Mexico: Tax System

Tax Rate For Foreign Companies

Mexican resident taxpayers’ are subject to corporate income tax from worldwide sources, whereas foreign residents are taxed on the income attributed to their permanent establishments in Mexico.
Foreign enterprises established in Mexico are subject to the same tax system as national enterprises, though they do benefit from certain exemptions. Although various states have started to offer competing tax incentives to attract foreign investors, the majority of taxes in Mexico are levied at the federal level.

Capital Gains Taxation

Gains on securities are included in regular taxable income.
When stocks issued by Mexican companies, securities that exclusively represent these shares, stocks issued by foreign companies listed on the Mexican stock market, and derivative financial operations based on stock indexes or the aforementioned shares are sold in recognized stock or derivative markets according to the Securities Market Law, the resulting capital gains will be subject to a 10% income tax rate.

For the purpose of calculating the taxable gain of real estate, the cost basis of the land and buildings may be increased for tax purposes, based on the duration of asset holding, through the application of inflation adjustment factors to the net undepreciated balance. Non-residents who choose to pay tax on net income by appointing a legal representative in Mexico are subject to similar rules, with the net gain taxed at a rate of 35% (or a lower rate as specified in a treaty). If not, the non-resident is subject to a final withholding tax (WHT) of 25% on the gross income. Gains or losses from the disposal of machinery, equipment, and other fixed assets are also determined by adjusting the basis of these assets through the application of inflation factors to the net undepreciated balance.

Main Allowable Deductions and Tax Credits

In general, all federal, state, and local (including the municipal tax on real estate) taxes levied on a company (not including taxes on acquisitions of fixed assets and real estate and CIT) are tax-deductible expenses.

Start-up expenditure incurred prior to the commencement of business may be amortised at the yearly rate of 10%, after applying the adjustment factors. The deduction of charitable contributions is limited to 7% of the taxable income of the previous year.
As a general rule, interest expenses can be considered deductible expenses provided that certain conditions are met. These conditions include investing the principal in the main activity of the Mexican taxpayer, fulfilling withholding obligations, submitting informative returns that disclose information about the loan and transactions with related parties, complying with thin capitalisation rules (which require a 3:1 debt-to-equity ratio), ensuring that the transaction is carried out at arm's length, and ensuring that the interest payment does not meet the criteria of a deemed dividend. Furthermore, a limitation applies to net interest (i.e. taxable accrued interest minus deductible interest) that exceeds 30% of an adjusted taxable profit amount. It is important to note that this limitation only applies to taxpayers whose deductible accrued interest exceeds MXN 20 million, which must be determined on a Mexican group basis or a related party basis.

R&D expenditure (including investment in R&D) gives rise to a 30% tax credit. The tax credit is equal to current-year R&D expenses in excess of the average R&D expenses incurred in the previous three years.

For payments related to technical assistance, the transfer of technology, or royalties to be considered deductible, they must be made directly to companies that possess the necessary technical expertise to provide the relevant service. If payments are made to foreign affiliates, they will only be considered deductible if they adhere to the arm's-length principle.

Net operating losses can be carried forward up to 10 years, subject to adjustments for inflation. The carryback of losses is not permitted.

Non-deductible items include penalties, unauthorised donations, contingencies, indemnities, goodwill, exempt salaries, etc.

Other Corporate Taxes

After their first year of operations, companies may be subject to employee profit-sharing tax (10%), as well as special excise taxes on production and services (tax losses cannot be applied against the profit-sharing base, and no later than May of the year following the year in which the profits were generated).
The transfer of real estate is subject to a tax at rates ranging from 2% to 5% on the highest of the value of the transaction, fair market value, or registered municipality value (some exceptions apply). Real property taxes are levied by the states at different rates.

Companies engaged in oil exploration and production are subject to a special tax regime as set out in the Hydrocarbons Revenue Law.

Social security contributions are based on the daily salary plus any other compensation paid to the employee, with rates varying according to the base salary of their Mexican employees and the type of concepts for which the compensation is given to the employee (ranging from 15% to 25%). For a low-risk company, the employer's maximum annual contribution is MXN 195,235. However, this limit may be higher depending on the employer's occupational risk premium, which is determined by the employer's activity. These maximum contributions apply only to employees who earn more than MXN 940,800 per year (or MXN 78,400 per month).

The acquisition of new vehicles is subject to taxation, while the different states may impose a tax on the ownership of vehicles. Mexico does not levy stamp duties.

Country Comparison For Corporate Taxation

Source: The World Bank - Doing Business, Latest data available.

Accounting System

Accounting Standards

Accounting standards are set by regulatory bodies, such as the Mexican Council for Research and Development of Financial Information Standards. Mexican companies are required to prepare their financial statements in Spanish and according to Mexican Financial Information Standards (NIF, formerly known as Generally Accepted Accounting Principles or PCGA). Accounting registries and books of account must be recorded in Spanish.

Accounting Regulation Bodies

Mexican Council for Research and Development of Financial Information Standards

Accounting Law

The General Law for Commercial Enterprises of 1934, Regulatory Law of Banking and Public Credit Service, Law on Systems for Retirement savings and the Tax Federation Code of 1987

Difference Between National and International Standards (IAS/IFRS)

The National Banking and Securities Commission of Mexico (Comisión Nacional Bancaria y de Valores (CNBV)) fully adopted IFRS Standards for financial reporting in 2012. The Mexican Financial Reporting Standards Board (CINIF) has also been eliminating differences between IFRS and Mexican Financial Reporting Standards (MFRS), which is one of the frameworks that can still be used by SMEs.

Accounting Practices

Tax Year

The fiscal year begins on 1 January and ends on 31 December of the same year.

Accounting Reports

There are two essential structures:

- The balance sheet, which reflects the financial situation of the enterprise and provides information about the assets, liabilities and capital on a particular date (the last day of the fiscal year).

- The profit and losses report, reflects the income, expenses, loss and profit obtained during that particular period (typically each trimester or fiscal year).

Publication Requirements

The balance sheet, the profit and loss account statements and the daily ledger are mandatory components. All accounts are published annually.
Corporations with gross income exceeding MXN 100 million, assets exceeding MXN 79 million or with at least 300 employees (in every month during the tax year) may file with the tax authorities a special report (dictamen fiscal) prepared by an independent public accountant. If the report is filed, the tax authorities will not audit on general principles, but instead review to verify that the audit was properly carried out.

Accountancy Profession

Accountants

The diploma of public accountant is required to practice the profession in the country. You can access the website of the Instituto Mexicano de Contadores Publicos, A.C.

Professional Accountancy Bodies

Mexican Institute of Public Accountants

Member of the International Federation of Accountants (IFAC)

Yes

Allowable Deductions and Tax Credits

Deductions are subject to an annual limit equal to the lesser of 15% of the yearly overall income of the taxpayer or an amount equal to five annual UMA (a maximum of MXN 189,222 in 2023).
Deductions are granted for business expenses, medical, hospital and dental expenses as well as a limited amount of medical insurance, retirement annuities, mortgage interest, etc. Personal allowances are also granted to the taxpayer and his or her dependents.
Contributions made to authorised charities are deductible, limited to 7% of the prior year's taxable income. Home mortgage interest (adjusted for inflation) is deductible, subject to certain limits.
Taxpayers are allowed to deduct tuition expenses paid for their spouse, children, parents, and themselves. The maximum amount deductible per student varies from MXN 12,900 to MXN 24,500, depending on the level of education.
Resident taxpayers are allowed to deduct un-reimbursed medical, dental, nutritionist, psychologist, health insurance premiums, and funeral expenses for themselves and their dependents when they are not paid in cash.

Business owners and independent professionals can generally enjoy the same deductions as corporations.

More information regarding deductions can be found on the Mexican Federal Tax Administration website.

Special Expatriate Tax Regime

Residents must pay taxes for their worldwide income, non-residents must pay only for income earned from Mexican sources. No special regime applies to expatriates.
If an employee is considered a non-resident for Mexican tax purposes, the tax rate applicable to compensation will vary from 15% (MXN 125,900 to 1 million) to 30% (above MXN 1 million). The first MXN 125,900 of employment income received in a 12-month floating period will be tax-exempt.
Non-residents are subject to withholding taxes on Mexican-source interest income, with rates between 0% and 35%. Gains arising from sales of real property located in Mexico and the sale of shares of Mexican companies outside the Mexican stock exchange are also subject to taxation: in general, the non-resident investor can elect to pay either a flat rate of 25% of the gross proceeds or 35% of the net gain. Sales of shares in the Mexican stock exchange are subject to a flat 10% tax withholding.

Capital Tax Rate

There are no taxes on estate or inheritance, therefore they are treated as normal income. A local real estate property tax may apply. A 10% withholding tax is applied to dividends paid out to resident individuals. A 25% withholding tax is applied to income received by non-residents from the lease of real and personal property.
Employees have to contribute to social security according to varying rates and subject to various limits based on multiples of the UMA, up to a maximum of MXN 25,656 (2023).
Real property taxes are levied by the states at different rates.