Mexico - Income Tax

Mexico - Income Tax

Taxation of international executives

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Tax returns and compliance

When are tax returns due? That is, what is the tax return due date?

30 April, with no extensions allowed.

What is the tax year-end?

31 December.

What are the compliance requirements for tax returns in Mexico?

Residents

Individuals should file a Mexican annual income tax return by 30 April of the following year on their worldwide income, except in the following cases.

  • When they receive only exempted income or income on which the income tax withheld or paid is considered final.
  • When they only receive wages and salaries amounting less than MXP400,000, provided they did not work for two or more employers simultaneously during the year and were employed at the end of the year. However, see the following condition. This exception does not apply when the employee receives salary payments derived from foreign sources or from entities with no withholding obligation.
  • Individuals obtaining a combined annual income of salary and interest income not exceeding MXP400,000, if and when the actual interest (interest versus inflation) does not exceed MXP100,000, are not obligated to file an annual tax return provided that the income tax on the actual interest has been withheld to them. In this case, the tax withheld is considered final. 

Those individuals who obtained total income amounting MXP500,000 or more during the tax year, including exempted income and income that paid final tax, are obliged to report in their annual tax return the travel expenses reimbursed by the employer, income on sale of principal residence (when the exemption applies), income from inheritances and legacies, as well as income received for prizes. Besides, all prizes, loans, and donations received in the tax year, that in aggregate or individually amount more than MXP600,000 in the tax year should also be reported.

Failure to comply with the earlier mentioned reporting requirements may result in the income being considered as taxable, even if originally such income was exempt or non-taxable.

The income tax is determined by applying a graduated scale with a maximum marginal tax rate of 35 percent for tax year 2016. This tax rate is reached at an annual income of MXP3,000,000.01 (monthly income of MXP250,000.01). Estimated tax payments and withholdings are credited to offset the final annual tax liability. The deadline to make the tax payments or remit the withholdings to the Mexican tax authorities is the 17th of the following month.

The maximum marginal tax rate is 35 percent for 2016.

Non-residents

Individuals considered non-residents are taxed on their Mexican-sourced income only and are not be subject to file a Mexican annual income tax return, as monthly tax payments/withholdings are considered as final or definitive.

Non-residents are allowed to have an exempt income on the first MXP125,900 wages earned, an income tax rate of 15 percent is applied when income exceeds MXP125,900 and 30 percent on income that exceeds MXP1,000,000 within a 12-month period. Individuals should accumulate the income received every month to determine the tax rate to be used to calculate the corresponding income tax.

Tax rates

What are the current income tax rates for residents and non-residents in Mexico?

Residents

Employers must make monthly income tax withholdings on compensation paid to their employees. Wage withholding is levied on a progressive scale as follows.

Income tax table for 2016

Taxable income bracket Fixed quote Tax rate on the excess over the inferior limit
Inferior limit (MXP) Upper limit (MXP) MXP Percent
0.01 496.07 0.00 1.92
496.08 4,210.41 9.52 6.40
4,210.42 7,399.42 247.23 10.88
7,399.43 8,601.5 594.24 16.00
8,601.51 10,298.35 786.55 17.92
10,298.36 20,770.29 1,090.62 21.36
20,770.3 32,736.83 3,327.42 23.52
32,736.84 62,500.00 6,141.95 30.00
62,500.01 83,333.33 15,070.90 32.00
83,333.34 250,000.00 21,737.57 34.00
250,000.01 Over 78,404.23 35.00

In the case of split payroll arrangements, the portion of the compensation received directly from abroad is subject to monthly personal income tax payments. That is to say, the individual is the one obligated to file monthly tax returns. It is important to mention that when the cost of the compensation paid from abroad is charged back to a Mexican entity, as salaries paid on behalf of the Mexican entity, such Mexican entity is obligated to withhold and remit Mexican income taxes.

Monthly tax payments are due on or before the 17th day of the month following in which the compensation was received, using the monthly graduated rate scales. In case the individual is obligated to file monthly personal returns, additional days are granted depending on the individual’s taxpayer ID number.

An employment subsidy may be applied against monthly withholdings and the annual tax liability. Employees with a monthly salary income more than MXP7,382.34 are not allowed to receive such subsidy.

Non-residents

Non-residents are only taxed on Mexican-sourced income. Mexican tax legislation establishes that income derived from an employment relationship should be considered as Mexican-sourced income when the associated personal services are rendered in Mexico.

Mexican salary income taxes for non-residents are calculated as follows.

Annual compensation (MXP) Annual compensation (MXP) Income tax rate (Percent)
0 125,900 Exempt
125,901 1,000,000 15
1,000,000 Over 30

The tax should be paid within 15 days following the receipt of the income, unless a Mexican entity or a foreign entity with a permanent establishment in Mexico is obligated to withhold the tax or one of the following options to remit the tax is used, in which the due date will be the 17th day of the month following in which the compensation was received.

Additional options to pay the non-resident income tax as follows:

  • the foreign employer withholds and remits the Mexican tax to the tax authorities (it is important to mention that this would require the foreign entity to be formally registered in Mexico as a withholding agent) 
  • the Mexican company in which the services of the individual are performed could act as the collecting agent of the taxes and be responsible of remitting the non-resident income tax payments for the non-resident
  • the individuals could name a representative in Mexico through a power of attorney. The representative would be required to file the non-resident monthly income tax payments on their behalf.

It is important to point out that Mexican-source salary income received by non-resident employees is fully exempt from Mexican income tax if the salary is paid by a non-resident that does not have a permanent establishment in Mexico, or in the case that he does, when the service is not related to said PE as long as the presence of the employee in Mexico is less than 183 calendar days, whether consecutive or not, in any 12-month period.

Note that the exemption is denied in case the non-resident-payer of the compensation charges-back the cost of such compensation to a Mexican entity.

The exemption will not be applicable if the payer has an establishment in Mexico even if such establishment does not constitute a PE for Mexican tax purposes and when the person who renders the service to such establishment (non-resident employee) receives complementary payments from non residents in consideration of services rendered for which salary income is subject to withholding.

Residence rules

For the purposes of taxation, how is an individual defined as a resident of Mexico?

According to the Mexican Tax Code, an individual should be considered resident for Mexican tax purposes if he/she establishes his/her place of abode in Mexico. In case the individual also has a place of abode in another country, the individual will be tax resident in Mexico if his/her center of vital interests is in Mexico. It is considered that the individual has his/her center of vital interests in Mexico in either of the following cases, among others.

  • When more than 50 percent of the individual’s total income received during the calendar year is derived from Mexican sources.
  • When the individual’s main center of professional activities is located in Mexico.

On the other hand, the Mexican Tax Code states that in the absence of proof of the contrary, individuals of Mexican nationality are presumed to be residents of Mexico.

Additionally, individuals of Mexican nationality should retain their status as tax residents of Mexico when proving their tax residency in a country with a preferential tax regime for the year in which the notice of termination of tax residence is filed and for the following three years. It is important to mention that this provision is not applicable in those instances where Mexico has executed an unlimited exchange of information agreement with such preferential tax regime country.

Is there, a de minimus number of days rule when it comes to residency start and end date? For example, a taxpayer can’t come back to the host country for more than 10 days after their assignment is over and they repatriate.

Not applicable, as residence is determined on the earlier mentioned rules.

What if the assignee enters the country before their assignment begins?

This could be considered as a business trip, unless the assignee establishes a place of abode in Mexico or in case the individual also has a place of abode in another country, if his/her center of vital interest is located in Mexico.

Termination of residence

Are there any tax compliance requirements when leaving Mexico?

Upon termination of a Mexican residence, the taxpayer is not required to file an annual income tax return. Withholding taxes and/or estimated payments made are considered as final tax payments. A notice should be filed to notify the tax authorities of the termination of tax residence in Mexico.

What if the assignee comes back for a trip after residency has terminated?

This could be considered as a business trip, as it is assumed that the assignee has changed tax residency to other country.

Communication between immigration and taxation authorities

Do the immigration authorities in Mexico provide information to the local taxation authorities regarding when a person enters or leaves Mexico?

This is not a common practice; however, this possibility could exist as there has been more communication between local authorities lately.

Filing requirements

Will an assignee have a filing requirement in the host country after they leave the country and repatriate?

If the resident assignee changes tax residency to other country, he/she will not have an annual tax return filing requirement and the monthly tax withholdings or payments made will be considered as definitive or final. However, taxes will need to be paid in case the non-resident individual receives payments derived from Mexican sources (if he/she is not exempt).

Economic employer approach

Do the taxation authorities in Mexico adopt the economic employer approach1 to interpreting Article 15 of the OECD treaty? If no, are the taxation authorities in Mexico considering the adoption of this interpretation of economic employer in the future?

Yes.

De minimus number of days

Are there a de minimus number of days2 before the local taxation authorities will apply the economic employer approach? If yes, what is the de minimus number of days?

No, the economic employer approach occurs when there is a charge-back of the cost of the compensation to a Mexican entity.

Types of taxable compensation

What categories are subject to income tax in general situations?

Most types of remuneration and benefits received constitute taxable income regardless of where they are paid. 

Resident individuals are taxes on worldwide income and non-residents on Mexican sourced income. Salary income is considered Mexican sourced income when the services are rendered in Mexico (based on Mexican working days). 

  • Reimbursement of foreign and/or home country taxes. Hypothetical taxes charged to the employee would be offset against this income to determine the net taxable income.
  • School tuition reimbursements are taxable.
  • Cost-of-living allowances and expatriation premiums for working in Mexico are taxable.
  • The employer contribution to rent is taxable. The imputed value of housing provided directly by the employer is also taxable. Hypothetical housing charged to the employee would be offset against this income to determine the net taxable.
  • A car allowance is taxable. An automobile granted by a Mexican company is not taxable and deductible for the Mexican company under certain limitations
  • Stock options are taxable at exercise for the difference between the fair market value of the stock at the time of exercise and the exercise price.
  • Contributions up to certain caps made by employers to employees’ savings funds qualify as a social welfare benefit when granted to all employees. The income from the funds is not taxable provided a number of requirements are complied with. Special rules also apply to thrift/savings plans and retirement plans.

Tax-exempt income

Are there any areas of income that are exempt from taxation in Mexico? If so, please provide a general definition of these areas.

  • The employee’s transportation costs incurred for a business trip, which has also been combined with home leave, is not taxable. However, the employee’s family transportation cost is taxable.
  • Moving expense reimbursements, which are claimed as a business expense, are non-taxable for the individual, but relocation allowances or unsubstantiated expenses are taxable.
  • Certain deferred compensation plans may result in non-taxable compensation, provided that the cost of the compensation is not borne by a Mexican employer.
  • Social welfare benefits granted to all employees, such as group life and medical insurance (without cap), as well as disability subsidies, educational scholarships, daycare center, cultural and sport activities, and other activities of similar nature (up to certain caps) are not subject to tax.

Expatriate concessions

Are there any concessions made for expatriates in Mexico?

The Mexican income tax law does not contain any incentives or special relief for resident expatriates working locally, except a limited foreign tax credit on income derived from foreign sources.

Salary earned from working abroad

Is salary earned from working abroad taxed in Mexico? If so, how?

Yes, in case the individual is a resident for Mexican tax purposes, since such individuals are taxed on worldwide income. However, if foreign income taxes were paid on such foreign-sourced earned income, a limited foreign tax credit is available when the resident individual files his/her Mexican annual income tax return.

Taxation of investment income and capital gains

Are investment income and capital gains taxed in Mexico? If so, how?

Worldwide investment income and capital gains for resident individuals is subject to Mexican tax at ordinary graduated tax rates.

Non-residents are only taxed in Mexico when the income derives from Mexican sources.

Dividends, interest, rental income

Dividends

Income from dividends, whether cash dividends, received by a resident individual is taxable regardless of the source of payment.

Resident individuals must accumulate income received from dividends and profits to other income received during the year wither received by a Mexican or foreign company. Said individuals may credit the income tax paid by the Mexican company distributing the dividends or profits against the tax determined on their annual return, provided that the person taking the credit considers as cumulative income, in addition to the dividend or profit received, the amount of income tax paid by said company, relating to the dividend or profit received. For these purposes, the tax paid by the company shall be determined by applying the maximum tax rate to the result of multiplying the dividend or profit by the factor of MXP1.4286 (gross-up factor for 2016 considering the corporate income tax rate of 30 percent). Taxes paid from dividends and profits derived from foreign sources can be credited towards the Mexican annual tax, under certain limitations.An additional tax of 10 percent has to be paid by resident individuals that earn dividend income (from 2014 profits and onwards) which should be considered as final payment. That is to say, such additional income tax cannot be able to be credited towards the final tax liability.

 An additional tax of 10 percent has to be paid by resident individuals that earn dividend income (from 2014 profits and onwards) which should be considered as final payment. That is to say, such additional income tax cannot be able to be credited towards the final tax liability.

When the dividend income is paid by a Mexican company, the Mexican entity is obligated to withhold and remit the corresponding tax.

If the dividend is paid by a foreign entity, the individual should file a personal return on or before the 17th day following the month in which the income is received.

Non-residents should pay taxes on dividend received in case income derives from Mexican sources. (i.e. when the dividend is paid by a company resident in Mexico).

Resident companies in Mexico that pay dividend to non-resident individual are required to withhold and remit a 10 percent of tax and issue an statement to the individual showing the amount of the dividend paid as well as the tax withheld.

Interest income

Any interest income received from Mexican or non-Mexican insititutions is taxable for resident individuals.

Interest on Mexican bank deposits is subject to a withholding tax at source, which is considered as a final tax payment only if the annual amount of interest adjusted by inflation does not exceed MXP100,000. If this amount is exceeded, the resident individual will be required to add the interest to other taxable income obtained during the year in his/her annual income tax return. 

Also, interest from non-Mexican bank accounts (adjusted by Mecican inflation) should be added to other sources of income earned by the resident individual during the year and taxed until the annual return is filed at ordinary graduated tax rates. Gains/Losses on exchange rate fluctuations are taxable/deductible.

Taxes paid from interest derived from foreign sources can be credited towards the Mexican annual tax, under certain limitations.

Non-residents should pay taxes on interest in case the income is derived from Mexican sources. (i.e. paid by a Mexican resident or a non-resident with a permanent establishment in Mexico or in case the capital is invested in Mexico).

Rental income

Income received by a resident individual from rental of property is taxable in Mexico at graduated tax rates. Taxable income is the amount received less certain deductions.

Individuals could claim a deduction for expenses incurred in the renting of the property, among others, letting agent’s fees excluding VAT, real state tax, repairs and general maintenance, depreciation subject to inflationary adjustments, insurance premiums and mortgage interests. Individuals should keep all the original receipts of the expenses, in order to avoid any challenge by the Mexican tax authorities. Receipts should comply with tax requirements.

A standard deduction of 35 percent from the gross rental income, together with the amount paid as real estate tax is available for those taxpayers who do not have proof of their expenses or whose total allowable expenses are lower that 35 percent of the gross rental income.

If the letting of the property creates a loss, this can be offset against other taxable income, except income from employment and business income.

Non-residents are obligated to pay Mexican income taxes only if the property is located in Mexico. The tax should be determined by applying a 25 percent to the rental income with no allowed deductions.

Gains from stock option exercises

The spread at exercise is considered taxable, that is the difference between the fair market value of the shares at exercise, less the price paid to exercise the options.

Residency status Taxable at:
  Grant Vest Exercise
Resident N N Y
Non-resident N N Y/N

Foreign exchange gains and losses

Foreign exchange gains are aggregated with other sources of income earned by the resident individual during the year and taxed at ordinary graduated tax rates.

Foreign exchange losses are allowed to reduce taxable interest from other non-Mexican interest, with certain limitations.

Principal residence gains and losses

In general, profits from the sale or transfer of property are taxable for resident individuals.

The gain from the sale of a resident taxpayer’s principal residence is non-taxable; however, there are certain conditions that should be met, as described below.

  • The sale price should not exceed 700,000 UDI (unidad de inversion/price-level adjusting unit), which is approximately MXP3,703,000, and the transaction is formalized using a public notary.
  • The taxable gain should be determined by reducing the sale price (excess over the limit above) by the authorized deductions set for in the Mexican income tax law. The deductions should be considered in the proportion resulting from multiplying the deductions times the excess sale price between the total sale price.

The exemption only applies if the taxpayer did not sell another principal residence during the past five years and obtained said exemption. The public notary should verify with the Mexican tax authorities if the taxpayer already sold his/her principal residence during the preceding five years. In case the exemption applies, the public notary should advice the Mexican tax authorities.

If taxable, principal residence gain for resident individuals is calculated by reducing the sale price by authorized deductions. Principal residence gain should be divided by the number of years the property was held (limited to 20 years). The result (includable portion) should be added to taxable income earned during the year and taxed at ordinary graduated tax rates. The difference between the total gain and the includable portion should be taxed at the individual’s effective tax rate (additional tax). The effective rate is calculated by dividing the income tax for the year by the total taxable income for the year.

Principal residence loss should be divided by the number of years the principal residence was held (limited to 10 years). The result (deductible loss) can be offset against other taxable income, except income for employment and business income. The difference between the total loss and the deductible loss could offset the tax resulting for other gains on sales of property.

Non-residents are obligated to pay Mexican income taxes only if the property is located in Mexico. The tax should be determined by applying a 25 percent to the total gross income.

Personal use items

Personal use items provided by the employer to the employee to perform their duties are non-taxable.

Gifts

Usually, non-taxable.

OTHER

The following events are considered exempt for tax residents:

  • Transfer of ownership by reason of death.
  • Donations between spouses or direct ascendants or descendants, regardless of the amount thereof received from the direct ascendants of their descendants, provided that the property received is not alienated or donated by the ascendant to another direct descendant, with no limit as to degree. Other donations are also exempt provided that the total value of donations received in a calendar year does not exceed three times the yearly general minimum salary for the taxpayer’s geographical area. Tax should be paid on the excess thereof.
  • Profits on sales of movable property different than shares, stock and securities up to an annual amount not exceeding three times the yearly general minimum wage.

Additional capital gains tax (CGT) issues and exceptions

Are there additional capital gains tax (CGT) issues in Mexico? If so, please discuss?

Sale of shares

Capital gains on the sale of stock is taxable for resident individuals and the taxable protion is the difference between the sales proceeds (less commissions on sale) and the individual’s cost basis (adjusted by inflation). The includable portion of the capital gain should be added to the other income earned by the individual during the year and taxed at ordinary graduated income tax rates. The includable portion of the gain equals the total gain divided by the number of years the stock was held (limited to 20 years). The difference between the total gain and the includable portion is taxed at the individual’s effective tax rate for the year. The effective tax rate generally will be lower than the marginal ordinary income tax rate. The longer the individual holds the stock, the smaller the percentage that is subject to higher ordinary rates as the includable portion.

Capital loss should be divided by the number of years the share was held (limited to 10 years). The result (deductible loss) can be offset against other taxable income, except income from employment and business income. The difference between the total loss and the deductible loss could be offset the tax resulting from other gains on sales of property.

Non-residents are obligated to pay taxes if the shares are issued by a resident of Mexico or the accounting value of the shares derives in more than 50 percent from real property located in Mexico. The tax should be determined by applying a 25 percent of the total gross income.

 

Sale of certain shares

A 10 percent tax should be paid by resident individuals on gains derived from the sale of:

  • Shares issued by Mexican or foreign companies when its sale is made in the Mexican Stock Exchange. 
  • Shares issued by Mexican companies when its sale is made in stock exchanges located in recognized markets that are within the countries with which Mexico has in force a treaty to avoid double taxation.

The corresponding tax payment for the fiscal year should be paid along with the filing of the Mexican annual income tax return.

The taxable income is the difference between sales proceeds (less commissions on sale) and the cost basis (plus commissions on acquisition), adjusted by Mexican inflation.

Non-resident individuals are required to pay a 10 percent tax on sale of shares issued by Mexican or foreign entities through the Mexican Stock Exchange. The taxable income is the difference between sales proceeds (less commissions on sale) and the cost basis (plus commissions on acquisition), adjusted by Mexican inflation without considering losses on sale of shares. The tax should be withheld by the intermediary and paid on or before the 17th day following the month of sale. 

The payment of the tax will not be applicable when the taxpayer is a tax resident of a country that has in place a double taxation treaty with Mexico and delivers to the intermediary a letter declaring under oath, that is a tax resident under the effects of the tax treaty and provide his/her tax ID number issued by the tax authority of the said country. If the individual does not file this letter, the intermediary should withhold and remit the corresponding tax.

General deductions from income

What are the general deductions from income allowed in Mexico?

In arriving to taxable income, certain exemptions and deductions are allowed.

Exemptions

Exemption for resident individuals includes the following:

  • 30 days of minimum wage for annual Christmas bonus
  • 15 days of minimum wage for profit sharing
  • 15 days of minimum wage for vacation premium pay
  • partial exemptions for overtime, pension, and severance payments.

Deductions

Deductions for resident individuals include the following:

  • medical and dental fees and hospital expenses paid in Mexico by check, wire transfer, credit card or debit card by the individual for him/her or for his/her family dependents, not reimbursed by insurance (1)
  • funeral expenses paid in Mexico by the individual or for him/her or his/her dependents, limited to an annual minimum wage (1)
  • authorized charitable donations, under certain limitations (1)
  • school transportation paid in Mexico by check, wire transfer, cre3dit card or debit card for children, if mandatory (1)
  • private medical insurance premiums paid in Mexico by the individual that benefit him/her or his/her economic dependents (1)
  • mortgage interest paid in Mexico adjusted by inflation for principal residence (under certain limitations) (1)
  • supplementary and voluntary contributions paid in Mexico to the national retirement savings system or to retirement personal accounts (under certain limitations) (1)
  • local income tax if imposed by the Mexican state in which the taxpayer resides as long as the local income tax rate does not exceed 5 percent
  • school fees paid in Mexico by check, wire transfer, debit or credit card. The deduction is limited to the following amounts: kindergarten – MXP14,200, elementary – MXP12,900, high school – MXP19,900, professional – MXP17,100, technical school – MXP24,500.
  • itemized deductions (with certain adjustments) relating to rental, business, and independent services income
  • The deductions would apply in the annual tax return if the receipts are in accomplishment with the requirements established by the Mexican tax law.

(1) The total deduction on the aggregate of such items should not exceed the lesser amount between four minimum annual salary wages or the 10 percent of the total income of the individual.

Tax reimbursement methods

What are the tax reimbursement methods generally used by employers in Mexico?

Tax reimbursements are considered taxable income for the individual when the tax payments are covered by the employer. The gross-up tax procedure is the method generally used by Mexican employers.

Calculation of estimates/prepayments/withholding

How are estimates/prepayments/withholding of tax handled in Mexico? For example, Pay-As-You-Earn (PAYE), Pay-As-You-Go (PAYG), and so on.

In general, Mexican income taxes are paid on earned income, PAYE.

Mexican income taxes which are due on employment income should either be:

  • withheld at source and remitted to the Mexican tax authorities, or
  • paid over through monthly tax filings done by the individual 

In order to determine the correct method to be used, the corporate cost allocation structure should be analyzed, as follows:

  • When compensation is paid by Mexico or from abroad, but the cost is charged-back to a Mexican entity and reflected on the Mexican payroll, the tax obligation will be satisfied via tax withholdings. Under this scenario, the Mexican employer should determine the individual’s monthly tax liability and remit the corresponding taxes to the Mexican tax authorities. A salary expense deduction could be claimed on a corporate level as long as the relevant requirements are met.
  • When compensation is paid from abroad (foreign entity that is not a resident for tax purposes in Mexico and does not have a permanent establishment in Mexico) and the cost is not charged back to a Mexican entity and as such, not reflected on the Mexican payroll, the individual will be required to file personal tax returns through the Internet by wiring the tax amount due from his/her personal Mexican bank account.
  • When an individual’s compensation is paid by a Mexican entity but the cost of such compensation is recharged to a foreign entity, the Mexican entity is not obliged to withhold and remit the Mexican income taxes due on the compensation. In this case the individual is obliged to remit the Mexican income taxes associated with his compensation by filing personal tax returns. A salary expense deduction should not be claimed by the Mexican entity as it will have been reimbursed for the cost of the compensation.

The way the taxes should be calculated will depend on the residence status of the individual in Mexico. 

Note: please refer to exemption conditions for non-resident individuals included in the “Tax Rates” section.

When are estimates/prepayments/withholding of tax due in Mexico? For example, monthly, annually, both, and so on.

Monthly personal tax returns and withholdings for resident individual are due by the 17th day of the month following that in which the compensation was paid. Additonal days are granted to file personal mponthly returns depending upon the taxpayer ID tax number.

Non-resident tax returns should be paid within 15 days following the receipt of the income, unless a Mexican entity or a foreign entity with a permanent establishment in Mexico is obligated to withhold the tax.

As stated previuosly, non-resident individuals obligtated to file personal returns could also remit the income tax via the following alternatives:

  • Through withholdings by the person or entity resident in the foreign country that makes the salary payments. Such person or entity should be registered as a withholding agent before the Mexican tax authorities.
  • Through remittance of the income tax by the entity resident in Mexico in which facilities the subordinated personal services are rendered.
  • Through remittance of the income tax by the representative of the non-resident individual.

For the above options and when the Mexican entity or foreign entity with a permanent establishment in Mexico is obligated to withhold the due date is the 17th day of the month following in which the compensation was received.

Relief for foreign taxes

Is there any Relief for Foreign Taxes in Mexico? For example, a foreign tax credit (FTC) system, double taxation treaties, and so on?

Mexico has entered into tax treaties with various countries to avoid double taxation. Furthermore, Mexican tax residents are entitled to credit income tax paid abroad on foreign-sourced income, subject to certain limitations, provided this income is subject to Mexican income tax.

General tax credits

What are the general tax credits that may be claimed in Mexico? Please list below.

Information is not available.

Sample tax calculation

This calculation3 assumes a married taxpayer resident in Mexico with two children whose three-year assignment begins 1 January 2014 and ends 31 December 2016. The taxpayer’s base salary is USD100,000 and the calculation covers three years.

  2014
USD
2015
USD
2016
USD
Salary 100,000 100,000 100,000
Bonus 20,000 20,000 20,000
Cost-of-living allowance 10,000 10,000 10,000
Housing allowance 12,000 12,000 12,000
Company car 6,000 6,000 6,000
Moving expense reimbursement 20,000 0 20,000
Home leave 0 5,000 0
Education allowance 3,000 3,000 3,000
Interest income from non-local sources 6,000 6,000 6,000

Exchange rate used for calculation: USD1.00 = MXP17.5

Other assumptions

  • All earned income is attributable to local sources except interest income.
  • Bonuses are paid at the end of each tax year, and accrue evenly throughout the year.
  • The company car is used for business purposes.
  • The employee is deemed resident throughout the assignment.
  • Tax treaties and totalization agreements are ignored for the purpose of this calculation.
  • There are no personal deductions.

Calculation of taxable income

Year-ended 2014
MXP
2015
MXP
2016
MXP
Days in Mexico during year 365 365 365
Earned income subject to income tax      
Salary 1,750,000
1,750,000
1,750,000
Bonus 350,000
350,000
350,000
Cost-of-living allowance 175,000
175,000
175,000
Net housing allowance 210,000
210,000
210,000
Company car* 0 0 0
Moving expense reimbursement** 0 0 0
Home leave 0 87,500
0
Education allowance 52,500
52,500
52,500
Total earned income 2,537,500
2,625,000
2,537,500
Other income*** 90,000 90,000 90,000
Total income 2,627,500
2,715,000
2,627,500
Deductions 0 0 0
Total taxable income 2,627,500
2,715,000
2,627,500

* The Mexican income tax law allows a corporate tax deduction for company cars under certain limitations, without being considered as a taxable item for the employee, when the company car is granted to the employee to properly carry out his/her duties. The corporate tax deduction is limited up to MXP130,000. In case the value of the company car provided exceeds this amount, the deduction will be limited to this amount. KPMG in Mexico is assuming that the company car is exempt.

** Moving expense reimbursements, when claimed as/expensed for a business expense purposes, are non-taxable for the individual. KPMG in Mexico is assuming that the moving expenses in this calculation are exempt.

*** Assuming that the amount above is the taxable income calculated based on Mexican income tax law and includes foreign exchange gains or losses.

Calculation of tax liability

  2014
MXP
2015
MXP
2016
MXP
Taxable income as above 2,627,500
2,340,000 2,627,500
Mexican tax thereon   1,494,201
  1,523,951
  1,494,201
Less:      
Subsidy 0 0 0
Foreign tax credits**** 0 0 0
Total Mexican tax   1,494,201
  1,523,951
  1,494,201

Foot Notes

1Certain tax authorities adopt an "economic employer" approach to interpreting Article 15 of the OECD model treaty which deals with the Dependent Services Article. In summary, this means that if an employee is assigned to work for an entity in the host country for a period of less than 183 days in the fiscal year (or, a calendar year of a 12-month period), the employee remains employed by the home country employer but the employee's salary and costs are recharged to the host entity, then the host country tax authority will treat the host entity as being the "economic employer" and therefore the employer for the purposes of interpreting Article 15. In this case, Article 15 relief would be denied and the employee would be subject to tax in the host country.

2For example, an employee can be physically present in the country for up to 60 days before the tax authorities will apply the economic employer approach.

3Sample calculation generated by KPMG Cárdenas Dosal S.C., the Mexican member firm of KPMG International, based on the Mexican Tax Law, articles 28, 36, 93, 94, 150, and 152.

© 2016 KPMG Crdenas Dosal S.C., a Mexico civil partnership and a member of the KPMG network of independent firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.

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