Mexico: Regulations require precise legal structuring for foreign investors to access real estate in restricted coastal and border zones

Article 27, Section I, of the Mexican Constitution allows foreigners to acquire real estate in Mexico, but conditions such possibility on an agreement before the Ministry of Foreign Affairs (SRE) to be considered as nationals with respect to such property and not to invoke the protection of their government, known as the Calvo Clause. Additionally, the Constitution establishes a specific prohibition for foreigners to acquire direct ownership of land and waters within a strip of 100 km along the borders and 50 km along the coasts, known as the restricted zone. The foregoing explains why real estate practice in these zones requires specific structuring in order to allow foreign investors to use and enjoy the property.

The Foreign Investment Law (LIE) and its Regulations (RLIE) develop these constitutional provisions and regulate two main structuring alternatives for real estate in the restricted zone: the trust and the acquisition by a Mexican company with foreign investment (special purpose vehicle) when the property is intended for non-residential purposes.

Regarding the trust, the LIE provides that banking institutions may acquire, as trustees, rights over real estate in the restricted zone for the purpose of allowing its use and enjoyment for the benefit of Mexican companies without a clause excluding foreigners, as well as foreign individuals or legal entities. Under this structure, the authorization does not seek to transfer ownership to the foreigner, but rather to establish a right of use and enjoyment through a trust vehicle. Under the LIE, “use” encompasses the use, enjoyment and, as applicable, the collection of proceeds, products and any returns derived from the property, without constituting property rights in rem in favor of the foreign beneficiary, that is, direct ownership rights.

In practical terms, the process works as follows: the seller of the property (trustor) transfers ownership to a Mexican financial institution or bank (trustee), which holds it in its trust estate. The foreign buyer (beneficiary of the trust) pays consideration to the seller (without the trustee’s involvement) and, in exchange, acquires the right to use, enjoy and exploit the property during the term of the trust, and may even lease it to third parties and collect the proceeds thereof. The bank does not acquire the property for itself but rather acts as trustee and executes the beneficiary’s instructions in accordance with the agreement. Upon termination of the trust, the property may be transferred to whomever the beneficiary designates (if entitled to acquire it) or, as applicable, to the beneficiary itself if by then it has acquired Mexican nationality.

The creation of this trust requires a permit from the SRE and has a validity of 180 calendar days from its issuance, extendable only once for another 180 days upon a justified request. Once the trust is formalized, the trustee must notify the SRE within five business days thereafter. The RLIE establishes that the public instrument formalizing the trust agreement must include the submission agreement (Calvo Clause), as well as obligations relating to maintaining the trustee as holder of the rights and reports related to substitutions or assignments of beneficiary rights.

Regarding duration, the LIE establishes that the trust shall have the term indicated in the instrument, up to 50 years, and may be extended upon request of the interested party, which must be filed within a specified period prior to (for example, the 90 business days preceding) the termination of the agreement. In practice, these trusts are usually structured to allow for substitution of the trustee, designation of substitute beneficiaries and transfer of beneficiary rights, always in accordance with the permit requirements and applicable regulatory obligations. The trustee must notify the SRE of the termination of the trust within 40 business days following such termination.

On the other hand, a relevant distinction is the classification of the property’s use. The RLIE defines what is to be understood as “real estate for residential purposes” (exclusively intended for housing). It also enumerates, in an illustrative manner, the cases considered “non-residential”: properties intended for timeshare; those with industrial, commercial or tourism activities that simultaneously have residential use (i.e., known as mixed-use developments); those acquired by credit institutions for debt recovery; those used for real estate project development until their commercialization; and in general, those intended for commercial, industrial, agricultural, livestock, fishing, forestry and service activities. This classification is determinative in selecting the most appropriate legal alternative. For real estate in the restricted zone for residential purposes, the LIE mandatorily channels the structuring towards the trust regime. In contrast, the LIE allows Mexican companies whose bylaws contain the agreement under Article 27 of the Constitution to acquire ownership of real estate in the restricted zone intended for non-residential activities, provided they file the corresponding notice with the SRE within 60 business days following the acquisition. This gives rise to the second alternative of acquiring the property in the name of a Mexican special purpose vehicle with direct participation of the foreigner as shareholder or partner.

On the other hand, in any structure with foreign investment, the administrative component must be considered. The LIE provides for registration with the National Registry of Foreign Investments (RNIE) of Mexican companies with foreign investment participation, foreign individuals or legal entities conducting activities in Mexico, and trusts over real estate in the restricted zone when there are rights in favor of foreigners. Likewise, the LIE contemplates the authority of the SRE to verify at any time compliance with the conditions under which the corresponding permits were granted, as well as the accuracy of the notices filed. In case of non-compliance or violation of the permit conditions, the trustee has a period of 60 business days to cure the irregularities. Failure to do so may result in a requirement to terminate the trust within 180 days.

The chosen alternative (trust or vehicle) significantly impacts the costs and tax obligations of the project. From the acquisition, local taxes associated with the transfer must be considered (for example, the ISAI or equivalent local tax), as well as notarial and registry fees. During ownership, property tax and other local taxes must be budgeted according to the applicable state. In trusts, although certain obligations may formally fall on the trustee, they are usually contractually assigned to the beneficiary, while in vehicles, the Mexican company is usually directly responsible. In the case of trusts, trustee fees for establishment, annual administration and, as applicable, for specific transactions (for example, assignments of rights or granting of powers of attorney) must also be contemplated.

By its nature, the tax treatment may vary significantly depending on (i) the chosen structure (trust or vehicle); (ii) the use of the property; (iii) the profile and tax residence of the investor (individual or legal entity, resident or non-resident); (iv) the form of exploitation (for example, own use, lease, development and sale); (v) the application of treaties to avoid double taxation, so the applicable treaty should be considered according to the investor’s tax residence; and (vi) the implications of Income Tax and VAT (among others) according to the type of transaction and the use of the property.

In light of the foregoing, it is highly advisable to validate the applicable treatment on a case-by-case basis, in order to achieve adequate and tailor-made tax structuring for the specific case.

In summary, the structuring of real estate acquisitions with foreign participation in Mexico is based on one premise: in the restricted zone, the Constitution limits direct acquisition by foreigners. The analysis focuses on choosing between the trust that enables use and enjoyment, or a Mexican company vehicle for non-residential cases, complying in both cases with the applicable permits, notices and registrations.