| Who is a "Tax Resident"?
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.
What is "Legal Residency" in Mexico?
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.
Building a Case for Exemption
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 FM2.
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. Open a Mexican bank account that pays interest. The bank will withhold income taxes on your behalf, making you a taxpayer.
4. Live in your home for at least six months. While there is now no time requirement to establish tax residence, often Notarios will want to see at least six months of continued residence at the house.
5. 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.
6. 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!
Raoul Rodrez-Walters, CFP ? is the founding partner of Mexico Advisor, the only company in Mexico offering financial management, legal, tax and title services sunder one roof, to English-speaking foreigners wanting to live, retire or set up a small business in Mexico. Read more about the comprehensive, integrated services provided by Mexico Advisor at the website www.mexadv.com or you can contact Raoul at his San Miguel de Allende office: Correo #24, CP 37700 tel.: 415-152-0586; info@mexadv.com |
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Tax Residence
As far as the governments of Mexico and the U.S. are concerned, you are a tax resident of the country in which you keep your principal residence. 1 ( Numbers refer to footnotes at the bottom ) Your legal residence is of little consequence. For example, you may have been living in Mexico on a tourist visa the last five years, but for tax purposes you would more than likely be considered a tax resident of Mexico.
Unfortunately for U.S. citizens and residents, you are required to report and possibly pay taxes on your worldwide income, regardless of residence. The consequence is that most Americans who reside in Mexico are subject to at least two very different tax jurisdictions: Mexican and U.S.
Furthermore, the location of the property, one could say the residence of your property, is important as well. Each country reserves the right to tax property within its boundaries. Not surprisingly, both Mexico and the U.S exercise this right.
Property Taxes
In Mexico property taxes are known as predial. Compared to property taxes in the U.S., the cost of the predial is quite reasonable. It is a local tax and in most areas it is payable quarterly. This tax bill is usually received in the mail, and can be paid at the local bank. Another option is to request that the bank deduct the tax bill from your account when the bill becomes due and payable.
It is important to remember to keep close track of the paid tax bills. You will need to show the paid receipts when the property in question is sold, or otherwise changes hands.
Income Taxes
According to the Mexico-U.S. Income Tax Treaty, and the Mexican Income Tax Law, rental income generated in Mexico is subject to Mexican income taxes. 2 If you are a resident in Mexico, rental income outside of Mexico should also be reported on your Mexican tax return. 3
Value Added Tax (Impuesto al Valor Agregado or IVA)
If you are renting out property for non-business use, you will not be required to collect IVA on the rental income, as long as the property is unfurnished. 4 Furnished homes and other property rented for business use are subject to IVA. If you own a business related property you will need to add the IVA tax on top of any rent that you may be collecting. For example, if you are using your home as a B&B, IVA will be due on the services provided.
When purchasing or selling a home, no IVA is due.
Estate and Inheritance Taxes
I mention estate taxes only because they can be a significant issue in the U.S. (at least for now). The fact is that Mexico does not have either an estate tax or an inheritance tax. 5 You should be aware, however, that when you receive property from an inheritance or bequest most people will want to register the property in question in their name. Property thus received is not exempt from regular registration and closing costs.
Gift Taxes
There is a tax on certain gifts in Mexico involving real estate, which is payable by the recipient of the donor's generosity. There is an important exemption however. Gifts between spouses and direct family members are not taxable. 6 Therefore, you could gift a home to your daughter, and she would not need to pay taxes on the gift in Mexico.
Acquisition Taxes and Registration Fees
When acquiring property, by purchase, gift, inheritance, or otherwise, there are several taxes and fees that you should be aware of. Principal among these is the acquisition tax, which runs about 2% of the property value. Other fees include: certificate of non-encumbrance, notario 7 and other attorney fees and appraisal fees.
The parties to the real estate transaction usually negotiate who will pay the fees for the certificate on non-encumbrance and the appraisal. Notario fees are generally split equally between the parties. The acquiring party pays for the acquisition tax and the seller bears the burden of the capital gains taxes.
Capital Gains Taxes
When property changes hands and capital gains taxes are due, the notario withholds a certain percentage of the gains according to a formula, on behalf of the seller. The seller pays the remaining portion of the capital gains when he or she files their annual tax return in Mexico.
How capital gains are calculated on the sale of property in Mexico involves a lengthy calculation that I will spare you. I would like to mention, however, a couple of factors that go into the calculation as examples of just how different the calculation is compared to how capital gains are calculated in the U.S. First, the cost basis of the property in Mexico is adjusted for inflation. Let us assume that you bought a condo two years ago at $100,000 and then sold it at the end of the second year. Inflation during that period was 15% and 10% respectively. The price of the home would be adjusted to $115,000 the first year and then $126,500 for the second year. 8 A second difference of note is that the price used to figure out the sale of the property is not necessarily what the property was sold for, as in the U.S. In Mexico many people use the appraised value or the municipal assessed value as the sales price, even though the property may have been sold for a different amount. Obviously, you may want to use the lower figure. Make sure you check with your notario before you do, however. In any case, the net result is that in Mexico the seller will pay substantially less capital gains on real estate transactions.
Finally, there is an exemption on capital gains if the property that is being sold has been used as a principal residence. In order to take advantage of the exemption, you or a direct family member (mother, son, spouse, etc.) must have lived in the home for at least two years prior to the sale. 9 There is no ceiling on the amount of gains that can be excluded. |
How to Set up a Mexican Corporation
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All of this also should involve an Attorney from Mexico or on the Border that knows Mexican Law but here are some steps in making a Mexico Corporation
This is a basic information provided by O’farrill & Associates on how to start a business such as Restaurant/Bar and boutiques , through a Mexican Corporation.
SET UP A MEXICAN CORPORATION:
1.- First, we need to obtain a permit at The Secretary of Foreign Affairs, but we need to provide at least 4 possible names for that corporation.
2.- Once the permit is obtained, we can help you write down the First draft for the incorporation agreement, and we need to know:
A).- Main Address in Mexico
B).- Who will be the members or partners, the members can be LLC’s or individuals and the distribution of shares
C) Who are going to be the members of the Administration Council, (President, Secretary , Treasury or President and Vice President etc)
D).- Grant Power of Attorney to a Mexican CPA or somebody else.
3.- The Final draft must be formalized by a Mexican Notary Public and registered at the Public Property Registry
4.- Once the Corporation is Registered , we can process:
A).- The inscription at The National Registry of Foreign Investments ( RNIE)
B).- Obtain the Tax ID (RFC) from the SHCP ( Mexican IRS)
C).- The FM3 for the foreign members.
OPEN A RESTAURANT BAR :
This is a little bit complicated because the license to sell alcohol is the most difficult one.
1.- Obtain the environmental impact study and /or risk study , before the Ecology and Sustainable Development Commission of Sonora.
2.- Getting a new license to sell and/or consume drinks with alcoholic content issued:
a).- The cost can be around $ 64,000.00 to $ 100,000.00 Pesos.( sometimes more)
b).- Permit before the City Hall ( this is granted by the municipal council)
c).- Blue print of place with measurements to the corners, by specialist in the matter,
d).-Letter of investment sent by specialist in the matter.
e). - Pictures of the interior and exterior of the establishment,
f).- Copy of incorporation agreement certified by public notary and power of the legal representative , and more ,
To obtain this special permit involves different authorities from Sonora (Health Secretary, City Hall, Treasury department, etc)
BOUTIQUE
1.- Obtain the Tax ID
2.- Permit by the state according to the kind of Clothes ( Leather, imported, etc)
This is a basic information provided by O’farrill & Associates on how to start a business such as Restaurant/Bar and boutiques , through a Mexican Corporation.
SET UP A MEXICAN CORPORATION:
1.- First, we need to obtain a permit at The Secretary of Foreign Affairs, but we need to provide at least 4 possible names for that corporation.
2.- Once the permit is obtained, we can help you write down the First draft for the incorporation agreement, and we need to know:
A).- Main Address in Mexico
B).- Who will be the members or partners, the members can be LLC’s or individuals and the distribution of shares
C) Who are going to be the members of the Administration Council, (President, Secretary , Treasury or President and Vice President etc)
D).- Grant Power of Attorney to a Mexican CPA or somebody else.
3.- The Final draft must be formalized by a Mexican Notary Public and registered at the Public Property Registry
4.- Once the Corporation is Registered , we can process:
A).- The inscription at The National Registry of Foreign Investments ( RNIE)
B).- Obtain the Tax ID (RFC) from the SHCP ( Mexican IRS)
C).- The FM3 for the foreign members.
OPEN A RESTAURANT BAR :
This is a little bit complicated because the license to sell alcohol is the most difficult one.
1.- Obtain the environmental impact study and /or risk study , before the Ecology and Sustainable Development Commission of Sonora.
2.- Getting a new license to sell and/or consume drinks with alcoholic content issued:
a).- The cost can be around $ 64,000.00 to $ 100,000.00 Pesos.( sometimes more)
b).- Permit before the City Hall ( this is granted by the municipal council)
c).- Blue print of place with measurements to the corners, by specialist in the matter,
d).-Letter of investment sent by specialist in the matter.
e). - Pictures of the interior and exterior of the establishment,
f).- Copy of incorporation agreement certified by public notary and power of the legal representative , and more ,
To obtain this special permit involves different authorities from Sonora (Health Secretary, City Hall, Treasury department, etc)
BOUTIQUE
1.- Obtain the Tax ID
2.- Permit by the state according to the kind of Clothes ( Leather, imported, etc) |
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Description of Income Taxes for US Citizens living in Mexico
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Wondering what are the Income Taxes for owning property in Mexico? Reporting, forms, process on the link below.
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