Taxes in Mexico
Unless you enter the business world in Mexico, the most common tax issues you will encounter are:
  • Income Tax
  • IVA (Value Added Tax)
  • Property Tax
  • Real Estate Tax (Buying or Selling)
  • Capital Gains Tax
  • Rental Income Tax

Before we get into the details, there is an important distinction that should be understood. “Tax Laws are Tax Laws”. Enforcement is an entirely different issue. Here we will give you a brief summary of what the laws are. When you come on a Focus Program you will learn more indepth information about the Rules and Tax Laws but even more importantly, you’ll learn the reality and common practices for everyday living here, which – you will find, can be quite different.
“Mexico has one of the lowest tax collection rates in Latin America. It does not have the resources (nor will it in the foreseeable future) to enforce its own Tax Laws. It is also caught up in the dichotomy between the need to encourage investment and tourism and the need to increase its tax revenues and to comply with the International Tax Treaties that is has signed with several countries.

Is Mexico a Tax Haven? Only to the extent that the Tax Laws are not enforced.

Will it change? Unlikely in the near future but over the long term some reforms will need to be implemented to make the system more efficient and fair. When???”
Source: Excerpt from Article by Raul Rodriguez-Walters, CFP
Income Tax
“Residents” of Mexico are liable to pay taxes on their world wide income. In 2004 the definition of “Tax Resident” was amended to “all those who have established an abode in Mexico irrespective of the time they have spent in the country”.

A further provision is that “if a person has a home in Mexico AND a home in another country, they are considered a tax resident in the place where they have their center of vital interests. Mexico will be considered as the center of vital interest for people who derive more than 50% of their income from Mexican sources”
“However, ‘foreign residents that have a home in Mexico and abroad, and who derive most of the income from sources outside of Mexico, need not worry about reporting and paying Mexican Income Taxes’.”
Source – Raul Rodriguez-Walters, CRP
Non-residents are subject to withholding taxes on income derived from Mexican sources at the rate of 25% of gross of up to 32% of net. Exceptions to this rule are gains from investments in publicly traded shares (4.9% tax) or debt instruments issued by the Mexican Government or Central Bank (0% tax).


Currently, this is the main area where enforcement is minimal due to the difficulty in establishing whether a person has a home outside of Mexico and establishing the centre of vital interest, which for most people, will in fact be outside of Mexico.


IVA (Value Added Tax)

IVA is charged on most goods and services at the rate of 15% (10% in border towns) and is normally included in the price displayed. Certain food and medical items are exempt.

Unless you are involved in a business, you’ll hardly notice you are paying IVA.

If you run a business, things get a little more complicated. In order to write off (allowable deductibles against revenue) the IVA and for that matter the actual expense, you must get a “Factura” (official government receipt). The problem here is that many small businesses “elect not to participate” in the system (too much paperwork and it highlights their revenue – remember Mexico is mostly a cash society with an underground economy), so they will not provide a Factura. A part of doing business in Mexico and you learn to work with it.
The problem is many times they don’ tell you they won’t provide a Factura.

When we first started our business and I would go into one of the local paper tiendas (shops) to purchase office supplies, I would always ask first if they could/would give me a Factura. Most times they would say “yes” (because they wanted to make the sale), but I would need to come back next Tuesday to get it. They hoped I wouldn’t, but if I did they would tell me to come back again.

Many of these Mom and Pop stores don’t exist officially so they don’t have a tax number and therefore cannot give you a Factura. And even if they do, they prefer not to and usually aren’t charging the 15% tax on the item, so if you insist on getting the receipt, the item will go up in price by the amount of the tax.

I soon caught on and just had to make the conscious decision that if I bought the item from small shops, the realization was that we would not be able to expense it. So for big ticket items, we would make the trip to Guadalajara to a larger store, like Office Depot, that would give Factura’s.
Property Tax

Property Tax is a local tax based on the “government assessed value” (much lower than the actual value) of a property or “valor catastral”. The concept is not unlike our system of taxation back in Canada and the U.S., yet the amounts involved are usually much less in Mexico. In the Lake Chapala area we all love to pay our taxes; they range from US$100 to $200 a year, with a 10% discount for early payment. It covers police protection, schooling, and road repair, and in some areas - garbage pick up. In a fully planned community, the condominium board ensures that the above items are maintained in an above-standard manner.


You will not receive a tax bill so the initiative is yours to make the payment. And you need to bring last year’s tax receipt with you to provide the information to pay them.


Real Estate Tax (Buying or Selling)

When purchasing a property you will pay a 2% transfer tax based on the property value (see declared value below). This tax is included in the closing costs. Of more interest is the tax on the gains when you sell a property. This comes under the heading of Capital Gains but it is significant enough to warrant its own section.


The capital gain on the sale of a property is determined as the difference between the “declared value” on the Deed (Escritura) when you bought the property and the “declared value” of the sale to be put on the new Deed. This may appear obvious but, this is Mexico and there are often “wrinkles” that you should be aware of.

Historically, the “declared value” was significantly below the "market value". This was done to pay less transfer taxes and is still a common practice, although perhaps not entirely legal.

However, the Mexican authorities are paying more attention to this practice as they realize they have been losing revenue. Also, Notarios are being more careful with the “declared values” they are willing to accept for the Deed.

If you are thinking on accepting a lower declared value on the Deed than the purchase price, just remember that when you sell, the gain is the difference in declared values so you could end up with a higher gain and a bigger tax liability.

Unless you are exempt (explained below), the Notary will calculate the capital gains due based on the original "declared" value when purchased, adjusted for depreciation and inflation, plus commissions, sales expenses and IVA and the selling price.

Capital Gains will be calculated as follows and the lower of the two calculations will be charged to the seller:

  1. 40% of the difference between the buying and selling "declared" values on the deed or
  2. 20% of the selling "declared" value
Oversimplified: (does not take deductions for depreciation and inflation, commissions, sales expenses or IVA into consideration)

For clarification let’s use 2 examples Example 1 Example 2
Purchase value (declared) $150,000.00 $180,000.00

Sale value (declared)

$200,000.00 $420,000.00

Difference

 $50,000.00 $240,000.00

40% of difference $20,000.00 $96,000.00
20% of sale price (declared) $40,000.00 $84,000.00


As you can see, in the first example, the lowest value would be the 40% of the difference whereas in the second example, the lowest value would be the 20% of the sale price. The lower values would be used for the capital gains charged.
Previously, to qualify for exemption from capital gains on the sale of your primary residence, you needed to be a resident of Mexico (FM-3 or FM-2) and have lived in the property for two years. In 2002, the law was amended to dispense with the two year requirement. Now, to be eligible for the exemption you only need to prove that you are a resident with a valid FM-3 or FM-2 and the property you are selling is your primary residence. This is one of the major benefits to obtaining your residency status (FM-3 or FM-2).

The previous information relates to properties registered by Direct Deed (Escritura). Currently, there appears to be some question as to the applicability to properties owned via a Trust (Fideicomiso). For foreigners, this applies to the restricted zone i.e. 50 km from the ocean and 100 km from the International borders, which included the major resort areas – Mazatlan, Puerto Vallarta, Cancun, etc

Opinion One

In an Article written by Prof. German Estrada and published in the PV Mirror (10 Jan 2004) it appears that the exemption does not apply to properties owned in a trust.

“As the Bank, the title-holder is the ‘owner’ of the property - the title is in its name, as it is also at the Public Registry, as well as in the receipts of the property tax payments, and such Fiduciary Bank, as a corporation, is deemed to be a ‘moral’ person, therefore the exemption of capital gains tax cannot be applied to the seller. The term ‘physical’ applies to individuals while ‘moral’ applies to corporations.

Note: The important concept with regard to this ‘exemption’ is that of ‘taxpayer’, and the Secretaria de Hacienda (SAT) in Mexico city has confirmed that it can only be applied to ‘physical persons ’.”

Note: Focus contacted Prof German Estrada in March, 2006 and he confirmed that to the best of his knowledge the information is the same and there has been no change.

Opinion Two

After contacting our Legal Expert (Lawyer) in Lake Chapala regarding the comments above, we received the following response, which is in direct opposition to Prof Estrada's article. Clearly this is an area where there are differences of opinion. Once Mr. Uriarte has researched this area more completely, we will update this topic with the best information and opinion we can find.

"Dear Ray:

I checked your site and I do not agree with the opinion of the person mentioned in the capital gains part.

For fiscal effect the "fideicomisarios" are considered as the sellers and they are individuals that can apply for the exemption. Even the Capital Gain Tax law specifically recognizes the cases when a transaction in a bank trust can be considered as a "sale" for fiscal effects and it mentions the "fideicomisarios", not the bank as the tax payer.

On the other hand if we follow the opinion given to you then the Notaries would not have to collect any capital gains tax since the seller is a corporation (the Bank) and always when the seller is a corporation the Notaries do not retain or collect the capital gains tax, since the corporations are obliged to make the monthly payment of said tax.

I will need to prepare a more detailed analysis on this matter but in my opinion he is wrong.

Sincerely

Jorge Luis Ramos Uriarte"



Capital Gains Tax
Many people who live in Mexico take advantage of the higher rates paid on investments in “Mutual Funds” offered by local investment companies. Because the funds are normally invested in Government or Central Bank Debt Instruments or Stocks traded on the Bolsa (Mexican Stock Market), the gains are essentially tax exempt. Other forms of investments that attract capital gains are taxable at the taxpayer’s marginal tax rate.


Rental Income Tax
This is another area where enforcement of tax provisions has been largely ignored due to the difficulty in administration. Some jurisdictions (i.e. San Miguel de Allende) are taking a more active interest and cracking down on those not paying taxes on rental income.


For residents the tax rate is regular rates after deduction of actual expenses or 35% of gross, whichever is greater. For non-residents it is a flat 25% of gross income.
The Bottom Line

Mexico is changing in many ways. In the future, the collection of taxes will become more efficient. However, understanding the Rules and planning your investments appropriately can result in lower taxes than you would normally pay.


The offsetting benefits of life in Mexico are more than worth the effort. And as we said above, when you attend a Focus on Mexico Program you will get the practical information of what people are actually doing, what Rules and Laws are being enforced and all the information in between. These are important areas and you need ALL the information and all the practicalities that go along with it. Then you can make informed decisions.



Focus on Mexico Programs will also cover
  • Corporate Tax
  • Tax on Corporate Assets
  • Payroll Taxes
  • Overview of Mexico – Canada/US Tax Treaties
Note: A survey of participants interests, prior to attending a Focus Program, guides the coverage of some Topics on our Programs. If we have only a small amount of people interested in a specific topic (like Corporate Taxes or Working & Doing Business), then we may handle it through an optional “University @ the Bar” session. Those not interested can participate in a different activity more to their interests and liking, allowing those with serious interest to get all the information they need.
 
Taxes in Mexico.What are the rules for mex-pats.