Although a simple activity, foreign residents may encounter several difficulties when leasing property in Mexico. Rules are not always clear and may not integrate all direct and indirect taxes in a comprehensible manner.

In general terms, leasing property in Mexico does not give rise to the creation of a permanent establishment. However, it does, in all cases, give rise to the generation of income, asset tax and value-added tax (VAT).

Real property lease payments are subject to a 21% income tax withholding on gross proceeds when the asset is located within Mexico. However, when leasing real property, an option exists to elect for taxation on the net gain. Generally the most important tax obstacle is to be cleared at the front end. Foreigners usually have to face the 15% VAT rate when acquiring or constructing a building, which under normal circumstances would be an added cost, since foreign taxpayers are not allowed to recover it unless they obtain a tax registration for VAT purposes.

Asset tax is generated when a foreigner leases property in Mexico. The tax is calculated at a 1.8% rate on the net value of the asset. The Mexican lessee may elect to consider the value of the asset as its own, therefore relieving the foreigner of any additional tax liability, or to credit the Mexican income tax withholding as established in treaty provisions.