So You Want Your Charity To Obtain Favorable Tax Status

BY: RAFAEL SOLORZANO

According to statistics just released by the tourism board, there are no less than 14,000 Gringos living in northern Baja, and there must be nearly that many charities cooked up by them. Foreigners seem to all have a heart of gold, and a desire to help their hosts, many of whom are not as fortunate as the visitors. So, the question often comes up, how do we form a charity that can legally take donations that can be written off our taxes? And how do we avoid paying taxes on those donations? And what other benefits are there to incorporating as a nonprofit? This article attempts to address those issues.

 In Mexico a non-profit organization is known as Asociacion Civil usually abbreviated as A.C. The AC must be organized before a notary public (Notario Publico), possess bylaws, and be listed in the Public Register of Property and Commerce and the Federal Tax Payers Register (RFC). Only certain endeavors qualify, and even then there are many hoops to jump through.   In the last 20 years Mexican charitable organizations have expanded to include fields like the environment and human rights., tax deduction for charitable giving has been limited to only a few charitable purposes. . And there are restrictions on activities.  Public and private charitable institutions devoted to public assistance, scientific research, and education cannot acquire real estate other than that which is essential to fulfill their objective.

Currently, there is an effort underway to reform the law by expanding the number of eligible organizations to include those dedicated to the promotion and protection of consumer rights. There are two main forms for a non-profit organization in Mexico: Civil Associations (ACs) and Private Assistance Institutions (IAPs).  An AC is formed by two or more persons who perform a common purpose which is not primarily to make money.  An IAP is created to perform charitable services with private assets. Since the foreign community depends on community fund raisers, we will only talk about the AC here.

ACs must be for the public benefit; this includes activities such as human rights, environment, alleviation of poverty, scientific or technological research, and grant making organizations, as well as for the benefit of organizations’ members such as sports. However, not all organizations engaged in activities for the public benefit are eligible for tax benefits or to receive government funds. Not-for-profit organizations must obtain approval from tax authorities on a case by case basis to be eligible for income tax exemption on their activities, and to bestow a tax break on their donors.

 An organization with authorized donee status may also be exempt from import taxes, which is really important to our readers who often bring goods in from the United States. An example would be St Paco’s animal shelter which brings across dog food donated in San Diego. If they could get their AC status, they could bring unlimited kibble across. Also, medical nonprofits with the AC status can bring in medical appliances and supplies without paying duty.

The hoops one must jump through are not as cumbersome as they used to be, but by U.S. standards, are very complicated. Nowadays, to register as a legal entity, a charity must follow the same procedures as any other legal entity. That is to say, again, it’s complicated.

 If a foreigner is among the founding members, the bylaws state that the foreigner shall be considered Mexican with respect to this situation, and that the foreigner agrees to not seek the protection of his/her government.

There is no minimum number of founders required or amount of assets required to establish an AC.

 Reporting requirements are onerous. Many reports have to be filed, such as financial reports to the federal government and the local government, including monthly and annual transparency and social security reports, audits, information for the mandatory national transparency website, reports to the government when an organization receives public funds, reports to the ministry that governs the particular field of activities, reports to the labor ministry, reports to the ministry of social development where an organization iswith the registry of social development, and reports to federal and state tax authorities.

Sanctions vary according to the law violated, but include the suspension of activities.

Organizations with authorized donee status or that receive government funding may engage in activities seeking to influence legislation under certain circumstances. There is no legal restriction on criticizing the government or on pursuing a special advocacy unless activities are contrary to law or public order. The right of petition is constitutionally protected.

There are no restrictions on foreign funding. In fact, there is a 1994 Mexico-U.S. tax treaty that encourages cross-border donations to Mexican organizations by allowing these donations to be deducted from U.S. taxable income.

In December 2009, provision was approved that permits charities to engage in commercial/ business/economic activities, but this income is exempt from taxation only up to 10%; in other words, income from a charity’s economic activity that exceeds 10% will be subject to taxation. This measure has proven controversial because a significant number of charities rely on economic activities to sustain them, and the 2009 provision compels them to pay 30% tax on revenue earned above the 10% exemption. The provision has also caused great confusion among the charities and the professionals who advise them because there has been no guidance issued on how to determine which are related or unrelated activities.

Are you still with us? Do you still want that AC tax status for the charity you work so hard for? For sure you will need to factor in the cost of a tax professional to keep you legal. Figure on that costing you anywhere from about $1800 to about $3500 and if you hire the right person, you can get it done in less than a month.

An alternative to obtaining this tax status is to use someone else’s AC. Yes, that’s legal. And it is customary for the organization who’s AC you are using to charge you a percentage for washing the donation through their AC. Expect to pay up to about 10% of the donation, depending on the size of the gift. One such organization, which enjoys a solid reputation, as well as a Mexican AC and a United States 501 (3) C status, is International Community Foundation out of San Diego. They funnel millions of dollars through their organization and into Baja every year. You can contact them at www.icfdn.org.  (619) 336-2250. info@icfdn.org.

About the author: Rafael Solorzano is a corporate attorney/business developer with practice located in Tijuana. He is a former trustee (Fiduciario) and foreign legal consultant in San Diego, with more than 32 years of professional experience in cross border-business advising U.S. and Asian companies and with a strong background in real estate law and fideicomisos.