Mexico: The Private Wealth & Private Client Review - Edition 4

I INTRODUCTION

As part of major reforms introduced by the executive branch of Mexico's federal government, important national sectors which in the past seemed 'unchangeable' are facing an ongoing shifting process derived from such reforms.

Mexico, member of the OECD since 1994, and one of the world's most important emerging market economies, plays an important role and has become an attractive destination for international investments within the Latin American region, which has led to the existence of an important number of wealthy individuals within an environment of unequal distribution of wealth.

Since the second half of the 1990 decade, Mexico has taken a more active approach to becoming an attractive investment spot by broadening its double taxation treaty network.

Taxation in Mexico is founded on a series of laws and regulations that are in constant flux. The major tax reform of 2014, which derived in the enactment of a new Income Tax Law, had an important impact on individuals, by incorporating new tax brackets up to a 35 per cent tax rate from the previous limit of 30 per cent and imposing taxation to gains obtained from the sale of publicly traded shares (until 2013 these were generally tax-exempt) and dividends received from both national and international companies at a rate of 10 per cent.

Inequality of income has been a historical problem for Mexican society. The authorities have constantly focused on developing policies for establishing additional taxes to the already captive taxpayers while the informal economy keeps growing as a response to the lack of formal employment that could provide the means of support for a significant number of Mexican households. Such inequality derives from the existence of a very big number of high net worth individuals in Mexico who hold investments abroad.

A major concern of wealthy individuals, not only in Mexico but worldwide, is the current trend of tax administrations to execute information-exchange agreements intended to provide additional elements for exercising audit faculties with respect to capital placed in investment structures abroad. Mexican tax authorities along with foreign tax administrations are playing an active role in response to the US Foreign Account Tax Compliance Act regulations, the Organisation for Economic Co-Operation and Development (OECD) BEPS (Base Erosion and Profit Shifting) action plan and the Common Reporting Standard of the OECD.

An outcome of the 2014 tax reform was the elimination of the option for income tax payment on a no-name basis. This payment alternative was applicable to Mexican resident individuals for income obtained from investments held overseas and represented a secure method of tax compliance under a confidentiality scheme.

Tax authorities are likewise focusing on gathering information with respect to inbound transactions conducted by taxpayers. Recently enacted provisions oblige individuals and corporations to constantly inform of specific transactions targeted as part of aggressive tax planning or with the intention of detecting money laundering.

Owing to the regulations that have recently been enacted, additional administrative resources must be invested by taxpayers so as not to fall into default with any of the obligations established therein.

Overall, taxation in Mexico for private wealth is constantly changing, and tax authorities are playing an active role not only on verifying whether individuals' tax obligations are duly being complied with, but also in promoting actions to reach agreement on a broad exchange of information and obliging taxpayers to keep providing information on their transactions.

II TAX

Domestic legislation establishes that Mexican resident individuals are subject to income tax with respect to their worldwide income.

An individual is deemed resident in Mexico if his or her dwelling is located within the country. If such individual holds property in Mexico and another country, the Mexican residence would be afforded if his or her main centre of interest (the place where more than 50 per cent of its overall income is obtained) is located in Mexico.1

Mexican resident individuals are subject to a progressive tax rate on their annual income. The 2014 tax reform increased the maximum tax rate from 30 per cent to 35 per cent.

Depending on the type of activities conducted by individuals, miscellaneous formal obligations may have to be complied with.2

Individuals are obliged to file an annual tax return on 30 April following year-end; however, depending on the type of income received, advance income tax returns may have to be filed before the Mexican tax authorities during the ongoing tax year. Mexican tax legislation provides that the tax year runs from 1 January through 31 December.

Several items of income are fully or partially income tax-exempt. Until 2013, individuals were fully exempt on gains derived from the sale of dwellings, to the extent that in the five previous tax years no other sale of dwellings was carried out. Since 2014 such sales are partially exempt for an amount of approximately US$230,000 (considering 2015 figures).

A major impact on individuals resulting from the most recent tax reform is a limit on the amount of personal deductions that could offset taxable income, such as medical expenses, additional contributions to private pension funds and interest on mortgages for acquisition of dwellings. The annual limit of personal deductions corresponds to the lower of approximately US$6,000 (considering 2015 figures) or 10 per cent of the individual's annual taxable income.

Most tax-exempt items of income must be reported to the Mexican tax authorities in order to maintain such status otherwise they are deemed taxable income.

i Taxation on real estate

Individuals are subject to income tax on gains derived from the sale of immoveable property. The tax basis of immoveable property is subject to restatement by Mexican inflation and subject to depreciation rules (except for land).

The Income Tax Law provides a tax computation procedure for individuals that results in having two types of gains, determined based on the number of years of their investment holding period. The first basket is taxed as part of the taxpayers' ordinary income, while the second basket is taxed at their previous five-year effective tax rate following the procedure established for such purposes.

Gains obtained from immoveable property deemed as ordinary income are subject to the annual progressive rate (maximum rate of 35 per cent), and in the case of sale transactions they are conducted before a notary public, who is then responsible for computing and remitting the corresponding tax to the authorities.

Local taxes apply to the acquiring party of immoveable property. State and municipal legislation may vary, however; property taxes normally range between 2 per cent to 5 per cent, which is habitually applicable to the greater out of cadastral value, according to each state's records, appraisal value or transaction value.

ii Taxation of gains of publicly traded securities

The tax exemption regime for gains obtained by individuals and non-residents derived from the sale of shares through the stock exchange was repealed by the 2014 tax reform.

As of 2014, individuals and non-residents in certain cases are obliged to pay income tax at a 10 per cent rate over gains derived from the sale of securities through authorised stock exchanges or recognised derivative markets.

Specifically, this new regime is applicable to shares issued by Mexican companies, or where the value stems more than 50 per cent from Mexican real estate, and securities that represent them such as American depository receipts; foreign shares that are listed on the Mexican stock exchange through its international quotation system; securities that represent indexes such as ETFs or TRACs, which are sold on the Mexican Stock Exchange and equity financial derivative transactions referred to shares listed on the Mexican Stock Exchange or referred to indexes on such shares that are realised in the Mexican market.

Mexican financial intermediaries must conduct the computation of gains or losses derived from sale transactions. Mexican resident individuals are entitled to offset losses against gains from the sale of securities.

Losses obtained from the sale of shares can only be offset against gains obtained from the sale of shares. A 10-year period is established for carrying forward losses obtained by taxpayers.

At year-end, Mexican financial intermediaries are obliged to provide Mexican resident individuals the information of the annual computation of gains or losses obtained during each calendar year. If a final gain is obtained, Mexican-resident individuals are obliged to remit to the tax authorities the 10 per cent income tax jointly with their annual tax return. The annual tax return for individuals is due to be filed on 30 April of the following year.

Non-residents can apply tax treaty benefits based on their tax residence. Mexico has an extensive network of tax treaties and exchange of information agreements.

There are some exceptions to which the 10 per cent rate does not apply, such as publicly traded securities that were acquired or sold in private transactions (the 10 per cent tax regime is applicable in cases where shares sold do not represent more than 1 per cent of the issuer's overall stock) and sales conducted by a person or group that within a 24-month period sells more than 10 per cent of an issuer's stock or its control, as defined in the Stock Market Law.

iii Taxation on dividends

Until 2013, Mexican legislation established an integrated profit distribution system in which profits were taxed at the level of the distributing entity, and no additional taxation was imposed on the recipients of such dividends.

As a result of the 2014 government's tax reform, individuals and non-residents are subject to an additional 10 per cent income tax on dividends received from profits generated in 2014 and the following years. Such income tax must be withheld by the distributing entity and remitted to the tax authorities.

Mexican resident entities are required to maintain separate records of profits generated until 2013 and of profits generated starting 2014 for the purposes of determining whether the additional 10 per cent income tax withholding is applicable or not in case any distribution to individuals or non-residents is conducted.

Additionally, Mexican resident individuals are subject to the additional 10 per cent tax on dividends received from non-resident entities, which must be paid in the month following such in which they receive profits.

In certain cases, tax treaties can reduce or eliminate the 10 per cent rate on dividends paid by Mexican resident corporations.

iv Preferential tax regime rules

Mexican residents holding investments in foreign vehicles are obliged to determine whether income arising from such investment is subject to a preferential tax regime.

Under Mexican legislation, and from a general approach, income is subject to a preferential tax regime when it is not subject to taxation abroad or is subject to income tax lower than 75 per cent of the income tax that would have been triggered and paid in Mexico, even when such situation derives from the application of special regulations, tax refunds, tax credit or any other procedure.

Income obtained from entities or foreign transparent legal vehicles is deemed as subject to a preferential tax regime, except when such vehicle conducts entrepreneurial activities and its passive income represents 20 per cent or more of its overall income.

An exception for not considering that income is subject to a preferential tax regime is established by the Mexican Income Tax Law for such cases where a Mexican resident does not exert control (directly or through a third party) in the management of foreign entities or legal vehicles to such a degree that could decide the moment of profit distribution. The Mexican Income Tax Law assumes that the Mexican resident exerts control; thus, proof to the contrary must be obtained in such applicable cases.

Income subject to a preferential tax regime is taxed at the level of the Mexican resident investor at the moment in which such income is generated, regardless of whether it has been distributed to such investor.

Mexican resident individuals and entities are obliged to comply with filing an informative return in case they obtain income subject to a preferential tax regime, conduct transactions through foreign transparent legal vehicles or obtain income arising from any territory established on the black list of the Mexican Income Tax Law transitory provisions.

Failure to comply with such informative return or providing incomplete information is a criminal offence. Administrative rules3 provide relief on specific cases for not filing the informative return, specifically if income is derived from a country that has entered into a broad exchange of information agreement with Mexico.

v Gifts

Gifts in Mexico are tax-exempt in the following cases:

  1. gifts between spouses or those received by descendants from their lineal ascendants;
  2. gifts received by ascendants from their lineal descendants, to the extent goods received are not sold or given to other lineal descendant in any degree; or
  3. other gifts that do not exceed an approximate amount of US$4,700 (considering 2015 figures). For the excess amount thereof, income tax must be paid.

A donee must consider the tax basis of goods received in relation to the donors immediately before they granted such goods as a gift. The acquisition date of goods received must also correspond to the acquisition date of donors.

However, in cases where income tax is paid on a gift transaction, the acquisition cost would correspond to the appraisal value considered for computing such tax and the acquisition date such in which the tax is paid.

The donee has to declare the amount of gifts received in his or her annual tax return in order not to lose the exemption.

To read this Chapter in full, please click here.

Originally published by Law Business Research Ltd.

Footnotes

1. 2015 Federal Fiscal Code.

2. 2015 Mexican Income Tax Law.

3. 2015 Miscellaneous Tax Resolution.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

Disclaimer

Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

Registration

Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

Cookies

A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

Links

This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

Mail-A-Friend

If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

Security

This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.