NUTS & BOLTS

Mexico 2018 | EXECUTIVE GUIDE | REVIEW

Uhthoff Gómez Vega & Uhthoff runs down the key points for international investors who want to do business in Mexico.

The purpose of this article is to provide a general summary of certain aspects of Mexican law, which may be of interest to foreign companies considering doing business in Mexico.

As of today, the political structure of our country is a federal republic that comprises 32 federal entities. The federal government is composed of the executive, legislative, and judicial branches. Each of the 32 federal entities has its own constitution, civil code, and other local laws and regulations, as well as its own executive, legislative, and judicial authorities. Mexico has a civil law system that is based from Roman law and Napoleonic principles. Thus, our basic legal principles are largely codified in civil, commercial, criminal, and procedural codes. Judicial precedents are not binding except for federal courts.
I. Regulation of Foreign Investment
The Foreign Investment Law (“FIL") and its regulations define “foreign investment" as:

• Participation by foreign investors (defined in turn as an individual or entity of any nationality other than Mexican, and foreign entities with no legal standing)—in any percentage—in the capital stock of Mexican companies;

• Investments by Mexican companies in which foreign capital has a majority interest; or

• Participation by foreign investors in activities and acts contemplated in the FIL.
As a general rule, the FIL allows foreign investors and Mexican companies controlled by foreign investors, without prior approval. In compliance with the Mexican Constitution, the FIL reserves certain strategic areas to the Mexican state. Neither Mexican nor foreign investors may engage in these areas of economic activity. These areas include: (i) exploration and extraction of petroleum and other hydrocarbons; (ii) planning and control of the national electricity system as well as the public service of transmission and distribution of electricity; (iii) nuclear energy generation; (iv) radioactive minerals; (v) telegraphs; (vi) radio telegraphy; (vii) mail service; (viii) issuance of money; (ix) control, supervision, and security of ports, airports, and heliports; and (x) certain others expressly indicated under the corresponding legislation.
Under the FIL, a foreign company must obtain approval from the Ministry of Economy to establish and register a branch or a representative office in Mexico. However, the aforementioned regulations are not applicable for foreign companies from the US, Canada, Chile, Costa Rica, Colombia, Nicaragua, El Salvador, Guatemala, Honduras, Uruguay, Japan, or Peru. Indeed, such entities only have to file a notice declaring certain information of the company, such as the corporate purpose, main activity and domicile. After the company files such notice, it can be registered with the Public Registry of Property and Commerce.
Under the FIL, all foreign investments, whether subject to prior approval or not, must be registered with the Foreign Investment Registry within 40 business days from the date of the respective incorporation, branch registration, acquisition, or execution of the relevant trust agreement. Foreign investors that do not register their investment with the Foreign Investment Registry are subject to administrative fines.
II. Forms of business organizations
The Mexican General Law of Commercial Companies (MGLCC) regulates various forms of business organizations. The MGLCC regulates not only the requirements for their incorporation, but also sets forth their corporate governance directives. Relevant and commonly used forms of business organizations regulated in the MGLCC include the following:

a) Corporations (“S.A.," Sociedad Anónima de Capital Variable, or “S.A. de C.V."; hereinafter collectively referred to as “corporation(s)").

b) Limited liability companies (Sociedad de Responsabilidad Limitada, “S. de R. L.," Sociedad de Responsabilidad Limitada de Capital Variable, or “S. de R. L. de C.V.").

c) Partnerships (Sociedades de Nombre Colectivo or Sociedad de Nombre Colectivo de Capital Variable).
Foreign investors do not commonly use partnerships as their investment vehicles in Mexico due to the fact that such investment vehicles do not provide limitation of liability to its partners. US investors frequently incorporate limited liability companies because this form of business organization does provide limited liability to its partners and also because it provides certain benefits for US tax purposes (as they are considered pass-through entities). Corporations, however, are by far the most common form of business organization used in Mexico.
III. Taxes treaties
Mexico has executed treaties for the avoidance of double taxation with various countries, including the US, Canada, and most OECD countries. Those treaties establish different rules for taxation of permanent establishments and of Mexican-source income (e.g., withholding rates on dividends, royalties, and interest) derived by residents of the signatory countries. The relevant tax treaty must be reviewed to determine the applicable rates. Absent such a treaty, the rules of the Mexican Income Tax Law (ITL) will govern.
Individuals and legal entities are subject to the payment of Corporate Income Tax when: i) they are Tax Residents of Mexico with respect to their worldwide net income (that is, gross income minus allowable deductions); ii) they are foreign tax residents with a permanent establishment (tax presence) in Mexico, with respect to the income attributable to such permanent establishment; and iii) they are foreign tax residents with Mexican source income when they do not have a permanent establishment in Mexico, or if such income is not attributable to a permanent establishment.
Mexico imposes a value-added tax on the following activities: sale of goods, lease of goods, rendering of services, and importation of goods or services. The general rate is 16% of the value of the subject matter transaction. A 0% rate applies in certain limited cases, mainly related to exportation of goods and services, as well as food and medicines.