In recent years, Mexico has become one of the most attractive destinations for foreign investment, thanks to factors such as its privileged geographical location, strong trade relations with other countries and competitive and skilled labor force. However, the country has a strong and complex tax system, which is essential to consider before making an investment, to estimate the expected net profit and avoid penalties, as well as to maximize financial and tax benefits.

Tax Legal System:

The Tax Legal System in Mexico is overseen by the Tax Administration Service (SAT), which has the following powers:

Administration and Collection of Federal Taxes: Manages the collection of taxes such as Income Tax (ISR), Value Added Tax (IVA), and other special taxes.

Taxpayer Registration: Registers individuals and businesses, assigning them a Federal Taxpayers Registry (RFC) and overseeing compliance.

International Interactions: Facilitates the relationship between the Mexican government and foreign companies, ensuring understanding of their tax obligations and the application of double taxation treaties.

Digital Services: Offers online platforms for filing of tax declarations and payments, simplifying compliance management.

Types of Contributions in Mexico

In Mexico, there are four types of contributions:

Taxes: Legal contributions that individuals and corporations must pay under specific circumstances.

Social Security Contributions: Mandatory contributions that the State covers on behalf of those benefiting from social security services.

Improvement Contributions: Taxes levied on those who directly from public works.

Rights: Contributions for the use of public goods and State services, excluding certain services provided by decentralized agencies.

Levels of Taxation

Taxes in Mexico are divided into three levels:

Federal: Applicable nationwide, including ISR and VAT. throughout the country, this includes ISR and IVA.

State: Applicable in each state, which may include payroll, property, and business income taxes.

Municipal: Applicable to each municipality, typically including property taxes, operating licenses, and public services.

Main Taxes for Foreign Companies

Foreign companies in Mexico are subject to two main taxes:

Income Tax (ISR): This tax applies to income generated within Mexico, with a standard rate of 30% on the profit obtained. Deductions and exemptions depend on the specific business activity and the applicable tax regime.

Value Added Tax (VAT): This tax is levied on sale of goods and services in Mexico at a general rate of 16%, although certain activities may be exempt or subject to a 0% rate (such as exports), and in border zones, the rate is reduced to 8%.

Additional Contributions to Consider

Social Security Contributions: Approximately 20% to 22% of the employee’s salary, covering health, pensions, disability, as well as contributions to the Housing Fund (INFONAVIT) and the Retirement Savings System.

These contributions are essential for the well-being of employees.

Tax Withholdings

Mexico requires withholding taxes on certain payments such as royalties, interest, and dividends. The withholding rates vary, and double taxation treaties may offer reductions.

International Double Taxation Treaties:

Mexico has tax treaties with over 50 countries to avoid double taxation, allowing foreign companies to reduce their tax burden on cross-border payments. It is crucial to evaluate the availability of these treaties to take advantage of the benefits they offer.

An example of these treaties is the agreement to avoid double taxation on income tax between Mexico and the United States of America, which is based on the OECD (Organization for Economic Co-operation and Development) model convention.

Tax Incentives and Deductions:

The Mexican government offers tax incentives to encourage foreign investment, including accelerated deductions and special economic zones. Companies can significantly benefit if structured appropriately within the legal framework. The most relevant deductions include:

Interest Expenses: Deduction of loan interest, subject to a maximum debt-to-equity ratio of 3 to1.

Charitable Contributions: Deductions limited to 7% of the taxable income from the previous year.

Capital Losses: Can offset capital gains and can be carried forward for up to 10 years.

Employee Salaries: Fully deductible provided that social security obligations are met.

Effective utilization of these deductions can yield significant tax savings.

Tax Obligations:

Companies must register with the Tax Administration Service (SAT) and comply with their tax obligations, including filing declarations, timely payment of taxes, safeguarding information, and sharing information with authorities. Non-compliance can result in significant penalties.

To maximize benefits and avoid risks, it is advisable for foreign companies to develop a comprehensive tax planning strategy that considers local regulations, double taxation treaties, and available incentives.

Foreign companies operating in Mexico must be aware of their tax obligations and leverage available incentives and treaties. Adequate tax planning is fundamental to minimizing tax burden and ensuring compliance with Mexican law effectively.

Conclusion

Foreign companies operating in Mexico must be aware of tax obligations and take advantage of the incentive’s treaties available. Proper tax planning is essential to minimize the tax burden and efficiently comply with Mexican law.

At Calderón Marín, S.C., we are at your disposal to provide comprehensive advice and support in meeting your tax obligations in Mexico, always with the goal of protecting your investments in the country. Our team is committed to keeping you informed of any relevant regulatory changes, particularly in tax matters, that could impact on your operations. In addition, we recommend conducting preventive audits to assess your company’s compliance status, ensuring adherence to current legislation and preparing you for potential future legislative changes.