In response to the economic crisis of 1994 (Tequila Crisis), with rampant debt and high inflation, the Bank of Mexico introduced the UDI in 1995.
My interest in UDIs (Unidad de Inversión or Investment Unit) came up when I searched for more information to explain to clients planning to sell their condo about ISR (Impuesto Sobre la Renta or Income Tax), capital gains.
How could they save on their ISR taxes? Mexico would consider them as fiscal residents if they would be eligible to apply. In this process, we had to understand how UDIs play a part in the partial tax exemption for a fiscal resident in the Mexican tax (SAT – Servicio de Administración Tributaria) system.
The value of the UDI is expressed in Mexican Pesos per UDI – an inflation-adjusted mechanism set by the Central Bank of Mexico based on variations in the Mexican Consumer Price Index.
The UDI can be traded in many currency markets because its value changes with respect to currencies. UDI, ¨Investment Unit¨ is known as ISO 4217 code MXV – an index unit of funds used in Mexico. UDIs are used for investments that are protected against inflation, such as mortgages, but the UDI is also an official measure if you qualify for tax allowances when you sell your home in Mexico.
To start the process, applicants must legally be here on a permanent visa or temporary visa in the process of becoming permanent. They cannot apply for this tax reduction using UDIs if they have only tourist visas.
Some sellers of properties are on tourist visas only, so they have a different tax strategy. The trip to SAT was set up, and by using their visa status, proof of identity, and CFE (electric company) bill in their name with their local address, my clients became fiscal residents able to use their RFC tax number in the Mexican system.
The RFC number is also helpful for the identification of the person, as there are no social security numbers for authenticating identity as taxpayers, like in the USA. We then submitted all this evidence to the notary, who could use the UDI system to compute the deduction for sellers.
Currently, the UDIs, updated daily, give sellers a deduction of 5,700,000 Mexican pesos each. This will significantly lower the capital gains tax they will owe at closing.
ISR tax is paid in pesos and goes directly through the notary to the government. The buyers should receive a factura from the notary proving payment to the federal government. This factura can be used in the country the sellers currently live in when not in Mexico.
This article is based upon legal opinions, current practices, and my personal experiences in the Puerto Vallarta-Bahia de Banderas areas. I recommend that each potential buyer or seller of Mexican real estate conduct his own due diligence and review.
