Mexico has a residence-based system under which if an individual resides in Mexico for tax purposes, he or she is subject to taxation over his or her worldwide income. An individual is a Mexican tax resident if he or she settles his or her habitual abode in Mexico. If an individual has a home in Mexico and another country, the centre of vital interests is the factor that determines the tax residence in Mexico. Mexican nationals are presumed tax resident in Mexico.
Income tax liability is the income obtained by the taxpayer during a fiscal year (which coincides with the annual calendar). Mexican law does not provide a general definition of 'income'; however, in the context of the Income Tax Law, Mexican courts have defined it as a 'positive modification registered in the patrimony of a person that is susceptible of pecuniary valuation'. Individuals are taxed on income received in cash, in kind, in credit or in services. Individuals can apply certain personal deductions (education costs, charity donations, medical and dental) and most personal deductions are limited to 15 per cent of the yearly taxable income.
Personal income tax rates are progressive up to 35 per cent. Individuals with business activities or professional income are subject to income tax at the rate of 30 per cent and may deduct normal business expenses according to entities rules. In most cases, a tax return has to be filed by the end of April in the following year.
Non-resident individuals are taxed only with respect to income, which is sourced in Mexico with varying terms and conditions depending on the type of income. The tax rate varies between 5 per cent and 40 per cent. Double taxation agreements apply by reducing the taxable rates or even producing a non-taxable event.
The principal type of taxable income for individuals (residents in Mexico and non-residents) are the following.i Sale of shares
Mexican resident individuals are taxed over the sale of goods, including shares issued by foreign entities. To assert the tax base, individuals are allowed to perform certain deductions. For such purposes, Mexican resident taxpayers will be able to deduct, among others, the updated amount of the acquisition cost of the shares, commissions and certain considerations paid to intermediaries, and some other taxes or duties paid.
With respect to foreign individuals, the sale of the shares will trigger a tax of 25 per cent on the net income, or 35 per cent on the gross amount, if the non-resident appoints a representative in Mexico. A tax return must be filed in conjunction with an auditor's opinion obtained from a Mexican public accountant certifying that the reported gain was correctly determined.
Income deriving from the sale of securities or publicly traded shares is subject to a 10 per cent tax on the gain (foreigners are subject to a 10 per cent withholding tax on the gain).ii Dividend distributions
Resident individuals must include the dividends received from Mexican corporations (grossed up for the corporate income tax paid by the corporation) in their individual income tax returns and are able to claim the underlying corporate income tax paid as a credit against their personal tax liability.
Moreover, with respect to dividends paid from profits that were generated by the distributing entity after 2013, an additional 10 per cent tax on the net dividend will be withheld by the Mexican company. This tax is in addition to the tax paid with the annual tax return, and it cannot be credited. In the case of dividends paid to foreigners, the dividend amount will also be subject to this 10 per cent withholding rate.
Double taxation agreements, in certain cases, grant preferential withholding rates upon any profit or dividend distribution sourced in Mexico (reducing it by up to 5 per cent).iii Interest income
Interest earned in accounts held in Mexican banks is subject to withholding tax and should be reported in the annual tax return.
Interest on bank accounts, bonds and other debt obligations issued by non-residents is fully taxable, and the taxable interest includes adjustments for inflationary losses and exchange gains and losses with respect to the principal.
Interest paid to a non-resident is subject to withholding tax at rates ranging from 4.9 per cent to 35 per cent and 40 per cent.iv Real estate
Income deriving from the sale of real estate is taxable for income tax purposes considering the seller's gains (tax basis with recognition of the inflationary effect).
With respect to the acquirer, a local tax of approximately 2 to 6 per cent is applicable on the commercial or transaction value (whichever is greater).
If the real property is acquired as a gift or at under 10 per cent of the appraisal value, income tax will also be triggered by the acquirer.
With respect to foreign individuals, the sale of the real estate will trigger a tax of 25 per cent on the net income or 35 per cent on the gross amount if the non-resident appoints a representative in Mexico.v Inheritance and gift taxes
There is no specific inheritance, estate or gift tax in Mexico. Inheritance and gifts are treated as income under the income tax law, but they may be exempted as long as certain requisites are complied with.
Income received by Mexican tax resident individuals from inheritance and donations (when applicable) in a given tax year, must be reported to the tax authorities in their annual tax return. Income received by resident individuals from donations shall be reported to the tax authorities when all donations (including prizes and loans) received in a tax year exceed 600,000 Mexican pesos.
Income received as a result of a gift from a spouse, lineal ancestors or lineal descendants is also exempt. However, gifts between siblings are not exempt, and gifts to parents are not exempt if the asset is later given or sold to a sibling of the original owner.
Other gifts are tax exempt, provided the gift does not exceed US$88,209 pesos. Any portion of the gift exceeding this amount would be subject to income tax.vi Taxpayers subject to the preferential tax regime
Mexican tax residents will be subject to the preferential tax regime rules regarding income generated directly or indirectly through foreign legal entities or figures, including those considered transparent (i.e., flow-through for tax purposes), in which they participate directly or indirectly, in the proportion of their participation in the capital of such legal entities or figures.
Income subject to the preferential tax regime is subject to taxation in Mexico in the fiscal year that such income is generated abroad, even if the income, dividends or profits have not yet been distributed by the entity or figure in which the Mexican taxpayer directly or indirectly participates.
Taxpayers must file in February of each fiscal year an informative tax return regarding income subject to the preferential tax regime directly or indirectly; income generated in the previous tax year; income generated in blacklisted countries; and transactions carried out through tax-transparent foreign legal entities or figures.
There are several exceptions to this regime, especially regarding the absence of effective control on the foreign legal entity or legal figure. See Section IV.