American expats with Fideicomiso and Foreign Trust

By ZM Ishmurzina

More and more Americans who own properties in Mexico find themselves in uncharted territory with the IRS. Fidecomisos are a hot topic among Americans expats living in Mexico. Many US citizens and green card holders are not aware of the fact that a fideicomiso is considered a foreign trust. A failure to file all foreign trust forms with US expat tax returns can result in substantial penalties.

This is an email from one of our clients. “We retired in Mexico and bought a property 3 years. Recently our neighbor received a letter from the IRS informing him about a huge penalty for a failure to file foreign trust forms. What does a fideicomiso have anything in common with US expat tax returns? Which forms should we file?”

Let us review key issues about US expat taxes, Fideicomiso and Foreign Trust.

What is a fideicomiso?

Under Mexican law, American expats are prohibited from owning property in certain “restricted” areas of Mexico, specifically the ones close to a coastline. Consequently, many US expatriates had to acquire an interest in fideicomiso that acts as a bank trust. A trustee of a fideicomiso is a Mexican bank or credit institution that holds a legal title to the property. However, a foreign trust grantor is a beneficiary who makes all decisions in regards to his/her real estate. A fideicomiso is effective for 50 years and can be renewed accordingly.

Are Mexican citizens subject to the fideicomiso rules too?

Mexican citizens are not required to buy a Mexican property through a fideicomiso so they are not subject to US expat tax return requirements like U.S. persons.

Which foreign trust forms should Americans expats with interests in a fideicomiso file?

There are several scenarios that require foreign trust filing.

  • Creation of a fideicomiso. Form 3520 must be filed when a fideicomiso is originally established. This foreign trust form is filed by the due date of US expat tax returns including extensions.
  • Annual trust filing. A trustee of a fideicomiso has to file Form 3520-A that is used to report income and expenses of a trust. These forms must be filed by March 15 of each year. An extension can be granted by filing Form 7004. Although, a Mexican bank is considered a trustee of a fideicomiso and a trustee has to file form 3520-A, Mexican banks will not file this form for a fideicomiso. So, the owners have to file Form 3520-A with the IRS.
  • Distributions to beneficiaries. In case a beneficiary receives a direct or indirect distribution from a fideicomiso, this person has to file form 3520 with US expat tax returns.

How to avoid foreign trust reporting requirements in regards to a fideicomiso?

American expats who want to buy property abroad in Mexico can do so through a foreign corporation. However, American expatriates who own a foreign corporation have to file form 5471. A penalty in the amount of $10,000 will be be assessed for a failure to file this form.

Conclusion

US expat tax law is one of the most complex in the world. American expats who want to buy a property in Mexico must consult an expat tax preparer that provides international tax services. An expat tax CPA will assist Americans living abroad not only with foreign trust forms but also with other complex tax forms like FBAR, FATCA, foreign corporation, foreign partnership etc. International tax experts at Artio Partners are here to help you.

Update: The IRS issued a Revenue Ruling on June 24, 2013 stating the Fideicomiso is not a Foreign Trust. Click here to read more about the IRS Revenue Ruling about Fideicomiso.