Income Tax (ISR) is one of the most important taxes in Mexico, both for individuals and corporations. But who is required to pay it and in which cases does it apply? In this article we will explain the main scenarios covered by Article 1 of the ISR Law.
1. Residents in Mexico: All Income is Taxable
The first paragraph of this article establishes that Individuals and legal entities residing in Mexico must pay ISR on all their income, regardless of the country where the wealth originates. This means that both income obtained within the country and those generated abroad are subject to this tax. In this sense, the principle of world income, which implies that any profit obtained by a Mexican resident, whether in Mexico or abroad, is subject to the payment of ISR.
For example, if a Mexican entrepreneur receives income from an investment in the United States, that income will also be taxable in Mexico, in addition to any taxes that may apply in the country of origin.
2. Residents Abroad with Permanent Establishment in Mexico
For those who are not residents of Mexico but have a permanent establishment in the country, they are also required to pay ISR. However, this obligation only extends to income attributable to that permanent establishment.
A permanent establishment Generally, it refers to an office, branch or any type of permanent physical presence that a foreign company or person maintains in Mexico. If a foreign company has a branch in the country, the income that said branch generates in Mexico must be subject to ISR.
3. Residents Abroad without Permanent Establishment in Mexico
In the third case, the law addresses the situation of the Residents abroad without a permanent establishment in Mexico, but who obtain income from sources of wealth located in the national territory. In this case, they are also subject to paying income tax, even if they do not have a continuous physical presence in the country.
For example, if a foreign investor earns income from a rented property in Mexico or from the sale of an asset in the country, he or she will have to pay ISR on that income, even if he or she does not have an office or headquarters in Mexico.
Conclusion
Article 1 of the Income Tax Law makes it clear that both individuals and corporations, whether resident in Mexico or abroad, have the obligation to pay Income Tax based on their income and the location of the source of wealth.
For residents of Mexico, all global income is subject to tax. In the case of foreigners, the obligation depends on whether they have a permanent establishment in Mexico or whether they generate income in national territory.
Understanding how and when the ISR is applied is key to avoiding problems with the Tax Administration Service (SAT) and ensuring correct compliance with tax obligations.
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