Mexico Withholding Tax: Rules, Rates, and Compliance

Mexico’s tax system uses withholding to collect income tax from foreign residents on money earned from Mexican sources. This approach requires the entity in Mexico making the payment to calculate, deduct, and remit the tax to Mexican authorities before sending the remaining funds to the foreign recipient. This system ensures tax is collected at the source of income generation, simplifying compliance for foreign entities without a physical presence in the country.

Payments Subject to Withholding

The Mexican Income Tax Law specifies numerous types of payments made from a resident in Mexico to a foreign resident that are considered Mexican-source income and are therefore subject to withholding. These rules are designed to capture tax on economic activities and returns on investment that originate within the country.

Salaries and Wages

Compensation for personal services performed within Mexico is considered Mexican-source income and is subject to withholding. An exemption is available for short-term stays of less than 183 days in a 12-month period, but only when the compensation is paid by a non-resident employer that does not have a permanent establishment in Mexico. If the salary is paid by a Mexican resident employer, the income is subject to withholding tax from the first day.

Professional and Technical Services Fees

Payments for independent personal services, such as consulting or legal services rendered in Mexico, are subject to withholding. A distinction is made for technical assistance, which involves the transfer of knowledge or technology, as fees for these services are also subject to withholding.

Royalties

Royalty payments made to foreign residents for the use of, or the right to use, patents, trademarks, copyrights, and other intellectual property are subject to withholding. The Mexican Income Tax Law also classifies payments for the use of commercial, industrial, or scientific equipment as royalties, meaning many leasing arrangements fall under these rules.

Interest Payments

Interest income derived from capital placed or invested in Mexico is subject to withholding, including interest on loans made to Mexican residents. The applicable tax rates can vary depending on the nature of the debt and the identity of the recipient, such as a foreign bank.

Dividends

Dividends paid by a Mexican resident company to a foreign shareholder are subject to a withholding tax. This tax is applied to profits generated by the company from 2014 onwards. Profits earned and distributed from years prior to 2014 may be exempt under a grandfathering rule.

Rental Payments

Income from leasing real estate located in Mexico is subject to a withholding tax. Similarly, payments for the rental of personal property, such as vehicles or machinery, used within Mexico also trigger a withholding obligation. The leasing of certain industrial or commercial equipment is often treated as a royalty payment.

Standard Withholding Tax Rates

Under its domestic law, Mexico imposes specific statutory withholding tax rates which serve as the default amounts before considering any tax treaty reductions. The standard rate for dividends from profits generated after 2013 is 10%. For interest payments, rates range from 4.9% for interest paid to foreign banks to as high as 35% for other loans.

Royalties for patents and trademarks are subject to a 35% rate, while copyrights face a 25% rate. Fees for technical assistance, independent personal services, and income from leasing real property are all taxed at a 25% rate.

The Role of Tax Treaties

Mexico has an extensive network of double taxation treaties with numerous countries, including the United States, which can prevent the same income from being taxed by both countries. These agreements often provide for reduced withholding tax rates on payments like dividends, interest, and royalties.

To access these lower treaty rates, the foreign income recipient must prove they are a tax resident of a treaty country by providing a Certificate of Tax Residency. This official document must be issued by the recipient’s home country tax authority, such as the Internal Revenue Service (IRS) in the United States.

For example, under the U.S.-Mexico tax treaty, the withholding rate on certain royalty payments may be reduced from the domestic 35% rate to 10%. The 10% withholding tax on dividends may be reduced to 5% or 0% if the U.S. recipient is a company that owns a certain percentage of the Mexican payer’s shares. Without a valid Certificate of Tax Residency, the payer must apply the higher domestic statutory rates.

Compliance and Documentation

The responsibility for withholding and remitting the tax falls on the Mexican resident making the payment. The payer must determine the correct tax rate, applying either the domestic rate or a reduced treaty rate if the foreign recipient provides the proper documentation.

The calculated tax must be withheld from the gross payment, and the net amount is paid to the foreign resident. The withheld funds must then be remitted to the Mexican tax authority, the Servicio de Administración Tributaria (SAT), by the 17th day of the month following the payment.

After remitting the tax, the Mexican payer must issue an official withholding tax certificate, known as a constancia de retención, to the foreign recipient. This document serves as proof that Mexican income tax has been paid and is needed for the recipient to claim a foreign tax credit on their home country tax return.