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.
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.
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.
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.
Raoul Rodríguez-Walters, CFP ® is the founding
partner of Mexico Advisor, the only company in Mexico offering financial
management, legal, tax and title services sunder one roof, to
English-speaking foreigners wanting to live, retire or set up a small
business in Mexico. Read more about the comprehensive, integrated services
provided by Mexico Advisor at:
http://www.mexadv.com. Or, contact Raoul at his San Miguel de Allende
office: Correo #24, CP 37700 tel.: 415-152-0586; e-mail: info@mexadv.com.
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. 
