Mexico’s Income Tax (ISR) is a key tax obligation for both residents and non-residents.
However, many foreigners are unsure about whether they are required to pay this tax, especially when they receive income from Mexican sources.
This article will clarify the main scenarios covered under Article 1 of the Mexican Income Tax Law (ISR) and explain when foreigners must pay taxes in Mexico.
1. Mexican Residents: Taxed on Worldwide Income
The first section of Article 1 states that individuals and legal entities (companies) residing in Mexico must pay ISR on all their income, regardless of where it comes from. This includes income earned both within Mexico and abroad. Mexico follows a worldwide income tax system, meaning that any income generated by a Mexican resident—whether earned domestically or internationally—is subject to ISR.
For instance, if a Mexican resident receives income from investments or business activities in the U.S., that income will also be taxable in Mexico, in addition to any taxes that may apply in the foreign country.
2. Non-Residents with a Permanent Establishment in Mexico
If you are a non-resident but have a permanent establishment (PE) in Mexico, you are required to pay ISR on the income attributable to that establishment. A permanent establishment typically refers to a physical presence in Mexico, such as an office, branch, or any fixed place of business that conducts significant activities in the country.
For example, if a foreign company has a branch office in Mexico, the profits generated by that branch are subject to Mexican ISR.
3. Non-Residents without a Permanent Establishment in Mexico
Even if you don’t have a permanent establishment in Mexico, as a non-resident, you may still be required to pay ISR on income from Mexican sources. This applies to foreigners who receive income from business transactions, property, or other assets located in Mexico.
For example, a foreigner who earns rental income from property in Mexico, or who sells assets located in the country, must pay ISR on that income. Even without a physical office or branch in Mexico, the source of wealth (i.e., the property or asset) is located in Mexico, thus making the income subject to tax.
Conclusion
Article 1 of the Mexican Income Tax Law clarifies that both residents and non-residents may be obligated to pay ISR, depending on the source of their income. Foreigners without a permanent establishment in Mexico are not exempt from this tax if their income is derived from Mexican sources. Therefore, understanding the tax implications of any income you earn from Mexico is crucial to ensure compliance with Mexican tax laws and to avoid any issues with the Mexican Tax Administration Service (SAT).
If you are a foreign individual or company receiving income from Mexico and have questions about your tax obligations, it is highly recommended that you seek advice from a tax professional familiar with both Mexican and international tax law.
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