Are you a business owner looking to expand to Mexico? Or perhaps you’re an entrepreneur with big dreams of having a business in North America and one in Mexico. Either way, if you’re interested in learning the ins and outs of starting a business in Mexico, including the laws and culture, then continue reading for everything you need to know about this exciting business adventure.
So why should you choose to start a business in Mexico? For starters, doing business in Mexico comes with many advantages. Skilled worker wages are lower, transportation costs are lower, and Mexico is closer to the US and Canada than countries like China or India. Additionally, as Mexico is part of the North American Free Trade Agreement (NAFTA), which includes Mexico, Canada, and the United States, tariffs between these countries are eliminated.
To start your business in Mexico, it’s recommended that you hire a Mexican law firm to help you navigate the process. They can provide proper guidance on zoning and building permits, Mexican taxes, environmental regulations, your immigration status, and Mexican labor laws.
Mexican labor laws are strict to protect its employees, so it’s vital to have a Mexican law firm to help you navigate these laws. All the conditions and expectations of the employees must be written in an employment contract, and there are numerous employment laws involving child labor, discrimination, harassment, maternity leave, profit sharing, overtime, annual salary negotiation, vacation time, and union regulations (if applicable).
When it comes to taxes in Mexico, the country is comprised of 32 states, each with different municipalities that apply different taxes. The main source of taxes is federal, while state and municipal taxes are not as dominant. The Tax Administration Service (SAT) governs the collection of federal taxes and supervises compliance. Mexican business owners may be subject to income tax, value-added tax, special tax on production and services, social security taxes, payroll tax, and real estate or land tax.
As an entrepreneur doing business in Mexico, it’s important to understand the Mexican business culture. The culture prides itself on building strong personal relationships, loyalty, a strong hierarchy, and status consciousness. The way you dress is also extremely important, as it’s imperative to be well-dressed in both social and business settings. Communication is key, and it’s recommended to check if a translator is necessary before a meeting.
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Are you an existing business owner looking to expand your business to Mexico?
You may be a budding entrepreneur with big dreams of having a business in North America and one in Mexico.
If you are interested in learning what is involved in starting a business in Mexico, including the laws and culture, then continue to be ready for everything you need to know about this exciting business adventure.
Why choose to start a business in Mexico?
Deciding to open a business in another country is a big decision. So why choose Mexico to expand?
Doing business in Mexico comes with many advantages.
Since wages are lower for skilled workers, transportation costs are lower than in many places in North America, and Mexico is closer to the US and Canada than countries like China or India, expanding into Mexico can be the right decision for you.
Mexico being part of the North American Free Trade Agreement (NAFTA), which includes Mexico, Canada and the United States, eliminates tariffs between these countries. There are agreements and legal processes related to the international rights of commercial investors.
Related: Tech trends that make entrepreneurs turn to Mexico
How to start your business in Mexico?
Now that you have decided that it is the right business decision to open a business in Mexico, you need to make sure that you take the appropriate steps.
Is recommend hiring a Mexican law firm to help you set up your business, as they can help you navigate any paperwork you may come across and provide proper guidance regarding:
- Zoning and building permits.
- Mexican taxes.
- environmental regulations.
- Your immigration status.
- Mexican labor laws.
Related: Becoming an Entrepreneurial Expat | International Business | Entrepreneur.com
What are the fundamentals of Mexican labor laws?
As Mexico has strict labor laws to help protect its employees, it is vital to have a Mexican law firm to help you navigate these laws.
All the conditions and expectations of the employees must be written in an employment contract between the worker and the employer. In Mexico, any disagreement between the two parties may result in the employer having to prove its case.
As in Canada and the US, there are also numerous employment laws that involve:
- Child labor.
- Discrimination.
- Harassment.
- Maternity licence.
- profit sharing.
- Over time.
- Annual salary negotiation.
- Vacation time.
- Union regulations (if applicable).
How is Mexican business taxation?
Since Mexico is made up of 32 states, and each state is made up of different municipalities, each level can apply different taxes.
The main source of taxes in Mexico is federal taxes, while state and municipal taxes are not as dominant.
The Tax Administration Service (SAT) is the governing body in charge of collecting federal taxes as well as supervising their compliance. Each state and municipality also has their own treasuries that help enforce their local Tax Law.
So what taxes might you be subject to as a business owner in Mexico?
Related: Tax Basics for Business Owners | Entrepreneur
Income tax
In Mexico, the income tax (ISR) is classified under a corporate tax rate of 30%, while the rates for individuals range between 1.92% and 35%.
value added tax
The Value Added Tax (VAT) has a standardized rate of 16% with a rate of 0% in certain activities.
Related: International payments and VAT: Facts | Entrepreneur
special tax
In Mexico, the Special Tax on Production and Services (IEPS) ranges from 3% to 160% or a compound tax.
Social Security
As an employer in Mexico, you are subject to social security taxes ranging from 25% to 30% of the employee’s salary.
Real estate or land tax
The Mexican states have implemented a Tax on the Acquisition of Real Estate. This means that the buyer of a house, land, building, apartment or any other is responsible for paying the tax.
While the tax rate varies from state to state, the average rate is 2%, with rates as high as 6.5% of the sales price in certain states.
Related: How To Leverage Real Estate Tax Deferral Strategies To Grow Your Business | Entrepreneur
payroll tax
The Mexican states have implemented the Payroll Tax on salaries and other expenses that come from an employment relationship.
The tax rate varies from state to state, but is generally between 2% and 3% of the wages paid.
Resident and non-resident status
How do you know if your business would fall under the resident or non-resident designation for tax purposes?
Please continue reading for a description of who is considered a resident and non-resident of Mexico.
mexican residents
Foreigners are natural or legal persons who normally pay taxes in another country due to their nationality, address, place of residence or business.
According to the Mexican Tax Law, there is a set of rules in which a foreigner is considered a resident for tax purposes.
For individuals, if you have a house in Mexico, you are considered a tax resident. If you do not have a home in Mexico, but your “place of business” is in Mexico or more than 50% of your income comes from Mexico, you are classified as a resident.
With regard to legal persons, any company incorporated in Mexico is considered a tax resident. Foreign entities are considered residents when their principal place of business or registered office is in Mexico.
Related: look inside the Amazon influencers retreat in Mexico | Entrepreneur
Non-taxpaying Mexican residents
In some cases, even non-residents may be subject to Mexican taxes.
For example, if a foreign natural or legal person has a permanent establishment in Mexico or receives income from any source located in Mexico, then they are subject to Mexican taxes.
Related: Mexico: a willing partner by your side
Mexican income tax
Depending on whether you are considered a resident or non-resident of Mexico, specific income tax rules may apply to some or all of your income.
All of your income may be subject to income tax if you are classified as a resident.
For non-residents with a permanent establishment in Mexico, income related to that permanent establishment may be subject to income tax.
Related: 4 effective strategies to reduce your income taxes | Entrepreneur
Individual Income Tax
Tax resident natural persons are subject to income tax at a rate of 1.92% to 35% of their annual income, including income from:
- Employment (salaries).
- Business and professional activities.
- real estate income.
- Sale of real estate.
- Interest and dividends.
- Lottery prizes.
business income tax
Companies that are residents or foreign entities that have a permanent establishment in Mexico pay income tax based on 30% of the profit they have obtained that year.
It is important to note that dividends are subject to withholding in Mexico and the tax rate for shareholders can be higher than 40%.
Income Tax Incentives
The Mexican Income Tax Laws provide some incentives, such as a 30% tax credit or the possibility of deferring the payment date.
If a business includes any of the following, it may qualify for a tax break:
- Hiring employees with special needs.
- Investment in national film production.
- Investment in theatrical production.
- Edition and publication of literary work.
- Visual arts.
- Research and technology development.
- High performance sports.
- Real estate developments.
- Installation of power equipment in connection with electric vehicles.
Related: 5 Legal Deductions for Entrepreneurs with the ‘Consumption’ Focus of the New Tax Law
mexican business culture
The Mexican business culture prides itself on building strong personal relationships.
Other predominant characteristics of Mexican business culture include loyalty, a strong hierarchy, and status consciousness.
The personal relationships that are built play an important role in Mexican business. Mexican business owners tend to spend a lot of time and effort building relationships with those with whom they do business.
Communication
Although English is widely spoken in Mexico, it is not a good idea to assume that all business partners you deal with will be fluent. It is recommended to check before a meeting to see if a translator is necessary.
Mexican culture places a high priority on communication, including body language. Mexican body language is often different than North American body language, as people tend to stand closer to each other and maintain eye contact more than in other cultures.
It’s important to accept this, as a lack of eye contact or being too far away can be a sign of a lack of confidence.
Related: What I learned from the Hispanic community about entrepreneurship | Entrepreneur
Dress code
Since Mexicans tend to be very conscious of their social status, business professionals are expected to look like one.
The way you dress is extremely important as it is imperative to be well dressed in both social and business settings.
Business meetings
As with many cultures, entertainment is a big part of the business world.
In Mexico, many business meetings take place over breakfast or lunch and can last up to two hours or more.
Related: Why Mexico needs to be on the radar of technology companies | Entrepreneur
Family
Family is fundamental in Mexican culture. Extended families tend to get together on most Sundays and on special occasions.
As a Mexican business owner, it is important to be aware of this and provide accommodation for your colleagues, employees and business contacts when necessary.
Take advantage of all that Mexico has to offer
By expanding your business to Mexico, not only can you gain a profitable business\ in a beautiful country, but you also have the opportunity to build lasting working and personal relationships with those with whom you do business.
Mexico has a family-first culture, known for its strong work ethic and friendly business approach. Expanding into Mexico could be the business opportunity you’ve been looking for.
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