Taxes in Mexico: Employee Profit Sharing

All businesses in Mexico with employees, whether organized as sole proprietorships, partnerships or corporations, are required to distribute a portion of annual profits among all employees, except directors and the general manager. The employee's right to share in the profits of a concern does not give them the right to intervene in its management.

Calculation of Amount Payable

Employees are entitled to receive as their share of their employer's annual profits an amount equal to 10% of taxable income, as determined in accordance with the Income Tax Law, with certain modifications to eliminate the income tax adjustments related to below, in which the labor law establishes a limitation equal to one month's salary.

In the case of entities whose income is derived exclusively from personal services, such as professional partnerships, the amount of profit sharing payments made to each employee need not exceed one month's salary. The same limitation applies in the case of employees whose duties relate to collecting loans and interest thereon or who manage rental property.

Method of Distribution

Distribution of the employee's share in the profits must be made within five months after the end of the fiscal year.

The employer is required to make a copy of the company's return available to his employees so that they may exercise their right to object to their employer's income tax return. Any objection by employees to the tax return is communicated to the Revenue Authorities who issue the final decision, which cannot be contested by the employees. The labor law provides that non-compliance with the provision of the law establishing profit sharing is grounds for a valid strike.

The portion of the company's profit that is distributed among its employees is divided into two equal parts. The first is distributed among the employees in accordance with the number of days worked by each during the year, and the second in proportion to the salaries earned by each, except that the maximum compensation for computing the profit sharing of each white collar or supervisory employee is 120% of the salary of the highest paid blue-collar employee.

Persons Subject To or Exempt From Distributing Profits

All individuals, companies or economic units without legal personality that have employees are required to distribute a portion of their profits to them. Non-profit organizations pay profit sharing in accordance with special rules contained in the Federal Labor Law. Taxpayers who are entitled to statutory reductions of their income tax will use as the base for profit sharing their tax profit computed as in the case of a taxpayer who is not entitled to these reductions. Profit sharing is not applicable to the following:

1. Newly established businesses, during the first year.
2. Newly established businesses that manufacture a new product, during the first two years.
3. Mining and similar businesses, during the exploration period.
4. Public and private welfare institutions recognized by law.
5. Enterprises whose capital and gross income are less than a certain minimum established by the Labor Department.

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