Accounting Archives - MEXLAW

The IRS Wants to Know – Reporting Requirements for US Citizens

MexLaw — Mon, 14 Nov 2022 21:58:26 +0000

There appears to be some confusion as to what needs to be reported to the IRS by US citizens owning property in Mexico. Some US based accountants and tax preparers provide contradictory information and instructions to their clients. This article intends to dissipate this confusion.

First, a reminder, if you are a U.S. Citizen, the rules for filing income, estate, and gift tax returns and paying taxes are the same whether you reside in the United States or abroad. You are subject to tax on worldwide income from all sources and must report all taxable income and pay taxes according to the Internal Revenue Code.

Q 1: Do I need to report my Mexican Bank Trust that I created to purchase property?

According to the Foreign Trust Reporting Requirements and Treasury Regulations, a foreign trust with a U.S. owner must file a complete and accurate Form 3520-A and furnish the required annual statements to avoid penalties. The report needs to be filed within 15 days of the fiscal year end of the trust. However, common sense has prevailed. In a ruling published in 2013 by Wendy L Gribble of the IRS it was determined that a Mexican Land Trust is not a trust in the traditional sense, but an accommodation required under the Mexican Constitution to permit foreigners to own property in the Restricted Zones of Mexico. In fact, the Mexican Land Trust is the only type of trust where trustee is only an agent for the beneficiary, the US owner, and is holding the property for the beneficiary. Title to the real property and effective control is vested with the beneficiary and not the trustee as is the case in a typical trust. Therefore, with a Mexican Land Trust the US citizen retains direct ownership of the property for federal income tax purposes.

Therefore, the answer to this first question is NO,US Citizens do not have to report a Mexican Land Trust to the IRS nor file Form 3520.

Q 2: Do I need to report any other assets in Mexico?

In a concerted effort to fight money laundering and terrorist financing, the United States joined with the international community in adopting laws to comply with this effort. Accordingly, if you are a US Citizen and you have a financial interest or control of a Bank account located in Mexico which the average annual value is equal to or exceeds $10,000 USD at any time during the calendar year, you must report this account to the IRS. Note that the law does not make any distinction with a joint account. Therefore, it cannot be argued that because you hold this account with another person and theoretically are only the beneficiary of half the value of the account, that you do not need to report it.

Another note of interest is that this does not affect your income tax payable as the account does not indicate or imply that it is considered revenue. The amount in the account could be post-tax dollars that you transferred from your US account to your Mexican account. The law only requires that you report the existence of the account. One final observation: the only exception to this rule is if the bank account is held by a registered IRA of the US citizen. So the short answer to this question is YES, if your Mexican bank account has a balance of $10,000 USD or more at any time during the calendar year.

Several clients have asked Mexlaw: how would the IRS know? Do Mexican Banks report bank accounts owned by US Citizens? Mexico also is a participant and signatory of international treaties to combat money laundering and terrorist financing therefore, theoretically, Mexican Banks should report the existence of these accounts to US authorities. However, in practice, we have yet to meet a Mexican bank executive that was able to confirm that this requirement is complied with. Regardless, considering that the penalties are severe (up to $50,000 for the failure to file the report and a 40% penalty on the understatement of tax attributable to nondisclosed assets) it would be wise to file the report with your annual income tax returns.

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Restrictions of Foreign-Owned Corporations in Mexico

Mexlaw — Wed, 26 Feb 2020 14:46:19 +0000

According to foreign investment laws in Mexico, foreign investors may hold 100% of a Mexican corporation or partnership. The legal system and tax laws do not discriminate between foreigner business and Mexican National owned businesses.

One thing that separates foreign-owned corporations and Mexican owned corporations are the activities they may carry out. Foreign investment is permitted in most sectors except for those activities listed below.

Sectors reserved for the Mexican State

Oil and other hydrocarbons exploration and extraction
Sale of electricity to the public
Nuclear power
Radioactive minerals
Telegraph and radiotelegraph services
Postal services
Printing money and coin minting
Control, supervision, and surveillance of ports, airports, and heliports

Sectors reserved for Mexican Corporations

National land transportation of passengers, tourism, and cargo, not including courier and parcel services.
Development of banking institutions.

Activities in which the foreign investment can only participate in 49%

Manufacture and marketing of explosives, firearms, cartridges, ammunition, and fireworks, not including explosives for industrial and extractive activities, nor the development of explosives.
Printing and publication of newspapers circulated within the national territory.
Series “T” shares of companies that own agricultural, livestock, and forestry land.
Freshwater, coastal, and exclusive economic zone fishing, not including aquaculture.
Integral port administration.
Port pilot services to vessels to carry out inland navigation operations under the terms of the Law.
Shipping companies dedicated to commercial exploitation of vessels for inland and cabotage navigation, except for tourist cruises and the operation of dredges and naval artifacts for port construction, conservation, and operations.
Supply of fuels and lubricants for ships and aircraft and railway equipment
Broadcasting
Regular and non-regular national air transport service; international air transport service not regulated in the air taxi mode; and, specialized air transport service.

The National Foreign Investment Commission under the Secretariat of the Economy is the government agency that determines whether foreign investors may move forward in a restricted sector.

Considerations for incorporating your business

Determine which type of corporation suits your need
Legal and accounting advice
Tax, accounting and reporting obligations
Labor laws in Mexico
Zoning and building permits
Environmental regulations
Your immigration status

Contact MexLaw to help you establish a business in Mexico. We assist with the first steps of incorporation throughout the entire lifecycle of the company.

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Advice From the Accountants at MexTax About Capital Gains

Mexlaw — Fri, 02 Mar 2018 21:24:39 +0000

Real estate transactions in Mexico typically involve a profit for the seller, and on that profit, the seller is expected to pay capital gains tax. The tax is classified as ISR (Impuesto Sobre la Renta) and applies as an income tax. Whether you are a foreigner or Mexican national, you will be subject to this tax. However, an experienced Mexican accountant can assess your situation and find the best way to reduce or avoid the capital gains tax.

Before you complete the sale of your property, you are advised to seek the advice of an accountant in Mexico. The assessment of capital gains tax in Mexico can be complicated and will vary in each situation and change over the years. You need an experienced tax accountant who stays on top of the tax laws and who will ensure you receive the best tax break possible.

A few points to consider regarding capital gains tax

Since the notary is responsible and liable for collecting and transferring the tax to the treasury on residential transactions, you need to investigate how they perceive the exemptions and tax laws. For instance, the law does not require a foreigner property owner to have permanent or temporary resident status, yet the property must be their primary residence so each notary may interpret this law differently.
Commercial property tax assessments will differ from residential properties. Business owners should consult an accountant to assess deductions and tax obligations.
What are your capital tax obligations regarding your country of origin?
Gain deductions by reviewing home improvements, such as additions, a new roof or amenities, with an accountant and provide proper facturas (official receipts) for all expenses.
How will the tax break affect co-owners of a property? Can both owners claim the tax break for a primary residence?
What percent is the capital gains tax? This amount varies greatly and must be reviewed by an accountant to ensure you receive the greatest deduction possible. The tax may be assessed at 25% of the gross sale with no deductions, or range from 1.92% and 35% on the profit, (the purchase price less exemptions and deductions).
Does your property qualify as a primary residence?

Proving you are selling your primary residence, and that you have resided in the home for a minimum of three years is one way to reduce the capital gains tax.

The seller must hold an RFC Registro Federal de Contribuyentes (tax registration number), and the property cannot exceed three times the size of the home.
What if the seller is a non-resident of Mexico without an RFC? An accountant will review the expenditures to determine if they qualify for tax deductions.

Send an email to contact@mextax.com.mx for a consultation and learn how you can save on your capital gains taxes.

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You Have Purchased Property in Mexico, What’s Next?

Mexlaw — Wed, 13 Dec 2017 14:23:54 +0000

The most critical points that must be considered after purchasing a property in Mexico include:

Getting Possession of the Original Title Deed

Get that title deed in your hands; five to six months after both parties sign the title deed, your lawyer or the Notary must provide you with the original title deed.

The original title deed includes the boleta de registro with the folio number; this document guarantees the title deed has been registered in the Public Registry of Properties. In their files the last information will be the transfer of rights in favor of the purchaser.

Annual Payment on the Trust

Begin paying the annual fees to the fiduciary; the amount depends on the bank trust. Your lawyer can provide the contact information of the fiduciary to request the invoice which must be paid each year to comply with the obligations of the trust. The annual fees will vary between $400.00 to $600.00 USD depending on the bank and the property and may be paid by wire transfer. Confirm with your lawyer the bank trust account number and verify the due date of your annual fee. You may never see an invoice, so it is essential to keep track of your due date to avoid late fees and always keep your receipt as proof of payment. Some foreign property owners hire an accountant or property manager to take care of their property financial obligations; it is imperative you follow up and request proof of payment that your taxes, fees or utility bills have been paid.

Condo Fees

If the newly purchased property is in a condominium development, you must contact the administration office to coordinate your condominium fees which are paid monthly.

Attending Condominium Assemblies

If the property is in a condominium, you should attend the assemblies along with the other owners in order to voice your opinion and vote on major decisions concerning your new home. You will need to vote on the budget and determine the amount that each owner must pay for the monthly condominium fees, the reserve fund and also to ensure you stay informed of any issues that may arise in the complex.

Predial Property tax

Property taxes must be paid annually. When the parties sign the title deed, the seller will provide a copy of the property tax to prove it is paid up to date and the purchaser will take over the payments for the following year. Review the invoice at the municipality or online. Confirm the property location and name on the deed. The property owner will be registered to the bank if it was purchased through a fideicomiso. Make sure the Cuenta Catastral is the same as the account number on your deed.

We recommend paying property taxes in December since the municipality provides a discount of the 20% or 25% if you pay the full year in advance. Property managers, real estate agents, your lawyer or a friend can make this payment if you are not in Mexico during this time, but again, request proof of payment. Keep your receipt from the property tax with your title deed.

Insurance

Purchase home insurance. Consult a reputable Mexican insurance broker to review your options. If you have purchased in a condominium obtain a copy of the master HOA insurance policy. This will help you determine which policy you require to protect your personal unit. Consider hurricane coverage, water damage, rental liability and loss of rental income coverage.

Employees

If you are employing workers in your home, you need to research the social security and benefit requirements. Mexico has strict labor laws which generally favor the worker; it is important to understand your obligations as an employer.

Hire an Accountant

Starting a home business or renting out your home? Consult with the accountants at Mextax, a professionally trained accounting team who will manage your personal and business tax and accounting obligations in Mexico with consideration of your country of origin’s requirements.

contact@mextax.com.mx

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Your Domestic Staff and the Aguinaldo Deadline

Mexlaw — Wed, 29 Nov 2017 15:34:30 +0000

The holiday season is quickly approaching, and if you have employees, you need to be aware of the annual bonus all workers are entitled to during the month of December.

What is aguinaldo?

An annual Christmas bonus that employers in Mexico are required by law to pay to their employees, and it must be paid by December 20. Aguinaldo is separate from vacation pay and it

benefits families for the added expenses that come with the holiday season.

Article 87 Federal Labor Law states that all employees in Mexico will be entitled to an annual bonus. Not only business owners need to provide this bonus, but this also includes domestic workers, cleaning, gardening or maintenance personnel you may employ on your property.

The aguinaldo is based on 15 days of wages for any worker that has one year or more of service, and if the employee has less than one year, the bonus will be calculated by proration.

Calculating the bonus for employees that have one year or more is based on their wage divided by 30 days (a month) which provides the daily wage, the daily wage multiplied by 15 days is the bonus.

If your gardener earns 8,000 pesos per month divided by 30 = 266.66 daily rate x 15 days = 4,000 pesos aguinaldo.

Part-time employees

If your gardener only works two days a week at 400 pesos a day = 800 divided by seven days of the week = 114.28 daily rate x 15 days = 1,714.28 pesos aguinaldo.

This income is subject to ISR (income tax) and as the employer you are expected to withhold and submit the tax, but if the aguinaldo is less than one month’s wage, it will be exempt from income tax.

If your employee works any statutory holiday such as Christmas or New Year’s Day, you are required to pay double time plus their regular wage for those days. Essentially employees earn triple time on a statutory holiday. This information is especially important for homes that employ nannies or kitchen staff over the holidays.

For information and advice about Mexico’s labor laws and employee benefits, email an accountant at contact@mextaxes.com

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Foreigners and Tax Obligations in Mexico

Mexlaw — Tue, 24 Oct 2017 13:52:27 +0000

Whether you are an individual earning an income in Mexico, or a business owner in Mexico, you have certain income reporting and tax obligations. This article includes a brief description of the most common taxes and contributions, as well as the corresponding authority.

As an employer in Mexico, you are responsible for the following contributions and taxes

Payroll Tax

3% of the total salary of the employees is to be submitted monthly to the State Government.

The Mexican Social Security Institute (IMSS) Instituto Mexicano del Seguro Social

As an employer, you are obligated to pay IMSS for health services and social security each month on behalf of your employees. The calculation of these fees is determined by the salary of the employee with a risk premium (depending on the hazards of the job), which may vary from 0.54% to 7.5%, depending on the type of activity of the business.

The National Institute of Workers’ Housing Fund (INFONAVIT)

Employers and employees are subject to social security and housing charges. These are payable to IMSS and INFONAVIT a fund which enables individuals to borrow money at a low-interest rate in order to purchase property. The payment of 5% of the salary is made bi-monthly and withheld from the employee’s salary and paid directly by the employer along with the contributions to IMSS.

Withholding of Income Tax on Salaries

This payment is calculated based on the salary of the employees and depends on the taxable income; a corresponding tax will be applied plus a fixed fee. The result is the amount to be withheld.

What is SAT, RFC, and FIEL?

Tax Administration Service (SAT) the Secretaria de Hacienda

SAT is the tax collection authority; they are equivalent to the IRS or CRA. SAT monitors and enforces taxation laws and obligations. To pay income tax (ISR) in Mexico, an individual or corporation must register with SAT, which is part of the Finance Ministry. If you are earning income, including rental income within Mexico, you are obligated to be registered and pay the appropriate taxes.

Federal Taxpayers Registry (RFC) Registro Federal de Contribuyentes

The tax identification assigned by SAT which can be applied to corporations or individuals. The ID for an individual is composed of a combination of initials, or date of birth, plus a unique code. A business RFC will also contain the registration date for the company.

The RFC must be provided whenever an electronic invoice is required for tax deduction purposes. Foreigners may obtain an RFC if they have temporary or permanent residency. The RFC enables foreigners to open bank accounts, purchase and register vehicles, and purchase real estate.

Digital Signature (FIEL)

FIEL is an electronic digital code and contains a file that can be saved on a USB which digitally identifies you when communicating with the government. The electronic signature enables you to access the SAT platform and thus file your tax reports.

The signature is valid for four years and may be obtained in person at the SAT offices by appointment.

Obtaining the FIEL is a long, tedious process that can take up to one month. If you retain the services of MexTax, they will obtain this code for you, as it will be required for the accounting services. The FIEL signature is often required for corporations to open bank accounts in Mexico.

Income Tax (ISR): Impuesto Sobre la Renta

Individuals

Individual income tax varies between 20 – 35%, depending on the income.

The payments are submitted monthly before the 17th of each month for income earned in the previous month. They are obligated to file the annual declaration by April 30th.

The ISR payments are considered a tax credit for foreigners in the US or Canada, therefore avoiding any double taxation.

You are obligated to pay income tax in Mexico if you fall into one of these categories:

Foreign residents who have a permanent establishment in the country, and gain an income from that establishment.
A resident living abroad, with revenue from sources in Mexico, although they do not have a permanent establishment here.
Foreigners with income from a rental unit in Mexico; even if the funds are deposited in another country, it is considered revenue earned in Mexico.
Foreigners employed in Mexico.

Legal Entity

Corporations pay ISR monthly, depending on the profits earned in the previous year, with an annual pay adjustment. This amount will be determined by calculating the income and deductions throughout the year. This tax is reported and paid monthly. Within the first three months of the following year, income tax declarations are filed in order to report revenue and expenditures throughout the previous year.

Value-Added Tax (IVA) impuesto al valor agregado

Equivalent to the Value-Added Tax and Sales Tax in other countries. It is applied at a rate of 16% to products or services. This tax is applied at the time of purchase and included in the price tag.

Property Taxes

Mexico has a considerably lower property tax compared to other countries; it is determined on the assessment or cadastral value of the property and collected by municipalities. Property tax may be as low as $100 to $500 USD a year depending on the property. Further discounts are available by paying your property tax in advance at the city hall.

Lodging Tax (Hotel Tax)

In the State of Quintana Roo, the lodging tax is 3% and is paid by hotels and individuals renting their furnished property.

This tax is collected directly from the guest, and the company or individual will report and pay monthly to the state tax-collecting offices.

Recently some states including Quintana Roo have formalized the lodging tax by having Airbnb collect the tax from the guest at the time of booking.

Obligations of the Taxpayer

Bank Account in the name of the company or the Taxpayer,

It is imperative that all payments and deposits are made through the account of the company or the individual. Otherwise, the expenditure will not be accepted as a deductible.

Invoices

The electronic invoice is a digital document (receipt), which is proof of a transaction between a consumer and a merchant recognized officially by the tax authorities. This document is generated with a digital stamp, resembling a bar-code.

Keeping your tax obligations current is very important to avoid fines which range from 12,640 to 25,300 pesos for each declaration that was not filed, or filed after the deadline.

For more information about tax obligations in Mexico, consult the accountants at contact@mextaxes.com

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Formalized Tax Collection Through Airbnb in Quintana Roo

Mexlaw — Wed, 06 Sep 2017 15:04:55 +0000

Travelers have changed over the years; nowadays many people prefer to stay in homes rather than large resorts. Airbnb has become a popular choice, an intimate, less expensive way to travel and see the world. Many travelers make lasting connections in these homes and neighborhoods and experience more culture than they would if they were staying at a large resort.

Airbnb’s popularity continues to grow and because of its success has triggered concern from the hotel industry regarding tax obligations and the lack of regulations for this type of accommodation. The Mexican government also recognizes the importance of home sharing for the development of local tourism and the income it generates. Airbnb and the state authorities have signed an agreement, As of October 1, 2017, travelers booking accommodations through Airbnb in Quintana Roo will be charged a 3% lodging tax, the tax will be calculated and processed online during the reservation process. The tax is not a new one, but it has been formalized by collecting it through Airbnb. A 3% tax on lodging is considerably low in comparison to other vacations destinations who charge up to 20% lodging tax.

At this time only Mexico City and Quintana Roo are included in this agreement, but other favorite locations in Mexico are expected to sign the agreement in the upcoming weeks.

According to Airbnb, they have experienced incredible growth in Quintana Roo, a 131% increase in Airbnb guests arriving in Quintana Roo, and 189% growth overall in Mexico. There are thousands of homeowners enjoying the success and ease of running their home business through Airbnb. The tax will provide a substantial revenue for the state.

The host benefits by having Airbnb be responsible for calculating, collecting and submitting the tax. The lodging tax does not affect the host’s income or income tax.

Airbnb reports that as a part of their long term commitment to Latin America they are opening offices in Mexico City and Buenos Aires, “growing our presence in Latin America and strengthening our commitment to democratizing travel around the world.”

The Secretary of Finance website states “In Mexico, 62,000 properties offer this service in several tourist destinations, among which CDMX, the Riviera Maya, Cancun and Puerto Vallarta.”

The companies that provide this type of platform are not responsible for declaring the income of individual hosts, but homeowners are reminded to claim revenue and comply with their income tax obligations it is important to be aware of Mexico’s tax laws.

Consult with an accountant at Mextax to find out the best way to manage your income, expenses and deductibles of your home business. contact@mextaxes.com

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Foreign Investors in Mexican Businesses Should Consult an Accountant

Mexlaw — Wed, 19 Jul 2017 18:01:50 +0000

MexTax Accounting Services

Mexican corporations can be 100% owned by foreigner investors enabling them to operate businesses in Mexico. Mexico’s legal system and tax laws for corporations do not discriminate between foreign business operators and Mexican National owned businesses.

Foreigners starting a business in Mexico should know the importance of hiring an experienced Mexican accounting adviser. It is well known that small companies, as well as the largest corporations, need an experienced accountant who can provide them with adequate advice regarding their financial, administrative and fiscal needs, to ensure they make the correct decisions concerning their financial and tax obligations in Mexico.

Many foreign entrepreneurs migrate to Mexico and operate a successful business. Mexico’s tax system is often complicated and different than other countries, and without professional advice, the business can run significant risks and therefore fail.

Failure to comply with legal and tax requirements may result in the closing of a business or the imposition of significant fines that affect the operation of the company. Such penalties can be avoided with a proper tax treatment and financial organization.

A professional accountant helps the entrepreneur plan and control the resources of the business, as well as finding the right tools for the fulfillment of his activities, to help minimize the risks, thus providing the possibility to grow and direct the company to greater success.

The main taxes that are payable in Mexico are those levied by the Federal Government, state, and municipal governments.

The principal tax obligations in business are as follows:

Income tax (IT)
Value-Added-Tax (VAT)
IEPS is the special tax on products and services
Social Security tax
Property tax
Payroll taxes

Paying less tax is achieved by understanding and claiming expenses which are considered deductible by the authorities. It is possible you are missing out on deductibles due to lack of information.

Requirements for an expense to be considered a deductible:

Expenses which are strictly indispensable for the activity
Expenditure which is intended to deduct must have a proper receipt (invoice).
Invoices must have the necessary requirements (RFC, name, and address)
Expense must be paid by the company or taxpayer’s bank account
If an invoice was paid in cash, it should not be more than 2,000.00 pesos.

Other expenses which are considered acceptable deductions depending on the activity of the company and the proper invoices, these expenses may be deductible.

Furniture
Office supplies, electronics, and computers.
Predial: property tax
Maintenance and Repairs
Business cards and marketing.
Vehicle is deductible up to 175 thousand pesos and will depreciate 25% each year. You may also deduct the expenses, such as fuel, spare parts, maintenance, and accessories.
Domains, hosting and web advertising
Software licensing
Advisory tax and accounting service: MexTax will provide an invoice which is 100% deductible for accounting or consulting services.
Legal Advice: Legal advice is imperative to a business owner. These fees are also 100% deductible.
Tuition fees
Payroll: provided it complies with the additional fees of IMSS, INFONAVIT, and retention.
Employee expenses: deductibles include employee expenses, such as uniforms, dining, transport service, and additional benefits.
Employee training
Interest on loans and bank fees
Travel expenses
Shipping costs, depending on the activity of the company
Utilities, including phone service and cellular
Rental: If you rent a commercial space for the business, it is 100% deductible.
Insurance: Insurance premiums of all movable and immovable property (car, home, business, building, etc.) are detectable.
Tax contributions: Must not exceed 7% of the tax revenue. If your activity is based on the income of rental properties, as an individual, you have the option to deduct 35% of the total revenue, without any proof.

Be aware these types of expenditures can NOT be declared as company expenses:

Personal expenses, groceries, entertainment, and clothing.
Any payments made through the company bank account without an invoice
Payments made in cash by over 2.000,00 pesos
Invoice with incorrect tax information (name, RFC, and address)

Contact the accounting team at MexTax to find out how we can help your business save money and comply with Mexico’s tax regulations.

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