There are many options for opening a small business in Mexico. As in many countries, you can form a company or be a sole proprietor.
The first thing a corporate attorney is taught to think about in Mexico is taxation. In this country, all legal entities pay the same tax rate, although certain ones can use a cash basis versus accrual, but in the end, the rate is the same. Sole proprietors can pay much less, so this is an option to seriously consider.
A sole proprietorship for certain types of business activities is entitled to a special tax stimulus program called regimen de incorporacion fiscal. It is for small businesses with income less than $2,000,000 pesos a year. Businesses that require a license for practice – such as doctors, attorneys, architects and engineers – and businesses related to real estate, do not qualify.
If you want to open up a store, do consulting, rent out furnished properties or have a hair salon, then this program is the one we recommend to clients. You can file your own taxes online every two months, avoiding the cost of accountants and monthly tax reporting, which can run around $1,500 pesos per month. The program also allows you to legally pay little to no tax the first few years.
You can issue facturas – official tax receipts – and the program benefit is phased out over a 10 year period, with a 100 percent tax reduction the first year, 90 percent the second year and so on. A chart is provided to show you what your income tax liability is before the reduction. This would be above and beyond the 16 percent IVA tax, also known as VAT or GST, or sales taxes in other countries. But this applies to all services in Mexico, not just the sale of products, so you would pay the IVA tax when buying a bicycle as well as hiring an attorney or accountant. The reduction applies both to the IVA tax and the ISR, or income tax.
The income tax rate paid on net income after expenses has tax rates from 2 percent up to 35 percent, and you would apply the program’s discount to this tax rate. For example, if you earned $61,000 pesos net in a two-month period you would be in the 18 percent bracket and have an income tax of $4,719 pesos. That means you would owe zero taxes the first year due to the special tax program. For year two, you would only owe $471 pesos.
If you want to open your small business as a sole proprietor, you will also need to determine if a municipal business license, potentially state and federal licenses – depending on business activity – and permission from immigration are required.
Because sole proprietors do not have to follow corporate formalities and reporting requirements, the savings can be substantial, even after the tax benefits end.
Expats starting businesses in Mexico need to have temporary or permanent residence status to start a sole proprietorship. If you do not hold one of these visas, you cannot get work permission. If you have a Mexican family or a spouse with a temporary or permanent visa, you can get work permission on a tourist visa after you change to a temporary visa within Mexico. But, it can be problematic changing from working for a company to self-employment with just a temporary visa.