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Individuals taking up employment in Mexico will be subject to a broad set of tax rules. The Mexican income tax liability depends on whether an individual is a resident in Mexico for tax purposes or a foreign resident for tax purposes. This determination is made based on the specific facts and circumstances of that individual. The following is an overview of the Mexican tax system for employees who will be working in Mexico.

Please contact Salles Sainz - Grant Thornton, S.C. a member firm of Grant Thornton International to discuss your specific situation

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Facts and figures
Pre arrival procedures

Foreign individuals that render services in Mexican territory to Mexican companies (expatriates) are subject to the fulfillment of different requirements on the legal and immigration field, as well as on the tax field.

In this sense, following please find some issues that should be bear in mind when assigning an expatriate into Mexico:

  • Verify that the Mexican company, in which the expatriate’s services would be rendered, is registered before the Mexican immigration authorities.
  • Obtain the working visa for the expatriate assigned into Mexico and/or, if the case, carry out the renewal or exchange procedure of such visa.
  • Verify with professionals specialized in legal and labor matters the existence of potential legal and labor contingencies for the companies involved in the expatriation; as well as obtaining advice about the issuance of contracts and agreements that diminish or eliminate such potential contingencies, if any.
  • Determination of the expatriate tax residence status (tax resident or not tax resident), as well as the applicable Mexican tax regime. The foregoing in accordance with the Mexican tax legislation and the international tax conventions signed between the Mexican and the foreign governments.
Tax year

The Mexican tax year is from 1 January to 31 December.

Tax returns and compliance

Individuals who are not tax residents in Mexico, must determine, every month, the income tax on the income they obtained from a source of wealth in Mexico, and file their definitive monthly income tax return through the Mexican tax authority website. On the other side, they are not required to file an annual tax return.

Notwithstanding, if the expatriate is on the payroll of the company in Mexico, the latter would be obliged to withhold the tax.

Additionally, individuals must obtain their ID tax number and password or electronic firm (e-firma) to access the website.

Due dates and extensions

In the month of April, individuals who are tax residents in Mexico must compute the annual income tax for the previous year. The monthly income tax must be paid by the 17th day of the immediately following month.

The definitive monthly income tax return for individuals who are non-tax residents of Mexico must be paid within 15 days after the income is earned.

Whether or not you are a tax resident in Mexico, there are no additional deadlines for the payment of the tax, if the payment is made after the deadlines mentioned above, updates and surcharges must be paid in addition to the tax.

Income tax rates

Tax residents in Mexico are subject to regular income tax brackets

Lower limit
(Mexican pesos) $

Upper limit
(Mexican pesos) $
Flat rate $ Percentage to be applied on the excess of the lower limit %
0.01 7,735.00 - 1.92
7,735.01 65,651.07 148.51 6.40
65,651.08 115,375.90 3,855.14 10.88
115,375.91 134,119.41 9,265.20 16.00
134,119.42 160,577.65 12,264.16 17.92
160,577.66 323,862.00 17,005.47 21.36
323,862.01 510,451.00 51,883.01 23.52
510,451.01 974,535.03 95,768.74 30.00
974,535.04 1,299,380.04 234,993.95 32.00
1,299,380.05 3,898,140.12 338,944.34 34.00
3,898,140.13 Forward 1,222,522.76 35.00

Non-tax resident employees working in Mexico for long periods (more than 183 days, consecutive or not, within a 12-month period, e.g. border-city employees) shall pay income tax by applying the following rates to the income obtained:

  • The first $125,900.00 Mexican pesos obtained in the calendar year in question will be exempt.
  • The 15% tax rate will be applied on the income obtained in the calendar year over the amount indicated in the preceding section and up to $1,000,000.00 Mexican pesos
  • The 30% tax rate will be applied to the income received in the calendar year for income of more than $1,000,000.00 Mexican pesos.

 

Sample income tax calculation

Suppose a resident of Mexico earns $585,980.75 Mexican pesos in a year.

Taxable income 585,980.75
(-) Lower limit 510,451.01
(=) Lower limit surplus 75,529.74
(*) Surplus tax rate 30%
(=) Marginal income tax 22,658.92
(+) Fixed quote 95,768.74
(=)Computed income tax 118,427.66

Suppose a non-resident of Mexico earns in one year $585,980.75 Mexican pesos.

Taxable income 585,980.75
(-) Annual exemption 125,900.00
(=) Accumulative taxable income - difference 460,080.75
(*) Tax rate 15%
(=)Computed income tax 69,012.11

 

Basis of taxation
Charge to tax

Foreign individuals considered as tax residents in Mexico are taxed according to the same rules that apply to national residents. They pay taxes on all their income regardless the location of its source of wealth. They are taxed at graduated rates on its worldwide income (worldwide basis).

Foreigners considered as non-residents in Mexico are taxed on the income originated in Mexican territory when obtained from a permanent establishment located in Mexico or on income from a source of wealth located in Mexican territory.

Residence

In order to determine if an individual has a tax residence in Mexico, a series of factors should be evaluated, including whether the individual has a place of living within Mexican territory, a habitual domicile in Mexico, holds a Mexican nationality, the existence of a tax convention between Mexico and the individual’s country of origin, or whether the individual has substantial economic ties to a country other than Mexico, among others. It is advisable to do a case-by-case analysis for each individual´s circumstances, in order to determine the individual’s tax residence.

Income from employment

Generally, all wage income (in cash or in-kind) is taxable in Mexico for both residents and non-residents. Please note the following list is not meant to be all-inclusive: base salary, bonus, cost of living allowance, housing allowance, education allowance for children, home leave reimbursements, reimbursement of host/home country taxes, personal use of company car and moving allowances. Once an individual resides in Mexico, all compensation received is taxable, regardless of the source.

Stock options and equity-based compensation

Stock options and equity-bases compensations are considered as wage for Mexican tax purposes, and in case the expatriate is on the payroll of the Mexican company, the latter must be responsible for withholding the corresponding tax.

Source of employment

The source of employment is generally determined by the place where services are performed. However, some fringe benefits attached to compensation such as housing, education, certain relocation costs and local transportation are sourced purely on a geographical basis.

Benefits in kind

Generally, an individual is liable to pay tax on any benefits in kind received, e.g.: car, housing, insurance, fuel, cell phone, toll highway, inter alia.

Expatriate concessions

Depending on the length and terms of the Mexican assignment, tax relief may be available under the provisions of a bilateral tax treaty between Mexico and the country of origin. Generally, treaty relief for compensation (income wages) is only available if the individual is not present in Mexico for more than 183 days during that tax year and the compensation is paid and borne by an offshore (ie a non-MX entity). It is critical that the treaty provisions of each particular country be examined.

Relief from double taxation

Mexico has an extensive income tax treaty network with 61 countries.

Relief for foreign taxes

Mexican tax residents may credit against income tax the income tax paid abroad on income from sources of wealth located abroad, provided that it is income for which they are obligated to pay the tax under the terms of the Mexican tax provisions.

When the creditable tax is within the limits established in the law and cannot be credited in whole or in part, it may be credited in the following ten years, until it is completely used up.

Deductions from taxable income

As a tax resident of Mexico, it is possible to reduce personal deductions against the income earned. Personal deductions are the expenses that taxpayers are entitled to deduct from their taxable income in the annual income tax return for the year. Some examples are: Medical, dental and hospital fees, clinical analyses and studies, funeral expenses, donations, real mortgage interest, complementary retirement contributions, purchase of prescription optical lenses, insurance premiums, children's tuition.

Non-residents, when making definitive payments and not being able to file an annual tax return, are not entitled to reduce personal deductions from their income.

Other taxes
Capital gains tax

Transfer of shares or securities that represent the ownership of property when the person who issued them is a resident of Mexico or when the book value of the shares or securities comes directly or indirectly in more than 50% from real estate located in the country, 25% of the income obtained is taxed without any deduction whatsoever.

If foreign residents have a representative in the country, and their income is not subject to a preferential tax regime, they may choose to apply 35% to the profit obtained, when the transaction is audited by a public accountant registered before the Mexican tax authorities.

Sale of a principle residence

Not applicable

Inheritance, estate, and gift taxes

Not applicable.

Investment income

Mexican tax provisions establish that foreign residents are obligated to pay income tax on income derived from a source of wealth located in Mexican territory. In this sense, it is necessary to identify when the source of wealth is considered to be in Mexico, since only when this is the case, the income tax withholding must be made, because if it is defined that there is no source of wealth in Mexican territory, the payment made abroad is not subject to income tax.

Income from sources of wealth in Mexico will be subject to income tax withholdings under the following items:

  • Dividends 10%
  • Interest 10%, 15% and 35%
  • Royalties 1%, 5%, 25% and 35%.

It is imperative to review each specific case, in conjunction with the tax treaties provisions to avoid double taxation.

Local taxes

There are no local taxes.

Real estate tax

Real estate (property) taxes are generally assessed at the local level and are paid on properties (land value and buildings) according to the number of meters and the zone where such properties are located, such tax is called property tax and is paid on a bimonthly basis.

Social security taxes / Superannuation

Employers that hire expatriates and as a result of which an employment relationship arises, the expatriates acquire the quality of being subject to the insurance before the IMSS (Mexican Social Security Institute), which is an institution that provides medical and hospital assistance, a public insurance in case of an occupational accident or general illness, disability, retirement, day care for the expatriate and its family, as well as an access to a housing loan from the INFONAVIT (Mexican federal institute for worker’s housing), after fulfilling certain requirements.

In these cases, social security laws guarantee minimum rights to expatriate as to any national workers.

Wealth tax

There is no wealth in México.

Other specific taxes

There are no other specific taxes.

Tax planning opportunities

There are no tax planning opportunities in Mexico.

For further information on expatriate tax services in Mexico please contact:

Monterrey office
Orlando Trujillo
E orlando.i.trujillo@mx.gt.com
T (52 55) 5424 6500
Querétaro Office
Pedro Zugarramurdi
E pedro.zugarramurdi@mx.gt.com
T (52 55) 54246500
Guadalajara Office
Mario Rizo
E mario.rizo@mx.gt.com
T (52 33) 38174480
Tijuana Office
Luis Fernando Acosta
E luis.f.acosta@mx.gt.com
T (664) 207-0050
Daniel Santiago
E daniel.santiago@mx.gt.com
T (52 33) 38174480
Ciudad Juárez Office
Daniel Santiago
E daniel.santiago@mx.gt.com
T (52 33) 38174480
Puerto Vallarta Office
Mario Rizo
E mario.rizo@mx.gt.com
T (52 322) 2241297
Puebla Office
Pedro Zugarramurdi
E pedro.zugarramurdi@mx.gt.com
T (52 55) 54246500