IRS Revenue Ruling: Fideicomiso is not Foreign Trust

By ZM Ishmurzina

IRS Revenue Ruling in regards to Fideicomiso or so-called Mexican Land Trust has been a welcome development for many American expats in Mexico.

Fideicomiso trust has been a popular topic among American expats living in Mexico. In 2012 and the beginning of 2013 many Americans in Mexico received the IRS letters from the IRS. The penalty was assessed by the IRS for a failure to file form 3520 and 3520A for Fideicomiso. We earlier wrote an article about Fideicomiso. Finally, on June 24, 2013 the situation has changed. The IRS issued IRS Revenue Ruling 2013-14 that concludes that a typical Fideicomiso or Mexican Land Trust (MLT) is not considered a trust within the meaning of § 301.7704-4(a). However, the IRS described in details the scenarios in which Fideicomiso is not considered a trust.

This is the latest email from one of our clients, American expats in Mexico. “I am so thrilled about the IRS Revenue Ruling as of June 24, 2013. Three months ago my neighbor received the IRS letter indicating a penalty in the amount of $10,000. The letter was in regards to a failure to file the Fideicomiso trust form 3520 and 3520A. I would like to learn more about this ruling.”

Let us review the key parts the IRS Revenue Ruling in regards to Fideicomiso trust.

Section 301.7701-4(a) provides that the trust is an arrangement created by a will or by an inter vivos declaration. As a part of trust, trustees take title to property to protect or conserve it for the beneficiaries. Usually the beneficiaries are not the voluntary planners or creators of the trust arrangement and the beneficiaries only accept the benefits. “However, the beneficiaries of a trust may be the persons who create it, and it will be recognized as a trust if it was created for the purpose of protecting and conserving the trust property for beneficiaries who stand in the same relation to the trust as they would if the trust had been created by others for them. Usually the arrangement is considered a trust if it can be shown that the purpose of the arrangement is to vest in trustees the responsibility for the protection and conservation of property for beneficiaries who cannot share in the discharge of this responsibility.”

The IRS Revenue Ruling provides that the Mexican Federal Constitution prohibits foreigners or non-Mexican persons from directly holding title to residential real property in restricted areas of Mexico that are close to a coastline. Foreigners can hold residential real property located in the restricted zones through a Mexican Land Trust with a Mexican bank and they have to obtain a permit from the Mexican Ministry of Foreign Affairs.

In case of Fideicomiso trust issue or Mexican Land Trust, a Mexican bank is considered a fudiciary in the MLT agreement. However, a Mexican bank disclaims all responsibility for a residential real property including obtaining clear title. Moreover, a Mexican bank has no duty to defend or maintain real estate. Since there is no any other arrangement, Fideicomiso is not considered a trust. The IRS identified certain scenarios under which Fideicomiso is not a trust as a part of this IRS Revenue Ruling.

Conclusion

The IRS Revenue Ruling 2013-14 is one of the latest IRS developments.

American expats are advised to stay up to date with the IRS news. In the past 3 years the IRS has introduced multiple updates in regards to the FBAR, FATCA, Fideicomiso trust, PFIC, controlled foreign corporation and other overseas tax issues. International tax experts at Artio Partners are here to help you.