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A Comprehensive Guide in Incorporating a Company in Mexico

by | Dec 14, 2021 | Corporate Structuring

Mexico has inarguably one of the most promising economies in the world. Economists project that it will become the world’s seventh largest global power by 2050.

If you are a foreign investor looking to expand your reach, setting up a company in Mexico will deliver a huge opportunity for you to enjoy the exciting developments in various high-tech industries that are starting to emerge in Latin America. World-class aerospace facilities, IT, automotive, fintech, renewable energy, and manufacturing plants are starting to grow in Mexico and nearby countries.

With the gross domestic product expected to reach 1170.00 billion  by the end of 2021 and projected an upward trajectory, foreign investors and entities are making the smart decision of setting up companies in Mexico as soon as possible. The strategic location of Mexico, with the United States at its northern border and access to both Pacific and Atlantic oceans, the country is solidifying its reputation as a crucial trade hub.

The country also leverages on its many free trade agreements (FTAs) with other countries and membership in various organizations, including the G20, the Organization for Economic Cooperation and Development (OECD), the OPANAL, Asia Pacific Economic Cooperation (APEC), and the Rio Group. It has one of the busiest trading markets and the 17th largest exporter in the world, with exported goods such as automobiles, computers, petroleum oil, medical supplies, and fresh produce. While the country exports to equally large markets with the likes of China, Canada, Germany, and Japan, over 75% of its exported goods are destined to the United States.

Once you’ve made the decision to establish a company in Mexico, here are a few pointers that you need to know to ensure a smooth and hassle-free process:

  1. Select a Business Entity Type

The first step to incorporating a business in Mexico is identifying its vehicle.

The most common options available for foreign legal entities to establish a presence in Mexico are as follows:

  • Setting up a local branch
  • Appointment of a local agent, distributor, or franchisee
  • Acquisition of a local company or partnership
  • Entry into a joint venture (JV) with a local company or partnership

It is important to remember that the right business structure  will largely depend on the nature of the business you plan to operate in Mexico. Operational volume and other factors will need to be considered by foreign investors looking to do business in Mexican soil.

  • A subsidiary is considered the best company set-up for those who are planning to establish manufacturing companies. Manufacturing facilities are deemed to adhered to the country’s labor and commercial requirements to legitimately establish presence in Mexico.
  • A foreign legal entity planning to sell products to Mexican consumers are not required to set-up a subsidiary, with the provision that it does not need to establish a physical presence in the country. Instead, a distributor agreement will manage all commercial activities of a foreign company.

Common Vehicles for Foreign Legal Entities in Mexico are the following:

Subsidiary

  • Usually in the form of a SA or LLC to prevent foreign shareholders from accumulating liability for company-wide debts and expenditure.
  • Set up is easy and fast, but in-depth understanding of local economic system and laws are needed to ensure successful market penetration.

Local Branch

  • Categorized as an extension of a foreign legal entity.
  • Parent company shares its assets to its Mexican local branch.
  • Best option for international companies looking to establish their presence in Mexico without going through the tedious incorporation of a brand-new company in order to be granted with a company registration number.
  • Can carry out the same commercial activities they perform in their country of origin.
  • No local shareholders or partners required.
  • No bylaws needed. Articles of incorporation by the parent company can be used by the local branch.
  • Investors are exposed to liabilities incurred by the local branch
  • Local branches are prohibited from participating in investment-related activities under the Foreign Investment Law (FIL).

Distribution Agreement

  • Ideal for foreign investors that are not required to establish a physical presence in Mexico.
  • Required to appoint a reputable local distributor to facilitate the entry and development on the local market.
  • Establish a detailed distributor contract to protect knowledge, IP rights, and ownership of a seller’s products and set-up clear commercial conditions, including price, delivery, guarantees, title risk, and many more.
  • Not expressly regulated by Mexican law, thus a thorough agreement must be finalized to avoid conflicts and problems over time.

Agency Agreement

In essence an agency agreement should feature the following conditions:

  • An individual or legal entity to assume the role of agent.
  • Determines temporary or long-term operation.
  • Promotes operations and facilitates contracts on behalf of another company.
  • Also referred to as commission.
  • No need to incorporate a subsidiary in Mexico.
  • Foreign company can directly sell products to end customers.
  • Delegate an agent to enter the Mexican market.
  • Ideal for small ventures, where operational volume is not large enough to make incorporation a worthwhile activity.
  • Foreign companies delegate well-established local companies as agents.
  • Extensive taxation knowledge to avoid being assessed with local taxes.

Franchise Agreement

  • Provisions under the Federal Law of Protection of Industrial Property Law (FLPIP) and its corresponding implementing regulation.
  • Follow general rules set by the Federal Civil Code and the Commercial Code.
  • Must provide Disclosure Document and other minimum provisions as prescribed by the Franchise Agreement.
  • Franchisor must have extensive experience in the chosen field or business sector
  • System in place for approval of licenses to local franchisees using its trademark
  • Franchisee should have the knowledge and expertise to produce and sell goods or render services
  • Established administrative and commercial methods of trademark owner to uphold image, quality, and reputation of the products and services distinguished by the trademark
  • Franchisors are required to provide the necessary knowledge of a tried-and-trues business model. They will be supplying the manuals, guidelines, standards, and technical support leading to greater results.

Acquisition of an Existing Local Company

  • Acquisition done through purchasing of shares and assets.
  • Common practice since local companies already have legal and commercial structures in place, including benefits such as a solid customer base, network of contacts, and know-how ensuring smooth business operations.

  1. Choosing a name

  • A legal company should decide on their business name.
  • Business name is registered to the Ministry of Economy.
  • Approval or rejection of business name typically takes between three and seven days.
  • Business name is not directly related to trademarks, as IP rights will need to be managed separately.
  • Business registration with various governmental authorities is to be done independent of each other.

  1. Governance

  • Foreign shareholders need to have the necessary documents notarized, legalized, or apostilled  prior to incorporation in order to be considered legitimate in Mexico.
  • Public lawyer to perform notary services is a lawyer appointed by the Governor of a state where you plan to do business in.
  • Local representative of foreign legal entities needs to secure a Power of Attorney (PoA). PoA should be notarized and apostilled to be effective in Mexico.

While waiting for incorporation to be finalized, a company is required to create bylaws like all corporations in Mexico. Articles of incorporation will soon be integrated based on bylaw specifications. Once all documents are fully notarized, the process of incorporating a company in Mexico is complete.

Timeline for incorporating a business in Mexico is influenced by a number of factors. Additionally, the location where documents are signed, notarized, and apostilled by an appointed local public notary. On average, signing off on the incorporation of a company will take less than ten business days.

Hard copy documents will be forwarded to the Mexican public notary with wet ink signatures. Digital signatures are not allowed by the Mexican authorities.

Even with the assistance of an expert to expedite incorporation, apostille and legislation could take an additional two to three days, and depending on the countries involved.

All the steps in business incorporation shall be done in person. A Mexican public notary also oversees the registration of a company before the Public Registry of Commerce in the city where a company shall set up its local domicile. This last step is completed in one day.

  1. Obtaining a Tax ID

Your newly incorporated company in Mexico is required to have a tax ID number in order to legally do business in Mexico.

  • Foreign shareholders need to remember that a tax ID may only be requested by a local Mexican resident.
  • A designated representative shall be given the Power of Attorney to obtain the tax ID number on behalf of the company.
  • Tax ID number is important as it is a pre-requisite in registrations before the Social Security Mexican Institute and National Foreign Investment Registry.
  • Banks and financial institutions also require account holders to present a tax ID number to open a bank account.
  • In order to issue invoices, a company should have a tax ID number, too.
  • To request a tax ID number, company representative is required to do this in person to the tax authority. He or she needs to bring the articles of incorporations to request the tax ID number for the business.
  • Requesting a tax ID number may also be facilitated through a personal appearance before a Mexican public notary.
  • Depending on the available public notary, the process of obtaining a tax ID number can take up to two months.
  • A company shall only be granted a tax ID number in the presence of a physical office or seat of administration in Mexico. Additionally, the company is required to submit proof of domicile to request a tax ID number.

  1. Opening a Bank Account

Newly incorporated companies must open a bank account in Mexico, given taxes can only be fulfilled by certain Mexican banks. Non-Mexican financial institutions do not support the platform used by Mexican tax authorities to process tax payments.

Opening a bank account may only be accomplished with the presence of a tax ID number. The process of opening a bank account in Mexico can take between six weeks and three months to completed. Bank account holders will fill up paperwork provided by the bank of choice.

If you are seriously looking to start doing business in Mexico and would like to learn about the Mexico business incorporation process, reach out to our Damalion experts today. We will be more than happy to discuss the various market entry options that suit your needs.

This information is not intended to be a substitute for specific individualized tax or legal advice. We suggest that you discuss your specific situation with a qualified tax or legal advisor.