/ Recursos Humanos / By

Avoiding Double Taxation: How Foreign Employers Should Structure Compensation in Mexico

Expanding your workforce to Mexico is a strategic move, but if you’re not careful, your compensation structure could trigger double taxation—for you and your employees. Whether you’re hiring remote developers, opening a factory, or outsourcing support functions, understanding how to legally structure compensation in Mexico is essential to avoid costly errors and remain compliant.

🔍 What Is Double Taxation?

Double taxation occurs when the same income is taxed by two different jurisdictions. This usually happens when:

  • A company is based in one country (e.g., the U.S.)

  • The employee resides and works in another country (e.g., Mexico)

  • Both countries claim taxing rights over the same income

For foreign employers, this can result in duplicate corporate income tax obligations, withholding tax errors, and employee dissatisfaction.

How Mexico Treats Foreign Employers

Mexico taxes worldwide income of its tax residents, including foreign-source income. An individual becomes a tax resident if they:

  • Have a permanent home in Mexico

  • Spend more than 183 days in the country in a calendar year

  • Have economic interests primarily based in Mexico

If your employee is classified as a Mexican tax resident, you are obligated to withhold and report income taxes in Mexico, even if you’re a foreign entity.

🧾 For details on Mexico’s tax residency rules, refer to the Servicio de Administración Tributaria (SAT).

📑 Mexico’s Double Tax Treaties

Fortunately, Mexico has signed more than 60 double taxation agreements (DTAs) with countries including the U.S., Canada, Germany, the UK, and others. These treaties:

  • Clarify which country has taxing rights

  • Prevent income from being taxed twice

  • Allow for tax credits or exemptions on foreign taxes paid

✅ View Mexico’s DTA network here: OECD Tax Treaty Database – Mexico

However, simply having a treaty in place is not enough—you must correctly apply it by submitting required forms (like Form 37-RFC for tax residents) and maintaining local payroll documentation.

🧠 How to Structure Compensation to Avoid Double Taxation

Here are practical strategies to ensure compliant and tax-efficient compensation:

1. Use a Registered Local Employer or EOR

Hiring through an Employer of Record (EOR) ensures that payroll taxes are withheld locally in Mexico, minimizing tax exposure in the employer’s home country.

This also guarantees:

  • Proper calculation of ISR (Impuesto Sobre la Renta)

  • IMSS and INFONAVIT contributions

  • Clear alignment with Mexican labor law

2. Avoid Paying from a Foreign Entity Without Local Reporting

Paying Mexican residents directly from abroad without reporting it in Mexico often leads to:

  • Tax evasion claims

  • Future audits or penalties

  • Denial of treaty benefits due to improper documentation

Always report compensation through a local or intermediary structure.

3. Separate Salary from Bonuses or Equity

To simplify reporting and avoid complex withholding scenarios:

  • Pay base salary in MXN, through local payroll

  • Handle stock options or crypto-based bonuses separately, ensuring you comply with Mexico’s crypto tax rules

4. Coordinate with a Local Tax Advisor

Each case may involve different withholding rates, social contributions, or treaty clauses. A certified Mexican accountant or payroll specialist can help you apply the correct rules.

🚫 Common Mistakes Foreign Employers Make

  • Paying net salaries without accounting for gross-up tax liability

  • Ignoring PTU (Profit-Sharing) and Aguinaldo obligations

  • Assuming treaty protection without applying for it

  • Using crypto or foreign currencies without MXN conversion and registration

To avoid these pitfalls, read:
📘 Understanding Holiday Pay and Aguinaldo Obligations in Mexico

💼 The Global Touch Advantage

  • If you’re planning to scale your team in Mexico, partner with a firm that understands local compliance.

    👉 At Global Touch, we help international businesses navigate labor laws, payroll structures, and taxation in Mexico with full transparency. Whether you’re hiring remote developers, sales reps, or factory workers, we ensure your compensation practices are audit-proof and efficient.

 

🧾 Final Thoughts

Avoiding double taxation in Mexico isn’t just about saving money—it’s about protecting your business, your team, and your reputation. With the right structure and expert guidance, you can stay compliant, keep your employees happy, and scale without risk.