Mexico

Mexico

A person’s liability for Mexican tax is determined by residence status for taxation purposes and the source of income derived by the individual.

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Key messages

Extended business travelers are likely to be taxed on employment income relating to their Mexican workdays.

Income tax

Liability for income tax

A person’s liability for Mexican tax is determined by residence status. A person can be a resident or a nonresident for Mexican tax purposes.

A resident is taxed on worldwide income. According to the Mexican Fiscal Code, an individual should be considered resident for Mexican tax purposes if the individual establishes a place of abode (home) in Mexico. When the individual also has a home in another country, the individual will be a tax resident in Mexico if the individual’s center of vital interests is in Mexico. It is considered that the individual’s center of vital interests is 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 Fiscal Code states that in the absence of proof to 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 a preferential tax regime country.

Nonresidents are taxed only 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.

Extended business travelers are likely to be considered nonresident of Mexico for tax purposes unless they:

  • Establish a home in Mexico and do not maintain a home in another location
  • Establish a home in Mexico and maintain a home in another location but have their center of vital interest, as described above, in Mexico.

Definition of source

Employment income is generally treated as Mexican-sourced compensation where the individual performs the services while physically located in Mexico.

Tax trigger points

Technically, there is no threshold/minimum number of days that exempts the employee from the requirements to file and pay tax in Mexico since, as explained above, a person’s liability to Mexican tax is determined by residence status. Once it is determined that the individual is a nonresident for Mexican tax purposes, however, the individual could be fully exempt from Mexican taxation as long as:

  • The salary is paid by a nonresident who does not have a permanent establishment (PE) in Mexico, or in the case that a PE does exist, when the service is not related to said PE
  • The employee is present in Mexico for less than 183 calendar days, whether consecutive or not, in a period of 12 months
  • The employer paying the salary does not have an establishment within Mexican territory to which the service is related. The exemption will not be applicable if the employer has an establishment in Mexico, even if such establishment does not constitute a PE for Mexican tax purposes.
  • The nonresident employee does not receive complementary payments from nonresidents in consideration of services rendered for which salary income was obtained.

Additionally, to the extent that the individual qualifies for relief in terms of the dependent personal services article of the applicable double tax treaty, there will be no tax liability. The treaty exemption will not apply if the Mexican entity is the individual’s economic employer and, as such, bears the cost of the individual’s compensation.

Types of taxable income

For extended business travelers, the types of income that are generally taxed are employment income and Mexican-sourced income.

Tax rates

For 2016 residents, taxable income is taxed at graduated rates ranging from 1.92 percent to 35 percent. The maximum marginal tax rate is reached on income earned over 3,000,000 Mexican pesos (MXN) annually (250,000 MXN, monthly).

Nonresident income tax should be determined by applying the following rates to salary income received and derived from Mexican-sourced income:

Annual income
from MXN
Annual income
to MXN
Tax rate percent
0 125,900 Exempt
125,901 1,000,000 15
1,000,001 and above 30

Source: KPMG in Mexico, May 2015

When the income in question is received in a 12-month period and such period does not coincide with the calendar year, the above rates should be applied as a function of the 12-month period.

Social security

Liability for social security

Foreigners who work for Mexican employers are subject to Mexican social security contributions when an employment relationship is deemed to exist in Mexico. Such relationship is deemed to exist in Mexico when the employee’s activities are supervised, controlled, or governed by a Mexican employer.

These are based on several components where the capped salary is 25 times the minimum wage of Mexico City (for 2016 the minimum wage is MXN 73.04 per day).

The aforementioned contributions are calculated based on the following percentages and subject to the capped salary:



Type of insurance
Paid by Total percent
Employer percent Employer percent
Social security (IMSS)*
9.934–24.434 2.727 12.661–27.161
Retirement fund (SAR)
2.00 0.00 2.00
Housing fund (INFONAVIT) 5.00 0.00 5.00
Total percent 16.934–31.434 2.727 19.661–34.161

Source: KPMG in Mexico, May 2015

* The above rates represent the effective rates for individuals with a capped salary. The employer contribution will depend on each employer’s risk classification.

Mexico has entered into formal duly signed social security totalization agreements with two countries: Spain and Canada.

There are no provisions for foreign employees working in Mexico under a contract with a foreign employer and with no Mexican employer. In such cases, although the employee could be deemed to be subject to Mexican social security contributions, it may be argued that there would be no basis to calculate such contributions (no salary borne in Mexico) and no vehicle to remit them (no Mexican employer). Thus, Mexican social security contributions would not be applicable under this approach.

Compliance obligations

Employee compliance obligations

Annual tax returns are due by April 30 following the tax year-end, which is December 31. Extensions are not permitted. Nonresidents are not obligated to file a Mexican annual tax return since the payments made are considered as final or definitive.

Employer reporting and withholding requirements

Mexican income taxes are paid on earned income, Pay As You Earn (PAYE).

Individuals are required to remit tax payments on compensation as follows:

  • When compensation is paid by Mexico or from abroad, but the cost of the individual’s compensation is charged back to a Mexican entity under a secondment agreement and, as such, reflected on the Mexican payroll, the tax obligation will be satisfied via tax withholdings. Under this scenario, the Mexican employer will determine the individual’s monthly tax liability and remit the corresponding taxes to the Mexican tax authorities.
  • When compensation is paid from abroad, the cost of the individual’s compensation is not charged back to a Mexican entity, and the compensation is 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 the individual’s personal Mexican bank account.

Monthly personal tax returns and withholdings are due by the 17th day of the month following that in which the compensation was paid. Nonresident tax returns should be paid within 15 days following the receipt of the income, unless a Mexican entity is obligated to withhold the tax or one of the following alternative options is used, in which case the due date will be the 17th day of the month following that in which the compensation was received.

Income taxes associated with salary income received by nonresident individuals can also be paid via one of the following payment alternatives:

  • The foreign employer withholds the Mexican tax and remits 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 entity where the services are being rendered collects and makes the tax payments.
  • A nominated and jointly liable Mexican representative makes the payments.

Other issues

Work permit/visa requirements

Over the past years in Mexico, there have been major changes related to the Migratory legislation as a result of international recommendations related to Human rights as well as Labor and Security rights. This process culminated with the entry in force of the New Immigration Law which was published in May 25th, 2011 and later on with the publication of the rules and guidelines that are in force as of today.

According to this, new kind of procedures and immigration documents are now required by the National Institute of Immigration and the former documents are no longer at use (FM2 and FM3).

If a Mexican entity is hiring foreign personal, it shall has the corresponding registry as employer at the National Institute of Immigration. Without this pre-requisite, the company will not be able to offer employment or work permit visas to any foreign individual.

In accordance with the new criteria issued by the Institute, it is necessary that before the foreign individual enters to Mexico, the company that intends to offer a work to a foreign individual must request to the Institute the temporary resident visa job (which can be requested for a period from 1 and up to 4 years), either in Mexico (if the foreign individual is going to be paid by the Mexican entity), of before the Mexican Embassy or Consulate abroad (if the foreign individual is going to be paid by a foreign entity without charging back the cost to the Mexican entity).

In case that the foreign individual is not within Mexican territory when the Institute authorizes the immigration visa, the foreign individual must go to the Mexican Embassy or consulate of his/her country where his/her residence is, in order to obtain his/her “temporary” immigration visa.

If the foreign individual is in Mexican territory, once that the visa is duly authorized by the Institute, they must leave Mexico and go before any Mexican Embassy or Consulate abroad in order to complete the process and obtain the visa mentioned above.

It is important to bear in mind that in both cases, the foreign individual will have to pay the rights for the issuance of the termporary immigration visa before the Mexican Embassy or Consulate of his/her country.

In addition, once this type of visa is authorized, the foreigner has a period of 30 days to enter Mexico and request the exchange of the temporary immigration visa for his/her immigration ID (card).

Double taxation treaties

In addition to Mexico’s domestic arrangements that provide relief from international double taxation, Mexico has entered into double taxation treaties with approximately 54 countries to prevent double taxation and allow cooperation between Mexico and overseas tax authorities in enforcing their respective tax laws. Please be informed that taxpayers must provide a tax certificate of residence in order to apply the benefits given by the treaties to avoid double taxation.

Permanent establishment implications

There is the potential that a permanent establishment (PE) could be created as a result of extended business travel, but this would depend on the type of services performed and the level of authority the employee has to bind the foreign entity in Mexico.

Indirect taxes

Value-added tax

The standard rate of value-added tax (VAT) is 16 percent.

The Mexican value-added tax law (LIVA) establishes that VAT is due on the following activities carried out in Mexican territory:

  • Sale of goods
  • Rendering of independent services
  • Importation of good or services
  • Temporary use or enjoyment of goods (leasing)

Mexican entities

All individuals and entities engaging in acts or activities in Mexico consisting of alienation of assets, rendering of independent services, granting of temporary use or advantage of assets, and import of goods or services must register for VAT purposes. This tax is paid on a cash flow basis. Please note that in Mexico there is only one tax ID for all the taxes payable by the Mexican taxpayer.

Non-Mexican entities

Non-Mexican entities that have established a Mexican PE have the obligation to register with the Mexican tax authorities; consequently, they are compelled to comply with all Mexican tax obligations, including VAT obligations.

Non-Mexican entities that engage in sales or leasing activities in national territory subject to VAT will be subject to withholding for the corresponding VAT amount by the Mexican taxpayer.

Transfer pricing

Mexican transfer pricing regulations rely on the arm’s-length principle. The arm’s-length principle requires taxpayers undertaking operations with related parties, as well as with residents in low-tax jurisdictions, except when proven that the latter are not related parties of the Mexican taxpayer, to determine their taxable revenue and authorized deductions by considering the prices and/or compensation that would have been agreed by or between independent parties in comparable transactions.

In order to document the compliance of the arm’s-length principle by Mexican taxpayers, the Mexican income tax law (Ley del Impuesto Sobre la Renta or LISR) establish the transfer pricing documentation requirements that must be complied with by said taxpayers.

Specifically, the LISR sets up the transfer pricing requirements that must be met by Mexican taxpayers in Fractions IX1, X, and XII of Article 76, as well as Articles 179 and 180. Among those transfer pricing requirements, taxpayers must not only prepare supporting documentation regarding domestic and cross-border intercompany transactions, but also file together with the annual tax return some information regarding their cross-border intercompany transactions, through an informative return.

If the Servicio de AdministraciónTributaria (SAT) concludes that a company underpaid taxes in Mexico because it employed transfer prices that did not comply with the provisions of the LISR, the taxpayer will be liable for the following:

  • Omitted taxes, restated for inflation
  • Interest
  • A penalty that may range between 55 percent and 75 percent of omitted income tax, or between 30 percent and 40 percent of the excess of the tax loss originated due to transfer pricing.

According to the Federal Fiscal Code, there is no specific penalty for not preparing supporting transfer pricing documentation. However, in the case taxpayers do not comply with the transfer pricing documentation requirements stated in Article 76 of the LISR, Mexican tax authorities might deny the deduction of expenses for income tax purposes originated as a company transaction.

In addition, Article 76 of the Federal Fiscal Code allows the SAT to assess penalties in cases in which it deems a company’s transfer pricing is not consistent with the arm’s-length standard under the Mexican transfer pricing regulations detailed in the LISR, as stated before. Said article also provides for a 50 percent reduction in the penalty imposed for underpaid taxes or for determining a loss in excess due to transfer pricing if the taxpayer keeps supporting transfer pricing documentation.

At the same time, Appendix 9 of the Multiple Information Return must be filled by all companies conducting cross-border intercompany transactions with their foreign related parties, with the exception of transactions between intercompanies that have Maquila operations in Mexico.

Companies filing the Dictamen Fiscal must file the transfer pricing information in the appendices of the Dictamen Fiscal, which is usually on June 30, however, this year will be July 16. In addition, the Information Transfer Pricing Return for Cross-border Intercompany Transactions could be filed with the Dictamen Fiscal.

Companies not filing the Dictamen Fiscal Information Transfer Pricing Return for Cross-border Intercompany Transactions and the transfer pricing documentation must be ready by the time the income tax return is due, which is March 31.

In addition to the above, there is a new requirement of filing an Informative Return for companies that have operations with their foreign related parties.

Format 76 (Relevant Operations) has 5 basic questions for Transfer pricing and other related items.

Local data privacy requirements

On July 5, 2010, the Mexican Official Gazette published the Federal Law of Data Privacy Protection (Ley federal de Protección de Datos Personales en Posesión de los Particulares - LFPDPPP).

Most organizations will have to consider that this Law is “of public order”, which means that private contract provisions that conflict with it are unenforceable. The Federal Institute of Access to Information and Data Protection (IFAI) is the Mexican Authority in charge of the compliance of the Law. The Law regulates the processing of Personal Data. The definition of the term “processing” includes the collection, use, disclosure, storage, access, management, transfer and disposal of Personal Data. The Law applies to Personal Data that is processed, transferred or disposed by private persons or entities. “Personal Data” includes any information pertaining to an identified or identifiable individual.

The Mexican companies that in virtue of the performance of their activities, gather personal data from their clients, suppliers and employees, should comply with the provisions stated on the LFPDPPP. The LFPDPPP identifies restrictions to the collection and use of Personal Data. Most provisions apply to “Data Controllers or Person in Charge”, the individuals or private corporations that determine how and by whom, Personal Data are processed.

The Data Controllers must collect and process Personal Data in a lawful manner. The data must be relevant, necessary, accurate, and updated for the purposes of which they were collected. Data controllers may process Personal Data only for the purposes stated in their Privacy Notice unless, the data subject consents to new use of data for a purpose that is not compatible with or analogous to the purpose that is set out in the Privacy Notice.

Violations of data protection regulations may lead to imprisonment and heavy fines, not to mention the loss of credibility and good image of the organization.

Exchange control

Mexico does not restrict the flow of Mexican or foreign currency into or out of the country.

Nondeductible costs for assignees

Nondeductible costs for assignees may partially include contributions by an employee and employer to non-Mexican pension fund.

Footnote

  1. Transfer pricing documentation is required by Mexican legislation. However, taxpayers whose revenue during the previous fiscal year did not exceed MXN13 million (for the operative company) and MXN 3 million (for service providers) are not required to produce supporting documentation with regard to cross-border intercompany transactions. However, there is no exception to the requirement of complying with the arm’s-length principle.

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