Last month we published an article on U.S. taxes to help American expats get ready for April 15. But there are plenty of expats who have their own businesses or are working in Mexico and may have tax obligations in this country.
My wife, Felice, for example, has her own sales and marketing company (Expats in Mexico Marketing) that she operates out of our home. Her business focuses on the real estate market in Mexico, which requires her to pay taxes in Mexico. Thankfully, she found a great accounting resource in Puerto Vallarta to help her manage her Mexican taxes.
Paula Blanco holds an accounting degree from Escuela Bancaria y Comercial and a master’s degree in Mexican taxes from the Instituto de Estudios Universitarios. She began her accounting career in the construction industry in Puerto Vallarta and is now the owner of equilibrium.mx Equilibrium Tax and Law.
If you are unsure whether or not you need to file a return with the Tax Administration Service (SAT) the Secretaria de Hacienda or want to understand your obligations and the process, please read on.
EIM: Do all expats in Mexico have to pay Mexican taxes?
Blanco: No, only those who have Mexican-sourced income or, sometimes, permanent residents, depending on what sources of income they have abroad. Mexico has treaties to avoid double taxation with over 60 countries, so unless they have Mexican-source income, chances are their income tax is waived – per the treaty – to avoid double taxation.
EIM: What falls under Mexico-sourced income?
Blanco: There are several reasons why you would have to pay taxes in Mexico. One of them is being a tax resident, which involves having your primary center of interest in the country, that is your primary home in Mexico. But because of the treaty, those living on social security, for example, would not pay Mexican taxes. Or those with investments or pensions in the U.S., Canada or other countries.
Another reason is having a permanent establishment, which is a business center that operates in the country for more than 183 days per year. Source of wealth is another reason to pay Mexican taxes, which is the case I find with most expats. What I have found is expats who have to pay Mexican taxes most often have a rental property in the country. Rental properties are a source of wealth because the revenue originates from a property in the country that cannot be moved out of the country. They would not have the revenue if it were not for that property. The same applies to those who set-up a business in Mexico. And of course, you would pay taxes in Mexico if you are employed by a Mexican employer.
EIM: When you say set-up a business, do you mean establishing an LLC or similar business entity?
Blanco: No, I mean having a business activity. For most people, it is more convenient to file as individuals, as sole owners. An online company, coffee shop or similar types of business.
EIM: What about the so-called digital nomads, those who may live here temporarily or permanently, and have their own online business?
Blanco: That’s a more common occurrence now with the rapidly expanding digital world. More and more people are working from home, whether as a remote worker or owning an online business. We would have to look at the source of wealth. If the service they are providing is being used in Mexico, they would have to pay taxes here. It would depend on how long they are here, their resident status and also whether the service is being used abroad or not.
EIM: If someone has a source of income from the U.S., for example, say a contractor, consultant or remote worker, what are their tax obligations?
Blanco: Those sources of income fall into the treaty to avoid double taxation. The treaty says this type of income may only be taxed in the country it originated in.
EIM: When you have to pay Mexican taxes, do you deduct them on your home country tax form?
Blanco: Yes. For example, if someone had a U.S. employer, like if someone worked for Amazon in Mexico or a high-tech company in Guadalajara, they are paid through a foreign entity and the employee would get a credit for the tax they paid in the U.S.
It’s the same thing with business activities. You usually get a credit in the U.S. for the tax you paid in Mexico. You can also use a credit the other way around. If your Mexican tax was higher than your U.S. tax, you could get a credit for the tax you paid in the U.S. or other home country. It’s very important that you keep detailed records of income and expenses.
EIM: If someone has a business in Mexico and sells it to someone in the U.S., for example, what taxes are paid and to whom?
Blanco: In Mexico, you have to pay a sort of capital gains. We only have income tax and don’t break income tax down into categories, so we don’t have capital gains per se. But you would have to pay income tax on whatever gain you made. You need to value what the business is worth, and then whatever profit you are making on that, you pay the tax on that gain.
EIM: If you own and operate a business in Mexico, how are those taxes handled?
Blanco: It depends on the business and tax system you are in. Mexico has five tax systems. We have one for non-residents, those who use a tourist visa and have a Mexican source of income. Then we have the option of setting up an entity with a flat mix, 30 percent corporate tax rate. And then we have three different systems for individuals who are residents.
We have what we call the general system, where your taxes are scaled up to 35 percent. It’s cash-flow based. Then we have a very friendly system for small businesses that are just starting. It’s for those businesses with up to 2 million pesos gross income per year (US$100,000). That one is very good because you have a lot of benefits, which includes not having to keep full books. You do simplified accounting, which makes administration much easier. Plus, you get discounts on federal taxes. The full tax burden doesn’t kick in until year 11 of business operation.
EIM: I would like to get into the issue of property ownership and rental properties and their tax consequences, but I think that would require much more time then we have today, so we will save it for another article, Paula. Thank you.
Blanco: Thank you, Robert.