New Hacienda regulations assist foreign investment to avoid expensive corporations

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A NEW SET OF MEXICAN IMMIGRATION LAWS – COMPLICATED & CONFUSING

Last year we saw a dramatic shift in Mexico’s foreign investment tax laws.  Previously,  foreigners were only allowed to maintain a Mexican business by forming a corporation.  Corporations in Mexico are expensive to establish – costing from $3,500 – 8,000 dollars.  And, expensive to maintain.  Both entities require three declarations of earnings each month plus an annual report that almost assuredly requires an accountant.  Even if there is no revenue into the corporation, monthly reporting is required.  A book keeper can provide that service except for the annual report.  A standard monthly rate for a bookkeeper is fifty dollars.  An accountant $75.00 minimum per month.

My clients complain that their multimillion dollar businesses in the United States are less expensive to maintain than a business in Mexico with only thousands of dollars in revenue.  The reason is red tape.  Mexico has three times the per capita number of bureaucrats compared to the States.  As a result,  the bureaucracy  typically has three more layers.   Bi national businesses know this and are resigned to it or leave Mexico.  Unfortunately, too many leave unnecessarily:  Good revenue stream, but the red tape and onerous taxation kills the motivation to stay.

A POSITIVE CHANGE – Since last year, Hacienda (Mexican IRS) began allowing  foreigners the advantage of being able to do business as a sole proprietor (persona fisica) as opposed to establishing a foreign owned corporation.   A foreign owned businessman no longer needs a lawyer, notario or public records department to perform the paperwork.  Therefore, the cost to begin doing business is zero. Working with the public servants at Hacienda to complete the process.  Be prepared to spend the better part of three days being shuffled from one department to another.  But, the result is a business structure that is much cheaper to maintain than a corporation.  The reporting is simpler.  And,  instead of paying taxes on capital gains you merely pay a “quota tax” based on  expected revenues.  This is ideal for cash only businesses.

A CHANGE AFFECTING FOREIGN INVESTMENT – In the past once we established a Mexican corporation with no revenue stream,  we could suspend activities.  This saved paying an accountant or book keeper every month simply to report in zeros.  Now you cannot suspend activities of a corporation.  You must report every month to three departments within Hacienda.  Accountants charge $75.00 to complete these reports and an additional $100.00 to maintain the company’s legal domicile in their office.  Legal domiciles are inspected to assure representations and subject to notifications regarding tax status.  If you want to cancel the corporation at some point the costs are $2,000.00 including accounting, notario and public registry fees.

IMMIGRATION CHANGES – No one I know likes the new immigration laws.  Including, the folks that are paid to enforce them.  Resident Immigrants must now leave Mexico and reenter the country in order to obtain a resident visa.  Before, you could complete the entire document processing with your local immigration office.  Now you must go to a Mexican Consulate, anywhere outside the country,  to start the  process.  They will, if they were trained on the new rules, issue a temporary resident visa.  I say “if they were trained” because, at least one half of all my clients were told by Mexican consulate officials that no such visa existed.  Hopefully this will get better with time and training.  Now, with the temporary visa from the Consul you must travel to the nearest port of entry into Mexico and report at the border with immigration.  Here in Baja, the port of entry would be Tijuana, Tecate or Mexicali.  Port of entry immigration will then provide another document and the two documents are then presented to the local immigration official.

The net effect of these changes is that,  here in Baja California,  or any other border state with Mexico: U.S. citizens who cross back home to the states,  with some frequency,  will not go through the hassle of becoming documented residents of Mexico.  Why bother?  Nobody checks your Mexican resident status when traveling into Mexico.  Immigration officials are not raiding gringo ghettos (gated communities).  And,  if they did,  the consequences are that they must assist in getting you properly documented.  No fines or deportation.     So there is no motivation to register unless you own property in a bank trust.  The advantages of selling the property with no capital gains tax (15%)  if you are a documented resident (estancia legal).  Otherwise forget about it.  Estimates are that more U.S. citizens live in “border towns” without documentation than with.  “Wet Back Whiteys”.

WORK VISAS – In the past, with a Mexican corporation,  you could apply for a work visa and complete the entire process with a local immigration office.  Now, as with a resident visa, you must leave the country and come back in.   Prior to the new immigration law,  you could register the address of the corporation with a ”legal representative”.  Usually a lawyer, accountant or book keeper’s office.  Thus avoiding a paid employee and office rent.   Under the new immigration law,  implemented in November of 2012, you must have an office and hire a permanent employee of the foreign owned business.

For many entrepreneurs this is motivation enough to not do business in Mexico. For example, if you are a small exporter of goods from Mexico, an office and staff is an unnecessary expense.  Not just salary but payment of social security benefits, obligatory Xmas bonuses, vacation pay and severance pay of three months for every year employed by you.  A three month underachieving employee will cost you three months of pay to terminate.

Many of my clients are real estate developers.  The process for having your project approved is a minimum of two years.  In that time no employees are necessary.  But,  fees are paid: engineers, lawyers,  accountants, and contractors are necessary.  And, the foreign businessman travels or lives in Mexico.  Contributing to Mexico’s economy  without the unnecessary burden of employees with no meaningful  work  to perform.

Mexico continues to “shoot itself in the foot” with regard to foreign investment and domestic investment.  Every Mexican businessman I know is focused on tax avoidance in order to survive.  Business folks in the U.S. are fed up with the bureaucracy at home.  Why would they want to put up with more onerous and complicated taxation and immigration policies in Mexico?  And, are often prey to Mexican professionals  who take advantage of a non Spanish speaking foreigners who don’t know the system.

The promise of this last immigration change was that you would get the document faster, two weeks instead of two months.  And, a simpler process, eliminating the need for a facilitator.  Guess what?  It is now taking twice as long to receive the documentation.  And, even with a facilitator, the process is more complicated.  I have given up facilitating immigration documentation.  Too much time, not enough value.

VIVA MEXICO – Despite my bitching, moving to Mexico was the best decision of my life and most ex pats will tell you the same.

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