Taxes in Mexico are administered by the Servicio de Administración Tributaria (SAT) and built around two main levies: the Impuesto Sobre la Renta (ISR), an income tax with rates up to 35% for individuals and a flat 30% for corporations, and the Impuesto al Valor Agregado (IVA), a 16% consumption tax charged on most goods and services.1datos.gob.mx. Servicio de Administración Tributaria (SAT) – Instituciones Whether you earn a salary, run a business, or collect rental income, how taxes work in Mexico for you depends first on whether you count as a tax resident, and then on which regime your activity falls under.
Who Mexico Treats as a Tax Resident
Residency decides whether Mexico taxes your worldwide income or only what you earn inside the country. You’re generally a Mexican tax resident if you’ve established a permanent home here. If you have homes in both Mexico and another country, the tiebreaker is your “center of vital interests”: more than 50% of your annual income from Mexican sources, or Mexico as the main location of your professional activities. Either factor on its own is enough.
Residents owe ISR on everything they earn globally, including foreign pensions, investments, and rental properties. Non-residents pay Mexican tax only on income with a Mexican source. Someone who lives in the US and rents out a vacation home in Puerto Vallarta, for instance, pays Mexican tax on that rental income but nothing else. Non-residents usually have tax withheld at the source rather than filing their own returns.
Personal Income Tax Rates
Individual ISR runs on a progressive scale with 11 brackets for 2026. The lowest bracket starts at 1.92%, and the top marginal rate of 35% applies to annual taxable income above roughly MXN 5.1 million. Employees have ISR withheld from each paycheck, and if your only income is salary under MXN 400,000 a year, you may not need to file an annual return at all.
Residents can reduce taxable income with authorized personal deductions: medical and dental expenses, mortgage interest, private school tuition, and voluntary retirement contributions. The combined deduction is capped at the lesser of 15% of gross income or five times the annual UMA, which for 2026 works out to about MXN 213,973. Retirement contributions and tuition have separate limits outside that cap, and medical expenses are exempt from the cap if you hold a certificate from a government health institution.
Dividends from Mexican corporations are included in a resident’s taxable income. Dividends paid out of post-2013 corporate profits also carry a separate 10% withholding tax when distributed.2PwC. Mexico – Corporate – Withholding Taxes The annual individual return is due April 30 for the prior calendar year, with narrow exceptions for people whose only income is bank interest under MXN 100,000.
How Non-Residents Are Taxed
Non-residents with Mexican-source employment income face a tiered withholding rather than the full progressive brackets. The first MXN 125,900 in a 12-month period is exempt. Income from MXN 125,901 to MXN 1,000,000 is withheld at 15%, and anything above MXN 1,000,000 at 30%. There’s a full exemption if the employer is a non-resident with no Mexican permanent establishment and the employee spends fewer than 183 days in Mexico in any 12-month window.
When non-residents sell Mexican real estate or shares, they have two options. The default is 25% of the gross sale price with no deductions. Alternatively, if the sale goes through a notary public and the seller appoints a Mexican legal representative, the tax becomes 35% on the net gain after original cost and improvements.3Servicio de Administración Tributaria. Sale of Real Estate Income Option two usually produces a smaller bill, but only when you can document your cost basis.
Capital Gains Exemption on a Primary Home
Selling your main home in Mexico can qualify for a capital gains exemption of up to 700,000 UDIs, which at recent values is roughly MXN 5.6 million. You can use it once every three years. The requirements: be a Mexican tax resident with an RFC, prove the property was genuinely your primary residence through utility bills or similar documents, and show it wasn’t generating rental or business income. The lot can’t exceed three times the building footprint. If the sale price goes above 700,000 UDIs, you pay capital gains only on the portion above that threshold.
IVA: The 16% Consumption Tax
The IVA functions like a European VAT. Businesses charge it on sales, reclaim it on purchases, and remit the net difference to the SAT each month. The standard rate is 16% nationwide, with a reduced 8% rate in designated northern and southern border municipalities under a presidential decree aimed at boosting activity in those areas.
A 0% rate applies to exports, basic food staples, and prescription medicines. The zero rate matters because sellers of those items can still reclaim IVA paid on their inputs. That’s different from exempt transactions, which include residential property sales, educational services, and healthcare: no IVA is charged to the buyer, but the seller also can’t reclaim IVA paid on related costs. The cash-flow difference is real, and correctly classifying each sale is one of the most common compliance headaches for Mexican businesses.
IVA on Foreign Digital Services
Since June 2020, foreign companies selling digital services to consumers in Mexico must register with the SAT, collect 16% IVA, and file returns. The rule covers streaming platforms, software subscriptions, cloud services, app stores, and similar products. Foreign providers that fail to register or miss three consecutive monthly returns can have internet access to their platforms blocked inside Mexico. For 2026, new withholding duties and electronic invoicing requirements take effect for digital platform operators.
Corporate Income Tax
Mexican corporations pay a flat 30% ISR on worldwide taxable income, calculated as gross revenue minus authorized deductions. Foreign companies operating through a Mexican permanent establishment face the same 30% on income attributable to that establishment. When profits are distributed, non-resident shareholders face an additional 10% withholding on dividends from post-2013 earnings.2PwC. Mexico – Corporate – Withholding Taxes Distributions from pre-2014 profits aren’t subject to that extra layer.
To deduct a business expense, you generally need a valid CFDI (electronic invoice), the expense must be strictly necessary for the business, and payment must flow through traceable means such as bank transfer or credit card rather than cash. Related-party transactions, domestic or cross-border, must be priced at arm’s length and backed by contemporaneous transfer pricing documentation. Missing any piece can lead the SAT to disallow the deduction entirely.
Employee Profit Sharing (PTU)
Most employers must distribute 10% of annual taxable income to employees under the Participación de los Trabajadores en las Utilidades program. A 2021 reform caps each employee’s PTU at the greater of three months’ salary or the average of their PTU payments over the previous three years, whichever benefits the employee more. The distribution is due by May 30 for corporations and June 29 for individuals with employees.
RESICO: The Simplified Regime for Small Taxpayers
The Régimen Simplificado de Confianza is a streamlined option for small taxpayers. Sole proprietors and freelancers with annual gross income up to MXN 3,500,000 can opt in and pay ISR at rates from 1.0% to 2.5% of gross income, scaled to earnings. Set against standard brackets that reach 35%, the savings can be large. RESICO calculates tax on gross revenue, so there are no deductions to track. A simplified version exists for small corporations with different thresholds and rules.
The tradeoff is less flexibility. RESICO participants can’t take the personal deductions available under the general regime, and they must issue CFDIs for all income. Missing three consecutive monthly returns can get you ejected from RESICO and pushed back into the standard regime retroactively, which turns into an expensive surprise.
Employer Payroll and Social Security Costs
Hiring in Mexico costs well beyond the salary itself. Employer contributions to the Instituto Mexicano del Seguro Social (IMSS) cover healthcare, disability, maternity, retirement, and workplace risk insurance. Total IMSS employer contributions generally run 24% to 38% of an employee’s gross base salary, depending on industry risk classification and wage level. Employers also contribute 5% of each employee’s integrated daily salary to INFONAVIT, the national housing fund, paid bimonthly and capped at a salary of 25 times the daily UMA.
Each state levies its own payroll tax, the Impuesto Sobre Nómina (ISN), with rates generally between 2% and 5% of taxable payroll, paid directly to the state authority. Add IMSS, INFONAVIT, ISN, and PTU together and total employer-side labor costs can run 35% to 50% above gross wages. Budgeting only for salaries is one of the most common mistakes foreign companies make when expanding into Mexico.
The US-Mexico Tax Treaty
The bilateral income tax treaty between the United States and Mexico prevents the same income from being fully taxed in both countries. The main tool is the foreign tax credit: a US citizen or resident who pays Mexican ISR can claim a credit against US federal tax using IRS Form 1116.4Internal Revenue Service. Instructions for Form 1116 (2025) The credit is capped at the US tax that would otherwise apply to that foreign income, so it offsets but doesn’t produce a refund beyond your US liability.
The treaty also reduces withholding on cross-border payments. Dividends from a Mexican company to a US beneficial owner are capped at 5% if the recipient owns at least 10% of the voting stock, 10% otherwise. Interest rates drop too, as low as 4.9% on bank loans and publicly traded bonds.5Internal Revenue Service. United States – Mexico Income Tax Convention
Pensions and Social Security
The treaty draws a sharp line between private pensions and US Social Security. A private pension from past US employment paid to a Mexican tax resident is taxable only in Mexico. US Social Security benefits run the other way: taxable only in the United States, even if the recipient lives in Mexico.5Internal Revenue Service. United States – Mexico Income Tax Convention Annuities follow the pension rule and are taxable only in the country of residence. Getting the distinction wrong can mean double-reporting and overpayment in both countries.
Registration, Invoicing, and Filing Deadlines
Anyone engaging in economic activity in Mexico, whether employed, self-employed, or running a business, must register for a Registro Federal de Contribuyentes (RFC).6Gobierno de México. Inscription at the Federal Taxpayer Registry The RFC is your unique tax ID, required to file returns, issue invoices, open bank accounts, and deal with the SAT. Foreign nationals need valid immigration documents, proof of a Mexican address, and generally an in-person appointment at a SAT office.
Once registered, businesses and self-employed individuals must issue electronic invoices called CFDIs (Comprobantes Fiscales Digitales por Internet) for every transaction. The current mandatory version is CFDI 4.0, which pre-validates the buyer’s tax data (RFC, name, tax regime, postal code) before stamping. An invoice that fails validation won’t process, so keeping SAT registration data current is non-negotiable.
Most taxpayers file monthly provisional returns for both ISR and IVA covering the prior month. The annual individual ISR return is due April 30; the annual corporate return is due March 31. Every taxpayer must also maintain an active e.firma (electronic signature) and enable the Buzón Tributario, the SAT’s official digital mailbox for notifications and legal communications. Starting January 1, 2027, failing to enable the Buzón Tributario will itself be an infraction subject to fines.7Servicio de Administración Tributaria. Buzón Tributario – SAT
Penalties for Falling Behind
Enforcement consequences run from fines to criminal prosecution. Late or missed returns carry fines of roughly MXN 1,400 to MXN 17,370 each under the Código Fiscal de la Federación. Incorrect or improperly formatted CFDIs draw MXN 400 to MXN 600 per invoice, which compounds quickly for a high-volume business. Failing to keep proper electronic accounting records brings penalties of MXN 5,000 to MXN 15,000 per omission.
The more severe tool is suspension or cancellation of your digital seal certificates, which effectively ends your ability to issue invoices and operate. The SAT can trigger that for repeated failures to file. Deliberate tax fraud can lead to criminal prosecution and imprisonment. The audit window is generally five years from the filing date, extended to ten years if the taxpayer never registered, didn’t keep required records, or never filed.
One trap catches people off guard: doing business with suppliers on the SAT’s published list of entities suspected of issuing fraudulent invoices. Even in good faith, deductions supported by those invoices can be disallowed entirely, leaving you to owe back taxes, interest, and penalties on money you genuinely spent. Checking suppliers against the list before paying is basic self-protection.