MADRID, March 22, 2007 . The Mexican law Firm TELLAECHE & ARRANGOIZ participated in a seminar about existing opportunities in Mexico in the Real Estate sector. The seminar was realized in collaboration with the Madrid Chamber of Commerce and AGM Law Firm from Spain.

One of the main speaker of the day was Mr. Gonzalo Arrangoiz, Partner of TELLAECHE & A RRANGOIZ, who first focused on different aspects and particularities of the Mexican Real Estate market, to later on talk about legal and fiscal considerations relative to the market.

Here is an overview of certain aspects that have been discussed during his presentation.

Legal and Tax Aspects, Opportunities for Investors

In order to purchase a property in the “restricted zone" (a strip of 50 kilometers from the coasts and 100 kilometers along the borders) a foreign investor can set up a new Mexican company, using 100% foreign capital, under the condition that the said Real Estate property is destined to tourist, commercial or industrial use. Likewise, a foreign investor can acquire rights on the property by means of a trust, inside or outside of the "restricted zone". These right are valid for a duration of 50 years, and renewable for an equal period of time. They can also be transferred or reassigned at any moment. In the rest of the country, as it is the case in Mexico City, that limitation does not exist.

A foreign company can invest and be incorporated in Mexico via a subsidiary, a representation office or a branch office. In certain cases, it turns out much easier to incorporate a new Mexican company, subsidiary of the foreign company, with 100% foreign capital. In that case, it is necessary to obtain a permit granted by the Ministry of Foreign Affairs, to divide by-laws that contain, among others things, a definite corporate purpose, a minimum of two shareholders is mandatory, whom must contribute a fixed minimum capital of $50,000 pesos (equivalent to 3333 Euro, considering an exchange rate of $15.00 pesos by Euro), a sole administrator or a board of directors, to formalizing the incorporation before a Notary Public, register the company in the corresponding Public Records Office of Commerce, at the Ministry of Finance and Public Credit, and at the National Records Office of Foreign Investments.

According to the plan elected by the investor, a property sales contract or agreement is concluded with the salespersons, so these can entitle the property to the newly constituted company or to a trust, in order to develop the business. If the property sales contract is chosen, it will be necessary to formalize it by means of a public deed, before the faith of a notary public; and register it in the corresponding Public Records Office of Property. Prior to the celebration of the property sales contract, the investor should verify that a) the property is found free of any lien; b) all payments of federal and local taxes are in order and up to date; c) that the land use determined for such place is adequate for the business; d) the restrictions in matter of density and construction are taken into account and e) an environmental impact study is carried out in order to know the limitations and implicit obligations in the business or project to be developed.

At every moment, the investor should opt for the fiscal plan that better adapts to type of business to be established.

If the property sales contract is chosen, the investor should pay the Real Estate acquisition tax, which varies in each State of the Republic, oscillating between 1% to 3% of the value of the transaction. The income tax and, in its case, the aggregate value added tax, shall be paid by the seller, even when it is transferred to the buyer. The distribution of Notary's fee and registry charges should be determined among the parties.

In the case of the trust, taxes shall be paid in function of the type of instrument that has been chosen, whether it is a trust in administration, a business trust or a Real Estate agency investment trust.

The figure of “association in participation” exists as well, but does not consider the contribution of the property to the business as alienation.

Income tax will be calculated in any of the previous cases, whenever the project is in operations.

To maximize profits and to select the best fiscal strategy for the client, there exist a treaty to avoid double taxation which was signed between Mexico and many countries, including some European Countries. This treaty takes into consideration the fiscal state to which the participants of the business are subject, the deductions, stimuli and applicable exemptions in each case. All this should be taken into consideration.

For example, suppose that a foreign business entity desires to invest in Real Estate in Mexico, specifically in buying a land near the beach (restricted zone). After looking at the property and planning the business project, it agrees to be associated with the seller (individual person of Mexican nationality), under the terms that the seller entitles the property to a trust in administration and that the foreign investor will provide the necessary economic recourses to carry out the project. Simultaneously, the foreign investor will associate himself, on one hand, with a Mexican architect of recognized prestige, agreeing with him that the latest will contribute to the architectural design and, on the other hand, with a construction company, who decides not to be part of the trust, for which the investor is seen obliged to constitute a Mexican company in association with the construction company, in order to reduce costs and future fiscal impact at the moment products will start being marketed.

In commercial terms, it turns out to be much more attractive to invest in Real Estate in Mexico, since in comparison with European markets, there are significant differences, such as:

-The impact of the land in Mexico is between 10% and 20%.

-The cap rates on investment in Mexico oscillate between 30% and 50%.

-As for the absorption, that is to say, the velocity of sales, in places such as Puerto Vallarta and Puerto Peñasco, only in 2006, around 2000 residential tourist type housing were sold in each zone.

Gonzalo Arrangoiz
Partner at Tellaeche & Arrangoiz
Mexico D.F., MEXICO