Israel – Mexico Tax Treaty

Business activity in Mexico

Mexico’s economy has grown at an average rate of 2.1% (2020) in the past decade due in part to being the largest exporter in Latin America. With the 15th largest economy in the world, they benefit from being a significant trading partner with countries that are major consumers, as Mexico specializes in production. Mexico produces cars, motor vehicle parts, computers, delivery trucks, and crude petroleum. Major trading partners include the United States, Canada, China, Taiwan, and Germany.

Given Mexico’s economic strengths and diverse industrial output, the country has several promising investment opportunities. The manufacturing sector, particularly in the automotive industry, offers growth potential, supported by skilled labor and proximity to major consumer markets. The renewable energy sector also presents lucrative prospects, leveraging Mexico’s abundant natural resources such as solar and wind energy. Moreover, investments in technology and electronics can tap into the country’s role as a significant producer of computers and electronic devices, catering to domestic and international demand. Finally, Mexican real estate is an interesting investment option; the need for residential and commercial properties keeps rising with a growing middle-class population.

Bilateral agreements between Mexico and Israel

Convention on the Prevention of Double Taxation between Israel –Mexico

The agreement between the Governments of Israel and Mexico regarding the avoidance of double taxation was signed in 1999 and entered into force in 2000.

To read the agreement in English click here.

Applicability of the MLI

Mexico and Israel have signed the MLI, which means that there is an automatic exchange of information between the two countries. Mexico and Israel signed the MLI in 2017. Israel ratified it in 2019, and Mexico in 2023. This means that the treaty between Israel and Mexico changed automatically according to the content of the MLI treaty, subject to the reservations set by both countries.

Residency for tax purposes in Mexico

Residence of an individual

In accordance with the Mexican Federal Tax Code, an individual is regarded as a resident for tax purposes upon establishing a home in Mexico. However, if they possess a home in another country, their tax residency lies in the country where their center of vital interests is located. Under Mexican domestic tax law, a person’s center of vital interests is deemed to be in Mexico if either (i) more than 50% of their income comes from Mexican sources within a calendar year or (ii) Mexico serves as the primary place for their professional activities.

Taxpayers are obliged to submit a notice of suspension of activities to terminate tax residency in Mexico. This notice must be filed within 15 days before the intended change of tax residency. Nevertheless, failure to provide such information does not result in the loss of one’s status as a Mexican resident.

A noteworthy exception applies to Mexican citizens who move to countries considered tax havens by Mexico. In this scenario, they will continue to be considered tax residents of Mexico for the year in which the change of tax residency suspension notice is filed, as well as for the following five years. However, this duration can be curtailed if Mexico has an effective information exchange agreement or a tax treaty with a provision for information exchange or if an international treaty enables mutual administrative assistance in the notification and collection of contributions.

Residency of a company

A corporation under the Mexican Federal Tax Code is deemed a resident of Mexico if the principal centre of administration or the effective place of management is located in Mexico.

According to Mexican Income Tax Law, for a business to be considered a permanent establishment if there is a place in Mexico where business activities or services are carried out or rendered. These activities or services can be conducted by non-residents, such as agencies, offices, mining exploration sites, or any other place of exploration, extraction, or exploitation of natural resources, regardless of length of time involved.

Under the Mexican Federal Tax Code or any tax treaty, a company looking to cease being a Mexican resident must liquidate for tax purposes. In this scenario, a notification is required at least 15 days before the change, and the CIT return must be filed with the Mexican tax authorities within 15 working days following the date on which the change of tax residency takes place.

The tax system in Mexico

The Mexico Tax Authority is called Servicio de Administración Tributariaz, SAT

Income taxation: For Residents the tax ranges from 1.92% to 35%, Non-residents are taxed at a flat rate of 25%.

Taxation of companies and branches: 30%

VAT: 16%

Capital gains tax: 28%

Withholding Tax

Inheritance tax and estate tax in Mexico

Under the Mexican inheritance tax, inheritance, gifts, or estates are all treated as income and thus are under the umbrella of the Mexican personal income tax.

There are several exceptions to this:

• Income received by a Mexican Tax resident through inheritance is exempt from income. This means that when a Mexican tax resident inherits assets or money (which are typically considered as ‘income’ for tax purposes), this specific type of income (i.e., the inherited assets or money) is not subject to personal income tax.
• Income received as a result of a gift from a spouse, lineal ancestors, or lineal descendants is also exempt from Mexican income tax.

Relocation

Mexico presents an enticing prospect for businesses with its rapidly growing consumer market, strategic location for easy access to North and South American markets, and a skilled yet cost-effective workforce. Leveraging Mexico’s network of free trade agreements and government incentives, companies can expand their reach, maintain profitability, and gain a competitive edge in international trade. Additionally, the country’s progressive economic reforms and thriving entrepreneurial ecosystem foster innovation, making it an attractive destination for startups and technology-driven enterprises seeking growth and success in a dynamic market.

Real estate taxation in Mexico

The real estate tax in Mexico depends on the state the property is located in. There are also different taxes for different stages of property. Acquisition Tax is from 2% to 4.5% depending on size, the state the property is in, and the value of the property at the time of purchase.

The Annual Property Tax, also known as the predial, is the annual tax that is due in January. This tax is also dependent on the size and location of your property. The annual property tax can vary from 6% to 10%.

The Impuesto Sobre La Renta, Rental Income Tax, this tax is paid monthly to SAT. If you are collecting any form of rent, it counts as a form of income that is taxable.

Transfer of funds from Israel to Mexico

According to section 170(a) of the Israeli income tax ordinance, any transfer of payment to a non-Israeli resident is subject to 25% of withholding tax. The tax authority can allow, under certain circumstances, to reduces or dismiss the withholding tax. Our firm handles withholding tax matters with the Israeli Tax Authority.

Due to the fact that both countries have a tax treaty with each other, one can submit a declaration form (2513/2 form – Statement regarding a payment to a foreign resident that is exempt from withholding tax), and under certain circumstances, there is a possibility to transfer the payment without the withholding tax and the approval of the Tax Authority.

In providing advice regarding the transfer of money abroad, in addition to the issue of withholding tax, our office handles the requirements of the foreign banks, such as an accountant’s approval regarding the payment of taxes and examines additional actions required in light of the uniform standard of CRS between the countries – automatic exchange of information between countries which is carried out first through the banks and then between the tax authorities of each two countries.

The banks raise many difficulties and charge high fees for converting shekels into other currencies, so it is important to consult before transferring the funds – Contact us.

For more information on money transfers abroad, click here.

Types of business entities in Mexico

1. Limited Liability Company – “Sociedad de Responsabilidad Limitada” Requires at least two partners, and company shares are not freely transferable or traded publicly.
2. Corporation or Stock Company – similar to an LLC; however, stocks can be freely transferred.
3. Limited partnership – A partnership with an LLC’s advantages. There are two types of partners, active partners, which have unlimited liability, and Silent Partners, which are only liable for their capital contribution.
4. Mexican Branch – Foreign companies open branches in Mexico and keep the original liabilities and characteristics. It must be approved by the National Commission of Foreign Investments and the Ministry of Foreign Relations. A Mexican Branch must also register with the Public Registry of Commerce.

Incentive laws in Mexico

Mexico offers incentives related to property tax. The Mexican government incentivizes paying property tax early and on time. Part of this incentivizing is offing 25% of your property tax if paid in December before it is due in January. Those who pay in January still see a discount of 20% on their property tax.

Mexico Double Tax Treaties