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 employer profit-sharing distributions.
Employees are allowed to exclude an amount equal to 30 days' UMA if they receive a year-end bonus (Christmas bonus), 15 days' UMA each if they receive a vacation bonus or participation in the employer's profits, and overtime pay up to five times the daily UMA per week, with certain limitations. These exclusions are taken into account by the employer when calculating the income tax withholding.
Fringe benefits, such as social welfare benefits, may be considered as totally or partially exempt income if the employer satisfies certain eligibility requirements (e.g. non-discrimination). However, the exempt amount of general social welfare benefits is limited to the equivalent of one annual UMA (MXN 37,844.35 [i.e. 103.74 x 30.4 x 12] for 2023). Under no circumstances will the social welfare benefits be taxable if their amount, added to other regular compensation, does not exceed seven times the UMA.
The use of an employer-provided automobile is usually not considered to represent additional taxable income to the employee. However, the employer's deductibility of automobile costs and expenses is subject to certain limitations, concerning mainly the maximum value of the vehicle. A per diem rate for business travel is treated as a taxable allowance unless supported by third-party receipts for actual travel expenses that are limited to lodging (hotel), meals, and transportation. Travel expenses are subject to certain maximum deductibility limits for domestic and foreign travel and are deductible (and not imputed as income to the employee) only when incurred outside a 50-kilometre radius from the employer’s base.
Living expense reimbursements, including housing and rental allowances, are generally taxable as compensation to the employee, even if paid directly to third parties.
Reimbursements of expenses of a spouse or dependants usually represent taxable income to the employee.
Fees paid to members of the Board of Directors are treated as salary income for income tax purposes. Under some circumstances, independent professionals can also elect to have their fees treated as salary income, in which case it will be the payer's responsibility to withhold the income tax from the professional's income and remit it to the tax authorities on a monthly basis.
Non-residents' wages, salaries, and other remuneration for personal dependent services rendered in Mexico are taxed on the basis of income received in a floating 12-month period, as long as the stay exceeds 183 calendar days, consecutive or not, in the mentioned period when paid by a non-Mexican resident.
Regarding employee stock options, income tax is payable when the options are exercised. The taxable amount is the difference between the value at exercise and the strike price. There are no tax-exempt amounts or caps. The tax rate depends on the amount of income received. The top marginal rate for 2023 is 35%. The tax is withheld at source and remitted to the Mexican tax authorities by the Mexican employer. If a stock option is exercised after the employee leaves Mexico and the former Mexican employer bears a portion or all of the benefit cost, the Mexican employer will be required to withhold by applying the income tax rates corresponding to salaries paid to a non-resident employee. Restricted stock units and other types of equity compensation are treated in a similar manner.
All income received by individuals from business activities carried out by unincorporated enterprises and the fees of independent professionals are subject to ordinary income tax rates, and the individuals may deduct their normal business expenses.
Under a tax incentive that applies to the northern border region, a tax credit equivalent to one-third of the income tax payable may be applicable. Certain exceptions apply. The fees of independent professionals do not benefit from this tax incentive.
Individuals that qualify as tax residents of Mexico are taxed on their worldwide capital gains.
However, gains on sales of securities through the Mexican Stock Exchange are only subject to a 10% tax on the net gain for the year. Shares of Mexican companies traded abroad in authorised exchanges also receive the same treatment, when determined by the Mexican Ministry of Finance to be placed among the general public.
In addition, gains from the sale of the taxpayer’s principal residence are exempt if certain requirements are met. The exemption is limited to the gain corresponding to approximately 244,560 United States dollars (USD) of gross proceeds, approximately. The exemption is limited to only one sale every three years.
Gains on the disposition of real estate property or shares of capital stock receive favourable income tax treatment where historical costs (converted to pesos) may be adjusted (increased) for inflation (on the basis of the number of months the asset had been held). In the case of shares of capital stock of a privately held Mexican corporation, the adjustment also includes amounts intended to partially cover net retained earnings, whether capitalised or not. The resulting net gain for tax purposes is taxed under a formula favourable to the taxpayer, depending on the number of years the asset was held before the sale.
Resident individuals must include in taxable income dividends received from Mexican corporations (grossed up for the corporate income tax [CIT] paid by the corporation) in their individual income tax returns and claim the underlying CIT paid as a credit against their personal tax liability. This ‘deemed paid’ credit system allows individual taxpayers to compute their tax on dividends at their own personal tax rate, which may be lower than the CIT rate of 30% in 2023. The CIT rate is lower than the top individual tax rate (35%).
Moreover, with respect to dividends paid from profits that were generated by the company after 2013, a 10% tax on the net dividend will be withheld by the Mexican company. This tax is in addition to the tax paid with the annual tax return, and it cannot be credited in the return.
Dividends paid by foreign corporations to resident individuals are fully taxable in the annual tax return. In addition, similar to domestic dividends, there is a 10% tax on the net dividend that the individual must pay by the 17th day of the following month. This tax is in addition to the tax paid with the annual tax return, and it cannot be credited in the return.
Interest from the Mexican banking system, except for certain exempt accounts with small balances, is subject to withholding and should be reported in the annual tax return. Except for certain transitional provisions, interest paid on most Mexican government obligations is taxable.
Interest on bank accounts, bonds, and other debt obligations issued by non-residents is fully taxable, and the taxable interest includes adjustments for inflationary losses and exchange gains and losses with respect to the principal.
Resident individuals are taxed on their worldwide rental income. They may deduct actual expenses incurred with respect to the property rented, including depreciation at 5% on the building’s cost, indexed for inflation; property taxes; insurance premiums; maintenance; interest on loans for the purchase or construction of the property (adjusted for inflation); and commissions paid. In order to claim these deductions, electronic accounting records must be provided to the Mexican tax authorities.
Alternatively, resident individuals may elect to deduct a standard deduction, equal to 35% of the gross rental income plus real estate taxes, in lieu of the deduction for actual expenses and depreciation mentioned above.
Tax haven investments
Taxable investment income includes income earned (even if not distributed) by investments of any kind located in countries considered to be tax havens, in proportion to the ownership percentage of the resident taxpayers. If the taxpayer either does not have effective control of the administration of the tax haven investment or the total amount of the revenues obtained in the prior year does not exceed MXN 160,000, the income does not have to be recognised until it is received. Residents are also required to file a separate report with the tax authorities by 28 February of each year regarding their direct and indirect investments held during the previous calendar year in countries considered to be tax havens. Failure to file the information report is considered a felony. A procedure is established to determine the accrued income.