Last updated on September 14th, 2023 at 08:56 am
Profit sharing in Mexico is exactly what it sounds like; a mandatory sharing of 10% of a company’s profits with its employees. If you plan to start a business in Mexico, consider this. Even though this is not strictly part of the business taxes in Mexico, it is an expense you must consider.
By now, you must be thinking, “well, I probably should outsource most of my tasks; this way, I can keep my payroll low and avoid paying profit sharing.” Sadly, thousands of companies thought that same thing.
Companies used outsourcing widely in Mexico, to the point of abusing it. As you can imagine, companies used to outsource their entire payroll to other companies. And the owners of these other companies manipulated them not to have profits. Statistics show that profit sharing nationwide was 2.8% of the aggregated profits before Mexico’s outsourcing reform. It should be 10%.
As a result, employees weren’t able to exercise their right to profit-sharing, nor were the companies fulfilling their obligation to share it.
Mexico’s Outsourcing Reform
In response, in 2021, the government regulated outsourcing and limited it to specialized services. This means that if you are a chair manufacturer, you cannot outsource carpenters because that’s what you do. You could, however, outsource security guards in your warehouse, for example.
Because of this, it is essential when incorporating a company in Mexico to draft a well-thought company’s purpose. If you make it too broad, you wouldn’t be able to outsource anything. If you make it too specific, on the other hand, you could run into limitations.
Another change is that all the parties involved in outsourcing, i.e., any company offering outsourcing services or any company using them, must be registered at a national registry called Specialized Works & Services Providers Registry (REPSE for its name in Spanish).
Now, invoices from payments to providers of non-specialized outsourced services are not tax-deductible, and you cannot use the VAT charged as credit.
On the other hand, the government made a change on the employer’s behalf. Starting in May 2022, the Mexican government limited profit sharing. Now, employees can get a share of profits equal to a maximum of 3 months of their salary or the average of the profits he has received in the last three years. Whatever is most favorable to him.
The Future Of Profit Sharing In Mexico
As you can notice, the government wants you to share your profits with your employees. Although it seems like it is our national sport to avoid it, the fines have gotten severe. There will always be people trying to find loopholes to avoid paying taxes, but at Start-Ops, we believe that with good planning, you can have a very lucrative business in Mexico while being fully compliant. Get in touch with us if you still have doubts after this article. We want to see you succeed.
We created this article to give foreigners starting operations an insight into what profit sharing in Mexico is all about and how to calculate it.
So let’s get to it.
Overview of Profit Sharing in Mexico
We can trace profit sharing in Mexico back to Mexico’s 1917 Political Constitution, which marked the end of the Mexican Revolution. There were many reasons for the revolution, but the horrible labor conditions were one of the main ones. The Mexican revolution resulted in a coup against Porfirio Diaz. He was a dictator who lasted almost 35 years in power. In the end, we exiled him from Mexico. This left us kind of scared; we don’t allow the reelection of our presidents ever since.
A funny thing was happening back then. Try to imagine the context of how the economy worked back then. Agriculture and trade were the only things moving the economy. So agricultural land was the best asset you could have. And, coincidently, rich people owned it.
This gave place to a system of large estates owned by wealthy people where people worked doing hard agricultural labor for a lousy salary. Back then, working days were 10-16 hours, so as you can imagine, workers got thirsty and hungry. Plus, they needed to buy food for their families too. So the Patron (Boss) established food stores for the workers.
Workers’ salaries were lousy, and store prices were high. So workers usually did not have enough money to purchase what they needed, but they had access to credit. This led to a vicious loop where the worker’s debt was impossible to pay with the salary they earned, and he couldn’t resign because he owed a lot of money.
Many workers died without paying their debt in full. But not even death was a relief back then; before the revolution, debt could be inherited. So if the worker died, his family was forced to start working on the farm to continue paying installments.
There is a song about this called El Barzón that dates back to that era. A Barzón is a ring that attaches a farm plow to a couple of steers (castrated bulls). The song tells the story, from the perspective of a farm worker, of a hard day’s work at the farm. Before going to work, it looked like it was going to rain, so his wife warned him to cover up and not die because she didn’t want to inherit the debt.
At the farm, while working, his barzón broke, and the steers kept going, which messed up his work. When he finishes his workday, he goes to his Patron (Boss) to get paid, but he hands him a bill for the food he has bought on credit. After doing the math, he still owes the estate money, so the Patron tells him to get to work to continue paying installments. When he finally gets home, he tells his wife what happened, and she gives him a hard time.
Why am I telling you about this song in a profit-sharing article? The piece embodies the socioeconomic context that led to a revolution. Mexican lawmakers’ decision in 1917 to make profit sharing mandatory for companies was born with this context in mind. And until this day, this ring used in agriculture has become a symbol of protesting. To this day, there are labor unions and civil associations called Barzón. Their mission is to protect Mexican workers from new forms of injustice. All of these social movements are named after this song. And, to be honest, I think the song’s cool. The song has a comic tone, a self-deprecating humor characteristic of Mexican culture.
Profit Sharing In Mexico: A Legal Overview
Now, let us look at what Mexican lawmakers wrote about profit sharing. In Title Six of our constitution, called On Labor And Social Security, the authors made their best effort to stipulate the entire framework for labor & social security in the country. That’s a lot of ground to cover, so we have laws stemming from it; Labor Law and Social Security Law.
Title Six has just one article; Article 123. Naturally, it is extensive. The minimum wage in Mexico, for example, is specified there. For the purpose of this article, I will discuss only the critical part.
Section A. – IX. of Article 123 of the Mexican Constitution states the following.
Workers shall have the right to participate in the profits of the companies, regulated by the following rules:
- A National Commission, made up of representatives of the workers, the employers and of the Government, shall fix the percentage of profits to be distributed among the workers;
- The National Commission shall carry out the necessary and appropriate investigations and studies to know the general conditions of the national economy. It shall also take into consideration the need for industrial development promotion of the country, the reasonable interest rate to be earned on capital and the
and the needs for capital expenditure;
- The same Commission may revise the percentage fixed when new studies and researches to justify them;
- The Law may exempt from the obligation to distribute profits to newly created companies for a determined number of years and for exploration works and other activities when justified by their nature and particular conditions;
- In order to determine the amount of the profits of each company, the taxable income will be taken as a base in accordance with the provisions of the Income Tax Law. Workers may file for objections before the tax authority, according to the process stipulated by the law;
- The right of the workers to participate in the profits does not imply the power to intervene in the management or administration of the companies.
We will focus on these rules in this article and all they concern with.
Who Sets The Profit-Sharing Rate In Mexico?
The National Commission For The Participation Of Workers In Company’s Profits (NCPWCP) is the body in charge of setting the rate for profit sharing in Mexico. They take factors like economic projections and inflation rate forecasts into account to do this. The last time the NCPWCP got together to determine the rate, they decided to keep it at 10%.
Companies That Must Comply With Profit-Sharing In Mexico
In general, every company in Mexico must share a portion of its profits with its employees. However, the law states a couple of scenarios exempt from paying.
- Newly incorporated entities during the first year of operation. This extends to two years if their purpose is to design and manufacture a new product.
- New mining companies during their exploration period.
- Organizations providing social and humanitarian assistance.
- Companies with a lower capital stock than the industries’ benchmark of Mexico’s Secretariat of Labor and Social Welfare.
- Companies that make less than MX $300K.
Employees Who Get a Share Of Profits In Mexico
It’s easier to understand which employees are NOT entitled to this benefit.
- Directors, administrators, and general managers.
- Temporary workers who have worked less than 60 days of a given financial year.
- Professionals hired under a services contract.
Everybody else should get their share of the profits.
Limits to Profit Sharing
- Employees cannot receive more than three months of salary or the average profits they received from the company in the last three years. Whatever is higher.
- Housemaids are not entitled to profit sharing.
- Temporary workers are not entitled to profit sharing unless they have worked sixty days or more in the company in a given year.
Mexican Labor Law defines a trusted employee as having more responsibility than the rest. This distinction gives them a different set of rights and obligations. Trusted employees cannot form unions, for example. A trusted employee cannot represent the workers at the Mixed Commission For Profit Sharing, which we discuss in the next chapter.
These types of employees are entitled to profit sharing; however, the limit as a function of their salary is slightly more complex. If a trusted employee’s salary is higher than the highest unionized worker (or non-unionized if there’s no union), The salary used for the computation of his profit-sharing limit will be that of the unionized worker plus 20%. The limit would be this salary times three.
Mixed Commission For Profit Sharing
Article 132 of the Mexican Federal Labor Law, Section XXVIII, states that every Mexican company must create a Mixed Commission for Profit Sharing. Workers and employer designate their respective representatives for this Commission.
Companies should create the Mixed Profit Sharing Commission within ten days from when the employer delivers the payroll tax returns for the year. The employer will report to the employees who shall represent the company, and the employees, in turn, will report to the employer who shall represent them.
Companies should integrate the Commission with equal representatives of the workers and the company.
Trusted employees may not be representatives of the workers of the Mixed Commission, as provided in Article 183 of the Federal Labor Law.
Duties Of The Mixed Commission For Profit Sharing
- Create the profit-sharing project approved by the members of the Commission.
- To oversee that the profits are paid according to the approved profit-sharing project.
- Tell former employees the amount corresponding to them and the date they can collect their profits.
- Inform the workers about the right to disagree concerning their participation and the term they have to do so.
- Receive and resolve the disagreements presented by workers regarding their distribution.
How To Calculate Profit Sharing In Mexico
The basis for profit-sharing calculation is similar to Mexico’s corporate income tax basis, with two exceptions. Mexican companies can deduct the previous year’s paid profits from the current year’s revenue to lower their corporate income tax basis. And Mexican companies can deduct from their revenue a part of the benefits paid to employees that did not generate income tax for the employee. You calculate the deductible amount as follows.
- 53% is deductible if, in the previous year, this amount was the same or lower.
- 47% is deductible if the previous year was higher (meaning this year, the company paid less).
Essentially, the government doesn’t want you to cut off on employee benefits, so this 6% spread is an incentive for that.
Now, let’s jump into calculating profit sharing.
Mexican PTU Calculation
Suppose a company with $10 million in revenue and four employees. This company has annual expenses of $8 million, paid tax-exempt benefits to its workers equal to $500,000, and paid $250,000 for profit sharing in the previous year.
Let’s see what this company’s corporate income tax and profit-sharing basis look like for this year.
- Annual revenue: $10 MM
- Annual expenses: $8 MM
- Exempt benefits paid to workers: $500 K
- Previous year profit-sharing paid: $250,000
As you can see, the calculation of taxable income for profit-sharing is slightly different than for income tax.
In this hypothetical case, the company profits to share amounts to $150,000, i.e., 10% of its taxable income for profit-sharing. This is the maximum amount of profit it could pay. But remember, there are limits to how much an employee can get. First, let’s see how much they would get if the limit were not there.
To calculate the proportional amount of PTU of each employee, you must follow this procedure. You divide the distributable profit into two equal parts. You will distribute the first part based on the days worked by each employee and the second part according to each employee’s salary. Here’s how it works.
First, let’s take a look at our payroll.
Let’s do part one first; distribution by work days.
- We divide 50% of our distributable profit ($150,000) by the aggregated days worked (1,270). This will give us a daily value factor. $75,000 / $1,270 = $59.05
- You multiply the daily value factor (0.1008) times each employee’s annual salary. This gives you their proportional profits.
Now, let’s see the second part; distribution by salary.
- We divide 50% of our distributable profit ($150,000) by the aggregated annual salaries ($744,000). This will give us a daily value factor. $75,000 / $744,000 = $0.1008
- You multiply the daily value factor (0.1008) times each employee’s annual salary. This gives you their proportional profits.
All you need to do now is add the two halves for each employee.
Let’s compare this with the profit-sharing limits to see if it favors the company.
*This is a made-up example, so we don’t have a 3-year profit-sharing average. The higher amount of these two is the limit to PTU.
In this case, the company will distribute $141,372. Before the new limits, the company would have shared $150,000. A difference of less than $10,000 may not seem like much, but it can substantially increase in large companies.
Profit sharing in Mexico is a constitutional (almost) right every employee has in Mexico and an obligation (almost) every company has. You can find the exceptions in this article. The current PTU rate in Mexico is 10%; the National Commission For The Participation Of Workers In Company’s Profits sets this rate. To do it, they analyze socioeconomic factors.
The right to profit sharing is written in the Mexican Political Constitution, the highest-order law in Mexico. This constitution was written in 1917 after the Mexican revolution, which happened to a large degree because of the labor conditions of the moment.
In recent times, Mexico had a problem with outsourcing. An issue related to a large degree with profit-sharing where employees were not receiving this benefit. In response, in 2021, the Mexican government introduced an outsourcing reform limiting this activity. This reform seeks to help companies by limiting the amount of profits workers can get.
Every Mexican company must create a Mixed Commission for Profit Sharing. Representatives of the company and the workers form part of this commission. Its mission is to calculate the company’s profits to distribute amongst the workers. This same Commission is responsible for attending to workers’ objections concerning profit sharing.
You divide profit sharing calculation into two equal parts. One part assigns profits as a function of the employees’ days worked, and the other part as a function of their salary. Once you finish this calculation, you should compare it with the employees’ limits to see which amount benefits you more.
I hope you enjoyed this article, and please don’t forget to share it.
If you still have questions about profit sharing in Mexico, leave them in the comments below.