Category Archives: taxes

Tax Obligations for Foreigners in Mexico

January 1, 2015general information, taxesSAT, taxesadmin

TAX OBLIGATIONS FOR FOREIGNERS IN MEXICO

DEATH and TAXES…..both are inevitable!

By Linda Jones Neil

Whether a property owner or just the occasional visitor on a beautiful beach in Mexico, everyone pays taxes, natives and foreigners. Some of the taxes are hidden and others are not. The purpose of this article is to touch on some of the important taxes levied and paid in Mexico.

WHO COLLECTS TAXES: The SAT (Servicio de Administracion Tributaria), also known as Hacienda, is the federal tax collector. It collects all federal taxes such as the ISR (Income or Capital Gains) tax, the IVA (Added Value) tax, the IDE (Tax on Cash Deposits) and the IEPS (Special Tax on Production and Services). Each state government has its own taxes such as the 2 to 3 percent tax on lodgings and tourism. The municipal governments assess and levy taxes on real and personal properties.

IVA TAX: This is the Value Added Tax which is charged on goods and services. The only exemptions are medicines and food. Often this tax is INCLUDED in the price of food served in a restaurant, legal services, and the items purchased in a department or clothing store. The business owner and tax resident is obligated to file a monthly declaration with Hacienda and pay the tax on earnings. Credited against this tax are IVA taxes paid on goods and services acquired.

There is no IVA tax on the sale of vacant land or on the sale of residential dwellings. The tax is levied on all commercial construction when it is sold or transferred, at the rate of 16% of the value of construction.

IVA tax is charged on lodgings, hotel rooms and furnished homes which are rented.

The IVA tax is 16% throughout the entire country of Mexico.

IEPS TAX: This is the Special Tax on Products and Services which was a new tax in 2010. It will cover certain internet and cable TV services, alcohol, cigarettes, and gaming.

PROPERTY TAX; This is a municipal tax with assessments on properties generally being made annually. The tax can be paid in six installments (every two months) but probably should be paid in full within the first two months of the calendar year to obtain a discount. Rates vary from area to area but are often far lower than U.S. or Canadian property taxes.

ISR TAX; Literally the Tax on Rents has been described as both an income tax and a capital gains tax. It is complex and a subject of confusion.

ON INCOME. Any income generated from sources within Mexico, is taxable. From business or salary, the rates are variable depending upon the amount of income received.

ON THE SALE OF A PRIMARY RESIDENCE No primary residence is exempt from tax UNLESS the taxpayer has resided in the home for the previous five years. Proof of residency is in the form of taxpayer identification number (RFC), voter’s registration with the property address, bank statements and utility bills. Foreigners must establish permanent residency in order to obtain their RFC documents..

For those who have sold or transferred a primary residence within the past five years and have not declared an exemption previously, an exemption of up to 700 UDIs or approximately 3,500,000. Mexican pesos, is available.

This applies to nationals and to those foreigners who have established a tax residency in Mexico (obtained their tax identification numbers) and make declarations on world wide income. They must also provide documents that the property being transferred is a primary residence.

ON THE SALE OF A VACATION OR SECOND HOME OR A RENTAL PROPERTY

No exemptions are permitted.

The tax on non-exempted transactions is 35% of the difference between the value declared in the deed and the value of the new sale, less allowable deductions or 25% of the entire amount of the transaction, whichever is less. It is very important when acquiring property to insist upon having the full amount of the sale declared in the deed, in order to avoid overpaying taxes upon sale.

Enforcement on the ISR tax on transfers is the obligation of the Notary Public formalizing the transfer. He has the obligation to enter the seller’s name and data on the internet and to check status of prior transfers.

ON RENTAL INCOME: There are several ways to calculate tax on rental income:

The blind deduction of 35% of total income, without deductions with tax of 35% paid on the remaining amount;
A 30% tax on income, less allowable deductions which include property tax, maintenance, interest on loans for construction expenses, insurance, salaries of employees and commissions paid to rental agents and property managers..
A 25% tax on the gross income, no deductions.

Hacienda is paying more attention to internet advertising and is beginning to inquire into the income of those who are renting their homes. It makes sense to become legal since penalties for non-compliance can be considerable. Methods one and two above require the RFC (taxpayer identification number) which can be challenging for a foreigner to obtain. Method three outlined above does not require residency or official status.

IDE TAX This is a Tax on Cash deposited into banks. In the year 2009, it was applicable on any combination of deposits made in a month totaling 25,000.00 pesos, or more. Tax was 2% of the excess. This tax has now been eliminated but banks receiving cash deposits of over $15,000. pesos in any one month or certain credit card payments are required to report this to SAT. This requirement is thought to discourage the informal economy (the street vendors).

STATE HOSPITALITY TAX. This is charged by hotels and on furnished short-term rentals. Money generated from this tax is used for promotion of tourism in the state and varies from state to state but is generally two to three percent of the per night cost of lodging.

It is important to understand the difference between Tax Resident and Non-resident for tax purposes.

The Tax Resident is the person, citizen or non-citizen, who has acquired his Federal Taxpayer Identification Number and who files and declares taxes in Mexico on his world-wide income. Any party receiving income from Mexican sources, such as from rental or from the sale of real properties, or from business activities, is required to file. No distinction is made between citizens of Mexico and non-citizens as to tax rates.

Tax authorities in the U.S., Canada and Mexico are working together and share information. Everyday there is more cooperation between the countries due to tax treaties. It is no longer possible to own a property in one country, enjoy income from that property, and not report it in BOTH the country where the property is located, and the country where the owner lives. Failure to comply means the owner is subject to double taxation and heavy penalties when the omission to file and declare is discovered.

Now REALITY!! DIGITAL FISCAL INVOICES. Taxpayers must use invoices produced by Hacienda (SAT) on internet. Hopefully this will simplify the “factura” situation which at present is challenging for the tax payer attempting to obtain receipts for deductible items. .

This is an overview of the tax situation in Mexico and may vary in individual cases. For additional information and consultations, please contact the author.

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about the author:

LINDA NEIL is the founder of The Settlement Company, which specializes in real estate transfers, escrows,and consultations. Just added as a new service, Settlement will now prepare monthly tax declarations on rental properties, file them and perform additional essential landlord accounting services.

For reprints of this article or for further information on tax paying services, please contact The Settlement Company® E-mail is info@settlement-co.com, and website: http://www.settlement-co.com

PAYING PROPERTY TAXES IN MEXICO

January 1, 2015taxesPROPERTY TAXadmin

PROPERTY TAXES IN MEXICO

by Alicia Parra

Just as in any other country, Mexico depends upon income from the annual tax on property to keep local governments functioning and provide important local services for the region.

The good part is that the annual tax assessed on Mexican properties is often less than it might be for property in many other countries! And, if the tax is paid in full during the first two months of the year, a discount is available in many municipalities.

Property taxes are calculated each year using a basic value for the property which has been established by the department. Rates vary throughout Mexico. A typical charge however, for a residential dwelling is 6.5 pesos per 1,000 of assessed value; for commercial, rental properties or residential dwellings used seasonally, the rate is 13 per 1,000 and for unimproved lots the rate ranges from 6.5 to 52 pesos per 1,000, depending upon whether the property is urban or rural. A rate may be modified if the lot is very deep, access is poor or other factors give more or less value to the property being assessed. Request for consideration of a lower tax rate must be presented in writing to the tax department for its review.

Property taxes can be paid in up to six installments; due the first ten days of each second month (i.e. January, March, May, July, September, and November). This is a helpful payment method for many who are on tight budgets. For those who can pay the tax in one lump payment at the beginning of the year, it makes sense to make the payment prior to the end of February, if a discount for early payment is offered. Not only does it save money for the property owner but also it helps the local government with its cash flow and in planning for its important activities.

Just as in other parts of the world, property taxes in Mexico must be current prior to transfer or sale of a property. A certificate from the Property Tax department is a prerequisite for the preparation of a deed (escritura).

It makes sense to pay taxes on time. The penalties can be high for late payment, up to 3% per month for past due taxes. In the event property taxes are not paid for several years, a tax lien is placed on the property and fees and penalties for removal of the lien can triple the normal tax amount very quickly.

Unfortunately, property tax departments throughout Mexico do NOT send out annual tax bills. Thus the foreign property owner will either go to the property tax office with a previous tax bill, or have someone else do it. It is essential that the owner have the Property Tax Number (Clave Catastral) for the property. The billings are filed by number, not by name.

Important note: Property tax amounts are often NOT available before mid-January to early February of the year the tax is due!!!

One of the inevitable duties of property ownership in any country is the payment of taxes. Better to do it right and avoid headaches and penalties later!

This article is written by Alicia Parra, Executive Closing Officer for the settlement company® the FIRST company in Mexico dedicated to processing the closings and registrations of Mexican real estate for foreign buyers and sellers. It handles closings and transfers on properties located throughout Mexico and can provide title search and title insurance on many properties throughout the country. It also provides a service for payment of property taxes and bank fees¼.

reprints of this article or for further information, contact:

The Settlement Company®:

E-mail info@settlement-co.com, website: http://www.settlement-co.com the settlement company ®

Important Tax Clarifications for the Buyers and Sellers of Real Estate

January 1, 2015taxesimmigration, tax id number, taxesadmin

IMPORTANT TAX CLARIFICATIONS FOR THE BUYERS AND SELLERS OF REAL ESTATE

by Linda Jones Neil

Confusion reigned this past summer when a series of regulations were issued by SAT, Mexico’s tax administration entity. Some people thought it was going to be necessary for the foreign buyer to obtain a Taxpayer Identification Number (RFC) and to obtain resident status in order to own property in Mexico.

Not so!

What really happened is that SAT (Mexico’s IRS) has insisted that the Mexican Notary Public who is issuing the deed of transfer to a property or rights in a property, if a fideicomiso, must issue an invoice showing the full amount declared in the transaction and his or her fees for doing the work on same. This is an official receipt and establishes the cost basis for a later sale of the property.

Most Mexican nationals acquiring or selling property already have their Taxpayer Identification Number (RFC) as well as a CURP number. This is not unlike a Social Security number in the US or Canada. Literally it is a Unique Number in the Population Registry. Foreign persons do not have this number, however, unless they become residents of Mexico.

NO SPECIAL IMMIGRATION STATUS REQUIRED TO ACQUIRE PROPERTY.

As of this time, the foreigner who buys property or rights in property located in Mexico does NOT have to obtain a specific immigration status. Any foreign tourist who arrives, falls in love with a home or lot, may acquire it without changing status. If the property is in the restricted zone, approximately 30 miles from a sea coast or 60 miles from a border, it must done in compliance with Article 27 of the Mexican Constitution and be acquired in fideicomiso, the Mexican bank trust. However , and this is the important clarification, to Regulation I.2.7.1.25., the invoice issued by the notary public in the deed for this acquisition, will contain a GENERIC taxpayer ID number and a GENERIC CURP number. No special immigration status is required!

THE GENERIC TAX ID NUMER (RFC)

The generic tax identification number is XEXX010101000. The generic CURP number is XEXX010101HNEXXXA4 for a Man and XEXX010101MNEXXXA8 if a woman. It may make sense for the foreigner who loves Mexico and wants a home, wants to build, to make note of these important numbers. Any invoices issued for building materials, services rendered and incidentals in the construction of a building should contain these same numbers and be saved with property documents to show increase in basis when the property is sold.

THE SWITCH TO ELECTRONIC INVOICES.

Another important point to remember is that invoices may still be printed out but also must be sent electronically by the vendor or service provider in an XML file to taxpayer’s email address. For those who only acquire a property and may not have other reporting obligations, keeping careful track of these electronic files is a must. There are no exemptions on capital gain tax for second homes or rental properties and the tax is either 25% of the entire sales price, or 35% of the difference between the amount declared in the deed, and in the Notary Public’s invoice, and the amount of a new sale, less allowable deductions, whichever is less. Maintaining correct records is an absolute must!

LINDA JONES NEIL is the founder of The Settlement Company®, which specializes in real estate transfers and escrows, specializing in the Virtual Closing®. The company does business throughout Mexico. Licensed as a California real estate broker, Ms. Neil has pursued her profession in Mexico for more than thirty years. Her skills in negotiating contracts between parties from three distinct cultures have placed her services in demand as a consultant and for speaking engagements on Mexican law and customs in Mexico, the United States and Canada. She has been widely published on the subject of real property in Mexico. Memberships; FIABCI, AMPI and NAR. Linda is a former member of the National Advisory Council of AMPI and has served as AMPI Coordinator for the state of Baja California Sur. Additionally she is co-founder of Global Mexico Real Estate Institute, dedicated to education the real estate professional in Mexico.

For reprints or further information, please contact

The Settlement Company®:

E-mail info@settlement-co.com, website: http://www.settlement-co.com

PAYING TAXES ON INCOME ON RENTALS

January 1, 2015taxesMexico, rentals, taxesadmin

MAKE LIFE SIMPLER! DON’T SPEND IT WORRYING ABOUT COMPLIANCE!

Mexican newspapers are full of headlines about the growing problem of foreigners who are renting their homes or condominiums and failing to pay Mexican taxes. Not only is this a violation of the terms of most bank trusts (fideicomisos), but also it is a violation of Mexican tax law and reprisals are severe.

FOREIGNERS ARE OBLIGATED TO PAY TAXES ON INCOME GENERATED IN MEXICO. Mexico’s tax law is patterned after those of the United States and Canada (world rental system) which states in the First Article::

Article One: Physical persons (individuals) and legal persons (companies) are obligated to pay an income tax in the following cases:

I Residents of Mexico, must report and pay on all income no matter where the source is located;

Those with residence in a foreign country with a permanent establishment in Mexico must report and pay on all income generated from the permanent establishment in Mexico.

III. Those with residence in a foreign country, must report and pay on the income produced by property located in the national territory, when there is no permanent establishment in the country or, even if there is, but not covered by the situations outlined in I and II above..

If you own a property in Mexico and rent it often or only occasionally, ENJOY your rental income and SLEEP EASILY KNOWING YOU HAVE COMPLIED WITH TAX LAWS!

The Settlement Company® with many years of experience in the transfer of titles and resolution of problems related to title, is now able to assist you in receiving your funds in an escrow account, complying with your fiscal obligations in Mexico, and providing you with the overage and the documents you require in your country of residence to avoid double taxation!

Additionally………..as part of our service, if requested, we pay your annual property taxes and, if your property is in trust (fideicomiso) bank trustee fees! We also can pay other property related expenses, at your request! We are able to provide you with a limited or a complete accounting service, based upon your requirements.!

For further information on this program, please contact The Settlement Company® at quirino.parra@settlement-co.com or info@settlement-co.com

Building or Remodeling?

January 1, 2015legal, taxesfactura, invoices, remodeladmin

BUILDING OR REMODELING?

Be sure to get the right receipts!

by Linda Jones Neil

It can be exciting to buy a vacant lot or a fixer upper and build a dream home or make wonderful repairs and changes to an existing building to make the home “yours”!

Any money spent on repairs, remodel or new construction can add to the value and to the tax basis of the property, IF the right fiscal receipts are obtained!

Mexico’s tax laws, most of which are patterned closely after the US IRS and Revenue Canada, are much stricter when it comes to obtaining tax deductible receipts. We have the official invoice, known in Spanish as ihe “factura”

For all of us in business, it is essential we obtain official facturas for all equipment, paper goods, electricity, telephone services, gasoline, office rent, any and ALL commercial purchases for use in our business. Additionally, if we consult with an attorney, a notary or other professional, we need a Recibo de Honoarios . These documents must bear special markings and be sent through special services which print the invoices. They must also bear the vendor’s name, address and Federal Registration Number as well as the Buyer’s information.

All of this is essential for the business owner in Mexico to have deductions against income.

What is often not understood in the real estate world is that the buyer or fixer upper of Mexican homes must also have official receipts in order for them to be applied as deductions against the capital gains tax (Impuesto sobre la Renta ISR) when the property is sold.

All contractors, and suppliers of building materials must be registered with SAT, the Mexico tax authority, have a Taxpayer Identification Number and file taxes on income each month. Additionally, they must issue to the buyer, foreign or national, their invoice (factura) or receipt for fees (recibo de honorarios) that bear Vendor’s details, a description of the property where improvements or construction is being done, and buyer’s full name, address and Tax ID number. If a Buyer is a Foreigner, this is no excuse for not issuing the official receipt. According to SAT the number which must be used if the buyer has no tax identification number is XEXX010101000.

Why is this important to the foreign owner of a home in mexico??

No exemptions of tax are permitted when a vacation or rental home in Mexico is sold. This applies to all, Mexican nationals and foreigners. The tax on non-exempted transactions is 35% of the difference between the value declared in the deed and the value of the new sale, less allowable deductions; or 25% of the entire amount of the transaction, whichever is less. It is very important when acquiring property to insist upon having the full amount of the sale declared in the deed, in order to avoid overpaying taxes upon sale. and to obtain and retain official receipts for all construction and improvements made on the property. This record-keeping can reduce the tax owed substantially.

If you are a foreigner with property in Mexico and want to increase your tax basis in your investment, be sure to insist upon the Factura or Recibo de Honorarios when you make a purchase of materials or pay for services rendered.. Accept nothing less!

Copyright, 2014, Consultores Phoenix, S.C. Reproduction prohibited without permission.

about the author:

LINDA JONES NEIL is the founder of The Settlement Company®, which specializes in real estate transfers and escrows. Licensed as a California real estate broker, she has pursued her profession in Mexico for over forty years. Her skills in negotiating contracts between parties from three distinct cultures have placed her services in demand as a consultant and for speaking engagements on Mexican law and customs in Mexico, the United States and Canada. She has been widely published on the subject of real property in Mexico. Memberships; FIABCI, AMPI and NAR. Linda is a former member of the National Advisory Council of AMPI and has served as NAR Presidential Liaison to Mexico..

E-mail info@settlement-co.com, website: http://www.settlement-co.com