Mexican Taxes for Foreign Companies: ISR, VAT, CFDI e-Invoicing and Compliance

Mexican income tax (Impuesto Sobre la Renta, ISR) applies on three bases. Mexican tax residents pay on their worldwide income. Foreign residents with a permanent establishment (PE) in Mexico pay on the income attributable to that PE. Foreign residents without a PE pay on income from Mexican sources, usually through withholding by the Mexican payer.

A legal entity is a Mexican tax resident if it has its principal administration or place of effective management in Mexico. A Mexican subsidiary is therefore a Mexican resident taxed on its worldwide income. An entity that stops being resident must give notice to the SAT, Mexico's tax authority, within the 15 days before the change. Without that notice it keeps its Mexican residence.

A foreign company has a PE in Mexico if it has any place of business there from which it carries out business activities, in whole or in part. Examples include branches, offices, factories, workshops and installations. It can also have a PE without a fixed place, if a person other than an independent agent habitually concludes contracts in Mexico for it, or habitually plays the principal role leading to such contracts.

An agent is not considered independent if, for example, it works under the foreign company's detailed instructions or general control, assumes its risks, or acts exclusively or almost exclusively for related parties. A place used only for preparatory or auxiliary activities, such as storing or displaying goods or purchasing goods, does not by itself create a PE. Tax treaties can modify these rules for residents of treaty countries.

Entities that must file returns or issue electronic invoices must register in the Federal Taxpayers' Registry (RFC), report a tax domicile and keep it updated, and obtain an advanced electronic signature (e.firma). Legal entities must also report their shareholders and who exercises effective control. Returns, notices and applications are filed electronically with the e.firma.

Representatives through whom foreign residents carry out taxable activities in Mexico must file returns and notices on their behalf.

Legal entities pay ISR at a rate of 30% on their taxable result. The taxable result is accumulable income, minus authorized deductions and the employee profit sharing (PTU) paid in the year, minus any tax losses carried forward.

During the year, companies make monthly provisional payments by the 17th of the following month, using a profit coefficient based on the last fiscal year. The annual return is due within three months after the fiscal year ends, which for a calendar-year company means 31 March. The PTU base is also determined in this return.

To be deductible, expenses must be supported by an electronic invoice (CFDI). Payments above MXN 2,000 must be made by electronic transfer, nominative check, card or other authorized electronic means, not in cash. Transactions with related parties, including the foreign parent, must use arm's-length prices determined under the transfer pricing methods in the law.

When a Mexican company pays dividends to its shareholders, Mexican law generally requires a 10% withholding on dividends paid to foreign residents. An additional 10% applies to profits distributed by a PE. Tax treaties may reduce these rates. Other payments to foreign residents, such as interest, royalties and service fees, may be subject to Mexican withholding under Title V of the Income Tax Law. The rates depend on the type of income and on any applicable treaty.

Mexican entities must also report, by 15 February each year, the balance of loans granted or guaranteed by foreign residents.

VAT (Impuesto al Valor Agregado, IVA) applies to sales of goods, independent services, leasing of goods and imports of goods or services carried out in Mexico. The general rate is 16%. VAT must be charged expressly and separately to the customer. Certain activities listed in the law are taxed at 0%. The company pays the difference between the VAT it charges and the creditable VAT it has paid, by the 17th of the following month.

In some cases the buyer must withhold VAT instead of the seller. This applies, for example, to legal entities that receive independent services from individuals or ground freight services, and to anyone acquiring tangible goods from foreign residents without a PE.

The Special Tax on Production and Services (IEPS) is an excise tax that only affects certain goods and services. These include alcoholic beverages, tobacco, fuels, energy drinks, sweetened beverages, high-calorie foods, pesticides, gambling, and some telecommunications services. If you operate in these sectors, the rates and per-unit quotas in Article 2 of the IEPS Law apply.

Mexico requires electronic invoices for all sales, services, rentals, payments received and tax withholdings. These are called CFDI (Comprobante Fiscal Digital por Internet). To issue them, the company needs an active e.firma, an RFC with tax obligations and a digital seal certificate. Each CFDI must be sent for validation before it is issued. The SAT or an authorized certification provider (PAC) validates it, assigns a folio number and adds the SAT's digital seal. Only then is the invoice valid and delivered to the customer.

The CFDI must contain the requirements in Article 29-A of the Federal Tax Code, such as the issuer's RFC, name and tax regime, the folio and seals, and the place and date of issue, plus the technical requirements published by the SAT. The current technical standard is version 4.0 of the CFDI, set by SAT rules. Customers must ask for a CFDI, and without one they generally cannot deduct the expense.

Accounting records must be kept electronically and sent to the SAT every month through its website, under the SAT's general rules. Supporting documentation must be available at the tax domicile. Accounting and supporting documents must generally be kept for five years from the date the related return was filed or was due.

As a rule, tax withheld or collected is paid by the 17th of the following month. In practice, a Mexican subsidiary's typical monthly filings, all due by the 17th, are: the ISR provisional payment, the VAT return, payroll ISR withholdings, and other ISR and VAT withholdings. IMSS contributions are also due by the 17th. The annual corporate return is due by the end of the third month after year-end. Several information returns, such as foreign loans and related-party information, have their own deadlines in February and May.

The SAT issues an "opinion of compliance with tax obligations". This is a certificate showing whether the taxpayer is up to date with its tax obligations. Public bodies and anyone spending federal public funds may not contract with taxpayers that have unpaid tax debts, are not registered in the RFC, have unfiled returns, cannot be located at their tax domicile, appear on the SAT's lists of invoices for non-existent transactions, or report figures that do not match their CFDI.

Taxpayers also need this opinion to obtain subsidies and incentives, for certain tax procedures and authorizations, including foreign-trade ones, and often in private deals. Many Mexican customers and banks ask suppliers for a positive opinion before onboarding them. Listed companies must obtain one every month.

SDV handles tax registration, monthly and annual filings, electronic accounting and CFDI invoicing for foreign-owned companies. We can also review PE exposure and withholding on payments abroad together with your international tax advisers. This guide is general information, not tax advice. Treaty benefits and transfer pricing require a case-specific analysis.