Taxes in Mexico

May-2024-Monthly-Tax-Update-for-China
Understanding the tax system in Mexico is essential for businesses looking to expand into the country or manage a workforce there. Whether you are using EOR (Employer of Record) or PEO (Professional Employer Organization) services, having a clear understanding of Mexico’s tax structure is critical for smooth operations and compliance. This guide provides an overview of the key taxes employers and employees need to be aware of when operating in Mexico.

Key Taxes in Mexico for Employers and Employees

1. Corporate Income Tax (CIT)

Corporate Income Tax (CIT) in Mexico is applied to both domestic and foreign businesses that operate within the country. The rate is consistent across most industries, although some sectors and regions may benefit from preferential rates.
Tax Rate
Applicable To
30%
General corporate income tax rate
Reduced Rate
Certain sectors like agriculture and non-profit organizations may qualify for preferential rates.
Outcome: Employers should ensure they comply with Mexico’s corporate tax laws and explore any available tax incentives or reduced rates applicable to their business.
 

2. Individual Income Tax (ISR – Impuesto Sobre la Renta)

Mexico’s Individual Income Tax (ISR) is progressive, with rates ranging from 1.92% to 35%. Employers are required to withhold ISR from employee wages based on their income bracket.
Income Bracket (MXN/month)
Tax Rate
Up to 6,942
1.92%
6,943 – 58,922
6.4% – 30%
Above 58,922
35%
Outcome: Employers must withhold and report ISR accurately to avoid penalties, ensuring compliance with Mexican tax authorities.
 

3. Social Security Contributions

Employers in Mexico are required to make social security contributions on behalf of their employees. These contributions cover pensions, health insurance, and other social services.
Contribution Type
Employer Rate
Employee Rate
Pension (Retirement Fund)
2-3.15%
1.125%
Health Insurance (IMSS)
7.1%
2.45%
Unemployment and Housing Fund
5% (for INFONAVIT)
5% (for INFONAVIT)
Outcome: Employers must manage and contribute to various social security programs, ensuring compliance with both national and local regulations.
 

4. Value-Added Tax (VAT)

Mexico applies VAT to most goods and services provided within the country. The standard VAT rate is 16%, but lower rates may apply in certain border regions or to specific products.
Tax Type
Rate
Standard VAT
16%
Border Zone VAT
8%
Outcome: Companies providing taxable goods or services in Mexico must register for VAT, report it regularly, and comply with the country’s tax obligations.
 

5. Withholding Tax on Dividends and Royalties

Foreign companies operating in Mexico may be subject to withholding tax on dividends, interest, and royalties when these are distributed to foreign entities.
Tax Type
Rate
Dividends
10%
Royalties
25-35% (depending on the type of royalty)
Outcome: Companies should be aware of the withholding tax obligations, particularly when making cross-border payments, and take advantage of tax treaties to reduce withholding rates where applicable.

 

Tax Filing and Compliance Obligations in Mexico

Employers operating in Mexico are responsible for complying with a range of tax filing and reporting requirements. Some key filing obligations include:
Tax Type
Filing Requirement
Corporate Income Tax
Filed annually by March 31 following the fiscal year
Individual Income Tax
Withheld monthly from employee wages
VAT
Filed monthly
Social Security Contributions
Filed monthly through the IMSS
Outcome: Timely and accurate filing of taxes is essential to avoid penalties and maintain good standing with Mexican tax authorities.

 

Tax Residency for Employers and Employees in Mexico

  • Corporate Residency: Businesses are considered tax residents if their central management and control is exercised in Mexico or if they are incorporated in the country.
  • Individual Residency: Individuals are considered tax residents if they spend more than 183 days in Mexico in a calendar year or have a primary residence in the country.
Outcome: Correctly determining tax residency is important to avoid double taxation and comply with Mexican tax laws.

 

Tax Incentives for Employers in Mexico

Mexico offers various tax incentives designed to promote foreign investment and support key industries. Some examples include:
Incentive Type
Description
Maquiladora Program
Reduced taxes for manufacturers exporting goods
R&D Tax Deductions
Incentives for companies investing in innovation
Special Economic Zones
Lower taxes for businesses operating in certain regions
Outcome: Employers should explore available tax incentives to reduce their overall tax burden and foster business growth in Mexico.

 
Managing Mexican Taxes with EOR/PEO Services
EOR and PEO services, such as GlobainePEO, simplify tax compliance for foreign businesses operating in Mexico by managing payroll taxes, social security contributions, and ensuring adherence to the country’s complex tax regulations. These services can significantly reduce the administrative burden for companies unfamiliar with Mexico’s tax landscape.

GlobainePEO – Your Partner in Mexican Tax Compliance

At GlobainePEO, we specialize in helping businesses navigate Mexico’s tax system, ensuring compliance with corporate income tax, payroll, VAT, and more. Our experts handle the complexities of Mexican tax regulations so that you can focus on growing your business in this dynamic market.

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