Last updated on July 28th, 2023 at 01:48 pm
Mexico’s dividend withholding tax is a tax that is levied on dividends paid by Mexican companies to resident and non-resident investors alike. The tax is levied at a rate of 10% and is generally considered a deduction from the gross dividend payments.
The good news for Americans and foreigners doing business in Mexico is that we have a tax treaty allowing you to pay less. In this article, we will dig into the nitty-gritty of it.
The article is structured as follows. Firstly, we talk about Mexico’s dividend withholding tax for nationals and people with permanent residency in Mexico. We do an exercise to see what is the maximum amount of effective tax rate that a business owner in Mexico can pay, and we compare it with other countries.
Secondly, we look at how this affects foreigners and how they are taxed on Mexican dividends depending on their country of origin. Mexico has signed a tax treaty with 59 countries, so we discuss how investors can take advantage of this treaty.
And, lastly, we take an in-depth look at the Mexico-US Tax Treaty and analyze some instances in which Mexico’s dividend withholding tax can be partially avoided.
So, let’s get to it.
Mexico’s Dividend Withholding Tax For Residents
First, let’s get something straight. Dividends are taxed at two different levels; the corporate level and the individual level. To understand how they are taxed at the corporate level, we need to know that Mexico has a corporate tax rate of 30%.
So, first, Mexican companies pay a 30% tax on their profit when they declare them in their annual return. Once companies have paid taxes on a corporate level, they keep these profits in a special account. This account is called CUFIN because of its name in Spanish (Cuenta de Utilidad Fiscal Neta), which roughly translates to After-Tax Profits Account.
So, the profits accumulated in the CUFIN account have already paid Mexican corporate tax. Still, if the company issues dividends, the individual shareholder must pay taxes on that income as an individual according to Mexican income tax laws.
If you wish to know how much income tax individuals pay in Mexico, you can read our article on Mexican taxes. Even though it is written from the perspective of a business owner, the tax brackets are the same for individuals.
Now, the second level on which dividends pay taxes in Mexico is at the individual level. For this, the government entrusts companies with Mexico’s dividend withholding tax, which is 10%. This is clearly stated in Article 140 of the Mexican Federal Income Tax Law.
Now, the way individuals present dividends in their annual return is a little more complex than that. Let’s see how it’s done.
Dividend Tax Declaration for Individuals
Let’s say that Roberto, a Mexican company shareholder, will receive one million pesos from the company as a dividend payment. Now, Roberto has two options; the first one is to declare the $1M of income, and the second, is to declare that millions of income plus the corporate tax the company paid. This way, he would obtain a tax credit for that amount.
Let’s look at the second option to understand the total effective tax rate paid for dividends in Mexico.
Remember that the dividends issued by the company already paid corporate tax. So, for Roberto to declare this dividend in his annual return, he must multiply it by a factor of 1.4286, which essentially adds back the 30% corporate tax rate and gives us the pre-tax profit.
| Concept | Amount |
|---|---|
| Dividend | $1,000,000 |
| Factor | 1.4286 |
| Total | $1,428,600 |
| Corporate Tax Rate | 30% |
| Corporate Tax | $428,580 |
So Roberto would be declaring $1,428,600 as income. However, he can credit the $428,580 income tax the company paid against the total income tax for that year. Afterward, he would pay an income tax rate according to his income level.
So, how does this work?
Well, before doing a step-by-step calculation, let’s see what the income tax brackets are for individuals in Mexico annually.
| Income level | Lower Limit | Upper Limit | Fixed Payment | Surplus Rate |
|---|---|---|---|---|
| I | $0.01 | $7,735.00 | $0.00 | 1.92% |
| II | $7,735.01 | $65,651.07 | $148.51 | 6.40% |
| III | $65,651.08 | $115,375.90 | $3,855.14 | 10.88% |
| IV | $115,375.91 | $134,119.41 | $9,265.20 | 16.00% |
| V | $134,119.42 | $160,577.65 | $12,264.16 | 17.92% |
| VI | $160,577.66 | $323,862.00 | $17,005.47 | 21.36% |
| VII | $323,862.01 | $510,451.00 | $51,883.01 | 23.52% |
| VIII | $510,451.01 | $974,535.03 | $95,768.74 | 30.00% |
| IX | $974,535.04 | $1,299,380.04 | $234,993.95 | 32.00% |
| X | $1,299,380.05 | $3,898,140.12 | $338,944.34 | 34.00% |
| XI | $3,898,140.13 | Onwards | $1,222,522.76 | 35.00% |
This table tells us the different tax rates you have to pay depending on your annual income. If your income lies between the lower limit and the upper limit of an income level, you would pay the fixed payment and apply the surplus rate to the difference between your income and the lower limit.
For this article, all we need to understand is that for everything an individual in Mexico earns above 3.9 million Mexican pesos, he pays a rate of 35%
Now, let’s make a step-by-step calculation to understand it fully. First, we will assume that Roberto has at least another $3.9 million in annual income; this would set him in the highest income tax bracket level (35%); this way, we will see an example of the highest rate can be paid.
| Concept | Amount |
|---|---|
| Dividend (Before Corporate Tax) | $1,428,600 |
| Individual Tax Due (35%) | $500,010 |
| Creditable Taxes (Corporate Tax Paid) | $428,580 |
| Dividend Withholding Tax (10%) | $100,000.00 |
| Income Tax Due | $171,430 |
So this is the maximum income tax amount an individual can get. In other words, this is the worst-case scenario for getting your income as dividends. So let’s break it down to get the effective tax rate paid.
| Concept | Amount | Proportion |
|---|---|---|
| Dividend Issued | $1,428,600 | 100.00% |
| Corporate Tax Paid | $428,580 | 30.00% |
| Individual Income Tax Paid | $171,430 | 12.00% |
| Total Tax Paid | $600,010 | 42.00% |
Sounds bad, right?
First, remember that dividends aren’t the only way to get money from your Mexican company. For example, if you are working as a director, you are entitled to compensation. Also, a foreign company may charge its Mexican subsidiary for services (granted that a transfer pricing study has been done). It’s all about having the best tax strategy.
But for now, let’s focus on Mexico’s dividend withholding tax and the country’s competitiveness. Fortunately, the OECD keeps a table with dividend income tax information on all its members.
Let’s compare Mexico with other countries to see if the rate is high or low.
Comparison of Mexico’s Dividend Withholding Tax with OECD Countries
| Country | Corporate Tax Rate on Profits | Dividend Withholding tax | Net Personal Income Tax | Overall PIT + CIT rate |
|---|---|---|---|---|
| Australia | 30.0% | . | 24.3% | 47.0% |
| Austria | 25.0% | 27.5% | 27.5% | 45.6% |
| Belgium | 25.0% | . | 30.0% | 47.5% |
| Canada | 26.2% | . | 39.3% | 55.2% |
| Chile | 10.0% | . | 33.3% | 40.0% |
| Colombia | 31.0% | 10.0% | 0.0% | 36.0% |
| Czech Republic | 19.0% | 15.0% | 15.0% | 31.2% |
| Denmark | 22.0% | . | 42.0% | 54.8% |
| Estonia | 20.0% | . | 0.0% | 20.0% |
| Finland | 20.0% | . | 28.9% | 43.1% |
| France | 28.4% | . | 34.0% | 52.7% |
| Germany | 29.9% | 26.4% | 26.4% | 48.4% |
| Greece | 24.0% | 5.0% | 5.0% | 27.8% |
| Hungary | 9.0% | . | 15.0% | 22.7% |
| Iceland | 20.0% | . | 22.0% | 37.6% |
| Ireland | 12.5% | . | 51.0% | 57.1% |
| Israel | 23.0% | . | 33.0% | 48.4% |
| Italy | 24.0% | 26.0% | 26.0% | 43.8% |
| Japan | 29.7% | 20.3% | 20.3% | 44.0% |
| Korea | 27.5% | . | 44.0% | 59.4% |
| Lithuania | 15.0% | 15.0% | 15.0% | 27.7% |
| Latvia | 20.0% | . | 0.0% | 20.0% |
| Luxembourg | 24.9% | . | 21.0% | 40.7% |
| Mexico | 30.0% | 10.0% | 17.1% | 42.0% |
| Netherlands | 25.0% | . | 26.9% | 46.6% |
| New Zealand | 28.0% | . | 15.3% | 39.0% |
| Norway | 22.0% | . | 31.7% | 46.7% |
| Poland | 19.0% | 19.0% | 19.0% | 34.4% |
| Portugal | 31.5% | 25.0% | 28.0% | 50.7% |
| Slovak Republic | 21.0% | 7.0% | 7.0% | 26.5% |
| Slovenia | 19.0% | 25.0% | 27.5% | 41.3% |
| Spain | 25.0% | . | 26.0% | 44.5% |
| Sweden | 20.6% | . | 30.0% | 44.4% |
| Switzerland | 19.7% | . | 22.3% | 37.6% |
| Turkey | 20.0% | . | 20.0% | 36.0% |
| United Kingdom | 19.0% | . | 38.1% | 49.9% |
| United States | 25.8% | . | 28.9% | 47.2% |
Mexico’s Dividend Withholding Tax For Foreigners
According to Mexican income tax law, Mexico’s dividend withholding tax applies to Mexican residents and foreigners, regardless of whether they are individuals or other corporations.
Therefore, when a Mexican company distributes dividends to foreign shareholders living abroad, the foreigners are obliged to pay a 10% income tax in Mexico, which will be withheld by the company and passed over to the tax authorities.
That said, there are exemptions. Mexico has celebrated tax treaties to avoid double taxation with around 59 countries. Some of them have preferential rates for dividends, 0% and 5%, for example. This rate can be applied if certain requirements are met.
List of Mexico’s Tax Treaties
| Country | Country | Country | Country |
|---|---|---|---|
| Arab Emirates | Estonia | Lithuania | Singapore |
| Argentina | Germany | Luxembourg | Slovak Republic |
| Australia | Greece | Malt | South Africa |
| Austria | Hong Kong | Netherlands | Spain |
| Bahrain | Hungary | New Zealand | Swiss |
| Barbados | Iceland | Panama | Turkey |
| Belgium | India | Peru | Ukraine |
| Brazil | Indonesia | Poland | United Kingdom |
| Canada | Italy | Qatar | Uruguay |
| China | Jamaica | Romania | |
| Colombia | Kuwait | Russia | |
| Czech Republic | Latvia | Saudi Arabia |
Mexico’s Dividend Withholding Tax Under Mexico-USA Tax Treaty
In this section, we will analyze dividend payments specifically to American residents. Sadly, we cannot analyze every tax treaty Mexico has, but all of these treaties are based on the OECD standards, so they don’t vary too much.
So let’s jump right into article 10, “Dividends,” which, as the name states, talks about dividends payment.
The first point in the article states the following.
1. Dividends paid by a company which is a resident of a Contracting State [Mexico] to a resident of the other Contracting State [USA] may be taxed in that other State [USA].
Great start, right? You don’t need to be a lawyer to understand that Americans can get their dividends taxed in their country. Let’s see what the second point states.
2. Such dividends may also be taxed in the Contracting State of which the company paying the dividends is a resident [Mexico], and according to the laws of that State. However, if the beneficial owner of the dividends is a resident of the other Contracting State [USA], […], the tax so charged shall not exceed:
- a) 5 percent of the gross amount of the dividend if the beneficial owner is a[n] [American] company which owns at least 10 percent of the voting stock of the [Mexican] company paying the dividends;
- b) 10 percent of the gross amount of the dividends in other cases.
This paragraph shall not affect the taxation of the company in respect of the profits out of which the dividends are paid.
So let’s analyze this point. It says that the dividends can be taxed in Mexico unless the beneficial owner, meaning the shareholder, is a resident of the US.
And, if the shareholder is a US resident and he is an American Company owning at least 10% of the stock in the Mexican company, then the tax will not exceed 5%. In all other cases, they would pay the regular 10%.
The last part says that the corporate tax, which goes on profits, has to be paid where the company is established, in this case, Mexico.
So, to summarize, if an American company owns more than 10% of a Mexican company’s stock, Mexico’s dividend withholding tax would be 5%. In all other cases, 10%.
So, is there a way for an American to get a Mexico dividend withholding tax of 0%?
The answer is yes, the treaty does allow for some specific cases. But it gets too complex to explain in this article. Please comment at the end if you wish for us to write an article about the tax treaty.
Conclusion
The highest effective rate a Mexican resident can pay for dividends in Mexico is 42%. This is the sum of the corporate tax rate, Mexico’s dividend withholding tax, and the personal income taxation of the individual shareholder.
Mexico has many tax treaties, and foreigners can leverage them to pay fewer taxes in Mexico.
