Foreigners and Tax Obligations in Mexico
Whether you are an individual earning an income in Mexico, or a business owner in Mexico, you have certain income reporting and tax obligations. This article includes a brief description of the most common taxes and contributions, as well as the corresponding authority.
As an employer in Mexico, you are responsible for the following contributions and taxes
- Payroll Tax
3% of the total salary of the employees is to be submitted monthly to the State Government.
- The Mexican Social Security Institute (IMSS) Instituto Mexicano del Seguro Social
As an employer, you are obligated to pay IMSS for health services and social security each month on behalf of your employees. The calculation of these fees is determined by the salary of the employee with a risk premium (depending on the hazards of the job), which may vary from 0.54% to 7.5%, depending on the type of activity of the business.
- The National Institute of Workers’ Housing Fund (INFONAVIT)
Employers and employees are subject to social security and housing charges. These are payable to IMSS and INFONAVIT a fund which enables individuals to borrow money at a low-interest rate in order to purchase property. The payment of 5% of the salary is made bi-monthly and withheld from the employee’s salary and paid directly by the employer along with the contributions to IMSS.
- Withholding of Income Tax on Salaries
This payment is calculated based on the salary of the employees and depends on the taxable income; a corresponding tax will be applied plus a fixed fee. The result is the amount to be withheld.
What is SAT, RFC, and FIEL?
Tax Administration Service (SAT) the Secretaria de Hacienda
SAT is the tax collection authority; they are equivalent to the IRS or CRA. SAT monitors and enforces taxation laws and obligations. To pay income tax (ISR) in Mexico, an individual or corporation must register with SAT, which is part of the Finance Ministry. If you are earning income, including rental income within Mexico, you are obligated to be registered and pay the appropriate taxes.
Federal Taxpayers Registry (RFC) Registro Federal de Contribuyentes
The tax identification assigned by SAT which can be applied to corporations or individuals. The ID for an individual is composed of a combination of initials, or date of birth, plus a unique code. A business RFC will also contain the registration date for the company.
The RFC must be provided whenever an electronic invoice is required for tax deduction purposes. Foreigners may obtain an RFC if they have temporary or permanent residency. The RFC enables foreigners to open bank accounts, purchase and register vehicles, and purchase real estate.
Digital Signature (FIEL)
FIEL is an electronic digital code and contains a file that can be saved on a USB which digitally identifies you when communicating with the government. The electronic signature enables you to access the SAT platform and thus file your tax reports.
The signature is valid for four years and may be obtained in person at the SAT offices by appointment.
Obtaining the FIEL is a long, tedious process that can take up to one month. If you retain the services of MexTax, they will obtain this code for you, as it will be required for the accounting services. The FIEL signature is often required for corporations to open bank accounts in Mexico.
Income Tax (ISR): Impuesto Sobre la Renta
Individual income tax varies between 20 – 35%, depending on the income.
The payments are submitted monthly before the 17th of each month for income earned in the previous month. They are obligated to file the annual declaration by April 30th.
The ISR payments are considered a tax credit for foreigners in the US or Canada, therefore avoiding any double taxation.
You are obligated to pay income tax in Mexico if you fall into one of these categories:
- Foreign residents who have a permanent establishment in the country, and gain an income from that establishment.
- A resident living abroad, with revenue from sources in Mexico, although they do not have a permanent establishment here.
- Foreigners with income from a rental unit in Mexico; even if the funds are deposited in another country, it is considered revenue earned in Mexico.
- Foreigners employed in Mexico.
Corporations pay ISR monthly, depending on the profits earned in the previous year, with an annual pay adjustment. This amount will be determined by calculating the income and deductions throughout the year. This tax is reported and paid monthly. Within the first three months of the following year, income tax declarations are filed in order to report revenue and expenditures throughout the previous year.
Value-Added Tax (IVA) impuesto al valor agregado
Equivalent to the Value-Added Tax and Sales Tax in other countries. It is applied at a rate of 16% to products or services. This tax is applied at the time of purchase and included in the price tag.
Mexico has a considerably lower property tax compared to other countries; it is determined on the assessment or cadastral value of the property and collected by municipalities. Property tax may be as low as $100 to $500 USD a year depending on the property. Further discounts are available by paying your property tax in advance at the city hall.
Lodging Tax (Hotel Tax)
In the State of Quintana Roo, the lodging tax is 3% and is paid by hotels and individuals renting their furnished property.
This tax is collected directly from the guest, and the company or individual will report and pay monthly to the state tax-collecting offices.
Recently some states including Quintana Roo have formalized the lodging tax by having Airbnb collect the tax from the guest at the time of booking.
Obligations of the Taxpayer
- Bank Account in the name of the company or the Taxpayer,
It is imperative that all payments and deposits are made through the account of the company or the individual. Otherwise, the expenditure will not be accepted as a deductible.
The electronic invoice is a digital document (receipt), which is proof of a transaction between a consumer and a merchant recognized officially by the tax authorities. This document is generated with a digital stamp, resembling a bar-code.
Keeping your tax obligations current is very important to avoid fines which range from 12,640 to 25,300 pesos for each declaration that was not filed, or filed after the deadline.