August 2008 - Mauricio Monroy
Mexican Tax Questions to Ask Regarding Real Estate
Maurico Monroy, Tax and Office Managing Partner, Deloitte
Taxes operate in a relatively similar way in all countries: principally taxes on income, taxes on sales and payroll taxes levied on employers. But the rules in Mexico are very special, in particular, as far as how to compute a taxable base.
Furthermore, real estate transactions are subject to special tax provisions.
This is a summary of some of the important tax issues you should ask about to your tax advisor, to ascertain that you are in compliance, and that you are taking advantage from incentives.
AS A DEVELOPER
Level of exposure to Mexican taxation.
Depending upon facts and circumstances, you may or may not be exposed to Mexican taxation on Mexican sourced income.
There is a set of specific rules related to having a “tax presence”: 1) doing business from you home country (tax may or not may apply depending upon the nature of the income), or 2) doing business physically in Mexico through a so-called permanent establishment (PE) in the country. A PE is considered, any business where partial or totally business activities are developed or where independent personal services are offered. 3) Owning and developing a property for commercial purposes through a Mexican bank trust as an individual would constitute a Mexican tax presence. Finally, owning a Mexican subsidiary or formalizing a branch.
Significant taxes are levied at a federal level. No state or city income taxes are imposed. The only relevant tax is the real estate transfer tax that is levied by states and that hovers around 2% of the higher of the transaction value, the appraised value or the value registered for property tax purposes. Property taxes vary significantly from location to location but are generally established on a per thousand basis (point for each one thousand pesos, rather than a per cent basis).
Projections of impact of business flat tax in the project. This is an alternative minimum tax at the rate of 16.5% in 2008 (17% 2009 and 17.5% from 2010 on) on a special taxable base computed on a cash basis. It coexists with the 28% income tax which follows the accrual basis in general.
Value- Added Tax (VAT), sales or use tax. Key topics are: 1) to determine whether your product is taxable for VAT purposes, i.e. time shares – taxable, sale of fractional – may or may not taxable, sale of homes , generally not taxable . 2)Whether the payments that you make to your vendors are subject to VAT, you would have to pay such VAT to the vendors and 3) whether VAT paid to vendors is creditable against the VAT that you collect from you customers. A condition to claim a VAT credit is that you sales and/or rental activities are taxable for VAT purposes. Otherwise the VAT becomes part of the cost of goods sold.
Profit repatriation techniques, for you and for your financial and development partners, there may be Mexican withholding taxes on (interest, development fees, etc., generally no withholding taxes on commissions, VAT consequences on payments abroad.
Recognition of income and deductions. For income tax purposes, there are a number of provisions to recognize income and to claim deductions, for example, matching of deposits and advances with estimated future deductions.
In Mexico the form prevails over the substance in many instances, accordingly, it is important to comply with special, documentation and information, requirements to secure deductions for tax purposes.
Tax obligations of sub-contractors and vendors, construction companies, real estate brokers, mortgage brokers, from Mexico and from abroad. Generally the developer and landlord are not liable for the taxes of their sub-contractors and vendors, but they may have withholding tax obligations or even may be eventually held jointly liable for certain third party tax obligations, such as social security taxes.
Tax incentives. There are a number of tax incentives and administrative conveniences for developers in the income tax and business flat tax laws.
AS A BUYER
Taxes in Mexico. Under domestic law, if you move to Mexico you become a Mexican tax resident and you are subject to pay income tax in Mexico on your worldwide income , however, Mexico has a wide network of treaties to avoid double taxation, including the U.S. and Canada, which provide tax relief provisions.
Selling property in Mexico. If you report your taxes as a tax resident of the country where you live other than Mexico, when you sell property in Mexico you are subject to tax in Mexico although, generally, that tax may be creditable in your home country.
Renting Mexican property. If you receive rental income from a Mexican property directly from the tenant or through a rental pool, you are subject to many taxes in Mexico, principally income tax at the rate of 28% and VAT at either 10% or 15%. Local lodging taxes may also apply.
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This summary is not intended to be all inclusive, but simply tries to illustrate some peculiarities of the Mexican tax system as far as real estate operations is concerned. Speak to your tax and legal advisor and do not forget that there are also tax consequences in your home country that should be reviewed in line with the Mexican tax research and planning.
Mauricio Monroy
011-52-664-622-7870
mmonroy@deloittemx.com
http://www.deloitte.com/mx