Mexico: Global Tax Guide

Table of Contents

Legislation

Income Tax Law – 2024

Residence/Territorial Scope

Article 1 of the Income Tax Law provides that legal entities pay income as follows:

• Companies that are resident in Mexico, are subject to corporate income tax with respect to all their income, regardless of the location of the source.

• Companies that are resident abroad who have a permanent establishment in Mexico, pay corporate income tax with respect to the income attributable to the permanent establishment.

• Companies that are residents abroad, are subject to withholding tax with respect to income from sources of income in Mexico, when they do not have a permanent establishment in Mexico, or when having one, income is not attributable to it.

Permanent Establishment

Article 2 of the Income Tax Law provides that a permanent establishment is any place of business in which business activities are carried out, partially or totally, or independent personal services are provided. Permanent establishments include, branches, agencies, offices, factories, workshops, facilities, mines, quarries or any place of exploration, extraction or exploitation of natural resources.

When a resident abroad acts through a natural or legal person in Mexico, other than an independent agent, the resident abroad is deemed to have a permanent establishment in Mexico, in relation to all the activities that the natural or legal person carries out for the resident abroad if the person habitually concludes contracts or habitually performs the main role that leads to the conclusion of contracts entered into by the resident abroad.

Note that, a resident abroad will be considered to have a permanent establishment in Mexico, when they act in Mexico through a natural or legal person who is an independent agent, if he does not act within the ordinary framework of his activity.

An independent agent is considered not to act within the ordinary framework of its activities, among others, when it is located in any of the following cases:

• Has stock of goods or merchandise, with which it makes deliveries on behalf of the resident abroad.
• Take risks from the resident abroad.
• Is subject to detailed instructions or general control of the resident abroad.
• Carries out activities that economically correspond to the resident abroad and not to his own activities.
• Receive remuneration regardless of the result of any activities.
• Carries out transactions with the resident abroad using prices or amounts of consideration different from those used by unrelated parties in comparable transactions.

A natural or legal person is presumed not to be an independent agent, when he acts exclusively or almost exclusively on behalf of residents abroad who are his related parties.

In the case of construction services, demolition, installation, maintenance or assembly of real estate, or for projection, inspection or supervision activities related to them, a permanent establishment is considered to exist only when they have a duration of more than 183 calendar days, consecutive or not, in a period of twelve months.

Article 3 of the Income Tax Law provides that there is not a permanent establishment when the following activities are carried out, provided that they are of a preparatory or auxiliary nature:

• The use or maintenance of facilities for the sole purpose of storing or displaying goods or merchandise belonging to the resident abroad.
• The preservation of stocks of goods or merchandise belonging to the resident abroad for the sole purpose of storing or exhibiting such goods or merchandise or that they are transformed by another person.
• The use of a place of business for the sole purpose of purchasing goods or merchandise for the resident abroad.
• The use of a place of business for the sole purpose of carrying out activities of propaganda, provision of information, scientific research, preparation for the placement of loans, or other similar activities.
• The fiscal storage of goods or merchandise of a resident abroad in a general warehouse or the delivery of the same for importation into the country.

Entities Within Scope

Article 45 of the General Tax Code provides that corporate income tax applies to the following companies and other legal persons, regardless of their purpose, carrying on their activity in Tunisia:

• companies referred to in Article 7 of the Commercial Companies Code;
• production, consumer or service cooperatives and their unions;
• public establishments and bodies of the State, governorates and municipalities of an industrial and commercial nature enjoying financial autonomy;
• civil-law companies if they in fact have the characteristics of capital companies;
• joint ventures, members of economic interest groupings and co-participants in common debt funds when they are legal persons subject to corporation tax;
• certain associations that do not carry out their activities in accordance with the provisions of the legislation governing them;
• the members’ fund provided for in the Insurance Code.

Corporate Income Tax Rates

Article 9 of the Income Tax Law provides that legal entities are subject to corporate income tax at a rate of 30%.

Taxable Income and Allowances

Article 16 of the Income Tax Law provides that resident legal entities are taxable on all income in cash, goods, services, credit or any other type of income obtained in the fiscal year, including that from their establishments abroad. Capital gains on the disposal of fixed assets are also included.

Under Article 22 of the Income Tax Law, to determine the gain on the sale of shares, taxpayers reduce from the income obtained per share, the average cost per share of the shares they dispose of, as follows:

The average cost per share will include all the shares that the taxpayer has in the same legal entity on the date of the sale, even if it does not dispose of all of them. This cost will be obtained by dividing the original adjusted amount of the shares by the total number of shares held by the taxpayer on the date of the sale.

Stock

Article 41 of the Income Tax Law provides that stock can be valued using one of the following methods:

• First in, first out (FIFO)
• Identified cost
• Average cost
• Retail method

Taxpayers who dispose of merchandise that can be identified by serial number and their cost exceeds $50,000.00, must only use the identified cost method.

If the retail method is used, taxpayers they must value their inventories at the reduced sales price with the gross profit margin they have in the fiscal year.

Once the method has been chosen, it must be used for a minimum period of five years.

Group consolidation regime

Article 59 of the Income Tax Law provides that qualifying groups may opt for a group consolidation regime.

Under Article 60 of the Income Tax Law, qualifying companies are considered to be those that meet the following requirements:

• The company is resident in Mexico;
• It owns more than 80% of the voting shares of another or other companies, even if indirectly;
• No more than 80% of its voting shares are owned by another or other companies, unless the companies are resident in a country with which there is an agreement for the exchange of information.

Article 62 of the Income Tax Law provides that the following will not be qualifying companies:

• Financial companies and capital investment funds;
• Non-resident companies;
• Companies in liquidation;
• Civil societies and associations, as well as cooperative societies;
• Joint ventures;
• Companies that carry out maquila operations;
• Companies with tax losses from previous years which have been generated prior to the date on which they are qualifying companies;
• Companies that provide public air transport services.

A group that qualifies for the group consolidation regime pays corporate income tax on a group basis with profits and losses of the group companies consolidated to determine taxable income.

Deductions

Article 25 of the Income Tax Law provides that companies can deduct the following:

• The refunds received or the discounts or bonuses made during the year
• The cost goods/services
• Expenses net of discounts, bonuses or returns
• Investments
• Uncollectible credits and losses due to fortuitous event, force majeure or the sale of assets;
• Employers’ contributions paid to the Mexican Social Security Institute, including those provided for in the Unemployment Insurance Law.
• Interest accrued in the year;.
• Contributions made for the creation or increase of reserves for staff pension or retirement funds.

Foreign legal entities with a permanent establishments in Mexico, may make the deductions that correspond to the activities of the permanent establishment. When the legal entities are resident in a country with which Mexico has a double tax treaty, the expenses that are prorated with the central office or its establishments may be deducted, provided that both the central office and the establishment, in which the expenditure is made, also reside in a country with which Mexico has a double tax treaty.

Remittances made by the permanent establishment located in Mexico to the company’s head office or to another establishment of the company abroad are not deductible, even if the remittances are made by way of royalties, fees, or similar payments, in exchange for the right to use patents or other rights, or by way of commissions for specific services or for procedures made or for interest on money sent to the permanent establishment.

Donations are deductible up to an amount not exceeding 7% of the taxable profit of the taxpayer in the fiscal year immediately prior to the one in which the deduction is made. When donations are made to the State, the deductible amount may not exceed 4% of the taxable profit.

Payments of life insurance premiums granted for the benefit of workers are deductible only when the benefits of the insurance cover the death of the holder or in cases of disability or inability of the holder to perform paid personal work in accordance with the social security laws. Payments of medical insurance premiums made by the taxpayer for the benefit of workers are deductible.

Bad debts are deductible where there is a significant possibility of non-collection.

For debts not exceeding 30,000 pesos this applies, when within a period of one year from the date of default, their collection has not been achieved.

For debts exceeding 30,000 pesos, the debts are deemed non-collectible, when the creditor obtains a final resolution issued by the competent authority, with which it demonstrates that it has exhausted the collection procedures or it is proven that the debtor has been declared bankrupt or insolvent.

Non-deductible expenses

Article 28 of the Income Tax Law provides that the following are not deductible:

  • Expenses that relate to exempt income;
  • Gifts, hospitality and other expenses of a similar nature, with the exception of those that are directly related to the sale of products or the provision of services and that are offered to customers in general;
  • Representation expenses;
  • Travel expenses or travel expenses, in Mexico or abroad, when they are not used for lodging, food, transportation, use or temporary enjoyment of automobiles and payment of mileage, of the person receiving the per diem or when they are applied within a 50-kilometer strip that surrounds the taxpayer’s establishment.

In the case of travel expenses for food, these will only be deductible up to an amount that does not exceed $750.00 per day for each beneficiary, when they are disbursed in Mexico, or $1,500.00 when they are disbursed abroad.

Travel expenses for the temporary use or enjoyment of automobiles and related expenses will be deductible up to an amount not exceeding $850.00 per day.

Travel expenses for lodging will only be deductible up to an amount not exceeding $3,850.00 per day.

  • Interest accrued on loans or acquisitions of securities held by the Federal Government registered in the National Securities Registry;
  • Provisions for the creation or increase of supplementary reserves of assets or liabilities that are constituted against the acquisitions or expenses of the year, with the exception of those related to bonuses to employees corresponding to the year;
  • Losses due to a fortuitous event, force majeure or sale of assets, when the acquisition value does not correspond to the market value at the time when the assets were acquired by the transferor.
  • Payments made to related parties or through a structured arrangement, where the income of your counterparty is subject to preferential tax regimes.
  • Interest derived from the amount of the taxpayer’s debts that exceed three times its stockholders’ equity that come from debts contracted with related parties residing abroad.
  • Net interest for the year that exceeds the amount resulting from multiplying the adjusted tax profit by 30%. This only applies to taxpayers whose interest accrued during the fiscal year exceeds $20,000,000. The amount of net interest for the year that is not deductible may be deducted during the following ten years until it is exhausted.
Depreciation

Article 34. The maximum authorized percentages, in the case of fixed assets by type of asset, are as follows:

10% for properties declared as archaeological, artistic, historical or heritage monuments, in accordance with the Federal Law on Archaeological, Artistic and Historical Monuments and Zones, which have the restoration certificate issued by the National Institute of Anthropology and History or the National Institute of Fine Arts.

5% in all other cases, including installations, additions, repairs, improvements, adaptations, as well as any other construction carried out on a mining lot in accordance with Article 12 of the Mining Law.

3% for fuel supply pumps to trains.

5% for railways.

6% for railroad cars, locomotives, harmonies and self-harmonics.

7% for track leveling machinery, nailers, track grinders, motor jacks for track lifting, remover, inserter and sleeper drilling.

10% for communication, signaling and remote control equipment.

10% for office furniture and equipment.

6% for boats.

25% for aircraft dedicated to agricultural air fumigation.

10% for other aircraft.

25% for cars, buses, cargo trucks, tractor-trailers, forklifts and trailers.

30% for personal desktop and laptop computers; Servers; printers, optical readers, graphers, barcode readers, digitizers, external storage units and computer network hubs.

35% for dice, dies, molds, dies and tooling.

100% for animals and vegetables.

5% for transmission towers and cables, except fiber optic cables.

8% for radio systems, including transmission and handling equipment that uses the radio spectrum, such as digital or analog microwave radio transmission, microwave towers, and waveguides.

10% for equipment used in transmission, such as internal plant circuits that are not part of the switching and whose functions are focused on the trunks that reach the telephone exchange, including multiplexers, concentrator equipment and routers.

25% for telephone exchange equipment intended for switching calls of technology other than electromechanical.

8% for a satellite segment in space, including the main body of the satellite, transponders, antennas for the transmission and reception of digital and analog communications, and monitoring equipment on the satellite.

10% for satellite equipment on the ground, including antennas for the transmission and reception of digital and analog communications and equipment for satellite monitoring.

100% for adaptations made to facilities that involve additions or improvements to the fixed asset.

100% for machinery and equipment for the generation of energy from renewable sources or efficient electricity cogeneration systems.

25% for conventional bicycles, bicycles and motorcycles whose propulsion is through rechargeable electric batteries.

5% for the right of usufruct constituted over a real estate.

Under Article 36 of the Income Tax Law, repairs, as well as adaptations to the installations will be considered investments provided that they involve additions or improvements to the fixed asset.

Expenses for conservation, maintenance and repair, which are disbursed in order to keep the property in question in operating condition, are not considered capital investments.

Automobile investments will only be deductible up to an amount of $175,000.00. In the case of investments made in cars whose propulsion is through rechargeable electric batteries, as well as electric cars that also have an internal combustion engine or a hydrogen-powered engine, they will only be deductible up to an amount of $250,000.00.

Tax Losses

Article 57 of the Income Tax Law provides that unutilised tax losses can be carried forward for offset against taxable profits of the the following ten fiscal years.

Withholding Tax

Withholding tax applies to various payments with a source in Mexico.

Under Article 154 of the Income Tax Law income from salaries and the provision of a personal service, is considered to be in Mexico when the service is provided in Mexico.

The tax will be determined by applying the following rates to the income obtained:

• The first $125,900.00 obtained in the calendar year in question will be exempt.
• The rate of 15% will be applied to income received in the calendar year in question that exceeds the amount indicated in the preceding section and that does not exceed $1,000,000.00.
• The rate of 30% will be applied to income received in the calendar year in question that exceeds $1,000,000.

The person who makes the payments must withhold the tax if he is a resident in the country or a resident abroad with a permanent establishment in Mexico with which the service is related.

For independent personal services provided in Mexico, Article 156 of the Income Tax Law provides that the tax is determined by applying the rate of 25% on the total income obtained, without any deduction, and the person who makes the payments must withhold the tax if he or she is a resident in Mexico or a resident abroad with a permanent establishment in Mexico with which the service is related.
Income from the temporary use or enjoyment of real estate in Mexico or the sale of real estate in Mexico is subject to a 25% withholding tax under Articles 158 and 160 of the Income Tax Law.

Dividends or profits distributed by resident legal entities, are subject to a 10% withholding tax under Article 164 of the Income Tax Law.

Under Article 166 of the Income Tax Law, interest income is classed as having a Mexican source when the capital is placed or invested in Mexico, or when the interest is paid by a resident in Mexico or a resident abroad with a permanent establishment in Mexico.

The rate is:

10% for interest paid to the following persons:

Financing entities belonging to foreign states, provided that they are the effective beneficiaries of the interest.

Foreign banks, including investment banks, provided that they are the beneficial owners of the interest.

Entities that place or invest in the country capital that comes from credit securities that they issue and that are placed abroad among the general investing public.
Interest paid to residents abroad on credit instruments placed through banks or brokerage firms, in a country with which Mexico does not have a double tax treaty.

To the acquisition of a credit right of any kind, present, future or contingent.

4.9% in the following cases:

Interest paid to residents abroad on credit instruments placed among the general investing public.

Interest paid to financing entities resident abroad in which the Federal Government, through the Ministry of Finance and Public Credit, or the Central Bank, participates in their capital stock, provided that they are the effective beneficiaries thereof and comply with the provisions of the general rules issued for this purpose by the Tax Administration Service.

15% to interest paid to reinsurers.

21%, to interest in the following cases:

Interest paid by credit institutions to residents abroad, other than those indicated above.

Interest paid to foreign suppliers for the sale of machinery and equipment, which are part of the purchaser’s fixed assets.

Interest paid to residents abroad to finance the acquisition of the goods referred to in the previous paragraph and in general for the qualification and equipment or marketing, provided that any of these circumstances are stated in the contract.

Under Article 167 of the Income Tax Law, income from royalties, technical assistance or advertising, is subject to withholding tax when the goods or rights for which royalties or technical assistance are paid are used in Mexico, or when royalties, technical assistance or advertising are paid by a resident in Mexico or by a resident abroad with a permanent establishment in Mexico.

The rate is:

Royalties for the temporary use or enjoyment of railroad cars; containers, trailers or semi-trailers that are imported temporarily for up to one month under the terms of the Customs Law; as well as vessels that have a concession or permit from the Federal Government to be commercially exploited, provided that such goods are used directly by the lessee in the transportation of passengers or goods – 5%

Royalties for the temporary use or enjoyment of aircraft that have a concession or permit from the Federal Government to be commercially operated, provided that such goods are used directly by the lessee in the transportation of passengers or goods – 1%

Other royalties – 25%

Transfer Pricing

Article 179 of the Income Tax Law provides for a general transfer pricing rule. Entities that enter into transactions with related parties are required to determine their taxable income and deductions based on an arms-length amount (the amount obtained between independent parties in comparable transactions).

Operations are comparable, when there are no differences between them that significantly affect the price or amount of the consideration and when there are differences, they are eliminated through reasonable adjustments. To determine any differences, the relevant elements that are required, depending on the method used, will be taken into account, considering, among others, the following:

• The characteristics of the operations, including:

o In the case of financing operations, elements such as the amount of the principal, term, guarantees, solvency of the debtor and interest rate.

o In the case of service provision, elements such as the nature of the service, and whether or not the service involves technical experience or knowledge.

o In the case of use, enjoyment or alienation of tangible goods, elements such as the physical characteristics, quality and availability of the good.

o In the case of the exploitation or transfer of an intangible asset, elements such as whether it is a patent, trademark, trade name or transfer of technology, the duration and the degree of protection.

o In the case of the sale of shares, elements such as the updated stockholders’ equity of the issuer, the present value of the projected profits or cash flows or the stock market price of the last event on the day of the sale of the issuer will be considered.

o The functions or activities, including the assets used and risks assumed in the operations, of each of the parties involved in the operation.

• The contractual terms.
• Economic circumstances.
• Business strategies, including those related to market penetration, permanence, and expansion.

Two or more persons are related parties when one participates directly or indirectly in the management, control or capital of the other, or when a person or group of persons participates directly or indirectly in the management, control or capital of such persons.

Unless proven otherwise, it is presumed that transactions between residents in Mexico and companies or entities subject to preferential tax regimes are between related parties in which the prices and amounts of the consideration are not agreed in accordance with those used by independent parties in comparable transactions.

The OECD Transfer Pricing Guidelines are deemed to be applicable in Mexico.

Article 180 of the Income Tax Law provides for the following pricing methods:

• Non-controlled comparable price method .
• Resale price method.
• Added cost method.
• Profit sharing method.
• Residual method
• Transactional operating profit margin method.