Us Individuals And Taxation In Mexico

<div class="Section1"><br /> <br /> Mexican law prohibits the direct ownership of real estate within what is designated as the “restricted zone,” which is defined to include “all land located within 100 kilometers (about 62 miles) of any Mexican border, and within 50 kilometers (about 31 miles) of any Mexican coastline.”<br /> <br /> In order for a U.S. individual to acquire property within the restricted zone, the buyer must first form a “fideicomiso”<a href="#_ftn1" name="_ftnref1">¹</a> with the buyer’s bank serving as the title owner of the real estate, and as the trustee to the trust, with the U.S. buyer being the trust beneficiary.<a href="#_ftn2" name="_ftnref2">²</a> This structure allows the U.S. buyer to enjoy complete and unrestricted use of the real estate.<br /> <br /> Essentially, the seller of the property sells the parcel to the bank as the trustee of the fideicomiso. The bank has a fiduciary obligation to follow instructions provided by the U.S. trust beneficiary, who will retain all ownership rights, while the bank retains title. Under this arrangement, the U.S. person can sell the property that is held in trust at its market value to any ready, willing and able buyer. In addition, the buyer can instruct the bank to lease the property to any person at terms favorable to the beneficiary.<br /> <br /> </div><br /> <div class="refs"><br /> <br /> <hr align="left" size="1" width="33%" /><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>     In essence, a Mexican trust that will hold real estate.<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>     In addition, the bank as trustee is also required to apply to the Ministerio Público (Minister of Public Affairs) for permit to acquire real estate and to establish the trust.<br /> <br /> </div>

<p>Generally, yes, though there are certain conditions and restrictions that must be understood first. U.S. individuals and other non-Mexican individuals may directly own real estate in Mexico. However, U.S. individuals may <em>not </em>directly own any real estate parcels within an area designated as the &ldquo;restricted zone&rdquo; (see Q <a href="javascript:void(0)" class="accordion-cross-reference" id="1002">1002</a>).<br /> <br /> From a very practical position, any U.S. individual seeking to purchase real property in Mexico should understand the following basic premises:<br /> <p style="padding-left: 40px;">(1)&nbsp;&nbsp;&nbsp;&nbsp; The real estate industry in Mexico is generally unregulated. Real estate agents and brokers are neither licensed nor regulated as they are in the U.S. In addition, there is no &ldquo;Office of the Real Estate Commissioner&rdquo; or equivalent in Mexico to provide any type of consumer protection or advocacy. In any Mexican real property transaction, extreme caution must be exercised before executing any contract.</p><p style="padding-left: 40px;">(2)&nbsp;&nbsp;&nbsp;&nbsp; Any acquisitions in the &ldquo;restricted zone&rdquo; by a U.S. individual must be undertaken with the following entities:</p><p style="padding-left: 80px;">o&nbsp;&nbsp; A bank;</p><p style="padding-left: 80px;">o&nbsp;&nbsp; A public notary; or</p><p style="padding-left: 80px;">o&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; The buyer&rsquo;s attorney (preferably a licensed Mexican attorney).</p></p><br />

<div class="Section1"><br /> <br /> Based on the scenario described in Q <a href="javascript:void(0)" class="accordion-cross-reference" id="1002">1002</a>, the primary issue becomes whether or not the U.S. individual is required to report his interest in the fideicomiso to the IRS as required pursuant to current Code provisions.<a href="#_ftn1" name="_ftnref1">¹</a><br /> <br /> Recent guidance issued by the IRS has indicated that the fideicomiso is not deemed a trust for U.S. tax purposes, thus it is treated as a disregarded entity.<a href="#_ftn2" name="_ftnref2">²</a> This means that the trust is not subject to otherwise applicable reporting requirements.<a href="#_ftn3" name="_ftnref3">³</a><br /> <br /> Accordingly, any gains resulting from the sale of the Mexican property by the trust will be recognized by the U.S. beneficiary and subject to the favorable maximum current capital gains rate of 20 percent, as opposed to the maximum rate of 37 percent applicable to ordinary income. However, the receipt of any rental income must be reported as income on the U.S. individual&rsquo;s return.<br /> <br /> <div class="refs"><br /> <br /> <hr align="left" size="1" width="33%"><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.&nbsp;&nbsp;&nbsp;Forms 3520 and 3520-A, pursuant to Notice 97-34, &sect; IV, 1997-1 CB 422.<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>.&nbsp;&nbsp;&nbsp;Rev. Rul. 2013-14.<br /> <br /> <a href="#_ftnref3" name="_ftn3">3</a>.&nbsp;&nbsp;&nbsp;Similar decision reached in Let. Rul. 201245003.<br /> <br /> </div></div><br />

<div class="Section1"><br /> <br /> 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.<br /> <br /> 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,<a href="#_ftn1" name="_ftnref1">¹</a> taxes will be due to the U.S. on the same income.<a href="#_ftn2" name="_ftnref2">²</a> As such, the Mexican investor would be taxed twice on the same investment income.<br /> <br /> 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<br /> 75 percent of the income tax that would have been paid in Mexico in accordance with their tax laws.<a href="#_ftn3" name="_ftnref3">³</a> 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.<a href="#_ftn4" name="_ftnref4">⁴</a> Thus, such advice tends to be harmful to the investor.<br /> <br /> Other advisors recommend the use of passthrough entities<a href="#_ftn5" name="_ftnref5">⁵</a>wherein 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.<br /> <br /> </div><br /> <div class="refs"><br /> <br /> <hr align="left" size="1" width="33%" /><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.   This assumes that the investment portfolio includes US registered securities.<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>.   IRC § 881(a)(1).<br /> <br /> <a href="#_ftnref3" name="_ftn3">3</a>.   Article 86 of the ITL (domestic tax law).<br /> <br /> <a href="#_ftnref4" name="_ftn4">4</a>.   Servicio de Administracion Tributaria (better known as “Hacienda”).<br /> <br /> <a href="#_ftnref5" name="_ftn5">5</a>.   Partnerships, Limited Liability Companies, etc.<br /> <br /> </div>