Damalion Mexico desk

 

Doing business in Mexico

In terms of gross domestic product (GDP), Mexico ranks 15th largest economy  in the world. With an annual growth rate of 3.5%, that which is superior  to that of other developing countries, Mexico is projected to be the 7th largest economy by 2050. Its openness to business, international trade, and foreign investment has been slowly attracting foreign legal entities to do business in Mexico.

By rule, all sectors of the Mexican economy are open to foreign investors unless otherwise stated by the country’s Foreign Investment Law. While Mexico has been liberalized in recent years, there are still prevailing foreign investment restrictions that specific for certain activities , as well as limitations in land ownership for foreign companies and investors.

Mexico is growing at a rapid rate, with over 130 million citizens as of 2021. Most of its citizens have settled down in the capital, Mexico City and the nearby state of Mexico which is home to more than 25.1  million people. States with the largest number of people include Chiapas, Nuevo Leon, Puebla, Jalisco, and Veracruz.

Compared to other developing countries, Mexico comprises of a predominantly young population with more than 55% of its population under the age of 30. The literacy rate in Mexico jumped from 91% in 2004 to 95.4% in 2018. While a great percentage of the population speaks Spanish, over 7 million Mexicans speak one of over 72 indigenous languages, with Maya and Nahuati widely spoken dialect in the country.

LEGAL SYSTEM

Under the Political Constitution of United Mexican States, the country runs a representative, democratic, and federal Republic consisting of 31 states and Mexico City. The federal government is divided into three branches, namely the Legislative, Executive, and Judiciary. The Constitution also states that powers not explicitly granted to the Federation will be reserved for the State. For instance, business matters  will be under federal jurisdiction, civil matters under local, and real estate will follow the laws of the state.

ENTITY CHOICE

nA private business corporation is categorized as an entity independent of its partners, operating independently of the latter. Private business entities in Mexico can take various legal forms. The most commonly used legal form for business corporations under General Corporate Law are as follows:

• Limited Liability Company (S de. R.L.)
• Stock Company (S.A.)

The Securities Exchange Law of Mexico was created to handle debt and equity issues in the Mexican market. Businesses under the Securities Exchange Law are as follows:

• Listed Stock Investment Promotion Company
• Public Stock Company (S.A.B.)
• Stock Investment Promotion Company (S.A.P.I.)

There are also civil corporations that can be legally formed in Mexico.

• Civil Corporation (S.C.)
• Non-Profit Association (A.C.)

In essence, business corporations are formed for economic gains while non-profit associations feature the exact opposite purpose. Om Mexico, there are no one-man company, except for special circumstances. A corporation in Mexico may be formed with two more partners and can either be Mexican citizens or foreigners.

1. Stock Company (S.A.)

A stock company or S.A. is the most commonly used legal form in Mexico and closely resembles stock companies in other jurisdictions. It has a flexible internal organization in terms of rights, obligations, transfer limitations, administrative management, and many more.

• Allows the issuance of highly flexible variable capital.
• Common stock is represented by shares, giving shareholders corporate rights. Some share series may give shareholders both corporate and economic rights.
• Management of S.A. may be under a sole administrator or board of directors.
• Minimum of two stockholders, unlimited shareholders.
• No minimum share capital.
• One or more auditors.
• Shareholder liability is limited to their paid-in capital amount.
• Shares may be freely traded but transfers are limited as per bylaws.

2. Limited Liability Company (S. de R.L.)

• Minimum of two partners; 50 partners maximum.
• No minimum share capital requirement to form a S. de R.L.
• The company is represented by partnership interest and does not include credit instruments.
• Shareholder liability is limited to their paid-in capital amount.
• Common stock is allocated as partnership interests, one per partner and is not represented by shares.
• Partnership interest assignment is only permitted d if majority of partners agree on the allocation.
• Management of a S. de R.L. may be handled by a sole manager or board of directors.
• Internal auditors for management and accounting oversight.
• In some Mexican jurisdictions a S. de R..L is considered a flow-through organization or partnership, where in check-in-box is allowed for tax purposes.

3. Stock Investment Promotion Company (S.A.PI.)

• Minimum of two stockholders, unlimited shareholders.
• No minimum share capital requirement and is represented by shares or credit instruments.
• Shareholder liability is limited to their paid-in capital amount.
• Common stock is represented by shares, giving shareholders corporate rights. Some share series may give shareholders both corporate and economic rights.
• Shares may be freely traded but transfers are limited as per bylaws.
• Management solely entrusted to the Board of Directors.
• One or more auditors if listed company scheme is defined. Otherwise, an independent or external auditor will be assigned.
• Primary function is to prepare the issuance and listing of shares in the stock exchange by laying the foundations to become a public stock company or S.A.B.

MEXICO INVESTMENT VEHICLES

Here is a list of mechanisms set-up that facilitate foreign investments in Mexico:

• Capital contributions
• Debt contracting, including convertible debt and hybrid instruments
• Non-business administration trust
• Joint venture agreements
• Trust issuing in various forms, including (i) Capital Development Certificates, (ii) Investment Project Certificates, (iii) Real Estate Fiduciary Securitization Certificates, (iv) Energy Infrastructure Fiduciary Certificates
• Investment Funds
• Private Capital Investment Trust

FOREIGN INVESTMENT

Sector-specific restrictions were established to bar foreign investments in Mexico. These restrictions were made or protect the national security and public interest of its citizenry.

• 49% foreign ownership is allowed for companies engaged in manufacturing firearms, explosives, fireworks, ammunition, radio broadcasting, newspaper printing and publication, traditional and non-traditional air transportation.
• Certain thresholds may be exceeded in certain sectors, including legal services, port services related to internal navigation operations, line mooring, freight charge, and navigation companies in the exploitation of high-traffic vessels.
• Domestic overland transportation of passengers, cargo, and tourism
• Hydrocarbon exploration and extraction

BANKING 

Financial intermediaries are regulated by specialized and decentralized organizations under the Treasury Department. These agencies are mainly responsible for tax resource management, government budget oversight, and the Bank of Mexico. The most relevant financial institutions in Mexico that foreign legal entities must be aware of are as follows:

• National Baking and Securities Commission (CNBV) is responsible for financial intermediaries, including brokerage houses, ancillary credit organizations, banks, and stock exchanges.

• National Commission for the Protection of Defense of Financial Services (CONDUSEF) an independent entity and not related to the Treasury Department is responsible for safeguarding financial service users (consumers).

• National Insurance and Bonding Commission (CNSF) oversees insurance companies, bonding companies, brokers, and other sectoral organizations.

• National Retirement Savings System Commission (CONSAR) manages the retirement savings system, including mandatory pension funds for Mexican employees.

In Mexico, only full-service financial institutions such as banks are permitted to accept deposits from the general public. These depositaries are wholly covered by insured issued by the Bank Savings Protection Institute (IPAB), created with pre-determined bank reserves.

There are no restrictions on foreign investment in banks. Consequently, foreign financial organizations may be formed in Mexico via affiliation.

TAX REGIME

The federal tax income system of Mexico is all-encompassing except in certain cases, such as received interest by individuals. Interest is assessed at a flat rate by the Medical financial system and must be paid with the overall annual personal tax return.

• Non-resident companies and individuals will be assessed tax on various incomes earned in Mexico. In case incomes are considered to have multiple long-term establishments for income tax purposes, all incomes will be credited to such establishments will be combined in one annual return.

• Non-residents with the inclusion of Mexicans who can show proof of residence for tax reasons in a foreign country will only assessed with tax on their income earned in Mexico.

• By rule, corporations that have set-up their administration or management office in Mexico are automatically considered Mexico tax residents.

  INCOME TAX (ISR)

• Income tax is levied at 30% of a company’s total gross income, with losses carried up to ten years. No carryback is allowed.

• Rates applicable to individuals are progressive and limited to 35% whose annual income exceeds MXN 3million. They are subject to federal income taxation on their respective worldwide income, regardless of nationality.
  VALUE ADDED TAX (VAT)

• Mexico follows a credit system where VAT charged by others may be used to offset VAT owing.

• VAT is assessed at the rate of 16%. In some cases, a 0% VAT may be applicable.
  WEALTH TAX

• No tax payment is required based on the value of a company upon incorporation or shares issuance, except for minor state incorporation fees.

• No tax payable on wealth or on the value of assets for individuals.
  DIVIDEND TAXATION

• Dividends paid to individuals and foreign residents are subject to 10% withholding tax. Dividend taxes on the other hand are either lower or non-existent under certain tax treaties contracted with other countries.

• Foreign legal entities are assessed 30% of any profits distribution carried out in excess of after-tax earnings accounts.n
  TAX RETURNS

• Corporations are mandated to submit an annual income tax return per calendar year on or before 31 March of the suceeding year, with provision that tax due balance be paid immediately.

• Tax returns audited by a CPA must be submitted together with CPA’s recommendations on compliance with federal taxes by 15 July of the following year.n
  PENALTIES

• Interest on penalties will be calculated on tax deficiency with adjustments following inflation.

• Penalties will be assessed on taxes that were left out unless a taxpayer corrects the mistakes and pays voluntarily.

• Surcharge or penalties up to the accumulated amount for a 5-year period is payable on delayed payments or additional tax assessments from the date the taxes should have been paid.n
  TAX WITHHOLDING ON SALARIES

• Employees whose salaries do not exceed MXN4000,000 don’t need to file an annual tax return.

• Employers are mandated to file information return no later than 15 February of the following year. The return must include a detailed disclosure of taxable and exempted compensation paid to employees and income tax withheld.

• Mexican companies are mandated to withhold income tax on renumeration paid to employees at established rates, and remittance of withheld taxes must be done on the 17th of the following month.
  FOREIGN INVESTOR CONSIDERATIONS

• 10% corporate tax will be assessed on profits generated by a Mexican branch of a foreign company. Under certain treaties, corporate tax may be reduced.

• Branches will be taxed in the same manner as corporations. Payments fo interest, commissions, fees, and royalties to the home office of the legal entity will not be deductible. In some cases, branches may deduct fair allocations of home office expenses.

• Capital gains are included in gross income and assessed of tax at the same rate as regular income.

• Dividend tax will not be applied to profits generated before 2014. To activate a benefit, separate individual accounts will be required for the net after-tax earnings account prior to 2014 and after 2013.

• Dividends coming from after-tax earnings are not assessed additional taxation at the corporate level.

• Employee profit sharing payments are deductible for corporate tax income reasons.

• Entities under the financial sector must submit an annual report of their cash deposits received by taxpayers in accounts opened under their name when total deposit amount exceeds $15,000 per month.

• Goods in bonded warehouses in Mexico is not considered permanent establishment. The Mexican customer is considered the importer at the time of goods are released from bonded warehouses.

• Inflationary gain is considered additional taxable income and must be recognized as an inflationary loss as deductible expense.

• Interest from excess indebtedness is non-deductible.

• Interest paid to a related party may be considered as dividend in certain cases.

• Mexican residents living abroad, and Mexican individuals are subject to an additional 10% withholding tax on dividends paid from profits.

• Mexican tax regime follows the OECD model treaty for a permanent establishment.

• Mexican-source income by a foreign non-taxed business is categorized as income obtained by an entity resident in a preferential tax regime.

• Mexican-source income unrelated with business through permanent establishment is assessed with specific withholding tax rates. Tax treaties may reduce or eliminate additional withholding tax in certain cases.

• Mexico does not recognize any transparency for foreign companies for domestic taxation reasons.

• Net operating losses may be carried forward for up to ten years, while capital losses may only be carried forward against the same kind of income.

• Representative offices may operate tax-free in certain cases. However, if a company employs local workforce, they are assessed with normal payroll obligations.

• Specific requirements are in place when deducting payments for foreign-related parties in tax havens.

• Thin capitalization rules feature debt to equity ratio of 3:1.

• While the tax consolidation regime was eliminated in 2014, the new integration regime was developed for corporate groups based on shared participations of 80% may defer certain amount of income tax for a period of three years.

DOUBLE TAX TREATIES

Mexico has more than 70 tax treaties in place with other countries, including the US, Canada, the UK, Germany, Spain, France, Switzerland, and Germany. Mexico is continuously negotiating tax treaties with several other countries.

On 7 June 2017, Mexico enacted the Multilateral Instrument or MLI for certain countries and is pending to be approved by the Mexican Senate to be effective in Mexico started 1 July 2018. It amends prevailing bilateral tax treaties, enforcing tax avoidance measures developed by the OECD. Tax treaties will effectively reduce taxation or completely remove all withholdings.

INTELLECTUAL PROPERTY

• Patents

Determines inventions that are patentable. Under Article 16, Industrial Property Law, the following can be patented in Mexico:

• Invention is brand new

• Invention entails a few innovative or inventive procedures

• Invention has relevant industrial application

Patentable subject matters include the following:

• Inventions in the fields of biotechnology, electricity, physics, chemistry, metallurgy, consumer goods, and mechanics.

When an invention is patented, the patent holder effectively prevents other companies or entities from producing, commercializing, and importing their patented inventions.

To protect an invention, an application must file a patent with the Mexican Institute of Intellectual Property (MIIP).

Application of preliminary measures may be filed before the MIIP include seizure of infringing foods. The MIIP may impose a fine of up to 20,000 units called UMA during an administration of infringement action case.

Patent protection lasts up to 20 years from the filing date, with the provision that annual fees are paid.

• Trademarks

In essence, a trademark is any sign or symbol perceptible by the senses and capable of being presented in a manner that permits the determination of clear and precise object of protection, differentiating a product or service from all others, within the same class on the market.

Trademarks that may be protected under the Intellectual Property Law are as follows:

• 3D marks

• design marks

• plurality of operative elements such as size, color, design, layout, label, packaging, and decoration that differentiates products or services on the market.

• scents, sounds, textures, animated, and dynamic signs

• word marks

• word-and-design marks

A registered trademark holder has exclusive rights to use the mark. The use of an unregistered trademark may have certain rights. A trademark owner may register an application requesting MIIP to declare a trademark as famous or well-known.

Well-known trademarks are those prominent in a specific sector or to the general public, as well as commercial groups in Mexico. On the other hand, a famous trademark is known by a majority of the general public.

Trademarks that are not distinctive enough or known by a majority of the general public may be registered, given trademark owner proves that a trademark has acquired distinction among its consumer base or the public through repeated use.

Trademarks are protected upon successful registration with the MIIP. In the case of  violations in the use of trademarks by other parties, a trademark holder may file with the MIIP claims relating to the following:

• Administrative cancellation and annulment actions

• Opposition actions

• Non-use cancellation actions

• For infringement actions, trademark holders may request preliminary measures that may include seizure of infringed goods and request to pay for damages after an administrative proceeding has been concluded and the MIIP’s decision has been confirmed.

Trademark protection is enforced for ten years from the date of filing. Trademark is renewable given the use of the trademark by the owner is uninterrupted for more than three years. If use remains undeclared in connection with certain goods and services covered by protection, the remaining goods and services will be detected from trademark protection coverage.

• Registered Designs

A design can be registered under IPL law if it’s brand new or applied in industrial applications. It is divided into two categories, namely industrial models and industrial drawings.

Registered design holders assume exclusive rights to the use of their design and restrict others from using or producing the registered designs.

Protection of a design  must be filed before the MIIP. Registered design rights are enforced similar to patents. Protection for registered designs last for five years from the filing date. The protection coverage is renewable for equal periods up to 25 years.

• Unregistered Designs

Unregistered designs may be protected as either three-dimensional trademark that are distinct and not merely functional and copyright.

• Copyright

Copyright refers to the recognition of protection that the State makes in favour of literary and artistic works, providing an author or creator exclusive rights that are moral and patrimonial in nature over his or her works.

The following works can be protected under the Federal Copyright Law:

• Musical Works

• Literary Works

• Audio-visual Works

• Dramatic Works

• Cinematographic Works

• Photography Works

• Computer Programs

• and other intellectual works

Reservation of Rights may also be given to characters appearing in works, publication names and titles, group of individuals carrying out artistic activities, original operation characteristics of advertising promotions. Registered protection and reservation of rights allow copyright holders to stop any third-party from reproducing the work without consent or license.

Copyright needs to be registered to gain protection for an applicant’s creations on tangible media. Registration must be filed before the Copyright Office.

Copyright infringement comes in two types, including pure copyright infringement, pursued by the Copyright Office and commercial infringement pursued by the MIIP.

Holders of copyrights may file criminal actions in certain infringement cases. Copyright owner may file an injunction and claim damages in court.

Protection of copyrighted work is for the entire lifespan of the author plus 100 years after his or her death. The term is not renewable. Titles of publications are given one year protection, while characters, names of individuals and groups carrying out artistic activities gain five years of protection. These copyrights can be renewed indefinitely, provided they are in constant use.

PRODUCT LIABILITY AND SAFETY REGULATIONS

• Liability as a result of an illicit action is regulated by various laws, such as the civil codes of respective states and the Federal Consumer Protection Law.

• Simply put, product liability is non-existent in Mexico until the amendments to the Federal Consumer Protection Law enacted in 2004.

Federal Consumer Protection Law

• Products and services that may potentially be dangerous for consumers or place harm to the environment must feature instructions and warning about their harmful qualities. Additionally, instructions and recommended guidelines must be included in the packaging or upon payment for a service.
• Consumers may request replacement of goods or services, to rescind the contract or reduce compensation when the product or service has faults or hidden defects that renders it ineffective for regular applications. The claim must be submitted against the seller, manufacturer, and/or importer by the consumer.

Civil Codes

Federal and state civil codes clearly defines all civil actions that consumers can make in the event of defective products or potentially harmful services. A party that causes loss or damage to a consumer is required to respond through payment of damages unless the damage was proven to be the result of negligence of the complainant.

Sellers, manufacturers, and importers will be held liable to pay for damages in cases where loss or damage was directly caused by the illicit action and break of an obligation, taking into consideration the liabilities for loss and damage suffered by a consumer as a result of a product or service utilization.

Injured party can file claims to the offender in two forms: 

• Perform the necessary actions to revery the original condition whenever possible.

• Pay damages to the victim.

Class Actions

Several laws were enacted by the Federal Congress in 2010 pertaining to class action claims. Under the Federal Code of Civil Procedure and other provisions, certain areas were created in which class actions are applicable. It also features the rules and procedures and basis for calculation of damages for the class action members.

Class actions may be filed through:

• Common representative of a class with at least 30 members

• Consumer Protection Agency

• Non-profit, civil organizations legally incorporated for at least 12 months before the filing date, whose mission is to defend the rights and interests of stakeholders of the matter at issue.

The Federal Courts have total jurisdiction to hear and process class actions where the goods and provisions and services transpired and caused private, public, or environmental damage and tortious liability.

Damalion Mexico desk wants to guide legal entities in setting up their business in Mexico. We take pride in our expertise and experience, allowing us to help foreign investors during the tedious process of establishing a company in Mexico. Our team of experts consists of professionals in various sectors, including law firms, accounting and tax advisors, business consulting services. Working with local experts who have got a thorough understanding of the challenges to be overcome by foreign investors will be very helpful for you in order to lead your business to a solid integration and success in Mexico.

If you want to set up a business in Mexico and would like to know how we can make the process smooth and efficient, contact us today.

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