The tax system in Mexico

General information about Mexico

Mexico is a federal constitutional republic, neighboring the United States of America to its north. In the south and west, it borders the Pacific Ocean, and the eastern part faces the Gulf of Mexico. On the southeastern border, it separates from Guatemala and Belize. Mexico City is the country's capital city. The entire country has 32 federal states, and the Mexican peso is their national currency, while Spanish is the official language. In major cities and tourist destinations, and places bordering the United States, most people do have a decent level of English. At least you will be able to communicate your needs. English has become mandatory in the business world, so you do not have to worry about it.

What groups of taxes are there in Mexico?

You can split the two types of taxes in Mexico into federal and local taxes.

Federal taxes are:

• The Income Tax: Individual income tax rates range from 1.92 percent to 35 percent, depending on their income. For businesses, the corporate tax rate is 30%.
• Value Added Tax (IVA): The regular rate is 16%, while a 0% rate applies to specific activities. Usually, it is already included in the price displayed. However, some restaurants may add it at the end.
• Import duties
• Special Tax on Production and Services (IEPS): The tax can be represented as a percentage ranging from 3% to 160 %, like a particular tax or a cumulative tax.
• Social Security: Employers are liable to pay social security taxes, which can range from 25% up to 30% of the employee's wage.

Local taxes are:

• Taxes on Real Estate or Land: It is also known as “Property Acquisition Tax.” Anyone that wants to buy a home, land, building, flat, or any other sort of real estate is liable for the tax. The relevant tax may depend on the state, although the average is 2%. However, the Property Acquisition Tax might exceed 6.5 percent of the transaction price in some states.
• Payroll Tax: The Payroll Tax is imposed by states on salaries and other expenses resulting from an employment contract. The effective rate may differ extensively, depending on the state, although it is typically between 2% and 3% of the salary paid.

We do not want to bore you with all the details, but we have gathered the essential tax groups below, so you can get a better and more profound understanding of what awaits you in Mexico.

Read also Retirement in Mexico

The most important taxes in Mexico for expats

Income tax in Mexico

Paying income tax is relatively straightforward in Mexico, and taxes are automatically deducted from your paycheck. Therefore, unless you earn more than 400,000 pesos (around 20,000 USD) a year, you don't have to file any tax statement or do any paperwork whatsoever. In fact, at most companies, you won't even receive your yearly tax statement unless you specifically ask for it.

The only reason to declare your taxes is if you plan on making deductions for business expenses. This usually does not apply to average workers but rather to business owners or the self-employed. To make these deductions, you will need to collect and provide official receipts called facturas. For specific information about these declarations, it is a good idea to pay a visit to a Mexican accountant. Regardless of citizenship, every person who holds legal resident status must pay income tax on all earnings. It does not matter if these earnings were received within Mexico or outside. This is especially important for people who are subject to double taxation, a matter that we will discuss in-depth later on in the article. Therefore, residents and therefore taxed are people who have their usual domicile in Mexico unless they are abroad for over 183 days per calendar year and can verify their income in another nation.

Non-residents are responsible for paying Mexican income tax only on their Mexican earnings, not on income from abroad.

Important:

In Mexico, the fiscal year runs from January 1st to December 31st.

Read also Working in Mexico

Corporate tax in Mexico

The corporation tax rate, known in Spanish as "Impuesto Sobre la Renta (ISR)," is 30% of earnings. If the parent firm owns at least 80% of the subsidiary, linked businesses will benefit from group taxes ("Regimen Opcional para Grupos de Sociedades"). It is not permitted to settle dividends and taxes indefinitely. The annual tax declaration for company taxes must be submitted to the SAT by March 31st of the following year. It is simple: The more you earn, the bigger your tax payment will be in the next year.

Read also Starting a business in Mexico

Sales tax in Mexico

Sales tax in Mexico is set at 16% as of early 2020. In Spanish, it is called IVA, or impuesto al valor agregado, in English 'value-added tax.' It is nearly always included in the price and not added on later, like in the U.S.

However, some restaurants in tourist areas do add this tax at the end. There's not much you can do about this except to be prepared to pay slightly more than the price shown since the total amount only shows up at the end.

Important:

At the moment, there is no such thing as an inheritance tax in Mexico. However, there is a gift tax that the receiving end of the asset has to pay unless it is the spouse or some other member of your family.

Important taxes if you want to buy property in Mexico

• When you acquire the property, there is a 2% acquisition tax

An official evaluation may be substantially lower than the estate's market worth, and it is not uncommon that it marks only between 30% to 40% of the true selling price.

Technically speaking, this is not considered legal, but everyone does it. So if you buy, for example, an apartment for 100,000 USD, instead of paying the complete 2% (2000 USD), you would only pay 600 USD or 800 USD.

• Annual real estate taxes (predial)

It also is pretty standard that your annual property taxes are around 100 USD or even less, and they rarely exceed 300 USD.

• When you sell the property, you must pay capital gains tax

There are two different methods to evaluate capital gains tax once you want to sell your home.

1. You have to pay 25% of the transaction's reported value

or

2. You decide to pay 30% of the net wealth, which is the difference between the evaluated worth when you acquired the estate, and at the time you want to sell the property. Any improvements on the property that you have made or commissions you had to pay will be taken into account as well.

Good to know:

If you are not a Mexican resident, you will be taxed 35%!

So to sum it up - even though it might seem to be the cheaper option at first to accept the lower rate at the initial evaluation for the acquisition tax, once you are planning on selling your property, you could end up with a pretty significant portion of tax you have to deduct in case the difference is a huge one. It is always best to ask a tax lawyer, accountant, or notary before buying or selling real estate in Mexico. Just like you would do in any other part of the world

Read also Buying property in Mexico City

Capitals Gains Tax (and dividends)

Dividends given to a Mexican or a foreign natural person will be subject to a 10% withholding tax.

Capital gains taxes apply to any capital gains, including the sale of shares, properties, bonds, or other assets. Now, the tax is 35% for non-Mexican residents, 25% on the gross value of the transaction, or 30% on the actual capital growth. The tax liability basis will determine the capital gain for expatriates, the kind of property to be sold, the list price, and other considerations.

In the case of real estate, one will then be obliged to pay 2 - 5% of the entire transaction in municipal taxes. Capital gains relate to global earnings if you are a resident. However, if you are not considered a resident, you can only be required to pay taxes derived from Mexican assets.

Custom Agreements

Mexico has 13 different trading agreements with 50 countries in the world. Apart from that, it's a member of the WTO (World Trade Organization), the Pacific Alliance (with Chile, Peru, and Colombia), the G-20, the OECD (Organization for Economic Cooperation and Development), and the APEC (Asia-Pacific Economic Cooperation)

The most prominent free trading agreement in which Mexico is taking part is called NAFTA. The NAFTA agreement is a free trade deal between Canada, the United States, and Mexico that provides for customs-free goods exports and imports. Both imports and exports have dramatically increased since the trade agreement was made, and all the countries are profiting from it.

Paying tax in your home country - Double taxation

Most countries have a reciprocal tax agreement with Mexico, which means that because you've already paid Mexican taxes on your Mexican income, you don't have to pay taxes in your home country.

One exception to this is the United States. All U.S. citizens living abroad must continue to file taxes and declare their foreign earned income and are subject to double taxation. If your earnings were less than 105,900 USD in the previous year (the Foreign-Earned Income Exclusion), you do not have to pay taxes on the income, but you do have to declare it. Until they have formally shifted their legal address outside Canada, Canadian residents are taxed on their international income.

For specific information about filing taxes as a foreign resident, especially if you are self-employed or have income from various countries, it is a good idea to consult an accountant in your home country.

Who does Mexico consider a tax resident?

Foreigners are people or companies who are liable to pay tax in another country due to factors such as citizenship, residence, or where their company is registered. Mexican Tax Law, however, sets up a number of rules that include a foreigner (regardless of being a natural person or a business) in their compound of tax residents in Mexico.

• Residents
• Non-Residents

Tax residents because of legal residence status

People who live in Mexico, both Mexicans and expatriates, are tax residents. Living concludes with having your official residence in Mexico. However, a person without a residence permit might be considered a tax resident if their main professional activity is in Mexico. Another reason is if a person gets more than half of his yearly earnings through someone in Mexico. A corporation formed in Mexico is a tax resident in terms of legal formations. When an international company's primary business site or address is in Mexico, it is considered a tax resident.

Tax residents without legal resident status

Non-resident people or corporate organizations could be responsible for paying Mexican taxes in some scenarios. For example, suppose a foreign natural person or company maintains a "fixed place of business" in Mexico or receives payment from any source of capital situated in Mexico. In that case, they are liable to pay Mexican income or corporate taxes. Generally speaking, a fixed place of business is any commercial location where operations are in parts or wholly conducted or when separate personal services are provided.

Tax refund for tourists

If you are only a visitor, or your family will spend their vacation with you, this paragraph will be important. You might be eligible to get the 16% IVA back for items you purchased during your Mexico stay. It is crucial to ask the shop for a tax receipt and present the things you intend to bring with you when leaving. The refund will be made in Mexican Pesos, and you can ask for it at any major tourist airport like Cancun, Los Cabos, or Puerto Vallarta.

Useful links:

Tax refund for foreign tourists

Mexican Institute of Public Accountants

IRS, U.S. foreign earned income exclusion

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