All posts by admin

Tax Obligations for Foreigners in Mexico

TAX OBLIGATIONS FOR FOREIGNERS IN MEXICO

DEATH and TAXES…..both are inevitable!

By Linda Jones Neil

 

Whether a property owner or just the occasional visitor on a beautiful beach in Mexico, everyone pays taxes, natives and foreigners.   Some of the taxes are hidden and others are not.   The purpose of this article is to touch on some of the important taxes levied and paid in Mexico.

 

WHO COLLECTS TAXES:   The SAT (Servicio de Administracion Tributaria), also known as Hacienda, is the federal tax collector.   It collects all federal taxes such as the ISR (Income or Capital Gains) tax, the IVA (Added Value) tax, the IDE (Tax on Cash Deposits) and the IEPS (Special Tax on Production and Services).  Each state government has its own taxes such as the 2 to 3 percent tax on lodgings and tourism.   The municipal governments assess and levy taxes on real and personal properties.

 

IVA TAX:   This is the Value Added Tax which is charged on goods and services.   The only exemptions are medicines and food.   Often this tax is INCLUDED in the price of food served in a restaurant, legal services, and the items purchased in a department or clothing store.   The business owner and tax resident is obligated to file a monthly declaration with Hacienda and pay the tax on earnings.   Credited against this tax are IVA taxes paid on goods and services acquired.

 

There is no IVA tax on the sale of vacant land or on the sale of residential dwellings.   The tax is levied on all commercial construction when it is sold or transferred, at the rate of 16% of the value of construction.

 

IVA tax is charged on lodgings, hotel rooms and furnished homes which are rented.

 

The IVA tax is 16% throughout the entire country of Mexico.

 

IEPS TAX:  This is the Special Tax on Products and Services which was a new tax in 2010.  It will cover certain internet and cable TV services, alcohol, cigarettes, and gaming.

 

PROPERTY TAX;   This is a municipal tax with assessments on properties generally being made annually.   The tax can be paid in six installments (every two months) but probably should be paid in full within the first two months of the calendar year to obtain a discount.   Rates vary from area to area but are often far lower than U.S. or Canadian property taxes.

 

ISR TAX;   Literally the Tax on Rents has been described as both an income tax and a capital gains tax.   It is complex and a subject of confusion.

 

ON INCOME.   Any income generated from sources within Mexico, is taxable.   From business or salary, the rates are variable depending upon the amount of income received.

 

ON THE SALE OF A PRIMARY RESIDENCE    No primary residence is exempt from tax UNLESS the taxpayer has resided in the home for the previous five years.   Proof of residency is in the form of taxpayer identification number (RFC), voter’s registration with the property address, bank statements and utility bills.  Foreigners must establish permanent residency in order to obtain their RFC documents..

For those who have sold or transferred a primary residence within the past five years and have not declared an exemption previously, an exemption of up to  700 UDIs or approximately 3,500,000. Mexican pesos, is available.

This applies to nationals and to those foreigners who have established a tax residency in Mexico (obtained their tax identification numbers) and make declarations on world wide income.   They must also provide documents that the property being transferred is a primary residence.

 

ON THE SALE OF A VACATION OR SECOND HOME OR A RENTAL PROPERTY

No exemptions are permitted.

 

The tax on non-exempted transactions is 35% of the difference between the value declared in the deed and the value of the new sale, less allowable deductions or 25% of the entire amount of the transaction, whichever is less.   It is very important when acquiring property to insist upon having the full amount of the sale declared in the deed, in order to avoid overpaying taxes upon sale.

 

Enforcement on the ISR tax on transfers is the obligation of the Notary Public formalizing the transfer.  He has the obligation to enter the seller’s name and data on the internet and to check status of prior transfers.

 

ON RENTAL INCOME:   There are several ways to calculate tax on rental income:

  1. The blind deduction of 35% of total income, without deductions with tax of 35% paid on the remaining amount;
  2. A 30% tax on income, less allowable deductions which include property tax, maintenance, interest on loans for construction expenses, insurance, salaries of employees and commissions paid to rental agents and property managers..
  3. A 25% tax on the gross income, no deductions.

 

Hacienda is paying more attention to internet advertising and is beginning to inquire into the income of those who are renting their homes.   It makes sense to become legal since penalties for non-compliance can be considerable.   Methods one and two above require the RFC (taxpayer identification number) which can be challenging for a foreigner to obtain.   Method three outlined above does not require residency or official status.

 

IDE TAX   This is a Tax on Cash deposited into banks.   In the year 2009, it was applicable on any combination of deposits made in a month totaling 25,000.00 pesos, or more.   Tax was 2% of the excess.   This tax has now been eliminated but banks receiving cash deposits of over $15,000. pesos in any one month or certain credit card payments are required to report this to SAT.  This requirement is thought to discourage the informal economy (the street vendors).

 

STATE HOSPITALITY TAX.   This is charged by hotels and on furnished short-term rentals.   Money generated from this tax is used for promotion of tourism in the state and varies from state to state but is generally two to three percent of the per night cost of lodging.

 

It is important to understand the difference between Tax Resident and Non-resident for tax purposes.

 

The Tax Resident is the person, citizen or non-citizen, who has acquired his Federal Taxpayer Identification Number and who files and declares taxes in Mexico on his world-wide income.   Any party receiving income from Mexican sources, such as from rental or from the sale of real properties, or from business activities, is required to file.  No distinction is made between citizens of Mexico and non-citizens as to tax rates.

 

Tax authorities in the U.S., Canada and Mexico are working together and share information. Everyday there is more cooperation between the countries due to tax treaties. It is no longer possible to own a property in one country, enjoy income from that property, and not report it in BOTH the country where the property is located, and the country where the owner lives.  Failure to comply means the owner is subject to double taxation and heavy penalties when the omission to file and declare is discovered.

 

Now REALITY!!  DIGITAL FISCAL INVOICES.   Taxpayers must use invoices produced by Hacienda (SAT) on internet.   Hopefully this will simplify the “factura” situation which at present is challenging for the tax payer attempting to obtain receipts for deductible items. .

 

This is an overview of the tax situation in Mexico and may vary in individual cases.  For additional information and consultations, please contact the author.

Copyright 2014. Consultores Phoenix, S.C. Reproduction prohibited without permission.

 

# # # # #

about the author:

LINDA NEIL is the founder of The Settlement Company, which specializes in real estate transfers, escrows,and consultations.  Just added as a new service, Settlement will now prepare monthly tax declarations on rental properties, file them and perform additional essential landlord accounting services.

 

For reprints of this article or for further information on tax paying services, please contact The Settlement Company® E-mail is info@settlement-co.com, and website: http://www.settlement-co.com

 

Share Button

Renewing the Foreign Relations Permit

The FOREIGN RELATIONS PERMIT FOR THE FIDEICOMISO……………..

            What do we do when it expires?

 

Under Mexican law, all properties acquired by foreigners must be held in a Mexican bank trust which is known as a fideicomiso (fi day co me so).     These bank trusts are established by permission and a permit from the Mexican Secretary of Foreign Relations.

 

Originally, when the law was established in 1972, the permit was given for thirty years.   At that time no one knew what would happen when the permit expired except that the law stated that “property must be transferred to one who is legally entitled to hold title”.    This left a big uncertainty for those who were investing large sums of money in Mexican properties.

 

The law was clarified in 1989 with the following in Article 20 of the Foreign Investment law which was published in the Official Diary of the Federation on May 16, 1989.

The text states: When the term expires for those trusts created under Articles 18 and 19 of the Law, the Secretary of Foreign Relations will expedite, under the terms of the same laws, new permits requested for the same properties located in the restricted zone, providing the following conditions are met:

 

1.- That the new trusts involve the same foreign investors that are named in the trusts that are expiring;

                       

2.- That the new trusts contain the same terms and conditions as those in the trusts that are expiring with regarding to purpose, usage and general characteristics.

 

3.- That the permits are requested within a time period of 180 days (minimum) and 365 days (maximum) prior to expiration of the trust.

 

4.- That the dispositions of the Law, of this Regulation and of the General Resolutions are observed.

 

This declaration gave clarity to the law.  It was established that the permits could be renewed and, in 1995, pursuant to the conditions of the NAFTA treaty,  the period for the foreign relations permit to establish a Mexican bank trust, fideicomiso, was extended to fifty years and could be renewed multiple times.    This was tantamount to ownership in perpetuity.

 

Thus for trusts established between 1972 and 1995, these are expiring between 2012 and 2025, unless the owners have taken it upon themselves to extend the term of the trust to 50 years.    This indeed was done by many who were concerned about leaving a property to heirs with a trust that is expiring.

 

What is the procedure for renewing a trust permit?     It is relatively simple;  An application must be made to the Secretary of Foreign Relations to obtain a new fifty year permit.   Upon receipt of same, the old permit extinguished by the trustee bank and the new permit formalized by the trustee bank and the notary public.    The trustee bank may be the same or a different one from the original permit.   The primary beneficiaries however must be the same as per number one in Article 20 of the Foreign Investment law (see #1 above).    To change the primary beneficiaries in this renewal action will trigger an acquisition tax which is 2% of the value of the property,  and a possible capital gain tax which is 35% of the difference between the former value and the new value.   Substitute beneficiaries may be changed however.

 

Other costs involved are the bank cancellation fees for extinguishing the old permit,  a new permit fee, registration in the Foreign Investment Registry,  a signature fee and the first annual fee for the new trust, notary, public registry fees, etc.    It is wise to consider budgeting three to four percent of property value to renew the permit and receive the new notarized deed.

 

This may seem expensive to some but it is important to remember that this is once every fifty years and the only other expense to maintain the legal status of the property is the payment of bank annual trustee fees which range from US 350.00 to US 550.00 per year.   Compare these expenses with the cost of annual property taxes on a home of comparable value in the US or Canada and it will most likely be considered a bargain!

 

about the author:

LINDA JONES  NEIL is the founder of The Settlement Company®, which specializes in real estate transfers and escrows, as well as renewals of permits and other legal services for the foreign property owner. Licensed as a California real estate broker, she has pursued her profession in Mexico for over forty years. Her skills in negotiating contracts between parties from three distinct cultures have placed her services in demand as a consultant and for speaking engagements on Mexican law and customs in Mexico, the United States and Canada. She has been widely published on the subject of real property in Mexico. Memberships; FIABCI, AMPI and NAR.  Linda  is a former  member of the National Advisory Council of AMPI and has served as NAR Presidential Liaison to Mexico..E-mail info@settlement-co.com,      website: http://www.settlement-co.com

 

Share Button

Ejidos and Ejidal Properties in Mexico

EJIDAL PROPERTY…..      Is it a bargain?  Or a problem?

by Linda Jones Neil

 

EJIDAL (EEEE-heee-doll) properties were established in Article 27 of the Mexican Constitution of 1917 as an outcome of the revolution and represent probably 50% of all the land in Mexico.

 

After the revolution hundreds of millions of acres from the original Spanish land grants were expropriated by the government and classified as “ejidal” properties. The state retains ownership of these lands and the peasants, or farmers, have the right to use them, to live on and to grow their crops on them. The rights of usage pass from father to son, but ejidal properties cannot be sold as private property.

 

Per decree published on February 26, 1992 in Diario Oficial, Mexico’s Official Newspaper, certain ejidal lands can now be converted to private property through a process known, in Spanish, as the PROCEDE, (the procedure).

This is a seven step process that may take as much as five years to accomplish, and consists of the following:

  1. Resolution within the ejido. A two-thirds majority must decide to convert parcel lands to private property. This does not pertain to human settlement or communal property, also a part of ejidal land. This pertains only to the individual parcels.
  2. Mapping, allowing for streets, green areas, other donated lands, human settlements and communal lands
  3. Allotment of a parcel to each ejiditario (farmer, member of the ejido group).
  4. Application to Agrarian Reform, Mexico City
  5. Approval by the Agrarian Reform
  6. Transfer of parcels to the individual ejiditarios.

 

After this process is completed and registered with the Agrarian Reform, the ejiditario who wishes to sell to an outsider must first notify other family members, those who have worked the property for more than one year, then other ejiditarios in the group, neighbors, and the local and  ejidal governments before completing a sale to the outsider.  These parties have the right of first refusal and notifications must be made following a specific procedure. An appraisal issued and/or authorized by the national authorities must be obtained to confirm that the price of sale to an outsider is fair and legitimate.  .

 

            ONLY after all correct notifications have been made and procedures followed may the ejiditarion transfer in fee simple to third parties, nationals or foreigners.  If the property is in the restricted zone ONLY then can an ejidal property be acquired by a foreigner, PROVIDED the Secretary of Foreign Relations will grant a permit for same.

THIS IS FOR PROPERTIES WHERE THE EJIDAL group agrees in an assembly to convert its parcel property to private property.

 

What about the ejidal group who chooses NOT to convert its parcel land to private property?  Can it be used by outsiders?

 

Article 45 of the law states that ejidal properties may be the object of any type of contract in association or use contract made by the ejidal group, or by individual ejiditarios on common lands or parcel lands. Contracts made with third parties may be granted for a term up to thirty years and can be renewed.

Under the Mexican Civil Code the maximum lease for residential property is ten years. Thus it can be said that the ejidal properties have an important advantage over private RESIDENTIAL property when it comes to leasing.

There is, however, a substantial difference between OWNERSHIP and LEASING. It is important not to confuse the two.

 

OWNERSHIP, even in the prohibited zone, where ownership is a PERSONAL right of use and enjoyment, permits indefinite usage through multiple renewals (every fifty years) of trust permits, and a clear-cut right to rent those rights, to sell those rights, and to collect a profit therefore.  Annual costs under a trust (fideicomiso) are limited to bank administration fees and property taxes and the owner has full rights to all improvements on the land.

 

LEASE RIGHTS from an ejidal group can be for a maximum term of thirty years and can be renewable. The annual lease cost, however, is often a monthly or annual payment and, while it may be fixed for the first lease term, (up to thirty years) costs upon renewal are not usually negotiated for the following lease term, and may be increased to any amount that the leaseholder, the ejido, requests.  Failure to pay the amount requested by the holder of the lease means that lessee (the tenant under the lease) must vacate the property and, of course, must leave behind ALL improvements affixed to the property.

In a rental situation, the tenant never owns the improvements and the amount of the rental will probably be determined by market conditions.

Copyright, 2004-2014, Consultores Phoenix, S.C. Reproduction prohibited without permission.

 

about the author:

LINDA JONES NEIL is the founder of The Settlement Company, which specializes in real estate transfers and escrows. Licensed as a California real estate broker, she has pursued her profession in Mexico for over forty years. Her skills and experience in negotiating contracts between parties from three distinct cultures have placed her services in demand as a consultant and for speaking engagements on Mexican law and customs in Mexico, the United States and Canada. She has been widely published on the subject of real property in Mexico. Memberships; FIABCI, AMPI and NAR.  Linda  is a former  member of the National Advisory Council of AMPI and serves as Presidential Liaison for Mexico to the National Association of Realtors®.   She is also co-founder of Global Mexico Real Estate Institute (IIGM), an educational institution which provides international real estate classes and designations.

            For reprints or further information, please contact

The Settlement Company: in Mexico:

E-mail info@settlement-co.com,         website: http://www.settlement-co.com

 Copyright, 2004-2014, Consultores Phoenix, S.C. Reproduction prohibited without permission.

Share Button

The Bank Trust (Fideicomiso) Explained

THE BANK TRUST FOR OWNERSHIP OF REAL PROPERTY IN MEXICO

 

THE FIDEICOMISO

 

Article 27 of the Constitution of the Republic of Mexico prohibits foreign ownership of real property located within 30 miles of any coastline or 60 miles of either border. This is referred to as the restricted  zone.

 

In 1973, recognizing that many Americans would enjoy the rights of ownership, and bring needed dollars to the country, President Echeverria approved the bank trust, fideicomiso, form of ownership which is available to non-Mexicans.  This regulation was further expanded in the Foreign Investment Law of 1989.

 

Properties located within the prohibited zone, which includes the entire Baja Peninsula, may be acquired by a foreigner through a Mexican bank trust naming the buyer of the property as the beneficiary of the trust.  Naked title is placed in the name of the bank selected by the buyer, as his trustee.  The bank administers the property according to the instructions of the buyer/beneficiary.  The buyer/beneficiary has full ownership rights: he may build on the property, tear down existing buildings, modify them, rent, lease or sell at anytime conforming only to the general laws of the country established for all persons.

 

The term of the trust is fifty years and can be renewed for additional fifty year periods, after which it must be transferred to “one entitled to hold property” in Mexico. In other words, title to the property may rest in one beneficiary indefinitely, provided that it is renewed within the terms established by the law.

 

The procedure for establishing the fideicomiso, the bank trust, is as follows: a permit must be obtained from the Secretary of Foreign Relations which includes a description of the property to be placed in trust, the use for which it is intended, and personal data on each of the beneficiaries.  Once granted the bank draws up the trust document which is recorded in the municipality where the property is located.

 

The costs for the permit to establish and register the bank trust are currently about $1,500. US and annual administration fees are generally $350.00 to $500.00 per annum.  There are additional closing costs, however, and it is wise to request a written estimate prior to beginning the transfer process.

 

copyright, 2003,-2014, Consultores Phoenix, S.C. Reproduction prohibited without permission.

 

 

Share Button

The Role of a Closing Agent in a Mexican Property Transaction

The Role of the Closing Agent in a Mexican Property Transaction

 

by Linda Jones Neil

 

Every transfer of title to a Mexican property MUST, by law, be made before a Mexican notary public.

 

The Mexican notary public is required to have a degree in law.  He must have a minimum of five years of legal practice, pass a rigorous examination and then be appointed by the governor of the state in which he/she resides.   The notary is legally responsible for the review of the prior deed and the tax and lien certificates.  The notary must draft the new deed, calculate the taxes due and pay them.  Also very important, the notary is accountable for his/her actions through the state and national notary associations.

 

It is commonly believed that an attorney, in addition to the notary public, is required when buying property in Mexico.   This is not necessarily the case.  In fact it may make more sense to seek out a CLOSING AGENT to handle the many details of the transfer, such as ordering and reviewing the title investigation; obtaining the certificates and trust permits, interfacing with the buyer and seller, answering their questions and concerns in their native language, explaining the nuances of the transfer process; overseeing the payment of funds for these services and expenses; reviewing the deed to be sure names and addresses are correct; being sure it is registered in the public registry of property; making sure it is delivered to the buyer; providing tax receipts to the seller………….and more!

 

When these matters are left with the Notary Public to handle, they may not all get done, or get done slowly due to the work load of most Notaries.   When these matters are handed to another attorney to perform, they may be sandwiched in between criminal complaints, court appearances and other more remunerative activities.

 

A good Closing Agent can be an attorney with expertise in title transfers, or it can be a company with experienced closing officers and attorneys on its staff for consultations in the event there are title issues.   More and more there are closing agents throughout Mexico.   They are specialists in titles and transfers.

The role of the closing agent

An experienced Closing Agent is a key person in the real estate purchasing process. Hiring a good Closing Agent who understands the ins and outs of the Mexican legal system and the requirements of the law as it relates to foreign investment will make the real estate transaction go much smoother.

 

The closing agent should be involved in drawing up a promise contract and reviewing all documents including title, certificate of no encumbrances, and  permits. A closing agent can also order a complete title search before the transaction reaches the notary public, which will save the buyer valuable time and money should there be a problem with the title.

 

The prudent buyer will always insist upon using an independent third party closing agent to protect his or her interests.

.

Professional Closing Agents will have bi-lingual and experienced closing officers on staff to review the legalities of the transaction and to ensure that all the documents received are in order. Prudent buyers also enlist the help of the Closing Agent, who can oversee the permit process, review the draft of the deed being used in the transfer of title and order the title investigation, identifying any problems before the title has been transferred and money exchanged.

Finding a Trustworthy Closing agent

 

Clients should never hesitate to ask for details of the professional experience and references.  This is even more important when the real estate agent in the transaction is representing BOTH buyer and seller.  This is dual agency which is still common in Mexico.   In this case the buyer should definitely seek out his/her closing agent.

 

Questions to Ask a CLOSING AGENT:  What exact services will you provide? What areas of law or real estate are your specialties? Can you provide an estimate of taxes and closing cost expenses? Will you order or conduct a title search? Can you provide at least three references?   Do you have experience with transfers to foreigners, Mexican bank trusts and foreign investment? How long have you been offering Closing Services to the public? How do you handle the funds you receive for closing expenses? Do you prepare specific instructions for the disbursement of funds?

 

Closing Agents do not have to be specifically licensed in Mexico to be able to supervise the transfer process of Mexican property. It is important to be cautious and do the same homework as when researching a real estate agent. Ask for credentials and references. The more experienced the staff and in-house counsel the company has in handling foreign investment transactions, the more protection and safety the buyer should have in a Mexican property purchase.

 

Copyright, 2010-2014   Consultores Phoenix, S.C. Reproduction prohibited without permission.

 

about the author

LINDA NEIL  is  the founder of The Settlement Company®, which specializes in real estate transfers and escrows, specializing in the Virtual Closing®. The company does business throughout Mexico.   Licensed as a California real estate broker, Ms. Neil has pursued her profession in Mexico for more than thirty years. Her skills in negotiating contracts between parties from three distinct cultures have placed her services in demand as a consultant and for speaking engagements on Mexican law and customs in Mexico, the United States and Canada. She has been widely published on the subject of real property in Mexico. Memberships; FIABCI, AMPI and NAR.  Linda  is a former  member of the National Advisory Council of AMPI and has served as AMPI Coordinator for the state  of Baja California Sur.  Additionally she is co-founder of Global Mexico Real Estate Institute, dedicated to education the real estate professional in Mexico.

Share Button

Mexican Company? or Mexican Bank Trust?

A Mexican company?        Or FIDEICOMISO, the Mexican bank trust?

 

Which Works Best for  Buying Mexican property? 

                                                                                                  

                                                                                                   By Linda Jones Neil

 

 

Article 27 of the Mexican constitution requires that any foreigner buying residential property in the restricted zone (an area 50 kilometers wide along the coastlines and 100 kilometers along the borders) must acquire the rights in the property through a Mexican bank trust, known as a fideicomiso.

 

Pursuant to the Foreign Investment Law of 1994, any company established in Mexico ; is considered as Mexican even if all the shareholders are foreigners.    This applies to corporations, limited liability companies and partnerships..

 

Thus, many think that by establishing the Mexican company, a Mexican bank trust (fideicomiso) can be avoided.   It can be, but it is important to consider other aspects before making a final decision as to how to title your Mexican property.

 

The Mexican corporation, limited liability company, or partnership, should be established if the primary objective is business; whether it is to open and run a business, to hold properties for rental, or to achieve another type of money making goal.

 

The fiscal responsibility for the Mexican company involves filing monthly and annual tax declarations.   Also an annual report must be filed with the Secretary of the Economy if any foreigners are shareholders or partners in the company.

 

The benefits:   the administrator of the company may be able to obtain permission from the Immigration Department to work in the business activities of the company

 

The negatives:  the Mexican company will cost $2,000. to $3,000. USD to establish and to register in the public records..   Any properties which will be held by the company require a permit from the foreign relations department and must be necessary to the operation of the company.

 

Once established, the cost to maintain the company can be $100. USD, or more, per month to pay an accountant for handling the books and filing the declarations.   There will also be additional charges for the annual declaration before tax authorities and before the Secretary of the Economy.

 

If the business activities and projected income will support this type of expense then a Mexican company makes sense.

 

If however, the goal is to acquire and enjoy a vacation or retirement home, renting it occasionally when the owner is not using it, it may be far simpler to place the property title in trust (fideicomiso).

 

If the property being purchased is for personal use, if it is residential property, then it must be held in the Mexican bank trust (the fideicomiso).   Not only will it be less expensive in the long run but also it may also be simpler to sell should the owner wish to do so.   Bank fees range from 350. to 550.USD per year, far less than the operations and maintenance expenses of a Mexican company.   Should you choose to rent your property when you are not using it, this too is permitted and can be simpler than the mandatory monthly declaration required for the Mexican company.

 

Mexico is an incredible land and rich in many aspects.    It does make sense to keep life simple and enjoy the properties acquired, not to become entangled in compliance with tax laws.

Copyright 2010 -2014   Consultores Phoenix, S.C. Reproduction prohibited without permission.

 

about the author

LINDA NEIL  is  the founder of The Settlement Company®, which has many years of experience in real estate transfers and escrows, and specializes in the Virtual Closing®. Licensed as a California real estate broker, Ms. Neil has pursued her profession in Mexico for more than thirty years. Her skills in negotiating contracts between parties from three distinct cultures have placed her services in demand as a consultant and for speaking engagements on Mexican law and customs in Mexico, the United States and Canada. She has been widely published on the subject of real property in Mexico. Memberships; FIABCI, AMPI and NAR.  Linda  is a former  member of the National Advisory Council of The Mexican Association of Real Estate Professionals (AMPI) and has served as AMPI Coordinator for the state  of Baja California Sur.  Additionally she is a co-founder of Global Mexico Real Estate Institute, dedicated to providing professional education for real estate agents.

            For reprints or further information, please contact

The Settlement Company®: in Mexico:

E-mail info@settlement-co.com,  website: http://www.settlement-co.com

Share Button

How Secure is Your Investment in Mexican Property?

HOW SECURE IS YOUR INVESTMENT IN MEXICAN PROPERTY???

 

by Linda Jones Neil

 

All too often citizens of the United States, Canada and other countries ASSUME that property purchases are carried out automatically in Mexico in a manner similar to that of their native countries.  The first law of property purchase in Mexico is DON’T ASSUME anything!  Purchasing property is NOT the same as in other parts of the world.

             Would you purchase a property in your hometown which is not registered in the local public registry or land titles office?

             Would you hand a complete stranger, without an office or an established business entity, a check for perhaps hundreds of thousands of dollars to pay for a property?

             Why do so many foreigners do this when they purchase in Mexico?  Many do not realize that Mexico has a complex and complete legal system and a court system that is as well organized as any that exists in the United States, Canada or Europe.  It is essential that you have an idea of how the system works and what to expect when considering a purchase of property in Mexico.

Don’t leave your brains at the border!

Article 27 of the Mexican constitution prohibits ownership by a foreign individual or business entity of real property (real estate) within the  “restricted”  zone which is an strip of land approximately 30 miles from any coastline and 60 miles from any border.  Recognizing the demand by foreigners for ownership of property and recognizing the importance of making desirable properties available to foreigners for potential positive impact on the economy, the Mexican government implemented a series of Foreign Investment Laws beginning in 1973.  The law was modified in 1989 and again in December 1993, to incorporate the provisions of the NAFTA treaty passed in late 1993.

For those who are acquiring property for residential usage, the law requires that title to the property in the restricted zone be transferred to a Mexican bank, as trustee, in the establishment of a trust (fideicomiso) in which the foreigner is the beneficiary.  The bank is the titleholder of the real property and the foreigner is the owner of the rights of usage of the property.  The bank owns the real property rights and the beneficiary owns the personal rights of usage.  Ownership of these personal rights is evidenced through a deed prepared by a Mexican Notary Public and signed by a representative of the trustee bank.

Currently the term for a trust is fifty years.  The Foreign Investment Law of 1989 provides for renewal by filing an application.  Multiple renewals are permitted under the law.  By requesting extensions every fifty years, a property may be controlled by a family or business entity for generations.

For those foreign individuals or companies buying property in the interior of the country, not in the restricted zone, no bank trust is required but authorization from the Secretary of Foreign Relations must be obtained and ownership must be registered in the National Foreign Investment Registry located in Mexico City, as well as in the municipality where the property is located.

 

AVOID TAXES AND EXTRA COSTS, LEAVE THE DEED IN THE SELLER’S NAME: This is wrong!  Until the buyer is formally named as the owner in fee simple or in the bank trust in a public document before a Mexican Notary Public, title to the rights in the property remain with the persons named in the previous property deed.  Their signatures are required to transfer title. If the buyer fails to obtain his or her own deed he/she will be required to obtain the titleholder’s signature before a sale and transfer to another buyer.  This can be costly, frustrating, dangerous and time consuming.

 

THE IMPORTANCE OF REGISTRATION OF THE DEED FOR BENEFICIAL RIGHTS.

The purchase/sale document signed by buyer and seller is generally legally valid between the parties to a transaction.  It most likely contains the description of the property, the price to be paid to the seller, and any other special terms and conditions.  It WILL NOT, however, provide valid notice to third parties unless it is recorded in the Public Registry Office of the municipality in which the property is located.  Mexico’s land registry system functions in much the same manner as the Public Registry offices in Podunk, North Dakota, Los Angeles, California, Ottawa, Canada or places in between.

 

Many foreigners purchasing property in Mexico do not understand the importance of registration of their interest in property.  They believe that it should be left in the name of the property developer, in the Master Trust, or in the name of the previous holder of title.  What if the developer goes bankrupt?  What if the corporation and its principals, disappear?  Who then owns the property?  Who can sign as the representative of the property?  What happens if an unscrupulous seller sells the property to someone else? While title is in the name of the seller, it is HIS/HER asset; she may mortgage it, he may sell it again, it may be attached in satisfaction of a judgment, she may die without a will.

             Unless the deed for the rights of the beneficiary has been recorded, there may not be a remedy for the purchaser who neglected to obtain a registered deed…his or her  interest and investment, may be lost.

             To obtain the deed an appraisal, a property tax certificate, and a no-liens certificate must be obtained.  Notarized bank instructions must also be obtained if property is in the “restricted “ zone. Seller’s capital gains tax and Buyer’s acquisition tax must be paid.  The deed transferring rights to the buyer must be registered and stamped by both the tax office and the public registry.  If this process is not complete, the buyer is not fully protected.  The buyer’s ultimate protection is registration in the Public Registry office record, NOT the Notary Public or the trustee bank!

 

FINANCED PROPERTIES

             When property is sold with a down payment and the balance to be paid over a term of years, many sellers prefer to hold title to the rights in their name and transfer title to their rights only upon receipt of payment in full.  Meanwhile, however, the seller may die, may disappear, may go bankrupt… again risky situations for the buyer.  The prudent buyer will insist upon a transfer of title and registration of a mortgage or pledge in which he gives his rights in the property as security for payment of the remaining purchase price.

In the event of default by the buyer, the seller must conduct a proceeding similar to a judicial foreclosure in the United States and Canada.  It is as troublesome as a foreclosure in any country in the world but not notably more problematical.  The registered title and recorded pledge or mortgage provides the buyer a greater comfort level in his investment.  The lender also enjoys protection in having his loan recorded and will have an established legal proceeding to follow in the event of default by the buyer.

copyright, April 2003 – 2014  Consultores Phoenix, S.C.,   reproduction prohibited without permission

# # # # # # #

            This article was provided by The Settlement Company®.  It is the first escrow company in Mexico and is dedicated to processing the trusts and title transfers of Mexican real estate for foreign buyers and sellers for properties located ANYWHERE in Mexico.  The company frequently sponsors seminars on the various aspects of real estate ownership in Mexico and holds membership in AMPI, NAR and FIABCI and received PROFECO Certificate 00063/96 based upon demonstration of qualifications and business practices of its chief executives. The Settlement Company handles transfers on properties located throughout Mexico, makes annual property tax and bank payments and provides title search and title insurance on properties located throughout the country.

Share Button

The Mexican Corporation, How it Works and Why

THE MEXICAN CORPORATION –

THE VEHICLE FOR BUSINESS DEALINGS IN MEXICO

 

“XYZ Company, S.A. de C.V.” – What does all THAT mean?

 

by Linda Jones Neil

 

The Sociedad Anonima de Capital Variable, translated literally is an anonymous society of variable capital.  This is equivalent to the U.S. corporation in which there are stockholders.  In Mexico it is governed by the Mercantile Law.  More and more, foreigners are forming Mexican corporations which end with the initials, “S.A. de C.V.”, to do business and to achieve their financial goals in Mexico.  The SA de CV is similar to the “Inc.” of  the United States and Canada.

Another version of a corporate entity is the Limited Liability Company which has become more common in recent years.  The Mexican counterpart is the SRLde CV, the Limited Responsibility company with variable capital.

            While there are differences between the S.A. de C.V. and the S.R. L. de C.V., for our purposes here, both are included under the term “corporation” in this article.

As of December 1993, the corporation formed in Mexico is considered as “Mexican” even though all shareholders may be foreign persons.

 

When should a corporation be formed?  It will make sense if the shareholders wish to perform services or sell goods for profit, build a hotel, or if they wish to develop a property for resale in lots or condominiums.  The corporate entity permits the principals to obtain working papers and to obtain working papers for other foreigners who provide services not easily obtained in the local job market.  Care must be taken, however, to set up the financial reporting system, to obtain invoices for all pre-operating expenses and to have an accountant who is knowledgeable to make the required filings in SAT or Hacienda, México’s version of Uncle Sam or Revenue Canada.

The minimum capital investment in a Mexican corporation is $50,000.00 Mexican pesos  Evidence of this capital contribution must be in cash or in assets which equal the total amount of the start up capital.  It is important to make the declaration of all assets which are to be included from the start up of the corporation.  Do not select the minimum amount just because it is the minimum.  If you do it may later be difficult to establish the true amount of initial capital invested. Once the initial capital is established, additional investment may be added by making a declaration before a Notary Public, without requesting permission to do so from the government.  This is the Variable Capital portion of the equation.

 

It is important to include in the corporate charter a statement of purpose (objecto social) that is very general.  It should mention all activities that may be of interest to the shareholders; better to have an ample charter, permitting many business activities, rather than to have it limited to one activity.  It is also a good idea to include export and import of all types of merchandise and technology in the charter.  This makes bringing equipment and or supplies in from another country simpler.

A minimum of two shareholders is required to form a corporation.  These shareholders will be required to sign the corporate charter before a Mexican Notary Public.  If they come into Mexico as tourists to sign the documents they should obtain a Business Visa at their local Mexican Consulate prior to coming so they may perform a business activity (signing the document) in a legal manner.  Once the corporation has been formed it is necessary to obtain a federal tax registration number for the corporation and the administrator or board of directors must obtain the proper visas to work in the activities of the corporation.

 

If the corporation includes or is composed of foreign stockholders it will include a clause in which the foreigners promise to be considered as Mexicans in the eyes of the law and not to invoke the aid of their government in the event of a dispute.

Administration of matters of the corporation may be either through a sole administrator (administrador unico) or through a board of directors.  A Comisario must be appointed.  This is the person responsible for the accounts and tax payments and should be a Mexican accountant.  The comisario does not need to be a shareholder.  The duties of the administrators, whether sole administrator or board of directors need to be clearly defined.  Will they be able to enter into lawsuits?  Obligate the corporation for loans?  Hire and fire personnel?

 

Generally it is wise to provide a list of five names, in order of preference, for the corporation for submission for the permit for incorporation. The first name which has not been used previously by another company will be designated.  Upon confirmation of the name, the corporate documents must be prepared and signed before a Notary Public within ninety days or the authorized name will become invalid and the process must be begun again.  Together with the name request, permission to incorporate, where foreigners are involved, must be obtained from SECOFI, the Secretary of Industry and Commerce.

Upon completion of the corporate document, it must be recorded in the local registry of Business and Commerce, the National Foreign Investment Registry and the business enrolled in the local Chamber of Commerce or Industry Chamber.  Monthly declarations must be filed with tax authorities. Additionally, the corporate accountant must file an annual statement with the National Foreign Investment Registry regarding the business activity for the previous year.  If the corporation is used for property development or is not active, the Mexican accountant will probably charge about $600. Dlls. per year to do the required filings.  If the corporation is active the accounting charge may be $300. to $500. Dlls. per month, or more.

Copyright, 2004-2014  Consultores Phoenix, S.C., reproduction prohibited without permission

Share Button

CLOSING THE MEXICAN REAL ESTATE TRANSACTION

REAL ESTATE CLOSINGS

 

MAKING THEM SIMPLER!

 

by Linda Jones Neil

 

Once you have selected that great property in Mexico, and you and your agent have negotiated a successful offer……………what is next?

 

How can you be sure that you are going to have a title to the property, and that it will be done properly?

 

In any country a real estate closing requires a thorough review of the title documents, the property tax payments, the liens on the property.  If there are liens, if property taxes have not been paid, these must be taken care of and paid prior to transfer of title.

 

If the property is residential and is located in the “restricted” zone, a permit for a Mexican bank trust must be obtained, or arrangements made for assignment of the existing trust.   A thorough review of the trust document is required in order to determine which is best in each case.

 

A major benefit of buying property through the Mexican bank trust is that you can name beneficiaries to succeed you upon your death.   Naturally this selection needs to be done carefully so your instructions are clear and not subject to misinterpretation.   Another important item:  is property to be taken in joint tenancy or tenancy in common?  The words have to be correct and understanding complete in your deed.

 

All of these matters can and should be handled by an independent third party closing company with attorneys on its staff and experience in the field.   The real estate agents representing buyer and seller can oversee the closing process but, generally, their efforts are better spent in promoting and selling properties, not spending time in detail activities.

 

A real estate closing on Mexican properties has similarities to a closing in the United States and Canada.   There are the same two main parties:   the buyer and the seller.   There are however, two additional parties to a Mexican closing; one is the Notary Public who is legally responsible for drafting the deed and calculating the taxes on the transaction and, if the property is located in the “restricted zone” (along the coastline or near the borders), the bank trustee who must approve the terms of the trust (fideicomiso) contract and sign before the notary public.

 

Trying to arrange a time and a place for all four parties to come together to sign the deed of transfer can be a challenge.   The buyer may live in New York state, the seller in Alberta, Ontario, the bank trustee may have his main office in Mexico City, Monterrey or Guadalajara and the Notary Public may have his office almost anywhere!

 

With internet, e-mail, courier service and bank wire transfer services around the globe, there is absolutely no need for the parties to congregate in one location on a specific day, at a specific time and in a specific place.

 

The Virtual Closing is the solution!

 

Instructions can be signed by both buyer and seller authorizing the completion of necessary tasks such as the appraisal, the lien certificates, the title investigation, the request for the foreign relations  permit, and so forth.  Funds for the purchase can be deposited in escrow accounts and paid out per specific instructions.   Funds for the closing costs can also be deposited in escrow and paid out pursuant to instructions.

The deed, be it fideicomiso or fee simple, when drafted, can be sent to the parties for review and approval.  Rather than trying to coordinate a simultaneous signing, the trustee bank can sign when convenient without making a special (and possibly expensive) trip to the notary office.   Buyer and Seller, if their signatures are required, can provide powers of attorney to the closing company supervising the transfer.

 

This keeps buyers happy, and on the beach or doing their thing at home and accomplishes the goal of the operation……….a deed to the property purchased!

copyright, 2004– 2014 Consultores Phoenix, S.C., reproduction prohibited without permission

 

Author Linda Jones Neil is the founder of The Settlement Company®.  It is the original escrow company in Mexico, and is dedicated to processing the trusts and title transfers of Mexican real estate for foreign buyers and sellers for properties located ANYWHERE in Mexico. Ms. Neil is also licensed as a Real Estate Broker in California, is an Accredited Buyer Representative through NAR, and has over thirty five years of hands on experience in all aspects of Mexican real estate.  She holds membership in AMPI, NAR and FIABCI and PROFECO Certificate 00063/96.

E-Mail; linda.neil@settlement-co.com  and website: Web Site: http://www.settlement-co.com.

Share Button

THE MEXICAN NOTARY PUBLIC AND THE APOSTILLE

The Mexican Notary Public and The Apostille,

 

By Linda Jones Neil

 

 

In Mexico, the ONLY authority permitted to draft a deed transferring real property (either in fee simple or in fideicomiso) is the Mexican Notary Public.  This person is different from a notary public in the United States where a simple exam, a bond, and a rubber stamp can make a notary public out of most people.  Nor is it similar to Canada’s Notary Public who must meet a few more stringent requirements to qualify.  Not so many, however as the Mexican Notary.

 

The Notary Public in Mexico must be an attorney, must have a minimum of five years of practical experience in the profession, must pass a technical examination and then be appointed as a Notary Public by the Governor of the state in which he or she is working.

 

The number of Notaries Public depends upon the number of people in the state. A new Notary is appointed only as the population grows above a certain number.

 

The Mexican Notary Public has many duties, but one of the most important is the drafting of deeds for transfer of real property.  Anytime a signature is required on a deed of transfer it must be made before the Mexican Notary Public.

 

As of now, foreigners buying and selling their rights in property in the ´”restricted” zone, through fideicomiso rights, do not always have to appear before the Mexican Notary Public in order to transfer their interest in the real estate.  These transfers in many cases may be made by having instructions signed in the buyer or seller’s place of residence and “legalized” or “authenticated” for use in Mexico.  This same process can be used for a power of attorney document in the event a buyer´s or seller’s signature is required.

 

And what is a “legalized” or “authenticated” document?

 

No matter what the document, it must be signed before a Notary Public in the place of residence; California, Arizona, Calgary, Vancouver…….or wherever.  Once signed before the Notary Public in the place of residence it must be “legalized” or “authenticated” in order to be considered as valid in Mexico.

 

This means that a designated public official performs a government act and certifies to the genuineness of the signature and the seal, and the position of the official who has executed, issued or certified a copy of a document.

 

In 1981, the Convention Abolishing the Requirement of Legalization for Foreign Public Documents entered into force in the United States.  Under the Convention (signed in the Hague, Holland) signatory countries, including both the United States and Mexico, but not Canada, agreed to mutually recognize each other’s “public documents” so long as such documents are authenticated by an apostille, a form of internationally recognized notarization.  The apostille ensures that public documents issued in one signatory country will be recognized as valid in another signatory country.

 

Thus, if the document required for a Mexican transaction has been notarized in the United States, it must then be sent to the nearest office of the Secretary of State and an “Apostille” obtained.  A search under state government in the yellow pages should reveal the telephone and location of the closest office of the Secretary of State.  The document to be authenticated through an Apostille can probably be sent through the mail and should not cost more than $25.00 U.S. dollars.  It is important to allow for extra time to accomplish this step.

 

Other countries that are signatories to the Hague Convention are, to name a few; Germany, Argentina, Australia, Austria, Bahamas, Spain, Israel, France, Greece and Norway.

 

All countries which are not signatories to the Hague Convention, such as Canada, must authenticate documents to be used in Mexico by obtaining a “legalization” or ratification of their document from the nearest Mexican Consulate.  It maintains a list of authorized Notaries with samples of their signatures and is able to ratify the authenticity of the Notary’s signature.

 

Many persons object to the time involved and the additional step required to “authenticate” a signature for legal use in Mexico.  It is less expensive and less time consuming, however, than making a special trip to Mexico in order to sign a document before a Mexican Notary.

copyright September 2004, Consultores Phoenix, S.C., reproduction prohibited without permission.

 

 

This article is provided by The Settlement Company, the first escrow company in Mexico, and is dedicated to processing the trusts and title transfers of Mexican real estate for foreign buyers and sellers for properties located anywhere in Mexico.  The company frequently sponsors seminars on the various aspects of real estate ownership in Mexico and holds membership in AMPI, NAR and FIABCI and PROFECO Certificate 00063/96 E-Mail: info@settlement-co.com Web Site: http://www.settlement-co.com

 

Share Button