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Mexican Corporations and the “Gringo” Owner

By Orlando Gotay, Tax Attorney

Spend any time beyond a mere visit in Mexico and you may come across the “opportunity” to form a Mexican corporation. They come in many flavors (like tacos, I reckon), and there may be an equally varied number of reasons as to why a US person would want to organize or become involved in one. They may range from legitimate purposes—such as partnering with locals to operate a business—to arguably less transparent ones, such as “saving” on fideicomiso (Mexican Land Trust) fees, or even, gulp! concealing income from the IRS, both in source and amount.

Uncle Sam is wise to the potential for abuse that could exist when US persons set up foreign corporations. Because of their foreign nature, the IRS knows it has little to no visibility on these entities or whether US persons are owners, control their activities, and benefit economically. Solution? Create a reporting requirement and pair it with a really nasty penalty for not complying. US shareholders, officers, or directors of foreign corporations may have a US reporting requirement with respect to those corporations. A form needs to be filed.

Another feature of this requirement: if you were required to report but didn’t, your normal three-year statute of limitations for audit does not even begin to run until the information is actually filed. No “substantially complete” information return filed? The IRS can audit that “open” year forever or three years after the information return is indeed properly filed. Now that the Treasury is getting FATCA information from partner jurisdictions, it may not be hard to see how some of this information can be traced to someone who did not report in the first place.

The Congress, particularly perverse, invented yet another requirement with equally nasty penalties: requiring the reporting of some contributions of cash or property by a US person to foreign corporations. An example would be forming a Mexican corporation and then wiring money to the corporation, say (would you imagine?) to buy land. Wiring the money can be a “contribution” to the corporation and may be reportable. If required, not filing that information return also tolls the IRS clock for audits.

These requirements are not the only ones at play; there are several more that could be involved, like Foreign Bank Account Reports (FBAR) or reports of “Specified Foreign Financial Assets.”

Mexican corporations: if you know what you are doing, they are perfectly safe. If you don’t, they can be a pile of trouble.

 

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

 

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