Tapuriah Jain & Associates

Income Tax in Mexico

Personal Income Tax:

The return shall be filled upto 30^th April and tax year is calendar year.

Tax Rate:

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 on excess
From	To
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		Income Tax Rate
From	To
0	125,900	Exempt
125,901	1,000,000	15
1,000,001	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.

Residency Rule:

The Federal Tax Code provides that a person is a resident for Mexican tax purposes when that person establishes a home in Mexico. If the individual has a home in another country, then the individual is a resident of the country where the individual’s centre of vital interests is located. Under Mexican domestic tax law, a person’s centre of vital interests is considered located in Mexico if either (i) more than 50% of the person's income comes from Mexican sources in a calendar year or (ii) Mexico is the primary place of the person's professional activities.

Taxpayers are required to file a notice of suspension of activities for termination of tax residency in Mexico. The notice should be filed during the 15 days prior to the date on which the change of tax residency will take place.

Mexican citizens are considered tax residents of Mexico until they acquire tax residency in another country. A Mexican citizen who moves to a country that is considered a tax haven by Mexico will remain a tax resident of Mexico for the year in which the change of tax residency suspension notice is filed and the following three years, unless Mexico has in effect an information exchange agreement with the country or a tax treaty with an information exchange clause.

Exempt Income:

· 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.

Taxable Income:

Employment income:

Income from personal services (earned income) includes salaries, commissions, and allowances of all types, including those for housing, living expenses, education, foreign service, tax reimbursements, and employer profit-sharing distributions.

Employees are allowed to exclude an amount equal to 30 days' UMA if they receive a year-end bonus (Christmas bonus), 15 days' UMA each if they receive a vacation bonus or participation in the employer's profits, and overtime pay up to five times the daily UMA per week, with certain limitations. These exclusions are taken into account by the employer when calculating the income tax withholding.

Fringe benefits, such as social welfare benefits, may be considered as totally or partially exempt income if the employer satisfies certain eligibility requirements (e.g. non-discrimination). However, the exempt amount of general social welfare benefits is limited to the equivalent of one annual UMA (MXN 29,403 [i.e. 80.60 x 30.4 x 12] for 2018). Under no circumstances will the social welfare benefits be taxable if their amount, added to other regular compensation, does not exceed seven times the UMA.

The use of an employer-provided automobile is usually not considered to represent additional taxable income to the employee. However, the employer's deductibility of automobile costs and expenses is subject to certain limitations, concerning mainly the maximum value of the vehicle. A per diem rate for business travel is treated as a taxable allowance unless supported by third-party receipts for actual travel expenses that are limited to lodging (hotel), meals, and transportation. Travel expenses are subject to certain maximum deductibility limits for domestic and foreign travel and are deductible (and not imputed as income to the employee) only when incurred outside a 50-kilometre radius from the employer’s base.

Living expense reimbursements, including housing and rental allowances, are generally taxable as compensation to the employee, even if paid directly to third parties.

Reimbursements of expenses of a spouse or dependants usually represent taxable income to the employee.

Fees paid to members of the Board of Directors are treated as salary income for income tax purposes. Under some circumstances, independent professionals can also elect to have their fees treated as salary income, in which case it will be the payer's responsibility to withhold the income tax from the professional's income and remit it to the tax authorities on a monthly basis.

Non-residents' wages, salaries, and other remuneration for personal dependent services rendered in Mexico are taxed on the basis of income received in a floating 12-month period.

Equity compensation:

Regarding employee stock oSptions, income tax is payable when the options are exercised. The taxable amount is the difference between the value at exercise and the strike price. There are no tax exempt amounts or caps. The tax rate depends on the amount of income received. The top marginal rate for 2018 is 35%. The tax is withheld at source and remitted to the Mexican tax authorities by the Mexican employer. If a stock option is exercised after the employee leaves Mexico and the former Mexican employer bears a portion or all of the benefit cost, the Mexican employer will be required to withhold by applying the income tax rates corresponding to salaries paid to a non-resident employee. Restricted stock units and other types of equity compensation are treated in a similar manner.

Business income:

All income received by individuals from business activities carried out by unincorporated enterprises and the fees of independent professionals are subject to ordinary income tax rates, and the individuals may deduct their normal business expenses.

Capital gains:

Individuals that qualify as tax residents of Mexico are taxed on their worldwide capital gains.

However, gains on sales of securities through the Mexican Stock Exchange are only subject to a 10% tax on the net gain for the year. Shares of Mexican companies traded abroad in authorised exchanges also receive the same treatment, when determined by the Mexican Ministry of Finance to be placed among the general public.

In addition, gains from the sale of the taxpayer’s principal residence are exempt if certain requirements are met. The exemption is limited to the gain corresponding to approximately 210,000 United States dollars (USD) of gross proceeds, approximately. The exemption is limited to only one sale every three years.

Gains on the disposition of real estate property or shares of capital stock receive favourable income tax treatment where historical costs (converted to pesos) may be adjusted (increased) for inflation (on the basis of the number of months the asset had been held). In the case of shares of capital stock of a privately held Mexican corporation, the adjustment also includes amounts intended to partially cover net retained earnings, whether capitalised or not. The resulting net gain for tax purposes is taxed under a formula favourable to the taxpayer, depending on the number of years the asset was held before the sale.

Dividend income:

Resident individuals must include in taxable income dividends received from Mexican corporations (grossed up for the corporate income tax [CIT] paid by the corporation) in their individual income tax returns and claim the underlying CIT paid as a credit against their personal tax liability. This ‘deemed paid’ credit system allows individual taxpayers to compute their tax on dividends at their own personal tax rate, which may be lower than the CIT rate of 30% in 2018. The CIT rate is lower than the top individual tax rate (35%).

Moreover, with respect to dividends paid from profits that were generated by the company after 2013, a 10% tax on the net dividend will be withheld by the Mexican company. This tax is in addition to the tax paid with the annual tax return, and it cannot be credited in the return.

Dividends paid by foreign corporations to resident individuals are fully taxable in the annual tax return. In addition, similar to domestic dividends, there is a 10% tax on the net dividend that the individual must pay by the 17th day of the following month. This tax is in addition to the tax paid with the annual tax return, and it cannot be credited in the return.

Interest income:

Interest from the Mexican banking system, except for certain exempt accounts with small balances, is subject to withholding and should be reported in the annual tax return. Except for certain transitional provisions, interest paid on most Mexican government obligations is taxable.

Interest on bank accounts, bonds, and other debt obligations issued by non-residents is fully taxable, and the taxable interest includes adjustments for inflationary losses and exchange gains and losses with respect to the principal.

Rental income:

Resident individuals are taxed on their worldwide rental income. They may deduct actual expenses incurred with respect to the property rented, including depreciation at 5% on the building’s cost, indexed for inflation; property taxes; insurance premiums; maintenance; interest on loans for the purchase or construction of the property (adjusted for inflation); and commissions paid, limited to 10% of the rental income for the period. In order to claim these deductions, electronic accounting records must be maintained.

Alternatively, resident individuals may elect to deduct a standard deduction, equal to 35% of the gross rental income plus real estate taxes, in lieu of the deduction for actual expenses and depreciation mentioned above.

Tax haven investments:

Taxable investment income includes income earned (even if not distributed) by investments of any kind located in countries considered to be tax havens, in proportion to the ownership percentage of the resident taxpayers. If the taxpayer either does not have effective control of the administration of the tax haven investment or the total amount of the investments are maintained at less than MXN 160,000, the income does not have to be recognised until it is received. Residents are also required to file a separate report with the tax authorities by 28 February of each year regarding their direct and indirect investments held during the previous calendar year in countries considered to be tax havens. Failure to file the information report is considered a felony.

Corporate Income Tax:

Corporate income tax:

Corporations resident in Mexico are taxable on their worldwide income from all sources, including profits from business and property. A nonresident corporation in Mexico is subject to profits tax on income earned from carrying on business through a permanent establishment in Mexico and on Mexican-source income. Corporations are considered residents of Mexico if their principal place of management is located in Mexico.

Corporations are taxed on profits in Mexico by the federal government only. Resident corporations are not subject to tax on dividends received from other Mexican residents. Dividends paid to individuals and nonresidents are subject to a 10% withholding tax.

The income tax law recognizes the effects of inflation on the following items and transactions:

· Depreciation of fixed assets

· Cost on sales of fixed assets

· Sales of capital stock (shares)

· Monetary assets and liabilities

· Tax loss carryforwards

The tax basis of investments in capital stock may be adjusted for inflation at the time of capital stock reductions or liquidation. Taxes are also indexed for inflation in certain circumstances.

Tax rate:

Corporations are subject to federal corporate income tax at a rate of 30%.

Capital gains:

Mexican tax law treats capital gains obtained by Mexican corporate residents as normal income and taxes them at the regular 30% tax rate. However, losses on sales of shares are restricted and may only be used to offset gains from the sale of shares. Nonresidents are subject to a 25% tax rate on gross income or a 35% rate on net income from the sale of shares. Capital gains derived from sales of publicly traded shares by individuals or non-Mexican residents are taxed at a rate of 10%. To determine the deductible basis for sales of real estate, fixed assets and shares, the law allows for indexation of the original cost for inflation.

Administration:

The tax period always ends on 31 December and cannot exceed 12 months. The tax return must be filed by the end of the third month following the tax year-end. Monthly tax installments must be paid during the corporation’s tax year.

Dividends:

Resident individuals and nonresident shareholders of a Mexican corporation are subject to a 10% income tax on dividends received that are paid out of profits generated after 2013. Dividends are not subject to corporate income tax at the distributing company level if the distribution is from previously taxed earnings and if the distributing corporation has sufficient accumulation in its “net after-tax profit” (CUFIN) account to cover the dividend. If the dividend is in excess of the CUFIN account, the dividend is also taxed at the distributing company level at a rate of 30% on a grossed-up basis. The following is an illustration of how to compute the annual net after-tax profit for the CUFIN account.

       

	MXN
Taxable Income	1,000
Income Tax 30%	(300)
Nondeductible profit sharing to employees (estimated)	(150)
Nondeductible expenses	(50)
Net after-tax profit added to the CUFIN account	500

If the CUFIN balance is not sufficient to cover an earnings distribution, the remaining amount triggers corporate income tax on the dividend grossed up by a factor of 1.4286. The corporate income tax rate is then applied to the grossed-up dividend. The following is an illustration of the calculation.

Calculation of excess dividend	MXN
Amount of dividend	700
Dividend from CUFIN	500
Excess Dividend	200
Tax on Excess Dividend
Grossed up income
(Gross-up factor of 1.4286 x excess dividend of MXN200)	285.72
Tax at 30%	85.72

Income tax paid on distributed profits in excess of the CUFIN balance may be credited against corporate income tax in the year in which the dividend is paid and in the following two years.

Similar rules apply to remittances abroad by branches of foreign corporations.

Foreign tax relief:

A tax credit is allowed for foreign income tax paid or deemed paid by Mexican corporations, but the credit is generally limited to the amount of Mexican tax incurred on the foreign-source portion of the company’s worldwide taxable income. This calculation must generally be made on a country-by-country basis.

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Note: Information placed here in above is only for general perception. This may not reflect the latest status on law and may have changed in recent time. Please seek our professional opinion before applying the provision. Thanks.