Practical Guide for Foreign Investors

Introduction

The vertiginous yet fascinating dynamic of business today is forcing business people to break out from their borders to expand their businesses, in order to have solid structures and legal strategies that permit the safest form of investment. Mexican legislation can be trusted to provide an optimal environment for the healthy development of companies seeking new and fertile fields for their business.

The aim of this guide is to provide you with a brief sketch of some of the guidelines you should read before starting to do business in Mexico. These guidelines are of a general nature and their specific application depends on various factors, special laws and the activities of the company.

For the most part, Mexican Laws are Federal in nature, which is why this guide is applicable for practically any State of the Republic of Mexico and the More info which represent it? can do so without the need for special certifications to practice in different States.

Foreign Investments

Since the reforms of the last decade with former President Salinas, Mexico has opened its borders to foreign investment and only a few activities were left reserved for the State, such as industries related with oil, other hydrocarbons, and basic petrochemicals, among others. Some activities, such as credit unions, the practice of certain professions, etc., are reserved for companies with entirely Mexican capital, and some are restricted to certain percentages of capital, such as up to 25% in national air transportation, up to 49% in money exchanges, etc.

• Possibility of Neutral Investment to increase the percentage of Foreign Investment.
  Neutral Investment is formed by Mexican and foreign capital, thereby permitting an increase of the permitted foreign investment percentage. In this case, special approval is required from the Foreign Investments Commission. This investment can be formed by Mexican corporations or by authorized trusts.

• Some advantages of setting up in Mexico
  Mexico has entered into over 35 international trade agreements, most notably NAFTA (North American Free Trade Agreement) and the MEUFTA (Mexico-European Union Free Trade Agreement) and consequently companies formed in Mexico are entitled to the benefits of those agreements. There are also agreements signed with a large range of countries which grant the same treatment to Mexican investors.

Why form a business?

Incorporation as a juridical person is not a legal requirement to be able to start up a business. What makes formal incorporation of a business important is the protection it provides to the personal capital of the shareholders, which is fundamental as a first strategy. Starting a business will always be a risk.

 

Forms of Business Entities.

The activity, the forms of management and the policies are what make up the personality of the company. We understand each company is unique and therefore its strategies must also be unique, based on these three aspects.

The ways in which the business can be incorporated owe more to these three aspects than to the legal requirements into which it might be expected to fit. The most frequent ways of forming a company in Mexico are the following:

1. Stock Corporation

This is the most popular form among Mexican Companies. The minimum Capital Stock needed to incorporate one is $50,000 pesos, which means the minimum amount that shareholders can risk are those $50,000 pesos. This amount cannot be decreased in order to be able to guarantee the various creditors of the company. It may be run under the modality of a Sole Director or under a Board of Directors. In either of these cases, they have the obligation to maintain four books: Minutes of the Board of Directors, Minutes of Shareholders’ Meetings, Stock Ledgers and Capital Variations. These books are often administrated and held in the custody of the company attorney.

This is the only business entity format in which the capital stock is represented by ordinary shares. Depending on the articles of association, these shares grant their holders different rights.

Modality of Variable Capital

Any business entity can have this modality. It refers to the fact that the increase or decrease in capital does not have to comply with any formal requirement, but simply to a resolution adopted at a shareholders’ meeting.

Subsidiary Shareholders

Foreign companies often prefer the shareholding structure to be formed by the same foreign company, instead of natural persons, since in their countries of origin they may be able to obtain tax relief on the investments they make in Mexico. This is possible, however for the General Law on Business Corporations [Ley General de Sociedades Mercantiles] it is a fundamental requirement for them to be formed by a minimum of two persons, hence a strategy called 99-1 is used, which means that factually the entity is formed by a single member, but the law considers them to be two persons.

Management.

We should fist distinguish the two bodies that make up any business entity: the Shareholders’ Meeting and the Management Body. The first is evidently formed by the investors and it decides the way the company will be run, i.e. whether it will have a Board of Directors or a Sole Director.

It is advisable for the persons who are going to run the company in Mexico to form the Board of Directors, since more than an honorary or hierarchical designation, it imposes obligations such as accountability to such officers.

The Board of Directors is a body formed by at least two members: a Chairman and a Secretary. The former is the person who calls meetings, proposes and directs, and the second is the person who executes and gives legal form to the resolutions. However, the board of directors may be formed by an unlimited number of officers and there may be as many designations as the company requires, for example: Vice Chairperson, Alternate Secretary, Non-designated Members, Legal Representative, Treasurer, Chief Officer, etc.

 

2. Limited Liability Company

This is the form, par excellence, preferred by most foreign companies due to its similarity with figures in their countries of origin. The minimum risk to guarantee payment to the various creditors is $3,000 pesos. It can be run by a Sole Director or a Board of Directors and its main difference with the Stock Corporation is the fact that the capital stock is not represented by freely-circulating shares, but rather by ownership interests, which are non-negotiable instruments.

 

3. Civil Partnership

This format is less popular by the day and its application is more suited to tax matters than to its corporate advantages, since it is an exception to the corporate veil because the partners are at risk with their entire personal wealth. It does not require a minimum capital stock and can be run through a Sole Director or else a Board of Directors.

 

4. Branches.

Our business attorneys recommend the opening of foreign branches in Mexico when the company is going to carry on commercial activities with or without income in Mexico, but only when the structure of "corporate governance" and the shareholders will remain in the same designation and distribution as the company abroad. For this case we apply for registration with the National Foreign Investments Commission in Mexico to obtain permission.

 

5. Offices of Representation.

Offices of Representation are to a large extent similar to branches, however they have a different tax treatment, more so in the case of foreign banks where it is an indispensible legal figure. Business entities in this format should apply for a Tax Identification Certificate in Mexico.

 

Joint Ventures.

The risk of investing in Mexico when the investors have not had experience, particularly in the activity they are going to carry out, is often a consideration for foreign companies and in some cases they prefer to make use of alternatives that will reduce that risk, as is the case when buying an existing Mexican business with a certain experience and background, or else agreeing to a joint venture.

Buying an established Mexican company can be a viable solution to reduce risk; however, care must be taken with the price of the shares to justify that reduction of risk.

In the case of the joint venture, there may be two ways of establishing one: strategic alliance and co-investment.

The strategic alliance does not necessarily require the parties to put liquid investment into the business, but for the companies to take advantage of the characteristics and qualities which one another may have for their own benefit, for example: use of infrastructure, establishment of branches without the need for investment, reducing costs, making agreements for supplies and/or exclusive distribution, etc.

In the case of the co-investment, both companies invest a sum of money in any percentage they agree upon to begin a new business. In the agreement they establish the way it will be run, its profits, and the rights and obligations of each.

Distribution Deals.

This way of entering the Mexican market does not involve direct investment by the foreign company. In certain cases it simplifies the incursion into the sale of the products; however, an intermediary is also involved who takes a fair amount of the profits. Some of the advantages to distribution: Distributors in many cases already have networks of clients and the distributors can often reach consumers for whom the foreign party will be almost incapable of reaching.

Litigation Prevention.

There are several kinds of disputes that can arise from this, the most important one you should know about is that in Mexico, as mentioned previously, the laws are mostly federal ones and are previously established by the Congress of the Union, which gives us a very favorable environment for preventing litigation as far as possible. In this case, we recommend contacting any of our attorneys for further information from them about Corporate Legal Armor Plating, which covers different areas, such as employment, commerce, relations among members, government entities, etc.

Maintenance to Business Entities with Foreign Capital.

Although the Foreign Investment Act [Ley de Inversión Extranjera] has allowed foreign investors to form their companies in Mexico with up to one hundred percent foreign capital, these companies formed in Mexico have a specific regulation regarding the information that must be supplied to the Secretariat of Economy. The cases are as follows:

• Enrollment in the National Foreign Investments Registry;
• Annual reenrollment in the National Foreign Investments Registry;
• Modification in the shareholding structure of the company;
• Quarterly Income Report.
• Merger or spinoff of the Company.
• Changes of address or name of the company.
• Granting of powers of attorney (in the case of branches and offices of representation).
• Presentation of financial statements (in the case of branches and offices of representation).
• Cancellation of enrollment.

*If the company takes out Corporate Legal Armor-Plating is contracted, the maintenance is included.

Tax Stategies.

The tax collection authorities in Mexico, as in most countries, is carefully vigilant that companies meet payment of their taxes and comply strictly with the regulations. However, there also exists the possibility of implementing legal strategies that can reduce excessive taxes.

One of the most common practices is to provide consulting services between the Mexican company and the company abroad.

We recommend you find out from your attorney and your accountant so that if this case applies to you, they can implement some tax strategies that can help you cut down your taxes.

FOREIGN FRANCHISES IN MEXICO

Currently, foreign companies are finding franchises to be a way of doing business in Mexico, enabling them to distribute their products and offer their services. Having a franchise in Mexico allows them to have points of support. Our company attorneys are duly authorized to help foreign companies with assistance to foreign franchises in Mexico, in coordination with business and financial consultants. For more information, consult our specialists.

IMMIGRATION

Tourist. This is a foreigner who enters the country for leisure or health purposes, for artistic, cultural or sporting activities, non-remunerated and non-profit, for a maximum period of six months, non-renewable.

Transmigrant. This is a foreigner who enters to pass through to another country, and who may remain in Mexican territory for up to 30 days.

Visitor. This is a foreigner whose objective is to engage in some activity, for profit or otherwise, provided that it is lawful and honest, with authorization to remain in the country for up to one year, under the following modalities:

• Visiting Person of Private Means. When visiting foreigners, during their stay, live off their funds brought from abroad, from the earnings they produce, from any income coming from abroad or from their investments in the country.
• Visiting Business Person or Investor. When the purpose of their visit to the country is to find investment alternatives or to make investments.
• Visiting Technician or Scientist. When the foreigner engages in scientific, technical or advisory activities.
• Visiting Artist or Sportsperson. When the purpose of the visit is to carry on artistic, sporting or similar activities.
  Visiting Position of Trust. When the person seeks to occupy positions of trust.
• Visiting Board Member. When the person seeks to attend shareholders’ meetings and board meetings of companies.
• Visiting Professional. When the person intends to perform professional activities.

We hope this guide will serve as a reference for you and that it will make you better placed to take the right decisions. For further information, please contact one of our business attorneys, who will be happy to attend you.

GIMENEZ & ASOCIADOS ABOGADOS, SC
WWW.GAA.COM.MX

Important: This guide for foreigners does not constitute a consult. Our attorneys in Mexico therefore have no obligation in terms of the use any readers may give it. For further information, please contact our firm.