Resident individuals are subject to Mexican income tax on their worldwide income, regardless of their nationality. Non-residents, including Mexican citizens who can prove residence for tax purposes in a foreign country, are taxed only on their Mexican source income.
The Federal Tax Code provides that a foreign individual will be considered a resident of Mexico for tax purposes when he has established his home in Mexico, unless he has been physically present in a foreign country for more than 183 days, consecutive or not, in one calendar year, and is able to prove residence for tax purposes in that other country.
Individuals holding immigration papers as temporary or permanent immigrants are usually considered residents, unless the foreigner enters Mexico during the last half of the calendar year, in which case he would have been outside the country for more than 183 days and should probably be taxed only on this Mexican source income during that first calendar year.
Foreigners working in Mexico under a visitor's permit should probably not be considered as residents until they have established some type of physical home in Mexico and have remained in the country for at least 183 days in a calendar year.
Income from personal services (earned income) includes salaries, commissions and allowances of all types, including those for housing, living expenses, education, foreign-service, tax reimbursements, and amounts received as employee profit sharing.
Certain benefits may be considered as taxable income of the individual even if they are not a deductible expense for the employer.
Living expenses can be absorbed free of tax to the employee only in the case of short-term visits and if supported by receipts from third parties. A per diem rate is treated as a taxable allowance. Reimbursements of expenses of a spouse or dependants usually represent taxable income to the employee.
Business travel expenses, other than those supported by receipts from third parties and limited to maximum deductible amounts, must, in general, be added to salaries for income tax purposes.
Residents are required to include investment income in their annual returns, except for: (a) interest from the Mexican banking system and government obligations, which is either subject to a final withholding tax of 20% on gross interest (or a portion thereof) or is exempt; (b) dividend income from Mexican corporations or investment funds; and (c) capital gains on transactions carried out through the Mexican stock exchange, which are exempt.
Gains on the disposition of real property or shares of capital stock receive favorable income tax treatment in that historical costs may be increased by factors (based on the number of years the asset had been held) to adjust them for inflation, and in the case of shares of capital stock also by amounts intended to partially cover net retained earnings, whether capitalized or not. The resulting net gain for tax purposes is taxed under a formula favorable to the taxpayer, again depending on the number of years the asset was held before sale. Gains on sales of securities through the Mexican stock exchange, when the securities are classified as available to the general public, are exempt from tax.
Gains from the sale of the taxpayer's principal residence are exempt, provided the taxpayer occupied it as such during the two years before the sale.
Residents of Mexico are taxed on their worldwide capital gains, whereas non-residents are only subject to Mexican tax on gains arising from sales of real property located in Mexico or non-exempt sales of shares of Mexican companies, regardless of where the sale takes place.
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