Why is it important to know that you are a fiscal resident of Mexico? Because, it could save you some money.
Most countries include a legal definition of fiscal residency in their tax code, or authorities use a variety of criteria for handling it on a case-by-case basis. Commonly, fiscal residency is determined to be in the country where a “center of vital interests” lies or the place that is the “habitual abode” or nationality.
Foreigners are considered fiscal residents in Mexico when more than 50 percent of their total revenue within a calendar year is from sources within the country, or their main center of professional activities is located in Mexico (center of vital interests). These foreigners are fiscal residents in Mexico and they may have some exemptions in the capital gains tax they pay when they sell Mexican property.
Individuals who temporarily use real estate for tourist purposes are fiscal residents in another country, and are not considered to have established their permanent home in Mexico.
In this case, a non-fiscal resident of Mexico may sell his/her property in Mexico without having to pay the IVA on the real estate commission if:
- The sales agent is a fiscal resident (paying taxes) in Mexico.
- The funds for the sales price will be in foreign banks or financial institutions in the account of the escrow company. Purchase funds will NOT BE IN MEXICO.
- The seller proves to the notary that he/she is a fiscal resident abroad and not a fiscal resident of Mexico.
Mexico applies a single standard rate of 16 percent across the country to all goods and services unless specifically exempted from the law, which includes sales of houses, except those to be used for commercial purposes, but only for the percentage of the property that is commercial.
In summary, if you are a fiscal resident of Mexico you may have a partial exemption in payment of capital gains tax upon a sale. You will pay IVA on the sales commission. If you are NOT a fiscal resident of Mexico when you sell you will pay capital gains and you will not have to pay IVA sales tax of 16 percent on the sales commission to the agent (the sales commission is still deductible against ISR or CG). You will have to prove you are a fiscal resident outside of Mexico
This article is based upon legal opinions, current practices and my personal experiences in the Puerto Vallarta-Bahia de Banderas areas. I recommend that each potential buyer or seller conduct his/her own due diligence and review. 1
