Mexico's tax system designed to benefit all citizens

Companies and individuals doing business in Mexico are subject to federal, state and local taxes. Federal taxes in Mexico include direct taxes (corporate and personal income) and indirect taxes, which comprises value-added tax (VAT), excise taxes and Customs duties. Property tax, real estate transfer tax and payroll taxes are the most significant categories among state and local taxes.

Tax Policies

The Mexican fiscal system has three components: revenue, expenditure and debt. Congress approves a federal revenue law on an annual basis, which generally includes a list of the federal taxes that will be imposed during the year as well as the revenue derived from other governmental bodies. Tax revenue, excluding that related to oil, represented approximately 12.6% of GDP in 2016. Total tax collection represented 17.44% during 2015, comparing negatively to the OECD average of approximately 34.27% of GDP.

During the last two years, the government has endeavoured to enhance tax revenue by reducing dependence on oil receipts. In 2016 oil revenue represented approximately 21% of Mexico’s total budget revenue. During the last decade, tax policy for direct taxes has focused on eliminating preferential or special tax treatment – including group tax consolidation, immediate depreciation and tax incentives for certain industries like the real estate and mining sectors – as well as limiting certain deductions related to fringe benefits granted to employees.

The VAT law has been modified to increase the tax base by decreasing the number of products and services subject to reduced rates. Currently, MXN0.75 ($0.05) of each collected peso is used for current expenditure rather than investment expenditure.

Tax Coordination

Based on the National Tax Coordination System, the states are prohibited from imposing certain taxes such as income tax and VAT in exchange for receiving a share of federal tax revenue. However, states and municipalities are permitted to impose certain local taxes, such as property tax, real estate transfer tax and payroll tax.

Paperless

Tax administrations have two main objectives with respect to e-commerce: the need to ensure that online transactions can be carried out safely, and being able to guarantee that the necessary controls are in place to maintain the flow of operations within the tax area. Mexico’s tax authority, the Tax Administration Service (Servicio de Administración Tributaria, SAT), has been taking steps to ensure that these objectives are achieved.

The SAT has made improvements to its processes, simplified tax compliance obligations and made the process more transparent. Some of the most relevant advances achieved by the SAT are electronic invoicing, reporting and reviewing; tax mailbox and electronic notifications; and the introduction of a single-window, paperless Customs mechanism.

Tax Announcement

A special commission announced on February 27, 2014 that the federal government was committed to not proposing any additional changes to the legal framework of the tax system until November 30, 2018. A “tax certainty agreement” – the first of its kind in the country – was signed by all branches and offices that are part of the federal government.

Principal Forms Of Business

The two legal forms most commonly used to incorporate a Mexican company are the variable capital limited liability stock corporation (Sociedad Anónima, SA) and the non-stock variable capital limited liability corporation (Sociedad de Responsabilidad Limitada, SRL).

Tax revenue, excluding that related to oil, represented approximately 12.6% of GDP in 2016 The liability of the partners/shareholders of such companies is limited to the extent of their capital contributions, and the company must be incorporated with at least two partners or shareholders, which can be either corporations or individuals.

The capital stock is divided into equity participation for an SRL and into shares for an SA. Participation in an SRL may only be transferred with the consent of the other partner(s), while stock in an SA can be freely transferred pursuant to the company’s by-laws. An SRL or SA can be managed by one or more managers or directors who need not be partners or shareholders of the company.

Resident Entities

The key factor in determining the applicable corporate income tax regime is residence. An entity is deemed a resident of Mexico for tax purposes if it is managed and controlled in Mexico. Resident entities are taxed on worldwide income. Taxable Income: Corporate tax is imposed on a company’s taxable income at a rate of 30%. Taxable revenue includes business and trading income, passive income and capital gains. Normal business expenses may be deducted in computing taxable income. Inflationary accounting for tax purposes is applicable to certain types of revenue and expenses.

Although not a tax, mandatory profit-sharing rules require an entity to distribute 10% of taxed profits to its employees no later than May of the year following the year in which the company generated the profits. Dividends: Dividends received by a Mexican resident company from another Mexican company are exempt from corporate tax. Dividends received from a foreign company are subject to corporate tax, but a credit for underlying corporate and withholding tax is generally available for foreign tax paid.

If dividends from a Mexican company are not paid from an account holding after-tax profits (Cuenta de Utilidad Fiscal Neta, CUFIN) the payer is required to pay tax. Capital gains & deductions: Mexican entities are not subject to special tax treatment on capital gains, and the use of capital losses is restricted in some cases. Business expenses are deductible if necessary for the taxpayer’s business operations and supported by relevant documentation. Certain items are non-deductible, including goodwill; a certain percentage of fringe benefits provided to employees; entertainment expenses; and other outlays not strictly needed for the business purposes of the company.

Mexico was one of the early adopters of principles relating to the OECD base erosion and profit-shifting initiative. Among the measures introduced were limits on the deduction of payments made to related parties in Mexico and abroad.

Dividends are not deductible by the distributing corporation or included in the gross income of the recipient, although they are included in the income base for calculating profit sharing. Thin capitalisation: Interest payments made by a Mexican resident company on a loan from a non-resident related party are non-deductible for income tax purposes to the extent the debt-to-equity ratio of the payer company exceeds 3:1.

Debts for investment in strategic business areas, or for the generation of electricity, are excluded from the thin capitalisation rules. Losses: Fiscal losses may be carried forward for 10 years, subject to applicable inflation adjustments. The carryback of losses is not permitted. Foreign tax credit: Foreign tax paid may be credited against Mexican tax on the same profits, but the credit is limited to the amount of Mexican tax payable on the foreign income. Transfer pricing: Rules and methods following the OECD guidelines and base erosion and profit-shifting recommendations apply to both cross-border and domestic transactions. Contemporaneous documentation must be prepared in these instances. Advance pricing agreements are available. Controlled foreign companies: Income from controlled entities is attributed to Mexican tax residents – including resident foreigners – when more than 20% of their income is passive income (broadly defined) that is taxed locally at a rate less than 75% of Mexico’s statutory rate.

Non-Resident Entities

Non-resident entities are taxed on Mexican-source income as defined under Mexican law. The key factor in determining the tax treatment of non-resident entities is whether or not they have a permanent establishment in Mexico.

A permanent establishment is any facility in which business activities are developed, in whole or in part, within Mexico’s borders. It includes company branches, agencies, offices, factories, installations, mines, quarries, or any other place of exploration or extraction of natural resources. It also includes construction or installation projects, maintenance or assembly activities on real property, or supervisory activities in connection therewith, when such activities last more than six months. Foreign-owned permanent establishments are taxed in the same manner as Mexican subsidiaries on the net income attributable to them.

Non-resident entities that do not have a permanent establishment in Mexico are taxed on certain types of Mexican-source income. Generally, the Mexican payer must withhold the gross payment made to a non-resident entity, although the withholding tax rate may be reduced under an applicable tax treaty. The current withholding tax rates levied on gross income are outlined as follows: Dividends: A company that distributes dividends to a non-resident must withhold a 10% tax, which is considered a final tax. The 10% rate may be reduced under an applicable tax treaty with the non-resident’s country. CUFIN balances as of December 31, 2013 are not subject to withholding tax when distributed in the future.

The 10% tax may be reduced for dividends paid to individuals residing in Mexico if profits generated in FY 2014, 2015 and 2016 are reinvested and distributed as from 2017. Interest: Any interest paid to a non-resident is subject to withholding tax at rates ranging from 4.9%, as with interest paid to a bank, to 35%. A 40% rate applies when interest payments are made to a related party located in a tax haven. Royalties: Royalties paid to a non-resident are subject to a withholding tax of 35% for patents and trademarks, or 25% for other kinds of royalties, unless the rate is reduced under a tax treaty. A 40% rate applies when royalties are paid to a related party located in a tax haven. The leasing of machinery and equipment is generally considered a royalty by the tax law. Technical service fees: Fees paid for technical assistance are subject to a 25% withholding tax unless the rate is reduced under a tax treaty. Other taxes: Other circumstances under which withholding tax may apply to non-residents include payments relating to immovable property, salaries, fees and capital gains.

Mexico Tax Treaties

Mexico has 55 income tax treaties in effect and has also concluded a number of tax information exchange agreements. To obtain benefits under one of Mexico’s tax treaties, the beneficiary must produce a tax residence certificate or a copy of its tax return filed for the most recent fiscal year. Any relevant conditions in the treaty must also be satisfied. The SAT may request proof that double taxation would, in fact, arise in the absence of treaty benefits by requiring an affidavit signed by the taxpayer’s legal representative.

Tax Incentives

undefined Research & development of technology: Taxpayers that conduct research and technological development will be granted a tax credit equal to 30% of incremental expenses with a maximum cap per taxpayer. The credit may be applied against income tax due in the year in which the credit is determined, with any excess available for carrying forward to the next 10 years. Other incentives: Accelerated rates of depreciation are available for investments made during FY 2016, 2017 and 2018 for taxpayers with revenue of at least MXN100m ($602,700). Investments must be related to the construction or expansion of transport infrastructure, or activities that relate to the treatment, processing or transport of oil, natural gas and petrochemicals. Other incentives are granted for national cinematographic and theatrical production, high-performance sports and electric vehicle power feeders. Incentives may also be available under a real estate investment trust (fideicomisos de inversión en bienes raíces , FIBRA) and under investment trusts for energy and infrastructure (fideicomisos de inversión en energía e infraestructura, FIBRA E).

Maquiladoras

undefined Purpose: The maquiladora regime (Industria Manufacturera, Maquiladora y de Servicios de Exportación, IMMEX) is designed to promote exports and encourage foreign investment in maquiladoras – factories that process, assemble or repair imported materials, parts and components into finished goods that are subsequently exported. Maquiladoras are typically owned by a foreign corporation with which the maquiladora contracts to produce semi-finished or finished goods for shipment to the foreign company. Key Qualification: Foreign investor must have a corporate presence in Mexico and may own up to 100% of a Mexican corporation. The foreign parent company provides most of the machinery and equipment required for the maquiladora activities, as well as the raw materials or the parts to be processed and/ or assembled.

These items are imported by the maquiladora but remain the property of the foreign company. Goods can be imported on a temporary basis and remain in Mexico for a limited period of time. The foreign principal company must be a resident of a country that has a tax treaty with Mexico. Benefits: VAT of 16% and excise tax are payable on the temporary import of materials and equipment by maquiladoras, although a maquiladora is not required to pay VAT or excise tax on imports when it has obtained certification from the SAT. If a maquiladora does not obtain such certification, the company alternatively may use a bond issued by a financial institution. There are also income tax benefits, which include an additional tax deduction equal to 47% of certain benefits provided to employees.

Also, the foreign principal company is protected from creating a permanent establishment in Mexico if its maquiladora complies with certain requirements such as special transfer pricing rules, namely safe harbour rules or advance pricing agreements.

Special Economic Zones

A law that became effective on June 2, 2016 created special economic zones (SEZs) in Mexico that offer tax, Customs duties, and administrative and regulatory benefits to companies setting up in the zones. Purpose: The SEZ regime is designed to stimulate growth, reduce poverty, facilitate the supply of basic services and attract investment to economically underdeveloped areas, mainly in the country’s southern states of Istmo Tehuantepec, Puerto Chiapas and Lázaro Cárdenas. Key qualifications: Investors may carry out activities such as manufacturing; agri-business; the processing, production and storage of raw materials and inputs; and scientific and technological innovation and development.

Support services for these activities may also be conducted in the zones, such as logistics, finance, technical services and any other services necessary to fulfil the objective of the law. The import of goods for the above purposes is also permitted. An SEZ may be established on either privately owned or state-owned real property. Benefits: Incentives and benefits will be set through a declaration issued by the executive branch. The benefits will be temporary – although they must be provided for at least eight years – and the amount of tax relief or reduction will be granted on a progressively decreasing scale.

VAT benefits will be granted for goods imported into and services carried out in the SEZs. In addition, Customs benefits may include expedited procedures; deferral of Customs duties until goods are removed from an SEZ; and a measure allowing companies to opt for the lowest Customs tariff available based on the duty applicable to the goods after they have undergone manufacturing, production or repair processes in an SEZ.

Oil & Gas Sector

Constitutional amendments and legislation introduced in 2013 and 2014 ended the state oil monopoly and opened the energy sector to private foreign and local investors for the first time since 1938. Beginning in August 2014, companies engaged in oil exploration and production are subject to a special tax regime as set out in the Hydrocarbons Revenue Law. The most significant features of the law are as follows:

• Each public bid for the blocks to be contracted for the exploration and extraction of hydrocarbons must comply with the fundamental principles in the Mexican constitution, the Hydrocarbons Law, the Hydrocarbons Revenue Law and the revised legal framework for the sector;

• Specific rates over the contractual price or operating revenue for the government take are derived from the contractual arrangements offered through a bidding process owing to significant differences in the risk and cost structure of different areas/ blocks with similar structures, following the general principles set out in the law;

• Exploration phase fees and royalties are imposed;

• The normal 10-year carryforward period for a company’s net operating losses is extended to 15 years for taxpayers that carry out activities in deepwater, offshore wells;

• Special depreciation rates apply to certain categories of an entity’s assets;

• A 0% VAT rate applies on hydrocarbons exploration and extraction activities to the extent the activities are carried out with the Mexican Oil Fund; and

• In addition to the consideration paid by a contractor to the Mexican federal government, the contractor must pay a monthly tax to the municipal and state governments for the exploration and extraction of hydrocarbons that will be used to pay for the environmental impact of activities. Rates are MXN1150 ($69.30) per sq km during the exploration phase and MXN6500 ($395) per sq km during the extraction phase.

Power Sector

Since the 1930s the Federal Commission of Electricity has dominated Mexico’s electricity sector by ensuring the generation, transmission and distribution of services to the entire country. Reforms carried out in the early 1990s opened the door to foreign and private investment in electricity generation in Mexico, but within certain limits. Now the sector has been further liberalised, and power generation is subject to free competition, with private companies allowed to participate in the generation and sale of electricity in the wholesale market. Mexican tax law contains some provisions specific to the power sector in order to incentivise the use of clean technology. Additionally, the SAT has issued an administrative rule to facilitate compliance with payment formalities regarding the use of land applicable to power projects.

Investment Vehicles: 

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Fibra E

This vehicle grants investors access to projects in the energy and infrastructure sectors under conditions similar to those applying under its real estate counterpart FIBRA, which is inspired by US real estate investment trusts. FIBRA E is available to both private and public companies with projects or stabilised assets that generate consistent cash flows, and aims to help companies continue to invest in new projects.

Further, certificates that operate as stock are issued, which allows investors to participate in Mexican energy infrastructure. The trust must distribute at least 95% of its taxable income and does not pay any corporate tax, since tax is withheld on payments made to the certificate holders.

Cerpi

Investment project certificates (certificados de proyectos de inversión, CerPIs) are focused on pension funds, insurance companies, and other domestic and foreign institutional investors.

CerPIs cover a wide range of projects in all productive sectors of the economy, but are especially popular for projects that are involved in the energy sector.

Ficap

Investment trusts for private equity ( fideicomiso de inversión de capital privado, FICAP) were created for investing in shares issued by Mexican companies that are not listed on the stock exchange at the time of investment, as well as providing financing to such companies.

Personal Income Tax

Residence is the key factor in determining the tax regime for Mexican personal income tax. An individual is considered a resident when he/she has a permanent home in Mexico. If an individual has a home in two countries, the key factor in determining residence is the location of his/her vital interests.

Mexican nationals, in principle, are considered tax residents, subject to the permanent home and/or vital-interests tests. Resident individuals: Mexican nationals are taxed on their worldwide income. Income is taxed, in part, under a schedular system, although some categories of income can be aggregated to determine taxable income. Profits derived from the carrying on of a trade or profession by an individual are generally taxed in the same way as profits derived by a company. A separate regime applies to interest earned by individuals.

Capital gains arising from the sale of publicly traded shares, including financial derivatives, are subject to a 10% tax on the gain. Deductions are granted for medical expenses and medical insurance; retirement annuities; and mortgage interest subject to certain restrictions and caps – typically an amount equal to the lower of MXN130,000 ($7840) or 15% of taxable income. Certain medical, dental and hospital expenses, however, are deductible without restriction. Personal allowances are available to the taxpayer and his/her spouse, children and dependents. Tax rates are progressive up to 35%. Non-resident individuals: Non-resident individuals are subject to tax on income derived from Mexican sources. The Mexican-source income of a non-resident is subject to withholding on a gross basis, applying the same withholding rates for payments made to non-resident entities without a permanent establishment in Mexico, for example, regarding dividends, interest and royalties.

Non-residents on a temporary assignment with firms or subsidiaries based in Mexico are exempt from income tax on the first MXN125,900 ($7590) of income earned in a 12-month period. They are taxed at 15% of income between MXN125,900 ($7590) and MXN1m ($60,300), and income in excess of MXN1m ($60,300) is taxed at 30%, with no deductions allowed.

Non-residents on a temporary assignment that are paid by non-resident foreign firms are exempt from income tax if the employee spends less than 183 days in Mexico in a 12-month period; the days do not need to be consecutive. Otherwise, the employee will be subject to tax.

Compliance

A tax year for both entities and individuals is the same as the calendar year. An advance electronic signature certificate must be available, electronic accounting records must be maintained, and the general ledger must be submitted to the SAT on a monthly basis.

Entities

undefined Consolidated Returns: Mexico’s tax consolidation system has been abolished and replaced by a tax integration regime, which allows a group to defer income tax for up to three years, taking into account only the profits and losses of entities in the group. Filing Requirements: Under the self-assessment regime, advance corporate tax is payable in 12 instalments. The annual tax return must be filed within the first three months of the following year, with no extensions available.

For VAT purposes, filing is due every month, within the first 17 days of the following month. For imports, VAT is based on the Customs value plus all tariffs. Information returns: Information returns must be filed detailing certain transactions. Taxpayers’ tax situation: Information relating to the taxpayer’s tax situation must be filed by June 30 of each year for Mexican entities with taxable income exceeding MXN644m ($38.8m), non-residents with a permanent establishment in Mexico, Mexican entities with related-party transactions, entities under the integration regime and state-owned entities. Tax audit report: An optional tax audit report may be filed for taxpayers with more than 300 employees, gross income exceeding MXN100m ($6m) or assets exceeding MXN79m ($4.8m). Reporting on transactions: Details on certain transactions such as transfer pricing adjustments, changes to the ownership structure, and company restructuring or reorganisation must be uploaded on a monthly basis to the SAT website. Disclosure requirements: Mexico has adopted country-by-country (CbC) reporting in accordance with the recommendations under the OECD’s base erosion and profit-shifting project. CbC reports for 2016 must be filed by December 31, 2017. Rulings: Taxpayers may petition the SAT for a ruling in connection with the interpretation of the tax aspects of actual transactions.

Individuals

Tax on employment income is withheld by the employer and remitted to the SAT. Income not subject to withholding is self-assessed; the individual must file a monthly tax return by the 17th of the following month. An annual tax return must be filed in April of the following year.

Vat

The standard VAT rate is 16%; VAT on imports is assessed on the Customs value of the import, plus the import duty.

A zero rate applies to exports and services used abroad if the services are contracted and paid for by a non-resident with a permanent establishment in Mexico. Some goods and activities are tax exempt.

Excise Tax

A special tax is levied on the sale of certain goods and the provision of certain services including alcoholic beverages and tobacco, beverages containing sugar, food with a high caloric density and fossil fuels other than natural gas.

Customs Duties & Free Trade

Customs duties must be paid on the import or export of goods. General import and export taxes are determined according to the tariff classification of the goods. A Customs processing fee is paid for utilising the Customs facilities, personnel and systems. An electronic pre-validation of approximately $16 per import document processed is also applied. Mexico has 11 free trade agreements with 46 countries and regions, 32 reciprocal investment promotion and protection agreements with 33 countries, and nine economic complementation and partial scope agreements. The main benefit of the trade agreements is the application of preferential rates on qualifying imports. The US is, to date, Mexico’s largest trading partner owing to its geographical proximity and the benefits under the North American Free Trade Agreement.

State & Local Taxes

Property taxes are levied by state and municipal authorities on the ownership of real property. Rates are deductible in calculating corporate tax liability. A rate between 2% and 5% is the tax that applies to the transfer of real estate. Payroll taxes range between 1% and 3% of salaries, being 3% in Mexico City.

Employment & Labour

undefined Profit sharing: While not a tax, mandatory profit-sharing rules require an entity to distribute 10% of taxed profits to its employees no later than May of the year following the year in which the profits were generated. Social security contributions: Programmes under the social security system cover work-related accidents and illness; non-occupational diseases and paid maternity leave; old age and various death benefits; and unemployment insurance.

The cost of the system is shared among employers, employees and the government. Employers generally bear most of the cost, with their share being approximately 20% to 30% of payroll, and employees make their contributions based on salary, subject to a ceiling of 25 times the daily minimum wage of the region. Pensions: Employers must contribute an amount equivalent to 2% of payroll to an employee retirement fund and 5% of the total payroll to a housing fund – which will be added to the retirement fund if not used for a housing credit – that, together, constitute a pension fund managed by private financial institutions. The usual retirement age in Mexico is between 65 and 70. Immigration: There are several types of legal immigration statuses a foreigner may hold in Mexico, and visa requirements may possibly apply to non-residents depending on the duration of time the individual will be staying in the country and his/her total income.