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Unfortunately, much misinformation has been circulated recently regarding the need for "everyone" to have an RFC. Earlier this year there was a big rush as the deadline was July 01, this has now been extended to next year. What is an RFC? An RFC it is a Mexico tax ID number. If you have economic activities in Mexico, rent a condo, sell a condo, buy a car, have a job etc - then you need one. If you just live here, you don't. PLEASE NOTE: Yes an RFC is required to buy real estate, but the notary will generate a generic RFC for you if you do not have one. Having your own specific RFC is much more important when selling. If you have an RFC AND are a resident, you may be able to claim a capital gains tax exemption when selling your house or condo - see below.
Let's debunk some misinformation first:
If you have a temporary or permanent residency you do not have to get an RFC unless there are specific activities or issues that you are involved in - see below
If you do not have an RFC your electricity will not be interrupted and/or you can still get a new account
If you have an RFC and you have registered it with the utility company, you may be asked to update your Constancia de situación fiscal with that provider (see how below)
If you are buying a car from a dealership, you WILL need an RFC
Most foreigners living in Mexico fall into four basic categories:
Tourists who are here on vacation
Folks who are living in Mexico full/part-time but are on tourist cards (a practice that is being put to an end by the government)
Folks who are on temporary visas
Folks who are here on permanent residency visas
I have had quite a few clients, and numerous friends, who own property here or regularly spend up to 6 months of the year here who do not have residency visas. Unfortunately for them, they will eventually be facing the unpleasant experience of being granted a short stay on their tourist card (or passport) as the automatic 180 day stay is not so "automatic" any more.
Foreigner's with residency can be simply residents or they can be "tax residents". You are considered at "Tax Resident" of Mexico if you earn more than 50% of your income in Mexico. In this case, you will have to file income taxes, and your global income may be taxable. The vast majority of ex-pats are not "Tax Residents" however, if you have any Mexican-sourced income, you will still need to pay income tax to Mexico on that income alone .
Example: you have a home in Canada or the USA, and you own a condo in Mexico which you rent out, you need to pay income tax on that rental income. You may be thinking "well, I've been renting my condo in Mexico for years and I've never paid taxes on that income" you are technically in violation. What about if I'm running my business through Airbnb? In fact the major digital platforms are already collecting/withholding that income tax for you and paying the government. They are doing this at the maximum tax rate. If you want to minimize this tax, and maximize your rental ROI, read on.
Most foreigners obtain their residency by showing economic solvency, which means they have proven that they can live in Mexico and do not need to earn income in the country. When you start any type of business activity in Mexico, including renting your condo, you must apply for permission to work. As a temporary resident you do not have automatic permission to work, If you have a permanent resident visa, you already have this permission. Again, you may be thinking: "I've been running my Airbnb for several years, I don't have a work permit" and yes, again, you are in violation. Keep in mind that the government is just now, over the last year and a half, starting to enforce these laws, so it's not likely that you will get a notice or have an agent knock on your door, but it could (and has) happened. Read on if you want to find out how to get legal and minimize your taxes.
In the case of a temp resident, in order to obtain this permission, the first step is to obtain your RFC registration stating the work activity you will be engaged in (condo rental, hair salon, tour operator etc). This used to be really easy back when the RFC registration process was done online; since that changed, the main challenge has been that some SAT offices in Mexico, such as the Puerto Vallarta office, have a criteria of not accepting temporary resident cards with no permission to work as a valid ID. But wait! That's what I'm applying for! Yes - it's ridiculous. It's like applying for a drivers license and the only ID they accept is a drivers license. There is a way to work around this and you will need a professional to help you with this. Click here to contact Equilibrium Accounting, they are experts in this field.
If you are a permanent resident you already have permission to work, so why bother with the RFC? There are numerous reasons, but one of the most compelling is taxation. Everyone wants to maximize their return on investment and nobody likes paying taxes at the highest possible rates, so how can you minimize these taxes? The best way is to utilize deductions. In the USA and Canada, receipts are sufficient to show expenses. Mexico has taken receipts to a higher level by having vendors or service providers issue a receipt that is specific to only you - this is called a FACTURA. It prevents random fake receipts from being used as deductions. In order for a receipt (factura) to be issued to you, you need a tax number. That tax number is your RFC.
Example:
You own a condo in Mexico, and you need a new bathroom vanity, sinks, shower and a fancy toilet to make your condo more rentable. This is a sizable investment in your small Airbnb business and you would like to deduct this expense from your taxes. After making your purchases at Home Depot the cashier hands you a receipt, you take that receipt to a special kiosk located by the exit (I bet you were wondering what that giant ATM-like machine was) and you will enter your RFC number. This machine generates a factura for you. It is also now registered with the government and it is your tax deductible receipt that is associated specifically to you.
As mentioned above, Airbnb is withholding the max amount of income tax from your earnings, however if you can provide them with a tax ID number = RFC, then they will withhold substantially less. You will still need to file a tax return, but now you can utilize that factura from Home Depot as a deduction. You can also register your RFC with the utility companies, electricity and internet companies will now also issue you facturas that you can use as deductions. By far the biggest and most important benefit of having an RFC is realized when you sell your home. As mentioned above, Mexico will tax you on any income that you earn in Mexico, When you sell your home for more that you bought it for, that is considered income. The tax rate on this type of income (capital gains) is hefty, up to 35%! Having an RFC entitles EACH owner up to $250,000 USD worth of deductions off of this capital gains tax. Additionally remember that new bathroom you installed? That is ALSO deductible. There are a number of other strategies that you can use to minimize your taxes here in Mexico and the best way to do so is to consult with the professionals at Equilibrium. Click here.
July 1st deadline, what was it? When is the next deadline?
As with any new government program, there are deadlines. Earlier this year the government wanted everyone to have their RFC and/or update their status by July 01. That included all of the Mexican nationals. Since their pay stub is a factura, they needed to get this done or face not getting paid - hence the long lines. What was this deadline for? The answer is a bit complex, but since you are still reading, I'll explain. Your RFC includes quite a bit of detailed information about you, including your zip code as well as your fiscal status. Your fiscal status or fiscal "regime" is simply a system that the government uses to categorize you for tax purposes. (Your accountant can help you determine the best category for you to minimize your tax burden.) On July 01, the government wanted to update their software for RFC's to now include your zip code and fiscal status, which perviously were not being tracked. These updates were put in place as extra protection for you, as it makes identity theft more difficult. Well this caused much confusion and huge lines, so now the deadline is Jan 01.
These two new metrics, (zip code & fiscal status) along with the your name will be automatically validated by SAT’s servers, at the time a factura is generated, which means that a factura cannot be issued unless these three fields match SAT’s information exactly. This is the reason why vendors and suppliers (like CFE) have been asking their clients to provide them with a recent Constancia de situación fiscal.
A Constancia de situación fiscal (fiscal status or regime) is an RFC certificate that includes the taxpayer’s general information as well as information on their tax regime and tax obligations on the date it was issued. Because the tax regime and address can change if the taxpayer needs to change them (if they move for example), vendors and suppliers request updated versions of the constancia.
Special note: There are folks who obtained their RFC last year or earlier simply by going online. If you fall into this category, you will have to complete your RFC process by physically going to the SAT office to get what is called your "efirma" in order to be able to get your constancia. I highly recommend you use a professional to get your appointment for this.
If you have an RFC, your up to date Constancia de situación fiscal can be downloaded from SAT’s website with just the RFC number and password here.
When you download this document it is dated and it has a digital signature that guarantees its authenticity. You can also obtain yours by showing up to SAT with a valid ID. As mentioned above, this is the reason behind the long lines outside the SAT office every day. It is mostly Mexican nationals, employees who now need to show their employers their constancia so the employer can issue electronic pay slips (facturas).
If you already have an RFC number and have registered it with utility companies such as CFE, Telmex, Izzi, etc., you may have received a request from them to update your tax information so they can continue to issue facturas with your RFC number. Keep in mind, the electric bill you get is not just a bill it is a factura, and the utility company cannot generate one unless your updated information has been provided.
You will need to update your constancia de situacion with the electrical/utility company but only IF your RFC is associated with your account.
If your utilities are in your name but you do not have an RFC number, utility companies have been and will continue to issue facturas using the generic RFC number for the general public and for foreigners which looks like this: XAXX010101000 and XEXX010101000.
If you are a new home owner and want to put utilities in your name and do not have an RFC number, they will simply use the generic RFC number. If you do have an RFC number, they will ask that you provide them with a Constancia de sitaución fiscal so they can make sure the information they input into their systems matches SAT’s. It is important to clarify that all banks and utility companies have been requesting constancias for a few years, it just became more important with CFDI 4.0 because, as explained above, if the name, zip code, and tax regime do not match SAT’s file on the recipient, the factura will not be issued as SAT’s servers will automatically reject it.
In summary, it's worth it to spend the time to get your RFC if you are a landlord or homeowner. If you do not have one, it's not the end of the world, start thinking about getting it done.
If you are a homeowner and you are thinking about or are about to sell your home, you need to get this done ASAP! Right now everyone is scrambling to meet deadlines so it's a bit hectic, but in the long run, you will benefit from this.
If you have further questions on taxes and RFC registrations, you can send an email to pblanco@equilibrium.mx; if you want to book a call, you can do so here. If you have questions on Immigration matters, you can contact Lic. María Lazareno at maria@klmexico.com
Interested in moving to Puerto Vallarta, Mexico? Let us show you how easy it is to own and invest in real estate in Mexico. Contact us. Selling your home? Click here to find out how much your home is worth.