The fiscal implications of renting property in Mexico

It is important to know that in front of Mexican law, at the moment of acquiring property and the rights to use and enjoy it, if via fideicomiso or another title, (regulated by the Secretaria de Relaciones Exteriores, SRE) you will be considered Mexican in every respect concerning the fideicomiso. In case of any failures to comply with Mexican laws, you may lose your rights as the holder of a fideicomiso and the related property, to the Mexican Nation as beneficiary (so it is ruled under the Second Title of the Foreign Investment Law and Regulations). The SRE gives the permission to foreigners to be holders of a fideicomiso which allows foreigners to acquire property in any zone. This brings with it the obligation to comply with all laws concerning the property as the object of the fideicomiso.

Taking into consideration the above, it is important to consider that the foreigner, who rents the property of his fidericomiso, has to comply with the Mexican fiscal obligations. One of these obligations concerns the payment, or in some cases the withholding, of the ISR, which is the direct tax over the rent or profit no matter what it is called ( for example: rent, utility, profit, interest, product, participation, income, salary and so on…).At the moment this tax is 25% of the total profit. This should not discourage or alarm those foreigners who rent their properties held through a fideicomiso.

Various options and alternatives of commercial and fiscal strategies exist to stay on top of tax regulations. For example, one can found a Mexican company as vehicle for such tax payments. Needless to say, this alternative brings with it a considerable cost of hiring approved accountants and lawyers and other obligations such as quarterly and yearly fiscal reports. Another alternative could be to comply with fiscal obligations as the holder of the fideicomiso as physical person or foreigner. However in this case, it would be necessary to register the fideicomiso at the Mexican Tax Office, Secretaria de Hacienda y Credito Publico. The third and probably easiest alternative would be, to hire a company specialized in the administration of rentals, which would then take care of all fiscal obligations for the holder of the fideicomiso, who wants to rent his property. Of course the reliability and seriousness of this company is of upmost importance, as they will be in charge of the complete payment of all taxes and will be obliged to produce the necessary documents to prove the correct payment of such for the fideicomiso.

In addition to that, a treaty to avoid double taxation exists between Mexico and the United States of America, which in its article 8 establishes that the taxation of rental profits will be treated as if the foreigner was a Mexican. However, if this tax is not paid, this will be treated as non-fulfillment of fiscal regulations and is thus as a fiscal evasion in both countries.

Los Cabos Agent

Nick Fong