in Mexico: What are you up Against?
The tax treaties Mexico has signed and local law establish who is a tax resident. Tax treaties also set forth the tax rates for different types of income. The main purposes of these treaties, however, are to provide the manner in which double taxation will be minimized, as well as to establish how countries will exchange information on their respective taxpayers. The Canadian and US tax treaties both establish that nationals of their country who are resident in Mexico may be subject to Mexican income taxes pursuant to local law.
As of 2004 the Mexican fiscal code has a new definition of "tax resident". Before 2004, a person needed to be in the country 183 days to be considered a tax resident. As of this year, tax residents are all those who have established an abode in Mexico irrespective of the time they have spent in the country. The law also provides that if they have one home in Mexico and another abroad, they are considered a tax resident in the place where they have their center of vital interests. Mexico will consider that that center of vital interests is in Mexico if over 50% of their income is derived from Mexican sources.
The main repercussion for the foreign residents is the effect it will have on the ability of foreign residents to obtain a homestead exemption on the sale of their principal residence in Mexico. If the homeowner has only one home, and that home is in Mexico, then they should be able to get a homestead exemption. However, if they have one home in Mexico and another in the US, it will be more difficult for the homeowner to get an exemption, especially if their income is not derived from Mexican sources.
In practice, it will be very difficult for the Notario, the attorney required by law to draft the deed and withhold taxes, to know if the homeowner has another home outside the country. However, I can see that some Notario's may request to see a Mexican tax return to prove that homeowner does in fact have his or her center of vital interest in the country.
The flip side is that those foreign residents that have a home in Mexico and abroad, and who derive most of their income from sources outside of Mexico, need not worry about reporting and paying Mexican income taxes. A clear example of these people are "snow birds" that spend six months in Mexico and six months abroad.
As of last year, Mexican financial institutions have begun to request that US citizens provide a US social security number in order to open an account in Mexico. While I have not heard if the SAT (the Mexican equivalent to the IRS) is sharing any information with the US at this point, this is clearly the intent. Once the Mexican authorities have access to the taxpayer's social security number they can also receive tax information from the IRS on that particular individual. Eventually, the US and Mexico will regularly exchange information on their taxpayers, just as Canada and the US do now.
If you have a bank account in Mexico that pays interest, the financial institution will withhold a small percentage of your principal for income taxes. If you are not a resident, this is the most you will pay on this particular income and you will not need to file a Mexican tax return. If you are resident, you can generally credit this amount on your annual Mexican tax return.
Mexico does not have the problem of double taxation of dividends that the US has. Dividends paid by Mexican corporations are usually paid after tax and are received by Mexican residents tax free. Non-residents will pay a tax in Mexico pursuant to treaty rates.Rental income generated in Mexico is taxed at regular income tax rates, after deducting actual expenses or a blind deduction of 35%, whichever is greater. This provision applies to residents. Non-residents pay a flat 25% on the gross income. Both residents and non-residents may be required to charge valued added taxes and may also need to charge a 2% hotel tax, depending on the circumstances. While it has been relatively easy to avoid taxes on Mexican rental income, some jurisdictions, for example in San Miguel de Allende, are cracking down on those persons who are not paying income taxes on rental income.
Mexican tax residents can obtain a capital gains exemption of the sale of a principal residence. If the property is not a principal residence, they must pay taxes on the gain based on their marginal tax bracket. The Notario will withhold a percentage of the gain and the taxpayer must pay the difference, or apply for a credit, with his or her annual tax return.
How the gain on the sale of real estate is calculated is based on the "declared value" stated in the deed, known in Mexico as the "escritura". Historically, the declared value has been significantly lower than the fair market value. Often, the purpose of having a lower value is to pay less in the way of transfer taxes. While common practice, the habit of declaring a value that is less than the fair market value is not legal in most states. The Mexican tax authorities have realized that they are losing significant amounts of tax revenue by not paying closer attention to these declared values and have begun to scrutinize these transactions more closely. The result is that the declared values in many parts of Mexico are much closer to the fair market values than they were ten years ago.
One result of this increased scrutiny is that Notarios are much more careful about the declared value they are willing to accept in the deeds that they prepare. Therefore, people that have artificially low declared values in their deeds may need to pay more in capital gains than they would have otherwise if they had used the transaction value. We have even seen people sell real estate at a loss and still have to pay capital gains taxes.
Our recommendation is to make sure that the value declared on the deed is as close to the full transaction cost as possible.
Gains from the sale of securities traded in the Mexico are tax free. Interestingly, the stocks of the Dow Jones Industrial average began trading on the Mexican exchange in 2003, but currently these are only available to institutional investors.
The tax on Mexican plated automobiles, tenencia, is often more than the real estate property tax bill! Again, depending on where you live in the country, you may need to go to the corresponding local office to ask for the bill. A new law was passed in 2003 that will require that residents with an FM-3 pay tenencia on their US plated vehicles. However, I have not heard if the authorities have begun to enforce this law as of yet.
Mexico has a value added tax that is applied to most products and services. It is 15% in most of the country and 10% in border areas.
This is not welcome news to those that move to Mexico in order to avoid all income taxes. However, those that are willing to pay their fair share will find that by planning effectively they may even pay less taxes than they did back home. This is certainly the case for most Canadian citizens that move to Mexico and is also the case for many US citizens.
Confused - and Concerned - About Tax Obligations Related to the Sale of Your Mexican Real Estate? Here's How to Build Your Case for a Mexican Homestead Tax Exemption!
"How can I obtain a capital gains, or homestead, tax
exemption on the sale of my Mexican real estate?" is one of the most
frequently asked questions by expatriate residents in Mexico when they
contemplate selling their homes.
Answers differ depending on where in Mexico you are
selling property. For instance, in Los Cabos, foreigners are almost never
granted the homestead tax exemption by Notarios. In Mexico City, homestead
exemptions are almost always granted to foreigners. And, in San Miguel, the
homestead exemptions are granted on a case-by-case basis to the extent that the
sellers comply with certain legal requirements.
Under Mexican Income Tax Law, Notarios are jointly liable
with the seller for all taxes due on the sale of real property in Mexico. If
Hacienda (the equivalent to the Treasury Department in the US) decides the
Notario did not calculate these taxes correctly, the Notario may be required by
the tax authorities to make up the difference. Obviously, when they are doing
dozens of transactions each year, very possibly involving millions of U.S.
dollars, Notarios have to be very careful and will generally take a conservative
The homestead tax exemption is still available to resident taxpayers in Mexico, and it is the Notario who decides who meets the requirements of tax residence. To make this determination, Notarios can base their decision on two different sets of laws: Mexican tax laws and Mexican immigration laws.
How foreign nationals who reside in Mexico are taxed in this country depends, first of all, on the tax treaties Mexico has signed with other countries. Often, tax treaties override any national legislation. In the case of U.S. citizens, therefore, one must review the Mexico-U.S. Tax Treaty, as amended in November 2002.
Article 4 of this treaty states that a "tax resident
means any person who, under the laws of that state, is liable for tax therein by
reason of his domicile, place of incorporation, or any other criterion of
similar nature." This article goes on to state that if the taxpayer is a
resident of both states he or she will be considered a resident of the country
where he or she has a permanent home.
A tax resident in Mexico is distinctly different from
someone who is a legal resident, although often a legal resident generally is
also a tax resident. Article 9 of the Fiscal Code of Mexico, amended for 2004,
establishes that tax residents are those "who have established an abode in
Mexico". If they have two homes available to them, one in Mexico and
another one abroad, they will considered a tax resident of the country where the
taxpayer has his or her center of vital interests. Mexico will consider that
that the center of vital interests is Mexico if over 50% of the taxpayer's
income is derived from sources inside of Mexico.
Expatriate tax residents have all the obligations and
benefits of all other tax residents in the country, including the homestead
exemption contained in Article 109 of Mexican Income Tax Law, which identifies
that the transfer of certain properties are exempt from taxes, including:
"Those resulting from the transfer of…the taxpayer's home…."
Where the current confusion arises is that some Notarios are of the opinion that the homestead exclusion is available only to legal permanent residents, and they make their tax liability determination on the basis of immigration law, not tax law.
Legal permanent residence is granted pursuant to Article 48 of the General Population Law and is evidenced by possession of an FM-2 visa. Temporary visitors on an FM-3 visa pursuant to Article 42, or on a tourist visa, are not considered permanent legal residents. In fact, the FM-3 document specifically states that the holder does not automatically acquire residency by merely holding the visa.
Your Notario will carefully examine a "fact
pattern" before deciding if you qualify for a homestead tax exemption when
you sell your Mexican residence. By complying with as many of the points below,
you can greatly increase your chance of obtaining a homestead exemption on your
How Foreign Residents Can Avoid Losing Control of Their Estates
US and Canadian citizens living in Mexico frequently ask,
"Do I need a Mexican Will? While there is no legal requirement to have a
Will executed in Mexico, our recommendation, even for people whose only asset in
Mexico is their real property held in trust, is to be proactive and draft a
Mexican Will. The principal reason is that Mexican property is often caught
outside of the trust arrangements: automobiles, jewelry, objects of art, shares
in golf clubs, business interests, etc. The second reason is that intestate laws
in Mexico are not always favorable to surviving spouses and seldom distribute
property in the manner in which the decedent would have liked. If you have
property in Mexico and die without any Will, the state courts will look to the
interstate provisions of their respective civil code to determine the
disposition of assets and establish guardianships.
US and Canadian Wills are valid in Mexico. However,
getting the US and Canadian instruments recognized here can entail a relatively
lengthy and expensive process. In the case of US documents, these need to be
apostiled and notarized in the US and these documents need to be converted into
Spanish by a court approved translator before the file is brought to the Notario,
who will initiate probate. In the case of Canadian Wills the process is
incredibly more complicated because apostils are not issued in Canada pursuant
to the appropriate Hague Convention. Therefore, a Mexican Will generally
provides for a quicker transfer of assets to the heirs, in a more cost efficient
Wrong! There is no such thing as rights of survivorship in
Mexico. At the first death, assuming that the partners own the property 50/50,
an undivided half will be transferred pursuant to either the decedents Will or
pursuant to state intestate provisions.
Yes, the executor or executrix is the person in charge of
locating the property, preparing an inventory, paying all debts, and is
generally in charge of administering the estate and supervising the transfer of
title. Some Mexican states require that the executor post a bond.
Probate is the legal process of transferring title to
those properties that do not transfer some other way, after a person dies. If
there is a Will, probate in Mexico is generally carried out in private and at a
Notario's office. If there is no Will, if the Will is contested, or if there are
guardianship issues, the Mexican courts get involved.
Mexico does not have either an estate tax nor deemed disposition rules. However, the settlement of an estate still has expenses to deal with. Attorney and appraisal fees, transfer taxes, bonds, etc. may all be costs to an estate.
As with anything else, you get what you pay for. A simple Mexican Will can cost anywhere from $150 to $600 US dollars.
We suggest a Mexican springing durable power of attorney
be executed. This document would come into effect upon disability of the person
who holds title to the property and allows decisions to be made with the Mexican
property during incapacity.
Estate planning, as we know the concept the US and Canada
is not available in Mexico. In most states, when a foreigner who does not speak
Spanish goes to a Notario to prepare a Will he or she is told to handwrite their
testament, which is then translated word for word. If you do happen to speak
Spanish you tell the Notario what you want and your wishes are given legal form.
The problem with this approach is that little thought is often given to the
complexities of any estate plan, especially international estates: family
relationships, ancillary probate processes, US estate taxes, survivorship
issues, special planning situations, etc. Here are a few tips:
5/29/04 Mexican tax laws regarding capital gains on the sale of your residence from Don Gussin.
The web has what seems to be a knowledgeable and thorough analysis of capital gains on the sale of a Mexican home by foreigners. See http://www.selectrealestate.com.mx/docs/Mex%20Homestead%20Tax%20Exemption%20July%2020032%20AR%20edits%20-6.pdf.
It says that if you are legally a resident for at least 183 days, you are deemed to be a "tax resident" and are exempt from paying capital gains tax. To nail this down, it presents a checklist on how to save your money:
Your Notario will carefully examine a “fact pattern” before deciding if you qualify for a homestead tax exemption when you sell your Mexican residence. By complying with as many of the points below, you can greatly increase your chance of obtaining a homestead exemption on your Mexican property:
1. Obtain an FM-2 visa to establish legal and permanent residence. There are some Notarios in Mexico who will indeed grant holders of an FM-3 visa a homestead exemption to the extent that the seller qualifies under the tax laws. However, you will gain more credibility as a legal resident with the FM-2. Most Notarios will allow the tax exemption if you hold an FM-2.
2. Obtain a Mexican tax identification number, known as “RFC”, to show that you take your tax responsibilities seriously. Remember: the homestead exemption is available to “taxpayers” per Article 109 of the Mexican Income Tax Law. What better way to prove that you are a taxpayer than by showing that you have a Mexican tax ID?
3. Live in your home for at least six months, the time necessary for you to establish official “tax residency” in Mexico (a total of 183 days).
4. Make sure that your utility bills are in the name of the person who holds title to the property. If the property is owned jointly, try to obtain at least one utility bill in the names of both persons. Gather at least six months of these utility bills as documentation for your Notario.
5. Make sure that the address of the property is exactly the same as the address listed on your FM-3 or FM-2.
If you meet most of the requirements above, and you have been told that you do not qualify for a homestead exemption, you owe it to yourself to get a second opinion and possibly save yourself thousands of dollars in taxes. There are Notarios who follow the tax laws -- and who will grant you the homestead exemption, even if you only have an FM-3. You just need to make the effort to find one!
Objectives of this page this section will contain all "tips regarding taxation on expatriates living in Mexico" that meet the criteria described in Instructions . All tips will be published in the date order of receipt, with the latest letters on top (the oldest nearer the bottom).