Whenever we Americans move abroad, buy a rental property, or start an international business, we must deal with both US taxes and taxes in our new country. In this article, I’ll look at what taxes Americans pay in Mexico. This post should apply to most countries out there.
The starting point for this post is the fact that Americans pay US tax on our worldwide income, no matter where it’s earned and no matter where we live. There was hope in the industry that Trump’s tax plan would apply equally to individuals and multinationals. But, that didn’t happy and individuals are still stuck with worldwide taxation on our income. Big corporations only pay US tax on US source profits.
This also means that the best defense we expats have against the IRS is the Foreign Earned Income Exclusion. If you’re out of the US for 330 out of 365 days or a resident of a foreign country, you can exclude just over $100,000 of salary income from your US tax return. Note that the FEIE does not cover capital gains or other passive income.
With that said, let’s take a look at what taxes US persons will pay in Mexico.
Paying taxes in Mexico when you are a foreigner can be more complicated than it seems. In most cases you will require good and well paid advice to avoid paying double and to stay in compliance. Americans have to pay taxes in Mexico when they reside abroad and earn income in Mexico, or when they have a permanent established business in the country.
Americans who are residents of Mexico and receive income in there are considered taxpayers and are taxed in the same way as nationals would be. Consequently, they must comply with the obligations that correspond to the regime for which they receive said income.
Keep in mind that you will get a foreign tax credit in the United States for taxes paid in Mexico. So, you should get a dollar for dollar credit in the US for these taxes. The purpose of the foreign tax credit is to avoid double tax on the same income.
An American who lives in Mexico must understand the concept of tax residence when paying taxes. Nowadays Mexican legislation establishes that a foreign person or a company is a resident when he generates 50.1% of his income in Mexico.
Likewise, a US citizen is a tax resident of Mexico if they spend 183 days a year in the country. This 183 day standard is used throughout the world to determine tax residency.
When an American has a Mexican residence, he is obliged to pay taxes if he obtains income from the following:
- Salary: money obtained from salaries and other benefits derived from an employment relationship, overtime, additional benefits, compensation, retirement, pensions, retirement insurance, bonuses, among others.
- Fees: income earned by providing independent professional services, that is, not granted in a subordinate manner.
- Compensations to members of councils, government administrators, curators and managers: salaries received by members of boards of directors, oversight, consultants, fees to administrators, commissioners and general managers.
- Leasing of real estate: income for renting real estate as long as that property is located within the national territory.
- Timeshares or tourist service contracts: for use, enjoyment, occupation or enjoyment of temporarily or definitively of one or more real estate or part of them for tourism, vacation, recreational or sporting purposes.
- Disposal of shares: When income is obtained from the sale or disposal of shares or other securities.
- Financial leasing: interests generated from leasing with option to purchase or with the right to participate when the good is sold to a third party.
- Royalties, technical assistance and advertising: profits obtained through the use of patents, inventions, trade names, copyrights, by transmission of visual images, sounds or both.
- Exempt interests: discounts for the placement of securities, payments made for the opening of credits, payments to a third party when there is an acceptance of an endorsement, profits from the sale of securities placed among the investing public, the income obtained by a resident abroad for the acquisition of a right or credit of any kind, present or future.
- Prizes: lotteries, raffles,, betting games or contests of any kind.
- Artistic activities, sports, or public shows: profits or income obtained by residents abroad that carry out sports, artistic or public shows in Mexico.
- Dividends and profits distributed by legal persons: When residents abroad obtain income from profits distributed by legal entities residing in Mexico.
- Sale of real estate: when income is received from the sale of some real estate that is within the national territory.
- Construction, installation, maintenance or assembly in real estate, inspection or supervision: those who provide construction services, installation, maintenance, or assembly in real estate within national territory.
Residents are subject to Mexico’s income tax on their world income, regardless of their nationality. The Federal Tax Code establishes that a foreigner will be considered a resident of Mexico for tax purposes when his domicile has been established in Mexico, unless he has been physically present in a foreign country for more than 183 days, consecutive or not, in a calendar year, and is able to demonstrate residency for tax purposes in that other country.
In order to work within these tax laws, most Americans set up an offshore company. They use one structure to manage investments (usually an LLC) and one to hold their business (usually a corporation). Then they bring into Mexico only the income necessary to operate there.
Also, most Americans look to set up residency in a foreign country that will not tax their income. Because they’ll be spending time in Mexico, they also need a country that doesn’t have a physical presence requirement to maintain the visa.
The best residency program without a significant physical presence requirement is Panama. You can become a legal resident with an investment of $20,000 and won’t be taxed on your income. You should spend a week or two in the country each year to keep up appearances. For more, see: Best Panama Residency by Investment Program
I hope you’ve found this article on Mexican tax laws for Residents to be helpful. Mexican tax law is a very complicated subject for more information, or for assistance in living in Mexico or opening an offshore company, please contact us at firstname.lastname@example.org or call us at (619) 550-2743. We’ll be happy to assist you with your international tax plan and with an international corporation and bank account.