1004 / How should Mexican clients seeking to open investment accounts in the U.S. structure their investment holdings in a tax efficient manner?

Citizens and residents of Mexico are taxed on income sourced on a worldwide basis at a rate of 30 percent. Taxable income includes all types of income, whether received in cash, in services or in credit, regardless of the source. This necessarily includes income derived from passive investment activities including dividends, interest and capital gain income.

Because of the above, the concept of ?“tax efficiency” in establishing investment accounts may be problematic for Mexican investors based on their enacted tax statutes and interpretations. As such, the conventional posture of a Mexican investor establishing investment accounts in his or her name becomes a simple proposition to the extent that he or she would be taxed on any earnings generated from investment activities. But, to the extent that the investment activities emanating from a U.S. broker/dealer will result in U.S. source income earned by a nonresident investor,¹ taxes will be due to the U.S. on the same income.² As such, the Mexican investor would be taxed twice on the same investment income.

To avoid this result, some advisors suggest that the Mexican investor consider utilizing a corporate structure in opening the account in place. However, that may be problematic under the Controlled Foreign Corporation (CFC) scheme under Mexican tax law where CFCs are defined as non-Mexican companies whose tax rate in its respective jurisdiction is less than
75 percent of the income tax that would have been paid in Mexico in accordance with their tax laws.³ Thus, the desire to utilize a corporation domiciled in a low tax jurisdiction or tax haven will create unwanted and unnecessary scrutiny by Mexican tax authorities.⁴ Thus, such advice tends to be harmful to the investor.

Other advisors recommend the use of passthrough entities⁵wherein one of the partners (or in the case of the LLC, a member) is an irrevocable non-Mexican trust wherein the Mexican investor is a beneficiary of the trust and could enjoy the beneficial interests of asset accumulation under a foreign trust as to Mexico. The trustee of such trust should be a non-Mexican entity or person located in a jurisdiction with a lower tax rate, as his or its ownership may be taxed as income. However, the net result of such arrangement would be the non-taxation of the investment income in Mexico as the Mexican client would no longer maintain control over the investment – a critical issue from a Mexican tax standpoint.