The ability to pocket undeclared income in Mexico is going away. Tax changes in 2020 have been announced by the government. The press and social media groups are circulating this important information to the expat community. The problem of foreigners who are renting their homes or condominiums and failing to pay Mexican taxes has existed for a long time. NO LONGER. Not declaring income and paying taxes is a violation of Mexican tax law with severe penalties if discovered.
FOREIGNERS ARE OBLIGATED TO PAY TAXES ON INCOME GENERATED IN MEXICO no matter where the income is received.
Effective JUNE 1, 2020, new procedures and regulations come into effect.
The law breaks tax rates and procedures for payments into two categories:
Resident in Mexico. If the owner is a resident of Mexico, he may obtain a taxpayer identification number (RFC) and declare income less allowable deductions. Taxes are generally lower than for non-residents but the requirements for residency are fairly high including minimum time in the country each year and verifiable proof of monthly income. In most cases the monthly declarations are provisional, and an annual declaration must be filed with the tax authorities.
Non-Resident in Mexico. If the owner is someone who came, fell in love and bought a property for appreciation, for retirement or just for fun but is not in a position to live in the country most of the year, or does not have sufficient stable income, he or she is a NON-RESIDENT, and declares under a different formula. Tax rates are fixed, and an annual declaration is not required.
As of June 1, 2020, the Mexico tax law requires that any property promoted and reserved through a digital platform, such as VRBO, AirBnB, etc. will have the income tax (ISR) and the added value tax (IVA) withheld from owner proceeds and delivered directly to the Mexican tax authorities.
RESIDENTS OF MEXICO with more than 300,000 pesos (approximately $13,000 USD) in annual income from their property must then file a declaration each month and a final annual declaration each year. The final tax rate will depend if taxpayer elects to take a 35% blind deduction or provide invoices for full deductions. Taxes declared and paid in Mexico are used as a credit in U.S. and Canadian taxes.
NON-RESIDENTS who rent exclusively through the tech platforms will have their taxes withheld and the withholding is considered as final. Airbnb and VRBO are requiring owners renting to provide their Mexican tax number. So, it has become necessary for these renting owners to enlist in the tax authority, SAT. The owners are asking for referral of names of good local accountants where their rental property is located. These tech platforms are responsible for providing an official receipt for taxes withheld and paid to the Mexican authorities. So, the owners need to register in order to be able to keep the tech platform account.
NON-RESIDENTS who rent occasionally through tech platforms and also through private rental agencies have the option of filing when income is received. These non-residents must appoint a Mexican company to declare and pay tax on their behalf and to provide official receipts for same. The return is considered as final.
NO DOUBLE TAXATION. Mexico has tax treaties with 32 nations. Taxes paid in Mexico can be taken as credits in taxpayer’s native country.
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This article is based upon information shared with me by Linda Neil, co-owner of The Settlement Company, Cabo San Lucas, legal opinions, current practices and my personal experiences. I recommend that each potential buyer or seller of real estate conduct his own due diligence and review.