I.  INTRODUCTION

Real estate transactions in Mexico are governed by local state law.  Each state in Mexico has its own civil code and other laws and regulations governing issues such as condominium ownership, zoning and registration of title.

All documents contemplating transfers of and creation of security interests on real estate must be executed before a notary public.  Real estate properties must be registered in the name of the owner in the Public Registry of Property of the place where the real estate is located.  Transfers of such property as well as liens and encumbrances thereon are only effective versus third parties (acting in good faith) if they are likewise registered.  Certificates evidencing registration may be relied upon by the parties to a real estate transaction and serve as conclusive evidence of the matters covered thereby.

According to the Mexican Constitution, foreign individuals or entities may not own real estate within the "restricted zone" (that is the strip of land 100 kilometers from the borders and 50 kilometers along the coasts).  However, they may hold a beneficial interest thereon under a trust agreement as discussed below.

Fee Simple ownership of real estate property outside of the “restricted zone” is allowed, however, by the Mexican Constitution to both foreign individuals and corporations. In this case a Covenant must be executed by the foreign person or entity seeking to acquire Fee Simple title of real estate outside of the “restricted zone”. Execution of this Covenant is aimed at securing that foreign owners do not seek protection from their governments in the event of a dispute arising from or in connection with the real estate property or rights pertaining thereto.

As of December 28, 1993 a new Foreign Investment Law became effective in Mexico, setting forth several innovative concepts for the participation of foreign investment in the country.

Regarding real estate, the most relevant issue is the fact that Mexican corporations, regardless of the percentage of foreign ownership, may now directly hold title on real estate within the restricted zone, provided said real estate is used for non-residential purposes.

Previously, foreigners or Mexican corporations without a foreign exclusion clause, could only hold a beneficial interest on real estate located within the restricted zone, through a trust agreement to be entered with a Mexican bank as trustee.

However, to hold title of property located within the restricted zone for residential purposes, foreigners and Mexican corporations without a foreign exclusion clause must do so through a trust agreement.  Under the new Foreign Investment Law, the term for the permits for said trust agreements has increased from 30 years to 50 years (renewable for additional 50 year periods).

The following taxes apply to real estate and transfers thereof:

A)  Income or Capital Gains Tax.  This tax must be always paid by the party obtaining the income.  For said purposes, an appraisal on the property must be practiced by an authorized appraiser.  Capital gains will be paid on the higher of the transfer value or the appraised value.  Any contractual provision stating otherwise is null and void.  Because most appraisals are lower than the actual price, many transactions are stated according to the former and the balance is paid "on the side".  This constitutes tax evasion and fines as well as imprisonment may be imposed by the tax authorities.  The income tax rate varies depending on the circumstances of the transaction, and certain exceptions apply.

B)  Transfer Tax.  A two percent transfer tax must be paid for by the purchaser of the property upon transfer.

C)  Real Estate Tax.  A percentage determined by local tax authorities, which may vary depending on the conditions of the property (if said property is vacant, has constructions, etc.), must be paid annually by the owner.  Upon transfer of the real estate, a copy of the most recent payments is requested by the public notary attesting the transaction, as well as a certificate evidencing that there are no outstanding debts thereof.

II. REAL ESTATE DUE DILIGENCE

Before acquiring a real estate property, it is highly recommended to conduct a title search in order to ascertain, if, as a matter of public record:

a) The property is free and clear of any liens, mortgages, or encumbrances. A search in the records of the Public Registry of Property will make evident past and present liens or charges against the property, as well as any lawsuit(s) with respect to which the property could have been involved. A counsel opinion may help determine whether any degree of uncertainty may arise in the future as a result of past issues.

b) The property has been assessed with special government fees by the relevant municipality or state government as a result of city improvement or infrastructure works.  

c) Property taxes for the property are paid up to date by the current owner.

d) The property has a water supply contract from the city water entity. Also, some properties do not have city water supply, but rather have a well concession by the National Water Commission (Comisión Nacional del Agua). If the latter be the case, a review of the well concession may be useful in determining usage water fees, and any quantity or use limitations imposed therein.

e) The property is current as to water fees.

f) The property has any access restrictions or otherwise is imposed with easements of any nature.

g) The property has ever been subject to communal or ejido property regime. Beginning in 1992, a series of legal reforms allowed for the disincorporation of farmland owned by ejido communities. For ejido farmland to be converted into private property, a series of highly formalistic legal steps must occur in compliance with the Mexican Agrarian Law, such as ejido meetings, observance of right of first refusal by all ejido members to acquire the disconporated land, which right is also extended to the municipalities where such land is located, etc. Failure to observe such formalistic requirements may result in the disincorporation process to be null, and the transfer of the land to third parties contended by ejido members themselves, in clear detriment of good faith purchasers.

h) The property owes any homeowners fees if incorporated into a condo regime.

i) The property has been used as a disposal site of hazardous materials.

These and other issues of particular concern for interested purchasers may be a matter of review through a title search and a title opinion.

III.  INCORPORATING

The recommended legal structure to incorporate in Mexico, is through either a joint stock limited liability company (sociedad anónima) or a limited liability company (sociedad de responsabilidad limitada).  The main difference between them is that the latter is a "closed" corporation (i.e. the transfer of stock requires consent of the remaining partners). 

Although the following outlines the most relevant aspects of a sociedad anónima, several provsions may also be applied to a sociedad de responsabilidad limitada.

Corporations are governed by their Charter and By-Laws.  In the absence of specific regulations they are governed by the provisions of the General Business Corporations Act (Ley General de Sociedades Mercantiles).

Corporations must have at least two shareholders, the liability of which is limited to their capital contributions. Said capital contributions are represented by shares.  Shares may be paid in kind or in cash; if shares are paid in kind, they will be kept in the treasury of the corporation for a two year period, pending depreciation.  Shares representing the capital stock may be issued: (i) with a par value, or (ii) without a par value; each share entitles its holder to cast one vote at shareholders' meetings.  Preferred shares may be issued, which may have limited voting rights.

The minimum capital stock of a corporation is $50,000  Pesos (approximately US$3,800.00); the capital stock may be fixed or variable; if the capital stock is variable it has to be divided into a fixed portion with a minimum capital of $50,000 and a variable portion; such variable portion may be for a fixed amount or for an unlimited amount.

The fixed minimum capital stock has to be fully subscribed upon incorporation, and may be either paid in full or in at least 20%; payment of the unpaid portion of the capital stock may be called by the corporation at any time or as resolved upon subscription, but not later than one year after incorporation.  Increases or decreases to the fixed minimum capital stock require the amendment of the corporate Charter and By-Laws and have to be resolved by an Extraordinary Shareholders' Meeting.

Increases to the variable portion of the capital stock do not require an amendment to the corporate Charter and By-Laws, and may be resolved by either the Ordinary Shareholders' meeting or the Board of Directors.  Decreases to the variable portion of the variable capital stock may be resolved by either an ordinary or extraordinary shareholders' meeting.

Unless otherwise provided in the Charter and By-Laws, and subject to certain requirements set forth in the law, shareholders may withdraw their contributions to the variable portion of the capital stock.

The duration of a corporation is usually 99 years and may be extended according to a resolution of its shareholders adopted prior to its expiration at a duly convened and held shareholders meeting.

To incorporate, the following shall be required: (i) a permit issued by the Ministry of Foreign Affairs (Secretaría de Relaciones Exteriores) authorizing the corporate name, (ii) a Charter and By-Laws, (iii) the execution of a Public Document before a Mexican Notary Public, containing the Charter and By-Laws, and (iv) registration of the Public Document referred to in item (iii) in the Section of Commerce of the Public Registry of Property and Commerce (Registro Público de la Propiedad y del Comercio) with jurisdiction over the corporate domicile of the corporation.

The supreme authority of a corporation is its shareholders' meeting.  Shareholders' meetings may be ordinary or extraordinary.  Matters and voting quorums for each are set forth in the Law; however, they may be increased pursuant to the corporations' Charter and By-Laws.

Ordinary Shareholders' Meetings deal with any matters not reserved to the Extraordinary Shareholders' Meetings and must be duly convened and held at least once a year to approve the corporation's financial statements submitted by its Board of Directors or Sole Administrator and either appoint or confirm directors and other officers.

IV.  APPLICABLE FOREIGN INVESTMENT RULES

Under applicable Foreign Investment Law provisions, foreign participation in Mexican corporations may be restricted depending on the activity (e.g. 25% in national air transportation)

If such economic activities are not limited as in the previous examples and/or by specific economic activities which require the prior authorization of the National Foreign Investment Commission (Comisión Nacional de Inversiones Extranjeras) (e.g. cellular telephone, etc.), no prior approval by the said Commission is required in order for foreigners to own up to 100% of the capital stock of a Mexican corporation.

As mentioned above, Mexican corporations with foreign ownership may own real estate within the restricted zone, provided, that said real estate is used for non- residential purposes and that the corresponding purchase is registered with the Ministry of Foreign Affairs.

In the event a Mexican corporation should own farmland (whether located or not within the restricted zone), said property must be evidenced by a special series of shares known as Series "T" shares, of  which foreigners may only own up to 49%; however, foreigners may own up to 100% of the remaining capital stock of said corporation.

Mexican corporations with foreign ownership must register with the National Foreign Investment Registry and must provide annual economic and financial information to said Registry.

V.  MEXICAN TAXATION OF CORPORATIONS

Income Tax.  Mexican corporations are obligated to pay Mexican Income Tax.  The Mexican Income Tax rate applicable is 30%; taxable income arises out of cash receipts and payments in kind, credit, services or otherwise.  The Mexican Income Tax Law defines taxable income as the difference between aggregate income and allowable deductions; accrued losses are also deductible.  Such deductions generally include costs and expenses incurred which are strictly indispensable for a company's operations.  Such costs and expenses, however, will be deductible to the extent formal requirements in applicable Mexican tax laws are complied with (e.g. costs and expenses incurred will be deductible to the extent that these are supported by documentation meeting legal requirements). 

Mexican tax laws are very formal and require the inclusion of very specific and substantial data in such documentation.  Additionally, costs and expenses have to be duly recorded in the corporation's corresponding accounting books, and if applicable, tax withholdings made on payment to third parties.

Value Added Tax.  Mexican Value Added Tax is payable  at a rate of up to 16%.  Value Added Tax is ultimately paid by the consumer of the goods or services; until such final consumer is reached, Value Added Tax paid is credited against Value Added Tax payable; if none is payable, reimbursement for Value Added Tax may be requested.  Acts levied with value added tax are, among others, (i) sale of goods, (ii) rendering of services, (iii) leasing of property, and (iv) importation of goods and services.

VI.  OBLIGATIONS UPON INCORPORATION

Upon incorporation a company must apply for and obtain all necessary registrations such as tax registration (Registro Federal de Contribuyentes) registration of the company and its employees in the Mexican Social Security Institute (Instituto Mexicano del Seguro Social), as well as federal, state and municipal authorizations and permits, such as sanitary licenses, registration with the local chamber of industry or commerce, etc.

Finally, a corporation must comply with periodical obligations such as filing provisional tax returns, payments of social security, etc., and annual obligations such as filing annual income tax returns, holding an Annual Ordinary Shareholders' Meeting, within the first four months of each year to approve its financial statements and submit the annual economic and financial report with the National Foreign Investment Registry.