L.C. Y L.D. Miguel Ángel García Piña
International Tax Associate en QCG Transfer Pricing Practice S.C.
Taxpayers residing in Mexico who, in addition to their domestic income, receive income from abroad must add such foreign income to their taxable income. This may result in double taxation if the procedure established by law is not correctly followed.
This is because the Income Tax Law states in its Article 1 that individuals and legal entities (residents in Mexico) are required to pay tax on all their income, regardless of the location of the source of wealth from which it originates.
To eliminate this double taxation, taxpayers residing in Mexico who earn income from abroad have the possibility of crediting against the income tax payable the tax that has already been paid abroad.
There are two types of tax credit: direct and indirect.
- The direct credit applies to the tax paid by the Mexican resident, whether an individual or a legal entity, usually through withholding.
- The indirect credit applies to the tax paid by the foreign company in which the Mexican resident has a shareholding. In this case, the Income Tax Law allows the credit up to a second corporate level, provided certain requirements are met and within the limits established in Article 5 of the Law.
The Tax Administration Service (SAT) frequently conducts reviews or audits to verify the crediting of income tax paid abroad. If the rules have not been correctly applied, the tax credit is denied, leading to excessive tax liabilities.
For this reason, it is essential to ensure that taxpayers who claim a credit for income tax paid abroad meet the required conditions, correctly apply the procedures, and comply with the credit limits established by law. To avoid unnecessary risks, we recommend consulting with our expert advisors for a preventive review of the credit for income tax paid abroad.
