Understanding Dividend Withholding Tax in Mexico for US Residents

Find out what taxes and withholdings US residents must pay to Mexican Tax Authorities when receiving dividends from Mexican companies.

Mexico is one of the most dynamic economies in Latin America. It attracts investors and executives from around the world, especially from the US. Therefore, it is vital to understand the local regulatory framework and the dividends that will be taxed by Mexican authorities when doing business in the country.

What are dividends in Mexico?

Taxes in Mexico are supervised by the National Tax Administration, or SAT (Servicio de Administración Tributaria – SAT). For tax purposes, dividends are defined by SAT as “profits distributed by legal entities operating in Mexico, in favor of their partners or shareholders.”. Note that in Mexico dividends have an effective tax rate rounding 42%.

According to the Mexican Income Tax Act, dividends are taxed with income tax, both for the distributing legal entity and for the receiving shareholder. To comply with this obligation, the distributing entity must withhold the value of the tax and file a return within 3 months after the end of the taxable year.

How are taxes calculated when dividends are distributed to US residents?

In Mexico, dividends are taxed with income tax for the distributing legal entity as follows:

1. The legal entity must approve the value to be distributed as dividends through a shareholders’ meeting.
2. As established by Article 10 of the income tax law, the approved value (A) is then multiplied by 1.4286 to account for the value of the tax that must be paid by the legal entity.
3. As established by Article 9 of the income tax law, the result of the last step (B) is then multiplied by the 30% corporate income tax rate. The result of this operation is the effective corporate income tax (C) to be paid.

The corresponding process for an individual or entity (Nonresident) is as follows:

1. According to the US-Mexico income tax convention, foreign taxpayers can be taxed up to 10% for dividends from the other country, which lowers to 5% if the taxpayer owns more than 10% of the voting shares of the distributing company.
2. Noting this, article 164 of the Income Tax Act states a 10% tax on dividends for foreign shareholders, which must be adapted to 5% if the condition stated above is complied with.

Example

1. A Mexican legal entity approves the distribution of dividends for the equivalent in local currency of USD$ 1.000.000.
2. The legal entity shall calculate the income tax for said dividends using the formula (USD 1.000.000*1.4286*30%) for a total tax of USD$428.580
3. The individual or entity resident in the USA who owns less than 10% of the voting shares will be charged a 10% tax on the dividends for the amount of USD 100.000
4. Both the corporate income tax and the withheld value must be included in the Mexican entity income tax return for the corresponding taxable period.

Calculate dividend withholding tax in Mexico with the help of an expert

Understanding dividend withholding tax in Mexico can be challenging without the right guidance and support. At Biz Latin Hub, our team of multilingual experts is equipped to deliver excellence, helping you and your organization understand the tax landscape in Mexico so you can make the most of your investments.

Biz Latin Hub has offices in key Latin American jurisdictions. With our full suite of bilingual market entry and back-office services, we are your single point of contact to successfully operate in the region. Contact us now to receive more information about our accounting and taxation services.

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