What Are the Main Types of Taxes in Mexico?

Mexico funds its public services and infrastructure through a structured tax system. This framework is primarily administered by the Servicio de Administración Tributaria (SAT), which functions as Mexico’s tax authority. Understanding Mexico’s tax landscape is important for individuals and entities operating within the country. The system encompasses various taxes, including those on income, consumption, and property, each with specific rules and applications that impact taxpayers differently.

Income Taxes

Income taxes in Mexico are levied on both individuals and corporations. Individual Income Tax, known as Impuesto Sobre la Renta (ISR), applies to a person’s earnings. This tax operates on a progressive rate structure for individuals, meaning higher income levels are subject to higher tax percentages, ranging from approximately 1.92% to 35%.

Common types of income subject to individual ISR include salaries, business profits, rental income, and capital gains. Capital gains are treated as ordinary income and are taxed at the applicable progressive rates. For instance, sales of shares on the Mexican stock exchange are subject to a 10% tax.

Corporate Income Tax, also referred to as ISR for corporations, is generally applied at a flat rate of 30% on the net profits of companies operating in Mexico. This rate is calculated on the company’s taxable income, which is determined by subtracting authorized deductions from total taxable revenue. Foreign companies that have a permanent establishment in Mexico are taxed on the income attributable to those establishments. Additionally, profits distributed to non-resident shareholders may be subject to a 10% withholding tax, unless a double taxation treaty provides for a reduced rate.

Consumption Taxes

Consumption taxes are another integral part of Mexico’s tax system, applied to the purchase of goods and services. The most significant of these is the Value Added Tax, known as Impuesto al Valor Agregado (IVA). IVA is a general consumption tax applied at each stage of the supply chain on most goods and services.

The standard IVA rate across Mexico is 16%. However, certain essential goods and services are subject to a 0% IVA rate, including exports, basic food items, prescription medicines, and books. In some regions, particularly those along the northern border, a reduced IVA rate of 8% may apply as a tax incentive to promote economic competitiveness.

Another notable consumption tax is the Special Tax on Production and Services, or Impuesto Especial Sobre Producción y Servicios (IEPS). IEPS is an excise tax levied on specific goods and services, often those considered luxury items or products with potential health or environmental impacts. Examples of items subject to IEPS include tobacco products, alcoholic beverages, sugary drinks, and gasoline. The rates for IEPS vary significantly depending on the specific product or service.

Property and Asset-Related Taxes

Mexico’s tax structure also includes various taxes related to property ownership and asset transfers. Property Tax, known as Impuesto Predial, is a municipal tax levied annually on real estate. The amount of this tax is based on the cadastral value, or assessed value, of the property and varies by municipality across the country.

When real estate is purchased, an Acquisition Tax on Real Estate, or Impuesto Sobre Adquisición de Inmuebles (ISAI), is applied. This is a state-level tax paid by the buyer during the property acquisition process. The rate for ISAI differs significantly by state, typically representing a percentage of the property’s value, with an average rate of 2% but potentially reaching up to 6.5% in some states.

Vehicle Ownership Tax, or Tenencia Vehicular, was historically a federal tax but is now primarily a state-level responsibility. Its application and rates vary considerably, with some states having abolished it entirely or offering significant subsidies to vehicle owners. Mexico generally does not impose a federal inheritance or estate tax. Income received by a Mexican resident through inheritance is specifically exempt from income tax.

Tax Residency and Obligations

Understanding tax residency is crucial for determining the scope of tax obligations in Mexico for both individuals and legal entities. For individuals, tax residency is primarily determined by having a “center of vital interests” in Mexico. This means Mexico is their primary home, or the main source of their income or professional activities is located there. Additionally, spending more than 183 days, consecutive or not, within Mexico during a calendar year typically establishes tax residency.

For legal entities, residency is generally determined by the location of their effective management or where their principal administration is situated. The distinction between a resident and a non-resident significantly impacts tax liability. Mexican tax residents are generally taxed on their worldwide income, meaning all earnings, regardless of where they are generated, are subject to Mexican taxation. Conversely, non-residents are typically only taxed on income sourced within Mexico. Non-residents may also be subject to various withholding taxes on their Mexican-sourced income.

To prevent individuals and companies from being taxed twice on the same income, Mexico has signed numerous double taxation treaties with many countries. These treaties can significantly influence how certain types of income are taxed for residents of those countries, often providing mechanisms to avoid or reduce dual tax burdens.