Mexico real estate located within the restricted zone of 100 km (62 miles) from the Mexican border or 50 km (31 miles) from Mexican beaches cannot be owned directly by foreigners.
If you are thinking about purchasing property in Mexico’s restricted zones, there are a few things you need to know.
First, a Mexican trust must be created for the property with the foreign entity as beneficiary. A trust must obtain a permit from the Ministry of Foreign Affairs to own the real estate in the restricted zone. Residential property law requires that real estate be lived in by the owners (primary beneficiaries) or a third-party.
Second, a Mexican entity may make a foreign investment in the restricted zone for non-residential purposes by agreeing to be a Mexican under the law, and subject to all such applicable laws as a National. Notification of the creation of a non-residential entity is required to be given to the Ministry of Foreign Affairs. Non-residential is defined as time-share, accommodation, activities related to commercial, tourism or industrial purposes.
For various reasons, a foreign buyer may choose to be the primary beneficiary of a U.S. or Mexican Limited Liability Company. This LLC must be in a trust.
Are all these LLCs in trusts? No, there are mistakes. These mistakes are a huge problem for foreigners who are named as partners or shareholders. These persons cannot really own without a trust.
In the past 24 months, I personally ran into three that had been written up as recorded escrituras in the public registry. Someone thought that because there were also Mexican owners or there was a Mexican legal representative, these escrituras were properly created and registered without benefit of a trust.
In one case, it was necessary to have a will of the deceased verified as legal in his home country, and then submitted to Mexico (in a totally certified Spanish translation) to be probated here to prove it has the authority for the heirs to sell or be named owners themselves in a proper Mexican trust.
If there is a trust for the LLC, what happens in the case of a sell? A LLC´s real estate in a trust can be transferred by the bank trustee to a new trust. If the LLC is a Mexican or U.S. company, taxes are due upon a sale.
Tax benefits of selling a home residence or appraisals for permanent improvements may not be available to sellers of an LLC property since it is a business and not an individual.
A notary public is not required in the case of a sale to a buyer of an LLC stock. Transfer of stock uses a private document. But there is an obligation to withhold taxes on a sale of stock.
Income tax applies in the stock sale if more than 50 percent of the assets of the LLC are located in Mexico. The foreign buyer will need to appoint a representative to collect the taxes due in Mexico from the seller. If the buyer is Mexican, he will be obligated to collect taxes directly from the seller.
A vehicle created to avoid paying taxes when all sales are subject to taxes determined by the laws in place should not be created to circumvent the tax law.
If a foreign buyer prefers to buy as an individual, the notary who will handle the new trust collects LLC seller taxes. The LLC will cease to exist.
An LLC for a residential property occupied and/or rented by a primary beneficiary, cannot claim that it is not residential, and no trust is required. (Review the two types of foreigner property rights in the beginning of this article.)
This article is based upon legal opinions, current practices and my personal experiences in the Puerto Vallarta-Bahia de Banderas areas. I recommend that each potential buyer or seller of Mexican real estate conduct his/her own due diligence and review.