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Holding Baja property in a foreign owned mexican corporation

January 2006

Beach property titlesWatch out for realtors and attorneys who suggest you establish a Mexican corporation to hold title on your vacation/retirement home. They are giving you bad counsel and it could cost you your title down the road. Mexican foreign investment law clearly states that if it is residential property you must establish a bank trust to secure title. Unless that property is to be used as a rental. Then you must report the income, hire an accountant and be subject to a less friendly ISR, with the cozy sounding moniker-HACIENDA.

I have listed below the reasons attorneys and realtors make this foolish suggestion to buyers. It may be one or a combination of these reasons. The lawyer or realtor knowingly suggests a corporation knowing full well the client has no intention of using the corporation to run a business.

• Not all Mexican attorneys have experience in foreign investment. I was surprised, when I first began consulting with clients, how few attorneys in Ensenada or San Felipe thoroughly understood foreign investment law. I was also surprised to discover that, among young lawyers their law professors lectured to them with information based on pre 1993 foreign investment law. The laws changed drastically in 1993 and they were obviously not up to date. Realtors know even less. Typically a U.S. realtor does not speak Spanish nor is trained in Mexican Real Estate law.

• Attorneys have an ulterior motive in recommending a mexican corporation in instead of a bank trust. More hours to bill in setting up a corporation as opposed to a trust. Realtors like the corporation because it can be a faster route to receiving commissions. Also, realtors often work with attorneys who kick back fees for establishing a corporation.

• Foreigners cannot buy large parcels of land under a trust (maximum 2000sq. meters) without getting a variance from Relaciones Exteriores (Exterior Relations) which governs government trust permits. Therefore, rather than risk the sale because of red tape, the realtor recommends the easiest and quickest way to convey title and commissions.

In addition to putting your title at risk, the disadvantages of having a corporation outweigh any advantages. A corporation is expensive to maintain; requiring an accountant to report monthly and prepare year end reports that are time consuming and costly. A yearly bank trust fee is $500 and you can sleep at night without worrying about a HACIENDA audit.

In San Juanico Baja Sur, surfers know it as Scorpion Bay, a realtor and his attorney friend have set up over a dozen foreign owned Mexican corporations with no intention of doing anything but holding large residential parcels. I can’t imagine Hacienda not becoming curious about all these foreign owned corporations with no revenue streams in a fishing village of 500 people. This is going on all over Baja and I can’t believe Hacienda will allow it to continue unchecked.

The other disadvantage to a corporation is that at the time of sale you will be taxed on the capital gains received. Capital gains taxes are 35% of the profit. All property held by a corporation is subject to this tax. If you hold the property in trust for more than two years and can demonstrate it was a primary domicile in Mexico (fm-3 immigration permit plus light, water or phone bills in your name), the tax is 5% of the sales price. You can save yourself tens of thousands of dollars, at the time of sale by holding the property in a trust.

Get a bank trust if you don’t intend to run a business in Mexico. Get counsel from an experienced consultant or attorney and by all means get title insurance.

Mexicomatters is a consulting firm specializing in real estate transactions and title insurance – agents for Global Title – issuing agent for First American Title.

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