Simplified Mexican Corp. Could Be Handy

If you have a business or planning on starting a business, listen up
BY: ORLANDO GOTAY

In Mexico you can’t even open a taco stand without first forming a corporation. Fine, you say, you’re not planning on owning a taco stand anytime soon. But! Many of you are renting out your home when you’re not here. Some of you are even making a big business out of doing just that. You need to pay taxes on that income which means you need to form a corporation. For a county as grabby about taxes as Mexico is, they sure don’t make it easy to pay them. But now Mexico has created a simpler way of doing business:  It’s a simplified corporation or SAS for its acronym in Spanish.  It will be available beginning September 15 of this year.

The new regime provides a hugely more simple form of establishing a business entity.  No deeds (escrituras) are required.  What’s more, a single individual can form a SAS with him or herself as sole shareholder.  However, individuals must have a Mexican Tax ID number (RFC). SAS shareholders select provisions for their organizational by laws from a menu of options that will be made available online.  This provides ease, but limited flexibility.

One of the novel features of the SAS  is that it is completely done online.  Through digital signatures, shareholders will consent to the creation of the entity at the Secretary of the Economy website, where they will be listed and available for review by the public.

SAS entities are required to file annual reports, (in addition to regular tax compliance), and can be suspended if reports are not filed two years in a row.

This is all fine and dandy, but don’t ever forget that for U.S. persons involved with foreign corporations, you will need to tell the IRS back home.  Officers, directors and shareholders who own 10% or more of the value or stock of a foreign corporation, may be required to inform the IRS on annual Form 5471.  Penalties for not filing that form can be very steep.  Another zinger: if that form is not filed, the IRS can audit your personal return for that year forever.  There would be no statute of limitations on assessment. This means it will still be difficult to hide your activities down here from Uncle Sam up there.

Lastly, there’s that pesky issue of Foreign Bank Account Reports (FBARs).  If you have signature authority over the business accounts, those may be reportable to the U.S. Treasury under the FBAR regime, in addition to whatever personal foreign bank accounts you may own or control.

The bottom line:  Just know exactly what you are getting into and the responsibilities you assume!

And since we’re on the subject of Uncle Sam, AKA Big Brother:

U.S. persons are required to report annually to the U.S. Treasury, financial interest or signature authority over foreign financial accounts that exceed certain value thresholds. You should treat this only as “food for thought” primer; space does not permit an authoritative explanation. 

An “FBAR” is different from other forms that are filed with income tax returns.  It is filed electronically with Treasury, not the IRS.  It is due on June 30, 2016.

Are you a “U.S. person”?  Those are U.S. citizens, green card holders and others who meet the U.S. “substantial presence test”.  Some people may be US citizens without realizing it.  Typical cases are those born in the United States who left at an early age; or children of a U.S citizen parent born abroad.  The former are virtually certain to be U.S. citizens; children of U.S citizen parents abroad need to examine their particular circumstances.  Some may be citizens, and therefore U.S. persons.

Some people are deemed U.S. persons when they spend enough time in the U.S., meeting the substantial presence test.  Typical inadvertent cases could include some Canadian snowbirds, believing they are OK because they only stay for the 180 day yearly period allowed them under U.S. immigration law.

Financial interest: If you are the owner of record, you have a financial interest over the entire account, even if other owners are not U.S. persons.  You also have a financial interest if the account is for a corporation, trust or other entity that you control.

Signature authority:  One has signature or other authority over an account if you (by yourself or with others) can control the disposition of money, funds or other assets held in the financial account.

Foreign financial accounts:  Besides bank accounts, quite a few other things also fall in the definition of financial account such as life insurance policies with a cash surrender value, even if no money actually is disbursed.  Mutual funds, brokerage accounts, prepaid debit cards, and many similar items also come into play.  Excluded are stocks bonds, and most mercifully, Mexican Land Trusts (fideicomisos). But note: an account held by the Fideicomiso itself could be reportable.

Orlando Gotay is a California licensed tax attorney (with a Master of Laws in Taxation) admitted to practice before the IRS, the U.S. Tax Court and other taxing agencies.  His love of things Mexican has led him to devote part of his practice to the tax matters of U.S. expats in Mexico.  He can be reached at tax@orlandogotay.com.