Acquiring real estate in Mexico can be cumbersome and time consuming, particularly for foreign investors.
The legal framework applicable to private real estate in Mexico derives from the Constitution. Article 27 of the Constitution forbids foreign individuals and entities from holding direct ownership of land or waters in the geographic area known as the 'restricted zone', which stretches for 100 kilometres along Mexico's border and 50 kilometres along its coastline.
Based on the constitutional prohibition on acquiring direct ownership of land in the restricted zone, Mexican law allows foreign individuals and entities to use a foreign trust to acquire beneficial interests in real estate that is located in the restricted zone where it is intended to be used for residential or commercial purposes.
Further, Mexican companies with foreign participation may:
- directly acquire real estate for commercial use; and
- use a Mexican trust to acquire beneficial interests in real estate that is located in the restricted zone and intended to be used for residential purposes, subject to other formalities.
Trust agreements are the most common investment vehicle used by foreign investors. They were created by a federal commercial statute and are structured as agreements between:
- the owner of an asset or property (the settlor);
- a Mexican financial institution (the trustee); and
- a trust beneficiary.
Under such agreements, the owner of the asset or property transfers title therein in favour of a financial institution, as trustee, for the purposes set out in the agreement and for the beneficiary's benefit. Trust agreements have proven to be an efficient vehicle for foreign individuals wanting to purchase holiday homes in the restricted zone.
The amendments to the General Law of Business Corporations published in the Official Federal Gazette on 14 March 2016 created the simplified stock company – a new type of mercantile corporation designed to be used by small and medium-sized businesses. The main attribute of simplified stock companies is the same as that of Mexican stock or limited liability companies (ie, they limit the liability of shareholders to their contributions). However, in addition, simplified stock companies can:
- have only one shareholder;
- undertake their incorporation electronically through the Ministry of Economy website created for such purposes; and
- have no minimum capital.
The timing and requirements to incorporate a simplified stock company are much more flexible and cost efficient than for traditional mercantile corporations.
A simplified stock company's annual income cannot exceed Ps5,508,200 (approximately $270,000). This is often incorrectly viewed as a limitation on using the company as an investment vehicle. Pursuant to accounting criteria, the funds that a simplified stock company receives from its shareholders as capital contributions are not considered income and can eventually be capitalised. Therefore, strictly speaking, the value of the business or transaction for which the company is incorporated may be higher than Ps5,508,200.
The applicable legal provisions governing simplified stock companies do not limit or restrict them from carrying out transactions with respect to real estate, including its acquisition or sale.
A simplified stock company may be an attractive investment vehicle for:
- foreign parties wanting to acquire direct ownership of (as opposed to trust beneficial interests in) a holiday home outside the restricted zone; or
- other commercial or industrial projects involving real estate anywhere in Mexico.
In some instances, and as an exit strategy, transferring shares in a simplified stock company may be easier than selling trust beneficial interests. In such cases, the company may avoid the need for a trust agreement (and the annual acceptance and administration fees). However, it should be noted that as they are commercial entities, simplified stock companies must prepare and file tax returns with the Mexican tax authorities.
Despite the fact that the concept of the simplified stock company was created in 2016, the number of entities that have been incorporated as such is low. This is likely due to the different criteria applicable to the relevant authorities with regard to their day-to-day operations and the modality's limitations, such as with regard to annual income.
For further information on this topic please contact Isaac Zatarain V at Santamarina y Steta by telephone (+52 81 8133 6000) or email ([email protected]). The Santamarina y Steta website can be accessed at www.s-s.mx.
This article was first published by the International Law Office, a premium online legal update service for major companies and law firms worldwide. Register for a free subscription.
