This country-specific Q&A provides an overview to tax laws and regulations that may occur in Mexico.
This Q&A is part of the global guide to Private Client. For a full list of jurisdictional Q&As visit http://www.inhouselawyer.co.uk/practice-areas/private-client-2nd-edition/
Which factors bring an individual within the scope of tax on income and capital gains?
In Mexico, there is no distinction between income tax and capital gains tax. Capital gains are considered as ordinary income for tax purposes.
Individuals are obliged to pay income tax over all their income, regardless it is obtained in cash, goods, credit and in its case accrual or services. In this context, capital gains are considered as an additional cumulative income for individuals and integrate the taxable base to which the income tax progressive rate will be applied (that can go from 1.92% up to 35% on the total individual's income, depending on its amount).
The factors for which a person is obliged to pay income tax are regulated in Article 1 of the Law, and none of them includes citizenship, the location of a person's assets, or the location of their economic activity, so these factors don’t bring an individual within the scope of income tax.
The factors that subject an individual to pay income tax are the following:
- Tax Residence in Mexico. Residents in Mexico are obliged to pay income tax with respect to all their income, whatever the location of the source of wealth they come from.
- Permanent Establishment in the country. Residents abroad who have a permanent establishment in the country are obliged to pay income tax regarding all the income attributable to said permanent establishment.
- Source of wealth in Mexico. Residents abroad are also obliged to pay income tax regarding income which sources of wealth are located in national territory, when they do not have a permanent establishment in the country, or when having it, such income is not attributable to it.
It is important to note that according to article 9 of the Mexican Federal Tax Code, it is considered that an individual is resident in Mexico when he has established his home within national territory. When the individual in question also has a domicile in another country, he shall be considered resident in Mexico if his center of vital interests is in the national territory.
For these purposes, the center of vital interests is considered to be in national territory when, among other cases, the individual is located in any of the following cases:
- When more than 50% of the total income obtained by the individual in the calendar year has a source of wealth in Mexico.
- When in the country they have the main center of their professional activities.
What are the taxes and rates of tax to which an individual is subject in respect of income and capital gains and, in relation to those taxes, when does the tax year start and end, and when must tax returns be submitted and tax paid?
Individuals are obliged to pay income tax over all their income, regardless it is obtained in cash, goods, credit and in its case accrual or services.
The income tax of individuals is calculated in a schedular way, separating the different types of income that an individual can receive. Each of the regulated taxable income has its own calculation and deduction system, and each individual has to calculate the income obtained by each of the regimes and has to add the result to the general total income.
Among the different regimes regulated by our Law, there are the following: income from salaries; income from business and professional activities; income from leases; income from the sale of goods; income from the acquisition of assets; income from interests; income from obtaining prizes; and income from dividends and from profits distributed by a legal entity.
Once the individual calculates the tax base in accordance with the particular regime of each income (with their own deductions, if applicable), all income obtained during the year shall be added, regardless of their source of origin. The resulting amount can be reduced by personal deductions (deductions that can be made by all individuals), and the total amount will be the general tax base.
The rate imposed to the income of individuals is a progressive fee, contemplated on the article 152 of the Mexican Income Tax Law. The tax rates can go from the 1.92% up to 35% on the individual´s total income, depending on its amount.
Regarding the tax year, in accordance with article 11 of the Mexican Federal Tax Code, tax year equals the calendar year, so it starts on January 1 and ends on December 31. The annual tax return shall be presented before April 30 of the immediately following calendar year to the year in which such incomes were obtained.
Notwithstanding the foregoing, throughout the tax year individuals shall execute advance payments over the income tax. Such payments shall be credited by the tax payer from the annual income tax calculation at the end of the tax year.
Are withholding taxes relevant to individuals and, if so, how, in what circumstances and at what rates do they apply?
Withholding is relevant for income tax purposes, since the pay or could be obliged to withhold taxes in certain cases. Among the main cases, we can enlist the following:
- In the case of salaries, employers (whether entities or individuals) shall withhold and pay income tax for the payments made to their employees. This income tax shall be withheld and paid monthly applying the monthly rate (up to 35%, as explained before) established in the article 96 of the Mexican Income Tax Law, and it is an advance payment of the annual tax. It is important to mention that our Law establishes in article 94 several cases in which it is considered that an individual receives an income that can be deemed as a salary, and in all of them the tax shall be paid through a withholding made by the person making the payment.
- According to the article 106 of the Mexican Income Tax Law, if an individual performs business and professional activities, and he renders professional services to an entity, that entity is obliged to withhold, as advance payment, the amount resulting of applying a rate of 10% over the payments made by the entity to the individual.
- According to article 116 of the Mexican Income Tax Law, when an individual obtains income for leasing real estate to an entity, such entity is obliged to withhold the 10% of the total amount paid to the individual, as an advance payment of income tax, and without the possibility to make any tax deductions.
- According to article 126 of the Law, if an individual sells any goods and it is a transaction registered in a public deed, the advance payment shall be made within the next 15 days as of the signing of such public deed. The certifying public officer shall calculate and pay the income tax under his responsibility and issue the tax receipt with the corresponding withhold of taxes. Tax could be up to 35% of the profit received by the individual.
- Regarding the sale of other goods, the advance payment shall be the result of applying the rate of 20% over the total amount of the transaction and shall be withhold by the buyer if he is a resident in Mexico or if he is a resident abroad with a permanent establishment in Mexico. Some alternatives may apply when shares are being sold, in which the advance payment could be up to 35% on the profit.
- If an individual obtains income from interests and the institution who makes the payment is part of the financial system, this institution shall withhold the tax as an advance payment applying the withholding rate of 1.04% per annum, applied on the amount of capital that originates the payment of the interests. In the event that the pay or of the interest is not part of the financial system, the withholding rate could increase up to 35%.
- If an individual receives an income from awards, such as lotteries, raffles, bets and contests, the pay or is obliged to withhold taxes, which, according to article 138 of the Mexican Income Tax Law, shall be calculated applying a rate of the 1% over the total price amount corresponding to each ticket, without any deduction, as long as the federal entities do not tax locally the above mentioned income sources or such tax is below the 6%. The tax rate shall be 21% in those federal entities that apply a local tax over such income sources with a rate above the 6%.
- Regarding incomes obtained by individuals coming from dividends and other earnings coming from entities, individuals are subject to a rate of the 10% over such dividends distributed by the entities, being the Mexican entities obliged to withhold and pay the tax.
Finally, and regarding Value Added Tax, according to article 1-A of the Mexican Value Added Tax Law, individuals are obliged to withhold value added tax regarding the acquisition or temporary use of tangible goods, alienating or granting residents abroad without permanent establishment in Mexico.
Entities shall withhold value added tax to individuals when individuals render personal services or when they give the entity the temporary use or enjoy of goods.
Is there a wealth tax and, if so, which factors bring an individual within the scope of that tax, at what rate or rates is it charged, and when must tax returns be submitted and tax paid?
Mexican law does not distinguish income tax and wealth tax, as wealth is contemplated as an ordinary income for tax purposes.
Is tax charged on death or on gifts by individuals and, if so, which factors cause the tax to apply, when must a tax return be submitted, and at what rate, by whom and when must the tax be paid?
According to article 93, section XXII of the Mexican Income Tax Law, income derived from death is exempted for income tax purposes.
Nevertheless, it is important to mention that individuals that during a tax year have obtained income that exceeds the amount of $500,000 Mexican pesos are obliged to declare all their income in their tax return, including income deriving from successions.
If an individual fails to comply with such obligation, Mexican law establishes a presumption that does not admit evidence to the contrary, by virtue of which the tax authorities will consider that all undeclared income constitutes cumulative income for income tax purposes, regardless of whether the income was originally exempt.
Also, it is important to consider that death might generate other taxes, such as Real Estate Acquisition Tax, which is a local tax that shall be paid by the individual that is inheriting a real state.
In Mexico City, this tax has a progressive rate that goes from 3.163% to 4.565% on the total value of the property, and shall be paid by the person who is inheriting the real state by means of a withholding made by the notary public at the time the acquisition takes place.
Regarding gifts, article 93, section XXIII of the Mexican Income Tax Law states that gifts received by individuals are exempt from paying income tax in the following cases:
- Gifts between spouses or those who receive the descendants of their ascendants in a straight line, whatever the amount.
- Those who receive the ascendants of their descendants in a straight line, provided that the goods received are not disposed of or donated by the ascendant to another offspring in a straight line without limitation of degree.
- All other gifts, provided that the total value of those received in a calendar year does not exceed three times the general minimum salary of the taxpayer's geographical area raised per year . For the surplus, tax will be paid in the terms of the Mexican Income Tax Law.
Regardless of whether the donation is taxed or not, it is important to mention that individuals residing in Mexico are obliged to report, in their annual tax return, about the loans, donations and prizes obtained therein, provided that these, individually or as a whole, exceed $600,000.00 Mexican pesos.
Again, if an individual fails to comply with such obligation, Mexican law establishes a presumption that does not admit evidence to the contrary, by virtue of which the tax authorities will consider that all undeclared income constitutes cumulative income for income tax purposes, regardless of whether the income was originally exempt.
If the donation is not exempt for income tax purposes, the individual shall pay the corresponding tax, at the progressive rate that corresponds to him depending on the total amount of his income (as explained in question 2). Said tax must be paid through the annual tax return, no later than April 30 the following year.
Notwithstanding that, the individuals that obtain income from taxed donations shall cover, as an advance payment, the amount that results from applying the 20% rate on the income received, without any deduction. The advance payment shall be made through a tax return that shall be presented to the authorized offices within 15 days after obtaining the income.
Are tax reliefs available on gifts (either during the donor’s lifetime or on death) to a spouse, civil partner, or to any other relation, or of particular kinds of assets (e.g. business or agricultural assets), and how do any such reliefs apply?
As stated in question 5, according to article 93, section XXIII of the Mexican Income Tax Law gifts made between spouses or descendants of their ascendants in principal degree and the gifts made by ascendants of their descendants in principal degree, provided that the goods received are not sold or donated by the ascendant to another descendant in principal degree, are exempted of paying income tax in Mexico.
Do the tax laws encourage gifts (either during the donor’s lifetime or on death) to a charity, public foundation or similar entity, and how do the relevant tax rules apply?
The Mexican Income Tax Law authorizes taxpayers to deduct the donations made to the entities that are called by the law as "tax-exempt institutions” or "grantee institutions” (“donatarias autorizadas”), as well as those donations made to the federation or to the federative entities.
The donatarias autorizadas must be entities dedicated to altruistic purposes and must obtain an authorization from the Mexican tax authorities.
According to article 151, section III of the Mexican Income Tax Law, donations made by a taxpayer to this kind of institutions are deductible up to a total amount that does not exceeds the 7% of the taxable income obtained by the taxpayer in the immediately preceding year that in which the tax deductions are being made.
How is real property situated in the jurisdiction taxed, in particular where it is owned by an individual who has no connection with the jurisdiction other than ownership of property there?
Real estate located in Mexican territory is taxed by a local tax called “Predial”.
This tax shall be paid annually, and it is calculated by applying the rate foreseen in each state on the catastral value of the real estate, calculated in accordance with the procedure stated in each local law. In Mexico City, the tax rate can go from 1.5% to 20% on the value, depending on the catastral value of the property.
Assuming that the individual who owns the real estate is a foreign resident, he can also be taxed with income tax or value added tax, depending on the activities to which such real estate is being subject in Mexican territory.
Individuals who own real estate in the national territory shall pay income tax in the event that they decide to dispose of said property, provided that such alienation results in a gain or income for the individual.
In accordance with Article 160 of the Mexican Income Tax Law, tax is determined by applying a rate of the 25% over the total income obtained, without any deduction. The tax shall be paid by means of a withholding, made by the purchaser if he is a resident in Mexico or a resident abroad with a permanent establishment in the country; otherwise, the foreign individual shall pay the corresponding tax by means of a declaration that he shall present before the authorized offices within fifteen days after obtaining the income.
In the same sense, individuals who own real estate in the national territory shall pay income tax in the event they receive any income from the leasing of such property.
In accordance with article 158 of the law, tax will be determined applying the rate of 25% over the income obtained, without any deduction. By general rule, the tax is paid by means of a withholding made by the person making the payments. In the event that the person making the payments is a resident abroad, the tax shall be paid by means of a declaration filed before the tax authorities within fifteen days of obtaining the income.
It is important to mention that in both cases tax treaties could provide relief regarding the applicable rate.
The alienation of the real estate shall also cause value added tax, which must be paid at the rate of 16% on the sale value of the constructions, by the person who performs its alienation.
The leasing of such real estate shall also be taxed by Value Added Tax, unless the estate is destined or used exclusively for house-room.
Are taxes other than those described above imposed on individuals and, if so, how do they apply?
In addition to Income Tax in the terms explained before, other taxes may apply depending on the activities performed by the individual. Between the main taxes, we could include consumption taxes, which affect the entire population. We will not enter into more details since we consider those taxes exceed the purpose of this document.
Is there an advantageous tax regime for individuals who have recently arrived in or are only partially connected with the jurisdiction?
No, it does not exist an advantageous tax regime for individuals who have recently arrived in or are only partially connected with the jurisdiction, they will be taxed as any other tax resident or a foreign resident with a source of wealth located in Mexico.
What steps might an individual be advised to consider before establishing residence in (or becoming otherwise connected for tax purposes with) the jurisdiction?
Before establishing their tax residence in Mexico, individuals must take into consideration the following aspects:
- Once they establish their tax residence in Mexico, individuals must pay income tax on all of their worldwide income, regardless of the origin of said income. In this virtue, individuals must pay taxes in Mexico with respect to all income that is received abroad (including any income derived from the alienation of goods located abroad), which may lead to a double taxation event if the country in which the income is received does not have a tax treaty with Mexico.
- The individual must consider which activities are performed abroad, since activities that are exempted abroad may not be exempted in Mexico. In the same sense, and related to the previous point, it should be considered that the income received from activities held abroad will also be taxed in Mexico.
- The tax base of the property owned by the individual must be considered, since once the individual is considered as a resident in Mexico, it will be necessary to determine the tax value of said assets in the event of a possible transfer.
What are the main rules of succession, and what are the scope and effect of any rules of forced heirship?
In accordance with current legislation, people in Mexico can inherit through two different forms or regimes: testamentary succession and legitimate succession.
Through testamentary succession, a capable person can freely dispose of his assets and rights and declares or fulfills duties for after his death.
The general rules for granting a testament are regulated in each of the state legislations, to the extent that in Mexico successions are governed under state jurisdiction. However, we can cite some rules contained in the Civil Code of Mexico City, which states that only those who are over 16 years of age and who are in full trial can grant a will. The formalities to grant a will in Mexico will be analyzed in subsequent questions of this document.
On the other hand, the legitimate succession occurs when the author of the inheritance does not dispose of his property by means of a testament after his death, for which the legislator interprets what his intention had been, replaced his will and presumed his intention.
Legitimate succession can be opened when the author of the inheritance has not disposed of all his property by means of a will, either because he did not test or because he only referred to some assets and not to all, or because the dispositions that he disposed cannot be fulfilled and he does not name substitutes or did not establish rules for the case that the first ones did not have effects.
Regarding the people who have the right to inherit according to the legitimate succession, each state has its own rules regarding the order and form of inheriting.
Notwithstanding the above, and as an example, we can enlist the following rules of legitimate succession in Mexico City:
- In accordance with the civil code of the city of Mexico, they have the right to inherit by legitimate succession the descendants, ascendants, collaterals up to the fourth degree, spouse or surviving concubine, and in the absence of all of them, the System for the Integral Development of the Family from Mexico City.
- As a general rule, the closest relatives exclude the most distant, except in those cases where ascendants or descendants concur, since the descendants, even being of the same degree or farther degree, exclude the ancestors, who will only be entitled to food.
- As a general rule, relatives who are in the same degree will inherit equally.
- Kinship by affinity does not give the right to inherit.
- The straight line excludes collateral. In a straight line, descendants exclude ascendants.
Finally, it is important to note that in Mexico there is no rule of forced succession, so that all people are free to dispose of their assets in the way they deem appropriate.
Is there a special regime for matrimonial property or the property of a civil partnership, and how does that regime affect succession?
Yes, it does exist a special regime for matrimonial property, which is a marital partnership, regulated under the civil law, which is a local matter and the regulation may vary from state to state within Mexico.
The following analysis is according to the Mexican Federal Civil Code, which states that the marital partnership shall be ruled by the prenuptial agreement, which are the agreements between spouses to incorporate and rule the marital partnership under the marriage agreement, and on its defect, by the Law.
According to article 205 of the Mexican Federal Civil Code, in the event a spouse dies, the one who remains alive shall continue with the possession and management of the goods that constitute of the marital partnership, with intervention of the representant of the succession, until the verification of the partition of the goods subject of the martial partnership.
Regarding civil partnerships (understood as civil entities governed by the Mexican Federal Civil Code), one of the causes of dissolution involves the death of a partner with unlimited responsibility for the social compromises, except if the incorporation deed bylaws state that the partnership shall continue with its inheritors. Likewise, civil partnership shall also be extinguished by the death of the industrial partner, provided that his industry has originated the partnership.
What factors cause the succession law of the jurisdiction to apply on the death of an individual?
Our legal system does not expressly indicate in which cases the Mexican law may apply to successions that have an international vocation (that is, those that have factors or points of connection with the outside), when the deceased had not granted a will to the date of his death.
Notwithstanding the above, Article 13 of the Mexican Federal Civil Code, provides the specific rules for determining the applicable law should the specific act not be otherwise expressly regulated.
In accordance with section II of the aforementioned legal norm, the status and capacity of individuals is governed by the Law of the place of his domicile, while for its part, section III provides that the constitution, regime and termination of real rights over real estate, as well as leases and temporary use of such property, and personal property, will be governed by the right of the place of their location, even if their owners are foreigners.
Based on the foregoing, the Mexican succession Law would be applicable to a foreigner provided that at the time of death he has its domicile in national territory, or when the real or personal property of that person is located in national territory at the time of death (in which case Mexican Law will only apply with respect to said assets).
It should be noted that article 29 of the Mexican Federal Civil Code, considers as the domicile of a natural person: (i) the place where he habitually resides; in the absence of this, (ii) the place of the main center of its business; in the absence of these (iii) the place where they simply reside; and in the absence of all these (iv) the place where they are. It is presumed that a person habitually resides in a place when he remains in the place for more than six months.
Finally, with regard to the competent courts to hear the hereditary trial (if necessary), section VI of Article 24 of the Mexican Code of Civil Procedures provides that it is competent judge: (i) the one of the place where the author of the succession was domiciled at the time of his death; (ii) in the absence of domicile, the one of the place of the location of the estate assets; (iii) and in the absence of both, the place of death of the author of the inheritance.
How does the jurisdiction deal with conflict between its succession laws and those of another jurisdiction with which the deceased was connected or in which the deceased owned property?
According to article 12 of the Mexican Federal Civil Code, Mexican Laws govern all persons who are in Mexican territory, as well as the acts or events occurred inside the territory or jurisdiction and to those who are subject to Mexican laws, except when said laws provide for the application of a foreign law and except as provided in international treaties to which Mexico is party.
Section II of article 14 of the Mexican Federal Civil Code states that, when applying foreign law, substantive foreign law shall be applied, without considering conflict provisions that would make Mexican law applicable. Exceptionally, attending to the special circumstances of the case, such conflict law provisions may be applied.
In accordance with Article 15 of the Federal Civil Code, foreign law shall not be applicable in cases of fraud of law and when the foreign laws are contrary to Mexican public interest institutions and principles.
At last but not least, it is important to mention that as of the date Mexico has not concluded any international treaties to avoid conflict of succession laws with other countries.
In what circumstances should an individual make a Will, what are the consequences of dying without having made a Will, and what are the formal requirements for making a Will?
An individual should make a will as always as it has assets, rights or obligations that are susceptible to be transmitted because of death.
The consequence of dying without having made a will is that all assets, rights and obligations of the deceased are transmitted through the legitimate succession, which means it will apply the will that the Law presumably considers would be of the author of the inheritance. For purposes of determining the order in which the family members of the deceased would inherit, the legislation of the domicile of the deceased must be considered, since the succession matter is local competence in Mexico and each federal entity has its own regulation.
As for the requirements of the Will, these will depend on the type of Will in question and the place of its grant. Notwithstanding the foregoing, the requirements set forth in the Civil Code of Mexico City regarding the public open will are analyzed below.
In accordance with the aforementioned legal ordinance, the open public will must comply with the following formalities:
- A will may be granted by any individual over 16 years old who enjoy their full judgement, except that in the event an individual does not enjoys their rightful judgement the individual is in a state of lucidity.
- It must be granted before a public notary.
- Testator must express his will clearly and strictly, having the notary to write it down.
- Once drafted, the notary must read it out loud for the testator to indicate if he agrees, if so, both proceed to sign it.
- The notary must record the day, month, year and time in which it was granted.
- The will must be granted in a single act, which will begin with the reading of the will and end with the signing of the will.
- The notary shall attest that all the before mentioned formalities have been complied.
Finally, it is important to highlight that, to our consideration, a foreigner whose only connection with Mexico is a real estate located in the country does not necessarily have to grant a will in Mexico regarding such property, since as noted in previous answers, it is sufficient that said individual has granted a will in his country of residence that is valid according to the laws of such jurisdiction.
How is the estate of a deceased individual administered and who is responsible for collecting in assets, paying debts, and distributing to beneficiaries?
The estate of a deceased person is administered by the executor (“albacea”), which is an auxiliary of the administration of justice in charge of liquidating the assets that form the estate of a deceased person (hereditary wealth), and that by the mandate of the law is empowered to perform all the acts necessary to guarantee such liquidation.
They have the capacity to be executors all the people who have the free disposition of their assets, so only who have legal age (more than eighteen years) and those who are not disabled can be executors. The executor may be appointed by the persons indicated in the following order: (i) by the testator; (ii) by the heirs; (iii) in certain cases by the legatees; and (iv) a lack of the previous ones, by the judge.
The executor is in charge of formulating the corresponding inventory, collecting the assets, paying the debts, legally defending the succession and carrying out the project of inheritance and asset allocation.
The administration of assets must be done under the fundamental principle that the estate of the deceased is an estate in liquidation, so that although the executor is allowed to perform new operations, these operations should not be an end in themselves, but rather they must be transitory and with the shortest possible duration (thus, if the deceased had immovable property, the executor can rent said assets, but only for a maximum period of one year).
Finally, it should be noted that the executor has powers for lawsuits and collections and administrative acts in relation to hereditary property by legal provision, without implying that he is directly someone's representative, but that he is an executor with powers to perform legal acts.
Do the laws of your jurisdiction allow individuals to create trusts, private foundations, family companies, family partnerships or similar structures to hold, administer and regulate succession to private family wealth and, if so, which structures are most commonly or advantageously used?
In Mexico, people who intend to maintain, manage and regulate the succession of private family wealth could do so through two legal structures: through a "family" company or through the constitution of a fideicomiso.
The first of these options would involve the constitution of a "family entity", or a company whose partners or shareholders are only members of that family, being able to condition the alienation of the company´s shares only among the members of that particular family.
Nevertheless, the most commonly used structures are fideicomisos, since they allow individuals to establish a purpose and a regulatory framework that best suits the needs of each specific case, in the extent that the fideicomiso is a structure through which any purpose can be achieved, as long as it is legal and possible, so the uses and purposes that can be given to the contract of fideicomiso are very varied.
How is any such structure constituted, what are the main rules that govern it, and what requirements are there for registration with or disclosure to any authority or regulator?
For Mexican legal purposes, the fideicomiso is a contract through which the trustor conveys to a fiduciary institution the ownership of one or more assets or rights, as the case may be, to be used for lawful and determined purposes, entrusting the execution of said purposes to the fiduciary institution itself.
As a general rule, there are three different parties in the fideicomiso:
- Settlor: Is the one who constitutes the trust and in turn transmits ownership of the property or assets to the trustee so that it fulfills the specific purpose of the trust. Anyone with the capacity to transmit ownership of the assets or rights subject to the trust, as the case may be, as well as the competent judicial or administrative authorities to do so, may be trustors.
- Fiduciary institution or trustee: Is the person ordered by the trustor to carry out the end of the trust. This becomes the owner of the assets constituted by the goods or rights destined to the realization of such purpose. Only institutions that are expressly authorized to do so may be fiduciary in accordance with the General Law of Credit Institutions (including credit institutions, insurance institutions, surety institutions, brokerage firms, etc.).
- Beneficiary: Is the one in whose favor the administration of the trust assets is exercised. People who have the necessary capacity to receive the benefit that the trust implies can be beneficiary. The Settlor can designate more than one beneficiary or even substitute beneficiaries.
It is important to mention that it is possible to create a fideicomiso without an initial beneficiary, as long as the purpose is legal and determined and the fiduciary institution accepts the assignment.
As for the object necessary to constitute the fideicomiso, we find that in accordance with our Law, all kinds of assets and rights can be the object of the trust, except those that, according to the law, are strictly personal of the owner.
The assets that are given in fideicomiso are considered to be used for the purpose for which they are intended and, consequently, only those rights and actions that refer to said purpose, except those expressly reserved by the trustor, can be exercised in relation to them.
As for the duration of the fideicomiso, those whose duration is greater than fifty years are prohibited, when a non-public entity or charity is designated as a beneficiary. However, they may be constituted for more than fifty years when the object of the trust is the maintenance of museums of a scientific or artistic nature that are not for profit.
Finally, it is important to mention that the constitution of the fideicomiso must always be in writing and if any real state is provided to the trust it must be granted before a notary public.
The steps for its constitution are the following: (i) determine what is the purpose to be done and select the goods you want to dispose of to achieve it (the purpose must be legal and determined); (ii) select who will be the beneficiary or trustee: (iii) choose a fiduciary institution to be in charge of the administration and agree with it the conditions of the administration; (iv) define the duration period (taking into account the limitations that will be analyzed later); and (v) sign the contract with the fiduciary institution.
Regarding the main rules governing its operation, we can enlist the following:
- The fideicomiso constituted in fraud of third parties, can at all times be attacked for nullity by the interested parties.
- The fideicomiso whose purpose is real estate must register with the Property Section of the Public Registry of the place where the assets are located. The trust will take effect against a third party, from the date of registration in the Registry.
- The fideicomiso whose purpose is movable property, will take effect against third party from the date of its registration in the Sole Section of the Sole Registry of Secured Transactions of the Public Registry of Commerce.
- The beneficiary has, in addition to the rights granted to him by virtue of the constitutive act of the fideicomiso, that of enforcing compliance with the fiduciary institution; that of attacking the validity of the acts that it commits in its detriment, in bad faith or in excess of the faculties that by virtue of the constitutive act or of the law corresponds to it, and when it is appropriate, that of claiming the assets that consequence of these acts have left the patrimony object of the trust.
- The fiduciary institution will: have all the rights and actions that are required for the fulfillment of the trust, except for the limitations established when it is constituted; will be obliged to fulfill said trust according to the constitutive act; cannot excuse or renounce his assignment except for serious reasons in the judgment of a judge of first instance of the place of his domicile, and must always act as a good father of family, being responsible for the losses or impairments that the goods suffer because of him.
- The fiduciary institution must register the assets or rights attached to the trust account and keep them separately from their freely available assets.
- Secret fideicomiso and those in which the benefit is granted to successive persons who must be replaced by death of the previous one are prohibited, except in the case that the substitution is made in favor of people who are alive or conceived already, at the death of the trustor.
It is important to mention that the fiduciary institutions have their own regulation issued by the Bank of Mexico through general circulars, which indicate their powers, prohibitions, transparency measures and the obligation they must provide to the Mexican authorities.
With respect to the information that the fideicomiso Institutions must share, in accordance with the general rules issued by the Bank of Mexico, they must provide the Financial System Information Directorate of said institution the information on the fideicomisos that they celebrate or administer in the form and terms that, if applicable, this requires.
Notwithstanding the foregoing, as a general rule, the information related to a fideicomiso agreement has the character of confidentiality under the fiduciary secret regulated in article 142 of the Mexican Credit Institutions Act, according to which, the information and documentation related to the trust operations will be confidential, so that the credit institutions, in protection of the right to privacy of their clients and users, in no case may give news or information of these operations or services, but the trustee, their legal representatives or those who have granted power to intervene in the operation or service.
How are such structures and their settlors, founders, trustees, directors and beneficiaries treated for tax purposes?
As a starting point, it is important to mention that as indicated before, for Mexican legal purposes, the Fideicomiso is a contract that lacks legal personality, so it is never considered as a taxpayer. Instead, Mexican law attributes the tax burden to either the beneficiary or the trustor, as the case may be, and even in some specific cases assigns different obligations to the fiduciary institutions.
In order to know who the taxpayer in each fideicomiso is and in what cases the fiduciary institution has different obligations, it is important to distinguish whether the fideicomiso carries out or not business activities.
- Fideicomiso with business activities
It is considered that a fideicomiso carries out business activities whenever it carries out commercial, industrial, agricultural, livestock, fishing or forestry activities.
In accordance with Article 13 of the Law, when business activities are carried out through a Fideicomiso, the fiduciary institution shall determine in the terms of the legal entities, the result or the tax loss of said activities in each tax year and shall perform on behalf of the set of beneficiaries the obligations indicated in the Law, including the one of making the advance payments.
However, there is a regulated exception in our legal order, since a fideicomiso that carries out business activities can be exempted from the previous obligations provided that at least ninety percent of the total income obtained through the fideicomiso, during the tax year in question, comes from passive income.
In the case of fideicomisos that carry out business activities, the tax is attributed to the beneficiaries, except in cases where there is no beneficiary, or they cannot be identified, in which case it will be understood that the business activities carried out through the fideicomiso are performed by the trustor.
In these cases, the beneficiaries (or the trustor, if applicable) must accumulate to their other income for the year, the part of the tax result derived from the business activities carried out through the fideicomiso that corresponds to them, and they can credit in that proportion the amount of the advance payments made by the fiduciary institution.
- Fideicomiso without business activities
If the fideicomiso does not carry out business activities, it is considered as a transparent structure for tax purposes, and the fiduciary institution has no obligation other than calculate the percentage of participation that each of the settlors or beneficiaries (depending on whatever it is a revocable or irrevocable fideicomiso, as explained below) have in both the profits and the losses (or, if applicable, deductions) of the fideicomiso, for the purpose of each individual accruing said income in accordance to their corresponding schedular regime and calculate its general tax base for the year.
For purposes of knowing who the taxpayer in this type of trust is, it is important to determine if it is a revocable or irrevocable trust, since from this will depend to whom the generated income is attributed.
For tax purposes, the fideicomiso will be revocable when the trustor reserves the right to reacquire ownership of the assets that were contributed to the fideicomiso (right of reversion).
For its part, the fideicomiso will be irrevocable when the trustor does not have the right to reacquire ownership of the assets that were contributed to the fideicomiso.
The above distinction is of great importance, since it will condition that the constitution of a fideicomiso is considered as an assumption of alienation in favor of the beneficiary (there will be alienation if the trust is irrevocable, either from the moment of its constitution or when the trustor loses the right of reversion) and will determine to whom the tax burden of the fideicomiso will be attributed.
If the fideicomiso is revocable, it is considered that the income generated through it is received by the trustor, for which reason he is the one liable to pay the tax. Otherwise, if the fideicomiso is irrevocable, it is considered that the income is received by the beneficiary, so the tax burden is transferred.
As an example of this, Article 117 of the Law establishes that in the fideicomiso operations for which the temporary use or enjoyment of real estate is granted, the income is considered to be the income of the trustor even if the beneficiary is a different person, except in the cases of irrevocable trusts, in which case the income is considered to be income of the beneficiary from the moment the trustor loses the right to reacquire the real estate.
Are foreign trusts, private foundations etc recognised?
Article 13 of the Mexican Federal Civil Code establishes that legal situations validly created in a foreign State in accordance with their right, must be recognized.
Derived from the foregoing, foreign structures validly created under foreign law are recognized for Mexican legal purposes, so in principle, foreign trusts and private foundations should be recognized in Mexico (as long as they have been validly created in their country of incorporation), and they will receive the legal treatment that corresponds to them depending on the legal nature that they have in their place of incorporation.
Thus, if in its place of incorporation the trust is considered as a legal entity with legal personality and its own assets, in Mexico it will also be considered as a legal entity, receiving the legal treatment corresponding to that nature.
On the other hand, if the trust is considered in its place of incorporation as a contract, that same nature must be respected in Mexico. In this case, it is important to mention that in accordance with the same article 13, the legal effects of the contracts will be governed by the law of the place where they should be executed, so if the effects of such foreign trusts will be executed in Mexico, they shall be subject to Mexican legislation.
In the same line of thought, private foundations are recognized in Mexican law, having the corresponding effects depending on their legal nature according to their place of incorporation.
How are such foreign structures and their settlors, founders, trustees, directors and beneficiaries treated for tax purposes?
As a starting point, it is important to briefly explain the general tax regime applicable to individuals who have some participation in a foreign entity or trust, so we can be able to explain each particular case.
As a general rule, individuals residents in Mexico that have any participation in a foreign entity or trust are obliged to consider the income they obtain from these entities or trusts as a cumulative income of the year, until the moment in which said income is distributed to them by the foreign entity or structure. Under this context, individuals shall accumulate the income until the moment they have any increase in his assets, which occurs when the entity or foreign trust materially distributes their profits to them.
Notwithstanding the foregoing, our law regulates an exception to this regime, in the event that the income comes from a jurisdiction considered by Mexican law as a preferential tax regime.
For Mexican purposes, a jurisdiction will be deemed as a preferential tax regime when the income received by an individual is taxed at a tax rate lower than 22.5%, or when the entity or trust through which the income is generated is not considered as a taxpayer in the country of its incorporation or creation, and the income is attributed by that jurisdiction directly to its members, shareholders or beneficiaries (in these cases, the foreign entity or trust is denominated by Mexican law as a transparent entity or structure).
If the company or the foreign trust from which the income derives is in any of the above cases, the general rule changes, and the individuals that have any participation in them are obliged to recognize the income that comes from those entities or trusts in advance, from the moment in which the income is received by the foreign figure and without being able to wait for the profits to be materially distributed.
Having explained the general regime, we can enlist the following particular cases.
Foreign entities deemed as taxpayers. Individuals who are considered as shareholders of a foreign entity that is deemed as a taxpayer in the country of its incorporation shall recognize as cumulative income any income that they receive from the entity. Individuals shall accumulate the income until the moment in which the entity distributes the profits or dividends.
Foreign entities that are not deemed as taxpayers. If the foreign entity is not deemed as a taxpayer in the country of its incorporation (and therefore, is considered by Mexican law a as transparent entity in the terms explained before), individuals shall recognize the income based on the rules of the preferential tax regimes, which has the consequence that the individuals shall recognize such income in advance since the moment the entity receives it, without waiting for the moment in which the entity distributes them the profits or dividends.
Foreign trusts. In the case of foreign trusts, it is important to mention that for tax purposes, the Law considers them as foreign legal structures, understood as any trust, association, investment fund or any other similar legal form incorporated under the foreign law that does not have legal personality.
If the trust is considered as a transparent foreign legal structure (again, assumption that is updated when the trust is not considered as a taxpayer in its country of creation), the income derived from the trust shall be accumulated in advance by the individuals participating in such trust, since the moment in which the income is received by the trust and without waiting for the moment in which such profits are distributed.
Otherwise, if the trust is not considered as a transparent foreign legal structure and is a taxpayer in its country, the income received by the trust shall be accumulated by the individuals participating in it until the time of its distribution, without having to accumulate them in advance.
Regarding the person considered as a taxpayer in these cases, we must distinguish if the trust is revocable or irrevocable (in the terms explained in question 20).
If the trust is revocable, the income must be accumulated by the settlor. On the other hand, if the trust is irrevocable, the income must be accumulated by the beneficiary, which normally occurs at the moment of the profits distribution.
To what extent can trusts, private foundations etc be used to shelter assets from the creditors of a settlor or beneficiary of the structure?
For Mexican legal purposes, a trust (understood as a Fideicomiso in the terms of Mexican Law) cannot be used to protect the assets of any of the trustors from a creditor if the trustors are the beneficiaries, since now the assets to be claimed are the rights on the trust.
In accordance with the Mexican Federal Civil Code, the debtor responds of the fulfillment of its obligations with all its assets (including his rights under a trust), except those that are inalienable and indefeasible, independently that these had been or not cause of the debt.
With the foregoing, Mexican legislation guarantees creditors the fulfillment of their obligations, since it constitutes a kind of guarantee in favor of the creditor with all the assets and rights of the debtor, except those that are inalienable or unattachable according to the law.
As indicated before, in a trust agreement, the trustor transmits to a fiduciary institution the ownership of one or more assets or rights, as the case may be, to be used for lawful and specific purposes, entrusting the realization of said purposes to the fiduciary institution itself.
In this regard, when a person establishes a trust in Mexico, ownership of the assets that are affected by the trust is transferred to the fiduciary institution, so that it can be used to fulfill the purposes of the trust.
In this context, if any of the trustors is sued by a creditor after having contributed the assets to the trust, said assets would no longer form part of his own assets, so they could not be seized for the purpose of paying off the outstanding debt.
Notwithstanding this, and in accordance with the regime explained in previous paragraphs, if said trustor has any right derived from the trust (such as the right of reversion or the right to receive any return, product or proceeds of the trust assets), the right would be considered part of the assets of that trustor, so its creditors could affect it for the purpose of liquidating their respective debts.
On the other hand, it should be noted that if the debtor decides to affect his assets in trust knowing that he can be sued by his creditors, this act can be considered as an act in fraud of creditors under the terms of article 2163 of the Mexican Federal Civil Code. Pursuant to that provision, the acts entered into by a debtor to the detriment of his creditor may be annulled, at his request, if the insolvency of the debtor results from those acts, and the credit under which the action is sought is earlier to them.
What provision can be made to hold and manage assets for minor children and grandchildren?
Other than a Tutor, that is the person in charge of a minor, the typical structure regulated by Mexican law to be able to maintain and manage the assets of minor children and grandchildren is the fideicomiso, which, as noted, is a structure that can have any purpose as long as it is licit and determined.
Based on the foregoing, nothing would prevent a person from establishing a fideicomiso for a fiduciary institution to administer the assets of their minor children and grandchildren, provided that said assets are lawful and determined. This would have the tax consequences that were explained in previous answers.
Are individuals advised to create documents or take other steps in view of their possible mental incapacity and, if so, what are the main features of the advisable arrangements?
Mexican law regulates two different figures to address the mental disability of a person: guardianship and conservatorship.
In accordance with article 449 of the Mexican Federal Civil Code, the object of the guardianship is the protection of the person and property of those who not being subject to parental authority have natural and legal incapacity to govern themselves.
In the other hand, conservatorship is planned to monitor the conduct of the guardian and to inform the judge of anything that he or she considers may be harmful to the incapacitated person.
Mexican law does not allow any of the previous positions to be appointed by the person that is incapable, nor that a person can decide who will be their guardian or curator in view of an imminent disability, since the appointment of these positions is previously established in the Law.
Given this circumstance, people who are in Mexico cannot take any previous step or preventive measure against an eventual mental disability.
What forms of charitable trust, charitable company, or philanthropic foundation are commonly established by individuals, and how is this done?
In Mexico, two types of moral persons can be constituted for charitable or philanthropic purposes: the civil association (“A.C.”) and the private assistance institution (“I.A.P.”).
A civil association is a non-profit private entity with full juridical personality made up of individuals for the fulfillment of cultural, educational, dissemination, sports or similar purposes, in order to promote among its members and / or third parties any social activity.
The steps to constitute a civil association are the same as those regulated to constitute any entity in Mexico and basically consist of the following:
- The association must be made up of at least two people, who must be natural persons in accordance with the Mexican Federal Civil Code.
- The corporate name or name of the association must be chosen, which must be registered before the Ministry of Economy of the Mexican federal government.
- The statutes of the association must be drawn up, where the corporate purpose must be indicated. The corporate purpose cannot pursue lucrative purposes.
- These statutes must be notarized before a notary public.
Regarding their administration, these associations may have an individual or collegiate administrative body, which shall be called Director or Directors, without having any additional requirements for their appointment.
Finally, it should be noted as to the heritage of these associations that unless they are authorized as an authorized grantee (“donatarias autorizadas”), they may freely acquire, dispose of and / or tax their assets, without requiring any prior authorization or have to give some notice or notification in this regard.
For their part, people who want to perform philanthropic or welfare work in Mexico can also do so through a private assistance institution.
Like public associations, private assistance institutions are also legal entities intended for assistance, with the following differences:
- Social object, it is important to distinguish that private welfare institutions, unlike a civil association, which may have other purposes, comply solely welfare purposes.
- As for its form of constitution, the A.C. do not require authorization or special permission to be constituted, instead the I.A.P. needs to obtain the prior approval of their bylaws by the Private Assistance Board, a work plan must be added, and they must be subsequently notarized and registered in the Public Registry of Legal Entities of its City.
- Regarding its Social Reason, in the constitution of the A.C. the corresponding authorization must be requested from the Ministry of Economy, unlike the I.A.P. that the request is made directly before the Private Assistance Board, who will give a reply within 15 working days.
- Regarding its Heritage, in the I.A.P., the members cannot alienate immovable property of the institution without prior authorization from the Board of Private Assistance.
Finally, it is important to mention that both types of companies can obtain authorization from the tax authorities to receive tax-deductible donations for the persons who perform them, provided that they process their authorization to be an authorized grantee (“Donataria Autorizada”) before the tax administration service.
What important legislative changes do you anticipate so far as they affect your advice to private clients?
Currently, we don’t have information of any legislative initiative in the congress that could affect the advice given to our private clients.