MEXICO Law and Practice Contributed by: Christian Lippert, Gabriela Pellón, Fabiola Jiménez and Cecilia Díaz de Rivera, Galicia Abogados
5.2 Testamentary Dispositions Mexico does not impose a federal estate or inherit- ance tax. Instead, the tax consequences arise mainly through income tax rules and certain local taxes, depending on the nature of the assets transferred and the tax residency of the beneficiaries. Mexican tax law generally does not treat death as a taxable realisation event for purposes of income tax. As a result, the deceased person is not deemed to have disposed of their assets at death, and unrealised capital gains are not taxed at that moment. Instead, the assets are transferred to the heirs or beneficiaries without triggering immediate income tax on the unre- alised appreciation. While Mexican law does not operate a formal “step-up in basis” system like those found in some common law jurisdictions, Mexican legislation provides that when Mexican tax resident individuals acquire assets through inheritance or gifts, the acquisition cost of such assets is the same as the cost held by the donor or the deceased prior to the transfer or death. Accord- ingly, the original tax basis of the asset is carried over to the beneficiary, meaning that the heir inherits the historical cost of the asset rather than receiving a step-up to its fair market value at the time of death. On the other hand, if the recipient is a foreign tax resi- dent and the transfer is subject to taxation in Mexico, the taxable capital gain may generally be determined based on the asset’s fair market value (often estab- lished through an appraisal) rather than the original acquisition cost of the deceased. Even though there is no federal inheritance tax, local taxes may arise when certain assets are transferred (ie, ISAI).
However, the applicability of this exemption must be carefully analysed in each specific case, particularly when the donee is a foreign tax resident. Factors such as the nature of the asset, the structure of the transfer, the relationship between the parties, and the applicable source-of-income rules under Mexican tax legislation may affect whether the exemption applies or whether withholding or other tax obligations could arise. Notwithstanding the foregoing, in any case involv- ing lifetime transfers or inheritances, it is important to consider that, although Mexico does not impose a federal estate, inheritance or gift tax, certain local taxes may still be triggered, depending on the nature of the assets being transferred. In particular, when the transfer involves real estate located in Mexico, a local tax known as the Real Estate Acquisition Tax ( Impuesto sobre Adquisición de Inmuebles , or ISAI) generally applies. This tax is imposed by state or municipal authorities and is trig- gered upon the acquisition of real property by any legal means, including purchase, inheritance, legacy or donation. The ISAI is typically payable by the acquirer of the property, regardless of whether the acquirer is a Mexi- can tax resident or a foreign tax resident. The appli- cable tax rate varies depending on the state in which the property is located, as the tax is governed by local legislation. In practice, the rate generally ranges from approximately 1% to 6% of the value of the property, although the exact rate and calculation method may differ among jurisdictions. Accordingly, even in situations where no federal income tax applies due to an exemption for inher- itances or donations, the local real estate acquisi- tion tax may still arise when Mexican real estate is transferred. For this reason, when structuring estate planning or lifetime transfers involving real property in Mexico, it is important to consider not only the fed- eral tax implications but also the potential local tax liabilities that may be triggered upon the transfer of the asset.
6. Lifetime Succession Planning Mechanisms 6.1 Common Planning Techniques
Mexican laws allow for the creation of many succes- sion planning structures ( fideicomisos , family compa- nies, private foundations, etc, and the execution of donation agreements. However, the most convenient
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