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Changes to Capital Gains Rules in Mexico
by
J. Beaulne LL.B
While working and having a good time in Puerto Vallarta,, I read two articles in a local English newspaper regarding the new rules on Capital Gain Tax starting 2007, After my reading I realized that I needed to sit down and do an article to correct the errors committed by the two writers who should have gone to law school before becoming writers, thus the following:
1.- For physical persons who have Real Rights on a Dwelling:
Article 109. XV. of the income tax law called (Ley del Impuesto Sobre la Renta) which establish the rule regarding the imposition of capital gain tax on a dwelling was modified and now reads:
“Income tax will not be paid for obtaining the following income:”
(There are 28 chapters describing each type of income that is exempt. The important one for us in this article is number XV. Where the legislator established the new rules regarding a “Casa Habitación” (dwelling).)
XV. “The derivatives of the alienation of:
a) The Dwelling (house) of the contributor, providing that the amount of the obtained consideration does not exceed of million five hundred thousand units of investment (“Unidades de inversion o UDIS”) and the transmission public is formalized before “Fedatario Publico”.
For the surplus he /she will decide in each case, the profit and the tax will be calculated as per the annual tax and the provisional payment according to Chapter IV of this Title, considering the deductions in the proportion that should prove to divide the surplus between the amount of the obtained consideration.
The calculation and point of the tax that corresponds to the provisional payment will be realized by the “Fedatario Publico” in conformity with the above mentioned Chapter.
The exemption foreseen in this clause will not be applicable to other alienations of a dwelling carried out during the same year of calendar.
The limit established in the first paragraph of this clause will not be applicable when the alienating one demonstrates that he has resided in his / her dwelling during five immediate years previous to the date of his /her alienation, as per the terms of the By-Laws (Reglamentos) of this Law.
The “Fedatario Publico” will have to consult to the fiscal authorities to find out if the contributor has alienated a dwelling during the previous 12 months in case the exemption is proceeding and will warn the fiscal authorities of such act.…”
Also See The Mexican Capital Gains Laws
Author’s note:
While I am not a certified translator, the translation of the legislation that appears in this article was done using the best of my ability in translating from Spanish to English.
Before continuing it is important to indicate that when one reads a legislation one has to take in consideration that every word and / or expression in a text must be questioned so as to know exactly what is the intention of the legislator and to question the true meaning of the word or expression according to the interpretation rules in Law. This been said let us analyze the above article and put it in simple English.
Using the “a contrario” principal we can say that the legislator tells us that one who contributes as a tax payer and sells his dwelling before he has resided in the dwelling for a period of five years immediately before the sale will have to pay capital gain tax on the portion of the selling price which exceeds one million five hundred thousand units of inversion at the moment of the sale. In his wisdom the legislator establishes the rules for this by indicating that the one who will instrument the sale must be a person who can give faith to the act of sale (either a judge or a Notario Publico) who must make sure that the seller did not claim an exemption on an other house during a period of 12 months prior to the present sale and that the responsibility of calculating and remitting the tax to the income tax department is part of the function of the person giving faith to the act.
At this point It is important to provide definitions of key words used by the legislator and let us begging with the word:
A) “Casa habitación” (Dwelling): The legal definition is found in article 129. of the By-Law of the income tax law (REGLAMENTO DE LA LEY DEL IMPUESTO SOBRE LA RENTA) that establishes:
“For the effects of the article 109, fraction the XVth, clause a) of the Law, the dwelling of the contributor includes besides the surface of the constructed area no more than three times the area covered by the constructions.”
Now that we have the legal description of the dwelling we must look at how we must prove that it is the dwelling of the seller and this is done by reading the next article:
“For the effects of the article 109, fraction the XVth, clause a) of the Law, the contributors will have to credit before the”Fedatario Publico” that formalizes the operation, that the object (the building) of the operation is the dwelling of the contributor, with any of the documents “comprobatorios” that are mentioned later, providing that the domicile recorded in the above mentioned documentation coincides with that of the domicile of the alienated real property”
I. The elector's credential, sent by the Federal Electoral Institute.
II. The vouchers of the payments carried out by the presentation of the services of electric power or of fixed telephony.
III. The bank statements that provide the institutions that compose the financial system or for business firms or of not bank cards of credit.
The documentation to which the previous fractions refer, will have to be addressed to the contributor, his or her spouse or his / her ascendancies or descendants in straight line.
B) “Contributor” (one who contributes): To find out the true legal meaning of this word and to know the exact legal description one must read article 6. of the “Código Fiscal de la Federación” (Fiscal code of the Federation) which says:
“The contributions are caused as the juridical situations are realized or of fact, foreseen in the fiscal in force laws during the space in which they happen.”
I other word when one sells a dwelling one causes a juridical situation foreseen in the fiscal laws and becomes an instant tax payer thus no more need to present an RFC number.
C) “Unidades de inversión o UDIS” (units of invesment or UDIS): Instead of using a currency the legislator decided that it would be best to use unit of investment which is caculated in respect with the rate of inflation; to establish the value of the unit one has to refer to the table emitted by Banco de Mexico which is published on the internet at http://www.sat.gob.mx/nuevo.html. Dividing the figure that appears for the day of the transaction one will acquire the value of the exemption in pesos which will then be deducted from the selling price so as to provide the amount that must be taxed at the actual rate of imposition that is 28 percent for 2007.
D) “Fedatario Publico” this is normally a Notario Publico (Contract lawyer) or a Judge, not a “Correador Publico” who can not do civil acts.
As for the question of knowing if the seller did or did not sell a dwelling and claimed a capital gain exemption in a 24 months period prior to the sale the “Fedatario Publico” will first verbally ask the seller and second to protect himself include in the official writing (Escritura) a declaration in accordance with the verbal answer. In the event that the seller declares contrary to the facts he stands to be accused of false declaration in front of the authority and suffer the penalties imposed by law.
2.- For physical persons who have a Fideicomiso Traslado de Dominio contract (FTD contract):
Article 109. of the income tax law does not apply because when one sells one sells only his personal Rights and not the real estate property; in legal terms a Session of Rights occurs over the property and not the transfer of Real Rights on the property.
Because of this the applicable legislation is under Title IV, Chapter IV, (TÍTULO IV, CAPÍTULO IV) of the Income tax Law which deals with the Incomes of the Sale of Goods (DE LOS INGRESOS POR ENAJENACIÓN DE BIENES). The first article of this section of the law (146.) tells us that the definition of GOODS (Bienes) is to be found in the “Codigo Fiscal de la Federacion” (Fiscal Code of the Federation). To be more precise the definition is found in article 14. of said Code and in the State’s Civil Codes and it is clear that a Right is a Good.
This been said one who stands to pay 29% in taxes should request from the government agency called SAT or “Hacienda” an opinion as to know if he can claim the exemption and this can be done using Articles 18 and 18A of the cited fiscal Code.
Finally we are of the opinion that the present legislation is anticonstitutional because of the established principal of article 1. of the Magna Carta which clearly establishes that all individuals in the Mexican Territory will have the same Rights and that discrimination is prohibited.
Conclusion, for a foreigner who has been smart enough to hold an FM-3 during the past five years or more there is a light at the end of the tunnel, he can apply for his Mexican nationality, ask the bank to convert the FTD contract to an “escritura” thus acquiring Real Rights on the property which will enable him to claim the capital gain exemption at the time of the sale.
Lic. J.E. Beaulne, LL.B.
Contact Information for Can-Am-Mex
Lic. J.E. Beaulne, LL.B.
Abogado / Avocat / Attorney at Law,
Cedula profesional # 0086,
Miembro del Colegio de Abogados de B.C.S.
Member of the Lawyer's College of B.C.S.
Plaza Cerralvo, Suite 6
Alvaro Obregon #1665
La Paz, B.C.S., Mexico C.P. 23000
24 Hour Emergency Tel: 044-612-8681027
Office: 612-128-6859
Puerto Vallarta - 044-322-227-6531