REAL ESTATE IN MEXICAN LAW

SUMMARY:

I.- II.- III.- IV.- V.- VI.- VII.- VIII.- IX.- X.- XI.- XII.- XIII.-

Laws governing ownership and real estate. The principles of ownership contained in the Constitution. The different kinds of real estate. Public Registers. Real estate operations between individuals. The role of the Notary. Eviction and title insurance. The mortgage. Purchase/sale by installments and with reserve of dominion. The trust. Financial leasing. The acquisition of property by foreigners Costs and taxes: Some aspects involved in real estate operations.

 

 

 

 

I.- Laws governing ownership and real estate.

Mexico is politically and legally organized as a federal system. This means that two orders of laws exist: federal laws, which apply throughout the Republic, and the local laws dictated by each of the 32 federative entities or States, which apply only in each State.
The subject of ownership and real estate is a matter which corresponds to the States, and which is governed principally under the 32 Civil Codes (1). However, there are some federal laws governing certain aspects of ownership and real estate, which apply as a single law throughout the Republic and including those concerning trade and industry and the rules on banks.

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II.- The principles of ownership contained in the Constitution.

 

1) Ownership corresponded originally to the Nation (the State), which has transferred this to individuals.
2) The Nation can regulate real estate as dictated by public interest.
3) The Nation is directly responsible for the natural resources of the subsoil (mines, petroleum, gas, nuclear energy), waters (sea, lakes, rivers), which cannot be transferred to individuals. These resources can be exploited under concession (2).
4) Concessions are granted both to Mexicans, and to the foreigners who enter into a pact with the Mexican Government to consider themselves as Mexican for this purpose and not to invoke the protection of their Governments, which is known as (Clausula Calvo, or Barren Clause).(3)
5) Foreigners cannot acquire the direct ownership of real estate within an area of 100 kilometers along the borders with neighboring countries, or 50 kilometers along the coast (restricted areas).
6) Agrarian property (rural or country properties) consists of various categories; lots of common land (4) or communal property granted to common land holders or communities, which cannot be negotiated or belong to individuals. The existence of privately-owned agricultural smallholdings is also recognized.

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III.- The different kinds of real estate.

In addition to the principles on ownership laid down in the Constitution, the National Assets Law and Civil Codes mention the existence of two kinds of property: that of public dominion and that held by individuals.

1) Property of public dominion is that corresponding to the Federation, States and Municipalities, and to special laws (5).
2) Property of public dominion can also be: property in common use which can be utilized by anyone (such as, for instance, air space, territorial waters, beaches, ports, roads, bridges or monuments) (6), that used for a public service and individual property.
3) Property of public dominion cannot belong to individuals (nor can it be transferred or prescribed, meaning that it cannot be transmitted or acquired by prescription). In order for someone outside the Federation to acquire property of public dominion (such as property destined for public service or unencumbered property), such property must be released from public dominion by means of a disincorporation ruling issued by the President of the Republic.
4) Privately-owned property consists of everything not of public dominion (of the Federation, States or Municipalities), or agrarian common land or communal property (which cannot be transferred or prescribed). This privately-owned property forms the subject matter of private operations, and is governed under the Civil Codes of each of the States.

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IV.- Public Registers.

The ownership of real estate is entered in sundry Public Registers, depending on the type of property in question. These Registers are public, and serve to make know the action taken in connection with real estate.
For example, the following Registers exist:
1) The Public Register for Property carried in each State of the Mexican Republic (and at times in certain Municipalities), which records the properties belonging to individuals. Entered here are the details of the property, such as location, surface area and boundaries and the name of the owner, the action under which ownership was acquired (purchase/sale, inheritance), mortgages or seizures in force over the property and any limitations which may exist in the dominion (for example, a right of way).
2) The National Agrarian Register is where the documents recording property operations and amendments and rights over common lands and community lands are contained, together with legal or official resolutions which recognize, create, amend of terminate common land or communal land rights and the guaranties conferred over agrarian property.
3) The Federal Public Property Register records the titles of ownership and possession of properties belonging to the Federal Government, together with the decrees incorporating or releasing certain properties from public dominion.
4) Special registers exist for other types of property (assets), such as the National Public Maritime Register,(7) which lists the matriculations of Mexican naval vessels and artifacts; the Mexican Aeronautical Register (8), which records the documents by means of which Mexican civil aircraft are acquired, transferred or encumbered and the matriculation certificates: the Industrial Property Institute (9) in which patents, trademarks and trade names are entered; and the Public Copyright Register (10), for recording copyrights.
5) There are also Registers of Persons, such as the Merchants' Register (not very common), and the register for associations and corporations. The Public Register for Commerce lists business associations (the most common being the stock company). The most important information regarding corporations is noted, such as name, domicile, purpose and by whom it is represented.

General rules on registers:

a) Registers are public, therefore any interested person can obtain information on what is recorded and can also obtain written certifications such as, for example, a certificate of encumbrance over a property.
b) The consequences of recording an act (contained in a public deed) in a register are that it takes effect before third parties (all people), not only with regard to the contracting parties. For example, a mortgage recorded over a property advises everyone that the property guarantees a credit, loan, etc.
c) To record an act in a register, the law regulating same establishes which are the "authentic" documents to which credibility will be given to enter the act. These documents are, generally speaking, public deeds issued before a Notary Public, court orders or documents of an official nature.

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V. - Real estate operations between individuals.

Properties belonging to individuals are those covered by the vast majority of real estate operations.
Operations between individuals on agricultural property can only be implemented with respect to properties regarded as smallholdings (agricultural or for raising livestock), which are on the market.
As regards properties of public dominion, these must be disincorporated before they can be held by individuals.
Properties are negotiated between persons and companies by means of certain operations, for example purchase and sale (the most usual), donation, inheritance, the award by legal auction of properties held under guaranty (mortgage), in cases where a debtor fails to pay; or where, for other purposes, operations are entered into as trustee or financial lessor.
The operations entered into over these properties are subject to recording before a Notary Public (11). This signifies that in order for an operation to be valid, it must be effected by means of a public deed issued before an officer, called a Notary Public.
A Notary Public is a consultant who is an expert on certain operations (Wills, incorporations, properties), who officially records an operation under which a property is transferred, held as collateral or modified (sub-division, merger, establishment of condominium).
In order to carry out an operation with regard to a property, the Notary studies the title deed submitted to him by the owner. This title deed is usually a public deed issued before a Notary Public.
In exceptional cases, the title can be a legal document, such as an award (for example, an award to a creditor, a prescription).
Once the Notary has determined that the person who is going to transfer or encumber a property holds the faculties of owner or owner's representative or possesses sufficient rights to do so, he asks the Public Property Register to advise him as to the situation of the property in accordance with its records. This report will tell him who owns the property, the location, surface area and boundaries of the property, and whether it is subject to any encumbrance, such as mortgage or seizure, or any limitation of ownership (as, for example, an easement).
It is probable that certain operations on properties are carried out by signature of a contract which does not take place before a Notary. This contract is provisional and must subsequently be formalized before a Notary Public and then recorded in the Public Register for Property in order for the operation to be valid. Although some operations with regard to properties are closed under private contracts, these documents, since they fail to formalize the operation, can be very risky for the person acquiring the property.
Some of the foregoing risks are: the person appearing as seller or transferring the property may not be the owner, the property corresponds to some type of asset which cannot be sold (agrarian land or that coming under public dominion), or the property may be mortgaged or subject to seizure.

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VI. The role of the Notary Public.

A Notary is a lawyer invested with the authority to attest documents, before whom operations regarding properties can be validly carried out. Additionally, other acts are carried out before a Notary, such as Last Wills, the incorporation of companies, the conferring of powers of attorney or company representation, etc.
To be a Notary, one must be a lawyer and hold an authorization (patent), granted to a specific number of persons by the Government of each of the States of the Republic. Notaries are governed by a special law at local or State level, the Notarial Law, of which 32 versions exist, one for each State.
The Notary Public holds a patent issued by the State Government which allows him to act with this status. Notaries are advisors to the parties in the operations authorized under their signature, and draw-up the corresponding documents. These documents must be recorded in a special book which is authorized for such purpose, called a protocol. One of the most important formalities of notarial performance is for the Notary to sign the documents and affix his seal of authorization. Documents issued before a Notary Public are public documents, valid (since no-one can object to their validity), and are documents which, in the case of certain operations, can be recorded in Public Registers such as that of Property (real estate), or Commerce (corporations), as officially certified documents.
By law, Notaries are responsible for and in charge of paying taxes and recording operations in connection with real estate. Notaries must calculate taxes and duties and ask their clients to pay them these amounts in order that they, in turn, pay them to the respective tax offices.
A recent federal law (12) created the so-called public brokers who engage in certain functions similar to those of a Notary, but limited to operations of a commercial nature. This law clearly indicates that public brokers can act as notaries public for the purpose of recording contracts, agreements, acts and deeds of a commercial nature, except in the case of real estate and powers of attorney.

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VII. Eviction and title insurance.

Any owner who sells or transfers a property by any means is bound by law to warranty of title and right of possession.
This means that if for any reason the acquirer of the property loses the ownership of same, whoever sold or transferred the property to him must pay the price, contract and legal expenses and, in the case of bad faith must, moreover, pay damages.
There are very few cases of eviction in Mexico; that is, someone acquiring a property subsequently losing same, since the actions taken before a Notary and the Public Registers provide sufficient assurance that the person selling, transferring or granting a mortgage over a property is really the owner.
Various circumstances must apply for eviction to exist:
a) the acquirer of a property has lost same under a lawsuit;
b) it is lost by a formal court order;
c) that this occurs under a right existing prior to acquisition; and
d) whoever claims eviction has summoned the person who sold or transferred the property to assist in his defense.
The warranty of title and right of possession is held by everyone who transfers (disposes of) an asset, as this is provided in law. However, the contracting parties can expressly agree that the seller or the person transferring an asset is not bound by eviction. In the case of donation, the law states that the donor is not bound by eviction, unless this is expressly accepted.
Title insurance does not exist in Mexico for various reasons:
a) Traditionally, the system for conferring title of ownership and transmitting same has always been through a Notary Public, and notification through the Public Registers of property.
b) If persons acquire properties under a public deed issued before a Notary, they can be sure that the title of ownership analyzed and recorded by the Notary is valid.
c) There are very few cases of eviction before the courts in which the owner loses his property under a previous title.
d) Titles of ownership, together with mortgages and other encumbrances over the property, are recorded in the Public Property Register which should always be consulted in real estate operations.
e) Under the legal system to which property is subject, nothing is required outside the Mexican tradition and system which supplements or complements title insurance.

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VIII. The mortgage.

A mortgage is the most usual and important guaranty within the Mexican credit system. A mortgage on property (13) is governed under State Civil Codes. It is defined as a "collateral established on property not delivered to the creditor, and which entitles the latter, in the event of failure to comply with the guaranteed obligation, to be paid with the value of the property, in the degree of preference established by law"(14). Even when property is conveyed to another person (by purchase/sale, inheritance or auction under seizure), the property remains subject to the established mortgage.
The establishment of a mortgage must take place by means of a public deed issued before a Notary. The mortgage can only be established by the owner of the property, or someone who hold powers or representation of the owner for this purpose. The mortgage must, in addition to the property in question and the characteristics of same, also indicate the creditor in whose favor it is granted., the obligation guaranteed, the amount in which the mortgage is granted, and the interests and term.
Mortgages must be recorded in the Public Property Register of the place where the mortgaged property is located, by means of the public deed under which they are established. The degree or preference of the mortgage will be determined when this is recorded in the Public Property Register, i.e., of the first place, of the second place, etc. However, it is very common to indicate in the documents establishing a mortgage that this is a mortgage in the first place, etc.
Once the mortgagor has complied with the guaranteed obligation or paid the credit, the creditor will cancel the mortgage under a public deed issued before a Notary. The notarial document of cancellation is recorded in the Public Property Register.

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IX. Purchase/sale by installments and with reserve of dominion.

Other means exist under the Civil Code, aside from the mortgage, to guarantee operations in connection with property. These are treated as forms of purchase/sale.
a) Purchase/sale by installments is where the buyer does not pay the whole price, part of this being paid subsequently in periodic installments. These operations include a clause showing that failure on the part of the buyer to make one or several payments will result in the purchase/sale being rescinded, i.e., the operation is canceled. This so-called "rescission" clause must be recorded in the Public Property Register in order that anyone interested in acquiring the property from the buyer, is aware that an amount is owning on the price, failure to pay which could result in cancellation of the operation. In these cases the buyer, even when owing part of the price, already owns the property.
b) The other form regulated by the Civil Code is the so-called "purchase/sale with reservation of dominion" under which, when the buyer fails to pay the entire price of the operation, the seller does not transfer ownership thereto, even though he delivers the property which the buyer can then use. In these cases the buyer is not the owner and cannot sell, mortgage or carry out any operation as owner. This type of purchase/sale is recorded in the Public Property Register, and whoever wishes to carry out an operation with respect to the property must prove that the reservation of dominion has been canceled.
In the two preceding cases, once the buyer pays the whole price a public deed is issued before a Notary Public to cancel, in the first case the so-called "rescinding" clause and, in the second, the reservation of dominion, in the Public Property Register.

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X. The trust.

Trusts are governed by the General Law on Credit Instruments and Operations and the Credit Operations Law, which are federal laws applicable to all the Mexican Republic. This operation has its origins in the figure of the Anglo-Saxon trust.
Under a trust, a person called the trust founder appropriates certain assets for a lawful purpose, entrusting the achievement of this purpose to a trust institution. The person receiving the profit or benefit from this operation is called the trust beneficiary. In Mexico, as opposed to other countries, in principle only credit institutions (banks) can be trustees. However, the trust founder and the trust beneficiary can be the same person.
The great freedom allowed by this figure makes it, in practice, widely accepted in Mexico, and it is used in many operations of very varying kinds.
There is a very common guaranty operation under which the trust founder, as debtor, allots a certain asset in guaranty to a trustee, to the benefit of the creditor, which is the trust beneficiary. In this type of guaranty operation, once the debtor defaults, the trustee (bank) sells the asset given in guaranty and pays the creditor, by means of a process agreed under the trust itself.
A trust can also be used for the administration of assets entrusted to the trustee, in order for the latter to deliver the profits to the trust beneficiary. For example, some shares of a stock company are encumbered in trust in order for the bank (trustee) to exercise the rights, collect dividends, etc. This trust is also common (and is often established in Wills) in order that, at the death of the trust founder, amounts of money are encumbered and the proceeds therefrom delivered periodically to the minor children, until these trust beneficiaries attain a certain age.
The trust is much used in real estate matters. For example, a person encumbers land on which a group of houses or apartment building is to be erected, and subsequently instructs the trustee to sell each of the houses or apartments of the group or condominium.
Under transfer of ownership trusts, the owner of the asset is the trust institution and the trust beneficiary is only entitled to instruct the trustee to take certain action within the purposes of the trust: For example, to transfer the asset to the trust beneficiary himself or to a third party, to mortgage the property, to change the system to condominium, and others of a similar nature.
A property trust is the form utilized in order for foreigners to be able to take advantage of, enjoy and utilize properties in the so-called restricted area: beaches and borders. The rights thus acquired by a foreigner are very broad, being similar to those of "acquisition" of the property, without covering the direct dominion retained by the trustee. Properties can be used for tourist, residential, industrial or dwelling purposes. The provisions governing these operations are contained in the Foreign Investments Law and the Regulations thereto.
The rights of the trust beneficiary can be transmitted by any title: purchase/sale, donation, inheritance, etc.

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XI. Financial leasing.

Financial leasing is a contract recently regulated in Mexico under the Credit Organizations and Supplementary Activities Law,(15) which has as an antecedent the United States of America leasing figure.
Under this contract, the financial lessor (which can only be an authorized institution(16), undertakes to acquire an asset and to grant its use to the lessee, who must pay a price periodically during an obligatory period. Upon termination of this period, he must exercise the option to acquire the asset, extend the contract or participate in sale of the asset to a third party.
Although financial leasing is a financing method which is generally used for movable property such as cars, machinery, computer equipment, etc., in recent years its use has been extended to real estate.
Financial leasing over real estate is a means for financing the purchase of a property which takes place through two operations:
a) A financial leasing contract between the lessee (user and future acquirer of the property), and the financial lessor; and
b) A purchase and sale agreement between the owner of the property and the financial lessor.
Although these are two operations, they can both be contained in the same notarial document.
Under the first operation (financial leasing), the financial lessor undertakes to acquire the property indicated by the lessee, to deliver the property to the latter, permit him to utilize same over a long period of time and, upon termination of the contract, to transmit the property to said lessee should the latter so wish. The lessee, for his part, undertakes to pay a price or periodic rent, and to elect an option upon termination of the contract, which include acquisition. This contract should be drawn up in writing and be ratified before a Notary Public, as it is an operation concerning a property.
The second operation is the purchase and sale of the property carried out between the financial lessor and the owner. This contract is drawn up before a Notary Public, gives rise to all the usual taxes for this type of operation, and the public deed is recorded in the Public Property Register, which will show the financial lessor as owner of the property. It is advisable to record the financial leasing contract in the Public Register, under the folio corresponding to the property, in order to advise third parties that the property forms part of a contract in which the lessee is entitled to acquire same in the future.
When the term of the financial leasing contract comes to an end, if the lessee wishes to acquire the property (which is usually the case), a purchase/sale operation takes place between the financial lessor (owner), and the lessee as buyer. This operation is no longer subject to acquisition tax, but must be recorded in the Public Property Register in order to show the lessee as new owner.

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XII. The acquisition of property by foreigners.

Foreigners, whether individuals or corporate entities, can acquire property in Mexico except in the so-called restricted area since, under Article 27, Section I of the Mexican Constitution, foreigners cannot acquire direct dominion over properties within an area of 100 kilometers along the borders, or 50 kilometers from the coast.
For this purpose, two classes of properties exist:
a) Those which lie outside the restricted area, which can be directly acquired by foreigners, and
b) The properties within the restricted area, over which foreigners cannot hold dominion or have direct ownership.
Due to a reformation of the Foreign Investment Law and a Resolution issued by the Ministry of Foreign Relations(17), in order to acquire properties outside the restricted area it is only necessary for foreign individuals (citizens of the countries with which Mexico maintains diplomatic relations) to present a document before the Ministry of Foreign Relations which contains the covenant to which Article 27, Section I of the Constitution refers, under which the foreign acquirer waives his right to ask his Government for protection to defend the property acquired (Clausula Calvo). This notice is given prior to notarizing the property, as the covenant known as the "Clausula Calvo" must be recorded under the notarial deed.
In the case of properties located within the restricted area, where foreigners cannot hold direct dominion, the Foreign Investments Law distinguishes between two types of property: that for non-residential activities and that considered residential.
a) In the case of non residential property (time-sharing, industrial, commercial or tourist activities, real estate projects and others(18), these can be directly acquired by foreign individuals and corporate entities upon obtaining permission from the Ministry of Foreign Relations.
b) In the case of residential property (exclusively housing), foreigners cannot have direct dominion and can only obtain permission to utilize, enjoy and exploit same through a trust. This trust has been, for many years, a very common operation for allowing foreigners to enjoy properties in Acapulco, Cancun, Puerto Vallarta and other tourist and Mexican border areas.
Under this type of trust an owner, as trust founder, irrevocably transfers to a trustee (bank) a house, condominium or property to the benefit of the foreigner, trust beneficiary (individual or corporate entity), who can utilize, enjoy and exploit same and issue instructions for it to be transferred to another person, being able to engage in practically all the activities of owner, without having the "direct dominion", which is held by the bank. These trusts can last for 50 years and the trustee (bank) must request permission from the Ministry of Foreign Relations to establish same.
In this matter of the acquisition of property by foreigners, Mexican companies having foreign investments can only effect acquisitions in the restricted area under the same requirements established for foreigners: for example, a trust.

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XIII. Costs and taxes: Some aspects involved in real estate operations.

The transfer of real estate in Mexico is encumbered under sundry taxes and duties. Some of these taxes are of a federal nature and others of a local nature, either State or Municipal.
For the person transferring the property, generally in the case of purchase and sale, Income Tax of a federal nature is applicable, arising from the profit on the operation, i.e., by the difference between the cost of acquisition and the selling price. This tax is calculated by updating the acquisition cost (with official inflation indexes) of the property, and can amount to up to 35% of the profit. Calculation and provisional payment of the tax is made by the Notary.
Certain acquisitions of property are exempt from this tax, such as those arising under an inheritance, a donation among ascendants and descendants in a straight line (grandparents, parents, grandchildren) and between spouses; or that relating to a property which has been inhabited for the last two years by the person transferring same. Another important tax is the so-called Property Acquisition or transfer of dominion tax, which is of a local nature (State or Municipal) and is established under the different laws of the States of the Republic. This tax can be from 2% to 4% of the commercial value or price of the property. The Notary is also responsible for withholding and paying this tax.
In addition to these taxes, dues are payable for recording the operation in the Public Property Register of the property's location. These dues are established under local laws and can be in a fixed amount, or represent a percentage of the value of a property (for example, 0.5%).
To summarize, operations in connection with a property can, including taxes, dues, expenses and notarial fees, represent between 4% and 8% of the value of the property, depending on the State where it is located and some other circumstances.

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NOTES:

 

1.- All references made to the Civil Code in this work correspond to the Civil Code for the Federal District.
2.- Special federal laws exist which govern these matters, such as: the agrarian law, the mining law, the national waters law, the forestry law and the general law on national assets.
3.- Under the so-called "Clausula Calvo" mentioned in Article 27, Section I of the Constitution and in the Foreign Investment Law, the State can grant foreigners the right to acquire dominion of the lands, waters and their accessions, "always providing that they agree before the Ministry of Foreign Relations to consider themselves as Mexican in connection with such assets, and not to invoke therefor the protection of their governments in connection with same; under the penalty, should they fail to keep the agreement, of forfeiting the assets they have acquired thereunder to the benefit of the Mexican Nation".
4.- Common land holdings represent a social interest corporation, made up by Mexican peasants with a patrimony consisting of the lands, woods and waters delivered by the State at no cost under an ownership which cannot be transferred, transmitted, seized or prescribed, the purpose of which is the exploitation and operation of their natural and human resources through the personal work of its members to their own benefit. A community is a form of agrarian organization operating under a system similar to that of the common land holding.
5.- Laws exist in the different States of the Republic, in addition to the General Law on National Assets, which regulate the assets of each State. For example, the Net Worth System and Public Service Law governs assets of public dominion in the Federal District.
6.- These assets are listed in Article 29 of the General Law on National Assets.
7.- This Register is regulated under the Navigation Law.
8.- This Register is referred to by the Civil Aviation Law.
9.- The regulation of patent, trademark and trade name registers is contained in the Industrial Property Law.
10.- This Register is provided for under the Copyright Law.
11.- It is thus established in the Civil Codes and Notarial Laws for the different States of the Republic. For example, Article 78 of the Notarial Law for the Federal District mentions that: "The transfers of properties whose value, under a bank appraisal, exceeds thirty thousand pesos, and the establishment or transmission of federal taxes estimated at more or less this amount, or which guarantee a credit in an amount higher than that mentioned, must be recorded in a public deed before a Notary Public…."
12.- The Public Brokerage Law of December 29, 1992.
13.- In addition to the mortgage of property, other laws govern special mortgages such ass the maritime mortgage on vessels, the mortgage on aircraft or the industrial mortgage over all the assets of a company..
14.- Article 2893 of the Civil Code for the Federal District.
15.- Financial leasing was governed in Mexico for the first time in the year 1982. The law currently regulating same was published on January 14, 1985.
16.- Authorization for a stock company to engage in financial leasing is granted by the National Banking and Securities Commission.
17.- The reformation of Article 10-A was published on December 24, 1996, and provides that the Ministry of Foreign Relations can determine, by resolution, those cases in which foreigners do not require permission, but need only give notice. The corresponding Resolution was published on March 2, 1998.
18.- A definition of non residential purposes is to be found in Article 5 of the Regulations to the Foreign Investments Law, in force as from October 7, 1998.