Archive for Blog

Starting a Business in Mexico: Taxes, Immigration and Incorporation

May 5, 2012 / Solomon Freimuth / No comments

This article was originally published in November of 2011 on the Calderón & Asociados website, but as I am no longer part of that firm I am just now getting around to adding it to this site. Enjoy.

So you want to pack up and move to paradise? Before you put your house on the market and start selling off your ski gear, you may want to spend some time investigating your options as to moving to Mexico. Starting a business has worked for thousands of foreigners in Mexico, but the expat business-owner life is not all sitting on the beach sipping margaritas and hopping from cantina to cantina singing along with the Jimmy Buffet impersonators. In fact, most business owners in Mexico, unless they own a bar or beach club, are far too busy or tired to take part in these activities. This article is a very basic, very general, look at a few of the things you need to consider before you embark on your tropical dream.

What Sector?

One of the things you have to decide before you start the whole process of creating your enterprise is what type business are you going to do. You need to have your plan well laid out and determine beforehand if it is a business that you can take part in as a foreigner in Mexico. The Mexican Constitution reserves exercise of some commercial activities for the government and some others for Mexican citizens, you will need to make sure that the business you want to create is something you are allowed to do.

There is a long list of businesses that are reserved exclusively for exercise by the federal government, some make a lot of sense, because of their nature as publicly necessary, while others are nationalized as an attempt to keep the country’s wealth in the hands of Mexican citizens. The federal government has exclusive rights to: harvesting and processing petroleum, generating electricity and nuclear power, processing and handling of radioactive minerals, telegraph/radio-telegraph, mail, the creation of money and supervision of ports, airports and helipads.

As well as industries that are exclusively performed by the government, the Foreign Investment Law specifies some businesses that can only be performed by Mexican citizens and still others that can only have limited participation of foreigners. The businesses reserved exclusively for Mexican citizens are broadcast television, terrestrial transport, and distribution or sale of gasoline. As for businesses that allowed limited foreign participation: Production cooperatives are allowed 10% foreign participation; airlines which fly routes inside of Mexico may have up to 25% foreign participation; insurance companies, suppliers of bonds, exchange houses, financial institutions, firearm and ammo manufacturers, newspapers, commercial fisheries, harbor pilots, interstate shipping, port management and telecommunications companies may have up to 49% foreign participation; and finally, tugboat operators, marinas, boat ramps, private airfields, private schools, law firms, insurance brokers, cell phone service companies, oil pipeline builders, petroleum drillers and railroad builders need a special permission from the government if their foreign participation is more than 49%.

One more consideration about restrictions for business type is that while the law only limits the previous activities, by custom some businesses are only performed by members of certain unions or syndicates. If you are not a member of a particular syndicate it can be extremely difficult to obtain a business license or sellers permit in certain fields, therefore you will need to research local customs in respect to unionization as well.

What Structure?

You have your idea; you have checked that it is possible for you to perform. Now you need to look at the way in which you want your business to run. The most common way of starting and running a business, at least for foreigners, in Mexico is through a corporation, although it is possible to run your business in Mexico as a sole proprietorship in many circumstances.

Everyone who has ever mentioned starting a business in Mexico will get the standard expat advice that you must start a corporation to run your business, which can be true in some cases. There are a wide variety of corporate structures available in Mexico, the most common of them being the S.A. de C.V. or Anonymous Society with Variable Capital, which is very similar to the Inc. in many English-speaking legal systems. Even though the S.A. de C.V. is the most commonly used, in this author’s opinion the S. de R.L. or Limited Responsibility Society fits better with the needs of small business owners. Without going into too much depth, basically the S. de R.L. has more of a small business feel, allows restrictions on transfer of ownership and has a lower required startup capital. The most notable advantage of using a corporation to run the business are the corporate veil which limits liability to the owners/partners, but the drawbacks of a corporation are that start up costs will be increased and you, of course, a corporation requires partners.

Sole proprietorship is a great option if you want to go it on your own. Expat legend tells us that foreigners cannot run businesses through sole proprietorships, but the reality is that this is just not true. Sole proprietorships have big tax advantages, avoiding the classis double taxation incurred by corporations. Many will say that the major disadvantage of the sole proprietorship is that it will not offer the limitations on personal liability that a corporation would give, but in this author’s opinion that might not really be a big concerns considering that the biggest liability risk is labor-related, which is not protected under corporate shielding anyway.

What Do I Need To Be Ready?

You will need to get yourself legally ready to do business in Mexico, not just your corporation but also your personal documents. Before leaving your home country, it is a good idea to ready some of your pertinent documents for use overseas, then after arriving in Mexico you will need to have these documents translated into Spanish. Finally, once in Mexico you will need both a permit from immigration and a personal taxpayer ID number. Both of these can be obtained personally or with help from a consultant or attorney.

Most documents issued by foreign governments are not valid for use in Mexico, at least how they are issued. Your birth certificates, school records and/or professional degrees, as well as your marriage licenses or divorce decrees will all need to receive a special certification from your home government, and depending on which country you hail from you might also need to get the Mexican government to authorize the use of the document in Mexico. Once the documents have been properly authorized for use in Mexico, the will also need to be translated into Spanish by a translator who has been authorized by the Mexican government.

In order to work in Mexico as a foreigner you will need a special permission from the National Institute of Immigration (Instituto Nacional de Migración or INM in Spanish). These permits are widely given to entrepreneurs, investors and professionals who have migrated to Mexico, but obtaining one of these documents can be taxing on the patience, usually requiring multiple trips to the INM office and a plethora of documents pertaining to your personal, academic and financial background. Immigration law in Mexico is currently in the process of reform; apparently the new laws will make the migratory process more agile.

The Mexican Treasury Department, also known as Hacienda, issues to all taxpayers in Mexico a unique taxpayer ID that is based on your name, birthdate and a few random numbers and characters. The taxpayer ID is commonly known as the RFC, which stands for Registro Federal de Contribuyentes or Federal Registry of Contributors in English. If you are opening the business as a sole proprietor, you will use this number for tax purposes. If you are opening your business with a corporation, you will still need a personal taxpayer ID number in order to be the legal representative of the corporation. Getting your taxpayer ID is very simple, much of the inscription process is online and the people in the Hacienda office are usually very efficient.

Other Considerations

Doing business in Mexico has its own unique style and flavor; many people never adjust to the pace and therefore struggle unnecessarily in their business. Most people that are able to run a business in Mexico for any long period of time have an accountant and an attorney that they trust and use regularly for advice and help on various issues that they face.
Tax laws are different in Mexico than in other parts of the world, many foreigners find the tax system in Mexico frustrating and confusing. A good accountant can help you sort through what taxes have to be paid and when, giving advice and helpful reminders which can keep your business out of trouble in the long run.

Labor law, contract law and other aspects of the legal system in Mexico are very different from those we are accustomed to in our home countries. Mexico’s laws tend to be favorable towards the employee, the renter or the customer, although this tendency is progressive and humanistic, it can also be very frustrating for individuals trying to conduct business in Mexico. A good attorney will help new business owners by orienting them in the laws and customs of Mexican businesspeople, explaining the importance of good labor practices, rental contracts, etc.

In conclusion…

Mexico can be paradise for the expat business-owner, but preparation and patience are keys for anyone thinking of taking this life path. If after reading and contemplating the ideas mentioned here, you still are interested in setting up shop “South-of-the-border”, Mexico will welcome you with open arms.

Category: Blog, Corporations in Mexico, Investment and Business in Mexico, Running a Business /

Quick Post: Permanent Import of Foreign Plated Cars

April 12, 2012 / Solomon Freimuth / 4 comments

In the beginning of February I spoke at a Seminar for foreigners in Puerto Aventuras, preceding my talk was a high ranking official from Mexican Customs. In her exposition she mentioned that it was no longer possible to permanently import vehicles once they were in Mexico: she claimed that foreign vehicles could only be imported at the border.

I disagreed at the time, so I went about looking up the law and various regulations pertinent to permanent vehicle registration, but found nothing specifically saying that the vehicle had to be imported at the northern border.

In law theory class we learned a concept of “is and ought”, there are two realities, how the world IS and how the world OUGHT to be according to the law. I passed the customs official’s statement off as an “OUGHT” situation, but I couldn’t find it.

So, I have been trying to contact a customs broker (they are like notaries who specialize in customs dealings), but getting one on the phone has been a huge ordeal. Finally after 3 weeks of trying (two really because they closed for Semana Santa), I got a customs broker on the phone:

I proceeded to talk to him about the possibilities of importing the car that has been in the country for a while…no problem. Costs….not too much. Time frame…oh, its very fast. So what paperwork do I need?

That is where the conversation got discouraging: The standard paperwork for transferring the title of a car, as you would in the US is needed. No problem. There was only one problem, the last requirement for permanently importing a foreign car is the CURRENT inspection paperwork from the Department of Environmental Quality. Current means less than 6 months old; inspection means physical, car in their facilities getting the emissions checked, inspection; and Department of Environmental Quality means the one in the United States or its equivalent in the vehicle’s country of origin.

I tried to get around this, I asked if there was any way around this requirement, if I could get the inspection done here in Mexico, isn’t there any kind of exemption…All of this was met with failure.

Without inspection paperwork that is less than six months old you cannot permanently import a foreign car. Punto.

I guess “can’t import cars that are already in the country” really falls into the category of “IS”.

So, this leaves us with the question, what are all these gringos going to do with their cars?

While I was on the phone with the customs broker in Mérida I made sure to ask, to which the reply given was:

It costs $1300 USD to get a car shipped back to the US.

Category: Blog, Debatable information..., Import - Export, Taxes and Fiscal Info, Useful Expat Info / Tags: , , , ,

Can foreigners buy a car in Mexico?

March 18, 2012 / Solomon Freimuth / 2 comments

With the changes in temporary auto import policy here in Mexico in recent years I have been more and more a proponent of expats owning Mexican plated cars instead of driving down their vehicles from the States or Canada and leaving them here. I must admit, I had an American plated car for a long time, but because of my migratory status driving it was no longer legal and getting parts for it was a hassle, so this year I made the switch to a Mexican plated car.

It used to be that buying a Mexican car was prohibitively expensive because of the costs involved because of the famous “Tenencia” tax, which over the life of the car added up to an extra 25% of the car’s value. As of 2012, there is no tenencia, or at least not at a federal level, therefore the cost of having a vehicle has gone down considerably.

So, as I said, I have recommended to a lot of people that they get Mexican plated cars to save themselves some hassle. Some people have started to look into the process, or at least have started to consider it for the coming year. I thought I’d write a little primer on buying a car in Mexico, specifically in Quintana Roo, so that people have an idea of what they are doing, as buying a car in Mexico, as with many things, is a little bit different here.

First a little aside, I debated going into this part because it is a little bit “legal theoryish” and sometimes when I tell people this I feel like I am confusing them, but I decided that my readers are pretty smart and if I put it down on paper (pixels), you can go over it again if you miss it the first time:

According to the law, there are two major classifications of goods that we need to take into account: real estate and EVERYTHING ELSE. Real estate has a very specific manner of being sold, basically through public deeds and notaries. Everything else is sold, according to the law, when there is an agreement on the item to be sold and the price. You don’t even need to exchange goods and money in order for the sale to have taken place, just the act of determining what is going to be sold and for how much makes the deal good.

So we go back to, the two types of goods, real estate and everything else. A car is not real estate, therefore it is everything else. Therefore, there is no special procedure for buying and selling cars in Mexico. Anyone can do it. If you want to sell me your car for $300 and I want to pay it, the deal is good and I have myself a new car. Anyone can buy a car in Mexico.

The problem comes in when you want to register the car. According to the law, you have 30 days after you purchase the vehicle to change the name of the owner. I know people who have had vehicles for a few years and never changed the name, just saying every time they get pulled over that they bought the car last week. I don’t recommend this, but it can be done.

In order to register the car in your name, you have to produce some specific documents. This is actually where the process can get difficult or tricky, so this is actually the HOWTO part of the article, I think the rest may have just been a little rant.

So, when getting ready to put the car in your name, here are the important things to remember to have:

1. You need the ORIGINAL invoice (factura) for the vehicle. It doesn’t matter if the car was originally sold in 1983, you NEED the original invoice in order to transfer the vehicle registration into your name. The original invoice will have the dealership’s logo and fiscal information on it and will be endorsed on the back by every owner. Normally, at the time of sale, the previous owner writes something on the back of the invoice to the effect of “I transfer all rights and obligations related to this vehicle to so-and-so”.

If the car you are trying to buy was originally foreign and has been legally permanently imported (has Mexican plates), you will not have the original dealer’s invoice, but instead will need to provide the ORIGINAL foreign title and ORIGINAL of the import documents (called the pedimiento, usually two pages with wet signatures and one of them will contain a printed seal showing that the duty has been paid). This documents are just as important as the original title.

If you don’t have the original title, there are ways to get the car registered to your name, but all of them are SO dastardly that I won’t really go into them here. Usually they involve witnesses, police reports, judges and notaries. Really.

2. There is a silly requirement, at least in Quintana Roo, that in order to register the vehicle in your name, you need an FM2 or FM3. This is not anywhere in the law, but it is an interoffice policy created by some boss somewhere. If you don’t have one of these residency documents, you will need to get one.

There is a workaround to this, I don’t recommend it, but I know a lot of people who don’t have FM3′s that have registered the car in their neighbor’s, lawyer’s or accountant’s name, which seems to work. If anyone goes this route, it is a REALLY good idea to draw up a little contract explaining that while the car is registered in a third party’s name, it is still your property and you retain all rights of ownership and possession over the car. Again, I really don’t recommend this method, it is sneaky and leaves yourself open to problems.

3. If the car was manufactured before 2012, you will have to provide the ORIGINAL payment receipts of the tenencia tax for up to five years before 2012, except if the car is older than 10 years old, in which case you will have to show that the taxes were paid for the five years prior to when the car became 10 years old.

What? I was going to make a diagram, but I think it is easier to just think of it this way: If the car is more than 5 years old you will need to provide 5 years of tenencia tax receipts, but if it is less than 5 years old you will only need to provide the tax payments until 2011.

The tax receipts are important, if you cannot prove that the previous year’s taxes were paid on the car you will have to pay them yourself in order to register the car, even though the tax is no longer in effect. This can be a deal-breaker because the tax on a $20,000.00 USD car can be $1,000.00 USD. If the seller cannot provide the tax receipts, you might want to think about not buying the car.

4. You need a proof of address. This should be a phone, water or light bill in your name. If the bill is not in your name, you should include a copy of your rental contract or a letter from your landlord (whose name is on the bill) stating that you live where your bill says you live. If you go with the letter from the landlord, also bring the copy of the landlord’s identification.

5. Finally, you need to bring copies of everything with you. Copies are very important and if you don’t have them you will be sent away to make them and will have to stand in line at the tax office all over again once you have them.

You will take all of these documents to the State tax office, any police officer can help you find it, in Spanish it is known as “hacienda estatal” or the “recaudadora de rentas”. There you will stand in lines and pay your fees, the car will be inspected to make sure it is really the car you have documents for and you will be issued a new set of license plates and maybe a sticker to go on the windshield.

As you can see, buying a car in Mexico is not that hard, but it has some differences from the process in the US or Canada. There are variations to the process, many people decide to draw up a simple sale document or document that transfers all responsibility for the vehicle to the new owner, but in the end the tricky part of the negotiation is getting the car registered. Good luck!

Category: Blog, Debatable information..., Taxes and Fiscal Info, Useful Expat Info /

Update and bits of off topic information…

March 13, 2012 / Solomon Freimuth / One comment

This isn’t going to be a really going to be really informational article. At least, not in the manner in which you have grown accustomed from this site (or at least how I would like to think that it is informational). I haven’t written for a while and thought I should just give everyone a basic update on everything I am working on:

I have been really busy with school. This term seems to be harder than I remember school being since I got my internship break starting in August. I am still amazed that I am going to graduate and be an actual lawyer in December of 2012, but at the same time I am starting to get a impending doom feeling about how much I really don’t know yet…

…Which I guess will come with practice. I have been getting lots of opportunity to practice with immigration law. January and February are always busy months for immigration, lots of people are here and want their documents changed or renewed. Immigration (INM) is being particularly strict when dealing with foreigners who let their documents expire this year, they are not granting permissions to leave the country and are asking people to appear for administrative hearings in order to justify their tardiness with their renewals. I have had a few clients cancel their FM3′s because the process has gotten too difficult and they weren’t able to leave the country when they wanted to. I have also had a few clients decide to take the leap from FM3 to FM2 in anticipation of the new immigration regulations, which still have not been published (as of 13/march/2012).

In school we have been playing around a lot with process law, ie. lawsuits. I am enjoying it and have been feeling a little bit like a kid with a new toy that I want to go try out: something not too important that I can test my training wheels with.

I had a breakfast with the representative from Interacciones bank the other morning and he presented me with a pretty good deal on land trusts. I will probably end up going exclusively with him, instead of offering trusts from the three banks I have listed right now, mostly because his deal is really good and I know that he has a lot of experience in the trust market and is famously easy to work with. We’ll see where that goes.

More than anything I want to apologize for not being more constant with my writing on this blog, I am trying to organize my life so that I can write more consistently. If anyone has any topics that they would like to know about that would make a neat little article, please let me know. One of the hardest parts of writing for me is deciding what topics people are interested in hearing about: I might like tax law or intellectual property rights, but is anyone else really interested in reading about it?

Category: Blog, Letters from the Editor /

Notes from talk in PA on Feb. 7, 2012

February 7, 2012 / Solomon Freimuth / No comments

I gave a talk this morning about immigration changes in Puerto Aventuras and mentioned to everyone that I would upload my presentation from the talk to the website.

Notes from talk in PA about immigration changes

I thought that I’d also give you some useful links to the other info we saw this morning.

Aduana(Customs) for importing cars and other stuff.

This is a link to the SAFE RETURN program for taking your car back to the US when the permit expires

US Consulate in Merida

As a little bit of homework for the readers, please leave comments with other useful links for expats living in Mexico.

Category: Blog, Uncategorized /

Do I need an FM2 to get a capital gains tax exemption?

January 12, 2012 / Solomon Freimuth / 3 comments

I often receive emails asking about “capital gains tax” on real estate sales in Mexico. There is a common expat legend that in order to get out of paying the 30-35% tax on the profits from the sale of a piece of property, foreigners must show their FM2/Inmigrante documents to the notary to prove their resident status. Recently I had someone come to me worried that the “capital gains” exemption was going to disappear with the new immigration law. With all the speculation and guessing associated with this tax, I thought it would make an interesting topic for an article.

What does the law say about capital gains tax?

Lets start with the most fundamental part, where does the law say that we have to pay taxes? First, the constitution gives congress faculties to establish the expenditures and corresponding income for the nation. That income comes primarily from taxes, of which there are many, but the taxes that most commonly apply to common people are: Impuesto Sobre la Renta (Income tax), Impuesto de Valor Agregado (Value added tax) and Impuesto Empresarial de Tasa Unica (Enterprise tax). There are other taxes, but most of them don’t apply to common people or individuals, at least not in a manner in which we notice their existence.

Notice that I didn’t mention capital gains tax? Lets examine what capital gains tax really is: it is a tax on the income from the sale of capital, but more importantly it is just income. So it is regulated in the income tax. The law doesn’t give special treatment to capital sales because they are capital sales, but instead gives special treatment to real estate sales because they are, by legal disposition, carried out by means of public deed and registered by a notary public in the Public Property Registry.

Article 154 of the income tax law says that any property sold by means of public deed is subject to income tax that in cases of individuals will be paid no later than 15 days after the sale of the property. In order to ensure the payment of these taxes the law leaves it up to the notary to calculate and collect the payment. The notary then is solely responsible for making the payment to the tax authority.

So what about the capital gains tax exemption?

The law talks about income that is not subject to income tax in Article 109, and specifically talks about primary residences in fraction XV, subsection a:

Art. 109. – The following income is exempt from income tax:

XV. The sale of:

a. Residential housing, as long as the cost of the operation is does not exceed one million five hundred thousand UDI* (aprox. $7 million pesos or $525,000 dollars) and the transmission is formalized before a notary public…

The limit established in the first paragraph of this fraction will not apply when the seller demonstrates that he has resided in the home during the five years immediately preceding the date of the sale, according to the terms of the Regulations of this Law.

That is the exemption. It is pretty clear, but we need to pay attention to that last part: according to the terms of the Regulations of this Law. Here is what the regulations say:

Article 130. For effects of article 109, fraction XV, subsection a) of the Law, taxpayers must accredit before the public functionary that formalizes the operation that the property that is object of the operation is his residence with any of the evidentiary documents mentioned below, as long as the address expressed in said document coincides with the address of the sold real estate:

I. The electoral identification, issued by the electoral authority.
II. Paid electric or telephone bills.
III. Account statements issued by financial institutions, trading houses or non-bank credit cards.

The documentation mentioned in the previous fractions should be in the name of the taxpayer, his/her spouse or his or her direct ancestors or descendants (parents, grandparents, children, grandchildren, etc..).

Nowhere does it say that foreigners have to show their FM2’s or that an FM3 doesn’t work as a evidentiary document, in fact, the law doesn’t mention anywhere that you have to show your migratory document as proof of residence. There is a legal precept that states that, “For the individual, anything that is not expressly prohibited is permitted.” This should mean that because it is not mentioned in the law that foreigners, or people possessing No-Inmigrante documents, cannot take advantage of the income tax exemption, there is no legal basis for anyone requiring an FM2 for said exemption.

So this begs the question, why do the notaries insist that you must show your FM2 in order to be exempt from income tax on property sales? Remember when I mentioned that notaries are solely responsible for the payment of the tax? Your notary does not want to be on the hook for your 28.5% income tax; therefore, he does everything he can to protect himself. This means interpreting the law in a stricter manner than actually necessary. If pressed, many notaries will allow the sale to go through and the exemption to happen with just an FM3, but this may require that someone explain to him the currently valid tax law and these specific dispositions.

Now, I think that when the new law takes effect and everyone has a Temporary Resident visa, the confusion will be diminished, but for the next couple of months this information might be able to help you when you try to sell your home.

Knowing this little bit about the tax law and the exemptions laid out in it can save you money in the sale of your Mexican dream home. Remember, accepting expat lore as the law of the land can often cost you money. When you are dealing with decisions that can cost you tens of thousands of dollars, it is always a good idea to spend a little bit of money to hire someone who can advocate for your rights.

Category: Blog, Immigration Questions, Investment and Business in Mexico, Real Estate in Mexico / Tags: , ,
« Older Entries  
Wordpress Theme by ThemeZee