Last updated on 7 de April de 2023
Mexico is one of the most promising emerging markets in the world. Its proximity to the United States and high quality of life are great assets. We analyze the most important taxes in Mexico in an easy-to-understand manner.
- Taxes on Earned Income
- Capital Income Taxes
- Corporate Tax
- VAT (Sales Tax)
- Real Estate Transfer Taxes
- Mexico Public Finances
Situated in North America, Mexico is the largest Spanish-speaking country in the world. With over 130 million people, it is set to become one of the largest economies by the middle of the 21st century.
Mexico has many things going for it: a young population, its proximity to the United States, allowing it to benefit from onshoring activities, great gastronomy and weather, and a great quality of life.
This is why so many foreigners are interested in relocating to Mexico, particularly Americans and Canadians.
One of the main things to consider before deciding whether we should move somewhere is how much tax we ae going to pay.
The currency used in Mexico is the Mexican Peso (MXN). We will see the original tax amounts in both Pesos as well as its equivalent in US Dollars. To that end, we will use an approximate exchange rate of $1 = MXN 25.
Taxes on Earned Income
We start our analysis by looking at how income from labor is taxed in Mexico:
In Mexico, both employers, known as patrones, and employees, must make social security contributions. These are used to finance services such as accident insurance, the pension system or medical leave.
When it comes to employers, how much social security they have to pay is dependent on multiple variables, such as the position of the employee, the salary level and the manner in which they are remunerated. However, the average social security contribution is around 25% of the employee’s gross salary.
It should be noted that this percentage does not have to be paid on the entire gross salary for those employees with very high incomes. Therefore, the higher the income, the lower the effective social security rate.
Regarding workers, they must pay 5% of their gross salary to the Mexican social security. However, there is a maximum amount to be paid. The maximum annual payment is 22,243 Pesos ($890), which corresponds to a maximum social security contribution of 1,855 Pesos ($74) per month.
Income Tax (ISR)
In addition to paying for social security, workers in Mexico must also pay Income Tax, known as Impuesto Sobre la Renta (IRS).
In Mexico, the income tax is progressive and has many brackets. They range from about 2% all the way up to 35% for the highest incomes:
- 0 to 7,735 MXN ($0 to $309: 1.92%
- 7,735 to 65,651 MXN ($309 to $2,626): 6.4%
- 65,651 to 115,376 MXN ($2,626 to $4,615): 10.88%
- 115,376 to 134,119 MXN ($4,615 to $5,365): 16%
- 134,119 to 160,578 MXN ($5,365 to $6,423): 17.92%
- 160,578 to 323,862 MXN ($6,423 to $12,954): 21.36%
- 323,862 to 510,451 MXN ($12,954 to $20,418): 23.52%
- 510,451 to 974,535 MXN ($20,418 to $38,981): 30%
- 974,535 to 1,299,380 MXN ($38,981 to $51,975): 32%
- 1,299,380 to 3,898,140 MXN ($51,975 to $155,926): 34%
- More than 3,898,140 MXN (More than $155,926): 35%
In general, Mexico taxes labor income more lightly than most Western countries, including the United States.
Total Tax Burden on Earned Income
Finally, to analyze the total tax burden that workers have to shoulder, we will take a look at the percentage they receive in net salary relative to the total amount that employers spend to employ them.
To do this we will take the social security contributions paid by the employer and the employee’s gross salary.
For the purpose of this exercise, we will assume a worker who is unmarried and has no children:
As we can see, the tax burden on labor income in Mexico is quite similar for everyone, regardless of how much they earn. In fact, lower income earners are taxes slightly more than high earners on a relative basis.
This is because higher social security contributions for lower income workers push up their total tax burden.
If you want to calculate net salaries in Mexico, use this link.
Capital Income Taxes
Let us know discuss what taxes apply to capital income:
Interest from bank accounts or investments in fixed-income instruments, such as government bonds, are added to our other sources of income and tax at the same progressive rates that apply to labor income.
However, it should be noted that the amount received in interest must be adjusted for losses arising from inflation. This means our interest income will only get taxed if it is higher than the rate of inflation, i.e. only real interest income is taxed.
Dividends received by Mexican tax residents will be subject to taxes. Specifically, they will be subject to two different types of taxes.
First, the gross dividend will be added to our other sources of income and taxed at the progressive rates used for labor income. Hence, dividends may be taxed at a top marginal rate of 35%.
On top of that, a dividend tax of 10% of the net dividend resulting from having subtracted the applicable income tax from the gross dividend will have to be paid.
If we combine both types of taxes, the top marginal tax rate for dividends in Mexico is 41.5%.
If we get income from our real estate investments, we will also have to pay income taxes in Mexico. The applicable rates will be the same ones as for labor income, ranging from 1.92% to 35%.
However, tax will only have to be paid on the tax base. To calculate how much our tax base is our gross rental income will be reduced by all expenses associated with the ownership of the property (taxes, cleaning fees, upkeep, insurance, mortgage interest, etc.), as well as an annual depreciation of 5% of the value of the property, which will increase with inflation.
As a result of the many expenses that can be deducted, it is possible to end up paying no income tax on our rental income.
Alternatively, it is also possible to reduce the amount received in gross rental incomes by 35% and subtract the amount of taxes paid in order to calculate the tax base. Nonetheless, the former option tends to be more cost effective.
Realized Capital Gains
When it comes to realized capital gains, how much tax we have to pay will depend on how they were originated.
If capital gains come from having sold our main home, approximately the first 5 million Pesos ($200,000) will be tax-exempt.
Gains coming from other types of investments, such as stocks, will only be taxed at 10%. And that 10% will be calculated by adjusting the initial cost base upwards to take into account the accumulated inflation between the purchase and liquidation dates.
When it comes to international stocks denominated in currencies other than the Mexican Peso, to find out how much tax we have to pay, the original cost is converted into Pesos and adjusted up to account for accumulated inflation. The final sell price is converted into Pesos and compared against the adjusted cost price.
Because the calculation of income tax due on realized capital gains accounts for the accumulated inflation during our holding period, only real capital gains above the inflation rate will get taxed in Mexico. And then at a very attractive tax rate.
Corporations will have to pay taxes on their profits. The general corporate tax rate in Mexico is 30%, regardless of how much money a company has made or the sector it operates in.
In this sense, the tax burden on companies is relatively high compared to what we find in most other countries in the world.
VAT (Sales Tax)
The consumption of goods and services in Mexico is subject to value added tax (VAT), which follows a very similar model to the one in most European countries. It has two different rates.
On the one hand, the general VAT rate in Mexico is 16% and applies to all products that are not specifically subject to the exempt tranche.
Thus, there is a series of goods and services whose VAT is 0%. In this category we find things like books, press, lottery tickets, and investment products, including gold and other precious metals that can be used as legal tender.
Real Estate Transfer Taxes
The purchase of a property in Mexico, either an apartment or a house, is also subject to taxes. This tax goes by the acronym ISAI.
The ISAI is set by the regional government of the jurisdiction in which our property is located. ISAI rates vary wildly within Mexico.
The average ISAI rate on the purchase of a real estate property in Mexico is 2%. However, it can be practically zero if we buy in Yucatan (0.02%) or higher than the average if we buy in the capital, Mexico City, where the rate is progressive and ranges from 3.1 to 4.5%.
Mexico Public Finances
Now that we have analyzed most taxes in Mexico, we will take a look at the state of the country’s public finances. This will allow us to determine the degree of fiscal responsibility.
To that end we will look at a historical chart of Mexico’s public debt relative to the size of its economy:
Compared to most Western countries, Mexico has a relatively moderate level of public debt, at just above 50% of GDP. However, we should add a couple of comments here.
First, the trend seen over the last few years is worrying. Public debt was below 20% prior to the 2008 financial crisis, meaning it has almost tripled since.
On the other hand, due to the weakness of their currencies, which is usually accompanied by higher inflation and interest rates, emerging countries can afford lower levels of public debt than developed countries. This means Mexico’s public debt is not as low as it may seem to be.
The tax system in Mexico follows a very similar structure to those of most developed countries. However, while the corporate tax rate is relatively high, most other tax rates are lower than in most countries.
Apart from that, Mexico has a lot to offer to those interested in living in a promising country with a high quality of life.
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