Mexico’s “RICO” (simple trust) regime offers a low‑rate tax option for independent contractors who become tax residents. The system applies a graduated tax of 1 % to 2.5 % on gross income, but only up to a ceiling of 3.5 million pesos per year (≈ US $175 k).
Who can use the RICO regime
- Independent contractors – freelancers, consultants, web developers, coders, etc.
- Not eligible – salaried employees, dividend or interest income, and owners of a local Mexican business.
- Client arrangements – you may work for a single Mexican or foreign client, or for multiple foreign clients. The key is that you invoice the client(s) and retain control over your working hours.
Core requirements
- Residency documentation – obtain a CURP (local identification number) and the corresponding tax registration (RFC).
- Invoicing – all earnings must be invoiced; the tax is calculated on cash actually received, not on accrued amounts.
- Monthly filing – pay the applicable tax each month based on the gross cash received. Deductions are not allowed under the regime.
- Annual return – file a tax return by April each year.
- Employment agreement – for a single client, an agreement that confirms you control your schedule helps preserve independent‑contractor status.
Tax rates and income cap
- Rate – 1 % for lower income brackets, rising to 2.5 % for higher brackets within the regime.
- Maximum taxable income – 3.5 million pesos per year. Exceeding this amount disqualifies you from the RICO regime; you must then revert to the standard Mexican tax system.
- Re‑entry – if you drop below the cap and remain compliant, you can re‑apply for the regime. Failure to meet filing obligations results in permanent loss of eligibility.
Interaction with U.S. tax obligations
U.S. citizens can combine the RICO regime with the Foreign Earned Income Exclusion (FEIE), which shelters roughly US $130 k of foreign‑source earned income from U.S. tax. This dual benefit can reduce overall tax liability dramatically, provided the FEIE requirements (physical presence or bona‑fide residence) are satisfied.
Practical considerations
- Cash‑basis accounting – taxes are levied on the amount actually received, not on invoiced amounts.
- No deductions – expenses cannot be deducted under RICO; to claim deductions you would need a separate corporate structure, which adds complexity.
- High‑tax environment – Mexico’s general tax system is comparatively high, and corporate entities face significant bureaucracy and tax rates. Most advisors recommend avoiding a Mexican company unless necessary.
- Higher‑income earners – individuals earning well above the 3.5 million peso ceiling, or those with e‑commerce or other business models with substantial expenses, may need to explore alternative structures (foreign companies, trusts) to defer or reduce tax.
Risks and compliance
- Loss of regime – non‑filing or exceeding the income cap results in loss of the low‑rate status, with no automatic reinstatement.
- Audit exposure – the regime is subject to Mexican tax authority oversight; maintaining accurate invoices and timely payments is essential.
- Limited applicability – the regime does not cover dividend, interest, or other passive income streams.
Overall, the RICO program provides a straightforward, low‑tax pathway for qualifying independent contractors residing in Mexico, but strict adherence to invoicing, monthly payments, and annual filing deadlines is required to retain the benefit.
