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RESTRICTIONS ON FOREIGN INVESTMENT Although there has been a great opening up to foreign investment and no adverse policy changes are expected in this area, there remain a small number […]

RESTRICTIONS ON FOREIGN INVESTMENT

Although there has been a great opening up to foreign investment and no adverse policy changes are expected in this area, there remain a small number of economic activities in which foreign investment is still prohibited or limited to a percentage of participation. The catalogue of restricted economic activities is larger when the foreign investor is a foreign government. In addition, there are a series of strategic economic activities that are reserved for the Mexican government and where private investment in general (foreign or domestic) is prohibited.

Additionally, pursuant to Article 27 of the Mexican Political Constitution, any foreign entity, individual, or government investing in Mexico must agree to waive the protection of its foreign government with respect to its investment in Mexico, at the penalty of forsaking such investment in favor of the Mexican government. This provision is commonly known in Mexico as the “Calvo Provision.” Although the validity of the Calvo Provision may be questionable in the state of origin of the foreign investor (i.e. in most countries citizens cannot waive the protection of their government), the provision must always be included. This poses a problem, particularly when the investing entity is a foreign government or state.

STRATEGIC ACTIVITIES RESERVED EXCLUSIVELY FOR THE MEXICAN GOVERNMENT

The following activities are considered as strategic, and therefore investment in them is reserved exclusively for the Mexican government. All foreign investors are prohibited from investing directly in them:

•Petroleum and other hydrocarbons

•Basic petrochemicals

•Electricity

•Generation of nuclear energy

•Radioactive minerals

•Telegraphy

•Radiotelegraphy

•Postal services

•Paper money issuance

•Minting of coins

•Control, supervision, and surveillanceof ports, airports, and heliports

•Others as expressly provided by applicable legal provisions

ACTIVITIES RESERVED EXCLUSIVELY FOR MEXICAN CITIZENS OR FOR MEXICAN COMPANIES THAT DO NOT PERMIT FOREIGN INVESTORS

The MFIL provides that foreign investment is not allowed in the following activities:

•Domestic land transportationfor passengers, tourism, and freight, notincluding messenger or courier services

•Gasoline retail sales and distributionof liquefied petroleum gas

•Radio broadcasting services andother radio and televisionservices, other than cable television

•Credit unions

•Development banking institutions underthe terms of the law governing the matter

•Rendering of professional andtechnical services set forth expresslyby applicable legal provisions

ACTIVITIES SUBJECT TO LIMITED FOREIGN INVESTMENT

The following economic activities (see Table 1) and types of corporations may have foreign investment up to the percentages set forth below. Such limitations are in addition to the restrictions to participation by foreign governments described in the section above.

FOREIGN INVESTMENT IN REAL ESTATE

Direct investment by foreigners in real estate located in restricted zones is not allowed. Restricted zones include all land within 100 kilometers of Mexico’s borders and within 50 kilometers of the coastline. Mexican companies with foreign investment may own land located within the restricted zones, provided that such land is not used for residential purposes.

Foreigners who intend to invest in land located within the restricted zones for residential purposes must purchase such land through a trustee (a Mexican banking institution) and obtain authorization from the Mexican government (usually this is a very simple process).

VEHICLES FOR INVESTMENT

Customarily, investments by foreigners in Mexico are made through two types of corporate vehicles regulated by the Mexican Mercantile Companies Law: (i) limited liability companies (SRL); or (ii) corporations (SA). Although there are other corporate organization forms, SAs and SRLs are the most customary forms of corporate organization. Additionally, investments can also be made through other structures such as trust agreements, which can vary based on the particular needs of a specific investment.

SRLs are commonly used by US investors since these type of entities qualify as pass-through entities for US tax purposes, as they resemble a closed corporation or partnership.

On the other hand, SAs are more commonly used by Mexican and non-US investors, since they operate as a general corporation that permits a more flexible transfer of equity. All publicly traded companies must be SAs.

Additionally, when the vehicle is dedicated to the professional rendering of financial services the applicable provision requires and/or provides that the relevant vehicle must be incorporated as an SA. Also, recent reforms have introduced the possibility of incorporating Investment Promotion Companies (SAPI). This type of SA operates as a regular SA, but may introduce in its by-laws more complex voting and distribution structures, pre-emptive rights, call and put options, and other types of provisions customary in certain joint ventures.

Below is a list of the documents and information required in order to form (A) an SRL; and (B) an SA:

Limited Liability Companies (SRLs)

The name of the SRL must be approved by the Secretariat of Foreign Affairs. Usually at least three potential names must be submitted in the application, in order of preference. This authorization process may take up to four business days, provided that the requested names are available.

The capital stock of SRLs is represented by partnership quotas that may grant the same or different rights. Mexican law requires SRLs to have a minimum capital determined by the founding partners.

Mexican law requires at least two partners. Each partner can subscribe one partnership quota. The value of each partnership quota (and the number of votes granted to each quota) depends on the contribution to the capital of the SRL made by each partner.

The administrative body of the SRL is the board of managers or a sole manager. The board of managers is formed by two or more managers (with rights and duties similar to those of directors) appointed by the partners. Each manager can have one or more alternates to act in his or her absence. Members of the board of managers may be Mexican or foreigners and may reside in Mexico or abroad.

SRLs may also have a surveillance board or a single auditor, although this is not a statutory requirement. The surveillance board is charged by law with the permanent review of the books, records, and activities of the SRL in order to protect the interests of the partners from fraud, abuse, or mismanagement.

Corporations (SA)

The name of the SA must be approved by the Secretariat of Foreign Affairs. Usually, at least three potential names must be submitted in the application, in order of preference. This authorization process may take up to four business days provided that the requested names are available.

The capital stock of Mexican corporations is represented by shares that, subject to certain limitations, may grant the same or different rights. In certain types of corporations (i.e. Investment Promotion Companies) the rights granted to each series of shares may have substantial differences.

An SA must be formed with a minimum capital to be freely determined by the founding shareholders. At least 20% of the value of each share must be paid to the corporation’s treasury upon incorporation. Thereafter, additional, unlimited equity contributions can be made in order to increase the fixed or variable portion of the capital stock.

Shareholders participate in the profits and vote at meetings in proportion to the number of shares owned by each of them. Each shareholder’s liability is limited to the payment of the shares subscribed. Mexican corporations must at all times have at least two shareholders, regardless of whether they are individuals or legal entities.

The administrative body of an SA can be the board of directors or a sole administrator. The board of directors is formed by two or more directors with the broadest powers in order to execute all the necessary operations of the corporation, appointed by the shareholders. Each director can have one or more alternates to act in his or her absence.

The statutory auditor, or comisario, is a special type of auditor who is charged by law with the permanent review of the corporate books, records, and activities of corporations in order to protect the interests of the shareholders from fraud, abuse, or mismanagement. It is customary for the statutory auditor to be a partner of the corporation’s auditing firm. More than one statutory auditor can also be appointed. Statutory auditors can have one or more alternates to act in his or her absence. The appointment of a statutory auditor is a requirement for all SAs.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

TBY would like to thank Mijares, Angoitia, Cortes and Fuentes law firm for compiling this analysis.