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IRS RULES A FIDEICOMISO IS NOT A TRUST

In order to comply with local law, Mexican real estate held by foreign interests will often be held in a “fideicomiso,” which is a vehicle under the law of Mexico that has certain trust-like features.

Code Section 643(i), enacted by FATCA, provides that any use of foreign trust property by a U.S.grantor, beneficiary, or any person related to a U.S.grantor or beneficiary will be treated as a "distribution" for federal income tax purposes. The IRS previously adopted the position that any U.S. person who either transfers property to or who has an interest in a fideicomiso must treat the entity as a foreign trust for the purpose of filing Forms 3520 and 3520-A. Thus, the foreign trust distribution reporting issues and potential penalties arise.

On November 9, 2012, the IRS issued Private Letter Ruling 201245003, which concluded that a fideicomiso is not a foreign trust. In this PLR, a corporation sought a ruling from the IRS that a fideicomiso between the corporation and the Mexican bank that held legal title to the real property in Mexico was not a trust for United States federal income tax purposes.

The IRS ruled that in this case the fideicomiso’s sole purpose was to satisfy the Mexican Federal Constitution by vesting legal title to the real property in the bank’s name as title holder. Further, based upon the facts, the bank’s sole responsibility for the real property was to hold and transfer title at the corporation’s exclusive direction. The bank had no duty and no right to defend, maintain or manage the real property. The corporation retained sole authority to manage and control the real property and the direct obligation to pay all taxes and liabilities.

The IRS therefore ruled that the fideicomiso was not a foreign trust and that the corporation was to be “treated as the owner of the [real property] for federal income tax purposes."

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