Business Taxation in Mexico
Congress conducts an annual revision of tax law, which is enforced by the tax authority, Servicio de Administración Tributaria, or SAT.
Corporate income tax, withholding taxes, tax on real estate, tax on cash sums, VAT, and social security contributions are among the main areas concerning companies with operations in Mexico, which are considered resident companies according to the location of their management.
Taxable and Deductible
As Mexico residents, companies pay tax on their worldwide income (where this comes from low-tax jurisdictions), whereas nonresidents only pay tax on their Mexican income.
A corporate income tax rate of 30% is made on the gross income of a tax year minus losses and deductible expenses. This gives the taxable income, which will largely be made of profits, capital gains, and passive income.
Dividends paid to resident shareholders may also be taxed, but not if the profits out of which those dividends are paid were taxed at corporate level. The record of these taxed profits is called a CUFIN account, and, by distributing all dividends from this account, a higher corporate income tax rate can be avoided.
Meanwhile, expenses deemed necessary to business operations are deductible, as are a percentage of employee benefits, which may include, among other things, pension contributions, bonuses, and travel and accommodation expenses.
Double taxation relief
Resident taxpayers qualify for an ordinary foreign tax credit up to the amount of income tax liability that can be attributed to their income from abroad.
Mexico has a broad range of international tax treaties and tax information exchange agreements that comply with OECD standards, from which a company can benefit as long as it provides standard documentation, such as a tax residence certificate or the relevant tax returns.
Anti-avoidance rules
With Mexico largely in line with OECD guidelines, transactions between related parties must follow the arm’s length principle; i.e. they are charged as if they were independent parties.
Furthermore, where transactions between related parties is considered to have taken place, the Income Tax Law acts as an avoidance countermeasure by applying what is calculated to be the Mexican-source income, thereby removing any gain accrued from favorable tax conditions elsewhere.
Equally, earnings from accounts based in low-tax jurisdictions abroad are subject to tax according to the Mexican rate.
Also, Mexican tax law regarding thin capitalization rules that interest from the excess debt of related parties is non-deductible.
How We Can Help
At Guerrero Santana we offer a complete service of:
Statutory compliance and risk assessment
Analysis of treaties
Analysis of legislative developments
Strategy support
Legal consultation
Systems integration
Documentation
We fully appreciate that each company faces its own distinctive challenges, and as such we are committed to cost-efficient compliance services according to the unique objectives and circumstances of each of our clients.