In recent years, Mexico has introduced several tax reforms designed to enhance efficiency and reduce the administrative burden for small and medium-sized enterprises and individual entrepreneurs. These reforms have made Mexico an increasingly attractive destination for business and work. Among these changes, the Simplified Trust Regime (“Régimen Simplificado de Confianza or RESICO”) stands out as a notable framework aimed at simplifying tax compliance and supporting the growth of SMEs and individuals engaged in economic activities.
This article provides a general overview of the RESICO regime, highlighting its key features, benefits, and how it simplifies tax reporting and reduces administrative burdens.
RESICO
The RESICO regime simplifies the tax reporting process, as no bookkeeping is required. A monthly fixed payment is required, with a progressive tax rate ranging from 1.0% to 2.5%. If An individual were to achieve an annual revenue of approximately $1,000,000.00 or $2,000,000.00 Mexican pesos; the annual applicable tax rate would range between 1.5% and 2.0%. No deductions are permitted under this regime.
These payments could cover income tax, value-added tax (“VAT”), and other applicable taxes. However, if the services are rendered by an individual to a foreign resident and paid from a foreign account under the name of the foreign resident, then the provision of independent services may subject to 0% VAT.
An individual under this regime would be required to issue proper invoices for his services, which shall meet the requirements set forth in the tax provisions. While formal accounting records might not be mandatory, maintaining organized records of income, expenses, and invoices would still be important for documentation purposes.
If the annual revenue exceeds the maximum threshold ($3’500,000.00), An individual might need to transition to a different tax regime that better suits his new tax status. This transition could involve meeting new eligibility criteria and complying with different reporting and payment requirements.
If an individual provides services primarily to a foreign taxpayer for more than one year, there is a potential risk that the Mexican tax authorities might interpret this as establishing a permanent establishment (“PE”) for the foreign entity in Mexico. A PE is generally defined as a fixed place of business through which a foreign entity conducts its operations. Should the tax authorities determine that a PE exists, the foreign entity could be subject to Mexican income tax on the profits attributable to the activities carried out through this PE.
This implies that income generated from services performed in Mexico would be taxed locally, even though the foreign entity is not based in Mexico. Therefore, careful consideration and planning are required to avoid unintended tax liabilities and ensure compliance with Mexican tax regulations.
Furthermore, tax authorities may classify this arrangement as a dependent employment relationship rather than an independent service, potentially leading to the assessment of social security taxes to the foreign resident. Additionally, if that is the case an individual will not be able to pay taxes under such a regime.
The RESICO regime offers a simplified tax framework that benefits both SMEs and individual entrepreneurs in Mexico by reducing administrative burdens and streamlining tax compliance. Its straightforward approach to tax reporting and fixed payments makes it an attractive option for those who qualify.
However, it is crucial for individuals and foreign entities alike to be aware of potential implications, such as the risk of establishing a PE or misclassification of services, which could lead to additional tax liabilities. By understanding these aspects and planning accordingly, taxpayers can effectively leverage RESICO’s advantages while ensuring compliance with Mexican tax regulations.
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