Private Wealth 2020

Last Updated August 12, 2020

Mexico

Law and Practice

Authors



Baker McKenzie 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 that 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.

Investments in Foreign Entities

As part of the 2020 Mexican Tax Reform, the MITL includes amendments (published in the Federal Official Gazette on 9 December 2019) to Mexico's Preferential Tax Regime (PTR) rules (see 3.1 Types of Trusts, Foundations or Similar Entities for further discussion) applicable, as of 1 January 2020, to investments made by Mexican residents exclusively in foreign entities.

Before the 2020 Tax Reform, these rules applied to income derived by Mexican residents through either foreign entities or legal figures (whether or not fiscally transparent).

Accordingly, a new provision (Article 4-B) was included in the MITL to address the tax treatment of income derived by Mexican residents through foreign fiscally transparent entities and foreign figures (such as foreign trusts, partnerships). In a nutshell, in terms of Article 4-B, Mexican residents are required to recognise the income obtained through:

  • Foreign fiscally transparent entities proportionally to their participation therein; if the entity is partially transparent, the income inclusion would proportionally correspond to the income attribution.
  • Foreign legal figures (whether or not transparent), such as a foreign trust, proportionally to their participation therein; if these figures are fiscally transparent, the income will be included in terms of the relevant MITL Title, in which case, the taxpayer may deduct the expenses and investments made by the legal figure, provided they are deductible in terms of the corresponding MITL Title (the deduction taken needs to be proportional to the income recognition).

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.

In recent years, we have seen an increase in tax auditing activity by the Mexican Tax Administration Service (SAT), in which transactions and structures entered into and implemented by taxpayers face more scrutiny and are more closely questioned, by taking into account domestic anti-avoidance rules as well as domestic and international trends regarding detailed analysis of transactions carried out by taxpayers based on a substance-over-form approach.

Indeed, for the first time, Mexican tax legislation includes express provisions, effective 1 January 2020, regarding substance-over-form, which is the approach adopted by the SAT when analysing structures and transactions entered into by taxpayers. It will disregard the use of structures lacking substance and business reasons. This piece of legislation is embodied in the Mexican Federal Fiscal Code (FFC) as a new general anti-avoidance rule (GAAR), which establishes a mechanism where the SAT is entitled to, during a formal audit, re-characterise legal acts that lack business reasons and that generate a direct or indirect tax benefit to those that correspond to the reasonably expected economic benefit for the taxpayer.

Accordingly, today more than ever, Mexican high net worth individuals (HNWIs) and families must base their decision to establish and implement given estate planning structures on business/personal reasons (instead of tax reasons) and pursue objectives such as asset protection or estate and succession planning purposes.

As a special measure amid the COVID-19 global pandemic, on 22 April 2020, the SAT announced additional time for individuals to submit their 2019 annual tax return, from 30 April 2020 until 30 June 2020. In light of this extension, no update and surcharges will be generated for those individuals who file their annual tax return after 30 April 2020 and until 30 June 2020.

Mexico has recently imposed restrictions (eg, on tax deductibility and application of double tax treaties) and enacted robust tax legislation following the adoption of most of the OECD recommendations around "base erosion and profit shifting" (the 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 SAT.

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 the 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 domestic legislation, the mechanisms required to implement the Common Reporting Standard (CRS), with the first exchanges in September 2017 and subsequent exchanges with late-adopter countries occurring in September 2018.

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

Just recently, Mexico introduced new provisions into its domestic tax law that may be considered as the Latin American equivalent of the Council Directive (EU) 2018/288 of 25 May 2018 (DAC 6). This derived from the Mandatory Disclosure Rules under Action 12 of the OECD BEPS Project.

Consequently, the FFC now sets forth the obligation (starting 1 January 2021) for tax advisors or, alternatively, taxpayers to disclose information about "reportable schemes" (defined) to the SAT in cases where such schemes, when entered into by taxpayers, trigger or may trigger, directly or indirectly, a tax benefit in Mexico and if they have (among others) the purpose of avoiding the exchange of tax information under FACTA and the CRS.

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 options 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 will be subject to marital property provisions before, during or after the marriage takes place. If this option is taken, and the spouses do not decide on the following items, they will 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 regime;
  • 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 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 over the moment of distribution of profits and/or yields from the trust, either directly or through a third person.

As noted in 1.1 Tax Regimes, on 9 December 2019, the MITL was amended (published in the Federal Official Gazette) as part of the 2020 Mexican Tax Reform. Significant changes to Mexico's PTR rules and controlled foreign corporation rules were embodied in Articles 176, 177 and 178 of the MITL. These provisions establish the tax treatment applicable to income derived from investments made by Mexican residents exclusively in foreign entities; whereas, before the 2020 Tax Reform, these rules applied to income derived by Mexican residents through foreign entities and legal figures (whether or not fiscally transparent).

Accordingly, any gain that may be triggered at the level of the trust would have to be recognised by the Mexican resident settlor for tax purposes in Mexico proportionally to his or her participation therein, in accordance with Article 4-B of the MITL, which addresses the tax treatment of income derived by Mexican residents through foreign fiscally transparent entities and foreign figures (ie, trusts).

Taking these new anti-deferral rules into account, if a Mexican resident is the settlor or beneficial owner of a foreign trust that holds financial assets, that trust will be subject to the provisions contained in the new Article 4-B, which means that (depending on the tax treatment of that company abroad) holding investments through it will trigger the obligations to (i) anticipate income even if not actually distributed by the trust and (ii) report the structure.

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 are 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 have a 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 proportion with the direct or indirect daily average participation that the taxpayer had in the relevant tax year in the foreign trust.

In addition, pursuant to Mexico's anti-deferral rules, the 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 derived through and at the trust level.

The PTR rules and PTR implications do not apply with regard to income derived through participation in a foreign entity where the taxpayer does not have (directly or through nominees) effective control over the investment. 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 residents of Mexico or abroad.

For the purposes of the PTR rules, 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, in the absence of proof to the contrary.

As a result of the 2020 Mexican tax reform, effective 1 January 2020, a taxpayer is deemed to have effective control in any of the following cases:

  • Ownership of more than 50% of the voting rights of the entity.
  • Ownership that allows veto rights over the entity's decisions.
  • Ownership that requires the agreement of the shareholder for decision-making process of the entity.
  • Ownership that represents more than 50% of the total value of the shares of the foreign entity or the entities established between the taxpayer and the foreign entity.
  • Ownership of more than 50% of the assets and profits of the foreign entity, or the entities established between the taxpayer and the foreign entity, in the event of:
    1. the entity’s liquidation; or
    2. capital reduction determination.
  • If the taxpayer and the foreign entity consolidate their financial statements.
  • If the taxpayer has sufficient rights to unilaterally take decisions in board meetings and/or to manage the foreign entity, directly, indirectly or through an intermediary.

Finally, according to the new anti-deferral rules contained in Article 4-B of the MITL, income recognition on accrual and reporting will apply regarding structures involving foreign trusts, partnerships or similar entities lacking legal personality and considered fiscally transparent abroad, regardless of the lack of control by the Mexican settlor/beneficial owner.

A structure that may grant asset protection includes holding assets through a foreign legal entity in a jurisdiction having a bilateral investment treaty in force with Mexico, however, depending on the tax treatment of such entity abroad, Mexican residents investing through such a foreign legal entity may be subject to Mexico's anti-deferral rules which would be triggered. Before the 2020 tax reform, the so-called "split-trust" was a structure that prevented the Mexican taxpayer having an interest in a foreign entity or legal figure with PTR-qualifying income abroad and allowed compliance with the PTR rules and eliminated reporting requirements. Nevertheless, in light of the recently amended anti-deferral rules, Mexican residents seeking asset protection through a foreign structure such as a trust will no longer benefit from tax deferral on income derived through the trust.

Life insurance policies legally offered by a foreign insurance company to Mexican clients constitutes 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 (on a 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 the 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 litigation 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, arbitration 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 (see 2.3 Forced Heirship Laws); 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 those  expressly authorised to do so 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 entities are authorised to be fiduciaries:

  • financial institutions;
  • insurance companies; and
  • 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 duties. 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 non-compliance with 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 for 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's 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).

Residency

Foreign nationals can become residents of Mexico on a temporary or permanent basis, provided they previously obtain the corresponding visa and further obtain the resident card.

Temporary resident visa (with or without work permit) – for stays in excess of 180 days and no more than four years

With a work permit: 

  • The Mexican employer of a foreign national must first be registered with the Mexican immigration authorities and have an employer's certificate.
  • Once the employer is duly registered, it must submit an application for the temporary resident visa in favour of a foreign national seeking to come to Mexico on a temporary basis for work.
  • Once this visa is issued, the non-resident must visit the Mexican consulate to retrieve it.
  • After issuance of the temporary resident visa, the foreign national individual must enter Mexico within the following six months.
  • Once the foreign national is present in Mexico, he or she must appear before the Mexican immigration authorities within 30 days following their entry into Mexico (see below for special measures due to COVID-19) in order to exchange the migratory document obtained at the port of entry for the corresponding resident card.

Without a work permit:

  • The foreign national must have had a labour relation during the past six months with a foreign employer and reach a certain income threshold of, which must be evidenced with payroll slips issued by the foreign employer.
  • Under this type of temporary resident visa, the foreign national has no right to derive Mexican source income.
  • Salary income threshold:
    1. if the person is employed outside of Mexico, he or she must provide evidence of earning an average of 300 days of Mexico's minimum wage (approximately MXN36,000) during the last six months; and
    2. if the person is not employed abroad (ie, has no labour relation with an employer in a foreign country), he or she must evidence earning an average of 5,000 days of Mexico's minimum wage (approximately MXN610,000) during the last six months.

Permanent resident visa – for stays longer than four years

This visa entails a change in a person's residency condition, from temporary to permanent, by filing an application with the Mexican immigration authorities.

Direct-line ascendant or descendant blood relatives (up to and including the second degree) of a person having a permanent resident visa are entitled to obtain this visa without the need to have been a resident of Mexico prior to submission of this permanent resident visa. 

The spouse of a person having a permanent resident visa may only obtain a temporary resident visa. The spouse can then obtain the permanent resident visa once two years have elapsed after holding the temporary visa and provided he or she evidences two years of marriage with the person having a permanent resident visa.

In other special cases (eg, the so-called permanent resident visa for retirees), a person (eg, a HNWI) may obtain this visa type, provided he or she evidences having economic solvency averaging 20,000 days of Mexico's minimum wage (approximately MXP2.4 million) during the last 12 months or, in the case of retirees, having a lien-free pension income at an average of 500 days of Mexico's minimum wage (approximately MXP61,000) during the last six months. Although this is not a statutory requirement, in practice, foreign affairs officials do require evidence in this regard.

In all cases, the resident card must be valid at least for a six-month period before a person initiates his or her naturalisation process.

COVID-19 Special Measures

These include:

  • suspension of the 30-day term for a foreign national to appear before the Mexican immigration authorities as of the date of entry into Mexico to exchange the migratory document obtained at the port of entry for the corresponding resident card;
  • suspension of expiration date of resident cards during the pandemic;
  • closure of some Mexican consulates; and
  • no closure of Mexican borders either for air or land travellers.

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, 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 other things, 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 or she must make certain waivers and attestations; prove that he or she can speak Spanish, knows the country's history and is integrated into the national culture; and provide proof of residence in Mexico (see 7.1 Requirements for Domicile, Residency and Citizenship.

As a general rule, a foreigner who wishes to become a naturalised Mexican national must prove that he or she has resided in Mexico for at least the last five years immediately prior to the date of his or her 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;
  • two years' residence in case of citizens of Iberia or Latin America;
  • a foreigner who marries a Mexican must provide proof that he or she has lived together with his or her 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 custody will then pass on to the child's grandparents. If the child were to lose its grandparents as well, a civil law judge would determine who was 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 question, 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 elderly in Mexico.

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 recognises 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, "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 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 those US-law standards for public charities are essentially equivalent to the standards of Mexican law for organisations authorised to receive deductible contributions (contained, primarily, in Articles 79-81 of the MITL).

Mexican families regularly seek to create domestic non-profit charitable entities and make them 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, 12th Floor
Lomas Virreyes / Col. Molino del Rey
11040 Mexico City
Mexico

+52 55 5279 2900

+52 55 5279 2999

Jorge.Narvaez-Hasfura@bakermckenzie.com bakermckenzie.com
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Sánchez Devanny is a leading Mexican law firm that provides full-service legal advice both to Mexican and international clients. With offices in Mexico City, Monterrey and Querétaro, as well as several strategic alliances worldwide, it is well positioned to represent and respond to its clients quickly and efficiently. With distinct practice areas that regularly collaborate with one another, the firm provides comprehensive counsel to help its clients make better decisions for their businesses as a whole, especially in the energy, automotive, retail, real estate, pharmaceuticals and manufacturing industries. Sánchez Devanny builds enduring client relationships that go beyond individual service contracts and makes every effort to understand clients’ businesses and expectations, to serve as an ally, and to provide complete, accessible and personalised advice. Throughout the firm, pride is taken in serving clients with a combination of experience and creativity because it recognises that when you know how things are done it is easier to think outside the box.

“The secret of crisis management is not good vs. bad, it’s preventing the bad from getting worse.”

Andy Gilman

2020 is promising to be the most challenging period in Mexico's recent history. A combination of negative variables, each one more egregious than the last, pose unprecedented risks and threats to private wealth. The unchecked and viral spread of COVID-19, whose “official death toll” surpassed 30,000 in June; an economic crisis that will likely result in a 10% decrease of GDP; spiralling violence from organised crime that has taken the lives of over 15,000 Mexicans through June of 2020; heightened scrutiny from tax authorities that will evermore look to high value patrimonies as the low-hanging fruit of fiscal revenue collection, with the threat of criminal actions as a new normal revenue collection enforcement tool; and economic policies and actions that generate uncertainty as to the government's commitment to a market economy, democracy and the rule of law, are just some of the top drivers that now require high net worth and ultra high net worth Mexican families to rethink their succession planning, corporate governance, investment portfolio, asset protection and regulatory compliance profiles and protocols.

Asset Protection Environment

We are only four months into the pandemic and Mexico has already seen the initiation of two major bankruptcy proceedings, one being the national airline Aeroméxico and the other being the retailer Grupo Famsa, which also has an important subsidiary financial business unit that is now in the process of liquidation. Although it was the corporate units that filed the bankruptcies, it is likely these proceedings will involve and/or affect the personal assets of the major shareholders of the same.

Given the current economic outlook, we expect these types of situations to multiply. Thus, the family groups who control companies of all sizes will turn their eyes to asset protection strategies to shield their personal wealth. Options for asset protection are wide and far-ranging both domestically and internationally. Diminished trust in the domestic rule of law, increased concern over the visibility of assets to organised crime and heightened scrutiny by tax authorities (coupled with strong-arm revenue collection tactics), have forced wealthy individuals and their gatekeepers – family office managers, bankers, financiers and lawyers – to think outside the box in terms of asset protection. Sophisticated domestic and international asset protection vehicles will likely become the new normal. Clients and their advisors will have to closely monitor and evaluate the use of diverse jurisdictions to set up these structures and become familiar with exogenous concepts such as fraudulent conveyance rules, the rule against perpetuities, the Statute of Elizabeth, decanting, support exception creditors, and tort exceptions. It will be a brave new world.

Tax Planning and Compliance Environment

It seems that Mexican well-to-do taxpayers will, once again, face the perfect tax storm. A revolutionary tax reform, with a major focus on controlled foreign corporations and transparent entities typically used in international wealth planning structures, coupled with unprecedented tax revenue efforts that combine public scorn and criminal prosecution muscle, and a volatile peso whose ups-and-downs will certainly give rise to a healthy dose of taxable foreign currency exchange gain, are certainly more than enough to keep many-a-millionaire awake for several nights.

Foreign vehicle tax reform

The BEPS-inspired 2020 Mexican tax reform included a major overhaul of the regime applicable to foreign vehicles in which Mexican taxpayers participate for holding and managing offshore financial and operational assets and investments. These changes particularly sought to limit tax deferral scenarios through the use of sophisticated offshore vehicles, to combat the use of hybrid entities to exploit arbitrage situations between Mexican and foreign tax legislation, to pierce through complex and unsubstantiated international reorganisations and secure information for the tax authorities to identify and challenge the above-mentioned scenarios. Most, if not all, international estate planning structures will need revisions for validation of various novel Mexican tax issues.

At a minimum, the following subjects will need to be assessed:

  • whether the vehicle is a transparent or non-transparent entity;
  • whether the Mexican beneficiaries of the same are deemed to have control and thus need to anticipate the recognition of the income therefrom or whether their interest is so remote and discretionary that they are not liable to the applicable tax obligations;
  • whether assets and income generated through the structure are now subject to foreign exchange currency gain;
  • under what circumstances an offshore structure will be subject to the tax domestication rule because its place of management is deemed to be in Mexico; and
  • how aggressive will the enforcement of the criminal penalties derived from the failure to file the informative tax return for such structures and income become.

Disclosure obligations

Moreover, Mexico has enacted aggressive DAC 6 tax disclosure type legislation. The newly adopted obligation for tax advisors and taxpayers to disclose reportable schemes is a game-changer. Firstly, the concept of reportable schemes includes any situation where a tax benefit is generated for the involved taxpayer and certain technical characteristics are present. These characteristics include, among others, the circumvention of tax information exchange treaties, the avoidance of application of the newly approved and amended transparent and controlled foreign corporation provisions. Secondly, the term tax advisor was, by design, very broadly defined and may encompass parties such as bankers, corporate officers, wealth advisors and fiduciary personnel, that would typically not have been considered as such. Thirdly, the hypothesis of disclosure is generously listed and includes design, commercialisation, organisation, implementation or management of any reportable scheme.

Enforcement concerns

Another concern for the business community is the intense enforcement carried on by the vaunted Financial Crimes Unit, Unidad de Inteligencia Financiera, of the Ministry of Finance and the reforms that have raised certain types of tax fraud and non-compliance to the level of organised crime. The Financial Crimes Unit has become a cornerstone of the anti-corruption crusade of the current administration, in particular, using its legal powers to carry out blanket interventions in the bank accounts of persons of interest. On its part, the new legal framework to combat organised crime allows authorities to incarcerate persons of interest or take over title to their assets on a pre-trial basis in certain circumstances. While the Mexican business community naturally backs a more efficient fight against corruption and organised crime, there is a genuine concern over whether there are sufficient institutional safeguards to make sure these new powerful oversight powers will be used within the rule of law. More than ever, conducting thorough know your client and anti-money laundering protocols is of paramount importance for all parties advising high net worth and ultra high net worth individuals and families. Likewise, properly documenting the paper trail of financial transactions related to international estate planning vehicles and securing the proper annual compliance of the same is more essential than ever.

Imposition of inheritance or wealth taxes

Finally, yet of equal importance, the ever present possibility of the enactment of an inheritance or wealth tax law cannot be lightly dismissed. Although recent legislative attempts to approve the same were rejected by the president's party – and the president himself has repeatedly stated in public forums that during his government there will be no new taxes – the uncertainty remains. The fact that is that, largely because of the economic downturn caused by COVID-19 and the erratic economic policy of the current administration, the Mexican economy and government tax revenues are poised to suffer a shocking contraction in 2020, thus setting the stage for winds of change in the national tax landscape.

Given that, currently, assets can be inherited by any Mexican tax resident without any requirement that there be a family affiliation with the author of the succession, this potential new levy is particularly troublesome in Mexico. Today, wealth is largely held directly without the protection of bespoke succession structures that could provide some type of protection against a levy of this kind. Although the initiatives to impose an inheritance tax have so far been overly simplistic, based on the simple elimination of the existing exemption on a partial or total basis and not addressing the treatment of domestic and international estate planning vehicles or techniques, nothing is written in stone.

The 2020 tax reform has shown the capabilities of the Mexican tax authorities to produce a sophisticated and comprehensive tax reform, both at the administrative and legislative level. Therefore, expecting the introduction of a comprehensive estate, gift and potential patrimony tax that specifically address direct and indirect ownership of assets, national and international vehicles, and retained economic and corporate interests other than bare legal ownership, is within the realm of the possible. 

Cross-Border Succession and Tax Migration

The unorthodox approach of the new administration to economic, industrial and rule of law policy in Mexico has not only disincentivised the inflow of new investment into the country, but it has, perhaps with more grave consequences, greatly incentivised the outflow of financial and human capital. Large numbers of Mexican businesses and families have elected to take their fortunes and investments elsewhere in recent years, with a compounding effect in 2020; but what may be not so widely known is that, for a large number of them, this exodus extends to themselves and their families as individuals. Not since the 2008 and 2009 financial crises have we seen such a mass migration of domestic financial and human resources to other jurisdictions looking for greener pastures; but what clearly remains a constant is the perplexity of the tax and legal issues involved in such scenarios.

The destinations of these financial and human elements are multiple and the degree of migration hard to asses, but the clear leading destination is the USA, with Spain, Canada and Israel potentially following as distant runners-up. Both types of migration pose unique and diverse challenges that need to be separately and systematically addressed, with experts on both sides of the border required for each case.

Migration of financial assets requires an in-depth analysis of the corporate vehicle to hold those assets, of the tax burdens applicable to the resulting income and repatriation of the same back to Mexico, of the legal requirements to operate the same, of the protocols to interact with the banking and financial institutions in the target jurisdiction, of special withholding regimes applicable to non-residents deriving income from domestic sources, etc.

Not to be outdone, migration of individuals requires a similarly complex analysis. Review of visa opportunities and their ensuing legal and tax consequences, filing of expatriation notices in and transition into non-resident tax regimes in Mexico, acquisition of tax residency in new jurisdictions, subjection to national and local income and estate levies, new tax information obligations for income and assets held abroad, treatment of unrealised foreign income, and exceptions to the inheritance exemption generally provided in Mexico in the case of recipients who are foreign tax residents inheriting Mexican real estate or stock of Mexican companies are just some of the niceties a Mexican expat will have to consider in their pre-migration tax planning calculations.

Needless to say, 2020 will clearly be a year to remember for clients and advisors in the realm of wealth planning, and not necessarily for all the best reasons. Navigating through the sea of novel and enhanced complexities will be a daunting, yet exhilarating, adventure.

Sánchez Devanny

Paseo de las Palmas #525 Piso 6
Col. Lomas de Chapultepec
Miguel Hidalgo
11000
Ciudad de México
México

+52 (55) 5029 8500

marketing@sanchezdevanny.com www.sanchezdevanny.com
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Law and Practice

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Baker McKenzie 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 that 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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Sánchez Devanny is a leading Mexican law firm that provides full-service legal advice both to Mexican and international clients. With offices in Mexico City, Monterrey and Querétaro, as well as several strategic alliances worldwide, it is well positioned to represent and respond to its clients quickly and efficiently. With distinct practice areas that regularly collaborate with one another, the firm provides comprehensive counsel to help its clients make better decisions for their businesses as a whole, especially in the energy, automotive, retail, real estate, pharmaceuticals and manufacturing industries. Sánchez Devanny builds enduring client relationships that go beyond individual service contracts and makes every effort to understand clients’ businesses and expectations, to serve as an ally, and to provide complete, accessible and personalised advice. Throughout the firm, pride is taken in serving clients with a combination of experience and creativity because it recognises that when you know how things are done it is easier to think outside the box.

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