Last updated on July 28th, 2023 at 01:41 pm
Taxes in Mexico are a reality of starting operations or moving to the country. Like most everywhere else, you must pay business and personal taxes in Mexico. Foreigners often have many questions about this area, so we created this guide to simplify things.
This guide compiles different articles and tax calculators we have created. Hence, each section links to an in-depth article regarding that subject.
This article is structured as follows. First, we discuss the tax treaties Mexico has with other governments. These treaties may grant special benefits to citizens of that country in areas like dividend withholding taxes, royalties, and interest income. Secondly, we discuss what a permanent establishment is and who is obliged to pay taxes in Mexico. Thirdly, we discuss the different types of business taxes companies in Mexico must pay. Fourthly, besides paying business taxes, foreigners with a tax residency in Mexico must pay personal taxes, so we look at how that works. And lastly, we discuss other taxes that do not fit into those categories.
So let us get to it.
Table of Contents
Taxes In Mexico: Tax Treaties With Foreign Governments
Mexico has celebrated tax treaties to avoid double taxation with around 59 countries. Some have preferential rates for dividends, 0% and 5%, for example. This rate can be applied if specific 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 |
Legal Reach Of Mexico’s Tax Treaties
To understand this, knowing a little about the Mexican Laws Hierarchy is essential.
The international treaties Mexico is subscribed to have the same hierarchical order as the constitution. This is stated in Article 133 of the Mexican Constitution. Therefore, what is stated in an international treaty has a higher rank than in the Federal Income Tax Law.
The treaties Mexico is subscribed to are generally based on the Organization for Economic Cooperation and Development (OECD) model. Although a few are based on the United Nations (UN) model.
In 2021 Mexico’s Miscellaneous Tax Resolution rule 2.1.35 accepted the commentaries made to the OECD model as a source of interpretation of these treaties. So, those commentaries are the easiest way to understand these treaties.
Permanent Establishment: Mexico’s Power To Collect Taxes From Foreigners
Who has to pay taxes in Mexico? The legal concept of Permanent Establishment gives a country the power to tax the wealth generated in its territory. Most of the tax treaties signed by Mexico reference this concept. But let us start with what Mexican law states.
Article 5 of the OECD Model Convention discusses this concept. For countries with whom Mexico has not celebrated a tax treaty, Article 2 of the Mexican Income Tax Law states what is considered a permanent establishment according to Mexican legislation.
Why is it important? If you are deemed a permanent establishment in Mexico, you must pay taxes to the Mexican government.
Incorporating a subsidiary company in Mexico would NOT qualify as a permanent establishment since the company is a Mexican resident, and it will pay taxes in Mexico. So, the result is the same.
Let us look at some scenarios where foreigners qualify as permanent establishments in Mexico.
A Fixed Place Of Business
The first paragraph discusses a scenario where a foreigner, while residing abroad, carries out business activities or renders services in any location in Mexico.
For the purposes of this Convention, the term “permanent establishment” means a fixed place of business through which the business of an enterprise is wholly or partly carried on.
As you can tell, this only refers to physical presence, which is one of the key concepts when evaluating a permanent establishment. Then the second paragraph gives us a list of examples of PE.
The term “permanent establishment” includes especially:
- a place of management;
- a branch;
- an office;
- a factory;
- a workshop, and
- a mine, an oil or gas well, a quarry, or any other place of extraction of natural resources.
A branch office, for example, is a foreign company’s office in Mexico. As such, it is recognized by the Mexican government as a permanent establishment and granted its Federal Tax Payers Registry (RFC). Since the company is carrying out business activities by itself, as opposed to a subsidiary acting on its behalf, the foreign company is fully liable for all of its actions in Mexico.
Dependent and Independent Agents
Another scenario where a foreigner carrying out business activities in Mexico can be deemed a permanent establishment is by having a relationship with an agent. An agent can be a company or an individual; the law distinguishes between dependent and independent agents.
Dependent Agents
Suppose a foreigner (or foreign company) who resides outside of Mexico acts in the country through a Mexican resident (company or individual). In that case, the foreigner can be deemed a permanent establishment even if he has no presence in the country.
According to Article 2 of the Income Tax Law, for this to happen, the contracts the Mexican party signs must have the following characteristics:
- Be signed in the name and on behalf of the foreigner ;
- Provide for the alienation of property rights, or the granting of the temporary use or enjoyment of an asset owned by the resident abroad or over which he/she has the right of temporary use or enjoyment; or
- Obliges the resident abroad to provide a service.
To summarize, if you work with a Mexican agent who signs contracts on your behalf with these characteristics, you must pay a portion of your taxes in Mexico.
Independent Agents
Independent agents are also recognized. Independent agents are businesses or individuals residing in Mexico who perform business acts on behalf of a foreigner with the following characteristics.
- It has inventories, with which it makes deliveries on behalf of the resident abroad.
- Assume the risks of the resident abroad.
- It acts according to the instructions or is controlled by the resident abroad.
- It exercises activities that economically correspond to the resident abroad.
- Receives his remuneration independently of the result of his activities (e.g., not as commission).
- Performs transactions with the foreign resident using different prices from those unrelated parties in comparable transactions would have used.
For example, if you are distributing goods through a Mexican person or company and they have to answer in case of failure, you would be deemed a permanent establishment and must pay taxes in Mexico.
Business Taxes In Mexico
The most common way for foreigners to start operations in Mexico is through a subsidiary. A subsidiary is a company that belongs to another company, usually referred to as the parent company. And the most common legal entities are the Sociedad Anonima, the equivalent of an American Corporation, and the Sociedad de Responsabilidad Limitada, the equivalent of an American LLC. So let us look at how subsidiaries pay taxes in Mexico.
Corporate Tax In Mexico
Corporate tax is levied directly on the income of a company. Article 9 of the Mexican Income Tax Law states that Corporate Tax in Mexico is 30%. This rate is applied to all corporate entities. Companies pay Mexican corporate tax over income or profit, the same as everywhere else. According to the Mexican Financial Reporting Standards, companies in Mexico recognize revenue and expenses.
There is, though, a little difference in how tax returns are presented. In Mexico, companies must present monthly tax returns and annual tax returns. In the monthly tax returns, companies pay a provisional tax based on a theoretical profit using the former year’s profit coefficient (the percentage of profit the company obtained from its revenue). If you wish to understand how this works, we recommend you read our Corporate Tax In Mexico article.
Taxes In Mexico: Value-Added Tax
Article 1 of the Mexican Value-Added Tax Law states that the tax is levied at 16%, although there are a few exceptions where products or services can have a VAT rate of 8%, 0%, or even be exempt.
| Scenario | Rate |
|---|---|
|
General Rate
|
16%
|
|
Border Regions (North & South)
|
8%
|
|
0% VAT Products & Services
|
0%
|
|
Exempt
|
|
VAT in Mexico is based on cash flow. This means you only pay VAT on the collected revenue. Companies must present a VAT declaration every month before the 17th of the following month.
In some instances, Mexican companies must withhold VAT from their suppliers. This applies to land transportation, independent services rendered by individuals, commissions paid to individuals, and goods leased from individuals.
Mexican companies may ask for a refund if they have creditable VAT at the end of the year. Some foreign trade incentive programs, like the IMMEX program for maquiladoras, can accelerate this process.
If you wish to understand VAT better, we recommend you read our article Mexico VAT Tax: How IVA Works. And, if you would like to get legal, you can read an English version of Mexico’s VAT law here.
Mexican Excise Tax
Excise tax means a tax only on specific products, usually, the ones that are bad for your health or the ones the government wants to disincentivize. Mexico’s excise tax, like VAT, is indirect, meaning the consumer pays it. And it is also ad-valorem, which means it is added to the price of the product or service.
The following are some of the products with their corresponding tax.
- Beer is taxed at 26.5%
- Spirits are taxed at 53%
- Wine is taxed at 26.5%
- Cigarettes and tobacco are taxed at 160%
- Energy drinks are taxed at 25%
- Flavored drinks are taxed at $1.3036 per liter
- Pesticides are taxed at 6% – 9% depending on the toxicity
- Gasoline (varies depending on octanes)
- Gambling & raffles are taxed at 30%
The commissions for selling these products are also levied with an excise tax.
Mexican Payroll Taxes
Payroll tax in Mexico, just like it sounds, is levied directly on a company’s payroll. This is a state-level tax, which varies depending on the state the company is registered in. You can see a full list in the following table.
| State | Tax Rate | State | Tax Rate |
|---|---|---|---|
| Aguascalientes | 3% | Morelos | 2% |
| Northern Baja California | 4.25% | Nayarit | 3% |
| Southern Baja California | 4% | Nuevo Leon | 3% |
| Campeche | 3% | Oaxaca | 3% |
| Coahuila | 3% | Puebla | 3% |
| Colima | 2% | Querétaro | 3% |
| Chiapas | 2% | Quintana Ro | 4% |
| Chihuahua | 3% | San Luis Potosi | 3% |
| Mexico City | 3% | Sinaloa | 2.4 a 3% |
| Durango | 3% | Sonora | 3% |
| Guerrero | 2% | Tabasco | 3% |
| Guanajuato | 3% | Tamaulipas | 3% |
| Hidalgo | 3% | Tlaxcala | 3% |
| Jalisco | 3% | Veracruz | 3% |
| Mexico State | 3% | Yucatán | 3% |
| Michoacán | 3% | Zacatecas | 3% |
Social Security Contributions
Every worker in Mexico has the right to social security. Employers and employees need to contribute to the Mexican Institute of Social Security.
First, there is a premium that the employer must pay related to the level of risk involved in the work. There are five levels of risk.
| Risk Category | Premium |
|---|---|
|
Class I
|
0.54355
|
|
Class II
|
1.13065
|
|
Class III
|
2.59840
|
|
Class IV
|
4.65325
|
|
Class V
|
7.58875
|
Besides the risk premium, there are a series of social security-related concepts to which employers and employees must contribute. You can see these in the following table.
| Concept | Type of Benefit | Company | Employee | Calculation Base |
|---|---|---|---|---|
| Work Risk | In-Kind and Money | Premium according to Risk Category | 0.00% | Base Listed Salary |
| Disease And Maternity Insurance | In-Kind | 20.40 % | 0.00 % | Monthly UMA |
| 1.10 % | 0.40 % | Difference between BLS and 3 times UMA | ||
| Medical Expenses for Pensioners And Their Beneficiaries. | 1.05 % | 0.375 % | Base Listed Salary | |
| In Money | 0.70 % | 0.25 % | Base Listed Salary | |
| Disablement and Life Insurance | In-Kind & Money | 1.75 % | 0.625 % | Base Listed Salary |
| Retirement; Advanced Age Severance and Old Age | Old Age | 2.00 % | 0.00 % | Base Listed Salary |
| Advanced Age Severance | 3.150 % - 11.88% | 1.125 % | Base Listed Salary | |
| Nursery and Social Benefits | In-Kind | 1.00 % | 0.00 % | Base Listed Salary |
| INFONAVIT | In Money | 5.00% | 0.00% | Base Listed salary |
If you wish to understand what these concepts mean and how to calculate social security for your Mexican company, we recommend you read our Social Security In Mexico: The Whole Picture article. We have also created a Mexican social security calculator to do the heavy lifting for you.
Employee’s Withholding Tax
Although it is a tax paid by the employee, Mexican companies have the duty of withholding the income tax from their employees and paying it to the government. This is stated in Article 96 of Mexico’s Income Tax Law. The payments are done every month and are credited against the employee’s annual tax payment. For employees making less than $7,383 pesos, the government grants a subsidy on the income tax.
If you wish to understand how to calculate this tax, we recommend you read our Mexican Withholding Tax article. Also, we created a Withholding Tax Calculator so you can easily calculate your employees’ withholding tax in Mexico.
Dividend Withholding Tax
Dividends in Mexico are taxed at the corporate level when the company has a profit. Then when that profit is distributed as a dividend, it is taxed at the individual level.
A 10% tax is levied on dividends withheld by Mexican companies to resident and non-resident shareholders.
If the payment is made to the resident of a country with which Mexico has signed a tax treaty, this amount may be reduced or even be 0%.
Individual Taxes In Mexico
After starting a business in Mexico, some of our clients decide to come and live here. Some send an expatriate to manage the business and oversee the operation. Be it as it may, if a foreigner has tax residency here, he must pay taxes in Mexico. So let us take a look at what constitutes a tax residency.
Residency For Taxes In Mexico
Article 90 of the Mexican Income Tax Law states that individuals living (residing) in Mexico must pay income tax in the country. Furthermore, individuals living abroad and performing profitable activities or rendering independent services in the country through a permanent establishment need to pay the attributable part.
Article 9 of the Federal Fiscal Code is more specific; it states what a resident is for tax purposes.
- You are a tax resident if you have a home in Mexico or your “center of vital interests” is here.
What is a center of vital interests?
Well, the law states that:
- If more than 50% of your annual income comes from a Mexican “source of wealth,” your center of vital interests is here.
- If your main center of activities is in Mexico, your center of vital interests is here.
Income Tax For Individuals In Mexico
| Income Level | Lower Limit | Higher Limit | Fixed Fee | Surplus Tax Rate |
|---|---|---|---|---|
| I | $0.01 | $746.04 | $0.00 | 1.92% |
| II | $746.05 | $6,332.05 | $14.32 | 6.40% |
| III | $6,332.06 | $11,128.01 | $371.83 | 10.88% |
| IV | $11,128.02 | $12,935.82 | $893.63 | 16.00% |
| V | $12,935.83 | $15,487.71 | $1,182.88 | 17.92% |
| VI | $15,487.72 | $31,236.49 | $1,640.18 | 21.36% |
| VII | $31,236.50 | $49,233.00 | $5,004.12 | 23.52% |
| VIII | $49,233.01 | $93,993.90 | $9,236.89 | 30.00% |
| IX | $93,993.91 | $125,325.20 | $22,665.17 | 32.00% |
| X | $125,325.21 | $375,975.61 | $32,691.18 | 34.00% |
| XI | $375,975.62 | Onwards | $117,912.32 | 35.00% |
How do you calculate it?
- Firstly, check where your level of income ranks (it should lie between the lower limit and the higher limit).
- Secondly, subtract the lower limit from your income. The difference obtained as a result is called a surplus.
- Thirdly, apply the income level tax to the surplus. As a result, you obtain what we call surplus taxes.
- Lastly, you add the fixed fee to the surplus taxes according to the income level.
Or, you can download our Mexican Personal Income Tax Calculator and easily calculate it.
Other Taxes In Mexico
Profit Sharing In Mexico
It is not exactly a tax but something you must consider when starting a business in Mexico. Mexican companies must share 10% of their annual profits with their employees.
Inheritance Taxes In Mexico
We have great news for you; until today, Mexico has not imposed a tax on inheritances. However, you must pay the property transfer tax if you inherit a property.
Property Transfer Taxes In Mexico
You must pay the local property transfer tax when buying or inheriting property in Mexico. This tax is levied directly on the municipal land registry value of the property.
This is a municipal-level tax, which varies according to the property’s location. The tax may range from 2%-5%, and the Notary Public must collect and pass it to the government.
Annual Property Tax
You must pay an annual tax if you own property or land in Mexico. This tax is also paid at a municipal level. This tax is not high (around 1%), and you can get a discount for paying it on time.
Conclusion
Taxes in Mexico are a reality for foreigners doing business in the country. It is not hard to understand this in theory, but in practice is a whole lot different. The Mexican tax system is very complex and changes every year through the Miscelanea Fiscal, the tax authority’s interpretation of the law, which becomes law.
If you wish your Mexican operation to be fully compliant and pay taxes most efficiently, contact one of our account executives. They will be happy to guide you.
