Mexico’s withholding tax on payments to non-residents runs from 4.9% on some interest up to 40% on payments routed to related parties in low-tax jurisdictions, with the Mexican payer legally responsible for deducting the tax before the money leaves the country and remitting it to the Servicio de Administración Tributaria (SAT). The rate that actually applies to you depends on what kind of income you are receiving, where you live, and whether you have the paperwork to claim a treaty rate.
How the Withholding Happens
When a Mexican resident pays a non-resident for services, royalties, rent, interest, dividends, or certain other categories of Mexican-source income, the payer deducts the tax from the gross payment and sends only the net amount abroad. The withheld tax goes directly to the SAT.1Secretaría de Hacienda y Crédito Público Servicio de Administración Tributaria. How to Pay Taxes You, the recipient, never see the gross figure.
For most non-residents, this withholding is a final tax. Once the payer remits the money to the SAT, your Mexican tax obligation on that income stream is done. You do not file a Mexican return for it, and there is no reconciliation at year-end. That simplicity is the point of the withholding system, but it also means the rate the payer applies is the rate you actually pay. Getting it right the first time matters.
“Mexican-source” is defined broadly. It covers income from assets located in Mexico, services performed in the country, and payments by Mexican entities for rights used in Mexican territory.
Statutory Rates by Payment Type
Interest
Interest carries the widest range of rates in the system. The rate turns on who receives the payment, why the loan exists, and whether the recipient sits in a jurisdiction Mexico treats as preferential.
- 4.9% on interest paid to foreign banks or financial institutions resident in a treaty country, when specific conditions are met.
- 10% on interest from certain financial instruments that does not qualify for the 4.9% rate.
- 21% on interest paid by Mexican financial institutions to non-residents on other obligations, and on interest paid to foreign suppliers financing machinery, equipment, inventory, or working capital, where the lender is properly registered.
- 35% as the default for interest that does not fit a lower category.
- 40% on interest paid to related parties located in preferential tax regimes, applied to the gross amount with no deductions.
The 21% versus 35% line is the one payers most often get wrong. If the loan finances a specific equipment purchase and the foreign lender is registered, the lower rate is available. Generic intercompany lending that does not fit a defined category defaults to 35%.
Royalties
Mexico defines royalties broadly. The category picks up traditional intellectual property payments and also technical assistance, transfers of know-how, and equipment leases.
- 35% on payments for the use of patents, trademarks, brand names, invention certificates, and advertising rights.
- 25% on payments for technical assistance, the use of plans, models, formulas, or procedures, the lease of scientific, commercial, or industrial equipment, and payments for scientific, commercial, or industrial experience (know-how).
- 40% when royalties go to a related party in a preferential tax regime.
Equipment leases are a common source of confusion because they are taxed as royalties under Mexican law, not as rental income. Whether a payment is characterized as a royalty or as a service fee also affects treaty treatment, so the label on the invoice matters.
Dividends
Dividends paid by a Mexican corporation to a non-resident shareholder are subject to a flat 10% withholding on the gross amount. This rate has been in effect since 2014 and applies to distributions from profits generated after that year.
Services and Rent
Independent professional services performed in Mexico by a non-resident are withheld at 25% on gross. Rental payments for Mexican real property also carry a 25% gross withholding rate.
Both service providers and property owners can elect a different regime: 35% on net profit instead of 25% on gross receipts. Under the net basis, you deduct ordinary expenses tied to the income, such as property taxes, maintenance, and depreciation for rentals, or travel and materials for service work. The election requires appointing a legal representative resident in Mexico and formally notifying the Mexican payer, who then stops withholding while you file directly. When deductible expenses are high relative to gross receipts, the net election produces a lower bill; when expenses are low, the 25% gross rate is cheaper.
Capital Gains on Real Estate and Shares
Non-residents selling Mexican real property face withholding tax on the sale, even when they have no other Mexican tax connection. The default is 25% on the gross sale price with no deductions. A non-resident who appoints a legal representative in Mexico and completes the sale through a notary public can instead pay 35% on the net gain after subtracting the inflation-adjusted acquisition cost, construction improvements, notary fees, and sales commissions.2Secretaría de Hacienda y Crédito Público Servicio de Administración Tributaria. Sale of Real Estate Income For properties held long enough to accumulate meaningful appreciation adjustments, the net basis calculation almost always produces a lower tax.
Share sales split by venue. Gains on shares listed on the Mexican stock exchange are taxed at 10%. Gains on unlisted shares follow the real estate structure: 25% on gross proceeds or 35% on the net gain, at the seller’s election.
US-Mexico Treaty Rates
Mexico maintains tax treaties with dozens of countries, and the US-Mexico Income Tax Convention is one of the most heavily used. Where it applies, it caps withholding below the domestic statutory rates. It never applies automatically; the reduction only takes effect if you supply the right documentation before the payer remits the tax.
Interest Under the Treaty
The treaty creates a tiered structure with a residual rate well below Mexico’s 35% domestic default.3Internal Revenue Service. United States – Mexico Income Tax Convention
- 4.9% on interest from loans granted by banks (including investment and savings banks) and insurance companies, and on interest from bonds or securities regularly traded on a recognized securities market.
- 10% on interest paid by banks to a beneficial owner that is not a bank or insurance company, and on interest paid by a buyer of machinery and equipment to the seller in connection with a credit sale.
- 15% on all other interest.
The 15% residual is the ceiling most US lenders extending general-purpose loans to Mexican borrowers will face. It is a significant reduction from the 35% domestic default, but still a real cost that should be priced into cross-border financing.
Royalties Under the Treaty
The treaty caps withholding on royalties paid to a US resident at 10% on the gross royalty. A single rate applies across all royalty categories, whether the payment is for patents, trademarks, technical assistance, or equipment leases. Because the domestic rates run 25% to 35%, the treaty saving on royalties is substantial.
Dividends Under the Treaty
The treaty caps dividend withholding based on the US recipient’s ownership stake:
- 5% when the beneficial owner is a company holding at least 10% of the voting stock of the Mexican payer.
- 10% in all other cases.
Since Mexico’s domestic dividend rate is already 10%, the treaty only helps corporate shareholders that clear the 10% ownership threshold. Individual US investors receiving dividends from Mexican companies see no reduction.
How to Claim the Treaty Rate
To get the reduced rate, you have to give the Mexican payer a valid certificate of tax residency issued by your home country’s tax authority. For US residents, that means IRS Form 6166, which certifies you as a US resident for treaty purposes. Deliver it before the payer calculates the withholding, not after.
The treaty also carries a Limitation on Benefits clause meant to block treaty shopping. To qualify, the beneficial owner must be a genuine resident of the treaty partner engaged in real economic activity, not a conduit set up to capture the reduced rate. If the Mexican payer has reason to think the recipient does not satisfy these conditions, the payer must apply the full domestic statutory rate.
Mexico is a party to the Hague Apostille Convention, so US documents generally need an apostille rather than full consular legalization to be recognized in Mexico. The residency certificate should be current for the tax year at issue, and some Mexican payers will ask for a certified Spanish translation as well.
Getting Credit for the Tax at Home
US taxpayers who have had Mexican tax withheld can offset the amount against their US tax liability through the foreign tax credit. Individuals file IRS Form 1116; corporations file IRS Form 1118.4Internal Revenue Service. Instructions for Form 1116 (2025) The credit is what stops the same income from being fully taxed twice.
The document that makes the credit possible is the CFDI de Retenciones e Información de Pagos, a digital tax receipt the Mexican payer must issue for every payment subject to withholding.5SAT: Trámites y Servicios. Factura de Retenciones e Informacion de Pagos (Anexo 20) The CFDI shows the gross amount paid and the exact tax withheld. Ask for it promptly after each payment, and check that the amounts line up with the agreed rate. Correcting errors months later, once the payer has filed annual returns with the SAT, is far harder than catching them in real time.
The IRS does not require you to attach proof of foreign tax paid to your return, but you have to be able to produce it on request.6Internal Revenue Service. Instructions for Form 1118 (Rev. December 2025) The CFDI is your primary substantiation. If the payment was in pesos, convert the withheld amount to US dollars and keep a note explaining how you calculated the rate. Store the CFDI, the bank record of the net payment received, and the exchange rate documentation together.
The credit is limited to the US tax attributable to the foreign-source income. If Mexico withheld more than the US would impose on the same income, the excess can generally be carried back one year or forward ten, but it cannot reduce US tax on domestic income.
When the Withholding Rules Do Not Apply
The framework above assumes you are a non-resident without a permanent establishment in Mexico. If your activities in the country cross the permanent establishment threshold, the withholding rules give way and you are taxed like a Mexican resident on the income attributable to that establishment, filing returns and paying the standard 30% corporate income tax rate.
A non-resident providing services in Mexico generally triggers a permanent establishment when their activities last more than 183 days, consecutive or not, within any 12-month period. Below that threshold, the withholding rates apply. Above it, you are into full Mexican tax compliance, which is a different problem from the one this article addresses.
A separate rule set that often catches foreign businesses is the 16% VAT on cross-border digital services. Since June 2020, foreign companies without a permanent establishment that deliver digital services to Mexican consumers must register with the SAT, collect VAT, and remit it monthly. For 2026, Mexico has expanded these obligations to include additional withholding requirements for digital platform intermediaries and mandatory electronic invoicing of the withholding. This VAT is distinct from the income tax withholding covered here and can apply even when no income tax withholding is in play.
What Happens If the Payer Gets It Wrong
The penalties for failing to withhold land on the Mexican payer, not on you. A payer who skips or miscalculates the withholding faces interest on the unpaid tax that accrues until the full amount is settled, plus SAT fines calculated as a percentage of the tax that should have been withheld. Payments made to non-residents without proper withholding may also be treated as non-deductible for Mexican corporate income tax purposes, and a payment to a related party in a preferential tax regime is automatically non-deductible when subject to the 40% rate.
Your exposure runs the other direction. If the payer never withholds, or withholds but never issues a CFDI, you may have no documentation to present to the IRS. The income then gets taxed in full at US rates with no offset for Mexican tax that was never properly collected or recorded. Confirming that a valid CFDI has been issued for each payment is the single most useful thing a non-resident recipient can do to protect the credit.