Mexico: Private Client Comparative Guide

1 Legislative framework

1.1 Which legislative provisions govern private client matters in your jurisdiction?

In Mexico, private client matters are regulated by different legal instruments, but all of them have their legal basis in the Political Constitution of the United Mexican States. Some private client laws are promulgated at the federal level, while others are promulgated at the state level. At the federal level, private client matters are mainly governed by the following regulations:

• the Federal Tax Code;
• the Income Tax Law;
• the Fiscal Miscellaneous Resolution; and
• the Civil Code, both federal and state-wide.

The Federal Tax Code, Income Tax Law and Fiscal Miscellaneous Resolution regulate tax matters; while the Civil Code regulate succession matters.

1.2 Do any special regimes apply to specific individuals (eg, foreign nationals; temporary residents)?

Those who reside in Mexico, either permanently or temporarily, are subject to income tax regulations. Foreign nationals are subject to income tax regulations if they have a permanent establishment in the country, which is understood as any place of business in which they carry out their business activities or provide services, whether partially or fully, regarding only the income which can be attributed to that establishment. In addition, they are subject to income tax regulations where their income originated in Mexico. For more information see question 2.1.

1.3 Which bilateral, multilateral and supranational instruments in effect in your jurisdiction are of relevance in the private client sphere?

To avoid double taxation and the prevention of fiscal evasion, Mexico has entered into bilateral income tax treaties with 61 countries (Argentina, Australia, Austria, Bahrain, Barbados, Belgium, Brazil, Canada, Chile, China, Colombia, Costa Rica, Denmark, Ecuador, Estonia, Finland, France, Germany, Greece, Hong Kong, Hungary, India, Indonesia, Iceland, Ireland, Israel, Italy, Jamaica, Japan, Kuwait, Latvia, Lithuania, Luxembourg, Malta, New Zealand, Norway, the Republic of Korea, Spain, the Netherlands, the United Kingdom, the Czech Republic, the Slovak Republic, Panama, Peru, the Philippines, Poland, Portugal, Qatar, Romania, Russia, Saudi Arabia, Singapore, the Slovak Republic, South Africa, Sweden, Switzerland, Turkey, Ukraine, the United States and Uruguay).

2 Taxation

2.1 On what basis are individuals subject to tax in your jurisdiction (eg, residence/domicile/nationality)? How is this determined?

In Mexico, individuals are subject to tax according to residence, under Article 9 of the Federal Tax Code.

Where natural persons have a home in another country, they will be considered residents in Mexico if their centre of vital interests is located in the national territory. This will be considered the case if, among other things:

• more than 50% of the natural person's total income in the year originated in Mexico; or
• the main centre of his or her professional activities is located in Mexico.

Citizens of Mexican nationality who are state officials or workers thereof will be subject to tax in Mexico even when their centre of vital interests is located abroad. Unless proven otherwise, it is presumed that natural persons of Mexican nationality are residents in the national territory.

2.2 When does the personal tax year start and end in your jurisdiction?

According to Article 11 of the Federal Tax Code, the fiscal year runs from 1 January to 31 December. If legal persons commence their activities after 1 January, the fiscal year will be irregular and will start on the date that activities begin and end on 31 December of the year in question.

2.3 With regard to income: (a) What taxes are levied and what are the applicable rates? (b) How is the taxable base determined? (c) What are the relevant tax return requirements? and (d) What exemptions, deductions and other forms of relief are available?

(a) What taxes are levied and what are the applicable rates?

In the case of natural persons, the income tax base is all income received that is subject to income tax, minus deductions and any other subtractive figures established by law. The rate varies from 1.9% to 35%, depending on earnings.

Article 113-E of the Income Tax Code establishes a new regime called the 'simplified trust regime', under which preferential rates of between 1% and 2.5% apply. In this case, however, the annual income must not exceed MXN 3.5 million.

(b) How is the taxable base determined?

The tax is paid by means of a declaration that is presented to the authorised offices within three months of the end of the fiscal year.

For natural persons, the income tax base is the income received that is subject to income tax, minus deductions and any other subtractive figures established by law. The rate varies from 1.9% to 35%, depending on earnings.

(c) What are the relevant tax return requirements?

Income tax and value added tax (VAT): The applicable provisions are Article 22 of the Federal Tax Code and Article 3 of the VAT Law.

Rule 2.3.2 of the Miscellaneous Tax Resolution for 2022 provides that individuals who file their annual tax return for the immediately preceding tax year in the corresponding electronic format and who opt for a balance in favour of income tax can request a refund from the tax authorities.

In addition to meeting the requirements set forth in the tax provisions, individuals who choose to avail of this benefit must submit the tax return for the immediately preceding tax year when requesting a return of the balance in favour, in an amount of between MXN 10,001 and MXN 150,000.

(d) What exemptions, deductions and other forms of relief are available?

Authorised deductions are set out in Article 147 of the Income Tax Code. These deductions should follow certain criteria, including being strictly necessary to conduct business.

2.4 With regard to capital gains: (a) What taxes are levied and what are the applicable rates? (b) How is the taxable base determined? (c) What are the relevant tax return requirements? and (d) What exemptions, deductions and other forms of relief are available?

(a) What taxes are levied and what are the applicable rates?

• VAT – 16%
• Income tax:
• • between 1.9% and 35% for individuals, depending on income; and
  • under the new trust regime, between 1% and 2.5%

(b) How is the taxable base determined?

Article 1 of the VAT Law provides that individuals and legal entities that carry out the following activities in the national territory must pay VAT under the law:

• dispose of assets;
• provide independent services;
• grant the temporary use or enjoyment of goods; or
• import goods or services.

The tax is applied at a rate of 16% on the value of such activities.

Income tax is payable at a rate of:

• 30% for legal entities;
• between 1.9% and 35% for individuals, depending on income; and
• under the new trust regime, between 1% and 2.5%

(c) What are the relevant tax return requirements?

Income tax and VAT: The applicable provisions are Article 22 of the Federal Tax Code and Article 3 of the VAT Law.

Rule 2.3.2 of the Miscellaneous Tax Resolution for 2022 provides that individuals who file their annual tax return for the immediately preceding tax year in the corresponding electronic format and who opt for a balance in favour of income tax can request a refund from the tax authorities.

In addition to meeting the requirements set forth in the tax provisions, individuals who choose to avail of this benefit must submit the tax return for the immediately preceding tax year when requesting a return of the balance in favour, in an amount of between MXN 10,001 and MXN 150,000.

(d) What exemptions, deductions and other forms of relief are available?

Authorised deductions are set out in Article 147 of the Income Tax Code. These deductions should follow certain criteria, including being strictly necessary to conduct business.

2.5 With regard to inheritances: (a) What taxes are levied and what are the applicable rates? (b) How is the taxable base determined? (c) What are the relevant tax return requirements? and (d) What exemptions, deductions and other forms of relief are available?

(a) What taxes are levied and what are the applicable rates?

In Mexico, there is no inheritance tax; but there are other taxes that are or could be levied on an estate. For example, property acquisition tax is applied at a rate of 3% in Nuevo Leon, according to Article 28bis of the Tax Law for the Municipalities of Nuevo Leon.

Before any inheritance, the property must also be up to date on payment of property tax, as set out in Articles 21bis2 and bis3 of the Tax Law for the Municipalities of Nuevo Leon.

(b) How is the taxable base determined?

Property acquisition tax rate is applied at a rate of 3% on the cadastral value of the property. Each state contemplates the tax base depending on the land or construction.

(c) What are the relevant tax return requirements?

None.

(d) What exemptions, deductions and other forms of relief are available?

None.

2.6 With regard to investment income: (a) What taxes are levied and what are the applicable rates? (b) How is the taxable base determined? (c) What are the relevant tax return requirements? and (d) What exemptions, deductions and other forms of relief are available?

(a) What taxes are levied and what are the applicable rates?

Generally, returns on investments must be included in the annual income and tax paid according to the income tax rules (see question 2.3).

What varies are specific elements such as withholding tax rates. For instance:

• with regard to interest, a withholding rate of 0.8% applies to the amount of the capital invested; and
• for dividends, a withholding rate of 10% applies to distributed profits.

Furthermore, as an exception to the above, a definitive tax of 10% must be paid on the profit from stock sales.

(b) How is the taxable base determined?

The general rule is that all returns on investments must be included in the annual income and tax paid according to the income tax rules.

Individuals pay tax at a rate of between 1% and 35%, depending on the level of income received in the fiscal year.

(c) What are the relevant tax return requirements?

See question 2.3(c).

(d) What exemptions, deductions and other forms of relief are available?

See question 2.3(d).

Furthermore, depending on whether Mexico has signed a double tax treaty with the relevant country, taxes paid on investments in foreign countries may be credited against income tax owned in Mexico, to mitigate the taxable base.

2.7 With regard to real estate: (a) What taxes are levied and what are the applicable rates? (b) How is the taxable base determined? (c) What are the relevant tax return requirements? and (d) What exemptions, deductions and other forms of relief are available?

(a) What taxes are levied and what are the applicable rates?

For a seller of real estate, the same rules on income tax apply: if the sale makes a profit, this should be included in the annual income and tax paid according to the relevant rules. However, a tax exemption or tax relief (depending on whether the seller is an individual or a corporation) is available if certain requirements are met. Individuals may benefit from an income tax exemption if:

• the profit does not exceed 700,000 investment units (approximately MXN 4 million);
• it can be proved that the property is the main residence of the seller; and
• the seller has not availed of this exemption in the last three years.

For a buyer of real estate, the tax levied consists of the real estate acquisition tax (ISAI). The rates of this tax differ from state to state and can range from 2% to 5% of the value of the property. The tax is levied on each purchase of real estate.

There is also an annual property tax, known as the 'predial'. This tax is paid annually to the municipality in which the real estate is located, at a rate which varies depending on the municipality and the value and size of the real estate.

(b) How is the taxable base determined?

The tax base for ISAI and the predial is determined by state or local authorities. Each jurisdiction calculates this differently, although most base this on the value of the property.

(c) What are the relevant tax return requirements?

See question 2.3(c).

(d) What exemptions, deductions and other forms of relief are available?

For the seller of the real estate, see question 2.3(d). Furthermore, it is possible to deduct any expenses invested on the real estate and thus mitigate the taxable base.

For the buyer of the real estate, a discount in the predial is available if it is paid within the first three months of the year.

2.8 With regard to any other direct taxes levied in your jurisdiction: (a) What taxes are levied and what are the applicable rates? (b) How is the taxable base determined? (c) What are the relevant tax return requirements? and (d) What exemptions, deductions and other forms of relief are available?

(a) What are they and what are the applicable rates?

• Payroll tax: A state tax levied for individual persons or corporations that generate income and pay their personnel in any form.
• Export rights: Paid by Mexican exporters for services provided by the state under public law with regard to customs operations.
• New car tax: A federal tax levied on the acquisition or import of new cars.

(b) How is the taxable base determined?

The tax base for payroll tax is determined by the federal or state authorities. Each jurisdiction may calculate this differently, although in general the taxable base is calculated on the value of the object of the tax.

Rates vary from 2.5% to 3% of the total payroll paid.

(c) What are the relevant tax return requirements?

See question 2.3(c).

(d) What exemptions, deductions and other forms of relief are available?

With regard to payroll tax, certain payments to personnel need not be included in the taxable base (eg, contributions for retirement and social security).

2.9 With regard to any indirect taxes levied in your jurisdiction: (a) What taxes are levied and what are the applicable rates? (b) How is the taxable base determined? (c) What are the relevant tax return requirements? and (d) What exemptions, deductions and other forms of relief are available?

(a) What are they and what are the applicable rates?

Depending on the economic activity, a variety of indirect taxes can be applied to goods and services, with different applicable rates.

The main indirect taxes are as follows:

• VAT is an indirect tax on consumption applied to those in the national territory that:
• • sell goods;
  • provide personal services;
  • grant the temporary use or enjoyment of goods; or
  • import goods or services.
• The special tax on production and services (IEPS) is levied on the production and sale or import of special products and services (eg, alcohol, beer, gasoline and tobacco).
• Import tax is payable for the import of goods into the national territory.

(b) How is the taxable base determined?

• VAT: The taxable base is calculated by applying the 16% rate (8% for estates on the US border) to the value of the taxable goods or services.
• IEPS: The taxable base is calculated by applying the relevant rate (which varies depending on the product or service) to the value of the price of the taxable goods or services.
• Import tax: The taxable base is calculated by applying to the customs value of the goods the rate of tax indicated in the Law on General Import and Export Taxes for each tariff item.

(c) What are the relevant tax return requirements?

Generally, taxpayers can file a tax return for various indirect taxes (including VAT and IEPS), as long as the relevant requirements are met.

Some specific requirements apply depending on the applicable tax, but the requirements are generally as follows:

• Have an active electronic tax mailbox active;
• File the request online;
• Have an active electronic signature;
• Have an active digital stamp;
• Not be included on the simulated operation lists (69-B CFF); and
• File all information and documentation that proves the right to the return

(d) What exemptions, deductions and other forms of relief are available?

Generally, indirect taxes are subject to a credit, whereby taxpayers can deduct the amount of indirect tax paid on goods or services from the amount of indirect tax charged for the sale of those goods or services. The result will be the indirect tax owed or subject to be requested on return.

3 Succession

3.1 What laws govern succession in your jurisdiction? Can succession be governed by the laws of another jurisdiction?

As a general rule, Mexican law governs the succession of a person who has his or her habitual residence in Mexico. However, in Mexico, the rules of succession are determined by state law.

Two main factors determine which state's succession or intestacy laws control the disposition of a decedent's estate:

• the person's last will; or
• the person's last domicile at the time of death.

These two factors will determine the disposition of intangible and tangible personal property, even if located in different states.

3.2 How is any conflict of laws resolved?

The succession or intestacy laws apply to all individuals:

• whose last place of residence was Mexico; or
• who have made their will in any Mexican state.

In case of any conflict of laws, the Mexican courts will apply the succession law determined under the regulation of a person's last will or last domicile at the time of death.

The courts may accept the doctrine of renvoi – under which a court adopts the rules of a foreign jurisdiction with respect to any conflict of laws that arises – only when:

• the law of succession is that of the deceased's habitual domicile at the time of the person's death; and
• the law of succession is that of the deceased's last will.

3.3 Do rules of forced heirship apply in your jurisdiction?

In every Mexican state, an individual is free to choose the beneficiaries of his or her estate by executing a will detailing his or her wishes. For all matters not detailed in a person's will, forced heirship rules can be applied, under which a certain portion of the estate cannot be freely disposed by a person other than to:

• children;
• a father, mother or grandparent with a disability;
• descendants or siblings; and
• a surviving spouse or partner of five years (in specific cases).

3.4 Do the rules of succession rules apply if the deceased is intestate?

Where someone dies intestate, the distribution of his or her estate will be subject to the intestacy laws of the state of his or her last permanent residence. State laws distinguish between different orders of beneficiaries in an intestate succession.

The following beneficiaries may be entitled to a share of the estate:

• a spouse or partner;
• children;
• grandchildren;
• parents;
• siblings;
• nieces and nephews;
• grandparents;
• aunts and uncles or cousins; and
• the state of the person's last residency.

3.5 Can the rules of succession be challenged? If so, how?

The rules of succession can be challenged before a court in Mexico, based on various grounds, such as:

• a failure to meet the formal legal requirements;
• assignments that are contrary to the forced succession rules of good faith or public order; or
• the legal incapacity of the testator.

4 Wills and probate

4.1 What laws govern wills in your jurisdiction? Can a will be governed by the laws of another jurisdiction?

Mexican state laws govern the wills of individuals whose residence is in a specific Mexican state. A foreign will is valid if it complies with the legal requirements of the country in which it was made.

4.2 How is any conflict of laws resolved?

In case of a conflict of laws, the Mexican courts will define the applicable law depending on the person's last domicile at the time of death.

4.3 Are foreign wills recognised in your jurisdiction? If so, what process is followed in this regard?

Mexican law recognises wills made in a foreign country. The competent authority will ensure that the foreign will meets all formal and legal requirements according to the foreign law.

4.4 Beyond issues of succession discussed in question 3, are there any other limitations to testamentary freedom?

In general terms, Mexican state laws give the testator complete freedom to choose the administration of the heirship; however, the testator cannot provide for anything that is illegal or against public order statutes.

4.5 What formal requirements must be observed when drafting a will?

Each Mexican state law has its own legal requirements in relation to the drafting of wills. Most contemplate the following general rules:

• A will must be in writing.
• It must be executed before a notary public, who will formally register the will in the State Department.
• If the will is executed before a notary public, it must be signed by two witnesses.
• The testator must be at least 16 or 18 years old, depending on the state law.
• The testator must have mental capacity according to law.
• The will must be signed by the testator; special rules apply if the testator does not know how to sign.

4.6 What best practices should be observed when drafting a will to ensure its validity?

To ensure a will's validity, it must be executed before a notary public, with specific rules established in each state law. The will must be signed by the testator, witnesses and the notary public.

4.7 Can a will be amended after the death of the testator?

In Mexico, under no circumstances can a will be amended after the death of the testator. After the death of the testator, the will can be challenged or revoked, but not amended.

4.8 How are wills challenged in your jurisdiction?

Each state in Mexico has its own legislation which governs the rules in civil court. Generally, the party that commences a civil matter in court to challenge a will must be:

• a spouse or domestic partner;
• a descendant; or
• a person who was wholly or partially dependent on the testator.

4.9 What intestacy rules apply in your jurisdiction? Can these rules be challenged?

Intestacy rules cannot be challenged. They are regulated by the law of the state of the person's last residence.

The following beneficiaries may be entitled to a share of the estate:

• a spouse or partner;
• children;
• grandchildren;
• parents;
• siblings;
• nieces and nephews;
• grandparents;
• aunts and uncles or cousins; and
• the state of the person's last residency.

5 Trusts

5.1 What laws govern trusts or equivalent instruments in your jurisdiction? Can trusts be governed by the laws of another jurisdiction?

Trusts are governed by:

• the Commercial Code;
• the General Law of Credit Instruments and Transactions; and
• the Foreign Investment Law and its bylaws.

Trusts in Mexico cannot be governed by the law of another jurisdiction, as they are regulated at the federal level.

5.2 How is any conflict of laws resolved?

In case of a conflict of laws, the Commercial Code states that companies constituted under foreign laws that undertake commercial activities in Mexican territory will follow Mexican law when it comes to matters of commerce. This means that both local and foreign trusts are subject to Mexican law.

5.3 What different types of structures are available and what are the advantages and disadvantages of each, from the private client perspective?

Trusts can be classified according to liability and purpose, which include:

• estate planning;
• investment;
• corporate planning;
• social prevention;
• tax planning;
• real estate administration; and
• payments.

The advantages and disadvantages of each type of trust structure will depend on the private client's needs and should be analysed on a case-by-case basis.

Some of the advantages may include:

• fiduciary duties and secret commissions;
• tax deductions; and
• distributions among beneficiaries.

5.4 Are foreign trusts recognised in your jurisdiction? If so, what process is followed in this regard?

Foreign trusts are recognised in Mexico if they meet all formal and legal requirements according to the foreign law. However, their operations will be governed by Mexican law.

5.5 How are trusts created and administered in your jurisdiction?

In Mexico, trusts are created by means of a contract with a fiduciary institution authorised by the Mexican government. If the trustor grants properties to the trustee, a notary public must intervene and make a formal registration of trust in the State Public Registry.

5.6 What are the legal duties of trustees in your jurisdiction?

In Mexico, the obligations of a trustee involves legal and fiduciary duties. A trustee's duties include the following:

• Act as a fiduciary (ie, in a way that benefits the beneficiaries of the trust);
• Preserve and safeguard the trust assets;
• Conduct due diligence and act in good faith;
• Keep tax records and relevant information regarding the trust; and
• Maintain confidentiality.

5.7 What tax regime applies to trusts in your jurisdiction? What implications does this have for settlors, trustees and beneficiaries?

In Mexico, trusts do not have their own legal personality; as a consequence, trusts are not subject to tax. Those who must pay taxes, such as income tax or value added tax, are the parties involved in the trust.

There are two main classifications of trusts for income tax purposes:

• business; and
• non-business.

In both cases, the trustor or beneficiaries will be the taxpayers. The fundamental difference lies in the obligations that the trustee institution must fulfil on behalf of the settlors or beneficiaries where the trust qualifies as a 'business'.

5.8 What reporting requirements apply to trusts in your jurisdiction?

Every year, trusts must report to the Tax Administration Service – the government agency responsible for the collection of taxes and the enforcement of tax law – the income taxes derived from the trust operations.

5.9 What best practices should be observed in relation to the creation and administration of trusts?

• Trusts must be created in a written contract, preferably executed before a notary public.
• A trust contemplates full tax rights and obligations, derived from its operations.
• The trustor transfers ownership of the estate to the trustee for the purpose of the contract.
• The constitution of the trust provides security to the assets and confidentiality regarding the trust property and parties.

6 Trends and predictions

6.1 How would you describe the current private client landscape and prevailing trends in your jurisdiction? Are any new developments anticipated in the next 12 months, including any proposed legislative reforms?

Since the administration of President López Obrador took office, several proposals to amend the legislation on succession and patrimony tax have been discussed informally. To date, no concrete proposal has been issued; however, as the current political debate is centred on a better distribution of wealth, and given that the ruling party currently has a majority vote, this remains a distinct possibility.

Likewise, following multiple reforms to Mexican tax law in 2020 and 2021, the authorities now have greater visibility of foreign structures and their controlling beneficiaries, which has had an impact on traditional working practices.

Although the current government has mainly focused its efforts on raising taxes from the large corporations, it is also true that several audits have arisen in relation to their shareholders and partners.

7 Tips and traps

7.1 What are your top tips for effective private client wealth management in your jurisdiction and what potential sticking points would you highlight?

It is important to have total clarity of the assets that comprise the client's portfolio and the potential tax effects that might ensue from their transfer, cession or donation.

In addition, it is important to identify the potential beneficiaries of those assets in case of succession, to identify the ideal structure for their protection given the nature of the assets.

Finally, certain exemptions and/or preferential rates may apply depending on the asset or the point at which the asset is transferred; this is where the adviser's work becomes particularly relevant.

Co-Authored by Oscar Dominguez Ortega, Olga Ofelia Pérez Valladares, Fernando Tomas Treviño Cangas and Ricardo Jesus Contreras Lozano.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.