One reason for being concerned with this issue is the tendency of many foreign individuals buying Mexican homes to use their “house” in a commercial activity in order to offset the costs of maintenance and Fiduciary (bank) fees.
Legitimate Hotel and inn owners frequently complain of the many foreigners owning houses in Mexico who rent them out or use them for other money-making activities and not paying taxes in Mexico, constituting unfair competition to their businesses.
But, is the beneficiary of a Mexican Real Estate Trust or fideicomiso allowed to rent said property? In order to answer this question, we must first understand two very important concepts: RESIDENTIAL OR NON-RESIDENTIAL USE. Knowing the difference between these two terms will help you understand whether property indirectly owned by foreigners in the Restricted Zone must be owned through a Mexican trust (Fideicomiso) or Mexican corporation, and if renting property in fideicomiso is permitted or not. Learning the two definitions will give you a better understanding of what is residential (held by bank trust) and not (held by corporation).
According to the applicable Mexican Legislation, The “explotacion lucrativa” or commercial operation of property held in fideicomiso is possible if proper permit from the Secretariat of Foreign Affairs (SRE) is obtained.
The Law defines residential use as the one “that is intended exclusively as housing, for the use of the owner or for third parties” and non-residential use as “anything not “residential,” specifically non-residential use listing the following:
“I. Those [properties] intended for time-share,-…”
- Those intended for any industrial, commercial or tourist activity, and that may be simultaneously used for a residential purpose;…”
- In general, real property intended for activities related to commerce, industry, agriculture, livestock raising, fishing, forestry, and the providing of services.”
(*Articles 11 and 12 of the Foreign Investment Act allow and Regulations to the Foreign Investment Law, Article 5).
Conclusion is, when property is to be used for commercial purposes regularly or if the foreign individual (beneficiary of the Fideicomiso) is really operating a business, the owner should form a Mexican Corporation, do business properly and pay taxes in Mexico.
If you are considering renting your property (in Fideicomiso), but you want to do it properly and in compliance with the laws, review your Fideicomiso contract, see what the conditions are and what is permitted under the Permit Granted to your Bank by the Secretariat. Also keep in mind that income on your rental activities must pay taxes either by you reporting it directly or having your property manager reporting in your behalf and always get receipts of taxes paid.
The following is the exact translation of the permit granted by Secretariat of Foreign Affairs-SRE to establish a Real Estate trust (Fideicomiso) which outlines the responsibilities or the three parties involved (Seller or Trustor, Buyer or Beneficiary, Bank or Fiduciary) and describes the permitted use of the property. You can find this document in all the Fideicomiso Contracts of this type.
“The secretariat of Foreign Affairs (SRE), based on the provisions of article 11 of the Foreign Investment Act, Grants to: (name of the authorized bank or credit institution), permit to acquire as fiduciary the ownership of the immovable assets subject to the fideicomiso detailed hereby. The corresponding fideicomiso contract shall be subject to the following characteristics and conditions: Trustor (Seller’s name and nationality), fiduciary (name of banking institution), beneficiary (name and nationality of foreign beneficiary(ies)-buyer). Duration: fifty years. Purpose (goal): residential use. Immovable assets object of the fideicomiso contract (description of location, total area, city, state, measurements and boundaries as depicted in the enclosed official blueprint). Total area: (size in square meters). Distance from maritime federal zone or border: (in meters)
Conditions
- The beneficiary(ies), in conformity with what is provided by the first paragraph of Article 27 of the Political Constitution of the United Mexican States, expressly agrees before the Secretariat Of Foreign Relations to consider him/herself as a Mexican national regarding the rights acquired over the immovable assets object of this trust contract, and not to invoke, therefore, the protection of his/her government with respect to said assets, under penalty, in case of violation, of forfeiting to the Mexican Nation the properties thus acquired;
- The goals of the fideicomiso derived from this authorization shall consist for the Fiduciary to always retain ownership of immovable assets subject to this trust contract and, without granting any right in rem (real rights), allow for the temporal use and enjoyment of said assets, in favor of the Beneficiary, or the individuals designated by said Beneficiary, to devote said assets to a residential use;
- In April of every year The Fiduciary shall report to the Secretariat of Foreign Affairs and the National Registry of Foreign Investment all authorized trusts (Fideicomisos), transfers of rights, change of fiduciary, designations of substitute beneficiaries or transfer of rights to foreign entities or individuals of all properties acquired for Residential Purposes;
- The Beneficiary is under the obligation to report to the Fiduciary, on the implementation of the trust contract’s goals and the compliance of the conditions contained in this permit;
- The credit institution acting as Fiduciary is under the obligation to monitor and report to The Secretariat of Foreign Affairs on the compliance of the goals authorized to this trust contract and of the conditions contained in this permit;
- The Beneficiary and the Fiduciary agree that, as a result of the breach of this contract or of the violation of any of the conditions established by this permit, at the request of the SRE, the Fiduciary shall cancel and liquidate the trust contract within one hundred and eighty days counted from the date of the serving of the notice by the SRE;
- In case of cancelation of the fideicomiso, The Fiduciary shall give notice to The Secretariat of Foreign Affairs within the following forty days.
- If the Fiduciary intends to extend the matter object or the purpose or use of the Fideicomiso, authorization from the SRE must be previously obtained;
- The duration of this trust contract may be extended as provided by Article 13 of the Foreign Investment Act (12 of its Regulations), in the understanding that the Fiduciary shall request the corresponding authorization prior to the extinction of the contract;
- This trust contract shall be registered with the National Registry of Foreign Investments pursuant to Article 32(III) of the Foreign Investment Act and 41 of its regulations;
- This permit is conditioned upon the Beneficiary to make an investment of $250,000 U.S. dollars in a period of three hundred days counted from the date of issuance of this permit; (Translator’s note: This condition does not apply in all cases).
- The Fiduciary and the Beneficiary are under the obligation that regarding the immovable asset object of this trust contract no walls, fences or any other elements that may impede the free access to the Federal Maritime Land Zone may be placed or erected, considering that said Zone, in conformity with Article 29(V) of the General Act of National Assets, constitutes an asset of common usage. Noncompliance by this trust’s beneficiaries shall be subject to the penalties described by articles 97, 1 and 2 of said Act without prejudice to the provisions of clause 6th of this permit.
- In accordance with Article 13(II) of the Foreign Investment Act, the SRE reserves its right to verify at any given time the compliance to this permit, its conditions and purpose; its usage implies its unconditional acceptance and its breach or violation shall result in the imposition of the sanctions hereby provided, independently of those imposed by the other applicable laws.
This permit is granted based on Article 27(I) of the Political Constitution of the United Mexican States; Articles 10 (II), 11(I, II), 13 and 14 of the Foreign Investment Act; 28(V) of the Federal Public Administration Act; 11 and 12 of the Foreign Investment Regulations, Act 14(VI), 33 (VI, XXXII) of the SRE’s Internal Regulations and the Agreement which Delegated Powers to Public Servants of The Secretariat of Foreign Affairs), published in the D.O. of 28 April 2005.
The full text of this permit shall be reproduced verbatim in the corresponding trust contract’s public deed to be established in conformity with this permit. This permit will lose its validity if not used within 180 days of its issuance. Granted in Mexico City, (Date)”.
*** For further information contact: Alba Walker, Attorney at Law and Official Translator, www.thepaperchase.com.mx Tel. (612)1656503.