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:
- gifts between spouses or those received by descendants from their lineal ascendants;
- 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
- 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.
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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.
