By: Jorge Ojeda
Cacheaux Cavazos & Newton
The Mexican real estate has been a dynamic area of the Mexican economy. The legal regime applicable to foreign investment in Mexican real estate is an important consideration, especially with respect to restrictions and requirements that could apply to investors participating in this segment of the economy. In Mexico, foreign investment is defined as: (i) participation by foreign investors (individuals or entities) in the capital of Mexican companies; (ii) investment carried out by Mexican companies with a majority of foreign investment; and (iii) participation by foreign investors in the activities or actions set forth in applicable Mexican law.
Private ownership of real property in Mexico and the Restricted Zone.
Private ownership of real property in Mexico is a constitutional right ordained in the first paragraph of Article 27 of the Mexican Constitution. Such right to acquire real property extends to foreigners, with certain additional restrictions, so long as the foreign investors agree to be bound by a Calvo Clause, pursuant to which the foreign investors agree to be considered as Mexicans with respect to said property, and not to invoke the diplomatic protection of their countries of origin with respect to their real property rights. Despite the requirement of agreeing to be bound by the Calvo Clause, it is important to note that Mexico has entered into a broad network of international treaties and agreements protecting the rights of foreign investors.
Foreign investors may not acquire direct ownership (real rights) in real property located in the so-called Restricted Zone, which consists of a strip of land 100 kilometers from the land border and 50 kilometers inland from the sea; however, in certain cases, foreign investors may obtain rights through a trust (personal rights) into which legal title of real property located in the Restricted Zone has been transferred.
Ownership by private parties of real property in Mexico does not allow such owners to freely take advantage of subsurface resources, all of which belong to the Mexican state, which may grant to private parties, whether Mexican or foreign, the use and enjoyment of such resources in conformity with applicable law, such as the National Waters Law and the Mining Law, among others.
Real property subject to Ejidal or Comunal ownership.
The Mexican legal system recognizes and protects certain real property for the benefit of the Mexican people that is subject to the ejidal or communal property ownership regime. As of today, approximately 52.7% of Mexico’s territory is subject to one of these types of property ownership.
Foreigners may not own land subject to ejido or communal ownership regimes, but may lease such properties for productive activities. In the case of ejido land, if one complies with certain requirements, it is possible for private parties, including foreigners, to acquire legal title of said property, although it is important to carefully and adequately review these types of projects.
Foreign investment in real property located outside the Restricted Zone.
Foreign investors (individuals or entities) may acquire direct, fee simple title ownership of land located outside the Restricted Zone, for which they must obtain a permit from the Mexican Department of Foreign Relations (Secretara de Relaciones Exteriores or “SRE”), the application for which will include an agreement by the foreign investor to abide by the Calvo Clause. The simple presentation of a waiver of agreement to the Calvo Clause applies if the foreigner is a citizen of a country with which Mexico maintains diplomatic relations.
In the case of a Mexican entity with a clause admitting foreign investors, such entity may acquire direct, fee simple title in Mexican real estate located outside the Restricted Zone without any restrictions except those related to agricultural, ranching or forestry lands to be discussed below.
Foreign investment in real property located within the Restricted Zone.
Foreign investors (individuals or entities) must enter into a trust to be able to acquire beneficial trust rights in real property located within the Restricted Zone.
In a real property trust agreement, a party known as the trustor, or settler, transfers to a financial institution (Mexican bank) legal title to real property for the benefit of a foreign trust beneficiary, who receives the right to use and enjoy the real property, including the fruits, production and income derived from same. The duration of these trusts is generally 50 years, and may be renewed; in case of a sale the trust beneficiary will receive the corresponding proceeds.
Mexican entities with a clause in their bylaws admitting foreign investors may acquire fee simple title of real property located within the Restricted Zone, provided they provide notice of such acquisition prior to closing. However, a trust is required when the use of the real property is residential, which is a very limited concept that does not include tourism projects, time shares, real estate development for sale to third parties, among others.
Foreign investment in agricultural, ranching or forestry land.
Mexican entities with a clause in their bylaws admitting foreign investors may own agricultural, ranching or forestry land; however, such entities must issue a special series of shares known as “T” shares, representing capital invested by the foreign investor in the land or assets being acquired.
Foreign investors may not participate at a level greater than 49% in a corporation’s series “T” corporate capital. The Foreign Investment Law allows participation at a greater level through a concept known as “neutral investment,” even though practically speaking the Mexican Department of the Economy (Secretara de Economa) does not issue such authorizations.
Tax aspects related to real property in Mexico.
In regard to income taxes, income derived from leasing and selling real property located in Mexican territory is subject to taxation in Mexico.
Income from leasing real property located in Mexico owned by foreign investors is subject to an income tax of 25%, without any deduction, and for the sale of real property by foreign investors, such investor has an option of paying 25% of the sales price, without any deduction, or applying a 30% rate to the profit realized from the sale, provided one complies with applicable fiscal requirements.
Mexico has entered into a wide range of international tax treaties in order to avoid double taxation, and from such treaties it is possible to obtain certain tax benefits.
In regard to the value added tax (Impuesto al Valor Agregado of “IVA”), a transfer of real property without improvements is not subject to such tax; however, improvements are subject to a value added tax rate of 16%, except in cases of a transfer of improvements to be utilized for primary residential (homestead) purposes.
Acquisitions of real property in Mexico are subject to the Real Property Acquisition Tax (Impuesto Sobre Adquisicin de Inmuebles, or “ISAI”), which as a general rule is between 2 and 3.5% of the value of the real property, depending on the location of such property, with the purchaser usually assuming the obligation to pay registration fees (Derechos de Registro) concerning the recording of the purchaser’s deed, which generally do not exceed 1% of the value of the transaction.
Property taxes (impuesto predial) in Mexico are determined by local authorities, and are generally low, equal to approximately 1% of the property’s appraised value as registered with the local tax assessing office (catastro).