Taxes in Mexico: Which taxes should we pay?

If you’re going to move to Mexico for a while and work abroad as a digital nomad, remotely or for a company in the country, you’ll want to know what taxes you’ll have to pay and, above all, how much. Tax rates there are moderate or even low compared to some Latin American countries, so you’ll want to make sure you’re well informed before you arrive. In this guide to taxes in Mexico you’ll find everything you need to know about them, explained in simple language. We want to help you plan your stay in the country and give you valuable information to help you take care of your money.

Are taxes high in Mexico?

Before we tell you what taxes individuals and companies have to pay in Mexico, here are some facts about the country’s tax system so that you can start to learn more about it. 

As in most countries, Mexico applies both direct and indirect taxes. In contrast to places like Chile or Uruguay, where the total tax burden is relatively higher, tax collection in Mexico is moderate, representing around 16-17% of GDP. This implies that the overall tax burden for taxpayers is lower, but also that the country faces challenges in the effective collection of tax revenues.

Let’s look at it with some examples. In Mexico, the Value Added Tax (VAT) is 16%, which is a standard rate compared to other countries in the region. Income tax (IT) has a rate of 35% for individuals in the highest income bracket, while companies pay 30%, similar to countries such as Brazil and Argentina, but higher than in other Latin American countries, such as Panama.

Compared to the United States, Mexico has a lower tax burden, both in terms of income tax and VAT, but this is also reflected in the levels of investment in public services. The tax burden in Mexico may be higher than in some Central American countries such as Guatemala or El Salvador, which have lower VAT rates, but it’s competitive with other emerging economies in the region.

These are just some generalities about taxation in Mexico compared to other countries. Now, let’s go a little further and see what happens in the case of natural and legal persons, i.e. companies.

Taxes in Mexico for individuals or natural persons

In Mexico, individuals (or natural persons) are subject to various taxes that help finance public spending. These can be direct, such as income tax (IT), and indirect, such as value added tax (VAT). Each has its own particularities and rates which may vary according to the income and type of economic activity carried out by the individual.

These are the main taxes that individuals have to pay in Mexico:

Income Tax (IT)

ISR is a federal tax on income earned by individuals and varies according to annual income. It’s one of the most relevant and progressive taxes in Mexico, meaning that rates increase as income increases.

The IT rate ranges from 1.92% to 35%, applicable depending on each person’s annual taxable income. In turn, taxpayers can reduce their taxable income through allowable deductions such as medical, dental, hospital, mortgage interest, donations and school fees (subject to certain limits). These deductions help to reduce the final amount of income tax payable.

Real Estate Acquisition Tax

Imagine you live in Mexico and you buy a property. In that case, you’ll have to pay the Real Estate Acquisition Tax, which is a local tax whose rate depends on the value of the property and the state where it’s located. Fees vary between 2% and 5% of the value of the property, depending on the state.

For example, if a person buys a house in Mexico City, he or she could pay up to 5% of the total value of the property in Real Estate Acquisition Tax.

New Car Tax (NCT)

The same applies if you buy a new car: you’ve to pay Real Estate Acquisition Tax, a federal tax. The fee in this case varies between 2% and 17% of the value of the vehicle, depending on the price and type of car. In some cases, certain electric or hybrid cars may be exempt from this tax or receive tax incentives.

Value Added Tax (VAT)

VAT is an indirect tax levied on most goods and services in Mexico. The standard rate is 16%, although there are some exemptions for commodities and medicines.

Among the products exempted from VAT are basic foodstuffs (such as fruit, vegetables and meat), medicines, books and some transport services. In Mexico’s border areas (such as Baja California), VAT is at a reduced rate of 8%.

Special Tax on Production and Services (IEPS)

IEPS is an indirect tax levied on certain products, such as tobacco, alcoholic beverages, high-calorie foods and fuels. It’s mainly used to discourage the consumption of products that may have negative effects on health or the environment.

IEPS rates:

• Tobacco: 160% over the sale price.
• Alcoholic beverages: It varies between 26.5% and 53%, depending on the type and alcohol content.
• Sugary drinks: $1.2616 MXN ($0.06 US) per litre.
• Fuels: It varies every week and is regulated by the Ministry of Finance and Public Credit.

Taxation in Mexico for legal and natural persons

In Mexico, legal entities or companies are subject to various taxes at federal, state and municipal levels, each of which contributes to financing services and projects of public interest. Businesses, whether small, medium or large, must comply with these taxes on a regular basis to avoid fines.

With a significant tax burden and multiple compliance requirements, it’s crucial that companies have a sound tax strategy to meet their obligations and, at the same time, take advantage of the benefits available. In other words, good tax planning can make a big difference to a company’s efficiency and competitiveness in the Mexican market.

Here we detail the main taxes affecting companies in Mexico, including their rates and examples of application.

Corporate Income tax (CIT)

CIT is a federal tax levied on corporate income and applies to both companies and individuals with business activities. This tax is calculated on the basis of the company’s net profits.

The CIT rate for legal entities in Mexico is 30% on annual taxable profits. Companies can deduct certain expenses necessary for the operation of their business, such as salaries, purchase of inputs, financial costs, investments in fixed assets and contributions to pension plans. For example, if a company has profits of $1,000,000 MXN ($48,469.750 US) in a year, it will have to pay $300,000 MXN ($14,543.119 US) of CIT.

Dividend Tax

Companies that distribute profits to their partners or shareholders are subject to an additional tax on dividends, the rate of which is 10%. This tax is withheld at source at the time of payment. Suppose a company pays a dividend of $500,000 MXN ($24,234.11 US). In that case, you must withhold and pay $50,000 MXN ($2,423.411 US) to the tax authority.

Value Added Tax

VAT is an indirect tax that businesses must charge their customers for the sale of goods and services. Companies act as intermediaries, collecting this tax and then handing it over to the government.

The standard rate is 16% throughout the country, although in border areas the value decreases to 8%. At the same time, some products are exempt from VAT, such as basic foodstuffs and medicines, while others, such as exports, are zero-rated. For example, if a company sells a product for $1,000 MXN ($48.46 US), it must charge an additional $160 MXN ($7.75 US) for VAT, for a total of $1,160 MXN ($56.22 US).

Special Tax on Production and Services (IEPS)

This tax applies to certain specific products and services, including tobacco, alcoholic beverages, high-calorie foods and fuels. Companies that market these products must calculate and declare IEPS.

IEPS rates:

• Tobacco: 160%
• Alcoholic beverages: 26.5% to 53%, depending on the alcoholic strength
• Sugary drinks: $1.2616 MXN ($0.06 US) per litre
• Fuels: charged weekly and depends on the type of fuel

Other Corporate Taxes and Contributions

1. Payroll tax It’s levied at state level and is the responsibility of employers, who must pay a percentage of the total wages and salaries they pay to their employees. The rate varies from state to state, but generally ranges between 1% and 3%.
2. For example, if a company in Mexico City pays $100,000 MXN ($4,847.21 US) in Mexican wages, it must contribute $3,000 MXN ($145.40 US) in payroll tax (at 3%).
3. Property tax Companies owning real estate in Mexico must pay property tax, which is calculated on the basis of the rateable value of the property. This tax is a municipal tax and rates vary from municipality to municipality. For example, for a property valued at $2,000,000 MXN ($96,937.35 US), the rate may be 0.1%, which equates to a payment of $2,000 MXN ($96.93 US) per year.
4. Rights for Public Services: In some municipalities, companies must pay additional fees for public services such as water use and sanitation. These fees depend on the size and activity of the company and are usually charged on a quarterly or annual basis.
5. Contributions to Social Security to (IMSS) and INFONAVIT (Institute of the National Housing Fund for Workers) Companies in Mexico must contribute to the Mexican Social Security Institute (IMSS) and INFONAVIT, which provide social security services and housing finance to workers.

Tax benefits in Mexico

Mexico offers a number of tax benefits designed to attract foreign investment, encourage business start-ups and facilitate the migration of professionals and entrepreneurs to the country. Here are the main incentives related to migration, business start-ups and incentives for residing or relocating businesses to Mexico.

Tax Incentives for Foreign Investment

The Mexican government implements policies to attract foreign direct investment (FDI), offering tax incentives that include:

• Immediate Deduction of Fixed Assets: Companies can immediately deduct investments in fixed assets, reducing their taxable base and thus their tax burden.
• Import Tax Refund (Drawback): This programme allows exporters to recover the general import tax paid on inputs, raw materials and components used in exported products.

Special Economic Zones and Industrial Parks

Mexico has special economic zones and industrial parks that offer fiscal and administrative benefits, such as:

• Tax Exemptions or Reductions: Companies setting up in these zones can access partial or total exemptions from Income Tax (IT) and other taxes.
• Administrative facilities: Simplified processes for obtaining permits and licences, facilitating the installation and operation of new companies.

International Treaties and Trade Agreements

Mexico has signed multiple free trade agreements and double taxation avoidance agreements, which benefit foreign companies in two ways. On the one hand, it allows income not to be taxed in both countries, reducing the tax burden for foreign investors. On the other hand, treaties facilitate access to international markets, promoting exports and business expansion.

Migration Programmes for Investors and Entrepreneurs

To attract foreign talent and capital, Mexico offers specific migration programmes:

• Temporary Resident Visa for Investors: Allows foreigners to reside in Mexico for up to four years, with the possibility of renewal, facilitating business and investment management.
• Permanent Resident Visa: Available to investors who meet certain criteria, granting rights similar to those of a Mexican citizen, without time restrictions.

Incentives for Strategic Sectors

The Mexican government implements specific incentives for key sectors, such as:

• Technology and Innovation Industry: Tax deductions and financial support for companies that invest in research and technological development.
• Renewable energy: Tax exemptions and facilities for clean energy projects, promoting sustainable investments.

Taxes in Mexico: frequently asked questions

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