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Introduction

Mexico passed a tax reform law that took effect on January 1, 2014. There are many broad changes, including new income tax brackets, new taxes on certain dividends and gains, and changes to the maquiladora regime. Attached is a summary of the current tax environment.

Individual Tax

  • Residents are taxed on their worldwide income.
  • Tax rates are progressive up to 35%.
  • No tax on estates or inheritances.
  • All residents must file an annual income tax return by April 30th of the following year.
  • Non-residents are subject to withholding taxes on their Mexican-sourced income.

Corporate Tax

  • Flat tax rate of 17.5% on income from sales, services rendered and rentals has been repealed.
  • The corporate income tax rate is 30%. The corporate tax rate applies to both resident and non-resident companies.
  • Accelerated depreciation deductions are no longer allowed.

Types of Entities

  • Sociedad de Responsabilidad Limitada (S.R.L.) – Offers limited liability to investors. Pays taxes as a Mexican corporation, but may be considered a partnership for U.S. tax purposes.
  • Sociedad Anonima (S.A.) – Similar to the U.S. Corporation. Incorporated under the law for Mercantile Societies. Pays tax as a Mexican corporation and is considered a corporation for U.S. tax purposes. Requires investment by at least two stockholders.

Value Added Tax

  • Standard rate of value added tax is 16%.
  • Similar to U.S. sales tax. This is a tax on sales, rendering of independent services, imports of goods or services and leasing.
  • Non-Mexican entities that have permanent establishment in Mexico must comply with value added tax obligations.

Withholding Tax

  • Dividends: 10%
  • Interest:
    • 4.9% on interest paid to: foreign banks registered as banks in Mexico and non-resident financing institutions in which the federal government owns a percentage of capital.
    • 15% on interest paid to reinsurance companies and on finance leases.
    • 21% on interest paid to non-resident suppliers financing the acquisition of machinery and equipment that is included in the fixed assets of the acquirer.
    • 40% on interest paid to a related party in a tax haven.
    • 35% in all other cases.
  • Royalties:
    • 25% on payments made for the use of industrial, commercial or scientific information, technical assistance or the transfer of technology.
    • 35% on payments derived from the right to use patents, inventions, trademarks, advertising or names.
    • 40% on royalties paid to a related party in a tax haven.

Maquiladora

  • A Maquiladora is a Mexican company that processes imported raw materials into finished goods which are then exported back to the raw materials’ country of origin.
  • Designed to promote foreign investment.
  • Materials and equipment can be imported on a duty-free and tariff-free basis.
  • Investor can avoid permanent establishment while conducting operations in Mexico if they meet certain criteria:
    • Must be residents of a country that has a tax treaty with Mexico.
    • Must be in compliance with all terms of the treaty.

Owning Property in Mexico

  • Inside of the restricted border/coastal zones, non-Mexican citizens may only own land through a fideicomiso (“a Mexican trust”). There are several tax disclosures for a U.S. person owning a foreign trust.
  • Non-residents are generally liable to pay a 25% withholding tax on gross rental income. Can elect to have rental income taxed as business income, which taxes net rental income at progressive rates.
  • Non-residents selling Mexican property are liable to pay a 25% withholding tax on the gross sales price. However, non-residents with appointed local representatives may be taxed on their net capital gains at 30%.

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