TRUST OR COMPANY??

By Agustin Galindo, Attorney at Law

This is my first article since I arrived in Ixtapa-Zihuatanejo and I want to share with you my surprise when some of my clients who have been residing here for many years ask me at the time of acquiring property, Should I create a trust or a company?

I believe that legal services must be tailored according to the needs of each client; even so, I will try to give you a general overview and legal opinion:

Constitutionally, a foreigner cannot acquire property within a range of 100 Km from the borders and 50 km from the shore (the restricted zone); This constitutional provision is regulated by a secondary law called Foreign Investment Law and its regulation providing the following:

• Foreigners can acquire property within the restricted zone for residential purposes through a bank trust.
• Commercial companies with a foreign admission clause (100%) can acquire property within the restricted zone for non-residential purposes.

Also, the regulation of this law gives us the next definitions:

• A property for residential purposes is a property used exclusively by the owner or third parties to live in such property.
• A property for non-residential purposes is property used, including but not limited to timeshare, industrial or tourist activities simultaneously used for residential purposes, acquired by credit institutions, financial intermediaries and auxiliary credit organizations for the recovery of debts derived from transactions within the scope of their purposes, by commercial companies to sell, develop, build or commercialize and in general, for commercial, agricultural, industrial, ranching, fishing, forestry activities as well as the provision of services.

NOW, IN ENGLISH this means that:

a) If you are planning to buy a property in the restricted zone to live in or allow other persons to do so, as provided by law, you need a trust and that's the most convenient way to do it for the reasons that I will mention later!

b) If you are planning to buy this type of property for business reasons, then create a company.

When I explained this to my clients, the same question always comes up, CAN I RENT THROUGH A TRUST? and IS RENTING NOT A COMMERCIAL MATTER?

First of all, YES. You are allowed to rent because that is one of your rights as beneficiary of a property trust and second, if you are renting/leasing for residential purposes, it is not a commercial matter, in other words, JUST RENTING ALL OR PART OF YOUR HOUSE IS NOT A COMMERCIAL MATTER!

My advice to my clients is: If you are planning to buy a house, condo or a lot to LIVE in, then create a TRUST, and if you are planning to buy property (commonly lots) to speculate or for COMMERCIAL purposes, then create a COMPANY.

Of course lots of persons circumvent the law by creating companies to acquire properties for living purposes because they believe is much simpler and because there is no penalty established in this regard! I need to warn you that under no circumstance can I recommend you violate the law and also please consider the following CONS of creating a company for such purposes:

• Pay legal and accounting services to fulfill all the obligations related to a Mexican company.
• File foreign investment reports annually.
• Create estate planning. (*This is not an obligation but something you will have to preview!)

The benefit of a bank trust is that it is a crystal clear device to own property and you can also:

• Use it as a will, since you are allowed to appoint as substitute beneficiaries, your children or significant other (whomever that means!)
• Transfer your beneficiary rights in case you want to sell.
• Have no further obligation than to pay an annual fee to the bank.
• Save legal and accounting expenses.

I hope this gives you a general overview on how to buy property. When you are planning to do so, PLEASE look for professional advice! That is the only way you can have a suit (sorry, bathing suit!) specially tailored for you.

If you want to know more about the Foreign Investment Law and its regulation, I recommend you take a look at the Secretary of Economy website www.se.gob.mx where you can find it in English and Spanish.

Agustin Galindo is an attorney at law and founder of Galindo Abogados, S.C. Fully bilingual, he specializes in real estate, tax, civil, and commercial matters including litigation. You can contact him at agustingalindo@prodigy.net.mx, or you can visit the firm's website at: www.galindoabogados.com. Telephone number: 55 4 99 15/16.

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