Mexico payroll and tax overview.

Mexico is a North American country that shares land borders with the United States to the north, and with Guatemala and Belize to the southeast. Mexico’s western coastline meets the Pacific Ocean while its eastern coastline meets the Gulf of Mexico and the Caribbean Sea and by extension the Atlantic Ocean. Mexico is one of the most populous nations in the world and serves as a gateway between the South and Central Americas and North America. A developing market economy, Mexico’s business landscape is diverse with an emphasis on exports: in addition to the North American Free Trade Agreement, Mexico has free trade agreements with over 40 countries in Asia, the Middle East, Europe and South and Central America. Mexico has one of the largest economies in the world: in 2019, its GDP reached an estimated $1.274 trillion, although growth declined to -0.15% - down from 2.14% in 2018. Mexico’s main industries include food and beverage, tobacco, chemicals, mining, and automobile manufacturing. Tourism is also becoming a major economic contributor: Mexico is home to numerous UNESCO World Heritage sites and receives over 20 million visitors per year. Mexico is a member of the UN, the WTO, and the G20 and was ranked 60 on the World Bank’s Ease of Doing Business Survey 2019.

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 become registered as an employer and process a payroll.

The most common forms of Mexican subsidiaries and the preference of foreign investors as their investment vehicles in Mexico are corporations (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 (Registro Público de la Propiedad y el Comercio).
• Registration of the legal vehicle with the National Foreign Investment Bureau (Registro Nacional de Inversión Extranjera).
• Application for the Tax ID (Registro Federal de Contribuyentes).
• Obtaining the Electronic Signature (e.firma), to file tax returns.
• Employer registration before the Mexican Social Security Institute (Instituto Mexicano del Seguro Social).
• Registration for the local payroll tax (if applicable).
• Registration for the Institute of the National Fund for the Workers’ Consumption (Instituto del Fondo Nacional para el Consumo de los Trabajadores).

The timescale for completion of this process varies depending on the city of incorporation but there is an average of 45 days.

Business Banking in Mexico

It is not mandatory to make employee salary payments from an in-country bank account, however it is mandatory to make third party authority payments from an in-country bank account.

Generally, banks operate at a national scale with plenty of branches and a wide spread ATM network. Banks are open to the public on weekdays from 9:00am to 4:00pm and closed at the weekend.

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 the National Banking and Securities Commission (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

What is the Working Week in Mexico?

The Federal Labour Law (Ley Federal del Trabajo) 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.

It is common business practice in Mexico for a working week to last from Monday to Friday.

Basic Facts about Mexico

General

Full Name: United Mexican States

Population: 129.2 Million (World Bank, 2019)

Capital: Mexico City

Major Language: Spanish

Major Religion: Christianity

Monetary Unit: 1 Peso = 100 Centavos

Main Exports: Machinery and transport equipment, mineral fuels and lubricants, food and

livestock

GNI per Capita: US $9,430 (World Bank, 2019)

Internet Domain: .mx

International Dialling Code: +52

The tax year runs from 1st January to 31st December for all Mexican entities and there is no election.

The Key Tax Authorities:

• Secretaria de Hacienda y Crédito 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)
• Instituto del Fondo Nacional para el Consumo de los Trabajadores (Institute of the National Fund for the Workers’ Consumption)

Income Tax in Mexico

Residents that are working in Mexico must obtain a tax ID number (RFC) and a CURP (Uniform Population Registry Code). 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 tax 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 “tax residents” in Mexico, must pay Mexican income tax based on their worldwide income. Specific provisions of this law define the cases in which income obtained by a non-resident in Mexican territory qualifies Mexico as the source of wealth, in which case, a Mexican final payment may be assessed on Mexican source income only. Furthermore, the network of over 50 tax treaties may provide relief to determine the non-tax residency qualification of an individual.

The individual income tax (ISR) for a resident is calculated at graduated progressive rates that vary from 0% to 35%. The 35% rate is applied to annual income more than MXN$3,000,000 or approximately US$153,850 @fx19.50 pesos/1USD). A non-resident will be subject to individual income tax rates which range from 0%, 15% and up to 30% on salary income.

There are 10 types of taxable income;

• Salaries and other salary like compensation;
• 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

The following types of salary income are tax-exempt, they must be properly documented and comply with any requirements established by law:

• Insurance benefits for sickness or work related injury;
• Reimbursement of medical and funeral expenses;
• Certain social security benefits;
• Social security contributions (the employee and employer portions);
• Benefits received from the Workers’ Housing Fund (INFONAVIT);
• Salary received by foreigners in the following cases (when there is a reciprocal law in the country of origin that applies to Mexican nationals) as an example:

1. Diplomatic agents
2. Consular agents
3. Embassy and consular employees
4. Official delegation members

The employee’s income tax is withheld at source and must be paid to the local authorities by the 17th of the following month.

A non-voluntary late payment of tax can attract a penalty as high as 50% of the amount due.

Expatriates who are resident in Mexico must file an annual tax return. Non-residents do not file annual returns. If a resident’s only source of income is from a Mexican employer and the compensation received is less than Ps$400,000.00 the employer is responsible for making annual withholding tax adjustments for the employee. They must be e-filed in April of the following year through the website of the Tax Administration Service.

Social Security in Mexico

A Mexican employer is required 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.

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 became active with the old statute may claim a federal pension benefit upon retirement age and provided that at least 500 weeks of contributions are recorded.

Contributions to the Mexican Social Security Institute are not subject to income tax, likewise a portion of the pension received is exempt from income tax.

Mandatory pension rights transfer 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 shall be hired.

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.

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 becoming a taxable event.

Employers can deduct a portion of their pension fund contributions from their income tax calculation provided that certain requirements are met. 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 with reserve analysis
• Employees’ information
• 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 Payroll Taxes in Mexico

Most Mexican states levy a tax on salaries in cash (but not on overall compensation), 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).

The submission is electronic.

The payroll provider needs to be granted with a POA for legal representation for tax filings, this will allow access to the e-filing system.

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 a termination or a severance pay.

It is legally acceptable in Mexico to provide employees with online payslips.

Payroll records must be kept for at least 5 years.