Private Wealth 2024

Last Updated August 08, 2024

Mexico

Law and Practice

Author



ZG MANUEL TRON CONSULTORES SC is a small and highly specialised law firm, dealing with tax and estate matters from our single office in Mexico City. We offer sophisticated tax advice on domestic and international matters, for both individuals and corporations. On international dealings we have ample experience in inbound and outbound ventures, and our client base includes Mexican and foreign investors. We also advise and represent taxpayers before federal tax authorities in Mexico, including representation in negotiation for private ruling letters, tax controversy, audits, and mediation procedures. In partnership with other specialised firms, we are also involved in providing both advice and representation to taxpayers on criminal tax matters and general tax litigation as well. We have ample experience concerning advice and structuring on domestic and international estate and succession planning for Mexican resident individuals and their families, and for financial, insurance and trust institutions.

Mexico has both federal and state taxes which may affect individuals, estates, trusts, and foundations.

Federal and State Taxation

State or local taxes concern mostly real property acquisition transactions, and property and payroll taxes; these taxes, including their rates and exemptions, vary from state to state for each of the 32 that exist in the country. The transaction cost of the tax on real estate acquisitions and the required notarial and registration fees range between 8% and 10% of the value of the property; these costs are charged to the acquirer and should always be considered.

At the federal level, the main taxes are income tax (IT) and value-added tax (VAT).

VAT applies to most transfers of property at the general rate of 16% and usually becomes a cost to be considered in asset acquisitions or disposals; real estate property is only taxable on the value of constructions (not the land) and only if those constructions are non-residential.

Mexican IT includes all type of income, including capital gains, gifts and successions-derived income.

Estate and Gift Taxes

There are no specific estate or gift taxes; estates as such are not considered taxpayers. IT applies to income received by Mexican resident individuals through a succession or a result of a gift up to a rate of 35% unless an exemption is available.

Non-resident taxpayers may also be taxed on income received through succession or gifts. Income will be taxed when obtained in kind, and only in the case of shares of stock in Mexican resident entities or real estate property located within the country; the tax is payable at a rate of 25% on the gross amount of the income (ie, the value of the shares or property).

Income from Inheritance

Mexico has a general exemption of IT on inheritance income for Mexican tax-resident individuals, as long as the recipient of the income obtains it following a proper inheritance procedure (either in Mexico or abroad); this income is fully tax-exempt, regardless of its amount, or the existence (or lack of it) of a relationship with the deceased.

If the estate includes shares of stock in Mexican companies or real estate located in Mexico, the tax exemption does not apply to any heir who is not a resident of Mexico, and therefore is subject to the 25% tax.

Income from Gifts (Donations)

Gifts are generally taxed as income in the hands of resident individuals, up to the 35% rate (it is a progressive rate), when the amount exceeds the equivalent of approximately USD5,000 per annum.

There is a total tax exemption regardless of the amount donated in case of gifts between spouses and gifts between ascendants and descendants.

This tax exemption is also applicable when the recipient of the gift is a non-resident, if that person is either a spouse or relative (ie, ascendant or descendant) of the person making the gift.

There are no specific procedures used as income tax planning mechanisms for Mexican residents.

In case of a change of tax residence from Mexico to another jurisdiction, as long as the person is not moving to a tax haven jurisdiction (one in which there is no IT, or in which the applicable IT is less than 75% of the Mexican IT) the person will not have to file the annual tax return corresponding to the year in which the change of residence was made. In fact, such individuals are prohibited from filing the said tax return.

Considering that in some cases the IT is only payable at the time of filing of the annual tax return (in April of the following year), no Mexican IT would be paid on certain items of income received during the last year of tax residence in Mexico; if the jurisdiction to which the change is being made does not tax income received before January 1st of the first year in which the person becomes a resident. In such circumstances, there could potentially be no taxation in either jurisdiction.

If the person is moving to a tax haven jurisdiction, the law establishes that the change of tax residence will only be deemed to occur five years after the change was actually made.

Non-residents and Non-citizens

In Mexico, citizenship is not a factor that determines the taxation system to which a person is subject. Both citizens and non-citizens of Mexico are treated equally for federal tax purposes.

However, a distinction is made depending on whether a person is a resident of the country for tax purposes. Mexican citizenship only carries the presumption of a person being also a resident for tax purposes in Mexico but is not absolute and admits Mexican citizens being non-residents for tax purposes.

Non-citizens Owning Real Estate in Mexico

While mining activities and the acquisition of land for that purpose have specific restrictions for non-Mexicans, non-citizens are generally allowed to own real estate property in Mexico, except in the so-called “restricted zones”. The restricted zones are those located within one hundred kilometres (approximately 62 miles) of the borders and fifty kilometres (approximately 31 miles) from the beach.

Non-citizens usually acquire real estate in coastal areas where popular resorts are located through fideicomisos (the Mexican equivalent of a trust) in which the Mexican fiduciary is the owner of the real estate, and the non-citizen is a beneficiary of the use of the property. For tax purposes these fideicomisos are transparent and the beneficiaries are deemed owners of the property, so they must recognise rental income, if any, and gains from sales.

Rental Income of Non-residents

Income from real estate located in Mexico obtained by non-residents for tax purposes in Mexico is taxable at the rate of 25% on the gross amount received. Payment of IT on this type of income is to be withheld, if paid by a resident for tax purposes in Mexico, or directly paid by the non-resident to the tax authorities if income is paid by another non-resident.

In cases of real estate property held through a fideicomiso, the fiduciary will be obligated to collect and pay the tax.

Mexico has more than 55 international treaties in force to prevent double taxation; most of those establish preferential treatments for income derived from, among other sources, real estate property located within Mexico.

Timesharing Agreements

The Mexican IT law establishes a tax for those non-residents who obtain income from real estate located in Mexico through timesharing activities, including the granting of the right to use or enjoy a property, provide lodging services or even the selling of timeshare units or memberships.

The tax is calculated by applying the 25% rate on the gross amount of income obtained, with the tax withheld if paid by a resident for tax purposes in Mexico, or directly paid by the non-resident to the tax authorities if the income is paid by another non-resident.

If the non-resident appoints a representative in Mexico for tax purposes, the tax may be calculated at the 35% rate on the actual gain obtained by the non-resident from the timesharing activities. There are specific rules as to the calculation of the taxable gain, and the resulting tax shall be paid by the appointed representative.

Gains from Sales by Non-residents

Non-residents selling real estate property in Mexico (including the sales made through a fideicomiso) are obligated to pay IT on the sale-related income.

The tax is calculated by applying the 25% rate on the gross amount of the sales price, with the tax withheld if paid by a resident for tax purposes in Mexico, or directly paid by the non-resident to the tax authorities if the sales price is paid by another non-resident.

If the non-resident appoints a representative in Mexico for tax purposes, the tax may be calculated at the 35% rate on the actual gain obtained by the non-resident from the sale. There are specific rules as to the calculation of the taxable gain, and the resulting tax shall be paid by the appointed representative.

Income from Acquisition of Real Estate Property

When a non-resident acquires real estate property located in Mexico at a price that is 10% (or more) smaller than an appraisal made by the tax authorities, the non-resident is obligated to pay IT at the rate of 25% on the amount of the difference between the purchase price and the appraisal.

The acquisition for free (ie a gift or donation) is also taxable at the rate of 25% as a general rule. The tax exemption described in 1.2 Exemptions applies when the non-resident recipient of the gift is either a spouse or relative (ie, ascendant or descendant) of the person making the gift.

Modifications to Tax Laws

Tax laws in Mexico require a specific very formalistic procedure to be modified, repealed, or adopted. Any proposal must be filed by the executive branch or a member of Congress before the Chamber of Representatives; if the proposal is approved it has to go to the Senate for further approval and publication is made afterwards by the executive branch.

Modifications to tax laws (and to laws in general) cannot be retroactive as a matter of constitutional law. Article 14 of the Mexican Constitution expressly prohibits the retroactive effects of laws, except if a benefit is obtained by it.

Mexico has a long-standing tradition to carry out a yearly review of its tax laws when the annual federal budget is being prepared. Usually, the changes relate to formal requirements, new sanctions, and anti-avoidance provisions trying to prevent further tax evasion.

Since the adoption of an international policy reaching out to conclude double taxation treaties, the substantial provisions have remained stable.

In addition, the treaty network helps to ensure permanence of tax provisions.

Taxation of Inheritance and Gift Income

However, there is a relevant change being discussed, consisting of the elimination of the tax exemptions on inheritance and gifts described in 1.2 Exemptions. This proposed change is still at the planning stage and no formal proposal has been presented to Congress; it is worth noting that several similar proposals (at least six) have previously been put forth but were not approved by Congress.

The likelihood of this exemption being repealed is high since the governing party (MORENA), which is behind this proposal, has a majority in both federal Congress chambers.

Mexico is extremely active in the fight against abuses/loopholes in the tax laws; it openly promotes international exchanges of information for tax purposes and is willing to use, under its own rules, the information received from other tax authorities in the world.

Mexico exchanges information automatically (FATCA and CRS) but is also active in the request of information for purposes of audits being conducted. In Mexico, there is no public beneficial owner register.

High net worth individuals and families have been the target of recent years’ exchanges of information, which the Mexican tax authorities use to question investment structures held in other countries, usually with tax deferral/saving purposes.

In recent cases, the Mexican authorities have classified the use of investment structures held in other countries (such as split trust/share or unite trust structures) as sham (simulated) transactions and have initiated criminal actions against taxpayers.

General Anti-Avoidance Rule (GAAR)

Mexico has enacted several provisions to fight tax avoidance; besides the fight to prevent tax fraud (a clearly illegal activity), Mexico introduced a General Anti-Avoidance Rule (GAAR) under which the tax authorities are empowered to recharacterise acts or agreements if not motivated by a valid business purpose. A new Article 5-A was added to the Federal Tax Code to implement these provisions.

Common Reporting Standard (CRS)

Mexico has openly adopted and subscribed to the Common Reporting Standard (CRS) following the guidelines established by the OECD, adding to Mexican domestic laws the required provisions to implement the collection, exchange, and processing of tax-related information.

Mexico is currently exchanging information with more than 60 countries on a yearly basis (this is a personal estimate based on different commentaries made by public officers; no official information is available as to this number).

Foreign Account Tax Compliance Act (FATCA)

Mexico was one of the first countries to accept and implement FATCA; this was made based upon the international treaty entered into with the United States for the exchange of information in 1989.

The first year in which information was effectively exchanged was 2015, when, according to the revenue authorities, more than 110,000 bank registries of Mexican nationals were sent to the Mexican authorities.

Convention on Mutual Administrative Assistance in Tax Matters

Mexico has been a signatory of this convention since 2011; this convention, combined with the treaties for the exchange of information, allow the Mexican authorities to exchange information with more than 100 countries around the world.

International Treaties for the Exchange of Information on Tax Matters

Mexico has 14 specific international treaties for the exchange of information on tax matters. The first was entered into with the United States in 1989. Mexico follows the OECD model for the adoption of this type of international treaty.

Mexican patriarchs (and matriarchs as well) are often reluctant to relinquish control of family assets to the younger generation; this provokes many conflicts both during the elders’ old age and throughout the succession process.

Mexican successions (if not very fine-tuned and planned) typically centre more on the control of the estate during and after the probate, rather than on safekeeping the assets and maintaining their productivity.

Many family enterprises and businesses have been lost during the succession process; sour experiences have motivated many universities and other think tanks to establish courses and graduate studies programmes regarding succession in Latin families in general, and Mexican families in particular.

In the face of a potential tax on inheritance and gifts (see 1.5 Stability of the Estate and Transfer Tax Laws), different planning strategies have been designed to allow the productive assets to be transferred to the younger generations while benefiting from the existing tax exemptions, but without losing control over the assets and keeping direct access to the yields or benefits generated by those assets. 

The intricate current network of exchange of information treaties, new and improved GAARs (both domestic and international), the numerous leaks and private information robberies (such as the case in Panama with Mossack Fonseca) and a quite extended social movement demanding higher taxes for wealthy families have complicated international planning activity enormously.

Mexico is no exception; the tax authorities are scrutinising the effective taxation of family members in different jurisdictions, and if the taxation level is not “enough”, the domestic authorities then believe they should be entitled to collect their “fair share” of taxes (regardless of the law and its strict application).

When dealing with international planning for a Mexican family one should be aware of the distinct risk of becoming jointly accused of wrongdoing if the authorities do not like the planning strategy, even if it is completely legal and properly executed.

Under current law, tax advisers, lawyers, accountants, and bankers may find themselves ensnared in allegations of tax evasion and organised crime. The penalties are severe, and most worryingly, those accused may have to undergo legal proceedings without the right to bail.

Mexico has no forced heirship laws.

Under Mexican law, any person is absolutely free to decide who the heirs of his or her estate will be. That being said, there are some exceptions worth noting:

  • minors have the right to alimony at least until they reach 18 years of age; and
  • older parents of the deceased have the same right to alimony that minor descendants have.

In a recent judgment, the Supreme Court of Justice of Mexico ruled that, if a partner in a couple – whether married or not – would have been entitled to a 50% division of assets in the event of divorce, then the same logic should apply upon the death of one partner, with the surviving partner inheriting 50% of the estate. This ruling was decided and made public, but the details of the ruling are not available yet, so a lot of questions remain unanswered.

Therefore, when carrying out planning for a Mexican family it is important to properly structure the marital economic agreement to prevent unexpected, undesired and expensive results.

Marital Property Regimes

Under Mexican law, there are two different regimes to be chosen by the parties to a marriage:

  • separated assets; and
  • conjugal partnership (community property).

The choice must be made at the time of formalising the marriage. In the absence of an explicit choice, the community property regime will be applied by default.

Separated Assets

If the couple decides to adopt this regime, each spouse will remain the sole owner of the assets acquired by her or him. However, for any assets not specifically or conceptually identified, a community property regime will be presumed.

However, there is a rule in many civil codes in Mexico (it is a local matter, therefore, each of the 32 states has its own civil rules) which establishes that, in case of divorce, if one of the spouses only performed housework while the other was the breadwinner, notwithstanding the fact that the breadwinner may be the nominal owner of all the assets (house, investments, cars, et cetera), the judge will split the assets equally between the two. This rule only applies under this marital property regime.

Community Property

Presently, the community property regime is less frequently chosen, largely due to a lack of knowledge about its benefits and workings. This lack of adoption, particularly among high net worth families, is somewhat perplexing given the potential advantages it can offer in terms of estate planning and preservation of family wealth.

This community property regime (or conjugal partnership as the law calls it) allows the spouses, at any time during the marriage, to establish which assets belong to each one, which assets to be acquired in the future will not be commonly owned (it could be goods acquired through inheritance from a family member, or donated by the parents to one of them) and how to dissolve the partnership in case of divorce: in other words, a prenuptial agreement.

This is particularly useful when the assets of the family include shares in family businesses that the family wants to keep among direct descendants, or similar situations involving specific real estate properties or cash gifts to one or the other.

Although increasingly used in recent years, the community property regime still remains a less common choice.

Renegotiation of Marital Property Regime

While it can be challenging, it is possible to change the marital property regime through a renegotiation after the wedding without the intention of ending the marriage. Both spouses must mutually agree to the change. Depending on the state, the change may require the approval of a judge or simply execution before a notary public. In both cases, the change will be recorded in the state’s civil registry.

This renegotiation can be beneficial for succession planning during the lifetime of the parents and when their children are grown up and of marriageable age, ensuring certain assets stay within the bloodline.

Asset Disposition under the Different Property Regimes

Persons married under a community property regime do need to have their spouse’s consent to dispose of an asset, waive a right or give away property.

The same is true for goods commonly owned in a separation of assets regime.

It is common practice to include recitals from parties to contracts clearly stating their marital status and liberty to dispose of assets.

Cost Basis of Transferred Property for Proper Consideration

Under Mexican law, the tax basis or cost basis of an asset, which has been subject to a transfer for a fair market value consideration, will have, in the hands of the purchaser, a cost basis equal to the purchase price.

Cost Basis of Property Transferred Without Consideration

In the case of transfers without consideration, the resulting tax basis will depend on the transfer having been taxable for the acquirer of the asset or not:

  • If the transfer was a taxable event for the acquirer of the asset, the new tax basis will be equal to the tax paid as a consequence of the transaction.
  • In cases of transfers without consideration (which are not taxable for the acquirer) of the asset, such as in the case of a gift between spouses or ascendants and descendants or in the case of inheritance, there are specific rules for shares and real estate property, which establish that the cost basis of the acquired asset will be inherited from the donor or the deceased.
  • In the case of transfers without consideration (which are not taxable for the acquirer) of assets different from shares or real estate property, there is no expressly stated rule, thus the assets so acquired should be treated as having as cost basis their fair market value at the time of the transfer.

Under the currently applicable rules and tax exemptions (please see 1.2 Exemptions) most transfers to younger generations may be executed tax-free, either through donations from the parents or inheritance.

That being said, the problem which is usually present in the case of donations is that the parents find it hard to relinquish control over the assets and the loss of income from revenue-generating assets.

Therefore, a series of planning techniques have been developed, including the donations of monetary assets with a deferred delivery or the reshaping of companies to allow for the reclassification of a series of shares, which may allow the transfer of the bulk of the shares while the parents retain voting control and receive most of the dividends. 

There are no special rules for digital assets. The general rules previously explained are also applicable.

Fideicomiso (Mexican Trust)

In Mexico, there is a widely used instrument for tax and estate planning purposes called a “fideicomiso” which is essentially a trust, only governed by a set of different rules.

Under the tax rules, a fideicomiso is transparent and the beneficiaries are deemed owners of the underlying assets, therefore subject to tax consequences for any redemption, sale, or transfer of the assets, and for any income derived therefrom.

Foundations

Foundations and similar concepts are not succession tools but rather a limited type of entity used for charitable purposes, severely limited as to what you can do through them. One thing that you cannot do is transfer wealth to be later enjoyed by someone else; any assets contributed to a foundation have to remain there for the sole charitable purpose for which the foundation was created.

Trusts

Non-Mexican trusts are generally recognised by Mexican law, but not always by Mexican tax officials. As a general principle of international private law, non-Mexican legal constructions or agreements will be recognised except when doing so would be against Mexican public order principles. 

Mexican fideicomisos are not trusts – a conclusion reached by the First Chamber of the Supreme Court of Justice in Mexico many years ago. Therefore, trusts are not subject to the Mexican fideicomiso tax rules.

Until 2019, trusts, either when being treated as transparent by the jurisdiction of formation or when used by Mexican residents in a structure generating income subject to a preferential tax regime (ie, one in which there is no IT or the IT of the jurisdiction is less than 75% of the Mexican IT), trusts were disregarded and the income attributable to the Mexican investor.

In 2020, a new set of rules were added to the IT Law which deal with trusts and other transparent forms of investments for tax purposes regardless of the use or of the tax treatment of the jurisdiction of formation; in essence the rules say:

  • If a Mexican tax resident derives income through a trust, the trust will be disregarded, and the Mexican resident will be liable for tax on the income received.
  • If a trust obtains income from a Mexican source, it will be deemed a separate non-transparent entity, subject to tax under Mexican law.

This dual treatment, applied concurrently, can create confusion and complications, particularly for Mexican residents who are beneficiaries of foreign trusts and who invest in Mexico through these trusts.

Under these new rules, two separate taxpayers are effectively receiving the same item of income simultaneously, leading to a puzzling question: who is liable to pay the tax?

Fiduciaries and Beneficiaries

Under Mexican law, only financial institutions may be fiduciaries for fideicomisos, thus there are no rules in Mexican law for individuals acting as fiduciaries of trusts, either in Mexico or abroad.

If a Mexican resident acts as a fiduciary of a foreign trust, the consequences would have to be determined considering the rights and obligations assumed under the agreement through which that person became a fiduciary.

If a resident in Mexico acts both as a fiduciary and a beneficiary, under current rules in Mexico, that person would be subject to IT for all income attributable as beneficiary and, depending on the actual agreement or deed, additional consequences may come from his/her acting as fiduciary.

Control over Non-Mexican Investment Structures

Under a tax reform that came into force in 2020 the notion of “control” was fundamentally changed.

Up to that moment, if a non-Mexican investment structure was organised in such a way that the Mexican beneficiary of the structure did not have the authority to determine the moment at which earnings or profits generated in the structure would be distributed, a lack of control exception was applicable and the structure was respected (and not disregarded); in these cases, the Mexican beneficiary would only be obligated to report and recognise taxable income when a distribution occurred.

Under the new rules, it is almost impossible to claim a lack of control exception; under the new rules, the concept of control is mixed and replaced with the content of a rule to determine ultimate beneficiary owners.

Therefore, any person deemed the ultimate beneficial owner of a structure will become obligated to report the structure and assume the income generated therein and will not be able to claim a lack of control exception even if the trust is 100% discretional.

In Mexico, there are not any particular structures that are specifically endorsed as the optimal method for asset protection planning.

Fideicomisos are the most popular by far as a tool for asset protection planning, estate planning and general matters concerning successions for assets located within Mexico.

Regarding assets located in other jurisdictions, trusts are undoubtedly the preferred method of protection used by Mexican investors.

In Mexico, the most common way to pass wealth and control from generation to generation is through wills.  This practice is reflective of a cultural norm where the older generation typically retains control until the last possible moment.

In recent years this has started to change, and parents are passing assets to their children allowing at least a partial transfer of control of the family wealth.

One popular way to do it is through usufruct arrangements, where title to the asset is transferred to the children, but the right to use and benefit from the asset remains with the parent(s). This arrangement, although widely used in connection with shares, presents concerning features since: (i) it is not a regulated agreement, thus the effects are limited to what is actually contained in the agreement or deed through which it is created, and (ii) the IT Law in Mexico attributes dividend income to the owner of the share (the title holder) and not to the owner of the usufruct (who receives the dividends), generating controversies with tax authorities (no clear precedents from Mexican courts exist in this matter).

There are other more innovative techniques developed in recent years since the threat of a tax on inheritances seems imminent. 

Mexican law allows for fair market values to be adjusted by reflecting different conditions such as lack of marketability or control due to a partial transfer of an interest in an entity.

It must be noted that, for tax purposes, a valuation shall be performed by any of the following persons:

the National Institute for the Management and Appraisal of National Goods (a governmental agency);

credit institutions (ie, banks);

public brokers (corredores públicos) duly registered before the Ministry of Economy; and

companies specialised in the purchase and sale of merchandise or public auctions.

Wealth disputes are usually unpleasant affairs, in which the only ones who really benefit are the lawyers; the same applies in Mexico.

Over the years, wealth disputes have taken the form of civil, and even criminal, litigation between siblings; alternative ways of dispute resolution are recognised by law and their use is notably increasing. 

A mediation institute was recently established by recognised lawyers. The aim of the institute is to provide a valid alternative for dispute resolution, and so far the results are encouraging.

In wealth disputes, sometimes damages are inflicted on one of the parties; the aggrieved party needs to file a formal civil lawsuit to try and recover these damages.

Under Mexican civil law, damages must be demonstrated in order for a judge to impose an indemnification, which in some cases is hard to prove; punitive damages are only a recent occurrence, and most judges will dismiss such claims.

Under Mexican law, only corporate fiduciaries can exist.

Mexican law expressly establishes that fiduciaries must be authorised institutions, thus there is no possibility for an individual to act as such.

Fiduciaries are subject by law to a large number of obligations and controls.

In Mexico, fiduciaries are rarely held liable for the occurrences within the trust or the losses incurred. This is mostly due to the fact that under current law and practice, fiduciaries act only under specific instructions of the technical committee of the trust.

Technical committees are formed by persons not related to the fiduciary, who are named by the settlor and act independently from the fiduciary.

As long as the fiduciary acts within the scope of the instructions legally given, there will be no liability deriving from the execution of those instructions, except if the fiduciary knowingly acts against the best interest of the assets and generates losses for which it may be held liable.

There have been a couple of public cases in courts in which a fiduciary has been found liable for losses suffered by a beneficiary even when acting under strict instructions of a technical committee; these cases are still pending in higher courts and there is not a clear precedent on the matter yet.

Depending on the purpose of a fideicomiso, regulations may exist to limit exposure encouraging fiduciaries to invest prudently.

In any event, the final decisions are always in the hand of technical committees, acting independently from the fiduciary and thus limiting its liability.

Fiduciaries, however, are responsible for acting always within legal parameters, as good patres familias and not against the purpose of the fideicomiso.

Fiduciaries invest in the way technical committees instruct them to do so, and will have no say in it, unless the instruction is deemed illegal or contrary to the purpose of the trust.

Residency

You can enter the country as a tourist and stay for a certain period of time, and are allowed to buy or rent a house without a problem.

If you want to establish permanent residency in the country, you have to be authorised to do so, demonstrating a valid reason to stay in the country and a lawful means of subsistence.

Once authorised, you will initially be given the status of an immigrant for one year. After renewing this status for five years, you become a permanent resident and are treated, for almost all legal purposes, as a national.

Citizenship

There are essentially three ways to become a Mexican citizen:

  • By birth: if you are born to one or two Mexican parents, or if you are born in Mexico.
  • By marriage: if you are a foreign national who marries a Mexican citizen, you can apply for Mexican citizenship.
  • By naturalisation: first, you become a lawful resident, then apply for citizenship.

The procedures to obtain citizenship can be complex and may not always be efficient. It is important to approach this process with patience and a good understanding of the required steps. 

If a non-citizen wants to become a Mexican national in an expeditious manner, the only way is to marry a Mexican national and apply for citizenship. In this case, it is essentially automatic.

In Mexico there are no special planning mechanisms for minors or adults with disabilities; regular structures are used and the way to cope with the issue is through proper drafting and structuring of the matter.

Guardians and tutors may be appointed or named through a will or in an inter-vivos act; it only requires the act to be executed and formalised before a notary public.

If the person needing a guardian or tutor is not a minor and has no one in charge of him or her, then a procedure shall be followed before a judge, who will appoint the guardian.

In Mexico, other than private sector efforts through not-for-profit entities, there is no work being done to help families prepare financially for longer lives.

From a legal perspective, children born out of wedlock and posthumously conceived children are not treated any differently from other children as long as they are recognised by one or both parents.

Adopted children only establish a family link with the person adopting them; if a couple wants to adopt they may both do so as long as they are married or in a formal non-traditional marriage relationship (concubinato).

There are no rules concerning surrogate children; the practice is to adopt the children after they are born. It is common for Mexican wealthy couples struggling to conceive to enter into surrogate mother arrangements in the United States.

Mexico recognises same-sex marriages.

That being said, not all the states expressly provide for same-sex marriage, but if validly executed in one State it will be recognised nationwide.

Unfortunately, charitable giving is not encouraged in Mexico. Organised civil society entities are traditionally viewed as a political risk and potential enemies of the government.

Having a Catholic majority, Mexico has a long-standing tradition of charity through the church and some Catholic organisations.

Authorised Charities

Philanthropic activities may be carried out through authorised charities. These charities (donatarias autorizadas) are not subject to IT on their income, and donations made to these charities can be deducted from income tax by the donor (the deduction is limited to up to 7% of the taxable income of an individual or the taxable profit of a legal entity).

Charities are strictly regulated, subject to a large number of formal obligations, considered a money laundering risk and heavily audited.

If a charity fails, for example, to limit its administrative expenses to 5% or less of its income, the penalty is to lose its authorisation to accept deductible donations, and taxes will be imposed on its income.

Authorised charities are usually formed in one of two ways:

  • as non-commercial interest entities (asociaciones civiles); or
  • as foundations (instituciones de beneficiencia) regulated under State laws for public charities.

The regulation of both for tax purposes is essentially the same; in the case of foundations, there are additional obligations to comply with vis-à-vis the state agencies.

ZG MANUEL TRON CONSULTORES SC

Moliere 311 piso 2
Polanco
CP 11,550
Mexico City
Mexico

+5255 6830 4509

+5255 6830 4510

manuel@metron.mx www.metron.mx
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Trends and Developments


Authors



Galicia Abogados, S.C. is a leading law firm in the Mexican and Latin American legal markets, with more than 29 years of experience. It is renowned for its specialist knowledge in the areas of finance, energy and infrastructure, private equity, regulated industries, real estate and hospitality, and life sciences. Galicia is the only leading Mexican firm able to provide a unique service offering that includes strong transactional and regulatory expertise coupled with strategic capabilities in litigation and ESG. Sustainability is at the top of the firm’s agenda when it comes to advising clients.

Next Generation Succession: Investing Trends and Family Business Onboarding

Context

Proactively planning for wealth transfer and family business succession has always been important. However, such planning has become essential for wealth continuity, as many sources, including the New York Times, expect a “Great Wealth Transfer” from Baby Boomers (1946–1964) to the next generation of investors – Gen X (1965–1980) and Millennials (1981–1996) (the “Next Generation”) – in the next ten to 20 years, representing USD84 trillion in the United States alone.

In light of this Great Wealth Transfer, more and more families are taking the initiative in their wealth planning structures and actively involving the Next Generation in the process, as it has been proved that families that implement this practice end up with a stronger structure for a multi-generational future, as the structure aligns with the Next Generation’s vision and interests, while preserving the family’s values.

Wealth transfer trends

When evaluating the way and timing to transfer wealth, families need to consider many different components, including the economic landscape, the Next Generation’s maturity and personalities, and the role of the current generation post-transfer. In this regard, the market has seen two general alternatives: giving while living, and giving post-mortem.

Giving while living

As part of the wealth planning process, the method of “giving while living” has become more popular. It allows members of the Next Generation to gradually receive their inheritance and learn how to manage it empirically while patriarchal/matriarchal figures are still available to provide guidance and advice, serving as “training wheels” for the Next Generation. Nonetheless, the extent of the involvement and role of the current generation in the management of wealth after all or part of it has been transferred is subject to each individual’s discretion and situation.

An advantage of this method is that the proposed structure can be revisited, and there is room to steer the family and its wealth in a different direction if it is not working for the Next Generation or if there is an area of opportunity in the Next Generation’s practices.

Post-mortem

The traditional method for wealth transfer is planning a structure that is triggered by the current generation’s death (or incapacity). The structure planned for this method needs to include clear rules, thresholds and governance tactics to propel the Next Generation's success and a harmonious co-existence between individuals of the Next Generation and of different lineages.

A benefit to this method is that it allows ultra high net worth families to plan for any eventuality (ie, unexpected death) in the early stages, leaving a framework for how wealth management should be carried out by the Next Generation and/or advisers and, if the case, avoiding or limiting access to wealth at an early age.

When using this method, it is suggested that, to the extent practicable, a conversation (or series of conversations as time passes by) is had with the Next Generation to ensure that their concerns are addressed and that they understand the desires of the current generation as well as each family member's role within the family’s wealth.

Wealth managers for the Next Generation

As the Next Generation starts making investment decisions for ultra high net worth families, investments are expected to move away from traditional investments; according to a study carried out by the Bank of America Private Bank in 2022, 75% of ultra high net worth individuals between the ages of 21 and 42 and 32%of ultra high net worth individuals from the age of 43 believe that it is not possible to achieve above-average returns from traditional stocks and bonds.

Likewise, an article by Wealth Briefing suggests that 90% of heirs change advisers after inheriting and that the Next Generation is not expected to fully rely on traditional advisers, so it is relevant to consider what matters to the Next Generation when choosing a wealth manager. Undeniably, a trusted and holistic adviser continues to be valuable to ultra high net worth families, but the Next Generation tends to obtain financial advice differently than the generation before them, relying heavily on easy-to-use and efficient digital sources (including social media). In this regard, as discussed in the article mentioned above, it is important for wealth management advisers to consider the following.

  • The Next Generation is fully conversant with digital platforms and expect a seamless experience in every aspect of their lives – including as it relates to their investment portfolios and decisions.
  • Lack of digital maturity in a wealth manager is the number-one reason for dissatisfaction among ultra high net worth individuals.
  • As the younger end of the Next Generation (eg, young Generation X and Millennials) continuously seek unique experiences, the traditional events (seminars, formal dinners, etc) held by lawyers and financial advisers do not seem to be the ideal way to reach this audience. Instead, wealth managers should propose a more creative and experience-based approach to connect.
  • The Next Generation wants to receive constant and efficient information, preferring digital channels (text, email, WhatsApp, virtual meetings) rather than formal in-person meetings, and advisers who are easily accessible.

Investment trends

In addition to the way the Next Generation diverges from its predecessors in regard to the profile of an adviser, the Next Generation from ultra high net worth families is changing the focus on asset class, focusing on multi-asset class products and portfolios with the following characteristics and trends.

Innovation

Considering that Millennials at least are digital natives, the Next Generation is focused on investing in opportunities driven by technology and on continuing to develop innovation. With that in mind, the Next Generation will invest in highly innovative industries (such as cryptocurrencies and artificial intelligence) and will not have much appetite for opportunities that fail to harness technology. Likewise, the Next Generation has an appetite for tech-savvy solutions to address global concerns such as climate change and healthcare accessibility.

Value-aligned investments

The Next Generation is or will be inheriting wealth and/or a business that was not built directly by them, and are consequently exploring ways to find their identity with their investments and management of wealth received. As a response, the Next Generation is seeking investment opportunities that align with their values and contribute to society one way or another. This trend is attributed to many factors: a more conscious world, a more racially and ethnically diverse generation, and more evident social and environmental challenges that threaten the future.

This trend could be in the form of ESG-focused investments, which contemplate and report environmental and social factors in their performance, or impact investing, through funds or entrepreneurships that are committed to environmental and/or social returns in addition to financial returns. The industry of ESG-focused or impact investing is still developing, with a lag in Mexico and Latin America in contrast to the market in the US and Europe. It needs patient capital but is on the rise, and the Next Generation of investors seems keen on propelling its success to make it a stabilised and profitable industry.

To give more context on the evolution of this trend, based on Capgemini’s World Wealth Report mentioned above, 76% of ultra high net worth individuals who are 40 years or younger and 46% who are older than 40 have ESG as an important investment objective.

Even when investing in more traditional opportunities, a new variable for the Next Generation to consider when deciding to invest is whether the investment aligns with their values and passions, considering only companies that align ethically with investors and/or are doing their part to solve one of the more relevant challenges faced by the world today.

Real estate

One trend that will remain a constant across generations is investing in real estate, which has proved to be an attractive asset for older and younger investors. As a result of the Great Wealth Transfer, according to an article by Merrill Lynch, the Next Generation is expected to acquire a first home, trade up their first home or even buy a second home. In addition to personal property, ultra high net worth families are expected to invest in properties to rent out, and also in mixed use real estate developments (shopping centres, hospitality, residential, etc) or passively through REITs (or similar vehicles).

Divestments

In addition to investing trends, the Next Generation is expected to divest from industries that contribute to environmental degradation, especially for companies that are not making an active effort to mitigate or set-off their negative environmental impact.

On another note, in the context of a family-owned business it is relevant to analyse and assess when is the right time for divestiture (as discussed in the section below).

Succession to the Next Generation in family-owned businesses

According to the National Institute of Statistics and Geography (INEGI), 90% of business units in Mexico are family-owned businesses. The INEGI 2023 Study on Business Demography showed that 85% of such businesses are currently with the first and second generations. However, one of the main concerns is the mortality of such businesses. The study showed that only 30% of such family businesses make it past the second generation, while only 10% make it past the third generation.

As a result, for families with a family-owned business, succession planning has additional hurdles that need to be tackled in the structure, specifically as the main goal is to have continuity of wealth, family values and relationships. The succession process can present its own kind of challenges, with multiple generations being involved (with three generations working together in some cases) and members of different lineages (ie, cousins). Considering the emotional component of succession to the Next Generation, family members need to be prepared to address the complex questions and hard conversations that will arise sooner or later. For this stage of the family business, it is suggested to consider the following.

New perspective

Having the Next Generation be part of the family business will bring renewal, fresh perspectives and new ideas, enabling the business to evolve, grow and understand the current market and a new generation of consumers, and will continue to incentivise the Next Generation individuals’ involvement.

For these purposes, it is important to onboard the Next Generation in the business and/or the business’ decision-making process from an early age, to successfully engrain an interest in and emotional connection to the business in the members of the Next Generation.

Changes to family-owned business

It is necessary for the current generation to keep an open mind on the next era of the family-owned business as it relates to different ways of managing, expansion to other markets, new product development, etc.

Consistent with investing trends, at the level of the family-owned business, the Next Generation will also be focusing on what the company or team is bringing to society (from a social or environmental perspective) and will look to make applicable changes in that regard.

Potential divestiture

In contrast to previous generations, not all members of the Next Generation will be interested in a traditional family business, and will have a less emotional connection to the family business or seek a venture in which they can independently succeed.

In this context, it is necessary to openly discuss the Next Generation's perspectives, abilities and interests – if they are not aligned with the business, an alternative (if the timing is right) could be for the current generation to divest from the family-owned business and invest the funds for wealth preservation to be used by the Next Generation pursuant to a well-planned structure in alignment with their interests.

Onboarding best practices

When thinking about the continuity of the family-owned business, good practices include:

  • incentivising and even requiring the Next Generation to have relevant experience in the workforce outside of the company for character development and in order to learn from a different perspective;
  • integrating members of the Next Generation in the business as soon as possible (either as an employee or through governance), with the purpose of developing a shared vision for the future with which the Next Generation, once in leading positions, feels aligned and engaged;
  • requiring members of the Next Generation to work their way up the ladder and reach leading roles once deserved and within an appropriate timeframe, having an effect on the family member’s self-esteem and accountability, and on the perception of them by other employees of the family business;
  • involving each member of the Next Generation in the areas of the business that actually interest them;
  • allowing successors from the Next Generation to lead in their own way, fostering autonomy, with the prior generation taking a step back (when the time is right);
  • training and educating members of the Next Generation from an early stage to be capable owners/shareholders, regardless of whether or not they intend to actively participate in the management of the family business;
  • transferring or planning to transfer part of the ownership in the family business to the Next Generation; and
  • creating a strong governance structure and transparent plan for the future.

Conclusion

Considering the above, the Great Wealth Transfer is expected to result not only in wealth changing hands, but also in a change of how the largest fortunes are managed and grown and what asset classes are the most relevant in the market, as well as bringing about a new era for wealth management.

Members of the Next Generation (especially Millennials) are used to – and seek out – constant change in all aspects of life; the management of their wealth and/or family business should be no different, and financial and legal advisers need to adapt accordingly to this need.

Galicia Abogados, S.C.

Torre del Bosque
Blvd. Manuel Ávila Camacho No. 24, 7th floor
Lomas de Chapultepec
11000, Mexico City
Mexico

+52 55 5540 9200

+52 55 5540 9202

www.galicia.com.mx
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ZG MANUEL TRON CONSULTORES SC is a small and highly specialised law firm, dealing with tax and estate matters from our single office in Mexico City. We offer sophisticated tax advice on domestic and international matters, for both individuals and corporations. On international dealings we have ample experience in inbound and outbound ventures, and our client base includes Mexican and foreign investors. We also advise and represent taxpayers before federal tax authorities in Mexico, including representation in negotiation for private ruling letters, tax controversy, audits, and mediation procedures. In partnership with other specialised firms, we are also involved in providing both advice and representation to taxpayers on criminal tax matters and general tax litigation as well. We have ample experience concerning advice and structuring on domestic and international estate and succession planning for Mexican resident individuals and their families, and for financial, insurance and trust institutions.

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Galicia Abogados, S.C. is a leading law firm in the Mexican and Latin American legal markets, with more than 29 years of experience. It is renowned for its specialist knowledge in the areas of finance, energy and infrastructure, private equity, regulated industries, real estate and hospitality, and life sciences. Galicia is the only leading Mexican firm able to provide a unique service offering that includes strong transactional and regulatory expertise coupled with strategic capabilities in litigation and ESG. Sustainability is at the top of the firm’s agenda when it comes to advising clients.

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