Foreign Investment Update with Focus on Real Property

This is Spencer's "One Page Reference" providing an update on foreign investment in Mexico with a focus on real property. It was prepared and presented at the Seattle World Trade Club's program "Doing Business in Mexico". The program was May 16, 2007. We reviewed this reference outline for continued accuracy and relevance in February, 2011.

© David D. Spencer

Spencer's One Page Reference

I. Megatrends:

(A) Separation of Powers and Pluralism lead to Federalism;

(B) Economic reforms lead to improved deal infrastructure and transparency;

(C) Improved fiscal administration and collection;

(D) Technology improves transparency and applications;

(E) Real Estate Boom; and

(F) Security Issues, depending on location.

II. The Foreign Investment Law: Some activities restricted to the State, some to Mexican nationals, and some with foreign investment ceilings. Restrictions on foreign ownership of real property within the restricted zone. Otherwise wide open.

III. Choice of Business Entity: Stock corporation (sociedad anónima) is the most common, followed by LLC (sociedad de responsibilidad limitada). Others possible but seldom used. Consider D&O Policy.

IV. Tax Rates

(A) Income Tax on Entity: 28% (2007).

(B) Income Tax on Individuals: 3% to 30%, non-residents pay a flat 25% on gross income.

(C) Real Estate Transfer Tax: Ranges from 2% to 4.8%, depending on location.

(D) Asset Tax: 1.8%.

(E) Dividend Tax: 0%.

(F) Rental Income: Taxed at regular income tax rates; non-residents pay the flat 25% on gross income.

(G) Capital Gains on Sale of Real Estate: Taxed at regular income tax rates and exempt if sale of principal residence. Non-residents pay the flat 25% on gross income.

(H) VAT: 15% (10% in border areas)

(I) Local Property Taxes: Nominal by U.S. standards

V. Immigration (One cannot do business in Mexico without the proper visa.)

FMN: Business meetings, negotiations, technical assistance, no remuneration from Mexican source.

FM3: Nonimmigrant visa issued for one-year periods for work in Mexico as specified in the visa document; renewable in one-year increments up to five years.

FM2: Immigrant visa issued for one-year periods for work in Mexico as specified in the visa document; renewable in one-year increments up to five years.

VI. Elements of a “typical” Real Estate Transaction (there is no such thing)

(A) Role of the Notary

(1) Legal obligation to assure the transaction meets legal requirements.

(2) Shop around, quality, price and timeliness vary. (3) Must use in real estate transactions, but does not replace use of competent counsel.

(4) Nationwide license, but consider logistics of Public Registry filing.

(5) Fees on real estate transactions range from 1.5% to 4.0% of the “value of the operation”. Some states and the federal district have fee schedules (aranceles notariales) for non-real estate services.

(B) The Preliminary Contract (Contrato de Promesa de Venta). Not preliminary at all; include all the terms and conditions. Consider obtaining immediate usufruct rights. Do not use prestanombres. Make sure it’s assignable to your trust or to a Mexican entity you intend to form. Do not automatically rely on the notary’s forms.

(C) Due Diligence: Review status of title and tax payments. Avoid over-reliance on the resident experts, including brokers and ex-pat gringos, even if they are real estate agents

(D) Consider Title Insurance: Stewart, First American, First International now issue policies in many locations, but not a substitute for buyer’s due diligence and we have no experience as to meaningful remedies. Review the policy carefully and do not assume it is a "standard" policy as we know in the U.S.

(E) If Using a Trust: Shop the banks to get a good form and reasonable trustee fees; if using a business entity, form the entity (if not formed already).

(F) The Closing:

(1) Escrow services: Stewart and First American purport to offer them, but read the fine print on the agreement. As buyer, escrow services a waste. As seller, valuable to make sure your buyer has the money.

(2) Review the “final” purchase and sale agreement prepared by the notary. Make sure it conforms to the preliminary agreement.

(3) Be there with the notary when the transaction closes. If you know what’s going on and speak the language, fine. Otherwise, have a competent Mexican lawyer with you. Do not attempt to close from a distance. If you cannot be there, grant a general power of attorney to a competent advisor who can attend for you. Do not transfer money to somebody else’s bank account for safekeeping pending closing.

(G) Special situation: Buying ejido land.

(1) Understand the nature of the ejido culturally and legally.

(2) Understand the process by which ejido land becomes private land.

(3) If buying from holder of a parcel certificate (certificado parcelario), get usufruct rights in the preliminary contract. You may also be able to negotiate getting a power of attorney from the seller that will enable you to cause the title certificate to be issued and to close the transaction.

(4) If buying from an ejidatario who does not yet have a parcel certificate, make sure the transaction is legal and is documented in a way that will result in transfer to you.