Aside from its favorable business environment, there are several other compelling reasons why businesses choose to operate in Mexico. This includes its strategic Location, large consumer market, competitive labor costs, and it’s strong trade relationships.
However, it’s important to note that engaging in commercial activities within Mexico requires an understanding of local regulations, one of which is its Corporate tax system.
Corporate tax in Mexico is governed by the Ley del Impuesto sobre la Renta (LISR), which is the Mexican Federal Income Tax Law. The LISR states every business entity operating in Mexico, irrespective of its structure or nature, must pay corporate income tax.
Mexican corporate tax
Mexican corporate tax is applicable to resident companies in Mexico, including branches of foreign companies, as well as non-resident companies that generate income from Mexican sources.
Corporate tax in Mexico: Taxable Base
Resident corporations within Mexico are obligated to pay income tax on their earnings, regardless of their origin. To determine residency for tax purposes, a corporation is considered a Mexican resident if its actual management site is situated within Mexican territory.
The calculation of the taxable basis involves deducting eligible expenses from the corporation’s worldwide income.
For non-resident entities conducting business activities in Mexico through a permanent establishment such as office branches or agencies, income tax applies to the earnings attributable to that specific establishment. In essence, they are required to fulfill the same obligations as Mexican corporations by the general guidelines.
Taxable Income businesses subject to Corporate tax in Mexico
The taxable income of a company subject to Corporate tax in Mexico is estimated by subtracting deductible expenses and authorized deductions from its gross revenue. These deductible expenses contain a range of items, including salaries, rent, interest, depreciation, and other ordinary and essential business costs.
Corporate tax in Mexico: Tax Rates
In Mexico, the corporate tax rate stands at 30% for both resident and non-resident companies. However, certain reduced rates are available for companies involved in certain activities. For instance, businesses engaged in manufacturing or maquiladora operations may be eligible for a lower tax rate, offering them potential tax advantages in their endeavors.
Value Added Tax (IVA) in Mexico
In Mexico, there exists an important tax known as the Value Added Tax (VAT), referred to as Impuesto al Valor Agregado (IVA). This tax applies to services rendered and goods sold within Mexican territory, with a fixed rate of 16%. Additionally, there is a reduced tax rate available, ranging from 0 to 8%. This reduced rate may apply to specific goods or services, offering potential savings for both businesses and consumers.
Other Corporate taxes in Mexico
Once businesses complete their first year of operations in Mexico, they may encounter additional corporate taxes. These include the employee profit-sharing tax, which amounts to 10% of profits.
Also, when engaging in real estate transactions, companies must consider a tax imposed at rates ranging from 2% to 5%. But, some exceptions may apply in certain cases.
Additionally, states in Mexico impose real property taxes at different rates.
Filing and Payment
Mexican companies are required to file an annual tax return, known as the Declaración Anual, which summarizes their income, deductions, and tax liability. The tax year in Mexico generally follows the calendar year. Quarterly tax payments may also be required based on estimated taxable income.
International tax treaties in Mexico
Regarding international taxation, Mexico has established tax treaties with over 50 countries, including major nations like the United States, countries within the Americas, and the European Union. These agreements serve as protection against double taxation, ensuring that commercial transactions already taxed in other jurisdictions are not subjected to additional taxation in Mexico. As a result, these treaties provide a financial incentive for foreign companies considering investments in Mexico.
Corporate tax plays a significant role in the business landscape of Mexico and holds several important implications for businesses. So businesses in Mexico need to engage with professionals or advisors to ensure compliance, optimize tax planning, and manage their tax liabilities effectively.
Contact your Damalion experts now for your tax compliance in Mexico.