MEXICO Law and Practice Contributed by: Roberto Cannizzo, Carlo Cannizzo, Stefano Amato and Mauricio Moreno-Rey, Cannizzo
8. Tax 8.1 VAT and Sales Tax
8.5 Tax Benefits Owners of real estate in Mexico are eligible for tax depreciation of fixed assets, mainly constructions, and can deduct certain expenses from their income tax liabilities. These include: • the proven cost of acquisition; • certain construction and improvements costs; and • notary fees and commissions. While there is no tax depreciation allowed for land, a portion of the sale price will be allocated to the land when the real estate is sold. These tax benefits serve to reduce the amount of income tax owed on the sale of the real estate. Further, based on the purchase price allocated to land, no VAT should be paid for the por - tion of the price applied to the land. **The authors would like to thank Paloma Iglesias for her contribution to this chapter.
If real estate is acquired through direct purchase, vari - ous taxes and rights must be paid, including VAT on the value of the construction (unless it is a lot or resi - dence), paid by the purchaser at a rate of 16%. As previously mentioned, certain jurisdictions mandate for the payment of a transfer tax – real estate acquisi - tion/property transfer tax ( impuesto sobre adquisición de inmuebles – ISAI) or ISABI – and such tax shall be calculated by applying a percentage to the value of the property. 8.2 Mitigation of Tax Liability The most common method used to defer transfer liability is through the use of a real estate trust. This arrangement is not considered a sale for tax purposes, in accordance with Article 14 of the Federal Tax Code, as long as the trustor retains the right to reverse the ownership of the real estate. If the reversion right is lost, through a subsequent sale, termination of the right or failure to meet the necessary tax requirements, the transferor will be responsible for paying the taxes owed. 8.3 Municipal Taxes There are no federal or local occupation taxes – only fees, licences and permits as required. 8.4 Income Tax Withholding for Foreign Investors The taxes to be paid are withheld by the notary pub - lic, who formalises the transaction if the seller is not a tax resident in Mexico. The amount of taxes owed is determined based on the Mexican income tax law and can be up to 35% of the net gains. Rental income from real estate is taxed in Mexico per the Income Tax Law and VAT Law. The rules regard - ing the taxation of rental income vary depending on the type of entity or individual receiving the income, as well as their residency status (Mexican or foreign). For example, flat fees of 25% or certain deductions may apply.
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