Mexico Withholding Taxes: Rates, Treaty Relief, and US Credits

Mexico’s withholding tax rates on payments to non-residents run from 4.9% to 40%, set by the type of income and the recipient’s relationship to the payer. The Mexican party making the payment deducts the tax before you receive the money and sends it to Mexico’s tax authority, the SAT. A tax treaty can cut those rates significantly, most often to 10% or less for US residents, but only if the paperwork is in place before the payment date.

What Counts as Mexican-Source Income

Mexico taxes non-residents only on income tied to a source of wealth inside the country, so the first question is always whether the income is Mexican-source at all.

Income from physical assets located in Mexico, like rent or sale proceeds from real estate, is always Mexican-source. Service fees are Mexican-source when the work is physically performed in Mexico, regardless of where the contract was signed or where the money comes from. Capital gains on shares are Mexican-source when the issuing company is a Mexican resident, or when more than 50% of the shares’ book value traces, directly or indirectly, to real property in Mexico.1PwC. Mexico Corporate – Income Determination Interest and royalties are Mexican-source when paid by a Mexican resident or charged against a permanent establishment in Mexico.

Domestic Rates by Income Type

The rates below are the statutory maximums under Mexican law. They apply when no treaty is claimed, or when the recipient lives in a country without a treaty with Mexico. Most rates apply to the gross payment.

Interest

Interest has the widest spread of any category. The rate depends on who receives the payment and how the debt is structured:

  • 4.9% on interest from publicly placed debt instruments abroad handled through banks or brokerage firms in a treaty country, and on interest paid to certain foreign financial institutions in which the Mexican government holds an equity stake.
  • 10% on interest paid to foreign government financing entities and to registered foreign banks that fund themselves through publicly traded debt. This rate also applies when the conditions for the 4.9% rate aren’t fully met.
  • 15% on interest paid to reinsurance companies, and on the interest component of financial lease payments.
  • 21% on interest paid by Mexican financial institutions to foreign residents, and on interest on loans from registered foreign suppliers financing equipment, inventory, or working capital.
  • 35% as the catch-all rate for interest that doesn’t fit a lower category. It also applies when the beneficial owner of otherwise lower-rate interest holds more than 10% of the issuing company’s voting shares (directly or through related parties) and receives more than 5% of the total interest from that instrument.
  • 40% on interest paid to foreign related parties whose income is subject to a preferential tax regime. This punitive rate replaces the domestic rate that would otherwise apply, though it does not apply to dividends or to certain interest paid to foreign banks.

Dividends

Dividends paid by Mexican companies to non-residents are subject to 10% withholding on the gross distribution. The rate applies to profits generated after January 1, 2014, and is a final tax with no further filing obligation for the recipient. Profits accumulated before that date that were already taxed at the corporate level through the previous CUFIN account can be distributed without the additional 10%, though those legacy balances shrink each year.

Royalties and Technical Assistance

Royalties split into two tiers based on what is being licensed:

  • 35% for the temporary use of patents, trademarks, trade names, and advertising rights.
  • 25% for the use of industrial, commercial, or scientific equipment, and for payments for technical assistance, plans, formulas, procedures, and transfers of industrial or scientific know-how.

The distinction can mean a 10-point difference on the same cross-border payment. When one agreement bundles trademark rights with equipment use or know-how, the payer has to allocate the payment correctly across the categories.

Service Fees and Wages

Independent professional service fees for work performed in Mexico are withheld at 25% on the gross payment. That covers consulting, engineering, legal, and similar engagements when the work happens on Mexican soil.

Wages for non-resident employees follow a progressive scale based on income earned during a rolling 12-month period. For 2026, the first MXN 125,900 is exempt, income between MXN 125,900 and MXN 1,000,000 is taxed at 15%, and income above MXN 1,000,000 is taxed at 30%.2PwC Worldwide Tax Summaries. Mexico – Individual – Taxes on Personal Income Board of directors fees are withheld at a flat 35%.

Capital Gains

Non-residents selling Mexican real property or shares in non-publicly traded Mexican companies can choose between two calculation methods: 25% on the gross sales price, or 35% on the net gain after deducting the tax basis and transaction costs.2PwC Worldwide Tax Summaries. Mexico – Individual – Taxes on Personal Income The net-basis election usually produces a lower bill, but it requires appointing a legal representative in Mexico and keeping proper documentation of the original cost basis.

Real Estate Rental Income

Rent from Mexican property paid to a non-resident is withheld at 25% on the gross amount, with no deductions allowed.3Servicio de Administración Tributaria. Cases in Which the Income Tax Must Be Paid Maintenance, property management fees, and mortgage interest don’t reduce the taxable base under this method.

Treaty Rates Under the US-Mexico Convention

Mexico has roughly 60 double taxation treaties, and where a treaty rate is lower than the domestic rate it controls.4PwC Worldwide Tax Summaries. Mexico – Individual – Foreign Tax Relief and Tax Treaties For US residents, the US-Mexico Income Tax Convention produces substantial savings across most income categories.

Interest

The treaty caps interest withholding at 10% for most arm’s-length payments between unrelated parties. Interest paid to banks or on publicly traded debt can still qualify for the 4.9% domestic preferential rate, which is already below the treaty ceiling.

Dividends

Treaty dividend rates depend on how much of the distributing company the recipient owns:

The 0% rate for majority-owned subsidiaries is what makes Mexico viable for corporate structures where a US parent fully controls a Mexican operating company. Without it, repatriating profits carries a 10% toll on every distribution.

Royalties

The treaty caps royalty withholding at 10% of the gross amount regardless of the type of intellectual property involved.6Internal Revenue Service. United States – Mexico Income Tax Convention That’s a 15- to 25-point reduction from the 25% or 35% domestic rates, which makes the treaty claim essential for any licensing arrangement.

Capital Gains on Shares

The treaty treatment of gains on shares in a Mexican company is not a blanket exemption. Under Article 13, gains are taxable only in the seller’s country of residence as a general rule, but Mexico keeps the right to tax gains in two situations: when at least 50% of the company’s assets consist of Mexican real property, and when the seller held a direct or indirect participation of 25% or more in the company during the 12 months before the sale.6Internal Revenue Service. United States – Mexico Income Tax Convention Minority shareholders selling stock in a company whose value doesn’t derive primarily from real estate are generally exempt from Mexican tax on the gain.

How to Claim the Treaty Rate

Reduced treaty rates don’t apply automatically. You need to give the Mexican payer documentation before the payment date, and they need it in hand before withholding at anything less than the full domestic rate.

The core document is a Certificate of Tax Residence from your home country tax authority. For US residents, that means IRS Form 6166, a letter on Treasury Department stationery certifying that you are a US resident for income tax purposes.7Internal Revenue Service. Form 6166 – Certification of U.S. Tax Residency Form 6166 takes time to process, so submit the request to the IRS well before you need the certificate in Mexico.

You must also qualify as the beneficial owner of the income, not a conduit for a third party in another jurisdiction. For related-party transactions and for the net-basis capital gains election, you need to appoint a Mexican tax-resident legal representative through a power of attorney. The power of attorney must be apostilled or legalized for use in Mexico; US state apostille fees typically run between $2 and $20 per document. That representative takes on joint and several liability for your Mexican tax obligations and must keep supporting documentation for at least five years. Mexican authorities may also request a sworn declaration that the income benefiting from the reduced rate is taxable in your home country.

The SAT has disregarded treaty claims entirely when required formalities, such as the timely appointment of a legal representative, weren’t completed before payment. Getting the paperwork wrong doesn’t just delay things; it changes the rate applied.

Limitation on Benefits

The US-Mexico treaty includes a Limitation on Benefits clause in Article 17 designed to stop entities from routing income through the US only to reach treaty rates. To claim treaty benefits, you must satisfy at least one of the qualifying tests:6Internal Revenue Service. United States – Mexico Income Tax Convention

  • Individual or government. Natural persons and government entities qualify automatically.
  • Active trade or business. The entity is actively conducting a business in its home country (not just making or managing investments), and the Mexican-source income connects to that business.
  • Publicly traded company. A company whose principal class of shares trades regularly on a recognized stock exchange in either country qualifies, and so do companies wholly owned by such publicly traded entities.
  • Ownership and base erosion. More than 50% of the entity’s beneficial interest is owned by persons who independently qualify, and less than 50% of its gross income flows out as deductible payments to persons who don’t qualify.
  • Tax-exempt organizations. Nonprofits and pension funds generally exempt from tax at home qualify if more than half their beneficiaries or members would independently qualify.

Failing every test means the full domestic rate applies, whatever the treaty rate tables say.

Where Withholding Stops: Permanent Establishment

Everything above assumes you don’t have a permanent establishment (PE) in Mexico. Once a PE exists, the flat-rate withholding framework doesn’t apply to the income attributable to it. That income is taxed like a Mexican corporation’s, at the standard corporate income tax rate on net profits after deductions.

A PE is generally triggered by a fixed place of business in Mexico, such as an office, warehouse, or long-running construction site, or by a dependent agent who habitually exercises authority to conclude contracts on your behalf. A PE has to register with the SAT, issue CFDIs through Mexico’s digital invoicing system, file corporate returns, and meet transfer pricing documentation requirements. For service providers, the line between “rendering services in Mexico” at 25% gross withholding and “creating a PE” taxed on net income depends on the duration and nature of the engagement. Getting this wrong can mean either overpaying on the gross basis when a PE would produce a lower effective rate, or unknowingly creating a PE and missing required filings.

Claiming a US Foreign Tax Credit

US taxpayers can generally credit Mexican withholding tax against US tax on the same income to avoid double taxation. Individuals file IRS Form 1116; corporations file Form 1118. The CFDI de retenciones the Mexican payer issues you is the primary proof of tax paid, and you should keep it for this purpose.8Internal Revenue Service. Certification of U.S. Residency for Tax Treaty Purposes

The credit is limited to the US tax attributable to foreign-source income, so it won’t always offset the full Mexican withholding. When the Mexican effective rate on a payment exceeds the US rate on that income (which happens with the 25% and 35% domestic rates on services and royalties), the excess can be carried back one year or forward ten. Claiming the treaty-reduced rate in Mexico first is almost always better than relying on the US credit afterward, since it cuts tax at the source instead of creating an excess credit that may take years to absorb.