Private Wealth 2019

Last Updated August 06, 2019

Mexico

Law and Practice

Authors



Baker McKenzie Abogados, S.C. organises its private wealth work globally, regionally and locally so as to co-ordinate work in the 47 countries where the firm is located. Work in Mexico is co-ordinated, in particular, by the global chair, the North American chair of the wealth management practice, a Latin America steering committee for wealth management and the Mexico chair of said steering committee. The key areas in relation to the private wealth sector are the tax/wealth management practice group and the financial institutions industry group.

At the outset, please note that pursuant to Article 1, Section I of the Mexican Income Tax Law (MITL), Mexican individuals are subject to Mexican income tax on a worldwide income basis, regardless of the source of wealth, at progressive rates of up to 35%. Generally, Mexican tax-resident individuals are required to report income on an accrual basis. However, this does not include income accrued and attributable to a third-party taxpayer (except for investments in preferential tax regimes) such as a corporation or other entity legally distinct from the taxpayer’s own legal personality.

Gifts between ascendants and descendants and between spouses are exempt from Mexican income taxation, provided the recipient reports the gift as tax-exempt income in his or her annual tax return. Failure to report an exempt gift in accordance with Mexican law will deem the individual as having received taxable income.

Reporting obligations apply in connection with gifts received exceeding an aggregate of MXN600,000 during the fiscal year.

Pursuant to Mexican tax legislation, no wealth tax is imposed on Mexico-resident individuals.

Income received by Mexican residents upon inheritance is tax exempt, provided it is reported in the recipient's annual tax return corresponding to the fiscal year in which the inheritance income is received.

Finally, in terms of Article 93, Section XXI of the MITL, only income received from insurance institutions authorised to operate as such in Mexico is exempt from income taxation. Accordingly, indemnity payments received by Mexican residents from insurance institutions not authorised to operate as such in Mexico are not entitled to the exemption treatment as per Article 93.

For many years, Mexico has had no gift, inheritance, estate or wealth tax and the provisions contained in the MITL have remained unchanged in this regard. In the past couple of years, bills have been introduced to Congress to eliminate the non-taxation regime applicable. However, they have not passed. A possible repeal of such tax exemptions has incentivised the flow of funds and investments abroad, and has accelerated transactions involving gifts among close relatives interested in availing themselves of the tax-exempt treatment on gifts.

Mexico has recently imposed restrictions (eg, on tax deductibility, application of double tax treaties, etc) and enacted robust tax legislation following the adoption of most of the Organisation for Economic Co-operation and Development (OECD) recommendations (ie, the base erosion and profit shifting, or BEPS, initiative) as well as legislation passed in the EU in an effort to tackle tax evasion, to get a better understanding of what taxpayers are doing in terms of aggressive tax planning, as well as how – and under which standards – financial institutions offer their financial services and share their information with the Mexican tax authorities.

Along these lines, Mexico has increased the number of Tax Information Exchange Agreements (TIEAs): it has an Intergovernmental Agreement in effect with the USA in terms of the Foreign Account Tax Compliance Act (FATCA) for purposes of exchanging financial information on an automatic and reciprocal basis (the first exchange was made in September 2015); as an early adopter of the Standard for Automatic Exchange of Financial Account Information in Tax Matters, Mexico has incorporated in its local legislation the mechanisms required to implement the Common Reporting Standard (CRS), with the first exchanges in September 2017 and the exchanges with the late-adopter countries that occurred in September 2018.

Tax authorities’ auditing powers have increased and have been enhanced by the information gathered as a result of FATCA and CRS exchange of information.

Mexican patriarchs like to have control over their investments and over their succession. That is why it is common that they want to set up structures during their lifetime to assure the transfer of assets as they want. This remains the case notwithstanding the family size.

It is important to point out that, at the moment, inheritance income derived by Mexican residents is exempt from federal income tax. This broadens the possibilities available for the transfer of assets upon death. However, sometimes having control over the succession of assets reduces the tax planning available for the heirs and may lead to the total elimination of the exemption.

From a tax standpoint, succession planning for Mexican individuals should not represent a challenge because inheritance income derived by Mexican residents is exempt from federal income tax. However, it is common that the planning also involves individuals (other family members) that are not Mexican tax residents. This fact increases the cost of transferring Mexican assets upon death to at least 25% of the fair market value of the corresponding asset. That is why proper succession planning should be made following the formalities established in the applicable local statute.

A testator is free to dispose of his or her property as he or she wishes, provided that he or she provides for the support of the following persons:

  • children who have not yet attained 18 years of age;
  • children (even if older than 18 years of age) who are unable to work;
  • the surviving husband if he is unable to work or the surviving wife who remains a widow and lives honestly;
  • parents;
  • the person with whom the testator lived as if she or he were his or her husband for the two years immediately preceding the death, or with whom she or he had children provided that they were both unmarried during the period of cohabitation; and
  • siblings and other collateral relatives up to the fourth level, where they are disabled or less than 18 years of age, if they do not have the ability to meet their own needs.

Please note that the Mexican statute does not establish a percentage of the succession that should be left in the above-mentioned cases. However, assets that enable these individuals to maintain their living and pay for education, if applicable, may be set aside from the estate.

Individuals may claim forced heirship in a Mexican court; a judge would be in charge of ruling on its application. These provisions are considered public law and, as such, no consensual agreements may overrule them.

The spouses may elect if the marriage would be subject to marital property before, during or after the marriage takes place. If this option is elected and the spouses do not decide on the following items, they would not be part of the marital property: assets and rights owned at the time of the marriage, assets acquired during the marriage via succession and gifts, income derived from the sale or transfer of assets that were not subject to the marital property, goods for personal use and tools required to perform their professions.

Transfer of property made in exchange of a consideration constitutes the cost basis of the property transferred. In the case of gratuitous transfers, the cost basis would be that of the last onerous transmission.

Inheritance income is exempt from income tax for Mexican tax residents; if the taxpayers/heirs follow the formalities established under the civil and tax legislation, the transfer may be made on a tax-free basis.

There are no specific regulations regarding the transfer of digital assets upon death. They would need to follow general provisions regarding intangible assets. However, this firm recommends including these assets in a Mexican will in order to have the benefit of the tax-free treatment for Mexican tax residents.

Mexican high net worth individuals (HNWIs) commonly use foreign trusts and life insurance policies offered by foreign insurance institutions as asset-protection tools and for estate planning purposes. Foreign trusts include discretionary, revocable, partially revocable and irrevocable trusts created both in blacklisted and non-blacklisted jurisdictions, the most important characteristic of which is the lack of effective control to determine the moment of distribution of profits and/or yields from the trust, either directly or through a third person.

As a civil law country, Mexico recognises transactions legally and validly entered into outside Mexico, provided that when entering into such transactions, no public principles are violated. While there is no Mexican judicial or administrative precedents on the tax treatment of foreign trusts, under conflict of law rules, Mexico does recognise trusts validly created outside Mexico under the laws applicable in the country of incorporation of such trust.

Therefore, in order to be valid and enforceable in Mexico, foreign trusts have to be documented in a written form and substance necessary to comply with laws and regulations of the jurisdiction applicable to the relevant trust deed or instrument.

The main consequence for a Mexican tax resident (regardless of nationality) who serves as a fiduciary, or is a beneficiary of a foreign trust, will be the obligation to recognise any income derived by the trust on an accrual basis for tax purposes in Mexico (ie, even if it is not actually distributed by the trust). Said income must be recognised in the proportion of the direct or indirect daily average participation that the taxpayer had in such tax year in the foreign trust.

In addition, pursuant to the Mexican Preferential Tax Regime (PTR) rules, such Mexican taxpayer fiduciary or beneficiary will be required to file an annual informative return (during the month of February each year) reporting any and all income that is treated as a PTR.

Mexican tax residents who are beneficiaries or settlors of a trust and also serve as a fiduciary will be deemed to have control over the structure and, as such, he or she will be liable for recognition of any income derived by the trust on an accrual basis for tax purposes in Mexico (ie, even if it is not actually distributed by the trust) as well as for filing an annual informative return (during the month of February each year) reporting any and all income coming into the trust that is treated as PTR income.

To avoid these adverse tax consequences, such beneficiary or settlor must avoid having effective control over the structure.

No express regulations or amendments to the existing PTR rules contained under the MITL have been enacted to impose tax consequences on taxpayers who, despite the irrevocable nature of trusts through which they maintain their investments abroad, retain extensive powers or rights over such entity.

However, it should be noted that the PTR rules and PTR implications do not apply with regard to income derived by reason of the average daily participation in a foreign trust where the taxpayer does not have (directly or through nominees) effective control on the investment, and also that the determination of effective control entails not only the daily average participation of the taxpayer but also that of his or her related or linked parties, whether a resident of Mexico or abroad.

Related parties are considered as such when one of them participates, directly or indirectly, in the administration, control or capital of the other or when the same person or group of persons participates, directly or indirectly, in the administration, control or capital of such parties. Persons are linked if one of them has management or responsibility positions in an entity of the other, if they are legally recognised as business associates, or in the case of the spouse or unmarried partner, direct-line ascendant or descendant blood relatives and relatives by marriage up to and including the fourth degree.

In terms of Mexican PTR rules, taxpayers are deemed to have control, absent proof to the contrary.

A structure that prevents the Mexican taxpayer from having any interest in a foreign entity or legal figure that generates PTR-qualifying income abroad, or from conducting transactions through any transparent entity, will ensure compliance with the PTR rules and eliminate reporting requirements. Such a structure is the so-called split trust, including an irrevocable or partially revocable trust where the taxpayer's/settlor’s rights are limited to receiving capital (not including realised capital gains). Income (including realised capital gains) is held to benefit the settlor's family members. As such, the settlor/taxpayer has no access to income and retains no power to determine timing of distributions.

Life insurance policies with an investment component legally offered by a foreign insurance company to Mexican clients also constitute a secure and efficient estate planning option for Mexican taxpayers and provide asset protection in connection with any underlying assets and investments.

The preservation of a family business across multiple generations can be achieved in an efficient manner without the need to transfer assets or interest participation in the business through the incorporation of a holding vehicle, such as a local fideicomiso to which the shares of the various entities (eg, operating companies) within a family business group can be transferred (at cost basis) without triggering capital gains tax, provided certain requirements are met; namely, that the transfer is structured as a share-for-share exchange. Once the various business entities are held through a fideicomiso, it is the Mexican trustee or fiduciario (ie, a bank) that is in charge of administering and preserving all of the proceeds from the family business, allowing for discretionary distribution of dividends and/or yields to the family member beneficiaries of such fideicomiso. In addition, family governance provisions can be incorporated into the purpose/goal of the fideicomiso in order to preserve the business objectives and reduce or even eliminate family conflict.

The value of a transfer of an interest participation in an entity must be determined according to a proper valuation prepared by an appraiser who must take into account lack of marketability and control.

Disputes regularly derive from litigations regarding wills, testamentary provisions and trusts. The procedures are carried out before the Mexican courts and are usually litigated until they reach higher courts. Sometimes, depending on the parties involved, arbitrage is a viable option to solve these kinds of disputes.

The courts will be in charge of determining the corresponding compensation applicable. Please note that in the case of forced heirship, the Mexican statute does not establish a percentage of the succession that should be left in the above-mentioned cases; when ruling in these kinds of disputes, judges usually refer to a defendant's lifestyle, alimony commitments (if any) and educational needs.

Pursuant to the General Law of Credit Securities and Operations, the only entities that can be fiduciaries are the ones expressly authorised by the law. In general, it can be established that the institutions that are part of the financial system are the only ones authorised to act as such (ie, credit institutions can be characterised as such pursuant to the Financial Institutions Law). Regarding guarantee trusts, the following are the only entities authorised to be fiduciaries: (i) financial institutions, (ii) insurance companies and (iii) brokerage firms, etc. These entities should comply with high-quality standards established for financial institutions and for performing fiduciary duties.

Pursuant to the General Law of Credit Securities and Operations, the fiduciary must abide by the trust’s by-laws when performing its duty. It will not be able to excuse or renounce this duty except for severe causes accepted by a judge, being responsible for the losses and impairments that the assets may suffer for this matter.

The fiduciary must be responsible for any damages or losses caused by the non-compliance of the terms and conditions established by the trust, mandate or commission, or law. Additionally, a technical committee may be created upon the incorporation of the trust or later on. When the fiduciary acts as instructed by the committee, it will not be held responsible for any consequences that derive from its performance as long as the trust purposes and applicable law are complied with.

The assets put into the trust should only be destined to the purposes of the trust; rights and legal actions regarding said assets will only proceed if they are related to this purpose, except from those reserved by the settlor or acquired by third parties prior to the incorporation of the trust. Thus, the fiduciary may only invest the trust assets if this investment is expressly set forth in the trust deed according to the guidelines established in the same document. Of course, this should be performed according to the fiduciary duty and, as such, it would be responsible for any damages or losses derived from the investments performed if they were not made according to the instructions set forth by the trust deed or the committee.

Please refer to 6.3 Fiduciary Regulation.

Citizenship

Individuals can be Mexicans by birth or obtain Mexican nationality by naturalisation.

Individuals are considered Mexican by birth if they are:

  • born in Mexican territory;
  • born abroad, but have either one or both Mexican parents, by birth or naturalisation; and
  • born in Mexican warships or commercial aircraft within Mexican territory.

Foreigners who obtain the naturalisation letter issued by the Ministry of Foreign Affairs, and foreign persons who marry a national citizen who has their domicile within Mexican territory, can obtain Mexican nationality by naturalisation; see also 7.2 Expeditious Citizenship.

Tax Residency

The following parties are considered residents in Mexico for tax purposes.

  • Individuals that have an established living in Mexico.
  • Individuals who also have a home in another country will be considered Mexican residents if the centre of their vital interests is located in Mexican territory. For such purposes, the centre of an individual’s vital interests is in Mexican territory when, among others, the source of wealth of more than 50% of the total income obtained by the individual in the calendar year is in Mexico and when the individual’s centre of professional activities is located in Mexico.
  • Mexican national individuals who are government officials and employees, even if the centre of their vital interests is abroad.
  • Individuals who are Mexican nationals and who demonstrate that their new residence for tax purposes is in a country or territory where their income is subject to preferential tax treatment pursuant to the Mexican Income Tax Law will not lose their status as residents of Mexico unless Mexico has in force a Tax Information Exchange Agreement with the new country of residence.

Foreign nationals can become Mexican citizens by way of naturalisation, provided the following requirements are met.

A foreigner who wishes to become naturalised must submit an application to the Ministry of Foreign Affairs expressing his or her wish to acquire Mexican nationality. He must make certain waivers and attestations; prove that he can speak Spanish, knows the country's history and is integrated into the national culture; and provide proof of residence in the national territory.

A foreigner who wishes to become a naturalised Mexican national must prove that he has resided in Mexico for at least the last five years immediately prior to the date of his application, except in the following cases:

  • two years' residence immediately prior to the application date will be sufficient in order to become a Mexican citizen by way of naturalisation, in cases where the interested party is a direct descendent of a Mexican by birth or has children who are Mexican by birth;
  • a foreigner who marries a Mexican must provide proof that he has lived together with his spouse in the marital domicile established in national territory during the two years immediately prior to the date of the application; and
  • a residence of one year immediately prior to the application is sufficient for adoptees and for minors who are descendants up to the second degree, and are subject to the parental authority of Mexicans.

If the persons invested with parental authority have not applied for the naturalisation of their adoptees or the minors, the latter may do so for one year after they reach adulthood, pursuant to the terms mentioned above.

Trusts may be settled for minors and adults with disabilities. These trusts will be handled by the person in charge of the child’s or adult’s guardianship/custody.

Mexico has both custody and guardianship figures that could apply depending on the particular case at hand. In either case, an interdiction trial could take place, in cases where a minor’s or a disabled adult’s custody needs to be ruled over.

Custody Trial

If they are no longer alive, or are not capable of undertaking the custody of the child, according to Mexico City's civil code the custody will then pass on to the child's grandparents. If the child were to be orphaned of grandparents as well, a civil law judge shall determine who is to have custody of the child.

Guardianship Trial

A trial is necessary in Judicially Appointed and Legitimate Guardianships. These trials take place before a civil judge who, depending on the kind of guardianship in play, shall establish a guardian for the minor or the incapable adult. There are several types of guardianship, such as precautionary guardianship, testamentary guardianship, legitimate minor guardianship, legitimate adult guardianship and judicially appointed guardianship.

Interdiction Trial

The interdiction trial applies when a minor or an adult is not physically or mentally capable. A judge intervenes in order to resolve who will be the minor's/adult's guardian or who will have the sole or partial custody over them. In order for the judge to determine that the minor or adult is factually incapable, two medical studies will be solicited by the court carrying out the trial. Two different medical experts will carry out the studies and determine whether the minor/adult is capable. If both studies reach the same or a similar conclusion that the minor/adult is indeed incapable, the judge will then resolve to declare the minor/adult officially incapable and shall establish who will have their custody and guardianship. In this case the judge must establish the specific terms and limits, as the case may be, of the custody in its final ruling.

Trusts, foundations and long-term investments have been set up in order to assure the financial stability of the elder.

From a tax perspective, Mexico has pension plans that economically assist individuals over the age of 65 – any contributions made to this kind of fund are deductible and the funds received when the requirements are met are not subject to income tax.

In terms of policy, the Mexican Income Tax Law establishes an incentive for employers who hire people over the age of 65. Employers may benefit from an income tax credit equivalent to 25% of the salary paid to this type of employee.

Children born out of wedlock must be recognised before Mexico’s Public Registry by both parents. In the case in which the child’s recognition takes place once the child is over the age of 18, the child’s approval must be taken into account. Once the recognition has taken place, this child will have the same rights as a child born in wedlock and shall have the same inheritance rights as any other of the parents’ children.

In the cases of adopted children, once they are adopted by a parent, the issuance of a new birth certificate will take place just as if the child being adopted was a blood relative to the parents and family. Adoption triggers the following legal effects:

  • creation of a binding relationship between parents and children with the respective irrevocable rights and obligations;
  • constitution of the blood kinship under the terms established by Mexico City’s Civil Code;
  • obligation by the parents to give the adopted child their last name; and
  • extinction of the filial bond between the adopted child and his birth parents and family.

Mexico does recognise 'same-sex' marriage. On 29 December 2009 Mexico City's civil code was amended in order to modify the respective provisions regarding marriage and the concept of marriage established by the law. Before 2009 the civil code used to establish marriage as the free union between a man and a woman. After the civil code's amendment, the concept of marriage was modified to become the free union between two individuals.

Payments for charitable or similar purposes made by a Mexican taxpayer (either company or individual) may be deductible for income tax purposes, provided said payments consist of (non-onerous and non-compensatory) donations and that these donations are received by any of the following entities:

  • the Mexican federal, state, or municipal government;
  • international organisations for charitable and humanitarian purposes of which Mexico is a lawful member;
  • a qualifying non-profit entity in terms of the MITL (ie, regarding entities that have officially obtained, from the Mexican Treasury, the 'authorised-donee' status for them to receive donations that may be deductible for income tax purposes);
  • to partnerships or entities granting scholarships; or
  • to authorised programmes for entrepreneurial schools. These are special programmes created to foster first-time employment.

Thus, Mexican families regularly seek to create a structure that allows the family business entities (eg, subsidiaries in Mexico or abroad) to take deductions for income tax purposes for payments made for charitable purposes.

In principle, such an organisation would have to be incorporated in Mexico and be treated as a qualifying authorised-donee non-profit entity (primarily) under Articles 79, 80 and 81 of the MITL. This follows from the fact that the authorised-donee status is only granted by the Mexican Treasury to non-profit entities or organisations incorporated under the laws of Mexico, which would not be the case of, for instance, a US private foundation owned by a Mexican family.

Nevertheless, pursuant to Article 22(3) of the US-Mexico Double Tax Treaty (the Treaty), contributions by Mexican residents to an organisation considered by the US tax authorities to meet the standards for public charities shall be treated as deductible contributions under Mexican law, provided said US law standards for public charities are essentially equivalent to the standards of Mexican law for organisations authorised to receive deductible contributions (contained, primarily, under Articles 79-81 of the MITL).

Mexican families regularly seek to create a domestic non-profit charitable entity and make it qualify for authorised-donee status so as to allow the family business entities (eg, subsidiaries in Mexico or abroad) to take deductions for income tax purposes for payments made for charitable purposes, as well as to allow for the charitable entity to derive tax-exempt income in the form of donations.

It is also possible for a Mexican family to have an international structure, such as a US private foundation organised as a qualifying organisation under Section 509(a)(1) or (2) of the US Internal Revenue Code, to which its various affiliates could make deductible payments.

Baker & McKenzie Abogados, S.C.

Edificio Virreyes, Pedregal 24, piso 12
Lomas Virreyes
Col. Molino del Rey
11040 Ciudad de México
México

+52 55 5279 2924

Jorge.Narvaez-Hasfura@bakermckenzie.com www.bakermckenzie.com
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Law and Practice

Authors



Baker McKenzie Abogados, S.C. organises its private wealth work globally, regionally and locally so as to co-ordinate work in the 47 countries where the firm is located. Work in Mexico is co-ordinated, in particular, by the global chair, the North American chair of the wealth management practice, a Latin America steering committee for wealth management and the Mexico chair of said steering committee. The key areas in relation to the private wealth sector are the tax/wealth management practice group and the financial institutions industry group.

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