Mexico has become one of the more aggressive countries in Latin American when it comes to taxing its residents. Mexico taxes residents on their worldwide income. If you’re living and working in Mexico, the government wants their cut. Here’s a summary of the taxation of expats in Mexico.
Many of our clients in Mexico are audited each and every year by the SAT (known as Hacienda). This agency is very happy to deny any and all expenses of a business which are not documented or are paid to a tax haven country. If you’re a gringo or European, expect the Mexican SAT to be even more hostile.
For example, one of our clients is a large real estate developer in Mexico. They buy all kinds of products from around the world.
They’re unable to buy from Panama because payments to Panamanian corporations are not being allowed as deductions by their auditor. This forces them to buy from the United States at a higher cost. All expenses paid to high tax countries are allowed while payments to low tax countries are denied.
Expert Tip: If you have operations in Panama and Mexico, income should go into Panama and Mexico should bill the Panama corporation for services rendered. If income goes into Mexico, the SAT can deny the corresponding deduction when you make a transfer to Panama. If income goes to Panama, Mexico has nothing to say about the inbound transfer.
Taxation of Expats in Mexico
Keep in mind that this article is intended for expats living in Mexico, not Mexican nationals. The laws for citizens are different than for foreigners.
Mexico taxes expat residents on their worldwide income. In most cases, you’re a resident for tax purposes if Mexico is your primary home (your home base) and you spend more than 183 days in the country.
It’s also possible to be classified as a resident if you spend less than 183 days a year in Mexico. If SAT believes Mexico is your “center of vital interests”, they will classify you as a resident of for tax purposes.
Mexico may be your center of vital interests if:
- More than 50 percent of your total income received during the calendar year is derived from Mexican sources.
- When your main center of professional activities is located in Mexico.
These are the two primary tests for vital interests. An auditor may also consider the total facts and circumstances and find you to be a resident if neither of the above is true.
In most cases, if you’re living and working in Mexico for an entire year, you’re a tax resident. Also, any income earned for work performed in Mexico is taxable in Mexico.
If you’re a resident of Mexico, income earned in a foreign corporation or from work performed outside of Mexico is taxable in Mexico. As a resident, you’re taxed on your worldwide income no matter where earned. If you paid foreign taxes on that foreign sourced income, you will receive a tax credit.
Likewise, you’ll pay Mexican tax on any capital gains or passive income earned abroad. A foreign tax credit is available to eliminate double taxation.
If you’re not a resident of Mexico, you’ll only pay tax on your Mexican sourced income. For example, you’re living in the U.S. and work 30 days in Mexico for a Mexican corporation. This income is Mexican source and taxable in Mexico.
That is to say, any personal service rendered in Mexico generates Mexican sourced income and is thus taxable in the country.
Non-residents pay 15% or 30% tax on their Mexican sourced income. The first MXN 125,900 (USD $7,000) is exempt in most cases.
Here are the personal tax rates for residents of Mexico.
Mexico Personal annual tax rates 2016 (MXN)
|1 – 5,953||1.92|
|5,954 – 50,525||6.4|
|50,526 – 88,793||10.88|
|88,794 – 103,218||16|
|103,219 – 123,580||17.92|
|123,581 – 249,243||21.36|
|249,244 – 392,842||23.52|
|3,000,001 and over||35|
Mexico’s corporate tax rate for 2017 is 30%.
I hope you’ve found this article on the taxation of expats in Mexico to be helpful. Please contact me for assistance in structuring an international business with operations in Mexico and offshore. You can reach me directly at firstname.lastname@example.org or call us at (619) 550-2743. All consultations are private and confidential.