MEXICO Trends and Developments Contributed by: Christian Lippert, Gabriela Pellón, Cecilia Díaz-de-Rivera and Fabiola Jiménez, Galicia Abogados, S.C.
else in the world unless such subsequent will clearly and adequately references the survival of a prior will. A fideicomiso is a contract whereby a person (sett - lor) transfers certain rights and/or assets to a trustee – a financial institution – for the fulfilment of certain purposes in benefit of one or more beneficiaries. In Mexican estate planning, fideicomisos are frequently used to manage assets like shares or other equity par - ticipations, cash and cash equivalents, and real estate properties intended to be shared among beneficiaries. Fideicomisos are legally binding – yet flexible – docu - ments that allow patriarchs/matriarchs the possibility of creating an estate that is legally separate from their personal estate for their own or their beneficiaries’ or successors’ benefit without losing beneficial control of such estate. Furthermore, fideicomisos offer the possibility of customising how decisions are made (who and until when is that person/committee allowed to make decisions regarding the estate) and who is considered a beneficiary (who is and is not entitled to benefit from the estate), and setting up rules for the allocation of expenses among beneficiaries, the distribution of profits or the exercise of economic and corporate rights, among others. From a tax perspective, fideicomisos created for estate planning and succession purposes are consid - ered transparent vehicles for Mexican tax purposes. This means the fideicomiso itself is not treated as a taxpayer, and all tax obligations are attributed to the individuals involved, depending on who is consid - ered to benefit from the trust under applicable tax law (either the settlor or the beneficiary). A key feature of Mexican fideicomisos is that when the settlor contributes assets but retains the right to recover them in the future (a reversionary right), the contribution is not treated as a transfer for tax pur - poses. In that case, the settlor remains responsible for reporting any income generated by the assets held within the fideicomiso . On the other hand, if the settlor contributes assets without retaining a reversionary right, and the settlor is not the beneficiary of the fideicomiso , the contribution is considered a taxable transfer to the beneficiaries;
therefore, the beneficiaries are considered the taxpay - ers and must report the income for tax purposes. In cross-border situations, this transparency may cre - ate mismatches with foreign tax systems, especially in jurisdictions that view trusts or similar vehicles differently – either as separate taxable entities or as opaque for tax purposes. As a result, individuals using fideicomisos to hold foreign assets or benefit foreign residents must carefully consider how both Mexican and foreign tax authorities will characterise the struc - ture. Failure to align both tax perspectives may lead to double taxation, reporting mismatches or the loss of certain planning benefits. Donation agreements are another instrument com - monly used in estate planning structures to effectively transfer property – and thus, control – of assets or rights during the donor’s lifetime, more so consider - ing that assignments to and/or from descendants and ascendants are generally exempt from income tax in Mexico. However, when a Mexican resident makes a gift to a descendant who resides in a country that imposes a gift tax (such as the USA), the transfer may trigger taxation in that country if it exceeds the local exemp - tion thresholds. In such cases, a direct gift may not be the most efficient option, and it may be worth explor - ing alternative structures – such as contributing the assets to a trust – that could offer more efficiency. International treaties as a tool to afford efficiency or protection Double taxation conventions When an individual meets the criteria to be considered a tax resident in more than one country under each country’s domestic law, bilateral tax treaties to avoid double taxation can play a crucial role in resolving these conflicts. (It is important to note that the Multi - lateral Instrument introduced by the OECD as part of the BEPS project does not modify the tie-breaker rule for individuals but only for juridical persons; therefore, it is not considered in this analysis.) Most of these treaties include a “tie-breaker” rule that applies a series of tests – such as the location of the individu - al’s permanent home, centre of vital interests, habitual abode and nationality – to assign a single country of
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