Doing Business in Mexico

Foreign Direct Investment In Mexico

The Constitution states that Foreign Investment should be of national interest for the Citizens of Mexico. Subsequently, Federal and State governments are open towards foreign investment that provides economic development, for example, providing wealth and job opportunities. Foreign and local investors are treated equally and are both eligible for investment incentives.

Registering A Company and Establishing an Entity In Mexico

From a legal point of view, there are different ways for foreign entities and individuals to set up and develop a business in Mexico. This can be done through the establishment of a subsidiary, a branch office or a representation office. The company is required to have one of the preceding legal vehicles entities established in order to process a Payroll.

The most common forms of Mexican subsidiaries and the preference of foreign investors as their investment vehicles in Mexico are either corporation (Sociedad Anónima – S.A.), or limited liability company (Sociedad de Responsabilidad Limitada – S. de R.L.), since such investment vehicles provide limitation of liability to its partners.

The following registrations are required:

  • Registration of the public deed containing the establishment of the legal vehicle at the Public Registry of Property and Commerce (PRC).
  • Registration of the legal vehicle with the National Foreign Investment Bureau.
  • Application for the Tax ID (Registro Federal de Contribuyentes).
  • Obtaining the Advanced Electronic Signature (Firma Electronica Avanzada) to file tax returns.
  • Employer registration before the Mexican Social Security Institute.
  • Registration for the local payroll tax (if applicable). The timescale for completion of this process varies depending on the city of incorporation but there is a minimum of 75 days.

Business Banking In Mexico

It is mandatory to make payments to both employees and the authorities from an In-Country bank account. Generally, banks are open to the public on weekdays from 9:00am to 4:00pm and closed on Saturdays and Sundays.

In Mexico payments created using a Mexico debit account will need the receiver of the payment to be a registered beneficiary. This is a regulatory requirement indicated in the General Decree applicable to Credit Institutions as stated by Comisión Nacional Bancaria y de Valores (CNBV).

The payments that require beneficiary registration include;

  • Priority Payments (International)
  • Priority Payment SPEI (Domestic)
  • Mexico ACH Credits – General Template, Payroll and Online Payroll

Working Week In Mexico

The Federal Labour Law (FLL) establishes maximum regular hours work on a daily basis, the normal work week ranges from 40 to 48 hours. Employees work a maximum of six days a week and are paid for the seventh day.

Although it is a common business practice in Mexico a working week from Monday to Friday.

Basic Facts about Mexico

General

Full Name: United Mexican States

Population: 125.34 Million (UN, 2015)

Capital: Mexico City 

Major Language: Spanish

Major Religion: Christianity

Life Expectancy: 75 Years (Men), 80 Years (Women) (UN)

Monetary Unit: 1 Peso = 100 Centavos

Main Exports: Machinery and Transport Equipment, Mineral Fuels and Lubricants, Food and Live Animals

GNI Per Capita: US $8,890 (World Bank, 2010)

Internet Domain: .mx

International Dialling Code: +52

Hello Hola

Good Morning Buenos días

Good Evening Buenas noches

Do you speak English? ¿Habla Inglés?

Good Bye Adios (despedida)

Thank you Gracias

See you later Hasta luego

Dates are usually written in the day, month and year sequence. For example, 1 July 2012 or 1/7/12.

Income Tax & Social Security In Mexico

The Tax year runs from 1st January to 31st December.

The key Tax Authorities are:

 

  • Secretaria de Hacienda y Credito Publico (Ministry of Finance and Public Credit)
  • Servicio de Administracion Tributaria (Tax Administration Service)
  • Instituto Mexicano del Seguro Social (Mexican Institute of Social Security)
  • Instituto del Fondo Nacional de la Vivienda para los Trabajadores (Workers National Housing Fund Institute)

 

 Income Tax In Mexico

Residents that are working in Mexico must obtain a tax ID number (RFC) and a CURP (Uniform Population Control).  Mexican employers are obligated to register all employees with the Mexican tax authorities. In practice, foreign individuals need to obtain the tax ID number directly from the authorities and a CURP from the Immigration Authorities. To obtain an RFC the individual must submit proof of tax domicile and a certified copy of the individual’s work permit visa.

The Income Tax Law defines concepts such as residence and source of wealth for purposes of determining those individuals and companies subject to this tax.  All individuals or companies who, according to the Federal Fiscal Code, are considered “residents” in Mexico, must pay tax for all income they perceive in a general scale (worldwide income). Specific provisions of this Law define the cases in which income obtained by a non-resident in Mexican territory qualifies as a wealth source in Mexico.

The individual income tax (ISR) for a resident is calculated at graduated progressive rates that vary from 1.92% to 35%. The 35% rate is applied to annual income in excess of Ps$3,000,000 or approximately US$153,850 @fx19.50 pesos/1USD). A non-resident will be subject to individual income tax rates of up to 30% on salary income. 

There are 10 types of taxable income;

  • Salaries and remunerations similar to salaries;
  • Professionals fees and income from business activities;
  • Incorporation regime;
  • Rental income;
  • Income from sale of assets;
  • Income from the acquisition of assets;
  • Interest;
  • Prizes;
  • Dividends; and
  • Other miscellaneous income

Social Security In Mexico

A Mexican employer is obligated to register all its employees with the Mexican Social Security Institute. Once registered, the employee will receive confirmation of registration. The Employee should submit this to the clinic that corresponds to the employee’s domicile if they intend to utilize the social security benefits such as medical care.

Employee contributions to the Mexican Social Security Institute are withheld at source.  The employer also makes contributions.  Both contributions are calculated at varying rates and subject to various limits based on multiples of the minimum wage.

The Social Security Institute administers the social security system.  In addition to old-age benefits, it provides full pay for 78 weeks of disability and offers permanent disability insurance.  Other benefits include pensions, death benefits, day time nurseries and paid maternity leave.  The system also covers work-connected accidents and illnesses and non-occupational diseases.

Employees must pay social security and retirement contributions on their salaries at a rate of approximately 5% (with a cap).

Employers contribute to Social Security, Housing Fund and Retirement Fund. However this is taken from the salaries of employees (based on the minimum wage), these add up to roughly 25% of the salaries.

Social Security contributions are capped to an integrated daily salary for calculation purposes.

Penalty for late payment of Social Security taxes is up to 40% of the amount due.

State Pensions 

Both the employer and employee contribute to the state pension in Mexico. The following contributions are made;

  • The employer pays 2% of the employees’ base salary as pension contributions for retirement.
  • The employer pays 3.15% of employees’ base salary as pension contributions for unemployment and old age insurance.
  • Employees pay 1.125% of their base salary as pension contributions for unemployment and old age insurance.

Before 1997, the Mexican Social Security Institute provided pensions to employees. Employees that began working for their employer before 1997, reach retirement age, and can prove that they have made at least 500 weeks of pension contributions can receive a pension.

Contributions to the Mexican Social Security Institute are not subject to income tax. A proportion of the pension is exempt from tax and the excess will be taxed at the applicable rate.

Mandatory pension rights transfer with the employees regardless of the employer.

Supplementary Pensions

The Social Security Law provides personal supplementary schemes, in which both the employee and/or the employer may agree to pay a greater contribution than that established by the law to increase the retirement funds in their personal accounts. An authorised Retirement Savings Funds Management Institution must manage these.

It is common (but not compulsory) for employers to provide access to supplementary pension schemes for their employees.

These contributions are not taxable income for the employee and are a deductible expense for the employer, provided that certain requirements are met. Depending on income, a certain proportion of supplementary pension scheme income is exempt from income tax. The excess income above this exemption is subject to income tax at the applicable rate.

There are different types of supplementary pension schemes and ways to determine their value. As these are a contractual benefit, employers can freely determine their terms and conditions.

Most supplementary pension plans include a provision allowing beneficiaries to transfer their benefits to a new employer pension plan in the case of termination of employment, without it being a taxable event.

Employers can deduct their contributions to pension’s funds from their income tax provided that certain requirements are met. From 2014, this deduction is limited to 53% of the total contribution paid (before this, employer contributions were fully deductible). Pensions paid to employees are partially tax-exempt, including those paid by insurance companies, provided certain requirements are met.

Where a supplementary pension plan is established, the National Commission for the Retirement Savings System requires that employers establishing the scheme provide the following information (via the Electronic Systems for Pension Plans):

  • Characteristics of the plan

  • Participants

  • Contributions

  • Benefits

  • Investment policy

  • Financial resources

In addition, where a reserve is established as a supplementary pension scheme without the intervention of the administrator of funds for retirement, the miscellaneous annual tax rules require that the following documents and information is filed on 15 February each year:

  • Statement of incorporation of the reserve

  • Information on employees

  • Amount of contributions

  • General terms of the pension plan

Supplementary employees' pension rights on a business transfer depend on the terms of transfer. In the case of an employer substitution, the employees' pension rights remain the same as they were before the business transfer.

Employees who are working abroad can participate in a pension scheme established by a Mexican parent company.

The tax implications will depend on the employee's tax residency.

Employees of a foreign subsidiary company can participate in pension schemes established by the company's parent company. However, all documents issued in relation to the pension plan must comply with the requirements of Mexican law.

Local taxes On Payroll In Mexico

Most Mexican states levy a relatively low rate on tax on salaries (but non on income in general), which is payable by the employer. Mexico City imposes a 3% payroll tax, as it is payable by the employer it constitutes a tax-deductible expense.

Reporting Tax In Mexico

Social Security contributions are filed and paid as follows:

Tax Returns

  • Social Security (monthly)
  • Housing (bi-monthly)
  • Retirement (bi-monthly)
  • Local Payroll Tax (monthly)
  • Employee withholding Income Tax (monthly)

Informational Returns

Annualized individual’s income tax calculation prior to the year end (annually in December).

Social Security’s professional risk coverage percentage calculation (annually in February).

Information return on payments & withholdings to the employees (annually in February).

Proof of income tax withholdings and annual income earned issuance for all the employees (in February).

The submission is via internet.

The payroll provider needs to be granted with a POA for legal representation for tax filings.

New Employees In Mexico

The employer and employees should register with the Instituto Mexicano del Seguro Social (IMSS).

New starters should register with the IMSS within their first five (5) days of commencing employment.

In order to set up a new start the following information is required:

  • Employment Contract
  • Employee Compensation package & benefits
  • Employee Personal Information
  • Employee Bank Details
  • Copy of Identification, tax ID (RFC), general population registry (CURP), social security number
  • Proof of Address

Please note: If an employee has a loan from the Workers National Housing Institute (INFONAVIT) the payroll provider will require a copy of the document stating the amount to be withheld through the payroll.

Leavers In Mexico

For leavers the payroll company will require an email confirming the leaving date and whether it is a resignation or the employee requires severance pay.

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