When buying property in Mexico’s “Restricted Zone,” it is necessary for investors to use one of two vehicles – a bank trust (“fideicomiso”) or a Mexican corporation. While the bank trust is the most common choice with some extra advantages, ownership through a Mexican corporation has its own benefits. Here we will review these benefits.
The Restricted Zone – Definition
Mexico’s Restricted Zone is defined by 50 km along every cost line, which includes all of Baja California, the entire area along the Pacific, a good portion of the Yucatan Peninsula, and the Gulf of Mexico Area. It also includes 100 km along the borders with the United States in the north and Belize and Guatemala in the south. In this entire area, it is necessary for buyers to own by means of a bank trust or Mexican corporation.
If the property is located more than 100 kilometers from the border or 50 kilometers from the coast, a foreigner can acquire direct ownership of property directly, or "fee simple," but some buyers nevertheless choose to own either through a bank trust or corporation because of some side benefits.
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The Mexican Corporation
Ownership of property through a Mexican corporation is an interesting and potentially lucrative alternative. The Foreign Owned Mexican Corporation (FOMC) is a vehicle that allows foreigners to open a business and work in Mexico. The corporation is a Mexican entity, and as such, has the right to hold title to real estate. An attorney or notary can help set up a corporation. It is important to know what your goals are in respect to the property, business and type of investment prior to setting up the corporation.
The advantages of the FOMC include:
- It allows for the purchase of properties larger than 2000 square meters. (Bank trusts are generally limited to 2000 square meters.)
- There are no limit to the number of properties it may own.
- It allows for one or more of the stockholders to live and work in Mexico legally year round.
- A Mexican corporation can own property outright, eliminating the need for a bank trust and its associated fees. This means that the owners of the corporation own the property essentially in fee simple.
- By establishing the property in a corporation, you can then legally rent out the property, thereby generating income.
- Mexican corporations are set up similarly to those in the U.S. and Canada, with by-laws, articles of incorporation, and the issuance of stock.
- As long as there are two or more parties to the corporation, a Mexican corporation can be wholly-owned by foreigners; a Mexican citizen does not need be part of a Mexican corporation for it to be valid.
The disadvantages of the FOMC include:
- The corporation requires more hands on attention than the bank trust.
- It does not have the ability to avoid capital gains taxes when it sells property.
- Creating the corporation requires a minimum of 2-individuals (stockholders), of any nationality, that are at least 18-years of age. One of the stockholders will be required to be the managing partner. (This is the “flip side” of the advantage mentioned above.)
- The managing partner will be required to acquire and maintain an FM-3 visa. The visa must be renewed every year.
- The corporation is required to make monthly reports to Hacienda (the Mexican Department of the Treasury) reporting income and expenditures. The reporting needs to be done by a certified accountant.
- A Mexican Corporations can only legally be used for property ownership if the property is to be used for commercial or investment purposes, not residential.
Each investor should discuss the pros and cons of forming a Mexican corporation with an attorney in Mexico who is familiar with this process.