| The IRS
Has Special Rules For Mexican Corporations And Your Really Do Not Want
To Ignore Them |
| By Don
D. Nelson, Attorney, C.P.A. |
| If you
have your own business in Los Cabos or are developing real estate you generally
must use a Mexican corporation as the entity to conduct the business. The
Mexican tax and legal rules concerning the operation of such corporations
are complex enough, but if you are a US Citizen or permanent resident,
Internal Revenue Services also has a lot more rules and regulations.
Special forms are required and certain elections must be made or you might
be in trouble or even worse, penalized. Unfortunately a majority
of the CPAs in the States do not know any of these rules and forms and
therefore cannot save you from possible tax disaster. |
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| Though the
rules are complex, generally if a US person (Citizen or permanent resident)
owns a ten percent or more of a Mexican corporation, they are required
to filed Form 5471 with their personal U.S. tax return each year.
Though this form usually often has no effect on the filers taxes, failure
to file this form on a timely basis results in a $10,000 penalty for that
failure or never filing the return at all. This penalty may
only be abated for reasonable cause which is not clearly defined.
When you transfer assets to a foreign corporation or dissolve one, form
926 must also be filed.
When you file
form 5471 you are required to provide a calendar year income statement
and balance sheet. You must also states, names, addresses and social
security numbers of all owners. If the corporation derives all of
its income from your own personal services, its income is all currently
taxable to the US owners (in addition to any tax it owes in Mexico)
as Subpart F income.
However, if
it operates a restaurant or retail store there is generally no current
US income to its owners providing is its not reselling merchandise made
in the U.S.A. When its profits are distributed they are taxed as
stock dividends to its shareholders. |
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| Be aware if
your foreign corporation has significant earnings from investments in stock
or bonds or real estate, it could be held to be a Foreign Investment Company
and its earnings may be currently taxable to the owners. The rules for
such companies are too complex to discuss in this article.
It is also
important to chose the proper type of Mexican corporation to own
your real estate or Mexican business. The type of Mexican corporation
know as Sociedad Anonina most commonly used can result in double taxation
of all income on your US tax return and the inability to pay the lower
US capital gains tax and take foreign tax credits for the taxes paid in
Mexico when the real property owned by the corporation is sold.
If the correct
Mexican entity is utilized using the U.S. “check the box” regulations it
is possible to take advantage of the corporations operating losses on your
U.S. individual tax return, and take foreign tax credits on Mexican taxes
paid by the corporation on your personal return. |
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Offshore
Resources Gallery
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| Only a Sociedad
de Responsabilidad Limitada or “S. de R.L” is elgible to be treated
as a flow through entity under U.S. tax law and you must file form 8832
to achieve that status.
Who cares
about all this you say, I don't have a foreign corporation. I just
own a part of a foreign partnerhip, Limited Liability Company or trust.
The IRS has some fairly tough rules with respect to reporting the activities
of those entities and special forms for each.
After 911,
the terrorists and drug runners, the IRS is very interested in all foreign
entities and are on the look out for those Americans who own part
or all of a foreign entity but fail to report that ownership with their
tax returns. You should keep in mind that the IRS unofficial policy is
to go lenient on a taxpayer that comes forward and complies with the law
in their own accord versus the taxpayer they first find in violation.
If you need
assistance with these forms or preparing the forms for your tax return
please contact us. |
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| If your tax
preparer has failed to tell you about these forms maybe its time to make
changes. The Mexican Hacienda becomes more sophisticated each year and
sooner or later data on every entity formed by gringo in Mexico will be
exchanged with the IRS under the terms of that mutual tax treaty.
Getting into compliance ahead of that potential crackdown will save you
a lot of stress and penalties.
Don Nelson
is an Attorney, C.P.A. with over 17 years experience assisting Americans
living in Mexico with expatriate and international taxation. More of the
U.S. Tax information concerning you is available at www.TaxMeLess.com. |
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