Credit for Income Tax Paid Abroad by Mexican Entities

Mexican residents, whether individuals or legal entities, are required to include foreign-sourced income in their taxable base in Mexico. Without following the proper legal procedures, this can lead to double taxation.

According to Article 1 of Mexico’s Income Tax Law, residents are subject to tax on their worldwide income, regardless of where it is generated. To mitigate the risk of double taxation, Mexican taxpayers earning income abroad can apply a tax credit for the foreign income taxes paid.

There are two types of credits available:

Direct Credit: which applies to tax directly paid abroad by the Mexican resident, often through withholding; and

Indirect Credit: which applies to the income tax paid by a foreign entity in which the Mexican resident holds equity. The law permits this credit up to the second corporate level, provided certain conditions are met and the limitations set by Article 5 of the Income Tax Law are respected.

The Mexican tax authority frequently audits the application of these credits, and any incorrect use of the rules can lead to the rejection of the credit or determinations of excessive claims.

To ensure compliance and reduce the risk of credit rejection, it is crucial for taxpayers to properly apply the procedures, meet the legal requirements, and adhere to the credit limits outlined by law.

If you’re claiming tax credits in Mexico for income tax paid abroad, a thorough review could avoid unnecessary risk and safeguard your tax position. Contact our experts advisors for a free consultation today.