (adjusted for inflation and depreciation per the official indexes, using as a basis the number of years you have owned the residence); 2. Additions and modifications that have improved the property (maintenance is not included) (this sum is adjusted as stated above); 3. Commissions paid to attorneys and real estate agents necessary for the sale (note: real estate brokers and agents are the same thing in Mexico and are not licensed, per se - see Real Estate Agency in Mexico elsewhere on this site); and 4. The total cost of expenses and fees paid to the Notary Public for the title closing. There may be other justified costs, on a case by case basis, but you should remember that in order to use receipts as deductible in Mexico, they should contain the issuer's Mexican tax payer I.D. Number and have the IVA Tax specifically identified and be signed electronically.
Vehicles Ownership (tenencia) Tax. All motorized vehicles (including scooters, motorcycles, cars, tractors, trucks, trailers, etc.) are all taxed on their value annually. The holders/owners are to pay local (state) for this tax (in addition to the annual state (done at city level) registry of the vehicles to circulate on public roads, know as the "tarjeta de circulación").
Other Federal Taxes. There are other federal taxes on transactions, which include: i. acquisition of real estate, ii. acquisition of new automobiles, iii, production of certain items such as alcoholic and non-alcoholic beverages, tobacco, gasoline, caloric food, etc.
State Level Taxation.
No Income Tax . There is no state or local income tax in Mexico or any of its states. However, there are substantial state and local taxes for other concepts, such as transfer of real estate and salaries.
Real Estate Transfer Tax. There is a transfer tax on the purchase of real estate, on land and its improvements. This tax rate is variable depending on the value of the real estate in Mexico City, with the maximum rate being 4.5%. Each state has its own rate, which is approximately the same.
Real Estate Holding Taxes. There is an annual tax charged by the state governments on the real estate located in their respective states. It is determined on the fiscal value appraised by the government appraiser.
Specific Cases / Specific Taxes . There may exist other federal, state and local taxes, depending upon the state you may be in and what the activity is that you are performing.
Special tax Incentives.
Maquila and Manufacture Programs. Those companies in Mexico that wish to import items into Mexico for processing, assembly or transformation and re-export (or even import into the interior of Mexico) my receive import taxation advantages. See the "Maquila" webpage elsewhere on this website.
Free Zone. The Free Zone, also known as the Liberated Zone, the Perimeter Zone or Free Trade Zone is that area located along the Mexican international land borders and provide advantages for import and export to Mexico and other countries. See the "Free Zone" webpage elsewhere on this website.
Weblink and Contact.
http://www.cpware.com (alternate source of tax information for Mexico)
The best on taxation matters (for planning and problems):
Sergio Santinelli.. He does speak English.
Tax Treaty US-Mexico.
Convention for Avoidance of Double Taxation and Prevention of Fiscal Evasion. (Between Mexico and the U.S.) It was signed on September 18, 1992. It became effective between Mexico and the U.S. January 1, 1994.
This treaty reduces the tax rates applicable to the residents of the other country (US residents in Mexico, Mexican residents in the U.S.), and will also reduce the risk of there existing double taxation, by means of a uniform source of income rules.
1. If you are a US resident, then you will pay U.S. income tax on your world income. See your U.S. account about getting a credit against your U.S. income tax for the money paid to a foreign income taxation authority for income earned in that country. (Consult your U.S. tax consultant)
2. If you are a U.S. citizen (or I believe, immigrated to the U.S.) and you are a full time resident of a foreign country and only earn income in that foreign country, you may have a right to an automatic income level set by the U.S. whereby you only have to identify that you are a full time resident of that other country and that your income did not surpass the limit set (possibly $70,000.00 U.S. - this sum may have changed), in order to have no income tax liability in the U.S. (Consult your U.S. tax consultant)
3. "CFC" Controlled Foreign Corporation. If you (a U.S. citizen or U.S. resident) hold 10% or more of ownership (in shares or other ownership parts) in a foreign corporation, which added together with all the U.S. owners (shares or other ownership parts) therein, hold 50% or more of the corporate ownership, then you may be required to include in your income certain types of income earned by the "CFC", even if the "CFC" has not yet distributed the income (via dividends or otherwise). A "CFC" can also be a "PFIC". (Consult your U.S. tax consultant)
4. "PFIC" Passive Foreign Investment Company. These companies are identified as such when 75% or more of their income is passive (earned by interest, royalties, dividends or rents, etc.) or 50% or more of their assets produce passive income, and they have U.S citizens or residents as shareholders (or other ownership partholders). If you (a U.S. citizen or U.S. resident) that holds ownership (in shares or other ownership parts) in a "PFIC", you may be required to spread any excess distribution (in dividends or like kind) in excess of 125% of the average distributions in the prior 3 years , over the holder's total holding period of the stock or corporate part of the "PFIC". There are additional rules governing "PFIC"s. A "PFIC" can also be a "CFC". (Consult your U.S. tax consultant)
5. Consolidated Tax Returns in the U.S. for U.S. Corporations. The U.S. corporations are not normally permitted to consolidate their U.S. tax returns with that of foreign corporations abroad. However, if the foreign corporation is wholly owned by the U.S. corporation and the foreign entity was created solely to comply with local laws in that country, then it possibly may consolidate the U.S. tax return. (Consult your U.S. tax consultant)
6. Foreign trusts. The U.S. may require you to identify those foreign trusts you hold and pay taxes on their assets. However, if the trust was created solely to comply with local law, this requirement may not exist. (Consult your U.S. tax consultant)
7. As of 2014, there is a new US taxation law that applies to US residents and US citizens (residents or not of the US), that requires them to provide information to the US IRS regarding the bank accounts they hold abroad. As well, this law also requires foreign banks to provide certain information on the US residents and US citizens that they have as account holders.
Affiliated Fiscal Expertise in Mexico
The Mexico City firm of Santinelli & Asociados, S.C. is a full service fiscal firm which has many years of extensive expertise in all areas of fiscal issues, including all areas of taxation, tax planning, representation and assistance before fiscal courts and negotiations with fiscal authorities in Mexico. You can reach Sergio Santinelli by mail, telephone or E-mail at the following address: SEE FULL WEBPAGE ON - SANTINELLI Y ASOCIADOS, S.C.
Santinelli & Asociados, S.C.
Montecito No. 38 Piso 37, Oficina 37
Edificio Wolrd Trade Center
Mexico D.F. C.P. 03810
Tel: (550 9000-5260
Fax: (55) 9000-5260 ext. 253