Mexico Withholding Taxes for Foreign Residents

In Mexico, a withholding tax is a mechanism for collecting taxes on income generated within the country by foreign residents. It functions as an advance payment of income tax, collected directly at the source. When a Mexican-based company makes a payment to an entity residing abroad, it must “withhold” a portion of that payment and remit it to the Mexican tax authorities.

The entity making the payment, known as the withholding agent, is legally responsible for calculating, withholding, and paying the tax to the Servicio de Administración Tributaria (SAT), Mexico’s tax authority. This process simplifies tax collection on cross-border activities. The specific amount to be withheld depends on the nature of the income.

Payments Subject to Income Tax Withholding and Standard Rates

Mexico’s Income Tax Law (LISR) establishes the default withholding tax rates for various types of income paid to foreign residents. These statutory rates are applicable to the gross amount of the payment when no tax treaty provision lowers them.

Dividends

Distributions of profits, or dividends, made by a Mexican resident company to a foreign shareholder are subject to a 10% withholding tax. This tax is considered a final tax for the foreign resident. This 10% rate applies to profits generated by the Mexican company from 2014 onwards.

Interest

The withholding tax on interest payments made to non-residents varies significantly. Interest paid to foreign financial institutions registered with the Mexican Central Bank can benefit from a reduced rate, often as low as 4.9%. This rate can also apply to interest on certain publicly traded debt instruments. For most other types of interest payments, the top rate is 35%, though this can be as high as 40% for payments made to foreign-related parties in jurisdictions with a preferential tax regime.

Royalties and Technical Assistance

Payments for the use of, or the right to use, patents, trademarks, and trade names are subject to a 35% withholding tax. A 25% rate applies to payments for technical assistance and for certain royalties, such as those for copyrights or the use of scientific equipment.

Independent Personal Services

Professional fees paid to a foreign resident for independent services, such as consulting or legal services performed within Mexico, are subject to a 25% withholding tax. This tax is levied on the gross income received for the services. An exemption may apply if the service provider’s stay in Mexico is less than 183 days in a 12-month period and other specific conditions are met.

Leasing of Property

Income derived by a foreign resident from the leasing of real property located in Mexico is subject to a 25% withholding tax. The withholding rate on income from the leasing of personal property, such as equipment or vehicles, varies depending on the specific circumstances.

Capital Gains on the Sale of Shares

When a foreign resident sells shares of a Mexican company, the gain is considered Mexican-source income and is subject to tax. The default rule imposes a 25% withholding tax on the gross proceeds from the sale. The law provides an alternative for the non-resident to elect to be taxed at a 35% rate on the net gain, provided they have a legal representative in Mexico and meet other requirements. For shares sold through the Mexican Stock Exchange, a 10% withholding tax on the net gain applies.

The Role of Tax Treaties in Reducing Withholding

Mexico has an extensive network of double taxation agreements with other countries. These treaties are designed to prevent the same income from being taxed by two different countries and to create a more predictable tax environment for cross-border transactions.

A primary function of these agreements is to reduce the standard domestic withholding tax rates. When a valid tax treaty exists between Mexico and the foreign recipient’s country of residence, its provisions can override Mexico’s domestic law. This often results in a lower, or in some cases, a zero percent withholding tax rate on specific types of income like dividends, interest, and royalties.

Applying these reduced rates is not automatic. The foreign income recipient must prove they are a tax resident of the treaty country and eligible for the treaty’s benefits. To do so, they must provide a valid Tax Residency Certificate to the Mexican payer.

The Tax Residency Certificate must be issued by the tax authority of the foreign recipient’s home country and contain their full name, address, and tax identification number. It must also explicitly state that the person or entity is a resident of that country for tax purposes under the terms of the tax treaty with Mexico.

This certificate must be valid for the fiscal year in which the payment is made and provided to the Mexican entity before the payment is processed. Without this certificate, the payer must apply the higher statutory rates, and the foreign recipient would have to file for a refund from the Mexican tax authorities later.

The Withholding and Remittance Process

Once the correct withholding tax rate is determined, the Mexican payer executes the withholding when the payment is made to the foreign resident. The payer calculates the tax on the gross amount of the income, subtracts it from the payment, and pays the net amount to the foreign recipient.

The withheld tax must be remitted to the SAT on a monthly basis. The deadline for remittance is the 17th day of the month following the month in which the withholding was made. This process is completed through a formal tax filing.

After remitting the tax, the Mexican payer must issue an official withholding certificate to the foreign recipient. This document, a Constancia de Retención, details the gross income paid, the amount of tax withheld, and the tax rate applied. This certificate serves as official proof that Mexican tax has been paid, which is necessary for them to claim a foreign tax credit in their home country.

Value Added Tax Withholding

Separate from income tax, payers in Mexico must also consider Value Added Tax (IVA) when making payments to foreign residents. This distinct obligation arises in cross-border transactions where services are used, or goods are enjoyed, within Mexican territory, even if the provider is located abroad.

The standard IVA rate in Mexico is 16%, which must be withheld and remitted on applicable transactions. Scenarios requiring IVA withholding include payments for the use of tangible goods or for services utilized inside the country. For example, if a Mexican company pays a foreign entity for digital services or software licenses used in its Mexican operations, it is required to withhold the 16% IVA.

Mexican payers must analyze both income tax and IVA implications for each payment to a non-resident. The rules for IVA withholding are specific and do not always mirror the conditions for income tax withholding. A transaction might be subject to both types of withholding, one, or neither.