Corporate tax in Mexico

Summary

Corporate Income Tax Rate (%) 30 (a)
Capital Gains Tax Rate (%) 30 (b)
Branch Tax Rate (%) 30
Withholding Tax (%)
Dividends 10 (c)
Interest
Paid on Negotiable Instruments 10 (d) (e)
Paid to Banks 10 (d) (f)
Paid to Reinsurance Companies 15 (d)
Paid to Machinery Suppliers 21 (e)
Paid to Others 35 (d)
Royalties
From Patents and Trademarks 35 (d)
From Know-how and Technical Assistance 25 (d)
From Railroad Cars 5 (d)
Branch Remittance Tax 10 (c)
Net Operating Losses (Years)
Carryback 0
Carryforward 10

a) A 10% tax is imposed for employee profit sharing (see Section D).

b) The capital tax rate for foreign residents may be 25% or 35% (see Section B).

c) This tax applies to dividends paid out of profits generated after 2013 (see Section B).

d) This is a final tax applicable to nonresidents. Payments to tax havens are generally subject to a 40% withholding tax.

e) This rate can be reduced to 4.9% if certain requirements are met.

f) A reduced rate of 4.9% is granted each year to banks resident in treaty countries.

Taxes on corporate income and gains

Corporate income tax. Corporations resident in Mexico are taxable on their worldwide income from all sources, including profits from business and property. A nonresident corporation in Mexico is subject to profits tax on income earned from carrying on busi­ness in Mexico. Corporations are considered residents of Mexico if their principal place of management is located in Mexico.

Corporations are taxed on profits in Mexico by the federal govern­ment only. Resident corporations are not subject to tax on divi­dends received from other Mexican residents. Dividends paid to individuals and nonresidents are subject to a 10% withholding tax.

The income tax law recognizes the effects of inflation on the fol­lowing items and transactions:

  • Depreciation of fixed assets
  • Cost on sales of fixed assets
  • Sales of capital stock (shares)
  • Monetary assets and liabilities
  • Tax loss carryforwards

Investment in capital stock may be adjusted for inflation at the time of capital stock reductions or liquidation. Taxes are also in­dexed for inflation in certain circumstances.

Tax rate. Corporations are subject to federal corporate income tax at a rate of 30%.

Capital gains. Mexican tax law treats capital gains obtained by Mexican corporate residents as normal income and taxes them at the regular 30% tax rate. Nonresidents are subject to a 25% tax rate on gross income or a 35% rate on net income. Capital gains derived from sales of publicly traded shares by individuals or non-Mexican residents are taxed at a rate of 10%. To determine the deductible basis for sales of real estate, fixed assets and shares, the law allows for indexation of the original cost for inflation.

Administration. The tax period always ends on 31 December and cannot exceed 12 months. The tax return must be filed by the end of the third month following the tax year-end. Monthly tax install­ments must be paid during the corporation’s tax year.

Dividends. Resident individuals and nonresident shareholders of a Mexican corporation are subject to a 10% income tax on divi­dends received that are paid out of profits generated after 2013. Dividends are not subject to corporate income tax if the earn­ings were already subject to corporate income tax and if the distributing corporation has sufficient accumulation in its “net tax profit” (CUFIN) account to cover the dividend. If the accu­mulated amount is not sufficient, the dividends are also taxed at the corporate level at a rate of 30% on a grossed-up basis. The following is an illustration of how to compute the net tax profit for the CUFIN account.

MXN
Corporate taxable income 1000
Income Tax (30%) (300)
Nondeductible profit sharing to employees (estimated) (150)
Nondeductible expenses (50)
Net tax profit (not subject to corporate income tax on distribution) 500

 

If the CUFIN balance is not sufficient, the remaining amount triggers corporate income tax on the dividend grossed up by a factor of 1.4286. The corporate income tax rate is then applied to the grossed-up dividend. The following is an illustration of the calculation.

MXN
Calculation of excess dividend
Amount of dividend 700
Dividend from CUFIN 500
Excess dividend 200
Tax on excess dividend
Grossed-up income (Gross-up factor of 1.4286 x excess dividend of MXN200) 285.72
Tax at 30% 85.72

Income tax paid on distributed profits in excess of the CUFIN balance may be credited against corporate income tax in the year in which the dividend is paid and in the following two years.

Similar rules apply to remittances abroad by branches of foreign corporations.

Foreign tax relief. A tax credit is allowed for foreign income tax paid or deemed paid by Mexican corporations, but the credit is generally limited to the amount of Mexican tax incurred on the foreign-source portion of the company’s worldwide taxable income.

Determination of trading income

General. Taxable profits are computed in accordance with gener­ally accepted accounting principles, with certain exceptions, in­cluding the following:

  • Nondeductibility of penalties and unauthorized donations
  • Nondeductibility of increases to reserves for bad debts, obsoles­cence, contingencies, indemnities and so forth
  • Monetary gain on debts, and monetary loss on credits, to recog­nize the effect of inflation
  • Nondeductibility of 53% of exempt salaries (percentage may be decreased to 47% if the exempt salaries are not reduced from previous year)
  • Nondeductibility of certain payments to tax havens or hybrid entities

Employee profit-sharing (see Section D) is effectively deductible.

Inventories. Instead of deducting the normal cost of sales, inven­tory purchases, labor costs and overhead expenses are deductible each fiscal year. However, beginning in 2005, the cost of goods sold is deductible instead of inventory purchases. Complex rules apply with respect to this measure.

Depreciation. The straight-line method is used to depreciate tan­gible fixed assets and to amortize intangible assets. Depreciation must be computed using the annual percentages set by law. The depreciation of new assets must be computed on a proportional basis relating to the months in which the assets are used. Depre­ciation is computed on original cost of fixed assets, with the amount of depreciation indexed for inflation as measured by price indices.

The following are the maximum annual depreciation rates for certain types of assets.

Asset Rate (%)
Buildings 5
Motor vehicles 25
Office equipment 10
Computers
Mainframe equipment 30
Peripheral equipment 30
Plant and machinery
General rate 10
Machinery and equipment used in the
generation and distribution of electricity
5
Machinery and equipment used in the
mining industry
12
Machinery and equipment used in the
construction industry
25
Environmental machinery and equipment 100

Relief for losses. Business losses may be carried forward for 10 years.

Groups of companies. A Mexican holding company may obtain an authorization to effectively compute income tax on a consolidated basis (integration regime), but each company of the group is re­sponsible for filing and paying the tax individually. This option is subject to several rules and limitations, including a recapture of benefits.

Other significant taxes

The following table summarizes other significant taxes.

Nature of tax Rate (%)
Value-added tax, on any supply of goods or
services, excluding exports, and on imports
General rate 16
Certain foods and medicines 0
Excise tax, on the supply of goods or services, excluding exports, and on imports; goods and services subject to tax include food with high caloric density, alcoholic beverages, alcohol,
tobacco, gasoline, diesel and telecom services
Various
Real estate acquisition tax; local tax on
market value of real estate transferred
(approximate rates)
2 to 4.5
State tax on salaries 2 to 3
Residence tax, on each employee’s salary
(approximate rate)
5
Employee profit sharing, on taxable profits of
resident entities and permanent establishments
of nonresident entities (loss carryforwards may
not be deducted)
10
Social security contributions, on salaries up to a
specified amount; paid by
Employer (approximate rate) 15
Employee (approximate rate) 4

Miscellaneous matters

Foreign-exchange controls. Mexico has no foreign-exchange con­trols.

Transfer pricing. Mexico has transfer-pricing rules. Acceptable transfer-pricing methods include the comparable uncontrolled price method, the resale price method, the cost-plus method, the profit-split method, the residual profit-split method and the trans­actional net-margin method. In certain cases, specific appraisals are used. Transactions between related parties are subject to greater scrutiny. It may be possible to reach transfer-pricing agreements in advance with the tax authorities. These agreements may apply for a period of up to five years.

Under the 2016 tax reform, beginning in 2016, certain Mexican taxpayers must file additional transfer-pricing documentation, in cluding a Master File and Country-by-Country Reports, as in­spired by Action 13 of the Base Erosion and Profit Shifting report.

Debt-to-equity rules. Interest deductions may be disallowed if the debt-to-equity ratio exceeds 3 to 1.

Treaty withholding tax rates

Dividends (l)

%

Interest

%

Patent and
know-how
royalties
%
Australia 0/15 (k) 10/15 (e) 10
Austria 5/10 (d) 10 10
Bahrain — (v) 4.9/10 (n) 10
Barbados 5/10 (d) 10 10
Belgium 5/15 (a) 10/15 (t) 10
Brazil 10/15 (a)(b) 15 (b) 15 (b)
Canada 5/15 (d) 10 10 (g)

 

Chile 5/10 (u) 15 (b) 15 (b)
China 5 10 10
Colombia 0 (w) 5/10 (n) 10 (b)
Czech Republic 10 10 10
Denmark 0/15 (a) 5/15 (n) 10
Ecuador 5 10/15 (m) 10
Estonia 0 4.9/10 (n) 10
Finland 0 10/15 (h) 10
France 0/5 (c) 5/10/15 (b)(h) 10/15 (b)
Germany 5/15 (d) 5/10 (n) 10
Greece 10 10 10
Hong Kong SAR 0 (w) 4.9/10 (n) 10
Hungary 5/15 (d) 10 10
Iceland 5/15 (d) 10 10
India 10 10 10
Indonesia 10 10 10
Ireland 5/10 (d) 5/10 (n) 10
Israel 5/10 (f) 10 10
Italy 15 10/15 (b) 15
Japan 0/5/15 (o) 10/15 (e) 10
Korea (South) 0/15 (k) 5/15 (n) 10
Kuwait 0 (w) 4.9/10 (n) 10
Latvia 5/10 (d) 5/10 (n) 10
Lithuania 0/15 (k) 10 10
Luxembourg 8/15 (d) 10 10
Malta 0 (w) 5/10 (n) 10
Netherlands 0/5/15 (d)(s) 5/10 (p) 10
New Zealand 15 (b) 10 10
Norway 0/15 (a) 10/15 (t) 10
Panama 5/7.5 (a) 5/10 (n) 10
Peru 10/15 (a) 15 15
Poland 5/15 (a) 10/15 (e) 10
Portugal 10 10 10
Qatar 0 (w) 5/10 (n) 10
Romania 10 (d) 15 15
Russian Federation 10 10 10
Singapore 0 5/15 (n) 10
Slovak Republic 0 10 10
South Africa 5/10 (d) 10 10
Spain 5/15 (a) 5/10/15 (b)(h)(t) 10 (b)(g)
Sweden 0/5/15 (d) 10/15 (q) 10
Switzerland 0/15 (d) 5/10 (p) 10
Turkey 5/15 (a) 10/15 (q) 10
Ukraine 5/15 (a) 10 10
United Arab Emirates 0 (w) 4.9/10 (n) 10
United Kingdom 0/15 (x) 5/10/15 (j) 10
United States 0/5/10 (b)(d) 4.9/10/15 (r) 10
Uruguay 5 10 10
Non-treaty countries 10 4.9/10/21/35 (i) 25/35 (i)

 

a) The lower rate applies if the recipient is a corporation owning at least 25% (20% under the Brazil treaty) of the shares of the payer. Under the Panama treaty, the lower rate applies if the recipient owns at least 25% of the shares of the payer.

b) These treaties have a most favorable nation (MFN) clause with respect to interest and/or royalties. Under the MFN clause in the Chile treaty, the with­holding tax rate for interest may be reduced to 5% for banks or 10% for other recipients and the withholding tax rate for royalties may be reduced to 10%, if Chile enters into a tax treaty with another country that provides for a lower withholding tax rate than 15% for such payments. Under the MFN clause in the France treaty, the withholding tax rate for interest and royalties is reduced if Mexico enters into a tax treaty with an Organisation for Economic Co-operation and Development (OECD) member that provides for withhold­ing tax rates that are lower than the rates under the Mexico-France treaty. However, the rate may not be lower than 10% if the OECD member country is not a member of the Euro pean Union (EU). Under the Italy treaty, the MFN clause applies only to interest. It may reduce the withholding tax rate for interest to as low as 10% only if Mexico enters into a treaty with an EU country that provides for a withholding tax rate for interest of less than 15%. Under the MFN clause in the Spain treaty, the withholding tax rates for inter­est and royalties may be re duced if Mexico enters into a tax treaty with an EU country that provides for withholding tax rates that are lower than the rates under the Mexico-Spain treaty. Under the Brazil treaty, if this country agrees with another country regarding a lower rate for dividends, interest or royal­ties, such rate will apply. For interest and royalties, the applicable rate may not be lower than 4.9% and 10%, respectively. Under the New Zealand treaty, if this country agrees with another country regarding a lower rate for divi­dends, such rate will apply. Under the MFN clause in the Colombia treaty, the withholding tax rate for royalties related to technical services and assistance will be automatically reduced if Colombia enters into a tax treaty with a third country that provides a lower rate. The standard rate for interest and for patent and know-how royalties under all of the above treaties is generally 15%. How­ever, as a result of the operation of the MFN clause, the lower rates listed in the table may apply in certain circumstances.

c) The 0% rate applies if the recipient of the dividends is the effective benefi­ciary of the dividends. The 5% rate applies if the recipient is a company that is resident in France and if more than 50% of such recipient is owned by residents of countries other than France or Mexico.

d) The 5% rate applies if the recipient is a corporation owning at least 10% of the shares of the payer. Under the US treaty, the 0% rate applies if the recipient owns 80% of the voting shares and if other requirements are met. Under the Switzerland treaty, the 0% rate applies if the recipient is a corporation owning at least 10% of the shares of the payer or if the beneficiary of the dividend is a pension fund. Under the Sweden treaty, the 0% rate applies if the recipient is a corporation owning at least 25% of the voting shares of the payer of the dividends and if at least 50% of the voting shares of the company that is the effective beneficiary of the dividends is owned by residents of that contracting state. Under the Luxembourg treaty, the 8% rate applies to Mexico if the re­cipient is a corporation that owns at least 10% of the voting shares of the payer.

e) The 10% rate applies to interest derived from loans granted by banks and insurance companies. Under the Germany treaty, the 10% rate also applies to interest paid to pension funds. Under the Australia and Japan treaties, the 10% rate also applies to interest paid on bonds or with respect to sales by suppliers of machinery and equipment. Under the Poland treaty, the 10% rate also applies to interest paid on publicly traded securities.

f) The 5% rate applies if the recipient is a corporation that owns at least 10% of the shares of the payer and if the tax levied in Israel is not less than the cor­porate tax rate.

g) The effective beneficiary of royalties is subject to withholding tax on the gross payments. Royalties on cultural works (literature, music and artistic works other than films for movies or television) are not subject to withhold­ing tax if they are taxed in the recipient’s country.

h) A 10% rate applies to interest paid on bank loans or publicly traded bonds, as well as to interest paid with respect to sales by suppliers of machinery and equipment.

i) See Section A and the applicable footnotes in the section.

j) The 5% rate applies if the beneficial owner of the interest is a bank or insur­ance company or if the interest is derived from bonds or securities that are regularly and substantially traded on a recognized securities market. The 10% rate applies to interest paid by a bank or by a purchaser with respect to a sale on credit of machinery if the seller is the beneficial owner of the interest. The 15% rate applies to other interest.

k) The 0% rate applies if the recipient is a corporation owning at least 10% of the shares of the payer.

l) Dividends are not subject to withholding tax under Mexican domestic law.

m) Beginning in the sixth year the treaty is in effect, the 15% rate is reduced to 10% if the beneficial owner of the interest is a bank. For the first five years, however, the 15% rate applies to such interest.

n) The lower rate applies if the beneficial owner of the interest is a bank. Under the Colombia treaty, a 0% rate also applies if the beneficial owner of the interest is an insurance company. Under the Estonia treaty, the 4.9% rate also applies if the beneficial owner is a pension fund.

o) The 5% rate applies if the recipient is a corporation owning at least 25% of the shares of the payer. The 0% rate applies if the condition described in the preceding sentence is satisfied and if both of the following conditions are satisfied:

  •  The recipient’s shares are regularly traded on a recognized stock exchange.
  •  More than 50% of the recipient’s shares are owned by one or any combination of the following:

— The state of residence of the recipient.

— Individuals resident in the state of residence of the recipient.

— Corporations resident in the state of residence of the recipient if their shares are traded on a recognized stock exchange or if more than 50% of their shares are owned by individuals resident in the state of residence of the recipient.

p) The 5% rate applies if the interest is derived from loans granted by banks or insurance companies or if the interest is derived from bonds or securities that are regularly and substantially traded on a recognized securities market. The 10% rate applies to other interest.

q) The 10% rate applies to interest derived from loans granted by banks.

r) The 4.9% rate applies if the beneficial owner of the interest is a bank or insur­ance company or if the interest is derived from bonds or securities that are regularly and substantially traded on a recognized securities market. The 10% rate applies to other interest.

s) Under a protocol to the treaty with the Netherlands, the 5% rate is reduced to 0% if the dividends are paid on a shareholding that qualifies for the participa­tion exemption under the corporate tax law of the Netherlands.

t) The 10% rate applies if the beneficial owner of the interest is a bank.

u) The 5% rate applies if the recipient is a corporation owning at least 20% of the shares of the payer.

v) The treaty does not limit the withholding tax rate on this income.

w) Dividends are taxed only in the country of residence of the recipient.

x) In general, dividends are exempt if the beneficial owner is resident in the United Kingdom. However, if the dividend derives from rental income from real property located in Mexico through an investment vehicle and if the majority of the rents are distributed annually and are not subject to tax, the dividend rate may not exceed 15%.