Taxes in Mexico


 

Taxes in Mexico


Property taxes are very low in Mexico as a whole. The property tax, known as a predial is .1% of the assessed value. Taxes are paid annually, with the assessed value determined at the time of sale. If you purchase a property with an assessed value of $100,000US dollars your annual tax rate would be $100.00US dollars. The reason taxes are so low is due to the fact that they have never been a source of revenue for the Mexican government

Real Estate Acquisition Tax (transfer tax): Individuals or companies purchasing real estate, consisting of land, or land and its improvements in Mexico, are subject to the payment of a real estate acquisition tax calculated at the rate of 2% of the value of the property (the rate may vary from state to state from 2% to 3.3%). All purchasers of real property must pay this tax whether the acquisition is carried out through a purchase and sale agreement, donation, trust, assignment, mergers of companies, split-off, or payment in kind.

TAXATION IN MEXICO

Mexico has high taxes on rental income

 

INDIVIDUAL TAXATION

Nonresident individuals are liable to pay tax on their Mexican-sourced income. Married couples are taxed separately.

INCOME TAX (Impuesto Sobre la Renta, ISR)

Income earned by nonresidents is taxed at progressive rates.

INCOME TAX 2013 FOR NON-RESIDENTS

TAXABLE INCOME, MXP (US$) TAX RATE
Up to 125,900 (US$8,393) 0%
125,900 – 1 million (US$66,667) 15%
Over 1 million (US$66,667) 30%
Source: Global Property Guide
 

However, nonresidents may be liable to pay 25% withholding tax on their Mexican-sourced income. 

RENTAL INCOME
There are several ways to tax rental income earned by nonresident individuals in Mexico: (1) through the 25% withholding tax and (2) by electing the business income option.

25% Withholding Tax

Gross rental income from the leasing of real estate, property and time-sharing services by a nonresident individual is subject to a 25% withholding tax. No deductions are allowed.

Electing Business Income Option

Nonresident individuals earning income from leasing property can consider their rental income as business income and choose to file an income tax return. Through this option, the taxpayer will be taxed on his net income at progressive rates.

INCOME TAX 2013 FOR NON-RESIDENTS

TAXABLE INCOME, MXP (US$) TAX RATE
Up to 125,900 (US$8,393) 0%
125,900 – 1 million (US$66,667) 15%
Over 1 million (US$66,667) 30%
Source: Global Property Guide
 

Income-generating expenses, depreciation allowance and property taxes are deductible when computing for the taxable income. Instead of itemized deduction, individuals may elect a standard 35% deduction of the gross rent to account for income-generating expenses.

CAPITAL GAINS
There are several ways to tax capital gains realized by nonresident individuals in Mexico: (1) through the 25% withholding tax and (2) by appointing local representatives.

25% Withholding Tax

Generally, capital gains realized by nonresidents from transferring real property in Mexico are subject to 25% withholding tax on the gross amount or selling price of the property.

Non-residents with Appointed Local Representatives

Nonresidents who have appointed representatives residing in Mexico may be taxed on their net capital gains at 30%. The tax base is the gross selling price or market value of the property, whichever is higher, less adjusted acquisition costs (the adjusted cost may not be less than 10% of the transfer value), investment costs and improvement costs, and transaction costs (taxes, valuation, notary fees, commission and brokerage fees).

 

PROPERTY TAXES

Property Tax (impuesto predial)

Property tax is levied on the cadastral value or assessed value of the real estate. The tax rate ranges from 0.05% to 1.2%, depending on the property location as each state has a different tax rate. It is payable to the state government annually.

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.

WithholdingThe 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 theValued 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.

 
For another interesting website with information on taxes in Mexico we invite to go here

Tax issuues for US citizens


 

From the Desk of Rick Ashley, CPA

Congratulations on your purchase of property in Mexico. As as a US citizen and a new property owner in Mexico, you may be required to file additional forms with the Internal Revenue Service. If you are going to live and work in Mexico or any other country, you are allowed an automatic 2 month extension to file your return. Remember, however, that if you use that extension, you will still be required to have prepaid your estimated taxes due or pay interest on any tax that is not paid by April 15th•

We are taking this opportunity to remind you that there are a number of other forms that US citizens who are living outside the United States may be required to file. Not all of these forms need to be filed by April 15th• Some can be filed later, and some must be filed earlier.

Attached you will find descriptions of some of these forms. Please read them carefully. You may find that one or more will apply to you.

With the improved electronic technology used by governments today and the information exchange agreements they are signing, it is important to prepare your tax returns that are compliant with both the Mexican and US regulations.

At Calderon, we are pledged to help you achieve the goal of fully compliant tax returns while taking advantage of the varying tax methodologies afforded by both countries. We have a great deal of experience working with the tax laws of both the Mexican and US governments, and understand their complexities.

 

If you own a Home through a Mexican Residential Trust (Fideicomiso) -Forms 3520 and 3520A

The IRS Form 3520, the "Annual Return To Report Transactions With Foreign Trusts and Receipt of Certain Foregn Gifts" is used to report 'transactions' in any foreign trust. This includes a fideicomiso, or Mexican Residential Trust. A reportable transaction may be the purchase or sale of a property titled through a /ideicomiso; a major remodel of that property; the gift or other disposition of that property; or the death of a grantor or beneficiary of the foreign trust.

Regardless of where you file your 1040, this form must be filed with the IRS Service Center in Ogden, Utah. It must be filed at the same time that your 1040 is due; taking into consideration any extensions to file you have received.

Failure to file this form can be as high as 35% of the gross value of the property. With a penalty of this size, it is obviously important to give careful attention to compliance.

There has been some controversy regarding this form and its applicability to /ideicomisos, but the IRS has informally indicated it is applicable for fideicomisos and there are very strong penalties if it is not filed. Addtionally the IRS has assessed penalties against taxpayers for filing this form late.

Form 3520-A, the 'Annual Information Return of Foreign Trust with a U.S. Owner', is used to report any activity that occurred in a trust during the tax year. This form must be filed every year by the fiduciary of a trust whether there is a 'reportable transaction' or not. Unfortunately, Mexican banks will not fill out these forms, and the IRS holds the US taxpayer ultimately responsible for filing them.

There are several important portions to this form. The 'Foreign Grantor Trust Owner Statement' (page 3) and the 'Foreign Grantor Trust Beneficiary Statement' (page 4) must be given to US owners and beneficiaries by the due date for filing. The Due Date for Form 3520-A is the 15th of the third month after the end of the trust's tax year, usually March 15th.

While the penalties for failure to timely file are not as onerous as those of Form 3520, they are still pretty severe in that the penalty is 5% of the gross value of U.S. owner's share of the trust assets.

 

If you open or have Financial Accounts in foreign countries Form TO F 90-22.1

Each United States citizen who has a financial interest in or signature or other authority over any foreign financial accounts must be familiar with the Form 90-22.1. This form is entitled "Report of Foreign Bank and Financial Accounts" and its purpose is to report to the IRS certain information regarding financial accounts in which a U.S. taxpayer has an interest or signature authority.

Basically, if a U.S. taxpayer has an aggregate value in excess $10,000 US Dollars at any time during the year, this form must be completed and filed. Examples of financial accounts that need to be considered are checking accounts, savings accounts, securities, securities derivatives, mutual funds, demand deposits, time deposits, debit card accounts, prepaid card accounts or any other accounts maintained with a financial institution or other person engaged in the business of a financial institution.

Ownership need not be direct ownership. For example, a bank account owned by a Trust in which the U.S. taxpayer has a present beneficial interest, either directly or indirectly, in more than 50% of the assets or receives more than 500" of the income would be required to be reported on this return. Don't forget that this requirement for reporting is in the aggregate. You cannot have $9,000 in an account in Mexico and $2,000 in an account in Brazil and think this is not applicable to you; it is.

This form must be filed with the US Treasury in Detroit, MI by June 30th of the succeeding year. Extensions for filing the Form 90-22.1 are not available.

If you your aggregate balance is less than $10,000, you are not required to file this form. The maximum value of an account is the largest amount of currency or non-monetary assets that appear on any quarterly or more frequent account statement issued for the applicable year. If periodic account statements are not issued, the maximum account asset value is the largest amount of currency and non-monetary assets in the account at any time during the year. In computing the maximum value in foreign accounts during the year, convert foreign currency by using the official exchange rate at the end ofthe year.

The civil penalty for willful failure to file this form can be as high as 50% of the total balance of the foreign accounts. Criminal penalties can also be applied. If your failure to file this form was "non-willful," the penalty imposed can be anything between zero and $10,000 per undisclosed account per year

If you are forming a Partnership or are a Partner in a Foreign Partnership -Form 8865

The purpose of this Form 8865, entitled ttReturn of U.S. Persons With Respect to Certain Foreign Partnerships", is to report the activities and income of a foreign partnership where as little as 10% of the partnership is owned by a U.S. taxpayer. A U.S. taxpayer is either a U.S. person, or a U.S. partnership, corporation or trust. In computing the ownership percentage, an interest in a foreign partnership owned directly or indirectly by or for a corporation, partnership, estate or trust will be considered as being owned proportionately by the owners, partners or beneficiaries.

There does not need to be a formal partnership agreement for this form to be required. If you developed a relationship with two or more persons in a foreign country who join together to carry on a trade or business with each person contributing money, property, labor, or skill with each member expecting to share in the profits or losses of their combined activities, then a partnership exists and this form is required. A limited partnership, syndicate, group, pool, joint venture or other unincorporated organization through which a business, financial operation or venture is carried on could be required to complete this form.

If you qualify for preparing this return, then it must be attached to and filed with your tax return by the due date of your return including extensions.

The penalties for failing to file the Form 8865 are $10,000 for failure to file plus an additional $10,000 for each month after notification up to a maximum of $50,000 plus 10% of the value of any transferred property not reported subject to a limit of $100,000.

If you are starting a Foreign Corporation or own stock in a Foreign Corporation -Forms 5471 and 926

If you are an officer, director or shareholder of a foreign corporation where you or another U.S. person owns at least 10% of a foreign corporation, then this Form 5471, entitled "Information Return of U.S. Persons With Respect To Certain Foreign Corporations" and appropriate schedules must be filed with the IRS.

If you qualify for preparing this return, then it must be attached to your income tax return and both returns filed by the due date of your tax return including extensions. Please note there are several categories of filers for this return and it is possible for one filer to satisfy the filing requirements of other filers, but the explanations and relationships are too detailed to discuss here.

If you are required to file this return, it may be beneficial to coordinate with other officers, directors or shareholders in order to avoid duplicative filings and possible differing reporting of information. Be aware however, any person required to file this Form 5471 and supporting schedules and agrees to have another officer, director, or stockholder file the form and schedule for him or her may be subject to penalties if the person filing the Form 5471 does not file a correct and properly completed form and schedules.

The penalties for failing to file the Form 5471 are $10,000 for failure to file plus with an additional $10,000 for each month after notification up to a maximum of $50,000.

If you want to open a corporation in Mexico to operate a business, you should consult with us in order to select the best type of entity and avoid the dreaded Controlled Foreign Corporation.

A U.S. taxpayer that owns stock of a foreign corporation must also be aware of Form 926. This form is entitled "Return by a U.S. Transferor of Property to a Foreign Corporation" and the purpose of this form is report certain transfers of tangible or intangible property to a foreign corporation.

For example if you own at least 10% of the outstanding stock of a foreign corporation or the amount of cash transferred is more than $100,000, then you are required to file this form. Be aware that if you own at least 10% of the outstanding stock, then any cash transferred will require the filing of this form.

If you qualify for preparing this return, then it must be attached to and filed with your income tax return. The penalty for failure to report these transfers is 10% of the value of the transfer not reported subject to a $100,000 limit

Thanks to

Richard H Ashley for the article

Certified Public Accountant, USA Email: rickashleymex@gmail.com

Enrique Mauricio Calderon Langarica Certified Public Accountant, Mexico

Lisboa # 150, Col. Gustavo Dlaz Ordaz, Puerto Vallarta, Jalisco, C.P. 48310, Mexico

Direct Line: (322) 293-5593 -US Number: (916) 226-1236 -Office Phone: (322) 224-0400 - www.calderonadvis8.com