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Doing business in Mexico requires knowing the fiscal obligations companies and individuals are subject to. A thorough understanding of how to apply Mexican fiscal policies will result in risk prevention, effective compliance and a solid foundation from which profitable business can be achieved.
The following is a brief guide of the Mexican contributions that includes Income Tax, Single Rate Business Tax, Taxes on Capital, Consumption Taxes and employment related contributions.
For a deeper insight of any of these topics, please contact Leal Benavides’ tax specialists.
Leal Benavides y Cía., S.C.
Tax Consultants, MexicoRio Tiber 100, D-11, Col. Del Valle
Garza García, N.L., 66220
Mexico
T (+52 81) 8356-9433
F (+52 81) 8356-9434
CONTENT
1.Income Tax
1.1. Corporate Income Tax
1.1.1. Residence
1.1.2. Taxable income
1.1.3. Expenses
1.1.4. Losses
1.1.5. Rate
1.1.6. Incentives
1.1.7. Non-resident companies
1.1.8. Special rulings
1.2. Individual Income Tax
1.2.1. Residence
1.2.2. Taxable income
1.2.3. Expenses
1.2.4. Personal deductions, allowances and credits
1.2.5. Rates
1.2.6. Other taxes on individual income
1.2.7. Non-resident individuals
1.3. Cash Deposits Tax2.Single Rate Business Tax
2.1. Taxable income
2.2. Expenses
2.3. Losses
2.4. Rate
2.5. Credits
2.6. Payments
2.7. Small taxpayer regime3.Taxes on Capital
3.1. Real estate tax
3.2. Vehicle ownership tax4.Consumption Taxes
4.1. Value Added Tax
4.2. Special Tax on Production and Services
4.3. New Automobile Tax
4.4. Lodging Tax5.Employment Related Contributions
5.1. Social Security
5.2. Payroll State Taxes
1.1. Corporate Income Tax
Corporate profits are subject to corporate income tax. There is another tax on corporate income named Single Rate Business Tax, which is commented in next Chapter.1.1.1. Residence
Companies who have established their place of main or effective management in Mexico are considered residents for tax purposes in Mexico.1.1.2. Taxable income
Resident companies are taxable on their worldwide income, including capital gains. The concept of income includes cash, benefits in kind, services, credit and inflationary gains. Taxable profits equal gross income less deductible expenses. Losses carried forward from previous periods can be compensated against profits. Inflation effects may be recognized as income.Domestic income rules generally apply to foreign income.
Foreign-source dividends are included in the recipient’s taxable base at their gross amount. For this purposes, tax credit is provided with respect to foreign tax paid on foreign-source income, so that double taxation relief is achieved. Special rules apply to indirect tax credit.
1.1.3. Expenses
Expenses are subject to specific requirements in order for them to be tax deductible. They must be supported with an official pre-printed or electronic invoice, paid within the fiscal year, and corresponding taxes must be withheld when required.Expenses over $2,000 pesos must not be paid in cash. Check, credit or debit card, wire transfer and other no-cash means are required for a deduction to be approved.
Assets are depreciated over time. Fiscal depreciation rates are provided, and in many cases may differ from financial rates.
Inflation effect is recognized as tax deductible.
1.1.4. Losses
Net losses include operating losses as well as capital losses, unless the latter are expressly disallowed. Losses may be carried forward for a 10-year period. No carry-back is allowed. Losses from previous years are adjusted for inflation for amortization purposes.Special rules may apply to capital losses from the disposal of securities.
1.1.5. Rate
The corporate income tax is levied at a rate of 30%.1.1.6. Incentives
The incentives taxpayers are entitled to are:
- Assembly operations (maquiladoras)
- Accelerated depreciation
- Credits for the acquisition of diesel
- Incentive for taxpayers dedicated to transport by land using highway toll services
- Research and development expenses credit
- Deduction for employers who hire handicapped employees
- Ease of administration for the agricultural and land transportation activities
- Incentives for taxpayers who invest in national film and theatrical production
1.1.7. Non-resident companies
Non-residents may conduct activities in Mexico either through a Permanent Establishment, or directly without an establishment. Those operating through a permanent establishment are subject to income tax for all income attributable to the establishment, regardless of its source (Mexican of foreign). Non-residents with no permanent establishment in Mexico are subject to taxation on Mexican-source income only, usually in the form of a final withholding tax generally at a rate of 25%. Dividends, interests and royalties have special withholding provisions.Local legislation provides a wider definition of Permanent Establishment, than that on Double Taxation Treaties.
1.1.8. Special rulings
Mexican tax law provides special rulings to prevent tax avoidance, such as: Thin Capitalization, Controlled Foreign Corporation, and Transfer Pricing provisions.1.2. Individual Income Tax
Individuals are subject to individual income tax. Partnerships are not transparent for tax purposes.1.2.1. Residence
Individuals who have a dwelling home in Mexico are deemed Mexican residents. An individual with a dwelling home in another country will be deemed Mexican resident if his center of vital interests is located in Mexico, meaning, among other things, when over 50% of his yearly income derives from a Mexican source, or when the main center of professional activities is located in Mexico. Mexican nationals are presumed Mexican residents unless proven otherwise.1.2.2. Taxable income
Income tax is calculated on the worldwide income of resident individuals, including capital gains, less applicable deductions and allowances. In general, if deductions exceed income in any given category, the excess may be deducted from any other category except independent personal services (specific exceptions may also apply such as interests, shares and stock). Progressive rates are used for taxing individuals.Domestic income rules generally apply to foreign income.
When obtaining foreign source income direct tax credit is foreseen in order to relief from double taxation. The direct tax credit may not exceed the amount of Mexican tax calculated on the foreign-source income less allowed deductions by Mexican law. Resident individuals taxed abroad by reason of nationality or citizenship have a limited tax credit to the amount of the tax to which he would have been subject in the foreign country if he did not have such nationality or citizenship.
Special ruling is provided for income from investments in preferential tax regimes (tax havens).
Income of individuals is divided into different categories: Employment income; business and professional income; rent from immovable property; capital gains from the transfer of property; income from the acquisition of goods, including gifts, treasure trove, and acquisition of under priced goods; dividends and profit distributions; interest income; and income from prizes. Some categories are subject to withholding when paid by a corporation.
There are three regimes for calculating taxable business and professional income:
- Business and professional activities. Subject to progressive rate taxation over net profit.
- Intermediate regime. Subject to progressive rate taxation over net profit.
- Small taxpayers’ regime. Subject to 2% tax over gross income less special allowance.
Exempt income includes, subject to conditions, interest paid by financial institutions and interest on qualifying bonds and securities; capital gains from the disposal of shares and other qualifying securities effected in the stock market; capital gains from dwelling houses, donations, inheritance; and copyright royalties derived from the original authors. Some categories of income obtained as an employee are partially exempt.
1.2.3. Expenses
Individuals carrying on business activities may deduct incurred expenses which are subject to specific requirements. They must be supported with an official pre-printed or electronic invoice, paid within the fiscal year, and corresponding taxes must be withheld when required.Assets are depreciated over time. Fiscal depreciation rates are provided, and in many cases may differ from financial rates.
In the professional services regime, some assets may be wholly deducted when paid.
1.2.4. Personal deductions, allowances and credits
Individuals may deduct expenses incurred for medical, dental and hospital expenses; fees paid on medical insurance; funeral expenses for dependants up to a certain amount; qualifying donations; compulsory school transportation of taxpayer’s children; mortgage interest and private schooling (up to middle school).1.2.5. Rates
Individual income tax is imposed at progressive rates, being 30% the maximum rate.1.2.6. Other taxes on individual income
Mexican states are authorized to impose a local tax on individuals. These taxes are imposed on individuals’ profits at a rate that shall be neither less than 2% nor exceed 5%.1.2.7. Non-resident individuals
Non-residents may conduct activities in Mexico either through a permanent establishment, or directly without an establishment. Those operating through a permanent establishment are subject to income tax for all income attributable to the establishment, regardless of its source (Mexican of foreign). Non-residents with no permanent establishment in Mexico are subject to taxation on Mexican-source income only, usually in the form of a final withholding tax generally at a rate of 25%. Dividends, interests and royalties have special withholding provisions.Local legislation provides a wider definition of Permanent Establishment, than those on Tax Convention Treaties on Income and Capital.
1.3. Cash Deposits Tax
Whenever a person deposits in a financial institution over $15,000 pesos during a month, in cash, 3% Cash Deposit Tax (CADET) will be collected.This tax may be credited against Income Tax in the same month, or in the annual tax return. CADET not credited must be claimed before tax authority.
Introduced in 2008, Single Rate Business Tax (SIRABUT) was enacted seeking to establish a minimum tax that would prevent the use of tax havens and discourage tax planning for evasion purposes. SIRABUT also replaced Business Assets Tax (BAT) levied on the taxpayer’s average total net worth wherever located, which has been derogated.
2.1. Taxable income
Similar to Income Tax, resident companies and permanent establishments are taxable on their worldwide income derived from selling of goods, provision of independent services and rent of tangible goods.SIRABUT is calculated over a cash flow basis.
2.2. Expenses
Expenses are deducted when paid (cash flow basis). Payments must represent counterparty's taxable income for this tax purposes. All Income Tax deduction requirements must be met as well.Assets are wholly deducted when paid. There are no inflation effects.
Paid interest derived from financing is not an allowed deduction. Royalties paid to a related party shall not be deducted either.
Salaries and social security contributions are non-deductible; instead, a tax credit may apply.
2.3. Losses
Legislation contemplates no losses; instead, a tax credit is available against next ten years’ tax.2.4. Rate
The SIRABUT is levied at a rate of 17.5%.2.5. Credits
Beside loss and salaries credit mentioned above, taxpayer is entitled to some credits that were provided as a transitional measure, recognizing some of the effects taxpayers had built before this new tax was in force.2.6. Payments
Taxpayers must make monthly provisional payments, and file an annual tax return, in the same schedule as the one for income tax.2.7. Small taxpayer regime
Entrepreneurs eligible for Income Tax’s Small Tax Payer Regime may apply special provisions from SIRABUT, allowing them to pay a bimonthly fixed fee, estimated by local authorities, in the same terms as their Income Tax. State authorities are entitled to collect tax under this regime.
The “Business Assets Tax” (BAT), levied on the taxpayer’s average total net worth wherever located, no longer exists in Mexico. 2007 was the last year this tax was in force.
There is no net wealth tax in Mexico.
3.1. Real estate tax
Immovable property located in Mexico is subject to municipal taxation. The tax is usually levied on reference to the cadastral value of each piece of property.3.2. Vehicle ownership tax
Ownership of vehicles is subject to federal taxation. Land vehicles are imposed a progressive rate upon the value of the vehicle, which is depreciated within 10 years. Tax for water vehicles is calculated at a 1.5% rate over the value of the vehicle, which is depreciated within 20 years. Tax for air vehicles is determined considering its weight capacity.Special treatments are provided for the following:
- Electric buses
- Temporary imports
- Diplomatic vehicles
- Vehicles used in public services (v.g. ambulances, fire-trucks, patrols, etc.)
- Merchant or commercial fishing ships
- Fumigator planes
- Commercial planes for over 20 passengers load
- Taxis
Vehicle registration fees and license plate charges also apply.
4.1. Value Added Tax
A federal Value Added Tax (VAT) is imposed in Mexico over the following activities:
- Sale of goods
- Services
- Leasing
- Importing
A rate of 16% is imposed on all activities carried within Mexican territory, 11% on the border region, and 0% for all exports.
Expenses VAT credit is allowed as long as the expenses are business related and they are also Income Tax deductible. VAT paid over imported goods and services is also creditable.
A 0% rate is imposed on the following:
- Sale of animals and vegetables
- Medicines and food
- Agriculture related machinery, equipment, services and leasing
- Gold and jewelry containing over 80% gold
- Books, newspapers and magazines
Exemptions are also provided for some special cases such as selling of land and dwelling houses, used non commercial movable property, gold, currency, land transportation, education, medical services, life and agricultural insurance, among others.
There is no sales tax in Mexico.
Besides VAT, there are other consumption taxes in Mexico such as the Special Tax on Production and Services and the New Automobile Tax. Due to their specificity, they will only be briefly mentioned in this article.
4.2. Special Tax on Production and Services
Similar in its structure to VAT, the Special Tax on Production and Services (STPS) is an excise tax on gasoline, diesel, tobacco, alcohol, gambling, and some telecommunication services. The rate of the tax varies depending upon the type of good or service.4.3. New Automobile Tax
All individuals and companies acquiring a new automobile are required to pay the New Automobile Tax (NAT), which is calculated with a progressive rate that depends upon the value of the vehicle, being 17% the maximum marginal rate.Vehicle registration fees and license plate charges also apply.
4.4. Lodging Tax
Mexican states may tax lodging services at a rate that oscillates between 1% and 2%. Hotels and other businesses providing these services are required to transfer this tax to lodgers.
5.1. Social Security
Social security contributions must be paid by employers with employees providing services in Mexico. These contributions include medical attention, disability pension, retirement pension and housing.The amount of the contributions depends upon the type of industry, employee risk exposure and other labor security measures. Its total cost varies within a range of 20% to 25% over the amount of the salaries. These contributions are Income Tax deductible.
Every year, risk exposure and labor incidents are informed to the authority in order to modify the company’s risk rate and, in consequence, increase or decrease the corresponding social security rates. This obligation is due in February next to the ending year.
5.2. Payroll State Taxes
A Payroll Tax is imposed in some states of Mexico. This tax is usually calculated over payroll total expense. Most states have a fixed tax rate, and a few have a progressive tax structure. The usual rate is 2%, but it may vary from 1% to 2.5% depending on the state the employer is situated.Certain categories of retribution may be excluded from the tax base, depending on local legislation.
This information is presented as a general overview, and should not be used or relied upon for any particular investment or transaction. We recommend you consult a tax professional or advisor for your specific situation. If you would like more information on these matters we would be glad to assist you.
For more information please contact us at:
Leal Benavides y Cía., S.C.
Tax Consultants, MexicoRio Tiber 100, D-11, Col. Del Valle
Garza García, N.L., 66220
Mexico
T (+52 81) 8356-9433
F (+52 81) 8356-9434* * *
