Investing in Mexican Real Estate
2006 Outlook: Residential Properties and
Developments
Presented by:
Procopio International Tax Institute
February 25, 2006
©2006 Procopio International Tax Institute
U.S.-Mexican Non Tax Issues Real Estate (Comparative Overview)
Key Non-Tax Considerations
Mexico
U.S.
Notário Público vs. Notary Public
Attorney
No
No
Yes
Generally No
Yes
Foreign Ownership Restrictions
Yes
No
Ejidos
Yes
No
Escrows and Closing
Title Insurance
©2006 Procopio International Tax Institute
U.S.-Mexican Taxes on Real Estate (Comparative Overview)
Type of Tax
Mexico
U.S.
Income Taxes
Yes
Yes
State Income Taxes
No
Yes
Withholding Taxes
Yes
Yes
Branch Profits Tax
No Indirectly
Yes
Sometimes
Yes
Value Added Taxes (IVA)
No
©2006 Procopio International Tax Institute
U.S.-Mexican Taxes on Real Estate (Comparative Overview)
Type of Tax
Mexico
U.S.
Local Transfer Taxes
Yes
Yes
Local Property Taxes
Yes
Yes
Estate or “Death” Taxes
No
Yes
“Asset” Tax
Yes
No
“Gift” Taxes
Sometimes
Yes
©2006 Procopio International Tax Institute
Mexican Taxes on Real Estate
Resident Individuals

Worldwide Income

Progressive Tax Rates
- (Range: up to 29% max
Nonresident individuals

Source of wealth in Mexico

Permanent establishment in Mexico
©2006 Procopio International Tax Institute
Mexican Taxes on Real Estate
Residents of Mexico - Individuals
—
Principal residence in Mexico (habitual abode)
—
Income Tax Law “Tie Breaker”

Center of vital interests (50% income criteria, if a
core of professional activities is maintained in
Mexico).
—
Sale of Primarily residence is exempted (only for
Mexican Residents)
—
Article 4 - “Tie Breaker” Rules
©2006 Procopio International Tax Institute
Mexican Taxes on Real Estate
Nonresidents of Mexico without Permanent Establishment
–
Capital Gains:
-
Sale of Real Estate
-
Sale of Stock in Real Estate Holding Companies
©2006 Procopio International Tax Institute
Mexican Taxes on Real Estate
Nonresidents of Mexico without Permanent Establishment
–
Withholding on sale of Mexican Real Estate
-
25% Gross Amount
(or)
-
33% Net Gain Amount Election / Art. 6 and 25 of
US/Mex Treaty
-
Withholding is done by the Notary Public.
©2006 Procopio International Tax Institute
Mexican Taxes on Real Estate
Nonresidents of Mexico without Permanent Establishment
–
Withholding on sale of Mexican Real Estate Holding Company
–
Source of wealth in Mexico if
–
The issuer is a Mexican Resident
–
The value of the Holding is made up of 50% or more from underlying
Mexican Real Property
-
25% Gross Amount
(or)
-
33% Net Gain Amount Election / Art. 6 and 25 of of US/Mex Treaty
©2006 Procopio International Tax Institute
Mexican Taxes on Real Estate
Nonresidents of Mexico without Permanent Establishment
Special Issues
- Acquisition of Mexican Real Estate, (Mexican corps or foreign corps with 50% +
value represented by Mex RE) by gift is subject to 25% gross withholding tax
- Only exemption applicable is for gifts among spouses, No exemption for gifts
among linear descendants!
- Question as to acquisition by inheritance.
- No “home” exemption (similar to U.S. “principal residence”)
- If Seller understates selling price (10% + difference as to FMV) Foreign Buyer is
liable for the unreported tax at a 25% rate on the gross understated difference.
©2006 Procopio International Tax Institute
Mexican Taxes on Real Estate
Nonresidents of Mexico without Permanent Establishment
Lease: Real Estate in Mexico

Withholding at 25% (Gross Amount)
—
Done by the lessee if it’s a Mexican resident or a
foreigner with permanent establishment in Mexico,
otherwise the lessor must pay the tax within 15 days
of receipt of the funds
—
Done by the trustee if its an asset in trust
(fideicomiso).
©2006 Procopio International Tax Institute
Mexican Taxes on Real Estate
ASSET TAX (IMPAC)

Rate of 1.8%.

Foreigners granting use of the assets to a Mexican
individual or a company and affected to the
entrepreneurial activity will be taxed

IMPAC: to be credited against the Income Tax liability
(akin to the Alternative Minimum Tax)

Tax Holiday for New Entities
— Not applicable to entities granting use of the
assets.
— Exemption of USD$1.4 Million
©2006 Procopio International Tax Institute
Mexican Taxes on Real Estate

Mexican “Gift” Taxes (Limited Application)
—
Exceptions for

Lineal Family Members

Spouses

General donations - $5,000
©2006 Procopio International Tax Institute
Mexican Taxes on Real Estate

Estate, Inheritance or other “Death” Taxes?
—
None
—
Income Tax applies subject to exemption among spouses
and linear descendents or ascendants.
©2006 Procopio International Tax Institute
Mexican Taxes on Real Estate
VALUE ADDED TAX (IVA)

General Rate of 15%
—
10% in Border Region (except that sale of RE in border
region is subject to 15% when applicable and leases
are subject to 15% if the lessor is not a resident of the
Border Region).

Basis Computation
—
Transfer of land and residential buildings: Exempt of
IVA (different than 0% rate which eliminates the tax)
©2006 Procopio International Tax Institute
Mexican Taxes on Real Estate
REAL PROPERTY TRANSFER TAX (ISABI)

Local tax

General Rate, In Baja: 2% (May vary from State to
State)
PROPERTY TAXES (Predial)
©2006 Procopio International Tax Institute
U.S. Tax Considerations - Choice of Entity - Corp.
continued
One consequence of the corporation's status as a separate
taxpayer is that there will often be so called "double taxation".
The corporation pays a corporate income tax on its profits. If the
after-corporate-tax profits are then distributed to the
shareholders as dividends, the individual shareholders pay a
separate, second tax on these dividends.
Disadvantages
Advantages of the Corporation
Double taxation in dividend
Limited Liability
distributions and liquidation
Continuity of life
Business losses cannot be used
Centralized management
personally
Stock ownership freely transferable
Possibly lower tax rate on entities income
©2006 Procopio International Tax Institute
U.S. Tax Considerations - Entity Classification
Rules
(the “Check-the-Box” or “CTB” Regime)
 U.S. corporation always treated as a corporation

U.S. partnership, U.S. limited liability company, and most foreign
entities may be treated under CTB regime as a corporation,
partnership (if 2 or more members) or simply disregarded (if
single member)

Certain foreign entities are per se treated as corporations
—

Mexican S.A. and S.A. de C.V., Dutch NV, German AG are
per se corporations
To obtain desired classification, must either file IRS Form 8832
or rely on default classification of entity
©2006 Procopio International Tax Institute
S.A. vs. S.R.L.
Schedule of Estimated Worldwide Income Taxes (U.S. Individual Shareholders)
Income of U.S. Shareholders From Foreign Corporation
Jurisdiction: Mexico (Dollars Calculation)
Selection of Form of Foreign Legal Entity - Foreign Corporation
FOREIGN CORPORATE STRUCTURE
*Sociedad Anonima. De facto foreign corporation pursuant to Treas. Reg. Section 301.7701-2(b)(8)
Foreign Corporation
*Mexican Taxable Income
$ 1,000,000
U.S. Indirect Foreign
$
-
$
-
Tax Credit (not eligible)
*Mexican Corporate Tax Rate
29%
U.S. FTC without regard to FTC
Mexican "Corporate" Taxes
$
290,000
limitations (not eligible)
Mexican After Tax Income
$
710,000
U.S. Taxable Dividend
$
710,000
$
U.S. Tax Rate
Dividend Distribution
*Max. Mexican Withholding Tax Rate
0%
Tax Treaty Rate (Article10) -10%
710,000
35%
U.S. Income Tax (Before FTC)
$
248,500
U.S. After Tax Income
$
461,500
Worldwide Tax Cost
(Structured as a Foreign Corporation)
(Before FTC)
$461,500
Mexican Withholding Taxes
$
Mexican Taxes
$
290,000
U.S. FTC (not eligible)
$
Total U.S. Income Taxes
$
-
Mexican Taxes
248,500
Total U.S. Income Taxes
$290,000
with FTC
Mexican Effective Tax Rate
$248,500
*Worldw ide After Tax Income
29.00%
Effective U.S. Tax Rate
35.00%
DATA FOR INPUT (CHANGING VARIABLES)
Corporate U.S. Shareholder (Yes/No)?
No
*Mexican Taxable Income
$ 1,000,000
Worldwide Taxes
$
538,500
*Mexican Corporate Tax Rate
*Mexican Withholding Tax Rate
U.S. Indirect Foreign Tax Credit
29%
0%
0
*Worldwide After Tax Income
$
461,500
U.S. Income Tax Rate
35%
Worldwide Effective Tax Rate
53.85%
©2006 Procopio International Tax Institute
S.A. vs. S.R.L.
Schedule of Estimated Worldwide Income Taxes (U.S. Individual Partners)
Income of U.S. Partners From Foreign Partnership/DRE
Jurisdiction: Mexico (Dollars Calculation)
Selection of Form of Foreign Legal Entity - Foreign Partnership/DRE
PROPOSED STRUCTURE
*Sociedad de Responsabilidad Limitada. Foreign Partnership/DRE if Election Filed under Treas. Reg. Section 301.7701-3
Foreign Partnership/DRE
*Mexican Taxable Income (47% share)
$ 1,000,000
U.S. Indirect Foreign
-
$
Tax Credit (FTC)
29%
*Mexican Corporate Tax Rate
Mexican "Corporate" Taxes
$
290,000
U.S. FTC without regard to FTC
limitations (now eligible)
Mexican After Tax Income
$
710,000
U.S. Taxable Income
290,000
$
$ 1,000,000
Worldwide Tax Cost
(Structured as a Foreign Partnership/DRE)
000,056$
Total Mexican Taxes
000,06$
Total U.S. Income Taxes
000,092$
Dividend Distribution
$
710,000
0%
*Max. Mexican Withholding Tax Rate
*Worldwide After Tax Income
35%
U.S. Tax Rate
U.S. Income Tax (Before FTC)
$
350,000
U.S. After Tax Income
$
650,000
U.S. FTC
$
290,000
Total U.S. Income Taxes
$
60,000
(Before FTC)
Tax Treaty Rate (Article10) -10%
Mexican Withholding Taxes
$
Total Mexican Taxes
$
290,000
with FTC (without regard to FTC limitations)
Mexican Effective Tax Rate
29.00%
6.00%
Effective U.S. Tax Rate
Corporate U.S. Shareholder (Yes/No)?
*Mexican Taxable Income
No
$ 1,000,000
Worldwide Taxes
$
350,000
*Worldwide After Tax Income
$
650,000
*Mexican Corporate Tax Rate
*Mexican Withholding Tax Rate
U.S. Indirect Foreign Tax Credit
29%
0%
0
Worldwide Effective Tax Rate
35.00%
U.S. Tax Rate
35%
Wordwide Tax Rate Savings
18.85%
Wordwide Tax Dollars Savings
$
188,500
©2006 Procopio International Tax Institute
Outbound Transactions
§6038 – Information With Respect To Certain Foreign
Corporations

U.S. person who “controls” a foreign corporation (>50% vote or value), or
who is a 10% shareholder of a “controlled foreign corporation,” must file
Form 5471 to report certain information concerning the foreign corp

Complex ownership attribution rules apply

Penalty for failure to timely file Form 5471 is $10,000 per form / per year,
with additional $10,000 penalties each 30-day period during which failure
continues after expiration of the 90-day IRS notice period, up to a
maximum of $50,000 per form; total penalty can be $60,000 per form for
the year of failure; reasonable cause exception
©2006 Procopio International Tax Institute
Outbound Transactions
Form 8858





•
•
•
•

Applicable to foreign disregarded entities (FDEs) for all tax returns
required to be filed after December 31, 2004
Does not apply to real branches
Applies to U.S. persons who are tax owners of FDEs or that own
certain interests in foreign tax owners of FDEs.
Due by the due date of the U.S. person’s income tax return, including
extensions
Filed as an attachment to:
Form 1120 if first tier
Form 5471 if owned by a CFC
Form 8865 if owned by a CFP
Form 1040 if owned by an individual
Failure to file may make corresponding Form 5471 or Form 8865
“substantially incomplete”
©2006 Procopio International Tax Institute
Outbound Transactions
§6038 – Information With Respect To Certain Foreign
Partnerships

U.S. person who “controls” a foreign partnership, or who is a 10%
partner of a “controlled foreign partnership,” must file Form 8865 to
report certain information concerning the foreign partnership

Complex ownership attribution rules apply

Penalty for failure to timely file Form 8865 is $10,000 per form / per
year, with additional $10,000 penalties for continued failure after notice
by the IRS, up to a maximum of $50,000 per year; reasonable cause
exception
©2006 Procopio International Tax Institute
Outbound Transactions
§6038 – Information With Respect To Certain Foreign
Corporations And Partnerships

Penalty may also include reduction of foreign tax credit

Statute of limitations with respect to reportable items does not
commence until a complete and accurate Form 5471 or 8865 is filed.
§6501(c)(8), CCA 200024051

Penalty exposure may be eliminated if foreign corporation has single
owner, is an “eligible entity,” and can make check-the-box election to
be disregarded entity
©2006 Procopio International Tax Institute
Outbound Transactions
§6038 – Information With Respect To Certain Foreign
Corporations (Example)
• U.S. Person forms FC-1 and FC-2 in 2001
(through the internet) but inadvertently fails to file
Forms 5471 for tax years 2001, 2002 and 2003
U.S. Person
100%
FC-1
100%
FC-2
• US. Person exposed to $60,000 in penalties per
year
• If FC-1 and FC-2 are not “per se” corporations,
possible to eliminate penalty exposure with
favorable private letter ruling granting extension to
file Form 8832 check-the-box election for
disregarded entity treatment
©2006 Procopio International Tax Institute
Outbound Transactions
§6038B – Notice Of Certain Transfers To Foreign Persons

U.S. person who transfers property to a foreign corporation in a
nonrecognition transaction (§§332, 351, 354, 355, 356, 361) must file
form 926 to report the transfer

U.S. corporation’s liquidation distribution (§336) to foreign person must
also be reported by filing Form 926

U.S. person who transfers property to a foreign partnership in a
nonrecognition transaction (§721), must file Form 8865 - Schedule O
to report information concerning the transfer
©2006 Procopio International Tax Institute
Outbound Transactions
§6038B – Notice Of Certain Transfers To Foreign Persons

Penalty for failure to timely file applicable form is 10% of the fair
market value of the property, not to exceed $100,000, unless the
failure was due to intentional disregard of the rules and regulations

In the case of a contribution to a foreign partnership, in addition to the
monetary penalty, gain is recognized on the transfer at Fair Market
Value

Statute of limitations with respect to reportable items does not
commence until applicable form is filed. §6501(c)(8), CCA 200024051
©2006 Procopio International Tax Institute
Outbound Transactions
§6039G – Information On Individuals Losing U.S.
Citizenship

Reporting requirement imposed in connection with rules on expatriation to
avoid tax under §§877 and 2107

Old law: Individual who loses U.S. citizenship or long-term resident status (green
card) must report for the year of expatriation: taxpayer identification number;
mailing address of principal foreign residence; foreign country of citizenship; and, if
net worth exceeds $500,000 (adjusted for inflation; i.e., $622,000 for 2004),
information detailing assets and liabilities (Form 8854)

Penalty for each year of the ten-year period beginning with the loss citizenship or
resident status equal to greater of $1,000, or 5% of tax to which individual subject
under §877; reasonable cause exception

American Jobs Creation Act of 2004 amended §6039G to require annual
reporting for each year taxpayer is subject to §877 (§877 also amended;
applies if 5-year average annual net income tax is greater than $124,000, or
net worth in excess of $2,000,000)

Penalty increased to $10,000 for each failure to file; reasonable cause
©2006 Procopio International Tax Institute
Outbound Transactions
§6046 – Organization or Reorganization of Foreign
Corporations and Acquisitions and Dispositions of its
Stock

The following U.S. persons are required to file Form 5471 - Sched. O
 U.S. persons who become officers or directors of a foreign
corporation if a U.S. person owns 10% of its stock,
 U.S. persons who acquire stock that causes them to own 10% or
more of a foreign corporation,
 U.S. persons who dispose of enough stock in a foreign corporation
to reduce his interest to less than 10%, and
 Other U.S. persons who are treated as U.S. stockholders of
foreign corporations under the captive insurance rules of §953(c)
©2006 Procopio International Tax Institute
Outbound Transactions
§6046 – Organization or Reorganization of Foreign
Corporations and Acquisitions and Dispositions of its
Stock

Complex ownership attribution rules apply

Penalty of $10,000 for failure to file Form 5471 for any tax year, with
additional $10,000 penalties each 30-day period during which failure
continues after expiration of 90-day IRS notice period, up to a
maximum of $50,000; reasonable cause exception

Statute of limitations with respect to reportable items does not
commence until Form 5471 is filed. §6501(c)(8), CCA 200024051
©2006 Procopio International Tax Institute
§6046A – Acquisitions, Dispositions and Changes of
Interests in a Foreign Partnership

U.S. person who acquires or disposes of an interest in a foreign
partnership must file Form 8865 - Schedule P if the 10% ownership
rule is met

Reporting is also required if their proportional interest in a foreign
partnership changes substantially (10%)

Penalty for failure to timely file Form 8865 - Schedule P is $10,000,
with additional $10,000 penalties each 30-day period during which
failure continues after expiration of 90-day IRS notice period, up to a
maximum of $50,0000; reasonable cause exception
©2006 Procopio International Tax Institute
Trusts Under Mexican Law – General Overview
–
Civil Law Legal System
–
–
Securities and Loan Transactions General Act or Ley
General de Títulos y Operaciones de Crédito
(“LGTOC”)
Written instrument between the Settlor and the Trustee
–
Must be a financial institution authorized to act as
Trustee
–
Contractual and fiduciary relationship
–
Independent patrimony (§§385,381,387 LGTOC)
©2006 Procopio International Tax Institute
Trusts Under Mexican Law – General Overview

For Mexican tax purposes:
—
If business activities are carried out through the Mexican Trust, tax
obligations arise for the Trust:

Registration before the Ministry of Finance

Keep accounting books

Filling of tax prepayments

Annual tax returns is responsibility of beneficiaries
–
—
Beneficiary is treated as the owner of the Mexican Trust, and it’s
income (whether distributed or not), and deductions are
considered for calculation of the beneficiary’s individual annual
tax return
If no business activities are carried out (testamentary, guarantee or other
purposes) the Mexican Trust is considered a pass-through entity
©2006 Procopio International Tax Institute
Trusts Under Mexican Law – General Overview

Business activities
—
Commercial activities – Mainly acquisitions and sale of
goods with speculative intent
—
Industrial activities
—
Agricultural activities
—
Ranching activities
—
Fishing activities
—
Forestry activities
©2006 Procopio International Tax Institute
Trusts Under Mexican Law – General Overview

Sale of property
—
For Mexican tax purposes it is considered that the grantor alienates the
goods transferred to the Mexican Trust, if grantor does not reserve the
right to “reacquire” the properties transferred, or loses such right
—
For grantor:

—
All tax consequences arise, including the possibility of deductions
For beneficiaries:


No acquisition cost basis with exceptions for individuals
Tax on the acquisition of immovable property is triggered when the
acquisition takes place (dispositions may change from State to State
in Mexico)
©2006 Procopio International Tax Institute
Mexican Fideicomisos – US Implications
•
Various U.S. Tax Implications of Mexican
Fideicomisos
–
No statutory definition under Internal Revenue Code
(IRC)
–
Agreement where Trustee takes title to property for
the benefit of another – Treas. Reg. 301.7701-4(a)
–
Characterization under State Law not definitive for
U.S. income tax purposes
©2006 Procopio International Tax Institute
Foreign Trusts – U.S. Tax and Reporting
Requirements
When do we have a foreign Trust?

Domestic Trust if:
—
Court Test - IRC 7701(a)(30) AND
—
Control Test – Substantial decisions - Treas.
Reg. 301.7701-7(c)(1)

Substantial decisions include power to
litigate, arbitrate claims, designate
Beneficiaries
©2006 Procopio International Tax Institute
§6048 – Information With Respect To Certain Foreign
Trusts

Gratuitous transfers by U.S. persons to foreign trusts (e.g., creation of
foreign trust) must be reported by the transferor on Form 3520

Form 3520 is filed –


In years where reportable transactions take place

Annually by U.S. persons treated as owners

In years when distributions are received
Failure to file Form 3520 results in penalty equal to 35% of the
reportable amount, with additional $10,000 penalties for continued
failure after notice up to a maximum of the reportable amount
©2006 Procopio International Tax Institute
§6048 – Information With Respect To Certain Foreign
Trusts

A foreign trust with a U.S. person treated as an owner is required to
file Form 3520-A annually to report information regarding the trust

U.S. owner should appoint a U.S. person to act as trust’s limited agent
regarding requests by the IRS to examine records and/or produce
testimony, otherwise IRS can unilaterally determine amount U.S.
owner is required to take into income

Failure to file Form 3520-A results in penalty equal to 5% of the gross
reportable amount, with additional $10,000 penalties for continued
failure after notice up to a maximum of the gross reportable amount
©2006 Procopio International Tax Institute
U.S. Estate and Gift Taxes and Mexican
Real Estate
•
Lifetime Exemption Equivalent –
•
Currently $ 2 million (for U.S. citizens and
those domiciled in U.S.)
•
•
IRC Code Section 2010(c)
USD$ 60,000 (not domiciled in U.S.)
•
I.R.C. §§ 2102(c)
•
No Lifetime Exemption Equivalent for
Gifts
©2006 Procopio International Tax Institute
U.S. Estate and Gift Taxes
Death in
year
Estate and Gift Tax
Life Time Exemption Equivalent for
Non-U.S. Citizens with Foreign
Domicile
Estate Tax Exemption Equivalent for
U.S. Citizens or U.S. Domiciles
Highest estate and
gift tax rate
2002
US$ 60,000
US$ 1,000,000
50%
2003
US$ 60,000
US$ 1,000,000
49%
2004
US$ 60,000
US$ 1,500,000
48%
2005
US$ 60,000
US$ 1,500,000
47%
2006
US$ 60,000
US$ 2,000,000
46%
2007
US$ 60,000
US$ 2,000,00
45%
2008
US$ 60,000
US$ 2,000,000
45%
2009
US$ 60,000
US$ 3,500,000
45%
2010
Estate Tax - Repealed
Gift Tax Rate - Equal to Income Tax
Rate
Estate Tax - Repealed
Gift Tax Rate - Maximum Rate
N/A
35%
2011
US$ 60,000
US$ 1,000,000
55% + 5% (surtax in
higher estates)
©2006 Procopio International Tax Institute
Informational Reporting Requirements
§6048(c) – Information With Respect To Certain Foreign
Trusts

Beneficiary should obtain from the trust a Foreign Nongrantor Trust
Beneficiary Statement (or a Foreign Grantor Trust Beneficiary Statement)
and attach to Form 3520 to avoid default treatment as accumulation
distribution. Notices 97-34

Penalty for failure to file Form 3520 is 35% of the distribution (even if
distribution was non-taxable), with additional $10,000 penalties for each
30-day period failure continues after 90-day notice period, not to exceed
amount of distribution; reasonable cause exception. §6677

Statute of limitations does not commence until Form 3520 filed.
©2006 Procopio International Tax Institute
§6501(c)(8), CCA 200024051
Other Considerations

Mexico’s New Thin Capitalization Rules - Structuring Debt Financing from
U.S. to Mexico on Real Estate Deal

U.S. Mexico Income Tax Treaty Benefits on Structured Finance of
Mexican Real Estate Deal

Contingent Interest – Benefits of Utilizing
©2006 Procopio International Tax Institute
Mexican Taxes: Purchase and Lease of Mexican Real Estate
U.S. Individual
Buyer/Landlord
•Transfer Taxes 2%
Arising From Sale
Mexican Tenant
Purchase of Real Estate
Lease
•Federal Asset Tax
1.8% (Annual Tax)
•Mexican Withholding Tax - 25%
Mexican Real Estate
•Local Property Taxes
-No Mexican “Death” Tax
-No Mexican State Income Tax
• Tax on Gross Payment Amounts
- -Payable by Mexican Tenant
•Mexican IVA Tax
• Tax on Gross Amounts
•15% on Rental Payments
•10% in Border Region
©2006 Procopio International Tax Institute
Mexican Taxes: Sale of Mexican Real Estate
•Transfer Taxes 2-4%
• Arising From Sale
U.S. Individual
Sale Agreement
Mexican Buyer
Mexican Real Estate
• Mexican Income Tax
-25% Withholding on Gross Receipts
or
-33% Tax on Gain (Net Profit)
-No Mexican State Income Tax
• Mexican Value Added Tax
-15% of Buildings/Structures
©2006 Procopio International Tax Institute
Mexican Taxes: Purchase and Lease of Mexican Real Estate
U.S. Individual
Purchase
Lease
•Transfer Taxes 2%
• Arising From Sale
Mexican Tenant
Mexican Company
•Income Tax on 33% (2004)
32% as of 2005 on Net
Income
-Depreciation and other
Deductions in Mexico
•Federal Asset Tax 1.8% (Annual Tax)
•Local Property Taxes 2%
Mexican Real Estate
• Mexican Value Added Tax (IVA)
-15% of Gross Payments - 10% in Border Region
-No Mexican “Death” Tax
-No Mexican State Income Tax
©2006 Procopio International Tax Institute
Taxes from Mexican Real Estate Lease
U.S. Tax Impact
U.S. Individual
•Foreign Tax Credit?
• Foreign Corporation -S.A. de C.V.
•NO Mexican Withholding Tax on
“Dividend” Distributions
•No FTC if U.S. Individual SH
•Indirect FTC if U.S. Corporate SH
• Foreign Partnership -S.R.L.
•FTC for Mexican Income Taxes and Withholding Taxes
•Must Make “Check the Box Election”
Mexican Company
Lease
Mexican Tenant
Mexican Real Estate
•Income Tax on 33% (2004)
32% as of 2005 on Net
Income
• Mexican Value Added Tax
-15% of Buildings/Structures
©2006 Procopio International Tax Institute
Taxes from Mexican Real Estate Lease
U.S. Tax Impact
U.S. Individual
•Foreign Tax Credit?
• Foreign Corporation -S.A. de C.V.
•Indirect FTC for U.S. Corporate Shareholder (Not
Ultimate U.S. Individual)
U.S. Company
•No Mexican Withholding Tax on
“Dividend” Distributions
• Foreign Partnership -S.R.L.
•Direct FTC for Mexican Income Taxes and Withholding
Taxes
•Must Make “Check the Box Election”
Lease
Mexican Tenant
Mexican Company
Mexican Real Estate
•Mexican Income Tax of 33%
(2004) 32% (as of 2005) on
Net Income
©2006 Procopio International Tax Institute
THE END
©2006 Procopio International Tax Institute