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Overview of Capital Gains in Mexico Page 2
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Taxes in Mexico: What are you up against? (cont)
If you have a bank account in Mexico that pays interest, the financial institution will withhold a small percentage of your principal for income taxes. If you are not a resident, this is the most you will pay on this particular income and you will not need to file a Mexican tax return. If you are resident, you can generally credit this amount on your annual Mexican tax return.
Mexico does not have the problem of double taxation of dividends that the US has. Dividends paid by Mexican corporations are usually paid after tax and are received by Mexican residents tax free. Non-residents will pay a tax in Mexico pursuant to treaty rates.
Rental income generated in Mexico is taxed at regular income tax rates, after deducting actual expenses or a blind deduction of 35%, whichever is greater. This provision applies to residents. Non-residents pay a flat 25% on the gross income. Both residents and non-residents may be required to charge valued added taxes and may also need to charge a 2% hotel tax, depending on the circumstances. While it has been relatively easy to avoid taxes on Mexican rental income, some jurisdictions, for example in San Miguel de Allende, are cracking down on those persons who are not paying income taxes on rental income.
Capital Gains Taxes
The concept of capital gains taxes is not as well developed in Mexico as it is in the US or Canada. Generally, the tax rate applied to gains is the same as the taxpayer’s marginal tax bracket. Most expatriates will face a capital gains issue when they sell Mexican real estate. Non-residents must pay either 25% of the gross amount of the transaction or the amount resulting from applying the highest marginal income tax rate in Mexico to the gain, whichever is lower.
Mexican tax residents can obtain a capital gains exemption of the sale of a principal residence. If the property is not a principal residence, they must pay taxes on the gain based on their marginal tax bracket. The Notario will withhold a percentage of the gain and the taxpayer must pay the difference, or apply for a credit, with his or her annual tax return.
How
the gain on the sale of real estate is calculated is based on the
“declared value” stated in the deed, known in Mexico as the “escritura”.
Historically, the declared value has been significantly lower than the
fair market value. Often, the purpose of having a lower value is to pay
less in the way of transfer taxes. While common practice, the habit of
declaring a value that is less than the fair market value is not legal in
most states. The Mexican tax authorities have realized that they are
losing significant amounts of tax revenue by not paying closer attention
to these declared values and have begun to scrutinize these transactions
more closely. The result is that the declared values in many parts of
Mexico are much closer to the fair market values than they were ten years
ago.
One result of this increased scrutiny is that Notarios are much more careful about the declared value they are willing to accept in the deeds that they prepare. Therefore, people that have artificially low declared values in their deeds may need to pay more in capital gains than they would have otherwise if they had used the transaction value. We have even seen people sell real estate at a loss and still have to pay capital gains taxes.
Our recommendation is to make sure that the value declared on the deed is as close to the full transaction cost as possible.
Gains from the sale of securities traded in the Mexico are tax free. Interestingly, the stocks of the Dow Jones Industrial average began trading on the Mexican exchange in 2003, but currently these are only available to institutional investors.
Other Taxes
Property taxes on real estate in Mexico, called predial, are low compared to other parts of the world. Depending on which part of the country you live in, you may not necessarily receive a bill in the mail. You may need to go to the local property tax office to request a bill.
The tax on Mexican plated automobiles, tenencia, is often more than the real estate property tax bill! Again, depending on where you live in the country, you may need to go to the corresponding local office to ask for the bill. A new law was passed in 2003 that will require that residents with an FM-3 pay tenencia on their US plated vehicles. However, I have not heard if the authorities have begun to enforce this law as of yet.
Mexico has a value added tax that is applied to most products and services. It is 15% in most of the country and 10% in border areas.
Conclusion
Mexico is modernizing. In the past, the Mexican governments simply printed money to meet its needs, or relied on oil revenues, and tax collection was a secondary source of income. The country today is run more responsibly and it is not possible to simply to order the Bank of Mexico to print an extra billion here and there. Necessarily, the government must now look to taxes as one of its primary sources of income in order to meet its residents’ needs (including the needs of its expatriate community). As it does, the government will become stricter in its enforcement, as well as more efficient.
This is not welcome news to those that move to Mexico in order to avoid all income taxes. However, those that are willing to pay their fair share will find that by planning effectively they may even pay less taxes than they did back home. This is certainly the case for most Canadian citizens that move to Mexico and is also the case for many US citizens.