In general, the Mexican Constitution enables foreigners to acquire direct title to land without restriction, provided they agree in writing to be bound by Mexican law as to matters regarding title. However, restrictions set forth under the Constitution (Art. 27) along with its foreign investment law, forbid foreigners from acquiring direct title to land for residential purposes within the so-called "Restricted Zone.” The Restricted Zone encompasses areas within 50 kilometers of the coastline and 100 kilometers of Mexico's borders and represents approximately 40% of the land in Mexico.  Obviously any beachfront property or property near the beach would be in the restricted zone. Foreigners may nevertheless acquire the effective use of residential property within the Restricted Zone through the establishment of a 50-year renewable trust, or fideicomiso, arranged through a Mexican banking institution that will hold title to the property for the benefit of the investor and future beneficiaries. Under such a scheme, the foreign investor is able to direct the trustee (the bank) in regards to every matter including financing, development, and transfer of title.  The other way that foreignors may obtain land or other property within the restricted zone is through a Mexican corporation.  The law states that now  a Mexican corporation may be  owned wholly by foreignors.  The only drawback to the corporation is that foreignors are not allowed to title property in their Mexican corporation if this property is purely for residential use.

Also, certain natural resources are not subject to private ownership (e.g., the beach, rivers, etc). These natural resources may, however, be the subject of a concession, which grants use rights to its holder.  Another important concern is verification of whether land was or may be affected by an ejido (agricultural cooperative). In order for a purchaser to claim clear title to ejido land, the land must be designated as private property or be the subject of a proper conversion from an ejido.

A number of title insurance companies have entered the Mexican market. Title insurance is now readily available in Mexico and is becoming increasingly more common in transactions.

The Role Of The Notary

Foreign investors should also understand the role of the notary in real estate transactions. Mexican law provides that in order to perfect the transfer of title to land, a notary must formalize the transfer.

A Mexican notary is an attorney duly authorized by each State to attest and certify that the transactions performed in his/her presence comply with all the statutory requirements, and, if applicable, to withhold the appropriate transfer taxes. The fees charged by a Mexican notary are generally based on the amount of the transaction and are negotiable.

Federal Taxes

As in most jurisdictions, the seller is normally the party obligated to pay the applicable income tax. However, should the parties agree to set a price below the appraisal value, the Ministry of Finance will collect from the purchaser 20% of the spread between the appraisal and the value set by the parties (without any allowable deductions). Other than in the foregoing case of a below market purchase price, effective January 1, 2007, the seller is subject to a 28% income tax rate, and the seller’s tax payment will be reduced by allowable deductions, unless the seller is a foreign non-resident for tax purposes, in which case, the seller will be subject to a 25% income tax rate without the benefit of any deductions.

Under Mexican tax law, the party bearing the burden of withholding the appropriate income tax (regardless of the party that is the ultimate taxpayer) will be determined based on the role and residency of the parties in the transaction. For instance, should the buyer or seller be foreign from a tax perspective, in general, the Mexican resident for tax purposes shall be bound to withhold the corresponding tax.

Also, pursuant to Articles 1st. and 2nd. of the Asset Tax Law, individuals and companies resident in Mexico are subject to payment of an asset tax at a rate of 1.8% of the total book value of their assets worldwide. It is noteworthy that the book value of assets in Mexico can appreciate over time. Foreigners with a permanent establishment, as well as with an inventory to be manufactured or already manufactured in a Mexican territory, will also be obligated to pay the asset tax on their assets held in Mexico. In regular terms, the asset tax in Mexico can be compared with the alternative minimum tax in the United States.

Local Taxes

Transfer tax is one of the few taxes still administered and applied by the States. Transfer taxes vary from State to State and can range from 1% (Veracruz) to 5% (Mexico City) of the value of the transaction. In order to record a transfer of title at the applicable State's Public Registry of Property, investors must pay recordation duties. Recordation duties vary from State to State and may either be subject to a cap or determined by the amount of the transaction. Property tax, or predial, is based on the property's value reported to the State and commonly supported by an appraisal. The applicable tax rate is set by each State.

Employment Issues

Investors should also consider that Article 123 of the Constitution, as well as the Mexican Federal Labor Law, provides employees the right to participate in the profits of their employer (10% of the pre-tax profits). In order to reduce the impact of this provision, it has been customary to incorporate a services company to hold the employees, allocating a non-significant profit to such service company, and thereby effectively minimizing the mandatory 10% profit sharing.

Conclusion

Becoming comfortable with the issues, complexities and costs of doing business in Mexico can be an expensive and time consuming process. Hopefully, the above overview will help you, and, if applicable, your clients, better understand the Mexican system and the need to obtain qualified Mexican counsel, advisors and partners when investing and doing business in Mexico.