MEXICO Law and Practice Contributed by: Javier Díaz de León, Monica Ramos and Martín Cortina, Díaz de León Abogados
which provides different opportunities for succession planning. Non-Profit Entities If the philanthropy of the family is to continue to pre - serve personal assets such as collections of any kind, intellectual property and charitable funding, the best alternative is to choose a not-for-profit entity, typically a “Civil Association”, a “Charitable Trust” or a “Spe - cial Purpose Entity”. In some cases, these tax-exempt organisations may be recognised in other jurisdictions under the applicable double taxation treaties entered into by Mexico. Another option is the use of a Dynasty Trust in a foreign jurisdiction like the US, the Cayman Islands or the Bahamas, which allows for perpetuity in relation to the family’s philanthropic goals, including collections, intellectual property and charitable fund - ing. 3.2 Recognition of Trusts The Mexican legal system recognises domestic and foreign trusts for all legal and tax purposes. The main difference is found in the taxation effects. Whereas domestic trusts have a specific tax regime set forth in the Federal Fiscal Code and the Income Tax Law, when it comes to foreign trusts, different interpreta - tions may arise regarding their tax effects. Article 4-A of the Income Tax Law must be analysed to verify if foreign trusts are fiscally transparent trusts or subject to taxation in their place of formation. Depending on the answer, the Mexican tax effects for Mexican and foreign beneficiaries would be unfolded regarding the foreign trust’s assets and income. 3.3 Taxation of Trusts, Foundations and Similar Entities Located in Other Jurisdictions Mexican trusts do not accept the role of trustee for Mexican individuals. Only Mexican financial institu - tions, typically Mexican banks, may adopt the role of trustee. In other countries, the idea of taking the role of trustee is accepted; nevertheless, it needs to be care - fully analysed from a Mexican tax perspective given the tax reporting obligations that Mexican residents have when they engage in transactions with transpar - ent entities. Another issue commonly arising is where the role of trustee gives rise to conducting the management of
foreign companies from Mexico. In this case, foreign companies could be classified as Mexican tax resi - dent entities. If Mexican residents are appointed only as beneficiaries of a trust, they would be required to report the income and activities arising from these vehicles, despite the trust not making actual cash flow distributions, pursuant to the Mexican fiscal transpar - ency regime set forth in Article 4-B of the Income Tax Law. 3.4 Tax Consequences of Fiduciary and Beneficiary Roles If a Mexican beneficiary has a fiduciary role in a trust, foundation or similar entity, the resident individual would be considered as a “control person” for all tax and legal purposes, which may involve reporting obli - gations in relation to the tax administration in Mexico. The most popular method for asset protection is the Mexican management and guaranty trust, since this vehicle allows the tax-free transfer of assets from the settlor (contributors) to the Mexican trust. After the contribution, the Mexican trustee becomes the legal owner of the contributed assets such that the settlor is no longer seen as owner of the contributed property other than for tax purposes. Under the trust mecha - nism, the trust assets escape from direct claims from third parties, authorities, creditors and employees, among other persons. In the event of disputes or waterfall provisions, the trustee may be required to release the contributed assets, whether principal and/ or income, to lenders, beneficiaries or the original sett - lor. 4.2 Succession Planning Holding Company 4. Family Business Planning 4.1 Asset Protection The incorporation of a Mexican holding company achieves different succession planning strategies such as integrating, under a master vehicle, the ownership of underlying subsidiaries that may include operative companies, treasury entities, real estate divisions, and foreign corporations. Mexican holding companies allow tax-free reorganisations in many instances with respect to underlying subsidiaries. In other cases, they
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