Mexico

DOING BUSINESS IN THE PACIFIC LEGAL ALLIANCE

Overview of the country and its economy

Mexico has embarked on a bold package of structural reform to break free from three decades of slow growth, low productivity, pervasive labor market informality and high income inequality. The package of reforms has already helped to improve confidence and bodes well for 2016 and beyond.

The reform package is being rolled out at a time when Mexico faces external headwinds, notably declining oil prices and the announced tightening of US monetary policy. Therefore, full implementation of the reforms in the near term will be crucial to reap the benefits of a strong and sustainable recovery. This will require maintaining a strong political commitment and further strengthening of administrative capacity.

1.1.- Demographic and economic environment

The government elected in 2012 quickly reached a historic agreement among previously divergent political parties on an ambitious consensus-based package of reforms known as the “Pacto por Mexico”, aimed at putting the country back on a path of prosperity. Major structural measures have been legislated to improve competition, education, energy, the financial sector, labor, infrastructure, telecommunications and the tax system, among many, and implementation has started in earnest. If fully implemented, these reforms could increase annual trend per capita GDP growth by as much as one percentage point over the next ten years, with the energy reforms having the most front-loaded effects, and the education reforms more lasting effects in the years to come.

Some of the principal’s reforms that the government had made it are in the following sectors:

  • In Labor.
  • Tax/Fiscal.
  • Political/Elections.
  • Economic Competition. (Antitrust)
  • Energy and Gas.

1.2.- Investment climate. Why is Mexico a good place to invest?

Mexico takes measures to attract foreign investment that will bring it long-term sustained growth. To achieve this, over the past few years, the Mexican government has introduced various structural reforms affecting the energy, education, labor, financial, and political sectors that are aimed at having the right condition in Mexico to encourage foreign investment and economic growth. It is not only Mexico’s structural reforms that have attracted investors. The free trade treaties that Mexico has signed with approximately 43 other countries have given Mexican companies competitive advantage.

The most significant changes in Mexico’s investment outlook have taken place in the energy and telecommunications sectors. Prior to constitutional reform, the state-controlled oil company, Pemex, had a monopoly on all hydrocarbon activity in the country. New legislation has opened this sector by allowing PEMEX to partner with domestic and international private sector firms and some of the country’s oil fields are now being opened to outside exploration and development. In telecommunications, reforms are intended to improve competition and diminish concentration in the sector through the creation of a new, constitutionally autonomous regulator. This regulator is empowered to order divestitures, enforce regulations, and apply targeted sanctions to companies it sees as dominant in the market.

In early 2014 legislation that describes the process of implementation was approved and providing more specific regulations governing the reforms to the energy, anti-trust, and telecommunications sectors. The government predicts that in 2015 the economy will improve and the Ministry of Finance has estimated annual GDP growth of between 3.2 percent and 4.2 percent for the year.

Foreign investment in Mexico has largely been concentrated in the northern states close to the United States border where most maquiladoras (export-oriented manufacturing and assembly plants) are located, and in the Federal District (Mexico City) and surrounding states, where many foreign companies’ headquarters are located. According to Mexico’s Secretariat of the Economy, Mexico has been the world’s top destination for aerospace manufacturing investments in each of the last four years. Financial services, automotive, and electronics have typically also received large amounts of FDI. In the first quarter of 2014, Mexico’s auto industry overtook Japan’s as the second-biggest vehicle exporter to the United States and remains the world’s seventh largest producer of vehicles. Historically, the United States has been one of the largest sources of FDI in Mexico. In 2014, U.S. investors accounted for 28.9 percent of the USD 22.5 billion of FDI in Mexico.

Foreign Investment

2.1.- Investment opportunities

Under the Foreign Investment Law of 1993 and the North American Free Trade Agreement (NAFTA) and with the reform package of 2014 most economic activities in Mexico, whether in manufacturing or services, are 100 percent open for participation by foreign investors. Only a few areas are completely restricted or limited to minority participation. Some areas, which previously have been reserved to the government, especially in the infrastructure sectors, are now being opened to private investment. Also, certain areas such as financial services, which previously have been reserved to Mexican investors, are now also available to foreign investors.

The energy and telecom sectors have already been opened to greater competition, with sufficient progress having been made to have economy-wide effects. These reforms can be observed through changes in the stringency of product-market regulation in these key sectors. An interim update of indicators for these sectors through August 2014 shows that Mexico has eased its regulatory stance from one of the most stringent levels. In a key sector where reform has focused, telecommunications, regulatory stringency will move from worse to better than the OECD average. Two-thirds of these indicators’ value reflects legislative changes in regulation, but de facto contestability of the market is also measured through the market share of either the incumbent or new entrants, and by this measure, it will take some time for the reforms to have their full impact on competition.

2.1.1.- Energy

Mexico has launched a major reform of the oil and gas sectors, following years of declining oil production by the state-owned company PEMEX, high energy costs for the business sector, and a lack of funding and technology to exploit new energy resources. Congress passed secondary legislation in August 2014 to implement a constitutional reform approved in late 2013. These laws established largely autonomous, independently-funded regulators for licensing, safety and environmental protection in the sector. These new regulators will help supervise the opening of the sector to greater competition and more efficient use of national resource wealth.

For the first time in 75 years, Mexico is opening up its oil and gas prospects to foreign investment, hoping to collect at least $50 billion from private companies by 2018.

The Ministry of Energy in Mexico has estimated a $100 billion in investment is needed over the next 10 years to develop Mexican shale resources.

2.1.2.- Telecom

A new regulatory and competition agency (IFT) focused on telecommunications and broadcasting was formed in 2013 and following the passage of the secondary legislation in May 2014 it is now fully operational. The IFT has exclusive authority for regulation and competition enforcement in the telecommunications and media industries, and has a range of new regulatory capabilities to promote competition, such as imposing obligations on dominant operators. The dominant operator in the fixed-line market, Telmex, has an 80% market share, while the mobile company Telcel has a 70% market share. OECD studies have suggested that data prices are relatively high (OECD, 2012a). An initial decision requiring these companies’ owner, América Móvil, to provide free interconnection to other operators, triggered its announcement of a plan to sell assets to reduce its market share below the 50% regulatory threshold to avoid the application of asymmetric regulations.

2.1.3.- Tourism

Mexico has never been more affordable. The global economy is still recovering, which is why hotels, villas, restaurants, and most tourist services across the country are offering some great deals and are adding serious value to their packages, often including things like free room upgrades, additional nights free, complementary dinners, spa services, and more.

Tourism is a pillar of the Mexican economy and the safety of its visitors is always Mexico’s top concern. While it’s no secret that Mexico has been getting some bad press lately, those who live here or have visited recently know that much of the bad news you read about is focused in just a few border towns and is NEVER directed at tourists.

Mexico is one of the World’s Top 5 most bio-diverse nations on Earth. More than 30,000 plant species; 1,000 bird species; and 1,500 mammal, reptile, and amphibian species are native to Mexico.

Mexico is fortunate to be the destination for three of the world’s most arduous animal migrations. Each year, thousands of Gray Whales migrate from the icy waters of Alaska to breed in the tropical waters of the Sea of Cortez, millions of Monarch Butterflies migrate from North America to the gorgeous hilltops of Michoacan, and thousands of whale sharks (the world’s biggest fish) migrate to the crystal-clear waters of Mexico’s Caribbean Coast.

2.2.- Regulation

2.3.- Limitations on foreign investment

There are limitations in certain areas, such as coastal trade, the mass media, fishing, and real estate property in border zones.

The 1993 Foreign Investment Law governs foreign investment in Mexico. The law is consistent with the foreign investment chapter of NAFTA (North American Free Trade Agreement-Agreement between the U.S, Canada and Mexico)). It provides national treatment, eliminates performance requirements for most foreign investment projects, and liberalizes criteria for automatic approval of foreign investment. The Foreign Investment Law provides details on which business sectors are open to foreign investors and to what extent. Mexico is also a party to several OECD agreements covering foreign investment, notably the Codes of Liberalization of Capital Movements and the National Treatment Instrument.

2.4.- Restrictions on foreign investment

There are certain restrictions on foreign investment that are outlined in the Foreign Investment Act, which regulates foreign investment and aims to ensure Mexico’s continued economic sovereignty. This Law sets forth territorial and conceptual restrictions on foreign investment, as it establishes the restrictions on what foreign companies may do in Mexico and where they may or may not do business, and also outlines the constitutional restrictions that foreign investors are subject to.

Mexico is open to foreign direct investment (FDI) in most economic sectors and has consistently been one of the largest recipients of FDI among emerging markets. Mexico’s macroeconomic stability and its proximity to one of the largest markets in the world.

Sectors Reserved for the State in whole or in part:

  1. Petroleum and other hydrocarbons;
    B. Basic petrochemicals;
    C. Telegraphic services;
    D. Radioactive materials;
    E. Electric power transmission and distribution;
    F. Nuclear energy;
    G. Coinage and printing of money;
    H. Postal service;
    I. Control, supervision and surveillance of ports of entry.

Sectors Reserved for Mexican Nationals:

  1. Retail sales of gasoline and liquid petroleum gas
    B. Development Banks (law was modified in 2008);
    C. Certain professional and technical services;
    D. Domestic transportation for passengers, tourism and freight, except for messenger or package delivery services.

Corporate Law

Common types of companies limited liability stock corporation (Sociedad Anónima, S.A. de C.V.) This is the most common type of business entity used in Mexico. The principle advantage of an S.A. is that the shareholders only are liable for an amount up to the value of their shares for the obligations and debts of the company. However, as in the U.S., the board members are personally responsible for the prudent management of the company. This company must have at least two, and can have up to an unlimited number of shareholders, whose shares are freely transferable by endorsement. This type of company is also required to have an examiner (usually an accounting firm) that is in charge of ensuring the proper and legal management of the company.

3.1.- Legal entities

3.1.1.- Limited liability company (Sociedad de ResponsabilidadLimitada, S. de R.L.)

3.1.2.- Civil enterprise (Sociedad Civil, S.C.)

3.1.3.- Branch Sucursal.

3.1.4.- Subsidiary (Subsidiario)

3.1.5.- Commercial intermediary

A commercial intermediary is a limited agency, avoiding a permanent establishment in Mexico. The intermediary can perform market research, promotion, solicitations, negotiation of sales, and will provide Mexican clients with information, prices, payment policies and forwarding and processing of orders.

3.1.6.- Company formation

Once the company form and ownership issues have been resolved, the investor will need to follow the steps below:

Corporate Name. The investor will need to select a corporate name and register with SRE (Ministry of external affairs). Before SRE grants a permit for the name, it will check that no identical name is already registered.

Proforma Agreement. Under Mexican Law, the foreign company will have to enter a proforma agreement whereby any non-Mexican shareholder is deemed to agree to be bound by Mexican laws and not invoke the diplomatic protection of his government.

Charter and By-laws. An attorney can help the investor to prepare these documents that spell out corporate governance, corporate purpose, duration of existence, domicile, capital stock provisions, management powers and special provisions for liquidation.

In addition, one needs to decide how capital will be subscribed, how the Board of Directors and officers will be appointed and what powers will be specifically granted to individuals.  Also, it is a regular practice in Mexico to grant power of attorney. The charter and by-laws must be taken, along with the permit from SRE, to a notary public (notario público) to formalize the incorporation.

3.2.- Is it expensive to invest in Mexico?

No, there is not a minimum of capital stock to start a company.

3.3.- Is tax treatment different according to each legal entity?

No.

Securities Market

Bolsa Mexicana de Valores, S.A.B. de C.V. is a financial entity that operates with a concession of the Ministry of Finance, and under the Securities Market Law.

As a result of the latest world trends and regulatory changes, Bolsa Mexicana finalized with its demutualization, becoming a company whose equity can be traded in the stock market. On June 13th, 2008, Bolsa did an Initial Public Offer of the shares representing its capital stock.

The essential principles of the Mexican Securities Market are:

  • Ethics: Strict adherence to the Code of Ethics of the Mexican Stock Market Community and the Code of Ethics of the Exchange.
  • Transparency: Provide clear, precise and timely market information.
  • Security: Reliable and trustworthy trading for market participants.
  • Innovation: Timely development of new products, functionalities and trading systems to meet market needs.
  • High Performance: Timely development of new products, functionalities and trading systems to meet market needs.

How to Invest?

Any Mexican or foreign investor or Corporation can carry out investments (in the equity or money markets) listed on the BMV.

The process begins when an investor is interested in buying or selling any stock listed on the securities market. As a first step, this investor should open a trading agreement with any Mexican brokerage firm.

How to Finance on the Exchange?

Every legally constituted company in Mexico can list its values without restriction in regards of the legal partnership it is established as long as the company complies with the issuing applicable requirements.

The issuing process starts with the company financing needs and every time the company requires better financing options other than traditional and common financing sources.

Taxation

5.1.- Direct taxes

5.1.1.- Corporate Tax

A corporate tax must be paid annually on the company’s taxable profits. Such profits are calculated by deducting certain allowed expenses from the total accruable income. Most of the company’s income is considered accruable for income tax purposes at the time invoices are issued, or when goods or services are delivered to the buyer if no invoice is issued. Basically, the allowed deductions are all discounts and/or expenses “strictly indispensable” for the business operation.

Except for the first year of operations, all Mexican corporations must file their income taxes through monthly provisional payments. These provisional payments will be credited against annual income tax returns.

5.1.2.- Tax on Dividends

Companies that distribute profits or dividends must, in principal, pay a tax on distributions when the rate is higher than 34 percent. However, if the company maintains a tax free Net Fiscal Profit Account, the tax on such distributions will be zero percent.

5.1.3.- Tax on Assets

There is a federal tax on corporate assets. This tax is applied on the fixed, financial and current assets of Mexican companies. The tax must be paid on an annual basis through monthly provisional payments. Payment of taxes on assets is not required during the preoperational period of a company, the first two years of its operation or when liquidated.

5.2.- Indirect taxes

5.2.1.- Value Added Tax

When the Mexican company transfers or leases goods, or renders services in Mexico, it will be obliged to pay Value Added Tax (Impuesto al Valor Agregado, IVA). This tax is 16 percent of the price of the goods or services and can be transferred to the clients by including the tax on its billing invoices.

 5.2.2.- Payroll Taxes

The company is subject to a local state payroll tax, at a rate that depends on the location of the working facilities. The Federal Government also taxes corporations with social security fees that amount to a minimum of 17.42 percent of the payroll, to be paid by the employer for sickness, maternity, old age, death, child care and retirement. The employer must also contribute to a Worker’s Housing Institute fee with the amount of 5 percent for each worker’s salary. The payroll taxes and fees are deductible for corporate income tax purposes.

In addition to the tax provisions discussed above, there are also various provisions under Mexican law and different tax treaties that apply specifically to foreign companies earning income in Mexico. These provisions cover areas such as withholding obligations with respect to the tax authorities of each country, available tax credits, and taxes on dividends and royalties.

5.3.- Tax year

For companies the last day to present their annual statement is on March 30th  of each year.

And for individuals the last  day to present their annual statement is on April 30th of each year.

5.4.- Tax holidays

There are no tax holidays.

5.5.- Double taxation treaties

Mexico has a very extend network of Double taxation treaties, with so much different countries: Argentina, Australia, Austria, Bahein, Barbados, Brazil, Canada, China, Colombia, Czech Republic, Estonia, Germany, Greece, Hungary, Hong Kong, India, Indonesia, Iceland, Italy, Kuwait, Latvia, Lithuania, Luxemburg, Malta, Netherlands, New Zealand, Panama, Peru, Poland, Qatar, Slovakia, Romania, Russia, Singapore, South Africa, Switzerland, Turkey, United Arab Emirates, United Kingdom, Ukraine and Uruguay.

Labor

Labor Law.

Labor and employment matters in Mexico are mainly regulated by article 123 of the Constitution of the United Mexican States (the Mexican Constitution) and the Federal Labor Code (FLC); however, the Social Security Law (SSL) and the National Housing Institute Law must also be carefully considered when analysing employment-related matters in Mexico.

Local and Federal Labour Boards.

Local and federal labour boards are the main labour and employment law enforcement agencies in Mexico. Labour boards function as trial courts and their awards may be appealed to federal courts. There are, however, other agencies in charge of supervising and enforcing compliance of specific employer obligations, mainly, the Employment and Social Prevention Secretariat, the Mexican Social Security Institute (IMSS), the National Housing Fund Institute (INFONAVIT) and the National Immigration Institute (INM).

Labor Agreements.

The FLC provides that an employment agreement must be in writing.

However, an agreement’s existence is not essential to the creation of an employment relationship and the lack of a written contract will not affect the employee’s rights under the FLC. In the event of litigation, the absence of a written contract will be weighed against the employer by the labour boards and, as a result, the evidentiary burden to the employer will be increased.

Employment contracts must include at least the follow-ing information:

  • name, nationality, age, gender, tax and personal identification numbers, and domicile of the employee and employer, as applicable;
  • the term of employment (indefinite or for a specific project or period);
  • indication of whether employment is subject to a trial period;
  • the services to be rendered by the employee, as well as the position of employment;
  • place or places where the services must be rendered;
  • work schedule and number of hours worked throughout the week, with at least one weekly rest day;
  • compensation;
  • training programmes and requirements;
  • fringe benefits payable to the employee; and
  • any other condition of employment that is not contrary to the law.

Fixed-term employment contract is permissible only if the nature of a particular task or service requires such employment or the employee is required to temporarily substitute for another employee.

Vacation.

The FLC establishes the following mandatory vacation time for all employees: mandatory holiday per year, in addition to the presidential inauguration day every six years and election day; and six paid vacation days for the first year of employment, with two more days added each additional year of employment until the fifth year of employment; thereafter, employees are entitled to two additional days for every five years of service.

Working Hours.

Standard Workday: 8 hours.

Maximum number of working days per week.

6 days.

Working Visas

Foreigners must secure a business visa to work legally in Mexico. (Non Resident) and (Resident) visas may be obtained through the Ministry of Interior (Secretaría de Gobernación) or through Mexican consulates abroad. The process usually takes 20 to 40 business days. Both visas allow you to receive income in Mexico. Note that lately business visa procedures have become quite restrictive and time consuming.

A tourist visa is not legitimate for conducting business in Mexico.

7.1.- Is there a working permit for foreigners holding tourist or students visa?

No

Foreign Trade

Mexico continues to work on port efficiency, customs environment, regulatory proficiency and e-commerce use in order to increase its trade facilitation. As mentioned, the country benefits from having an extensive network of Free Trade Agreements (FTA), which offers preferential access to markets in North America, the European Union, the countries of the European Free Trade Association (EFTA), Israel and ten partner countries in Latin America. It also has 39 commercial agreements that grant the application of preferential rates on the import of goods that are considered as originating goods from the FTA member nations.

According to the Ministry of Economy, Mexico is currently party to a network of 10 free trade agreements with 45 countries, 30 Bilateral Investment Agreements (APPRI, Spanish acronym) and 9 limited scope agreements (economic cooperation agreements and partial scope agreements) under the Latin America Integration Association (ALADI, Spanish acronym).In addition, Mexico is an active member of various multilateral and regional organizations and forums, including the World Trade Organization (WTO), the Asia-Pacific Economic Cooperation Mechanism (APEC), the Organization for Economic Cooperation and Development (OECD), and the ALADI.

Mexico’s most important international treaties include the following:

  • Free Trade Agreements: with the United States and Canada (NAFTA), and with Latin American countries (LAFTA: Argentina, Belize, Bolivia, Brazil, Colombia, Costa Rica, Cuba, Chile, Ecuador, El Salvador, Guatemala, Honduras, Nicaragua, Panama, Paraguay, Peru, Uruguay), Israel, Japan, and the European Free Trade Association.
  • Trans-Pacific Partnership Agreement
  • Mercosur: economic cooperation agreement.
  • European Union: Economic Partnership Agreement.
  • Bilateral Investment Treaties: with Argentina, Cuba, Panama, Trinidad and Tobago, Uruguay, China, Korea, India, Singapore, Germany, Austria, Denmark, Spain, Finland, Italia, United Kingdom, Switzerland, Sweden, Netherlands, and Portugal, among others.

8.1.- Imports

As a general rule, any person who wishes to import goods into Mexico must be registered in the Importers Registry.

Mexico’s Customs Law requires that all goods imported into Mexico be classified based on the tariff classification system specified in the Import Duties Law.

The tax base for import duties is the value of the imported goods. The Customs Law establishes that the value of a transaction is the value shown on the respective invoice. In addition to the price paid for the goods, the value of a transaction also includes certain expenses, such as customs fees, purchase commissions, packing and crating expenses, the cost of labor related to packing the materials, freight, and insurance premiums, among other items, incurred before the goods are imported.

The Customs law also establishes that all royalties and licensing fees related to the valued goods that the importer will need to pay either directly or indirectly as a result of the sale of the goods should be added to the value of the imported good.

Importers in Mexico must pay the applicable tariffs, VAT, and customs processing fees on the merchandise they import. In certain cases, an importer may also be required to pay antidumping duties.

8.2.- Exports

This operation is not affected by the payment of any custom duties, unless expressly established by law. Exports can be done by all individuals or legal entities with a Tax ID number and initiation of activities before the Tax Administration.

8.3.- Opportunities that the country offers

Mexico has a network of 10 Free Trade Agreements with 45 countries, 30 Reciprocal Investment Promotion and Protection Agreements (RIPPAs) and 9 trade agreements (Economic Complementation and Partial Scope Agreements) within the framework of the Latin American Integration Association (ALADI).

In addition, Mexico is an active participant in multilateral and regional organisms and forums such as the World Trade Organization (WTO), the Asia-Pacific Economic Cooperation (APEC), the Organization for Economic Cooperation and Development (OECD) and the ALADI.

Environmental Law

The General Law on Ecological Equilibrium and Environmental Protection, enacted in 1988, is the primary enviromental law governing Mexico. Under this law, the Federal Congress can grant federal, state and municipal leaders the authority to regulate protection of the environment, as well as preservation and restoration of the ecological balance within their jurisdiction. Under this law, a variety of regulations have formed governing water pollution, air pollution and hazardous waste:

Water Pollution – Under the National Waters law, key functions in the water sector are the responsibility of the federal government, through the National Water Commission (CNA). Extraction of national waters, discharge of wastewater and occupation of federal water zones all require authorization issued by the CNA. Violators can be held financially responsible for breach of permit under this law.

Air Pollution – Under Mexican environmental law, all sources of air pollution are regulated. Additionally, many manufacturing sites will be subject to federal jurisdiction, regardless of the municipality in which they are located. As such, all stationary sources of air pollution (such as a factory) must obtain an operating license for emissions.

Waste – According to the law, the Mexican government defines waste as hazardous waste, special management waste and solid waste. The law prohibits people from generating, storing, transporting or disposing hazardous waste without the appropriate permits.

PACIFIC LEGAL ALLIANCE

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