As a general rule, the registration of a Mexican branch requires the approval of the General Office of Foreign Investments. In special cases, a Mexican branch may constitute a permanent establishment in Mexico for tax purposes. However, entities established under the laws of World Trade Organization member countries are exempt from the requirement to obtain such authorization. All you have to do is file a notice with the General Office of Foreign Investment. Since 2005, Mexican states have been allowed to levy personal income tax on certain items of income such as fees, rental income, real estate sales, etc. Very few states have passed laws to tax this income. These types of companies obtain their legal existence by their incorporation before a notary and their subsequent registration in the public commercial register. Breaking the corporate veil is not allowed in Mexico for these companies, except in certain limited circumstances. However, Mexican courts have supported the possibility of breaking the corporate veil to avoid circumventing abusive laws and practices. Mexican taxpayers who engage in transactions with domestic and foreign related parties are required to conduct such transactions using prices and consideration that would have been used by independent parties in comparable transactions. Transfer pricing documentation and reporting requirements apply to all related party transactions. The reports are supported by transfer pricing studies conducted in accordance with the methods permitted by applicable laws. Mexico`s foreign trade tax laws establish two ways to import goods into Mexican territory: Tax treaties harmonize many tax laws between two countries and aim to reduce double taxation, including by reducing or eliminating withholding tax between countries.
Countries with more treaty partners have more tax regimes for foreign investment and are more competitive than countries with fewer treaties. A foreigner residing in Mexico is considered a resident of Mexico if certain conditions are met. National tax legislation provides for certain exceptions for the exclusion of an enterprise from the permanent establishment of the permanent establishment (for example, if it is only a preparatory or auxiliary place). Particular attention should be paid to cases where resident foreigners carry out entrepreneurial activities through trusts in Mexican territory. The activities of insurance companies are assessed on a case-by-case basis. If interest expense for income tax purposes were reclassified as dividends, the corresponding tax deductibility of interest payments would be excluded. Those circumstances justify a fresh examination of the effects corresponding to the tax treatment of dividends considered constructive. In Mexico, corporate income tax is largely payable by taxpayers and is levied at the federal level, with only certain matters imposed at the state or local level (e.g. property acquisition, property taxes and payroll taxes).
Companies are subject to federal corporate tax at the rate of 30%, which is applicable to profits after allowable deductions The tax year is generally based on the calendar year. Foreign residents engaged in manufacturing activities under the so-called maquiladora regime (for example, those engaged in certain processing-related activities from temporarily imported raw materials and stocks for the production of finished goods for export) should assess their position on a case-by-case basis to determine whether PEs should be created in Mexico as a result of that manufacturing activity. (b) Temporary imports. Under Mexican law, goods can be imported into Mexico temporarily. In a bonded transaction (bonded transaction), the bonded company usually temporarily imports (1) machinery and equipment used in the company`s bonded manufacturing and (2) goods (raw materials, inputs, etc.) that are subject to processing and subsequent export to the country of origin or another foreign jurisdiction. The taxpayer claims a tax refund within five years. Non-resident natural or legal persons may be subject to Mexican tax in certain circumstances. For example, a foreign natural or foreign entity is subject to Mexican tax if it has a “permanent establishment” in Mexico or derives income from a source of wealth located in Mexico.
Corporate income tax is a corporate income tax. All OECD countries levy a corporate income tax, but tax rates and bases vary considerably from country to country. Corporate taxes are the most damaging tax on economic growth, but countries can mitigate this damage by lowering corporate tax rates and providing generous capital cost allowances. With respect to legal persons, a company incorporated in Mexico is a tax resident. Foreign companies are tax residents if their principal place of business or business address is in Mexico. VAT taxable persons are required to make provisional VAT payments at the same time as provisional payments for income tax. In addition, countries have payroll taxes. These flat-rate taxes are levied on wage income in addition to a country`s general personal income tax. However, revenues from these taxes are typically used specifically for social security programs such as unemployment insurance, state pension programs, and health insurance.
The payment of leased assets used for economic activities is subject to income tax. A withholding tax may apply. The SAT may require a foreign taxpayer intending to apply a tax treaty to prove the existence of double taxation if it transacts with a related party that is a Mexican taxpayer. In this case, the foreign taxpayer must provide a declaration showing that the taxable income in Mexico (e.g. interest, royalties) is also taxable in his country of residence. The VAT rate is generally 16% throughout Mexico, payable by the buyer, beneficiary or consumer. However, the seller or service provider is usually responsible for invoicing and withholding VAT per invoice and monthly VAT payments. It goes without saying that some goods or services are subject to a 0% VAT rate, such as unprocessed food, medicines, etc. Mexican companies are allowed to borrow funds from residents, foreign residents, related parties or unrelated parties. Interest payments (including essentially all payments made under the loan in question and valued as interest) made by a Mexican resident to a foreign resident are generally subject to withholding tax (WHT).
Certain types of interest are exempt from WHT. Income from work (wages and other income earned by employees for activities in Mexico) is generally subject to payroll tax. These taxes are generally collected by the states and payable by Mexican employers. Tax rates on wages vary from state to state and are typically between 1% and 3%. Capital gains, as well as income from the temporary use of land or buildings attached to land in Mexico, are not subject to the WHT to the extent that the income derives from investments made by foreign pension funds and as long as these pension funds are the ultimate beneficial owners of the income and the income is exempt from income tax in the respective jurisdiction of the pension funds. A company may apply for VAT/IEPS certification and therefore not pay import VAT if the goods are subject to the following customs regulations: As an expat in Mexico, the taxes you pay depend in part on your situation. If you own real estate in Mexico, you pay property taxes. If you rent this property or own a business, have a job or have interest-bearing bank accounts, you owe income tax. Even if you don`t have one, you`ll still pay sales tax (known as sales tax or sales tax) on most retail goods and services. This tax is payable by legal persons on the assets of the company. The tax is payable at a rate of 1.8% on the value of the taxpayer`s assets and is complementary to income tax, meaning that if the amount of income tax due is higher than the applicable wealth tax, no wealth tax will be paid.
Only if the applicable income tax is lower than the wealth tax must the taxpayer pay wealth tax. Taxable persons may deduct the amount of VAT transferred to them (received) and the tax transferred (paid). The difference between the tax collected and the tax paid corresponds to the tax due to the Mexican government or, if applicable, to the balance due to it, which can be recovered by presenting the corresponding refund. For the 2020 financial year, the previously introduced “universal” compensation mechanism has been significantly modified; As a result, positive VAT balances cannot be offset by other taxes, leading to potential cash flow problems for domestic businesses (as VAT refunds are usually lengthy and cumbersome). Although a PE is treated as a taxpayer, it is not assessed as a Mexican resident. Sources of income attributable to a Mexican PE include entrepreneurial activities conducted through the MOU, fees, independent personal services, and sales of property or real estate in Mexico.