TAXES OF INDIVIDUALS IN MEXICO
This discussion is not intended as legal or tax advice, and cannot be relied upon for any purpose without the services of a qualified professional.
Tax laws in Mexico tend to change every couple of years.
A double taxation treaty between the U.S. and Mexico was effective January 1, 1994. It allows U.S. taxpayers to credit any income tax paid in Mexico to be used as a credit on their U.S. tax return.
All taxpayers in Mexico need to obtain a Mexican federal tax id number, as it takes the place of a social security number in the U.S.
There is no state income tax in Mexico.
Mexican residents pay income tax on their income no matter where it was earned. Deductions are limited to minimum wage salaries, medical, funeral, social security payment by an employee, limited payments to private pension plans, limited education expenses and certain charitable donations. A tax credit is allowed for each dependent. The tax rate is graduated, from 2% to a maximum of 30%. There is an alternative minimum tax (AMT) of 17.5% which applies to income on a cash flow basis.
Nonresidents generally pay a flat tax on the gross income without deductions or credits, 15% and 30% with approximately the first $8,300 U.S. exempt
Mexican tax withholding is approximately as follows:
- $0 on salaries up to $8,500
- 15% on salaries $8,500 to $67,000
- 30% on salaries above $67,000
Capital gains are treated as ordinary income. However, capital gains from the sale of securities on the Mexico stock exchange are not taxable.
The notary you select for the sale process will inform you what the exact documents they require. As in the U.S., selecting your closing attorney (notary in Mexico) should not be treated lightly. The tax laws in Mexico are uniform but they way they are handled from one notary to another is not.
For residents, after deducting rental expenses, the tax is 30%. Building depreciation is 10% per year. As an alternative, a blind deduction of 35% is made, and the remainder is taxed at 35% with no deductions allowed. Nonresidents pay 25% on the gross income. Both may have to pay the value added tax and a 2% hotel tax. Mexican tax authorities have begun looking at internet rental sites to identify properties not paying taxes on their bookings.
Mexican does not have “capital gain” rates on sales. The gain from the sale of assets is taxed at approximately 25%. Income from leasing of real property, services and sale of goods is 17.5% if it exceeds the year’s income tax. (See the principal residence section above. A rental property is often converted to ones home and then sold tax free)
Interest on Bank Accounts and Dividends
For residents and nonresidents, tax is withheld on the interest at 30%. Residents can credit this on their returns and nonresidents need not file a return. To claim the credit on your U.S. return, use IRS form 1116.
Dividends from Mexican companies are generally paid after tax and there is no double taxation of them.
Value Added Taxes
The value added tax is included in the purchase of goods and services. It is 16% generally with boarder areas at 11%. Technical services received have a 25% tax deducted at the source.
CORPORATE TAXES IN MEXICO
The general corporate tax rate in Mexico is approx. 28%. Agricultural and fishing may be taxed at lower rates. Its taxable income and deductions follow U.S conventions. Meals and entertainment, and amortization of goodwill are not deductible. Nonprofits and associations are not taxed. Mexican corporations file monthly and yearly income tax returns and pay the corresponding estimated tax on a monthly basis.
One way to view the value added tax (IVA) is a national sales tax. It is paid monthly when a corporation imports or leases goods, or provides services. The current rate is 16%.
Some businesses in Mexico lease their employees from companies whose sole purpose is providing labor. This practice allows them to farm out the burden of payroll tax reporting. It also allows them to skirt some of the employment laws such as profit participation, seniority premiums and severance.
Federal and state payroll taxes often approach 30% of gross salaries.
The following is a partial list of employee taxes that an employer incurs:
- Social Security Tax- 9.23%, the employee pays approx. 20% of this
- Retirement Savings Tax- 2% of the employee’s salary and benefits
- Employee Housing Tax- 5% of the employee’s salary and benefits
- Local Payroll Taxes – averages 2.5%
Depreciable lives of assets are similar to the U.S., but depreciation of buildings is more generous at 5% per year.
There is no capital gain carry back; instead, they are carried forward up to 10 years.
To a limited extent, they are allowed up to 7% of the previous year’s taxable income.