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Sunday December 17 2017
Individual Income Taxes in Mexico
Alfonso Delgadillo

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Resident individuals are subject to Mexican income tax on their worldwide income, regardless of their nationality. Non-residents, including Mexican citizens who can prove residence for tax purposes in a foreign country, are taxed only on their Mexican source income.

The Federal Tax Code provides that a foreign individual will be considered a resident of Mexico for tax purposes if one has established an abode in Mexico irrespective of the time they have spent in the country. The law also provides that if they have one home in Mexico and another abroad, they are considered a tax resident in the place where they have their center of vital interests. Mexico will consider that that center of vital interests is in Mexico if over 50% of their income is derived from Mexican sources.

The main repercussion for the foreign residents is the effect it will have on the ability of foreign residents to obtain a homestead exemption on the sale of their principal residence in Mexico. If the homeowner has only one home, and that home is in Mexico, then they should be able to get a homestead exemption. However, if they have one home in Mexico and another in the US, it will be more difficult for the homeowner to get an exemption, especially if their income is not derived from Mexican sources.

In practice, it will be very difficult for the Notario, the attorney required by law to draft the deed and withhold taxes, to know if the homeowner has another home outside the country. However, I can see that some Notario’s may request to see a Mexican tax return to prove that homeowner does in fact have his or her center of vital interest in the country. The flip side is that those foreign residents that have a home in Mexico and abroad, and who derive most of their income from sources outside of Mexico, need not worry about reporting and paying Mexican income taxes. A clear example pf these are “snow birds” that spend six months in Mexico and six months abroad.

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 amounts received as employee profit sharing. Certain benefits may be considered as taxable income for the individual even if they are not a deductible expense for the employer. Living expenses can be absorbed free of tax to the employee only in the case of short-term visits and if supported by receipts from third parties. A per diem rate is treated as a taxable allowance and reimbursements of expenses of a spouse or dependants usually represent taxable income to the employee. Business travel expenses, other than those supported by receipts from third parties and limited to maximum deductible amounts, must, in general, be added to salaries for income tax purposes.

Investment Income

Residents are required to include investment income in their annual returns, except for: (a) interest from the Mexican banking system and government obligations, which is either subject to a final withholding tax of 20% on gross interest (or a portion thereof) or is exempt; (b) dividend income from Mexican corporations or investment funds; and (c) capital gains on transactions carried out through the Mexican stock exchange, which are exempt.

Capital Gains

Gains on the disposition of real property or shares of capital stock receive favorable income tax treatment in that historical costs may be increased by factors (based on the number of years the asset had been held) to adjust them for inflation, and, in the case of shares of capital stock also by amounts intended to partially cover net retained earnings, whether capitalized or not. The resulting net gain for tax purposes is taxed under a formula favorable to the taxpayer, again depending on the number of years the asset was held before sale. Gains on sales of securities through the Mexican stock exchange, when the securities are classified as available to the general public, are exempt from tax.

Gains from the sale of the taxpayer's principal residence are exempt, provided the taxpayer occupied it as such during the two years before the sale. Whereas residents of Mexico are taxed on their worldwide capital gains, non-residents are only subject to Mexican tax on gains arising from sales of real property located in Mexico or non-exempt sales of shares of Mexican companies, regardless of where the sale takes place.

Income Taxes

Mexico taxes it residents on worldwide income pursuant to Article 1 of the income tax law. It is important to note that Mexico allows for a foreign tax credit for any taxes paid outside of Mexico. The US and Canada also allow for foreign tax credits; in effect, the taxpayer will pay taxes in both countries, but will also have offsetting tax credits. The net result is that the taxpayer usually pays an amount of taxes equivalent to the highest tax bracket among both countries.

As of last year, Mexican financial institutions have begun to request that US citizens provide a US social security number in order to open an account in Mexico. While there is no truth to the rumor that the SAT (the Mexican equivalent to the IRS) is sharing any information with the US at this point, this is clearly the intent. Once the Mexican authorities have access to the taxpayer’s social security number they can also receive tax information from the IRS on that particular individual. Eventually, the US and Mexico will regularly exchange information on their taxpayers, just as Canada and the US do now.


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