Income Tax due by residents of foreign
countries who lease real estate in Mexico
By Robles, Lazo y Gallardo Law Firm • August 2010
Franz Kafka’s novel, “The Trial”, does not monopolize the settings where the State – understood as a government entity, is able to investigate profoundly and suddenly determine the intimate matters of people’s lives, even of those which are not native of the State that appears as authority.
Mexican fiscal laws, and specifically the Income Tax Law (Ley del Impuesto Sobre la Renta), states that “the residents in foreign countries who obtain income in cash, in goods, services or credits, coming from businesses located in the national territory, when they have not a permanent domicile or when, if having it, the income cannot be imputed to it, shall be bound to pay the income tax thereon.”
We talk about the leasing of real estate, which generates “income in goods”, and the precise example in the Mexican scenario regarding the said topic is the following:
The resident in a foreign country owns real estate in Mexico. The resident in a foreign country leases such real estate. Sadly for him, the resident in a foreign country is not aware of the obligations he must fulfill in matters of Income Tax (“ISR”, acronym in Spanish)) and consequently does not pay such taxes, as he is bound to do.
One day, and unfortunately for the resident in a foreign country, his lessee receives an unexpected visit from an auditor of the “Secretaria de Hacienda y Crédito Público– SHCP”, which would be the equivalent to the Department of Treasury. During such visit, completely ordinary, regular and in accordance to Mexican Law, the auditor questions the lessee about the house he lives in.
The lessee shall have to answer and inform the authorities who the owner of the house is. The resident in a foreign country is exposed, among other things and in the worst of scenarios, to a calculation performed by the fiscal authorities of the tax amounts that had to be paid, plus fines, extra charges and updating fees (in a classic example of the figure of “presumptive determination”, considered in Mexican fiscal laws).
The resident in a foreign country, with records, timely in his tax obligations, and with fiscal residence in his country of origin, is not excused of the payment of income tax when he grants the temporary use or possession of real estate located in Mexico.
Such tax, according to article 186 of the Income Tax Law, “shall be determined by applying a 25% rate on the income obtained, without any deduction, and with the obligation to retain such tax in charge of those who shall make the payments” – with the under standing that, in most of the cases of the explained example, will be the lessee(s). If the person who makes the payments is a resident in a foreign country, the tax shall be reported to the fiscal authorities within the following fifteen days after obtaining the income.
Regarding the establishment in Article 186 of the impossibility to deduct the expenses related with the maintenance and other concepts linked to the property, it is important to mention that the tax treaties entered by Mexico with other countries (i.e.: the U.S.A.), allow for an estimation of the income tax considering a net base. This means that the resident in a foreign country shall have the opportunity to deduct some expenses related to the maintenance of the property; in the example of the leasing: maintenance, repairs, painting and as many expenses as can be reasonably included.
The issuance of receipts by the resident in a foreign country who owns the real estate, including the proper indications and requirements stated by the tax regulations, must also be considered as an obligation in charge of the landlord.
Regarding the Value Added Tax (IVA), a topic that is not primordial at this time, it is important to mention that the obligation to retain is also in charge of the lessee.
Finally, we may add that the real estate designated to habitation-use does not pay Value Added Tax. The repetition of Kafka’s visions is feasible. However, and differing a bit from the novel, the punctual and opportune counsel in matters – apparently as simple as the one explained, can, at the end of the day, make for a happy ending to the tax-payer’s story Email to a friend
Robles, Lazo y Gallardo - Law Firm
E-mail: jgallardo@rlg.com.mx
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• Robles, Lazo y Gallardo, S.C. is a Law Firm of specialists in various areas of Law, including Corporate Law, Real Estate, Immigration, Foreign Investment, among others. The Firm is integrated with a group of highly qualified attorneys and has offices in Guadalajara (Privada del Niño No. 676, Fraccionamiento Camino Real, telephone number 33-3121-3010 33-3121-3010 ) and Puerto Vallarta (Carretera a Mismaloya No. 479 interior 107, Edificio Scala. Telephone number 322-223-3218 322-223-3218 ).E-mail: jgallardo@rlg.com.mx
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