Mexico: Bill submitted to tax inheritances and donations exceeding 15 million pesos

The bill was submitted to the Congress of Mexico City with the intention that it, in turn, propose it to the Federal Chamber of Deputies under the terms established in Article 73, Section VII of the Constitution.

Under existing legislation, income received from bequests is fully exempt from taxation, while donations are only exempt when received from spouses, ascendants, or direct descendants. The bill aims to limit the scope of these exemptions and establish a progressive tax scheme on high-value inheritances and bequests, with the goal of reducing economic inequality and strengthening fiscal equity in the country.

Among the arguments supporting the bill, it is noted that Mexico is one of the countries in the Organization for Economic Cooperation and Development (OECD) with the lowest tax revenue relative to its Gross Domestic Product (GDP). In 2021, tax revenue accounted for only 16.7% of Mexico’s GDP, significantly below the OECD average of 34.1%.

It is also noted that, according to a study conducted by Oxfam Mexico, "The Myths Behind Taxes on Large Fortunes in Mexico", five recommendations are proposed to reform the country's current tax system:

• Establish a progressive federal wealth tax with rates ranging from 2% to 5%, applicable to fortunes between 20 million pesos and 20 billion pesos.
• Promote comprehensive, progressive, and transparent tax reforms at both the federal and state levels. These reforms should aim to systematically increase the income tax rate on the top 1% of earners, equalize tax rates on labor and capital, impose taxes on large inheritances and donations, and revise existing property taxes, such as real estate tax and vehicle ownership tax, to improve revenue collection and ensure that taxation is proportional to asset ownership.
• Review tax benefits granted to the wealthiest 1%, including exemptions, deductions, discounts, and other forms of tax relief that reduce public revenue needed for other priorities.
• Prioritize public investment in social infrastructure, including healthcare, education, and caregiving services.
• Strengthen Mexico’s participation in regional tax discussions.

Legislative Background

This is not the first time a bill has been submitted to tax income derived from inheritances and donations in Mexico. Similar bills were submitted to the Federal Chamber of Deputies in 2016 and 2018, proposing a similar tax framework.

Key Considerations

The bill does not specify which types of assets would be subject to taxation, or whether the location of the assets or the type of legal ownership would be considered. It appears that the bill would not affect the exemption currently granted to income received through life insurance payouts or similar payments that are not inherited. Additionally, the bill does not clarify whether the heir or recipient of a donation would receive a step-up in tax basis as a result of paying the applicable tax.

The feasibility of the objectives of this bill remains uncertain. Statistics of countries that already impose inheritance and gift taxes (such as the United States) have shown that revenue collection from these taxes is highly variable. Tax revenue depends on the number of high-net-worth individuals passing away each year and whether they have engaged in estate planning strategies to significantly reduce their taxable estate.

The debate over the taxation of inheritances and donations has been recurring and remains a focal point in political and tax discussions. It is therefore essential to monitor closely such bills and, more importantly, anticipate any potential impact should they be enacted.