For newcomers, the Mexican Tax System appears to be a little complicated. Without a doubt, Tax regulations in Mexico have some tricky refinements. The good news is: some aspects are pretty similar to other countries’ tax systems.
For example, just as in Germany or Austria, taxes in Mexico are imposed by national, federal state and local authorities. While income taxes, corporate taxes, as well as VAT / sales taxes are a matter of national competence, Mexican federal states are responsible for wage taxes as well as land transfer tax. Finally, local authorities expose taxes on goods and services that serve basic needs of the citizen, such as water and street lightning.
In this article, we would like to provide you with an overview on some basic tax regulations in Mexico.
What you need to know when owning a company in Mexico
Income tax is levied on all taxable income within a fiscal year, reduced by deductible operating expenses and tax loss carryforwards. Regarding what kind of costs are recognized as deductible operating expenses, the Mexican Tax system has relatively strict requirements. Also, electronic invoicing is an obligation in Mexico since all national expenditure must be evidenced by means of an electronic invoice.
VAT (Sales tax)
The VAT, which in Mexico is called IVA (Impuesto al Valor Agregado), is generally set at 16%, even though in some areas in the north of the country it is only 8%. Some goods and services from the primary sector, such as health care or basic foodstuffs, are exempt from VAT. In other words, in those specific cases the IVA rate is 0%.
In terms of sales taxation, Mexico has established an all-phase net sales tax system. That means that every taxable turnover is taxed at every level of the economy, based on the net amount. As the sales tax is not due until payment, companies need to consider that also the input tax is only deductible with the payment made to the creditors.
The payroll tax is levied on the sum of all salaries paid in a company, based on the gross amount. As payroll taxation is a federal state rather than national competence, the rate can vary between 1 and 3%, according to the respective state’s requirements.
Land Transfer Tax
All transactions that result in the transfer of ownership of land on Mexican soil or the associated rights from one legal entity to another are generally subject to land transfer tax. Just as payroll tax, land transfer taxation is a federal states’ competence. In that way, depending on the respective federal state, the land transfer tax rate can vary between 2 and 5%.
What you need to know when living and working in Mexico
Income tax (ISR = Impuesto sobre la Renta) applies not only for companies but also for private individuals. The rate varies depending on whether the person is resident in Mexico or not. While non-residents do pay income tax for earnings generated only in Mexico, residents are subject to unlimited taxation. A person is considered resident if more than 50% of his / her yearly income is generated in Mexico. The income tax applies to all taxable income including self-employed or non-independent work, renting and leasing activities as well as capital income, minus deductible expenses.
Withholding taxes in Mexico affect dividends, royalties and interests. The rate is 10% for dividends. For royalties, withholding tax varies between 25 and 35% based on the gross amount, depending on the type of royalty to pay tax on. In case of interests, the rate is generally 30%. There are some exceptions though, for example in case there is a double taxation convention between Mexico and the respective country involved.
Not only companies but also individuals have to pay the 16% VAT (IVA). In general, the IVA is already included in the products’ prices, except for products from the primary sector for which the rate of the IVA is 0%, as already mentioned above. Unlike companies, IVA is not creditable for private individuals.
The Mexican tax identification number: RFC
To pay taxes in Mexico, both companies and private individuals need to dispose of an RFC number; the abbreviation stands for Registro Federal de Contribuyentes. The Mexican tax identification number is assigned by the Mexican Tax Administration Service SAT (Servicio de Administración Tributaria). It is 13 digits long for individuals and 12 for companies, including both numbers and letters.
Several formal procedures and documents are required in order to obtain the RFC number at the SAT. Those include a proof of address, an official identification and the Unique Population Registry Code called CURP (Clave Única de Registro de Población), amongst others.
Once you are assigned an RFC, your company is one step closer to start operations in Mexico. And don’t worry about the requirements – WMP Mexico Advisors is happy to help you with the procedure!
WMP Tax & Accounting is an international tax consulting firm specialized in medium-sized international companies. Thanks to more than 10 years of experience in the Mexican market, we are familiar with local laws and regulations. We would be happy to support and advise you on any matter concerning tax regulations in Mexico, to make sure all requirements are met. Here, you can find an overview of our tax and accounting related services. Do not hesitate to contact us!
We serve our clients, who represent different industries, with over 100 employees at our offices in Queretaro, Mexico City, Puebla, Stuttgart (Germany), and Greenville (S.C., USA).
WMP Mexico Advisors
Pabellón Santa Fe
Anillo Vial Junípero Serra 2601 Office 201
Residencial Juriquilla Santa Fe
76230 Querétaro, Querétaro Mexiko
T: +52 (442) 209 6870
Dicsover the most attractive economic regions located in Mexico
- Automotive and aerospace industries in the Bajío region
- Puebla – Automotive mecca since the early days
- Metalworking industry at the US border
- Jalisco – The Mexican Silicon Valley
- Headquarters and the chemical industry in the capital region
- Baja California – The gateway to the Pacific Ocean
Automotive and aerospace industries in the Bajío region
Located in the center of the country, the states of Aguascalientes, Guanajuato, Querétaro, and San Luis Potosi are among the most popular regions when it comes to the location of automobile manufacturers. The new BMW and Daimler plants, which will open in 2019 and 2020 respectively, will also ensure an additional demand for suppliers. For the aviation industry, a strong growth potential is predicted for the coming years, which will consequently attract more FDI.
The Canadian company Bombardier has a strong presence in Querétaro, and a specialized Aviation University is located there. Overall, Mexico is one of the six most important suppliers in the U.S. aviation sector.
Puebla – Automotive mecca since the early days
Since the mid-sixties, the Volkswagen Group has been producing individual models in Puebla. Meanwhile, the German car manufacturer Audi has established facilities in the same state, more precisely in the village of San José Chiapa. In 2016 the new production plant, which includes an education center, was inaugurated.
Metalworking industry at the US border
Years ago, the metal industry was established close to the US border, in the Mexican state of Nuevo León, especially around its capital Monterrey. An advantage of this location is its proximity to the US market, as 84% (2017) of exports go to the neighboring country.
Jalisco – The Mexican Silicon Valley
IT companies have settled mainly in the state of Jalisco, which is located on the west coast of Mexico on the Pacific Ocean.
The region around Guadalajara is known as the Silicon Valley of Latin America, where you can find more than 700 high-tech companies such as Oracle, HP, Motorola, and IBM. Jalisco currently has the fifth-highest number of companies with FDI in Mexico. Approximately 50 percent of all foreign investment comes from the United States and Canada, with another 25 percent from Europe.
Headquarters and the chemical industry in the capital region
The location in and around the Mexican capital has been chosen by many companies for their Mexican headquarters. It is not only the central location and the well-developed infrastructure that speak for this region, but also its proximity to the economically strong regions of Puebla and the Bajío. The capital region has attracted companies from the chemical industry such as BASF and Bayer.
Baja California – The gateway to the Pacific Ocean
Baja California is an excellent opportunity for suppliers in all sectors due to its privileged geographical location and proximity to the United States. In recent years, medical technology is the main type of company to be established in this region; these companies work closely with manufacturers in San Diego.
The port of Ensenada, one of the five seaports in Baja California, is one of the most important ports on the Pacific Ocean.