Clients often ask about the restrictions on foreign ownership of Mexican coastal and border real estate. 

Here are the basics:

1.   Article 27 of the Mexican Constitution prohibits foreign (i.e., non-Mexican) ownership of: (A) Land within 100 kilometers (62 miles) of the territorial borders of Mexico; and (B) Land within 50 kilometers (31 miles) of the coast of Mexico (collectively, this land is called the “Restricted Zone“)

2.   The 1998 Foreign Investment Law creates certain exceptions to the constitutional prohibitions on foreign ownership of Mexican real estate located in the Restricted Zone.  The availibility of the exceptions depend on whether the real estate will be used for residential or non-residential purposes, as defined under the Foreign Investment Law.

• Residential Purposes.  If the real estate will be used for a second home, rental income property, or a primary residence, then the foreign buyer must buy the real estate through a Mexican trust (fideicomiso), with a qualified Mexican bank serving as trustee (fiduciario).  The seller (and settlor of the trust, or fidecomitente) will convey the title to the trust at the closing.  The buyer will be the beneficiary (fideicomisario) of the trust and may generally use, transfer, gift, or sell the real estate contained in the trust to third parties, either directly or by instructing the trustee to do so.  The trust has an initial term of 50 years, which may be extended for additional 50-year periods by written application to the Ministry of Foreign Relations (Secretaria de Relaciones Exteriores), which, as long as the purposes of the trust are the same as when the trust was formed, should be approved.  The buyer may name secondary beneficiaries of the trust to make it easier to pass the real estate to children or other heirs.  Such beneficiaries may be individuals, corporations, partnerships, or other entities.  However, when the real estate held in the Mexican trust is a condominium or other property that is subject to bylaws or regulations, an entity is the beneficiary of the trust, and ownership of the entity is shared among investors, the entity should make certain that the shared ownership structure does not violate such bylaws or regulations prior to purchasing the property.  
• Non-Residential Purposes.  If the real estate will be used for non-residential (i.e., commercial) purposes, then the foreign buyer may purchase the land through a foreign-owned Mexican corporation, limited liability company, or other entity.  Article 5 of the 1998 Regulations to the Foreign Investment Law list some of the activities that are deemed non-residential use of real estate, as follows:

subject to a time share;

intended for some industrial, commercial, or tourism activity, and which may be used simultaneously for residential purposes;

acquired by credit institutions, financial brokers, and credit auxiliary organizations, repossessed to recoup debts in their favor;

used by legal entitites to fulfill social objectives that may consist in the transfer, urbanization, construction, and all other activities inherent to the development of real estate projects until they are commercialized or sold to third parties; or

used for commercial, industrial, agricultural, livestock, fishing, forestry, or the rendering of services.

The foregoing is merely a summary of the restrictions on foreign ownership of Mexican coastal and border real estate.  Foreign investors in Mexican real estate should consult a competent Mexican attorney before entering into any real estate transaction in Mexico.

The Export-Import Bank of the United States announced on August 27, 2008 that it had approved a US$80 million medium-term credit guarantee facility to provide financing for up to 85% of purchases of equipment and services by Mexico’s national electricity provider, the Federal Electricity Commission (Comision Federal de Electricidad  - CFE), from to be selected U.S. suppliers. 

The guarantee provides a great opportunity to U.S. exporters of electric plant equipment and services, which may wish to take a sales trip to Mexico to visit CFE officials and market their wares and services as soon as possible.

More information about the Ex-Im guaranty to the CFE and how it benefits U.S. exporters is available here.

Mexican President Felipe Calderón officially announced the bidding for the Punta Colonet multimodal project today, according to a Ministry of Communications and Transportation (Secretaria de Comunicaciones y Transportes) press release.  The project will be located about 86 miles south of Ensenada, Baja California.

The project includes the construction of new port facilities, container terminals, a desalination plant, highway improvements, and 186 miles of rail lines, which will link Punta Colonet to the United States.  According to a report in today’s El Financiero, possible rail routes may run through Mexicali, Yuma, Nogales, or El Paso, but the bid terms will allow the concession winner to determine the route.  Once completed, the port is expected to double Mexico’s capacity for the handling of shipping containers to six milliion containers per year. 

The report said that the Punta Colonet port will be situated on approximately 6,700 acres, 205 of which are public lands owned by the government and 6,425 of which are territorial sea beds.  The precise boundaries of the project are set forth in the Official Federal Daily (Diario Oficial de la Federación) dated December 18, 2006.

Construction and operation of the project is expected to generate 83,000 jobs, 24,000 during construction and 59,000 during operation, and US$500 million in annual revenue.  Work is anticipated to commence in 2009 end by 2013 or 2014. 

Bid terms will be published next week, with Mexican development bank Banobras serving as bidding agent.

The report said the government also plans to allow construction of a new airport in Mesa de Tigre, Ensenada, with cargo capabilities to serve Punta Colonet. The airport will require private investment of approximately US$224 million.

The call for bids for the Punta Colonet project has been delayed several times due to the project’s complexity and land disputes with mining company Grupo Minero Lobos (GML), which had a concession to develop approximately 74,000 acres of coastline for mining projects, according to a report in Business News Americas (BNA).  Although the government revoked GML’s concession on July 18, 2007, the revocation has not been published in the Official Federal Daily, as required by Mexican law to consummate official invalidation of a concession, according to the BNA report.  The BNA report said GML still claims rights to the land.

As Mexico Law Blog reported on July 31, 2008, companies expected to submit bids for the Punto Colonet concessions include A.P. Moller-Maersk Group, Dubai Ports World, Ferromex, Hutchison Port Holdings, MTC Holdings, Pacer Stacktrain México, and Union Pacific México.  The bidding companies will likely form consortiums, given the project’s magnitude.

Best Buy will commence its operations in Mexico upon the opening of its first retail store in the country in October 2008, according to a report in El Financiero today.  The store will be located in the Mundo E shopping center in northeast Mexico City. 

The report said that Best Buy also plans to open a store in the Jalisco state after inaugurating the Mexico City location.  Best Buy hopes its Mexican stores will capture a portion of Mexico’s US$14 billion consumer electronics market.

Live Nation, Inc. (NYSE: LYV) announced yesterday that it has entered into a five-year exclusive distribution agreement with Corporación Interamericana de Entretenimiento, S.A.B. de C.V. (CIE) (BMV: CIE), and T4F (Time For Fun), extending Live Nation’s global distribution platform into Brazil, Mexico, and other countries in Latin America. Live Nation’s press release said:

CIE is the third largest concert promoter in the world, according to Billboard magazine. Producing live concerts that drew over 6 million music fans in 2007, CIE generated more than $1 billion in revenue and margins approaching 21 percent. CIE, which is publicly traded on the
Mexican stock exchange, operates top venues and regularly promotes major concerts and operates their own ticketing platform in many important music markets including Mexico City (population 20 million), Guadalajara (population 4 million), Monterrey (population 3.8 million)
and many others. CIE produces more than 85% of all the live concerts by international talent in Mexico, a country with a population of more than 100 million people.

T4F operates top venues in Sao Paolo (population 18.3 million), Buenos Aires (population 12.6 million), Lima (population 7.1 million), Rio de Janeiro (population 6 million), Santiago (population 5 million), and Porto Alegre (population 4.1 million) all of which are emerging as important new markets for international talent.

“This expansion provides us with a world class execution partner and a new revenue source to further monetize our global tours in a region where we currently have no market share,” said Michael Rapino, President and Chief Executive Officer of Live Nation. “Alejandro and Fernando have built a remarkable live music infrastructure in Latin America which will immediately allow us to expand our global distribution pipe into more than 25 new outlets and give us access to growing music markets with a total population of more than half a billion people.”

Alejandro Soberón Kuri, Chairman and Chief Executive Officer of CIE commented: “It is very clear to us that Live Nation’s global platform is attracting the world’s most exciting and successful artists, cementing their position as the leading provider of talent on a global basis. By forming an exclusive alliance with Live Nation, we are ensuring that our distribution channels will be filled with a steady stream of live concerts from the greatest artists in the world.”

Fernando Alterio, President of T4F spoke to the alliance: “Access to Live Nation’s unparalleled global touring division will help solidify our position as the market leader in South American live entertainment.”

According to Yahoo! Finance, “Live Nation, Inc. operates as a live music company. It principally promotes live music events in its owned and/or operated venues, and in rented third-party venues, as well as produces music festivals. The company also engages in the production and/or promotion of music tours, and provision of various services to artists. In addition, it manages its in-house ticketing operations, and online and wireless distribution activities, including the development of its Web site; and rents its venues for events. Further, the company involves in the presentation and production of touring and other theatrical performances, ownership and/or operation of theatrical venues, and sale of sponsorships and advertising.”

Thomson Premier Retail Networks, Inc. (PRN), a provider of digital media solutions for retail, announced today that is has entered into an agreement with Wal-Mart de Mexico, S.A. de C.V. to operate its in-store media networks at Wal-Mart Supercenters and Bodega Aurrera locations in Mexico. 

According to PRN’s press release:

As part of the agreement, PRN is providing Walmart with an end-to-end solution that includes a digital in-store media strategy, customized programming, advertising sales and operations.

PRN now operates and manages the largest in-store media network in Mexico, which is currently installed in 287 large-format Walmart Supercenter stores. The system features large plasma screens in select areas within the store and 19-inch flat-panel LCD screens at checkout lanes and waiting areas. The Walmart network is driven by two channels with displays and programs specifically designed for each location within the store. The storewide channel, positioned at the traffic hot spots in the main alleys guides shoppers and informs them of products sold in the store, encouraging cross-shopping via short and targeted messages. The waiting area channel enables shoppers to watch entertaining and informative content to reduce perceived wait time while they are in line at checkout and service areas. The waiting area channel broadcasts longer messages to provide more detail to the shopper about products and services.

The in-store media network programming will be custom designed by a dedicated creative PRN team to enhance the shopping experience and to enable Walmart to further brand its in-store environment and communicate with its customers using the power of sight, sound and motion.

PRN is an affiliate of Thomson, S.A. (NYSE ADR: TMS), a French-based provider of video technologies, systems, finished products, and services for the communication, media, and entertainment industries.

Mexican pawnshop operator Prendamex and Mexico’s National Pawnshop Association (Asociación Nacional de Casas de Empeño - ANACE) are drafting a proposal for regulation of pawnshops in Mexico, according to a report in today’s El Financiero.  

Prendamex’s CEO, Roberto Alor, said in the report that Mexico’s pawnshops must be regulated to maintain the integrity of the market, which consists of approximately 4,500 pawnshops nationwide.  He also said that regulations should obligate pawnshop operators to maintain insurance and post an irrevocable bond to ensure that they will honor their obligations to customers. 

Interest rates on pawn loans issued by Mexican pawnshops that are ANACE members generally fluctuate between 4% and 8% percent per month, according to Aldolfo Venez, President of ANACE, who was quoted in the report.  The report said that neither ANACE nor Prendamex indicated when the proposed regulations would be released.

A pawn loan is a loan of money to a consumer borrower secured by personal property of the borrower.  In Mexico, pawn loans are typically documented by a short-form loan and pledge agreement (contrato de mutuo con garantia prendaria).

Carlos Vargas and Patricia Rubirosa of KPMG wrote a nice article summarizing the tax implications of merger and acquisition transactions in Mexico in the July 15, 2008 issue of Venture Equity in Latin America.  Excerpts of the article follow; businesses and investors contemplating merger or acquisition transactions in Mexico should engage Mexican tax counsel in the early stages of the proposed transaction to determine its full tax implications. 

The most commonly-used Mexican entities for the purpose of running a business are the corporation, known as the S.A., and the limited liability partnership, known as the S.R.L.  Both entites are taxable at the same rate of 28% in Mexico.

Generally, in the case of stock acquisitions, the statute of limitations in Mexico is five years.  In some cases, the statute of limitations may be increased by another five years, for a total of 10 years.

Asset Acquisitions

One potential advantage of consummating an asset acquisition in Mexico is that it is possible to step up the basis of the acquired assets to market value.

Labor issues, however, may arise in asset acquisitions.  In Mexico, it is also common for an acquirer or surviving entity to be held jointly liable for any unpaid taxes related to social security contributions.

Goodwill resulting from an asset acquisition is not deductible for Mexican income tax purposes.

Furthermore, net operating losses (”NOLs”) and other tax attributes are not transferred to the acquiring company.  It is important to note that Mexican NOLs can be carried forward for 10 years and are subject to inflation adjustments.

All assets sold, with the exception of land (which is subject to a real estate tax between two and five percent), are subject to value-added tax (”VAT”).  The general Mexican VAT rate equals 15 percent.  Usually, VAT can be refunded.  It may take approximately 30 to 45 days to receive a VAT refund from the Mexican tax authorities.

Stock Acquisitions

* * *

In as stock acquisition, tax attributes, such as NOLs, remain with the acquired entity.  However, such NOLs may be subject to an annual usage limitation as a result of the acquisition (i.e., change of control).

Goodwill resulting from a Mexican stock acquisition is added to the tax basis of the shares acquired.  Such basis is also subject to an inflation adjustment.

No transfer tax or VAT is generally due in connection with a stock acquisition in Mexico.

One potential disadvantage of consummating a stock acquisition in Mexico is that it is not possible to step up the basis of the acquired assets to market value.

* * *

The tax on capital gains arising from the disposition of shares equals 25 percent of the gross proceeds.  That being said, the Mexican income tax law provides taxpayers the option to pay capital gains tax at a rate of 28 percent of the net gain, if certain requirements are satisifed.

Mexico has a large network of treaties that can allow for the reduction of domestic tax, under specific circumstances.  Payments made by Mexican residents to tax haven countries are subject to a withholding tax rate of 40 percent.

The U.S.-Mexico Tax Treaty, available here on the U.S. Internal Revenue Service website, provides certain tax benefits to U.S. individuals and businesses that are shareholders and/or affiliates of Mexican companies.  The treaty contains provisions preventing double taxation, limiting taxes on dividends and royalties, and other matters. 

Javier Gonzalez Garza, coordinator of the Democratic Revolutionary Party (PRD) in the Chamber of Deputies, said that the PRD and the Broad Progressive Front (FAP) would present a unified energy reform plan to compete with the plans proposed by the National Action Party (PAN) and the Institutional Revolutionary Party (PRI), according to a report in today’s El Financiero. 

Mr. Gonzalez Garza also said that the PRD and FAP were planning a national march on August 31, 2008, which will be led by leftist presidential candidate Andres Manuel Lopez Obrador, to protest the PRI and PAN energy reform plans. 

The PRI and PAN energy reform plans would, among other things, allow Pemex, the state-controlled oil monopoly, to enter into contracts with foreign investors to assist with the development of Mexican petroleum resources.

Baja California is home to more aerospace companies than any other Mexican state, according to a report in today’s El Financiero.

Honeywell, Delphi, Gulfstreat, Eaton, and GKN are among the major aerospace companies with facilities in Baja.  These companies develop and manufacture electronic control systems, fuselage components, radiators, turbines, compressors, and cables, and other aircraft components.

The undersecretary of economic development of Mexico’s Ministry of Economic Development (Secretaria de Desarrollo Economico - SEDECO), who was quoted in the report, said that Baja’s aerospace industry generated 27,000 jobs in 2007.  He added that Honeywell had recently established a Technology Research and Development Center in Baja.