A subject that keeps coming up in chats with expats is about foreign corporations. Some consider avoiding a Mexican fideicomiso (land trust) for a home near the coast or border zone, and of course, saving a few pesos on fees. The logic goes like this: If a Mexican corporation holds title to my house, voilà, I can avoid setting up that odious fideicomiso.
Of course, there are many other reasons US persons may need to become owners of a Mexican corporation, such as to run their local business. Perhaps -perhaps- fine from the Mexican standpoint, I still invite you to read on.
Not being a Mexican attorney I refrain from commenting on using corporations to avoid fideicomisos. But I will certainly comment on federal tax aspects of US persons being officers, directors or shareholders of foreign corporations, as that is my field of expertise.
Let me lead off this way: Unless there is a very good reason, getting involved with a Mexican corporation without guidance may be like opening a vial to see what Ebola smells like. Don’t do it.
From the US tax standpoint, it is perfectly legal for US persons to be officers, directors or shareholders of foreign corporations. But it must be done right. Those persons may be required to file an annual information return, telling the IRS “hey, I’m involved with a foreign corporation, and here’s what transactions I have with it.”
So who should look at this more closely to figure out if there is a reporting obligation? Among others:
-US officers or directors of foreign corporations that have any US shareholders
-US shareholders, especially those near the 10% ownership level and those who sold shares to end up below 10%
-US corporations (and their shareholders) who in turn own shares in foreign corporations.
Does your Mexican spouse own the shares? Those cases need more examination to figure if there is “constructive ownership” of those shares and of course, a reporting obligation.
Why, you say? Penalties, steep ones at that. They start at $10,000 for each year a return is overdue. But the real zinger is your own entire federal return will remain open for assessment forever with unfiled information returns.
On the bright side, there is more than one IRS voluntary disclosure program that may serve to mitigate penalties for these and other taxes, especially if these omissions were “not willful”. Awareness is key in devising a way to become compliant. As to Mexican Land Trusts, now they look cheaper, don’t they?
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 firstname.lastname@example.org, online radio at mixlr.com/orlandogotay or Facebook: GotayTaxLawyer.