[Please note that everyone’s tax situation is different, and the following article is for information purposes only. Please consult with a Mexican tax or accountant professional to help guide you with your particular situation.]
If you own property in Mexico and you rent that property out for extra income, new tax laws directing electronic platforms to collect taxes will have an impact on you and could collect as much as 39% in taxes.
Typical rentals will fall into two broad categories – those owned and rented by individuals who have a temporary or permanent residency in Mexico, and have the ability to get a Clave Única del Registro de Población (CURP) number, and a Registro Federal de Contribuyentes (RFC) number; and those who own property and are non-residents, and must rely on the electronic platforms to pay their taxes or on their property management company to do so.
“The 2020 Tax Reform includes changes both to Income Tax Law (ISR) and Value Added Tax Law (IVA) applicable both to trade activities done on digital platforms such as Amazon, eBay and Mercado Libre and to service activities on AirBnB, VRBO, etc.,“ explained Paula Blanco with Equilibrium Tax and Law. “These changes went into effect on June 1.”
Blanco added that if you are not a temporary or permanent resident of Mexico and do not have your CURP and RFC numbers, the electronic platforms will charge a total of 36% percent tax on rental transactions via the platforms – 16% IVA and 20% income tax. This does not include any local or lodging taxes imposed by local authorities.
“But this also means you will lose the ability to write expenses off, thus being taxed on the gross,” she said.
Blanco said that these withholdings are provisional payments, which means each taxpayer has to file monthly and yearly returns, where they will get a credit in the amount that was withheld.
There is also an option to consider those withholding as definite payments, thus eliminating the obligation to file other returns, as long as the gross income received through digital platforms is not higher than MXN $300,000 per tax year (January 1st to December 31).
But she cautioned that the tax system where taxpayers can opt for a blind deduction of 35% is for long-term rentals, this is not an option for short-term ones, whether they’re done through an online platform or not.
“That system is called Régimen de Arrendamiento,” She said. “Taxes are filed every month, plus a yearly income tax return and income is exempt from IVA for unfurnished residential buildings; in that case, the 35% blind deduction is great as landlords don’t usually have a lot of expenses associated with it, so they get to reduce their tax basis without the hassle of getting facturas; they can also claim their yearly property tax.”
L.C.P. Manuel Franco, director and CEO of Franco & Associates, an administration and accounting firm, said many accounting firms across Mexico were still reviewing the new tax laws and how they may affect their clients.
“I would suggest that residents and non-residents who have rental income that they get with a tax and accounting professional,” he explained. “That way they can make the best decision based on their individual situation.
Franco added that for those U.S. citizens that are filing taxes in Mexico and the United States, they would be able to deduct taxes paid in Mexico.
“Mexico has tax treaties with 32 nations,” he explained. “Taxes paid in Mexico can be taken as credits in taxpayer’s native country.”
The final tax rate will depend if taxpayer elects to take a 35% blind deduction or provide invoices for full deductions.
Tim Longpre, an owner with PVRPV Rentals, said he had heard from clients who were getting emails from the online platforms asking for the CURP and RFC numbers.
“The government of Mexico will be getting income information from digital platforms on how much revenue is being generated from properties rented on those platforms and is expecting their share of taxes on that revenue,” he said. “That’s why they are asking for that information.”
Longpre said his company was working with clients to help them understand and navigate the procedures.
“We can provide our accounting services which will help renters regulate your tax status on Mexico and report all your business activity,” he explained. “In a short summary the new law says that if you give your RFC to the platform then you’ll be responsible for paying your taxes. If you do not (because you do not have it or do not want to) then the platform will deduct the taxes and send it to SAT as payment for your rental taxes – withholding 20% for income tax and 100% of the IVA, 16%.”
All of the professionals we talked to cautioned to not use an online “RFC generator”.
“They must register with SAT,” Blanco said. “The platforms will cross check with SAT servers and return an error saying that the RFC number does not exist.”
“You just need to weigh the pros and cons of being able to file with your CURP and RFC and taking the eligible discounts and deductions or letting the platforms pay the full amount of taxes if you do not have or provide an RFC,” Blanco explained. “You and your accountant can discuss the cash flow effect of the reform and how it may affect your particular situation.”