Mexican Tax Law: Third Party Taxes, Part I

Withholding Third Party Taxes

Fees for Independent Services

In case a resident company pays fees for independent services rendered within Mexican Territory by residents in Mexico, a 10% tax will be withheld. In case the individual or legal entity resides abroad, but renders services within the Mexican Territory, the withholding gross rate shall be of 25%.

In accordance the provisions of the US-Mexico Tax Treaty, it is established that the income of this type can only be taxed by the state of residence of the rendered of the services. Such income can be taxed by the state different from the state of residence if: (i) the renderer has a permanent establishment in the state different from his state of residence; or (ii) the staying period of the service renderer in the foreign country different from the country of its residence exceeds 183 calendar days during any continuous twelve month period, since the renderer will automatically acquire residence in that other state by exceeding the mentioned limit.

Salaries

All salary payments for workers residing in Mexico will be subject to a withholding tax of up to 32%, and for workers that reside abroad, the tax shall be calculated applying the rates of the ITL.

However, salaries of foreign employees paid in Mexico by foreign employers that do not have a permanent establishment are exempt from the ITL, in Mexico, if the employee's stay in the Mexican Territory does not exceed 183 calendar days, consecutive or not, in a period of twelve months.

Likewise, in accordance with the US-Mexico Tax Treaty, the general rule states that the salaries, wages, and similar remunerations obtained by a person through employment, can only be taxed in the state of residence.

However, such income can be taxed by the state different from the state of residence when:

1. The employment is performed in that other state;
2. The receiver remains more than 183 days consecutive or not in any 12 month period, since the receiver will automatically acquire residence in that other state by exceeding the mentioned limit;
3. The remunerations are not paid by the employer that is not a resident in that other state and it does not have a permanent establishment; and
4. The remunerations are supported by a permanent establishment of that other state.

Individuals must include in their own taxable incomes ones received in the period by companies, entities and trusts located or resident in low-tax jurisdictions (tax havens) in proportion to their daily average share holding in the period, even when such income has not been distributed.

This income is not considered for the purpose of advance tax payments. Authorized deductions may be taken and prior year’s tax losses may be carried forward provided that the foreign entities accounting records are at the disposition of the tax authorities. As with business entities, individuals must file an annual information return reporting investments held in those low-tax jurisdictions.

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