Income tax in Mexico

August 14, 2017

INDIVIDUAL TAXATION

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Mexican residents pay income tax on their worldwide income. Married couples are generally taxed separately, but married couples under the joint asset ownership regime may opt for joint taxation.

Foreign individuals are considered residents when they establish their primary residence in Mexico, unless they spend more than 183 days outside Mexico during the calendar year.

INCOME TAX

Income is divided into ten different categories: (1) employment income, (2) income from independent personal services, (3) rent from immovable property, (4) capital gains from the transfer of property, (5) income from the acquisition of goods, (6) business income, (7) dividends and profit distribution, (8) interest income, (9) income from prizes, and (10) other income.

Income of resident individuals is taxed at progressive rates. For computation of taxable income, residents are entitled to some deductions and allowances.


ANNUAL INCOME TAX 2017

TAXABLE INCOME, MXP (US$) TAX RATE
Up to 5,952.84 (US$350) 1.92%
5,952.84 – 50,524.92 (US$2,972) 6.40% on band over US$350
50,524.92 – 88,793.04 (US$5,223) 10.88% on band over US$2,972
88,793.04 – 103,218.00 (US$6,072)

16.00% on band over US$5,223

103,218.00 – 123,580.20 (US$7,269)

17.92% on band over US$6,072

123,580.20 – 249,243.48 (US$14,661) 21.36% on band over US$7,269
249,243.48 – 392,841.96 (US$23,108) 23.52% on band over US$14,661
392,841.96– 750,000.00 (US$44,118) 30% on band over US$23,108
750,000.00– 1,000,000.00 (US$58,834) 32% on band over US$44,118
1,000,000.00 – 3,000,000.00 (US$176,471) 34% on band over US$176,471
Over 3,000,000.00 (US$176,471) 35% on all income over US$176,471
Source: Global Property Guide

Residents are entitled to deduct the following expenses from their taxable income:

  • Medical, dental, and hospital expenses of the taxpayer and his dependents
  • Fees paid on medical insurance
  • Interest expense on mortgage loans
  • Transportation expenses incurred for the travel of the taxpayer’s children to school
  • Funeral expenses for the dependents
  • Gifts to qualified recipients
  • Investments, premiums, and deposits (up to a certain limit)

RENTAL INCOME
Rental income is taxed at the standard income tax rates. Income-generating expenses, depreciation allowance and property taxes are deductible when computing for the taxable income. Instead of itemized deduction, individuals may elect a standard 35% deduction of the gross rent to account for income-generating expenses.

CAPITAL GAINS
Capital gains are taxed at the standard income tax rates. Individuals earning capital gains from transfers of immovable property are required to make advance payments which may be set off against their final tax liability. Capital gains from assets other than immovable property are subject to an advance payment of 20%, withheld by the purchaser.

The tax base is the gross selling price or market value of the property, whichever is higher, less adjusted acquisition costs (the adjusted cost may not be less than 10% of the transfer value), investment costs and improvement costs, and transaction costs (taxes, valuation, notary fees, commission and brokerage fees).

Income tax on capital gains of resident individuals is computed as follows:

  1. The capital gain is divided by the number of years the property was owned or held by the individual, to a maximum of 20 years;
  2. The result (i.e. the annual average capital gain) is included in the individual’s taxable base in order to calculate the amount of individual income tax (IIT) due;
  3. The individual income tax (IIT) due is then divided by the taxpayer’s income and the quotient is multiplied by 100 in order to arrive at an average rate. In this computation, the taxpayer’s income may not be reduced by the deductions enumerated above;
  4. This resulting average rate is then applied on the remaining portion of capital gain which is not taxed under the rules mentioned in [2]; and
  5. The individual’s final income tax liability is the aggregate of taxes mentioned in [2] and [4];
  6. The individual income tax (IIT) calculated under ordinary rule is divided by the taxpayer’s income and the quotient is multiplied by 100 in order to arrive at the average rate. This computation must be made for each of the last 5 years including the year of the transfer and, for this purpose, the taxpayer’s income may not be reduced by the deductions enumerated above;
  7. The aggregate of the rates calculated in [6] or each of the last 5 years, including the year of the transfer, is divided by five in order to arrive at the applicable average rate.

Capital gains derived by individuals from the transfer of immovable property through a bequest/inheritance and gift/donation are exempt from capital gains tax.

Capital gains derived by resident individuals from selling their primary residence are also exempted from capital gains tax.


PROPERTY TAXES

Property Tax (impuesto predial)

Property tax is levied on the cadastral value or assessed value of the real estate. The tax rate ranges from 0.05% to 1.2%, depending on the property location as each state has a different tax rate. It is payable to the state government annually.

CORPORATE TAXATION

INCOME TAX

Income and capital gains earned by companies are taxed at a flat rate of 30%. Income-generating expenses are deductible when calculating taxable income.

The corporate income tax rate will be reduced to 29% for 2013 and to 28% for 2014.

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