INDIVIDUAL TAXATION

Residents are taxed on their worldwide income. Married couples are taxed separately.

INCOME TAX

Income is classified according to the following categories: (1) business income, (2) employment income, and (3) income from assets or certain capital gains, rent and interest.

Income is taxed at progressive rates. Expenses and costs incurred in obtaining, maintaining, and preserving the revenues subject to the tax are deductible.

There are no special deductions with regards to the number of children, marital status, age, etc.

Exemptions are applicable to individuals receiving salaries. These exemptions include: dividends, additional benefits, and profit sharing.

RENTAL INCOME
Rental income earned by residents is taxed at progressive income tax rates. Taxable income is computed by deducting the following from the gross rent: interest expense, insurance premiums, taxes and fees charged on the property, depreciation allowance calculated on the property´s cadastral value and 1% of the property´s cadastral value as estimated maintenance expenses.

Itemized extraordinary expenses are deductible only if with permission from the tax authorities.

CAPITAL GAINS
Capital gains on the occasional sale of real property are exempt from income tax.

Municipal Tax on Royalty

Municipal tax on royalty is levied at 10% on the capital gains realized from the sale of urban properties. Tax base is calculated by deducting the following from the sales price or market value of the property: acquisition costs, improvement costs, 5% of the earnings realized for each year the property was held prior to the sale.

PROPERTY TAX

Municipal Property Tax (impuesto de propiedad de bienes inmuebles or impuesto a los predios urbanos)

Municipal property tax is levied on land and buildings based on official appraisals reflecting the property´s commercial sale value or the cadastral value. The tax rates are progressive from 0.025% to 1%, varying annually in order to cope with inflation.

Allowable deductions are mortgage loans for the acquisition, construction or improvement of the property between 20% and 40% of the principal but it must not be more than 50% of the property´s cadastral value. This deduction is available upon request.

Property taxes are deductible for business income tax purposes.

CORPORATE TAXATION

INCOME TAX

All income and capital gains earned by companies are subject to corporate income tax at a flat rate of 25%. Income-generating expenses are all deductible to arrive at the taxable income.

Depending on the transaction type, income is liable to withholding taxes. Gross income from lease transactions is subject to 8% withholding tax, which is credited against income tax liability.

If the profits are capitalized (i.e. expansion of capital) before 31 December of the assessment year and with the condition that the capitalization of profits must be completed the following year, the corporate income tax is levied at the rate of 15% on the amount reinvested.