WEALTH PLANNING CONSIDERATIONS IN MEXICO. A Guide for Clients of Morgan Stanley International Wealth Management

Transcription

1 WEALTH PLANNING CONSIDERATIONS IN MEXICO A Guide for Clients of Morgan Stanley International Wealth Management

2 A. INTRODUCTION Morgan Stanley International Wealth Management has had the opportunity to work with some of the most successful and influential business leaders across the region. The International Client Advisors who specialize in serving Mexican clients combine their deep, local knowledge and cultural understanding with the vast global resources and intellectual capital of Morgan Stanley. Our goal is to deliver the capabilities our clients need to pursue the aspirations they have for themselves, their families and their communities. In that spirit, we commissioned this in-depth analysis of key tax and wealth planning issues of interest to affluent Mexican residents. Mexican Political Structure Mexico is a federal republic, divided into 32 states, including Mexico City. Its government is representative, democratic and republican, based on a presidential system established by the 1917 Constitution. There are state laws issued by the legislative branches of the 32 federal entities; however, the Constitution provides the specific faculties of the federation and local governments. 2 WEALTH PLANNING CONSIDERATIONS IN MEXICO

3 According to the Mexican Constitution, the federal government is composed of the legislative, executive and judicial branches. The legislative branch is vested in Congress, which comprises the House of Representatives and the Senate. One of the main functions of Congress is to enact federal laws. The executive branch is vested in a single individual: the president of the United Mexican States. The president is granted the authority to, among other things, execute the laws enacted by Congress and sign international treaties. The president also has the authority to issue the regulation of federal laws. The Federal Judicial Power consists of a Supreme Court, circuit courts and district courts. The Supreme Court of Justice acts as a last-resort tribunal in federal jurisdiction as well as a constitutional court with the authority to exercise, in certain cases, constitutional control over the executive and legislative branches. Tax laws are submitted by the executive branch, through the Ministry of Finance and Public Credit, to Congress, which approves (or rejects) the laws for the executive to enact. The federal tax system is administered by the Ministry of Finance and Public Credit. Federal taxes are among Mexico s most important sources of national revenue and include corporate and individual income taxes.

4 (i) Legal Capacity According to the Mexican Federal Civil Code, the legal capacity of individuals is acquired at birth and lost at death, though it is restricted for those who haven t attained the age of majority. However, minors can exercise their rights or incur obligations through representatives. The Mexican Civil Code determines that at the age of 18, a person has the power to freely dispose of his or her property, except for certain limitations established in the law. (ii) Marriage/Property Regimes Marriages are carried out under the regime of a joint ownership or separation of property. Both regimes may include not only the assets owned prior to the marriage, but those acquired later. Under separations of property, spouses retain the ownership and administration of the property that belonged to them prior to the marriage. Separations can be absolute or partial. In a partial separation, goods that are not included in the agreement are subject to joint ownership by the spouses. As outlined, through a separation of property, spouses can elect to segregate their wealth. (iii) Divorce and Separation of Assets Divorce dissolves the marriage and leaves spouses entitled to remarry. Once the divorce is effective, common property is divided, either under the rules of joint ownership or separation of property. (iv) Civil Unions/Same-Sex Marriage/Concubinage In Mexico, each state has its own Civil Code, which regulates the different types of marriage. In general, civil unions and concubinage are recognized. In many states, same-sex unions are legal. 4 WEALTH PLANNING CONSIDERATIONS IN MEXICO

5 B. INCOME TAX (i) General Rules Domestic legislation establishes that Mexican resident individuals are subject to income tax with respect to their worldwide income (Mexican- and non-mexican-sourced income). An individual is deemed a resident of Mexico if his or her place of residence (home) is located within the country. If such an individual holds property in Mexico and in another country, the Mexican residence will be considered primary if his or her main center of interest is located in Mexico (i.e., where more than 50% of the individual s overall income is obtained). Mexican resident individuals are subject to a progressive tax rate on their annual income. The maximum tax rate is 35%, and there are specific requirements for each kind of income. Taxes must be determined by the individuals in Mexican pesos, and they have to determine foreign exchange effects on their investments when applicable. Several items of income are fully or partially income tax-exempt. For example, individuals are partially exempt on gains derived from the sale of their home (up to approximately US$220,000). Also, individuals may consider personal deductions up to a limited amount to offset taxable income, such as medical expenses, additional contributions to private pension funds and interest on home mortgages, among others. Contributions to savings and retirement plans are excluded from such general thresholds; however, a specific deductibility limit for such contributions is applicable. WEALTH PLANNING CONSIDERATIONS IN MEXICO 5

6 (ii) Preferential Tax Regime Mexican residents holding investments in foreign vehicles are obliged to determine whether income arising from such investments are subject to a preferential tax regime. Under Mexican legislation, income is subject to a preferential tax regime when it is not subject to taxation abroad or is subject to taxation lower than 75% of the income tax that would have been triggered and paid in Mexico, even when such a situation derives from the application of special regulations, tax refunds, tax credits or any other procedure. Income obtained from entities or foreign transparent legal vehicles is subject to a preferential tax regime, except when such a vehicle conducts entrepreneurial activities and its passive income represents 20% or more of its overall income. An exception to the preferential tax regime law exists in such cases where a Mexican resident does not exert enough control (directly or through a third party) over the management of foreign entities or legal vehicles to decide the moment of profit distribution. Mexican Income Tax Law assumes that the Mexican resident exerts this control; thus, proof to the contrary must be obtained in order to justify such an exemption. Income subject to a preferential tax regime is taxed at the level of the Mexican resident investor at the moment such income is generated, regardless of whether it has been distributed to said investor. Mexican resident individuals and entities are obliged to file an informative return in case they obtain income subject to a preferential tax regime, conduct transactions through foreign transparent legal vehicles or obtain income arising from any territory established on the black list of the Mexican Income Tax Law transitory provisions. Failure to comply with such an informative return or to provide complete information is a criminal offense. 6 WEALTH PLANNING CONSIDERATIONS IN MEXICO

7 (iii) Dividends Dividends distributed by Mexican residents Mexican individuals are obliged to consider as taxable income (subject up to a 35% rate) dividends received from Mexican entities. Also, Mexican resident individuals are entitled to credit the income tax paid by the Mexican entity that distributes the dividends (30%) to the extent that they consider as taxable income the amount of the distributed dividend and the income tax paid by the distributing company. In addition, individuals are subject to a 10% income tax on dividends received from profits generated in 2014 and the following years. Such income tax must be withheld by the distributing entity and remitted to the tax authorities. Mexican resident entities are required to maintain separate records for profits generated up to 2013 and for profits generated starting 2014, for the purposes of determining whether the additional 10% income tax withholding is applicable in the case any distribution. Dividends distributed by non-mexican residents Whenever Mexican resident individuals receive dividends paid by non-mexican entities, such dividends should be considered taxable income; nevertheless, said individuals are entitled to credit any tax withheld abroad, as long as the taxable income includes the tax withheld. Also, individuals are subject to an additional 10% tax on dividends received from nonresident entities, which must be paid in the month following that in which they received profits. The additional 10% income tax will not apply if the dividend is received from profits generated up to 2013 by the non-mexican entities, provided that supporting documentation is held by the taxpayer.

8 (iv) Interest Mexican individuals obtaining interest income are obliged to consider as taxable income in the relevant tax year (subject up to a maximum tax rate of 35%) the amount of the interest plus/minus any foreign exchange difference on the investment, which for Mexican tax purposes is considered interest, and any effect of inflation in Mexico on the value of the capital. In addition, Mexican Income Tax Law regulations offer a simplified method for determining the income tax for individuals earning income from interest and exchange gains arising from deposits or investments made in foreign resident institutions that are members of the financial system. This method consists of applying to the amount of the deposit or investment at the beginning of the year (investments generating interests) a simplified factor determined annually by Mexican tax authorities. (v) Capital Gains/FX Mexican resident individuals are subject to an income tax rate of up to 35% on capital gains resulting from the sale of shares. To determine capital gains on the transfer of shares, taxpayers shall subtract the average cost per share from the income earned per share. The Mexican Income Tax Law establishes a detailed method for determining average cost per share. The computation of the average cost per share must be done for all of the shares owned by the individual at the time of the sale, even if not all shares are sold. The Mexican Income Tax Law establishes a specific procedure for determining the payable income tax on capital gains of shares owned for less than one year. 8 WEALTH PLANNING CONSIDERATIONS IN MEXICO

9 (vi) Taxation on Real Estate Individuals are subject to income tax on gains derived from the sale of immovable property. The tax basis of immovable property is subject to restatement by Mexican inflation and subject to depreciation rules (except for land). Local taxes apply to the acquiring party of immovable property. State and municipal legislation may vary; however, property taxes normally range between 2% to 5%, which is habitually applicable to the greater of the cadastral value, according to each state s records, appraisal value or transaction value. (vii) Gifts Gifts in Mexico are tax-exempt in the following cases: a) gifts between spouses or those received by descendants from their lineal ascendants; b) gifts received by ascendants from their lineal descendants, to the extent goods received are not sold or given to other lineal descendants in any degree; or c) other gifts that do not exceed an approximate amount of US$5,000 (considering 2018 figures). For the excess amount thereof, income tax must be paid. The donee must consider the tax basis of goods received in relation to the donors immediately before they are granted such goods as a gift. The acquisition date of goods received must also correspond to the acquisition date of donors. The donee has to declare the amount of gifts received in his or her annual tax return in order not to lose the exemption. Income tax is applicable to gifts not listed above. In such cases, the gift is considered income for the donee. The acquisition cost corresponds to the appraisal value considered for computing such tax and the acquisition date when the tax is paid. WEALTH PLANNING CONSIDERATIONS IN MEXICO 9

10 (viii) Favorable Investments for Tax Purposes Alienation of shares through stock exchanges The Mexican Income Tax Law includes favorable treatment for capital gains that are obtained by individuals and derived from the sale of shares through stock exchanges. Such treatment implies that Mexican resident individuals are obliged to determine an income tax, to be considered a definitive payment, by applying a 10% rate on the profits obtained during the applicable tax year, generated as a consequence of sales of shares issued by Mexican entities carried out through the Mexican Stock Exchange or other financial markets, as well as shares issued by non-mexican entities listed in the international system of the Mexican Stock exchange (SIC, as per its acronym in Spanish) and realized within such system. The 10% tax on capital gains applies only when some thresholds and requirements are met, i.e., the purchase of the shares is carried out through a stock exchange, and the seller grants the control of the issuer as a consequence of the transfer and sells no more than 10% of the equity of the issuer, individually or collectively, with other parties that may be considered as a group. In order to determine the profits or losses arising as a consequence of the sale of shares, the net sale price (price less commissions on the sale) will be reduced with the average tax cost basis (restated cost paid for the acquisition of such shares), as well as the commissions paid to financial intermediaries when the shares were bought. In case a loss is determined, the taxpayers are entitled to carry forward such amount for the following 10 years, against profits subject to the preferential regime mentioned above. (ix) Succession Mexican individuals have freedom of will. In other words, upon death, they can leave their assets, as desired, with no limitations. Unlike other countries in Latin America, Mexico has no forced heirship rules. If a person dies without a valid will, the order of succession will be as follows: descendants, spouses and ascendants, in a different amount and according to specific rules. 10 WEALTH PLANNING CONSIDERATIONS IN MEXICO

11 According to Mexican law, any will can be accepted, even if it has been executed and formalized in a foreign country, to the extent it is valid in such country and does not violate Mexican law. Nonresidents can make wills in Mexico. The most common type of will in Mexico, the public open will, is executed before a Mexican notary public, in the presence of a witness, and formalized in a public deed. The beneficiaries of a will can decline or transfer their rights under the will in favor of other persons. Additionally, an executor can be appointed in the will or elected by the beneficiaries. The executor should make an inventory of the assets and manage such assets before distributing them to the beneficiaries, and is also obligated to file the annual estimated tax return with the state. (x) Inheritance Tax Successions do not give rise to a taxable event provided the recipient of the deceased s estate reports this situation in his or her annual tax return. If such a report is not made, the transferred estate is taxable. Nonresidents are not exempt from taxes on real estate and shares that have a source of wealth located in Mexico. Transfer of such assets is subject to taxation according to corresponding provisions. Contrary to what occurs in other jurisdictions, Mexican legislation does not include an estate tax. Notwithstanding this, certain property taxes may be triggered depending on the local legislation of each state and municipality. WEALTH PLANNING CONSIDERATIONS IN MEXICO 11

12 C. REPORTING REQUIREMENTS AND OBLIGATIONS (i) Annual Tax Return Depending on the type of activities conducted by individuals, miscellaneous formal obligations may have to be complied with. Individuals are obligated to file an annual tax return no later than April 30, following year s end; however, depending on the type of income received, advance income tax returns may have to be filed during the ongoing tax year. Mexican tax legislation provides that the tax year runs from January 1 through December 31. Most tax-exempt items of income must be reported to the Mexican tax authorities in order to maintain such status; otherwise, they are deemed taxable income. (ii) Preferential Tax Regime Informative Return As mentioned in previous sections, Mexican resident individuals and entities that i) obtain income subject to a preferential tax regime, ii) conduct transactions through foreign transparent legal vehicles, or iii) obtain income arising from any territory established on the black list of the Mexican Income Tax Law transitory provisions are obligated to file an informative return before the Mexican tax authorities. Failure to comply with such an informative return or to provide complete information is a criminal offense. 12 WEALTH PLANNING CONSIDERATIONS IN MEXICO

13 (iii) Reporting Obligation on Relevant Transactions The Federal Fiscal Code requires taxpayers to report relevant transactions as determined by tax authorities through administrative rules. Among such transactions are the following: a) Financial derivative transactions b) Financial transactions involving coupon strips c) Change in an entity s shareholders d) Sale of shares e) Change of residence to Mexico f) Sale of intangible assets g) Financing transactions h) Accrued interest in long-term financing i) Financial assets contributed to fideicomisos Taxpayers are relieved of reporting such transactions if their aggregate amount in a tax year is lower than 60 million Mexican pesos. This exception is not applicable to financial institutions. This obligation is part of the current trend in Mexican tax administration toward gathering information on transactions conducted by taxpayers in order to allow for more thorough tax audits that might, in turn, result in an increase in tax collection from both individuals and legal entities.

14 D. EXCHANGE OF INFORMATION (i) Foreign Account Tax Compliance Act (FATCA) Due to the economic and geographical relationship that exists between Mexico and the U.S., these countries have sought to maintain a long-standing and close relationship with respect to mutual assistance in tax matters as well. To that end, Mexico and the U.S. have been collaborating to improve international tax compliance, specifically with regard to tax rules and reporting requirements implemented to prevent tax evasion, such as the Foreign Account Tax Compliance Act (FATCA). FATCA requires foreign financial institutions to report to the Internal Revenue Service (IRS) information about financial accounts held by U.S. taxpayers or foreign entities in which U.S. taxpayers hold a substantial ownership interest. In return, the IRS collects and shares with Mexican tax authorities information regarding certain accounts held by residents of Mexico that are maintained in U.S. financial institutions. Mexico was one of the first countries to enter into an intergovernmental agreement under FATCA with the U.S. (IGA Model 1). Under the terms of the agreement, the countries authorize the exchange of information for tax purposes, including on an automatic basis. 14 WEALTH PLANNING CONSIDERATIONS IN MEXICO

15 (ii) Common Reporting Standard (CRS) As a G20 and OECD member country, Mexico has actively participated with other OECD countries in the development of new standards for the exchange of financial information in a more expedient manner. Mexican authorities have shown a keen interest in acquiring information on overseas investments of Mexican residents by being part of the Early Adopters Group for the common reporting standard (CRS), which enables the automatic exchange of information between tax authorities. The CRS was developed by the OECD. Mexican tax authorities, acting as signees of the Multilateral Competent Authorities Agreement, have sent a clear message about their position on challenging tax evasion by enabling the exchange of information in an automatic, standardized manner. Mexico as part of the Early Adopters Group members of the CRS, started the procedures under the applicable rules in order to carry out the first automatic exchange of information under the CRS standard in September WEALTH PLANNING CONSIDERATIONS IN MEXICO 15

16 Chevez Ruiz Zamarripa is a firm specializing in high-level tax advisory and consulting. We are known for providing personalized services and being fully committed to dealing with our clients problems. At Chevez Ruiz Zamarripa, we focus on developing solutions designed to meet the specific requirements of each client. We develop structures that provide legal certainty through full compliance with both Mexican and foreign legislation.

17 Eduardo Valenzuela A. Tax Advisory and Private Client Alfredo Sanchez T. Tax Advisory and Private Client New York Mexico City 450 Park Avenue Suite th Floor New York, NY Corporativo Pirámide Vasco de Quiroga 2121 Piso 4, Peña Blanca Santa Fe Mexico City C.P (55) WEALTH PLANNING CONSIDERATIONS IN MEXICO 17

18 Morgan Stanley International Wealth Management is a division of Morgan Stanley that focuses exclusively on the unique financial needs of clients who live outside the United States. Approximately 575 International Client Advisors, working out of our 18 International Wealth offices, serve highly accomplished entrepreneurs, executives and professionals from over 80 countries across the Americas, Europe, Asia and the Middle East. As our clients include some of the world s most prominent families, we also work with a substantial number of family offices, foundations and privately owned enterprises. International Wealth Management s International Client Advisors have extensive experience working with clients outside the U.S. Most specialize in a specific country or region, so they speak the language, understand the culture and are familiar with the economic and regulatory climate. Our International Client Advisors combine their investment knowledge with the vast global resources and intellectual capital of Morgan Stanley to deliver solutions that help our clients pursue the goals and aspirations they have for themselves, their families and their communities. 1 As of 9/30/ WEALTH PLANNING CONSIDERATIONS IN MEXICO

19 Chevez Ruiz Zamarripa is not affiliated with Morgan Stanley Smith Barney LLC ( Morgan Stanley ). Opinions expressed by Chevez Ruiz Zamarripa are solely their own and do not necessarily reflect those of Morgan Stanley. This brochure should in no way be considered a solicitation by Morgan Stanley for business on behalf of Chevez Ruiz Zamarripa or an endorsement of Chevez Ruiz Zamarripa by Morgan Stanley. There may be other lawyers, tax advisors or service providers that can provide you with similar services. If you choose to contact Chevez Ruiz Zamarripa, Morgan Stanley recommends that you interview Chevez Ruiz Zamarripa, conduct thorough due diligence and make your own independent decision. Morgan Stanley will not receive a referral fee or compensation from Chevez Ruiz Zamarripa. The Morgan Stanley International Wealth Management team has had the opportunity to work with some of the most successful and influential business leaders across the region. The International Client Advisors who specialize in serving Mexican clients combine their local deep knowledge and cultural understanding with the vast global resources and intellectual capital of Morgan Stanley. Our goal is to deliver the capabilities our clients need to pursue the aspirations they have for themselves, their families and their communities. Morgan Stanley Smith Barney LLC is referred to as Morgan Stanley. Chevez Ruiz Zamarripa is not affiliated with Morgan Stanley Smith Barney The information presented in this publication is being presented by Chevez Ruiz Zamarripa solely for clients of Morgan Stanley and does not constitute professional advice by either Chevez Ruiz Zamarripa or Morgan Stanley. This document contains information of a general nature, and thus it does not address any particular case or facts. We recommend that such information be reviewed individually in order to identify in a timely manner other topics that may be of interest but that are not discussed in this document. The information contained herein is accurate as of the date of issuance; however, Chevez Ruiz Zamarripa makes no representation that such information will be accurate in the future. Accordingly, Chevez Ruiz Zamarripa recommends that specific advice addressing your particular circumstances be requested. Furthermore, please note that Morgan Stanley, its affiliates and Morgan Stanley Financial Advisors, Private Wealth Advisors and International Client Advisors do not provide tax, accounting or legal advice, and the information contained in this document should not be considered, or relied upon, as tax, accounting or legal advice from Morgan Stanley. This document was not intended or written to be used, and it cannot be used by any taxpayer, for the purpose of avoiding penalties that may be imposed on the taxpayer under U.S. federal tax laws. Morgan Stanley strongly recommends that you consult with (i) your own tax or legal advisors prior to entering into any transaction, (ii) your tax advisor for matters involving taxation and tax planning, and (iii) your attorney for matters involving trust and estate planning, charitable giving, philanthropic planning and other legal matters Morgan Stanley Smith Barney LLC. Member SIPC. CRC /17 CS /18

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