Tax returns and compliance
Termination of residence
Economic employer approach
Types of taxable compensation
Salary earned from working abroad
Taxation of investment income and capital gains
Additional capital gains tax (CGT) issues and exceptions
General deductions from income
Tax reimbursement methods
Calculation of estimates/prepayments/withholding
Relief for foreign taxes
General tax credits
Sample tax calculation
All income tax information is summarized by KPMG Cárdenas Dosal, S.C., the Mexican member firm of KPMG International, based on the Mexican Tax Code, article 9 and the Mexican Tax Law, articles 5; Title IV articles 90, 93, and Chapter I, III, IV, VI, VIII, IX, XI; and Title VI.
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?
What are the compliance requirements for tax returns in Mexico?
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.
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.
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.
What are the current income tax rates for residents and non-residents in Mexico?
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|
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 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)|
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:
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.
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.
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.
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.
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.
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).
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?
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.
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).
Are there any areas of income that are exempt from taxation in Mexico? If so, please provide a general definition of these areas.
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.
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.
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.
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.
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).
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.
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:|
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.
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 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 provided by the employer to the employee to perform their duties are non-taxable.
The following events are considered exempt for tax residents:
Are there additional capital gains tax (CGT) issues in Mexico? If so, please discuss?
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:
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.
What are the general deductions from income allowed in Mexico?
In arriving to taxable income, certain exemptions and deductions are allowed.
Exemption for resident individuals includes the following:
Deductions for resident individuals include the following:
(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.
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.
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:
In order to determine the correct method to be used, the corporate cost allocation structure should be analyzed, as follows:
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:
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.
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.
What are the general tax credits that may be claimed in Mexico? Please list below.
Information is not available.
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.
|Moving expense reimbursement||20,000||0||20,000|
|Interest income from non-local sources||6,000||6,000||6,000|
Exchange rate used for calculation: USD1.00 = MXP17.5
Calculation of taxable income
|Days in Mexico during year||365||365||365|
|Earned income subject to income tax|
|Net housing allowance||210,000
|Moving expense reimbursement**||0||0||0|
|Total earned income||2,537,500
|Total taxable income||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
|Taxable income as above||2,627,500
|Mexican tax thereon|| 1,494,201
|Foreign tax credits****||0||0||0|
|Total Mexican tax|| 1,494,201
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.
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