WHAT TO USE WHEN BUYING PROPERTIES LOCATED IN MEXICO

COASTLINES AND BORDERS: A REAL ESTATE TRUST OR A MEXICAN

CORPORATION?

There are two options:

a) The constitution of a real estate trust with a Mexican Bank as trustee.

b) The settlement of a Mexican Corporation (Sociedad de Responsabilidad
Limitada de Capital Variable)

Lets take a look at the pros and contras of each option as well as the costs
of each one.

A) Restricted zone Real Estate Trust (Fideicomiso con inmuebles
en zona restringida)

1) The proceeding to settle the trust agreement as well as the rights and
obligations that you will have under the same are described in the
presentation (PowerPoint) named: REAL ESTATE TRUSTS IN
MEXICO. I beg you to review it carefully.

2) The duties and fees payable to the Mexican Federal Government as
well as the Banks Fees (Trustee) are detailed as follows:

I.- DUTIES AND EXPENSES PAYABLE TO THE
FEDERAL GOVERNMENT:


Permit from the Foreign Affairs Ministry MEX $__________

& Registration of the trust deed at the National
Registry of Foreign Investments.-

MEX$__________
Subtotal of duties and expenses: MEX$___________
Between ------- (exchange rate) USD$_______ (A)
II.- FIDUCIARY (BANK) FEES:


Elaboration of the Trust Agreement.- USD $_______

Annual fee for keeping the property in trust


USD$_______
11% I.V.A. ( Value Added Tax).- USD$________

Subtotal of Bank fees USD$________ B)
Total of duties plus Bank Fees (A + B) USD$_____

If you cannot be present at the signing of the Trust Deed, you must grant
a power of attorney. We can send you the formats in English and Spanish
for those powers of attorney. They must be signed in front of a notary
public if they are granted in Canada and then legalized by the Mexican
Consul. If they are granted in Europe or USA, after they are signed in front
of a notary public, you have to legalize them with an apostille according
to the Hague Convention of October 10, 1961 by the Secretary of State
of the State or Province where it is granted.


Pros of the Real Estate Trust Deed:

1) The most important advantage of having your property in a trust
deed is the possibility of appointing substitute beneficiary(ies) who
will receive the use and avail of the property upon your decease.
When you die, your beneficiary (ies) will only need to contact the
Trustee (Bank), bring his /their identification(s) and your death
certificate (legalized) and automatically he/they shall be recognized
as the new beneficiary (ies). This acknowledgement is formalized in
a deed entered by the Trustee and your beneficiary(ies) in front of a
Mexican Notary Public and is also filed at the Public Registry of
Properties. Acquisition Tax is generated (2.2% over the catastral
value of the property(ies) held in trust.

Even if a Trust deed was not necessary to acquire properties for land
located within the Mexican restricted zone I advise foreign
investors to purchase properties, because of the possibility of
appointing substitute beneficiary (ies).

It is very important to make the appointment of your trust
beneficiaries in the event of your decease during the period of the trust, in
order to avoid conflicts of laws of different countries (Canada, United
States and Mexico), probate procedures before Judicial Courts, the
State Ministry or Department of State in your country and Mexicos
Foreign Affairs Ministry and obviously very high attorneys fees (around
USD$6,000.00 at least), plus the cost of transferring the title to your heirs.

2) You do not have to register yourself at the Mexican Tax Authority
(Servicio de Administracin Tributaria). You just pay the annual fee of
the Trustee, as well as the property tax of the land (Impuesto
Predial) and that is all.
3) You do not need any special migratory status to purchase through a
Trust.

Contras of the Real Estate Trust Deed:

1) The only argument in contrary for acquiring through a Trust is the
payment of annual fees to the Bank. However, as they are expressed
in U.S. Dollars, they are not reevaluated yearly. They usually remain
the same.

B) Incorporating a Mexican Corporation

Pros of setting up a Mexican Corporation (Sociedad de
Responsabilidad Limitada de Capital Variable or Sociedad Annima de
Capital Variable):

1) The Sociedad de Responsabilidad Limitada de Capital Variable is
very similar in its tax structure to the Limited Liability Corporation
or to the Partnership (U.S.A.)
2) You dont need to obtain and pay a permit from the Foreign Affairs
Ministry as in the Trust. The Secretary of Economy grants the
authorization of use of the corporations name for free.
3) You dont have to pay annual fees to the Trustee (USD$440.00
yearly)
4) It is fine if you plan to rent your property (ies) or have it/them in
a rental pool. The Corporation declares the taxes.
5) If you are buying land and you are planning to build villas of
apartments over the lot, this could be your option. As a
corporation, you will have advantages in the payment of the
Capital Gain Tax when you sell the units.

Contras of incorporating a Mexican Corporation:

1) You need to file the Corporation at the Mexican Tax Authority
(Servicio de Administracin Tributaria or SAT) and file monthly
declarations of three type of taxes: Impuesto Sobre la Renta
(Income Tax), Impuesto Empresarial de Tasa Unica (Fixed Rate
Business Tax) and Impuesto al Valor Agregado (Value Added Tax)
as long as the corporation exists. Before 2009, many foreigners
used to incorporate Mexican Corporations to buy properties. Once
they were registered at the SAT, they used to present a
suspension of activities declaration. Since 2009, the suspension
of activities are not accepted by the SAT. If a Corporation is not
doing business you have to file monthly declarations in zero, or
extinguish the corporation.
2) You need the services of a CPA, in order to file the monthly
declarations and one yearly declaration of the three taxes
mentioned above. CPAS in Cancun usually charge from US$50 to
USD$100 per month, which makes $500 to $1,000.00 in a yearly
basis.
3) At least, the manager of the corporation needs to register as Tax
Contributor in the SAT
4) The stockholders and the corporation need to register at the
National Registry of Foreign Investments, and file annual
declarations of the activities of the corporation.
5) You need to grant a power of attorney to the CPA for
administration acts in order that he complies with all the Tax
obligations of the Corporation.
6) You need to obtain an FM3 (migratory visa as Investor) to
perform as Manager of the Corporation. The cost of obtaining such
FM3 is around USD$750.00 including duties and attorneys fees. It
has to be renewed annually.
7) You need to have a will granted in Mxico for your properties
located in this country. Cost of a will around USD$300.00. The
cost of the probate procedure (attorneys fees, duties and judicial
expenses) will cost not less than 2.0% of the property (ies) plus
the cost of the transfer of title deed.

In any of both cases, it is advisable to be sure that the actual price of the sale
is declared in the title (Trust Deed or Buy and Sale Agreement) before the
notary public, because this amount (purchase price) shall be deducted from
the sale price when you sell the property. The difference between purchase
and sale prices would be considered as profit/loss in order to calculate the
Capital Gain Tax (Impuesto Sobre la Renta) which is around 30% in the case of
profits.

It is also very important that if you build, to have the construction license in
your name as well as invoices of all amounts invested in the construction,
promotion, agents and notary fees, etc., to deduct them from the sales price.


Jos Antonio Avila Duarte
jantonioavila23@yahoo.com.mx