Mexican tax law distinguishes between residents and non-residents, whether they are individuals, companies or other entities treated as corporate bodies. As a general rule, residents are subject to taxation in Mexico on their worldwide income, whereas non-residents are taxed only on their income derived from Mexico. Legal entities are considered Mexican residents if they are headquartered in Mexico, meaning they have established their main business administration or place of effective management in Mexico. There are specific rules under domestic law and double taxation signed by Mexico, to determine tax residency for individuals.

According to the domestic law, individuals and legal entities are subject to income taxation in the following cases:

1. Residents are taxed on their entire income, regardless of its source
2. Non-residents with a permanent establishment (PE) in Mexico are taxed on income attributable to that PE
3. Non-residents are taxed on income derived from Mexican sources when they do not have a PE in Mexico or when the relevant income is not attributable to such PE.

In general, under domestic tax law, non-residents without a PE in Mexico, or with a PE in Mexico to which Mexican-sourced income is not attributable, will be subject to income taxation if they earn income in cash, goods, services or credit from Mexican sources. However, certain exemptions apply to investments made by foreign pension funds.

A non-resident is considered to have a PE in Mexico if certain conditions are met. Domestic tax law provides exceptions for a place of business to be excluded from the status of a PE, such as when the facility is merely of a preparatory or auxiliary character nature. Special consideration should be given to cases where foreign residents carry out entrepreneurial activities through trusts within Mexican territory. The activities of insurance companies are assessed on a case- by-case basis.

Although a PE is treated as a taxpayer, it is not considered as a Mexican resident. Sources of income attributable to a Mexican PE include entrepreneurial activities performed through the PE, fees, independent personal services and sales of goods or real estate located in Mexico. Income attributable to a PE includes income obtained by the head office from any of its foreign offices/branches, proportionally to the costs and expenses incurred by the PE in generating the relevant income.

Foreign residents without a PE involved in manufacturing operations corresponding to the Maquiladora regime (Mexican companies authorized to carry out certain manufacturing processing-related activities using temporarily imported foreign raw materials and inventories to produce final products for exports) should comply with certain statutory requirements to determine whether a PE is created in Mexico as a result of this manufacturing activity.

Corporate income tax is mainly payable by taxpayers in Mexico and is levied at the federal level, with only specific matters subject to taxation at the state or municipal level, such as real estate acquisitions, property taxes and payroll taxes. Corporations are subject to federal corporate income tax at a rate of 30% on profits after authorized deductions. The fiscal year generally aligns with the calendar year.

Non-profit organizations are exempt from taxation. Taxpayers engaged exclusively in activities related to agriculture, livestock, fishing, or forestry may have a specific tax treatment that reduces their tax liabilities. Income tax rates are progressive, with the maximum rate for a resident individual in 2023 being 35%.

In this chapter

• Legal system
• Taxation authorities
• Business vehicles
• Financing a corporate subsidiary
• Corporate income tax
• Cross-border payments
• Payroll taxes
• Indirect taxes

Legal system

The legal system in Mexico is based on civil law tradition.  The Federal Constitution serves as the essential statute of the Mexican legal system, establishing fundamental individual rights, the organization of the federal government and the scope of authority of the federal, state and municipal governments.  Certain areas of law fall within the exclusive jurisdiction of the federal government, while others are within the purview of the state governments, which are organized according to their own state constitutions.  The federal government holds the authority to regulate trade and commerce, including the incorporation of companies, while states usually have the right to regulate property within their territory.

The Mexican tax law framework comprises:

1. The Federal Income Law, which annually is approved by Congress and provides for federal taxes, levies, duties, assessments, fees and other charges imposed by the federal government during the relevant fiscal year
2. The Federal Tax Code and its regulations
3. The Income Tax Law and its regulations
4. The Value Added Tax Law and its regulations
5. The Special Tax on Production and Services and its regulations
6. International treaties, such as double taxation conventions and comprehensive agreements for the exchange of tax information
7. General Tax Rules/Omnibus Tax Bill
8. Non-binding criteria
9. Normative guidelines
10. Frequently asked questions
11. Rulings
12. Local tax laws and regulations.

The standard statute of limitation period is five years (from the date the relevant tax return was submitted) for tax authorities to audit a taxpayer’s compliance with their obligations, assess and collect taxes, audit tax returns or impose additional tax liabilities.  In certain cases, this period is 10 years and tax authorities retain the right to investigate fiscal criminal offenses even beyond this time frame.

Taxpayers may only request tax refunds within five years from the due date of the tax return.

Taxation authorities

The Tax Administration Service (SAT) is the federal agency, under the Ministry of Finance and Public Credit, responsible for administering the Mexican tax system at the federal level.  As of a 2022 reform, the administration of the customs system, which was previously under SAT, is now entrusted to the National Customs Agency, which is an independent agency also under the Ministry of Finance and Public Credit, with the authority to act as the tax and customs authority.

However, there are also coordination agreements between federal and state competent authorities that allow states to collect certain federal taxes under specific conditions.  Local tax administration agencies and offices also exist at the state level.

The Prodecon is a decentralized government entity in Mexico that serves as a taxpayer ombudsman.  It provides advice to taxpayers and, under certain circumstances, acts as a mediator between taxpayers and authorities during tax audit procedures and conflicting rule interpretations.  It also issues non-binding recommendations to the tax authorities, among other services.

In line with the guidelines of the Organisation for Economic Cooperation and Development (OECD), tax authorities have recently focused their attention on tax audits related to transactions with foreign residents or multinational groups (particularly payments abroad), related party transactions, international corporate restructurings, deductibility of expenses, transfer of fiscal losses, issuances of electronic invoices for nonexistent transactions, transfer pricing issues, aggressive tax structures based on the Base Erosion and Profit Shifting (BEPS) guidelines, and investments in tax haven jurisdictions abroad.

Business vehicles

Foreign residents are allowed to engage in business activities in Mexico, both on a permanent and non-permanent basis. It is not mandatory to establish a Mexican business entity, branch or representative office for this purpose.  However, any presence in Mexico should be carefully evaluated based on the intended business model.

The Income Tax (Impuesto sobre la Renta – ISR) law includes specific provisions regulating the taxation of certain types of income derived from Mexican sources by non-residents, particularly those without a PE within Mexican territory or those with a PE to which the income is not attributable. Special attention should be given to investments made by foreign resident pension funds. If a foreign resident intends to conduct regular business activities in Mexico, they may register a Mexican branch or representative office or establish a Mexican subsidiary/legal entity.

Business trusts can also be utilized for conducting business in Mexico. Mexican tax law provides certain tax incentives, including specific rules for the treatment of domestic Real Estate Investment Trusts (REITs) dedicated to the acquisition or construction of real estate. Additionally, Mexican tax authorities have issued regulations regarding local trusts that issue publicly traded securities in the form of bonds (FIBRAs E) listed on the domestic stock exchange. FIBRAs E primarily invest in equity of resident companies that own assets and engage in activities exclusively related to infrastructure and energy projects.  Certain tax incentives apply to the promotion of investments in domestic venture capital through trusts, such as angel investors.

Mexican branch

As a general rule, registering a Mexican branch requires authorization from the General Bureau of Foreign Investment of the Ministry of Economy.  Determined on a case-by-case basis, a Mexican branch may constitute a PE in Mexico for tax purposes.  However, entities incorporated in countries that are members of the World Trade Organization are exempt from this authorization requirement.  They are only required to file a notice with the General Bureau of Foreign Investment.

In either case, the relevant foreign resident shall:

1. Formalize the articles of incorporation and by-laws of the foreign company before Mexican notary public
2. Appoint an agent with sufficient powers and authority to represent the non-resident head office
3. Provide an address for service of process and tax purposes in Mexico
4. Register the articles of incorporation and by-laws with the Public Registry of Commerce.

Once registered, the Mexican branch, if engaged in business activities in Mexico, must obtain a tax identification number and e-signature.  It will generally be subject to the same tax obligations as Mexican taxpayers, including filing tax returns, maintaining accounting records, and ensuring compliance, with certain exceptions and deviations.

Branches may be allowed to deduct pro-rata allocations of expenses corresponding to the head office or its establishments, subject to certain conditions.  Generally, profit distributions to the head office (other than remittances accounts) in cash or in kind are subject to corporate income tax (grossed-up), unless the distribution is made from the balance of a net after-tax earnings account (CUFIN).

In general, profit distributions by Mexican residents to non-resident shareholders or by PEs to the head office or any of its foreign establishments are subject to a withholding tax of 10% on profits or reimbursements/returns, or a lower rate as provided by an applicable Double Taxation Treaty (DTT).  The applicability of DTT benefits should be confirmed on a case-by-case basis, as different requirements may apply.

The Mexican branch must also register with the National Registry of Foreign Investment and provide periodic activity reports.

Mexican subsidiaries

The most common types of Mexican business companies are limited liability companies (SRL), stock companies (SA) and stock companies for investment promotion (SAPI).

These companies are legally established through incorporation before a notary public and subsequent registration at the Public Registry of Commerce. Piercing the corporate veil is generally not permitted in Mexico for these companies, except in limited circumstances. However, Mexican courts have recognized the possibility of piercing the corporate veil to avoid the evasion of laws and abusive practices.

For closely held companies, SRLs are easier to manage than SAs or SAPIs due to the fact that SRLs are less regulated, and the corporate regulatory burden on an SRL may be easier to overcome in compare to an SAs or SAPI.

Unlike SAs or SAPIs, the shareholders of SRLs are known as “members,” and their equity participation is represented by the membership interests, which are not negotiable instruments under Mexican law.

Regarding SAPIs, they were introduced to Mexican law in 2006 as a modality of the SA mainly to promote and facilitate the creation of publicly traded companies. In addition to the provisions applicable under the LGSM to SAs, SAPIs are further regulated by the Securities Exchange Law (LMV). However, SAPIs are not required to become publicly traded companies and may remain closely held as long as preferred.

In fact, because of the ample flexibility that Mexican law provides to freely regulate the corporate governance matters of SAPI companies, it is often used to implement joint ventures requiring special corporate governance arrangements even if there is no intention to become publicly traded.

Financing a corporate subsidiary

Equity increase

Contributions for share/membership interests

When an equity investment is made into a Mexican company in exchange for shares or a membership interest, the amount of the investment is added to the corporation’s capital contributions account (“CUCA”). Generally speaking, a CUCA is composed of capital contributions, net subscription premiums, and certain balances stemming from distributed profits adjusted according to the law. The balance of the CUCA should not include reinvested or capitalized profits or any other item that may be part of the entity’s net equity.

Contributions without taking additional shares/membership interests

Funds may also be contributed by a shareholder or member of a Mexican company without issuing additional shares through the so-called “contributions for future capital increases.”  These contributions are only reflected in the company’s stated capital once a corporate resolution is passed approving their “capitalization.”  Contributions for future capital increases are considered as debt in the context of annual inflationary adjustment rules.

Taxpayers are required to compute on an annual basis a relevant adjustment for inflation, which may result in additional taxable income or a deductible expense.  Such adjustment shall take into account the annual average balances of liabilities (debts) and credits, as well as increases in the National Consumer Price Index.  Therefore, taxpayers must recognize for tax purposes the inflationary gains or losses attributable to monetary liabilities and assets.

Debt financing

Withholding tax implications

Mexican companies are allowed to borrow funds from residents, foreign residents, related parties, or unrelated parties.  Interest payments (including any payments made in connection with the relevant loan and assessed as interest) made by a Mexican resident company to a foreign resident are generally subject to withholding tax (WHT).  Certain types of interest are exempt from WHT.

Capital gains as well as income from the temporary usage/enjoyment of land or buildings adhered to land in Mexico, are not subject to WHT to the extent that the income is derived from investments by foreign pension funds, as long as such pension funds are the ultimate beneficial owners of the income, and if it is exempt from income tax in the relevant jurisdiction of the pension fund.

Statutory WHT rates on interest payments to non-residents may vary from 4.9% to 35%. Under certain circumstances, interest payments to non-residents may be subject to a WHT rate of 40% (e.g., when income attributable to non-residents is subject to a preferential tax regime). WHT on interest may be reduced or eliminated under certain double taxation treaties.

Interest expenses

Interest expenses are generally deductible for income tax purposes to the extent that the acquired debt (principal amount) is invested in the taxpayer’s main business activity, WHT obligations are met, relevant information returns on the loan and related party transactions are submitted and the thin capitalization rules, as well as the transfer pricing principles, are followed.

Additionally, general anti-avoidance rules (GAAR) related to interest reclassification (deemed dividends) should also be followed. Deductions are denied for items of income such as interest, royalties or technical assistance under certain conditions (e.g., income not subject to tax by the foreign recipient, payments made to a foreign entity that controls or is controlled by the Mexican taxpayer).

Thin capitalization

If the lender is a foreign resident related party, certain thin capitalization rules apply. Under these rules, whenever the borrower’s (Mexican taxpayer) debt-to-equity ratio exceeds 3:1, the interest paid to the foreign resident related party (lender) in connection with the portion of the borrower’s indebtedness exceeding the permitted debt-to-equity ratio shall not be deductible.  For instance, interest stemming from excess debt contracted with a non-resident related party by a Mexican taxpayer entity is non-deductible for income tax purposes.

In 2022, new rules were enacted to determine the limits of interest deductions under the thin capitalization rules. The new calculation rules now include non-operational expenses and a “business purpose test” to authorize deductions if the book and tax equity differ by more than 20%.

Debt incurred by entities forming part of the financial system and used for the execution of transactions related to their corporate purpose as well as debt incurred for the construction, operation or maintenance of productive infrastructure related to strategic areas of Mexico, or for the generation of electricity, will not be included within the debt accruing interest for the taxpayer, and for the purpose of computing the excess of debt. Tax authorities may permit a higher debt-to-equity ratio if a taxpayer demonstrates that the activity they perform requires greater leverage.

GAAR reclassification of interests into dividends (deemed dividends)

Regarding interests stemming from credits granted to legal entities or PEs in Mexico of non-residents by residents or non-residents who are related to the person liable for the credit, taxpayers should be aware that interest derived from those credits would be treated as dividends for tax purposes in the following cases:

1. When the borrower has made an unconditional promise to pay the loan, totally or partially, on a date determinable at any time by the lender
2. When the interest payable under such loans is not deductible because it exceeds the interest payable at market conditions; in this case, only the excessive portion of the interest payment is treated as a dividend
3. When, upon default by the borrower, the lender has the right to intervene in the direction or management of the borrower
4. When the interest payable by the borrower is conditional on the obtainment of profits, or the amount of such interest is based on profits
5. When the interest is payable under “back-to-back loans”.

For these purposes, “back-to-back loans” mean:

1. Transactions in which one person provides cash, services, or other goods to another person who, in turn, provides, directly or indirectly, cash, goods, or services to the first person or a party related to the first person
2. Loans secured by cash, cash deposits, shares, or debt instruments of the borrower or a party related to the borrower
3. Loans conditional upon the execution of one or more option agreements in favor of the lender or a party related to the lender, when the exercise of the option depends on the total or partial payment default of the credit or its accessories owed by the borrower.

Loans secured by shares or debt instruments of any kind owned by the borrower or a resident related to the borrower are not considered back-to-back loans as long as the lender is not allowed to dispose of those assets.  When interest expenses are reclassified as deemed dividends for income tax purposes, the tax deductibility of interest payments would be disallowed.  These circumstances would require further assessment of the implications corresponding to the tax treatment of deemed/constructive dividends.

Stamp tax

Mexico does not impose stamp duty, and currently Mexico does not have foreign-exchange controls in place.

Corporate income tax

ISR is levied on the income received by a taxpayer in cash, kind, credit or services.  For the year of 2023, the progressive rate applicable to individuals varies depending on the nature of the taxable income and can reach a maximum rate of 35%.  Companies are subject to a flat ISR rate of 30%.

To determine the taxable income of an individual, all profits and income received by the taxpayer should be considered, deducting expenses and authorized deductions (proper documentation is required).  For companies, taxable income is calculated based on total taxable revenue, minus authorized deductions and mandatory employee profit-sharing, which will be discussed below.

Foreign tax residents may be liable to pay ISR on income derived from the sale of shares or membership interests of Mexican companies, services provided in Mexico, products sold in Mexico, as well as royalties and similar payments received from Mexican tax residents.  Generally, ISR is paid through withholdings by the Mexican tax resident making payments to the foreign tax resident with, exemptions applicable depending on the specific transaction (e.g. sale of shares when a foreign taxpayer can apply a benefit under a DTT and pay through a legal representative).  The regular applicable rate ranges from 0% to 35% and is subject to the specific rules and exemptions provided by the Double Taxation Treaty.

Cross-border payments

Transfer pricing

The Income Tax Law also establishes rules for transactions between related parties and provides methods to ensure compliance with transfer pricing principles, including the arm’s length principle.

Mexican taxpayers involved in transactions with domestic and foreign related parties are required to conduct such transactions using prices and considerations that would have been used by unrelated parties in comparable transactions. Transfer pricing documentation and reporting requirements apply to all transactions between related parties. The reporting must be supported by transfer pricing studies conducted according to the methodologies permitted under the applicable laws.

Mexico recognizes transfer pricing methods (e.g., comparable uncontrolled price, resale price, cost-plus, profit split) that are consistent with the OECD transfer pricing guidelines.

Multilateral Instrument

On October 12, 2022, the Mexican Senate ratified the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (MLI) and deposited its ratification with the OECD on March 15, 2023. The MLI entered into force on July 1, 2023, and took effect in Mexico from January 2024.

Under the MLI, Mexico decided to cover all its existing DTTs, which will become Covered Tax Agreements (CTA) once the MLI is ratified by other jurisdictions. Once in effect in Mexico, parties will need to assess the new tax implications under the minimum standard provisions of the MLI and the corresponding DTT. Some of the key areas to consider include the following:

International tax reform

On October 8, 2021, Mexico, along with 135 other countries, committed to a two-pillar plan for international corporate tax reform that supports the OECD Inclusive Framework’s “Tax Challenges Arising from Digitalization” project. 

The Mexican tax authorities have stated in multiple forums that they are currently developing proposed amendments to the Mexican taxation framework, including the introduction of new legislation specifically intended to implement Pillar Two of the OECD Inclusive Framework.  However, no bills have been formally submitted to Congress yet.

Mexico faces several challenges in this process, such as reviewing the consistency of the required tax changes with the equity and proportionality principles enshrined in the Mexican Constitution, potentially needing to relinquish existing taxation rules applicable to digital platforms, amending existing tax treaties, and considering the implications of the proposed reforms on expected investments by international companies engaged in nearshoring trends.

Payroll taxes

Employment income (salaries and other income obtained by employees for activities performed in Mexican territory) is generally subject to payroll taxes. These taxes are typically levied by states and are payable by Mexican employers. Payroll tax rates vary from state to state, typically ranging between 1% and 3%.

Social security contributions

Social security contributions include contributions to the Mexican Social Security Institute (Instituto Mexicano del Seguro Social – “IMSS”), the National Workers Housing Fund Institute (Instituto del Fondo Nacional de la Vivienda para los Trabajadores – “INFONAVIT”) and the Worker’s Retirement Fund (Sistema de Ahorro para el Retiro, SAR).

Social security contributions depend on various factors, such as the number of employees, the employer’s risk premium and the services rendered by the employees. Social security contributions may amount to between 25% and 35% of payroll costs.

Profit sharing

Mexican employers are required to share a portion of their profits with employees. No profit sharing is paid during the first year of an entity’s operations.  In the second year, the entity is required to share 10% of its annual taxable income with its employees on an annual basis (e.g., 10% of adjusted taxable income). Under certain circumstances, and if specific requirements are met, the amount paid is deductible for corporate income tax purposes.

Indirect taxes

Value-added tax (VAT)

VAT is levied on the sale of goods, the provision of independent services performed in Mexico, the importation of goods and services, and the temporary use or enjoyment of goods within Mexican territory. The standard VAT rate is 16%, with certain activities subject to a zero VAT rate such, as exports. The VAT law also provides exemptions for certain activities/transactions.

A recent federal executive order has implemented tax incentives for the northern border region, potentially allowing for an effective VAT rate of 8% for certain business activities in that region. Strict requirements must be met to access the reduced VAT rate of 8%.

VAT is an indirect tax that is passed on to the final customer/user through the production supply chain. Companies can credit VAT paid on purchases and expenses (including those subject to a zero rate) against the VAT collected from customers on sales or services rendered. If VAT paid on purchases and expenses exceeds the VAT collected from customers on sales, companies can recover the excess through a refund process as positive VAT balances, provided relevant requirements are met.

In 2020, the previously established “universal” offset mechanism for VAT positive balances was substantially amended. As a result, VAT positive balances can no longer be offset against other taxes, potentially creating cash-flow concerns for domestic enterprises, unless taxpayers are subject to a tax audit and are willing to correct their tax situation. Please note that VAT refunds are usually time-consuming and burdensome.

VAT rules applicable to e-commerce transactions or services provided through digital platforms were introduced in 2020, and there rules essentially apply VAT to the extent that the provider’s activities are delivered in Mexican territory to Mexican residents, with some exceptions applicable to intermediaries.

Import taxes

In addition to VAT, individuals or companies importing goods on a permanent basis into Mexican territory are required to pay import taxes. The tax rate applicable to imported goods is determined based on the tariff classification code under the Harmonized Tariff Schedule. These rates may be subject to preferential treatment under existing Free Trade Agreements for goods originating from those agreements.

Import taxes may not always apply or can be deferred. The Customs Law states that taxes and customs duties are determined or deferred based on the type of customs regime, origin of the goods, and tariff classification (e.g., temporary imports, imports under authorized export programs, in-bond warehouses). 

Excise taxes

Mexico has a set of excise taxes primarily governed by the Special Production and Services Tax Law. Excise taxes in Mexico are indirect taxes similar to VAT in nature, as they are ultimately supported by the end user and applied only to certain products. Products subject to excise taxes include gasoline, diesel, alcoholic beverages, cigarettes, tobacco products, energy drinks and high-calorie foods and drinks.  Services subject to excise taxes include gambling and raffles, among others and the rates vary depending on the specific case