by Lic. J.E. Beaulne, LL.B.
Abogado / Avocat / Attorney at Law,
Introduction,
For a long time
a lot of persons did things the way they thought it should or could be
done so as to benefit personally. With time the legislator changed laws
and by-laws so as to make it more difficult for one to defraud the
government and also to make it equal for all citizens. This is what has
happened in the area of taxation on the profit obtained by selling a
real estate property except regarding Capital Gain Tax. As anywhere else
in the world in Mexico there is a correct legal way of doing things and
an incorrect and not legal way of doing things and this is what we will
illustrate in this article by categorizing the real estate properties
the Rights that one holds. the taxes and the consequences of not
respecting the law.
Categories of real estate
properties.
There are four
categories of real estate property, commercial, industrial, rustic and
residential. Once the type is identified we know which legislation we
must consider regarding taxation on the difference between the cost and
the selling price of a real estate property. From these four categories
we can now spilt them so that the first two are both “commercial real
estate property”, the rustic as a property without any construction and
residential as a real estate property with a building which is used as a
residence or domicile. In other word we now have only three types of
real estate property: Commercial, rustic and dwelling.
Categories of Rights on a
real estate property.
Under the legal
system we find two categories of Rights. One is the “Personal Right”
which is attached to the person and the other is “Real Right” which is
attached to the property. Example a mortgage is a Right which is
attached to the property; in other words it follows the property compare
to the Right one has when he is a beneficiary of a “Fideicomiso
Translativo de Dominio” contract (FTD contract).
More Below...
Categories of taxation to be considered and responsibilities to pay.
There are four different taxes that can be levied on
real estate property. The first one is the property tax called “predial”
which is imposed by the municipality. This tax is to be paid annually;
in the event that the tax is not paid as the law stipulates one will pay
at time of selling back taxes and interests. Municipalities provide
incentives such as discount for the ones who pay the “predial” in the
early months of the year.
The second tax is commonly called IVA. This tax is not imposed at the
alienation time and must not be applied to any purchases related to a
real estate property that falls in the residence category as per the
dispositions of the law:
Article 9. of Ley del Impuesto al Valor Agregado ( Law on
taxes on aggregated value):
“Will not pay the tax in the alienation of the following goods:
i.- The ground.
ii.- Constructions attached to the ground, designated or used as a
dwelling. When only part of the constructions is used or is designated
as dwelling, tax will not be imposed on the said part only on the part
of
the constructions not designated as the dwelling. Hotels are not
included in this fraction.
...”
When reading legislation one has to know the meaning of
words and the intention of the legislator. At this point one word that
we must analyse it the word “Alienation” which is found in every law to
be considered and this we do by first looking at a definition in a
dictionary:
Alienate
verb alienated, alienating
1. …
2. …
3. law:
To transfer ownership of (property) to another person.
Thus we now know that we can apply this to a sale of Rights or Session
of Rights on a real estate property. When one “sells” a property which
has a FTD contract one actually does a Session of Rights and not a sale.
We must now look at article 14 of the CÓDIGO FISCAL DE LA FEDERACIÓN
(Fiscal Code of the Federation) which says:
“Will be considered alienation of goods:
All transmission of property, with exception to the alineation with
reserve of ownership of the good alinieated with exception to the acts
of fusion or fission to which it is refered at article 14-a.
...”
In other words no IVA )sales and services tax) shall be applied to real
estate property designated or used as a residence.
The third tax is called acquisition tax and it is imposed by the State
Government. This tax is to be paid by the buyer at time of purchase and
it is the responsibility of the “Notario Público” (contract lawyer) to
retain said tax and remit the amount to the government based on the
divulged selling price which is called the “VALOR DE LA OPERACIÓN” by
said professionals.
The third tax that can be applied depending of various factors. It is
called “Capital Gain Tax” by foreigners but its definition is more as a
tax imposed on the profit obtained between the purchase price and the
divulged selling price. In other word it is called “Income tax”.
Application of the “Capital Gain Tax”.
I) Commercial real estate property.
Once a property is registered at the “CATASTRO” office (land registry
office) as being commercial (with or without building) there will be a
tax imposed which will be in relation with the profit made when
calculating the price paid at purchase and the amount paid by the buyer
when it is sold, the responsibility of paying this tax is upon the
seller. The amount will become part of the general accounting of the
business and at the end of the year if there is a profit from all the
business transactions tax will be applied.
II) Rustic real estate property.
A real estate property which has no building (lot) and is registered at
“Catastro” (Land registry office) as a non commercial property will be
taxed.
III) Residential real estate property.
When a property is been used as a dwelling and registered at “Catastro”
(Municipal land office) as a dwelling, the person who is alienating his
Rights is not to be taxed as the previous two categories.
To know how this is done one must read the applicable dispositions of
the LEY DEL IMPUESTO SOBRE LA RENTA (Income tax law) along with other
legislation:
First of all article 1. of the “ Ley del Impuesto sobre la Renta” tells
us that everyone has to pay income tax:
“The physical and moral persons, are obligated to pay the tax on income
in the following cases:
I- The residents of Mexico, in respect to all their income whatever is
the provenance.
...”
To be able to do understand the words of the legislator we must read
article 9. of CÓDIGO FISCAL DE LA FEDERACIÓN (Fiscal Code of the
Federation) regarding the meaning of the word “resident” for a physical
person:
“Are considered residents in the national territory:
The following physical persons:
Them who have established their dwelling in Mexico except the ones who
were in other countries for more than 183 continuous natural days and
that did not register residence for fiscal reasons in other country.”
Thus we now know that a resident must be a physical person who must have
been in Mexico for more than 183 days and who has not registered, for
fiscal reasons, a residence in an other country.
The test now is to have proof of residency for 183 days in the
residence. First of all the legal principal in law “Good faith is
presumed” has to prevail. But we must be sure without any doubt that the
person was present in Mexico during the last 183 consecutive natural
days before the sale. To prove this when a foreigner is involved we have
to use the immigration document(s) of the “Instituto de Migración
Mexicano” (Immigration Institute of Mexico) and the passport of the
foreign person to establish the movements from one country to an other.
We can also use as proof of second rank the last 3 bills from the
utility company (CFE) the payment of land taxes and potable water bill;
we can also use as proof of residency the attestation of two witnesses
confirming that the foreigner was present in the dwelling during the
last 183 consecutive natural days prior to the sale. This last way is
used when no electrical or telephone services are present on the
property. The same procedures are used for a Mexican born or naturalized
physical person except for the use of the immigration institute.
Once that we have the proof that the real estate property is a dwelling
in its entirety or in part and that the seller was a resident in Mexico
as per the law we now have to find out if said physical person is
registered as a tax payer to fulfill the conditions as per article 109 ,
Fraction XV a) of LEY DE IMPUESTO SOBRE LA RENTA (Income tax law).
A tax payer is a person who generates income and registered at SAT,
commonly called “Hacienda”, which is the government department which is
responsible to administer the fiscal obligations of every one in the
country.
Persons who generate income hold an RFC (Registro Federal de
Contribuyente) but foreigners who live in Mexico without working are not
producing a taxable income thus can not be registered as tax payer thus
no RFC but do contribute at the moment that they generate a gain by
selling a good and must report the transaction.
Once we have studied the first article we must look in the same law
references to Capital Gain when a dwelling is sold and we find this in
article 109. and, no one can differ from these words because of a strict
interpretation of the words made by the intention of the legislator in
the article 5. of the CÓDIGO FISCAL DE LA FEDERACIÓN (Fiscal Code of the
Federation):
“The fiscal dispositions that establish the charges to the particulars
and to the ones that are exceptions and the fines and sanctions are of
strict application.”
By principals of interpretation in law this means that we must not
amplify, reduce, modify or alternate the words of the legislator.
More below...
Beginning 2007, the Rules regarding the sale of a dwelling were changed.
From a very simple article which permitted one to sell a dwelling(s)
generating a gain(s) and not pay Capital Gain Tax which read:
Will not pay income tax on the following incomes:
I. …..
to
XIV. ……..
XV. The derivatives of the alienation of:
a) The dwelling of the tax payer.
...”
The legislator established the following:
“Income tax will not be paid for obtaining the following income:”
...
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.…”
To understand this new legislation we must break it down
and again make sure we have the right definitions of the terms used.
In this new article the legislator first establishes that Capital Gain
Tax will be applied starting from a certain amount based on UDIS and
that the transaction must be made in front of a person who legally gives
faith to it. To understand this we must know first of all what is a UDIS?
The answer to this can be found on the web site
http://www.sat.gob.mx/nuevo.html
One will see that the diffinition of UDIS is: Es el
factor (valor) que se aplica a la adquisición de créditos hipotecarios y
que son publicadas en el Diario Oficial de la Federación por el Banco de
México.(The factor (value) that is applied to the acquisition of
mortgages and are published in Official Diary of the Federation by the
Bank of Mexico). These values change every day the value of the pesos.
The other important words in the first paragraph is “Fedatario Publico”.
Said title is only given to Judges and “Notarios Publicos” ( Contract
Lawyers) since they are the only ones that can give Faith to a document
content and the signatures.
The second paragraph indicates how the tax will be applied and what will
be taken in consideration to establish the amount to be taxed.
The third paragraph tell us who will calculate the amount to be paid as
tax.
The fourth paragraph establishes that only once a year the exemption can
be claimed.
The fifth paragraph indicates that if a person has been residing in the
dwelling for the previous 5 years to the transaction that he will not
pay tax if he qualifies under the bylaws of the law.
The sixth and last paragraph puts the burden of investigating the
seller’s past on the Judge or the Contract lawyer who instruments the
transaction so as to find out from the fiscal authorities if he (the
seller) did claim the exemption in the previous 12 months and alsol
inform the said authorities of the transaction.
The bylaws,
This legislation informs us of the way one can prove he has been living
in the dwelling for the past five years and also informs us regarding
what is deductible when the grounds are bigger in square meters than the
constructions.
The “FIDEICOMISO TRASLATIVO DE DOMINIO” (FTD Contract).
Persons who hold a FTD contract instead of an
“Escritura” do not have Real Rights over a real estate property, what
the do have are Personal Rights thus when they do sell they normally do
a session of Rights thus they do not sell the property, they sell only
their Personal Rights thus the transaction does not fall in the category
of article 109. but in article 146. and following which are the
applicable legislation when a good is sold.
This means that a full tax will be applied on the difference between the
purchase price and the selling price.
Who is responsible in case a fraud is perpetuated?
In every real estate transactions there are several
actors. Some are in the play at times and others are there all the time.
The ones that have a role during a real estate transaction are seller(s),
buyer(s) in a sale or person(s) acquiring Rights in a session of Rights,
real estate agents and brokers, legal and general consultants, in some
cases translators, and finally the Judge or contract lawyer (“Notario
Público”) who will instrument the documents which will officially
transfer the Rights.
When a mutation of owner over a real estate property the contract lawyer
or the judge must asks the seller to produce three values of the
property; municipal evaluation, evaluation as per an expert evaluator
recognized by the Superior Court and the “cost of operation” which is
the selling price.
In the event that the evaluation and the selling price indicated does
not reflect reality the professional who will instrument the document
which will transfer the Rights will not be part of a fraud because good
faith is presumed and only the one(s) who lies to him and who signs the
documents transferring the Rights will be doing the fraud.
According to a very old principal called “Menz Rea” which means
“intention one has at the time the crime is done”. This means that we
must look at what was the intention of the person when the crime was
committed. In other words who ever is the actor who is not telling the
truth to save the capital gain in hole or part is guilty of fraud.
One who has been renting part of his real estate property (guest house)
and did not report the income has done a fiscal fraud in not reporting
said income and put himself in a position that he can not fulfill the
requirement of article 109 of the tax law.
Consequences of not respecting the law.
At the time of selling when a buyer’s documents does not
reflect the price he paid for a real estate property he only creates for
himself a first problem that will resurface when he decides to sell his
Rights and second more serious problem because he creates a crime of
fraud against the Municipal, Federal and State government and in Mexico
if you commit a fraud you go directly to jail without bail.
As for the actors who instruct others the following applies:
To be part of a fraud is to entice another to commit a crime thus we can
say that not only one crime is done but two if not several. Fraud and
other crimes related to fraud are punishable by prison and fines and for
the foreigner expulsion of the country once the sentence is completed.
Lic. J.E. Beaulne, LL.B.
Abogado / Avocat / Attorney at Law, International real estate investor
Member of the Lawyer's college in B.C.S., Mexico;
Senior partner at
Plaza Cerralvo, Suite 6
Alvaro Obregon #1665
La Paz, B.C.S., Mexico C.P. 23000
Office: 612-128-6859 Can_am_mex@hotmail.com
Conclusion.
As the law stands at this time persons who must have a
FTD contract so as to have the USUS and FRUTUS of a real estate property
in the restricted zones are to pay extra taxes compare to persons who
have an “Escritura” and this is unconstitutional. Persons who hide their
real selling price and people who contribute to a fraud are not only
guilty of fraud but guilty of perpetuating corruption, Kenny Rogers says
it very plainly in a song: “YOU CAN’T RUN AWAY FROM THE LAW”…one day it
catches up to you.
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