There are two types of Mexican corporations as listed below. When, as a US Taxpayer, you chose a type for your Mexican business or real estate, the US Tax Consequences can differ and have significant affect on your US taxes. Below we discuss the US income tax consequences of each type of corporation.
1. Sociedad Anonima (S. A.) and Sociedad Anonima De Capital Variable (S. A. De C. v.) are
negotiable stock corporations of two or more persons whose liabilities for acts of the corporation
are limited to their capital contribution.
This type of corporation will always be taxed as a foreign corporation. The corporation will pay taxes in Mexico on its income and if it pays out dividends to you the owner, you will have to pay taxes again on those dividends on your US tax return. Therefore its income is subject to double taxation. You as shareholder do not get to deduct is losses on your US income tax return or claim any foreign tax credits the taxes the corporation pays in Mexico to offset any of its income distributed to you.
If the corporation sells its business or assets, it will pay tax on that gain on its Mexican corporate tax return and when those funds are distributed to you, you will have to report that distribution as income on your US return and cannot claim any tax credits for taxes paid against that income in Mexico unless you make a Section 962 election which will allow you to claim the foreign tax credit, but will subject that income to taxes at the US corporation tax rates (which can be higher than your individual US income tax rate). Form 5471 may have to be filed for this entity depending your ownership percentage.
2. Sociedad De Responsabilidad Limitada (S. De R. L.) and the Sociedad De Responsabilidad
Limitada De Capital Variable (S. De R.L. De C.V.) are nonnegotiable stock limited liability
corporations of two or more persons whose liabilities for acts of the corporation are limited
to their capital contribution.
The tax consequences of this type of Mexican corporation are the same as stated above unless you make an election (which is only permitted for this type of corporation) to treat it for US tax purposes as a a disregarded entity(if you are the only shareholder) or a flow through partnership. This election must be timely made with the IRS. Only a S. De. R. L. can make this election. Mexican attorneys have stated that it is possible to convert to this type of corporation if you erroneously incorporated as a S.A. de C.V.
After the election is filed this type of Mexican corporation is treated for US tax purposes very similar to a US partnership or LLC. All income or losses of the Mexican corporation flow through to your US income tax return and are taxed on it. Any Mexican income taxes paid by the entity can be claimed as foreign tax credits against the US tax on the income that you are taxed on. If it has capital gains, those capital gains will be taxed on your US return the same as US capital gains. The clear possibility of double taxation is avoided when this election is made.
The S. De R.L. often works out best if the corporation owns Mexican real estate that will generate losses while rented out and capital gains when sold. It also works out well when an Mexican operating business will generate losses its early years and later when profits are made the owner expects to pull them all out from the corporation for his personal use.
The income or loss after the election is filed is included on your personal return if you are the sole shareholder or if there are several US shareholders, the income is reported by filing form 8865. We know Mexican tax law and how to best structure your Mexican business or real estate ownership to achieve he optimum US income tax benefits. www.taxmeless.com
About the Author:
Don has been preparing US Tax Returns and providing US tax planning for US Citizens living in Baja Sur for 25 years. He offers his clients the absolute privacy of “attorney-client privilege.” He has assisted numerous Baja residents with the procedures necessary to catch up with past unfiled US tax returns and Foreign Financial Account Disclosure (FBAR and FATCA). His website is at www.TaxMeLess.com and his email is at firstname.lastname@example.org. Phone him in Mexico at 624-131-5228 and in the US at 949-480-1235.