In today's interconnected world, cross-border financial planning is essential, especially for high-net-worth individuals with assets in multiple jurisdictions. For Mexico's wealthy residents, navigating the tax system and leveraging tools like life insurance can be complex but vital for protecting and transferring wealth. This blog provides an overview of Mexico’s tax framework, estate planning strategies, and life insurance considerations, highlighting how affluent Mexican families can structure foreign life insurance policies to maximize their legacy planning while remaining compliant with domestic laws.
TAX SYSTEM OVERVIEW
Income Tax
A Mexico tax resident is subject to income tax on a worldwide basis. Nonresidents, including citizens living abroad, are only subject to income tax on Mexico source income.
Mexico personal income tax is charged at progressive rates up to 35%. The maximum corporate tax rate is 30%.
Estate / Inheritance Tax
Presently, Mexico does not impose an estate or inheritance tax, however, certain gifts are treated as income under the income tax law. Inheritance received by a Mexico resident is exempt as are most gifts from a spouse or lineal ancestors/descendants. Gifts between siblings are not exempt.
Wealth Tax
Mexico does not impose a wealth tax.
KEY PLANNING OBJECTIVES
Wealthy Mexico residents typically have many wealth protection and transfer planning needs, including:
Personal / Family
Income Replacement / Debt Repayment
U.S. Beneficiary / Pre-immigration Planning
Sovereign Risk Mitigation
Asset Diversification
U.S. Estate Tax Funding
Business
Business Succession
Guaranteed Business Debt Repayment
Key Person Replacement
Executive Retention
LIFE INSURANCE CONSIDERATIONS FOR MEXICAN CITIZENS
Marketing and Solicitation
A Mexico resident cannot lawfully contract for a foreign life insurance policy insuring their life unless the "mobility" exception is used and all transactions specific to the acquisition of the foreign life insurance policy are completed while the Mexico resident is physically outside of Mexico.
No carrier branded material should be presented while the broker and Mexico resident are in Mexico.
Given the proximity and ease of travel to the U.S., Mexico residents typically implement U.S.-issued life insurance policies.
Structuring
Subject to any carrier restrictions, a Mexico resident can apply for and own foreign life insurance in their personal name or in a non-Mexican structure (e.g., U.S. LLC or trust).
Taxation
Mexico does not impose a premium tax on premium paid to a foreign insurance company.
Cash value accumulation is income tax deferred. Lifetime distributions of cash value may be subject to Mexican income tax to the extent of gain.
The death benefit proceeds of a life insurance policy issued by a domestic life insurance company paid to a Mexico resident beneficiary are exempt from income tax, however, death benefit proceeds from a foreign life insurance company paid to a Mexico resident beneficiary are subject to income tax.
OTHER PLANNING CONSIDERATIONS
Probate / Succession
The estate of a Mexico resident decedent is subject to probate. Only heirs identified in the decedent’s Mexican will are entitled to an inheritance. Absent a will, an estate will pass by intestate succession.
Trust Legislation
Mexico has implemented trust (fideicomiso) legislation, and trusts are commonly used to hold assets, including real property. Mexico will enforce foreign trusts, including U.S. trusts, in certain circumstances.
Controlled Foreign Corporation/Anti-Avoidance Legislation
Mexico imposes Controlled Foreign Corporation (CFC) and General Anti-Avoidance Rules (GAAR) to combat perceived planning abuses.
Forced Heirship
Mexico does not impose forced heirship, however, as noted above, an estate will be distributed according to the rules of intestate succession if the decedent dies without a properly executed and valid Mexican will.
Tax Haven Investments
Mexico tax residents are subject to Mexican income tax on income earned by investments of any kind situated in a country considered a tax haven, even if such income is not distributed. If the tax resident does not have effective control of the investment, the income does not have to be recognized
until received.
For Educational Purposes Only. Neither TRC Financial nor M Financial provide tax or legal advice. This material is intended for informational purposes only and should not be construed as legal or tax advice and is not intended to replace the advice of a qualified attorney, tax advisor, or plan provider.