Saturday, August 29, 2009
If you had unreported rental income from the Fido property and did not file those forms you must talk with an international tax expert to determine if you should enter the Voluntary Offshore Disclosure Program or risk the potentially bigger penalties of not entering the program. 9/23/09 is the deadline to take action or risk being assessed the tremendous penalties that the IRS can impose for not filing these forms.
Saturday, August 22, 2009
Failure to file these forms can result in monetary penalties. If the property in the fideicomiso generates no income (your house) or generates income and you have reported it on your US tax return if you attach a late filing excuse the penalties will be waived. If it generates income you did not report on your US tax return you may want to consider the IRS VOLUNTARY OFFSHORE DISCLOSURE PROGRAM which will end on 9/23/09 which could reduce your penalties for non filing and will stop any criminal prosecution for violating US tax law.
More information is at: http://www.taxmeless.com/page11.html
If you own property in a Mexican corporation you must file form 5471 with your yearly US tax return whether or not it makes income or you are required to file a US tax return. We will discuss this in a separate blog post.
If you wish assistance with these forms or with the Offshore Disclosure or forms 5471 contact me. I have over 20 years experience in Mexican - US taxation and other international tax matters. I do spend a great deal of time in Mexico and understand its business, real estate and taxes.
Saturday, August 15, 2009
IRS Crack Down on Secret Offshore Banks is Causing Taxpayers to Come Forward to avoid Criminal and Civil Charges.
One of the of first individuals to plead guilty is from Malibu California. He had over many years built up a foreign bank account to approx. $1 million but had never filed the TDF 90-22.1 form to report it to the IRS. Most experts feel is is only a matter of time before the IRS starts getting list of US account holders from banks everywhere in the world including Mexico.
The IRS Voluntary Offshore Disclosure Progam ends on 9/23/09. Read more about it on our Sister Blog at www.usexpatriate.blogspot.com and at www.TaxMeLess.com
Friday, August 14, 2009
THE MEXICAN CORPORATION – THE VEHICLE FOR BUSINESS DEALINGS IN MEXICO “XYZ Company, S.A. de C.V.” – What does all THAT mean?
by Linda Neil
The Sociedad Anonima de Capital Variable, translated literally is an anonymous society of variable capital. This is equivalent to the U.S. corporation in which there are stockholders. In Mexico it is governed by the Law of Mercantile Societies. More and more, foreigners are forming Mexican mercantile corporations which end with the initials, “S.A. de C.V.”, to do business and to achieve their financial goals in Mexico. The SadeCV is similar to the “Inc.” of the United States and Canada.
Another version of a corporate entity is the Limited Liability Company which has become more common in recent years. The Mexican counterpart is the SRLde CV, the Limited Responsibility company with variable capital.
While there are differences between the S.A. de C.V. and the S.R. L. de C.V., for our purposes here, both are included under the term “corporation” in this article.
As of December 1993, the corporation formed in Mexico is considered as “Mexican” even though all shareholders may be foreign persons.
When should a corporation be formed? It will make sense if the shareholders wish to perform services or sell goods for profit, build a hotel, or if they wish to develop a property for resale in lots or condominiums. The corporate entity permits the principals to obtain working papers and to obtain working papers for other foreigners who provide services not easily obtained in the local job market. Care must be taken, however, to set up the financial reporting system, to obtain invoices for all pre-operating expenses and to have an accountant who is knowledgeable to make the required declarations in Hacienda, México’s version of Uncle Sam or Revenue Canada.
The minimum capital investment in a Mexican corporation is $50,000.00 Mexican pesos Evidence of this capital contribution must be in cash or in assets which equal the total amount of the start up capital. It is important to make the declaration of all assets which are to be included from the start up of the corporation. Do not select the minimum amount just because it is the minimum. If you do it may later be difficult to establish the true amount of initial capital invested. Once the initial capital is established, additional investment may be added by making a declaration before a Notary Public, without requesting permission to do so from the government. This is the Variable Capital portion of the equation.
It is important to include in the corporate charter a statement of purpose (objecto social) that is very general. It should mention all activities that may be of interest to the shareholders; better to have an ample charter, permitting many business activities, rather than to have it limited to one activity. It is also a good idea to include export and import of all types of merchandise and technology in the charter. This makes bringing equipment and or supplies in from another country simpler.
A minimum of two shareholders is required to form a corporation. These shareholders will be required to sign the corporate charter before a Mexican Notary Public. If they come into Mexico as tourists to sign the documents they should obtain an FM-3 or FMN document at their local Mexican Consulate prior to coming so they may perform a business activity (signing the document) in a legal manner. Once the corporation has been formed it is necessary to obtain a federal tax registration number for the corporation and the administrator or board of directors must obtain the FM-3 permit to work in the activities of the corporation.
If the corporation includes or is composed of foreign stockholders it will include a clause in which the foreigners promise to be considered as Mexicans in the eyes of the law and not to invoke the aid of their government in the event of a dispute.
Administration of matters of the corporation may be either through a sole administrator (administrador unico) or through a board of directors. A Comisario must be appointed. This is the person responsible for the accounts and tax payments and should be a Mexican accountant. The comisario does not need to be a shareholder. The duties of the administrators, whether sole administrator or board of directors need to be clearly defined. Will they be able to enter into lawsuits? Obligate the corporation for loans? Hire and fire personnel?
Generally it is wise to provide a list of five names, in order of preference, for the corporation for submission for the permit for incorporation. The first name which has not been used previously by another company will be designated. Upon confirmation of the name, the corporate documents must be prepared and signed before a Notary Public within ninety days or the authorized name will become invalid and the process must be begun again. Together with the name request, permission to incorporate, where foreigners are involved, must be obtained from SECOFI, the Secretary of Industry and Commerce.
Upon completion of the corporate document, it must be recorded in the local registry of Business and Commerce, the National Foreign Investment Registry and the business enrolled in the local Chamber of Commerce or Industry Chamber. Monthly declarations must be filed with tax authorities. Additionally, the corporate accountant must file an annual statement with the National Foreign Investment Registry regarding the business activity for the previous year. If the corporation is used for property development or is not active, the Mexican accountant will probably charge about $600. Dlls. per year to do the required filings. If the corporation is active the accounting charge may be $300. to $500. Dlls. per month, or more.
Copyright, December 2004 Consultores Phoenix, S.C., reproduction prohibited without permission http://www.settlement-co.com
NOTE: The US owners or US residents who own foreign corporations, LLCs and Trusts (Fideicomisos) are required to file special tax forms with their US income tax returns for each year. Failure to file these forms can result in penalties or $10,000 or more per year. See our website at www.taxmeless.com to learn more about these forms and requirements.
EJIDAL (EEEE-heee-doll) properties were established in Article 27 of the Mexican Constitution of 1917 as an outcome of the revolution and represent probably 50% of all the land in
After the revolution hundreds of millions of acres from the original Spanish land grants were expropriated by the government and classified as "ejidal" properties. The state retains ownership of these lands and the peasants, or farmers, have the right to use them, to live on and to grow their crops on them. The rights of usage pass from father to son, but ejidal properties cannot be sold as private property.
In Baja California Sur alone, there were 100 ejido groups occupying 5 million 375 thousand hectares, according to the Ejidal Census made in 1991 by INEGI, the federal government statistical bureau. Only six other states in the entire country have more ejidal land.
The average amount of land for each ejido in BCS is 53,758 hectares. That's about 134,395 acres for each ejido or almost 210 SQUARE MILES of land for each ejidal group!
Per decree published on
This is a seven step process that may take as much as five years to accomplish, and consists of the following:
1. Resolution within the ejido. A two-thirds majority must decide to convert parcel lands to private property. This does not pertain to human
2. Mapping, allowing for streets, gardens, other donated lands, human settlements and communal lands
3. Allotment of a parcel to each ejiditario (farmer).
4. Application to Agrarian
5. Approval by the Agrarian Reform
6. Transfer of parcels to the individual ejiditarios.
After this process is completed and registered with the Agrarian Reform, the ejiditario who wishes to sell to an outsider must first notify other family members, those who have worked the property for more than one year, then other ejiditarios in the group, neighbors, and the ejidal government before completing a sale to the outsider. These parties have the right of first refusal and notifications must be made following a specific procedure.
ONLY after all correct notifications have been made does the EJIDITARIO receive a deed. ONLY then may he in turn transfer in fee simple to third parties, nationals or foreigners. If the property is in the restricted zone ONLY then can an ejidal property be acquired by a foreigner, PROVIDED the Secretary of Foreign Relations will grant a permit for same.
THIS IS FOR PROPERTIES
What about the ejidal group who chooses NOT to convert its parcel land to private property? Can it be used by outsiders?
Article 45 of the law states that ejidal properties may be the object of any type of contract in association or use contract made by the ejidal group, or by individual ejiditarios on common lands or parcel lands. Contracts made with third parties may be granted for a term up to thirty years and can be renewed.
Under the Mexican Civil Code the maximum lease for residential property is ten years. Thus it can be said that the ejidal properties have an important advantage over private RESIDENTIAL property when it comes to leasing.
There is, however, a substantial difference between OWNERSHIP and LEASING. It is important not to confuse the two.
OWNERSHIP, even in the prohibited zone, where ownership is a PERSONAL right of use and enjoyment, permits indefinite usage through multiple renewals (every fifty years) of trust permits, and a clear-cut right to rent those rights, to sell those rights, and to collect a profit therefore. Annual costs under a trust (fideicomiso) are limited to bank administration fees and property taxes and the owner has full rights to all improvements on the land.
LEASE RIGHTS from an ejidal group can be for a maximum term of thirty years and can be renewable. The annual lease cost, however, is often a monthly or annual payment and, while it may be fixed for the first lease term, (up to thirty years) costs upon renewal are not usually negotiated for the following lease term, and may be increased to any amount that the leaseholder, the ejido, requests. Failure to pay the amount requested by the holder of the lease means that lessee (the tenant under the lease) must vacate the property and, of course, must leave behind ALL improvements affixed to the property.
In a rental situation, the tenant never owns the improvements and the amount of the rental will probably be determined by market conditions. Copyright, 2004, 05, 06, 07, 08,
about the author:
LINDA NEIL is the founder of The Settlement Company, which specializes in real estate transfers and escrows. Licensed as a
For reprints or further information, please contact
The Settlement Company: in
International: 1-877-214-4950 or 011-52-612-123-5056
FAX: (011-52) 612-123-5056
E-mail firstname.lastname@example.org, website:
by Linda Neil
A tax specialist, familiar with the law and reporting requirements in both the
Property owned in trust (fideicomiso): Under Mexican law, any residential property located in the “restricted” zone when foreigners are involved, must be placed in a Mexican bank trust, fideicomiso. The “restricted zone” is an area 50 kilometers (approximately 30 miles) wide along all the Mexican coastlines and 100 kilometers (approximately 60 miles) from the Mexico U.S. and Mexico-Belize borders.
Under the U.S. regulation section 6048 (b) Taxpayers must report ownership interest on Form 3520-A yearly and on form 3520 initially and if there are any changes. The penalty for failing to file these information returns is five percent of the gross value of trust assets determined to be owned by the
Bank and Financial Accounts: U.S. taxpayers must annually report direct or indirect financial interest in a financial account that is maintained with a financial institution located in a foreign country if, for any calendar year, the aggregate value of all foreign accounts exceeded $10,000.00 USD at any time during the year. This report of Foreign Bank and Financial Accounts is commonly known as an FBAR, and the penalty can be as high as the greater of $100,000. USD or 50% of the total balance of the foreign account if the failure is deliberate omission. (Sec.31 U.S.C. 5321(a)(5). Nonwillful violations are subject to a civil penalty of not more than $10,000.00 USD.
Shares of Stock or Interests in Mexican Corporations and/or partnerships: Generally shareholders or partners with a 10% or greater interest in the partnership or corporation must inform the IRS of same through Forms 5471 or 8865. Failure to file can be quite costly.
As in most countries the
TAX OBLIGATIONS IN
Any foreigner with real property or business income in
Property Taxes: are due and payable every two months, or can be paid in one annual payment, usually with a substantial discount, during the first two months of each calendar year. Property taxes are based upon the value declared by the property tax office where the property is located and are generally relatively low in comparison with rates in the
On-going taxes on business income: If you have a Mexican corporation or partnership, no matter what the activity, a monthly declaration must be filed for IVA taxes (Added Value Taxes) and for Impuesto Sobre La Renta which, in this case, is more like an income tax. A local Mexican accountant should be hired to review the accounting procedures and to prepare and file the monthly declarations. The monthly tax payments are generally considered as provisional and an annual declaration will show either a refund or a payment due. These taxes can also be a credit or a deductible expense in a home country, depending upon how the companies are established. An attorney-accountant with international expertise in this will be an important advisor to help avoid double taxation on profits. Again you may wish to consult Mr. Don Nelson: email@example.com.
Impuesto Sobre La Renta when a property is sold: is a capital gains type of tax. For foreigners who are tax residents of another country, the tax is calculated in two ways:
1. It is a flat amount of the total selling price; without deductions, or
2. It is a percentage of the difference between selling price and the tax basis shown in the seller’s deed, less allowable deductions.
This calculation should be made both ways. The good part of this is that it is the LOWER of the calculations which shall be due and payable from seller proceeds. The Mexican Notary Public drafting the deed generally makes these calculations and the seller needs to confirm that it is the LOWER of the two figures which will be paid. The Notary Public should also provide the seller with a copy of the tax payment for use with the tax authorities in seller’s tax residence country.
Impuesto Sobre La Renta when income is received from a rental of Mexican property:
All income received from Mexican property is taxable in
Important Deadline. 2009. Copyright, 2009,
# # # # #
about the author:
LINDA NEIL is the founder of The Settlement Company, which specializes in real estate transfers, escrows,and consultations. Just added as a new service, Settlement will now prepare monthly tax declarations, file them and perform additional essential landlord accounting services.
For reprints of this article or for further information on tax paying services, please contact The Settlement Company® at 01-800-627-5130 if in
Copyright, 2009, Consultores Phoenix, S.C. Reproduction prohibited without permission
Sunday, February 1, 2009
It is possible that you along with a large number of US Citizens who own real estate in Mexico are in violating the U.S. Tax law each year when you file their your US returns. That occurs when you fail to file the special forms which are required if you are the beneficiary of a Fideicomiso which is the Mexican trust that owns real estate on behalf of foreigners. A Fideicomiso is required own the property when you are a foreigner and located near the ocean. It is a foreign trust in which you as the property owner are the beneficiary and a Mexican bank acts as the Trustee.
Form 3520A is suppose to be filed by the trustee of your Fideicomiso (the Mexican bank which charges you the annual fee to administer your Fideicomiso) . However, they do not in fact file that form since it is not required by Mexican tax law. Some banks have been reported to want $1,000US or more to look into filing the form and then stated they would want an additional fee if they had to fill it out. If that form is not filed in a timely manner each year (it is due on March 15th following the end of the calendar year) or filed late the penalty is 5 % of the value of the property held in the trust. You will be the taxpayer penalized by the IRS if this form is not filed and therefore, the IRS recommends you file it to avoid having to pay the large penalty. This form reports the information on the income of the trust (if any) and the value of its assets and your contribution to the trust and information on the trustee, the beneficiary and other related information.
Form 3520 must also be filed by you the taxpayer not later than the extended due date of your tax return. It needs to be filed in the year the Fideicomiso comes into being and in years there are distributions or dissolution of the Fideicomiso. Therefore it is not always filed. However, when the form is required to be filed the penalty for not filing it or filing it late is 5% of the value of the trust assets (your real estate). This form reports the name and address of the you, the trustee, when the trust was formed and other details of the trust. The first time is form is filed a copy of the Spanish fideicomiso document is attached to it.
The IRS has not excluded US taxpayers owning property through Mexican Fideicomisos from filing both Forms 3520 and 3520A. They are studying whether they should exempt Fideicomisos from the form but to date no decision has been made. A representative has stated it is a low priority issue. Therefore, you still are required to meet the filing requirements until they state otherwise.
Many US Citizens have said they do not file the form since the IRS could never find out they owned real property in Mexico. Those people are failing to take into consideration the Mexican-US tax treaty which provides for an open exchange of information between the two countries and the fact that when fideicomiso is created it is registered in Mexico with a copy of your U.S. Passport. Starting several years ago your passport is now connected with your social security number. In addition, as more banks in Mexico are acquired by U.S. Banks it becomes more probable that information on these fideicomisos will leak back to the IRS.
An IRS spokesman has orally indicated that if a late filing taxpayer attaches a “reasonable explanation” for the late or previous non filing of these forms, the penalties will be waived. So far that statement appears to been honored for those who have filed late, but it cannot be predicted when the IRS may change this informal policy of waiving the penalty. The IRS also has not defined what is acceptable as a “reasonable explanation.”
An IRS Tax auditor's job is to collect tax money to finance the government. That usually takes a lot of time and effort and reviewing tedious accounting records. Forms such as the 3520 and 3520A which provide for large penalties if filed late or not at all are an IRS auditor's dream. They can collect large penalties for non filing or late filing without conducting a tedious audit. This clearly sets forth a good reason to make certain these forms are filed when each year as required.
Most accountants are not familiar with the 3520 and 3520A forms since they are not involved in international taxation and have no training in that area of tax law. It is best to find an experienced tax expert to assist you with this form or to file any past forms not yet filed.
There is one other tax hurdle that relates to property ownership and your US taxes. If your real property is a commercial or rental property, Mexican law allows you to own it through a Mexican corporation. If that is the manner in which you do hold title to your Los Cabos real estate, each year with your US income tax return you must file Form 5471. Failure to file that form or filing it late can result in a penalty of $10,000 per year.
If you, a US Citizen, own your Mexican real estate or small business through a Mexican corporation you have a U.S. Tax filing obligation with the IRS each year. This form is generally required if you own 10% or more of the stock or equitable interest in the foreign corporation.
The form is due yearly on the extended due date of your US. Income tax return. It is filed with your personal return and includes information on the foreign corporation's ownership, formation, income and expenses, and assets and liabilities. Usually it will not result in any additional tax due with your personal return, but that is possible if it has Subpart F income.
In most situations (unless the flow through election is made as explained below) the form 5471 does not result in any additional tax on your US tax return. However, if the foreign corporation has a sufficient amount of investment income, income from the sole owners personal services, or income from reselling goods made by an affiliate in the US, its income may become immediately taxable to you the shareholder. Subpart F income is complex which means a careful analysis of the sources of the corporations income must be made to determine if it is immediately taxable to its shareholder. If another owner of the foreign corporation files the form, you just need to identify data on that owner in an attachment to your tax return.
If the corporation owns real estate, and possible for other reasons, it is advisable that it is formed a a Sociedad de Responsibilidad Limitada (SRL). You as the owner of the SRL can make an election for US income tax purposes to treat it as a flow through entity on the US return of its owner. (This is the same as the treatment of an LLC or partnership for US tax purposes.) This means all of its income or losses flow through to you on your personal tax return and becomes a part of your US taxable income each year. It also allows you to take a foreign tax credit on your personal return for any taxes the foreign corporation pays in Mexico on its income. This election also stops any possibility of double taxation or converting capitals gains into ordinary income on your US income tax return.
If the IRS discovers you filed late or you should have been filing this form and did not the penalty is $10,000 per year for each unfiled form. There is a tax treaty between Mexico and the U.S which allows both countries access to the other countries records. Your US passport is included with other documents in the bureau where your Mexican corporation is is registered in Mexico.
We recommend to you that you file this form each year if you have the requisite stock ownership in a Mexican Corporation. Failure to file could result in extreme IRS penalties if they discovered you failed to file.