FORMS OF BUSINESS ORGANIZATION
The principal forms of business entities are the corporation (sociedad anonima, SA), corporation with variable capital (sociedad anonima de capital variable, SA de CV), general partnership (sociedad en nombre colectivo, S en NC), limited partnership (sociedad en comandita simple, S en C), limited liability company (sociedad de responsabilidad limitada, S de RL), and limited partnership with shares (sociedad en comandita por acciones, S en C por A). All these forms possess a legal identity distinct from that of their members. Other forms include the branch (sucursal) and the joint venture (asociacion en participacion). Professional partnerships are often organized as companies formed under civil, rather than commercial, law. A company formed in this way is called a civil company (sociedad civil, SC).
Except for joint ventures, these forms are taxable entities for corporate income tax purposes. In the case of a joint venture, each participant must include its share of the annual profit or loss under the joint venture contract in its own individual or corporate income for the period and is responsible for paying the annual tax due and crediting a proportion of any provisional payments made. Only the active associate makes provisional payments.
Most investors choose to form SAs, but the SA de CV is also popular. Branches are used less frequently as they may take longer to form and the legal and other costs are higher. Partnerships are not widely used.
EXCHANGE CONTROLS
Exchange controls were repealed in November 1991.
LOCAL PARTICIPATION REQUIREMENTS
Some activities are reserved exclusively for the government, including those in the following sectors: oil, other hydrocarbons, and basic petrochemicals; electricity; nuclear energy generation; ra-dioactive minerals; telegraphy and radiotelegraphy; postal services; currency printing and coin minting; and control of ports, airports, and heliports. Activities reserved exclusively for Mexican individuals and for companies with a foreigner exclusion clause in their articles of incorporation include sales of gasoline, most radio and television services, credit union activities, development bank activities, and specified professional and technical services.
Foreign investors may own up to 10% of production co-operatives; up to 25% of domestic and special air transportation services; and up to 49% of controlling companies of financial groups, bank credit institutions, and stockbrokers. They may own up to 49% of insurance companies; bonding companies; currency exchanges; bonded warehouses; leasehold or limited purpose financing companies; factoring companies; companies referred to in the Stock Exchange Law; shares of stock representative of the fixed capital of investment corporations and of operating companies of investment companies; companies producing and commercializing explosives, firearms, cartridges, most ammunition, and fireworks; companies printing and publishing national newspapers; series L shares of agricultural companies; satellite communications companies; cable television networks; basic telephone services; fresh water, coastal, and exclusive zone fishing companies; port administration companies; shipping companies; railroad-related services; and suppliers of fuel and lubricants to ships, aircraft, and trains. For participation over 49% in the following activities, authorization is required: port services for domestic navigation, high seas shipping, air terminal management, private schools, legal services, credit information services, insurance services, cellular telephone services, oil duct construction, and oil and gas well drilling.
The maximum foreign investment percentage will gradually increase in the case of internal land transportation of passengers and freight, as well as passenger bus terminal administration and ancillary services. Currently, the percentage is 49%; as of 1 January 2001, it will be 51%; and as of 1 January 2004, it will be 100%. The current percentage for the automotive and auto parts industry is 49%, but as of 1 January 1999, it will be 100%. Construction and installation of projects with higher than 49% foreign participation currently require previous authorization from the National Foreign Investment Commission, but as of 1 January 1999, 100% participation will be allowed.
In all activities not expressly regulated, majority foreign capital can be invested without authorization.
INVESTMENT INCENTIVES
The federal government does not at present grant nontax incentives, but some state governments do. These incentives range from the use of water free of charge for a certain period to land grants.
Tax incentives include accelerated depreciation of new fixed assets (see "TAXATION OF RESIDENT ENTITIES"). In addition, the government has recently agreed to a number of new tax incentives with effect through 31 December 1996. These incentives include an exemption from tax on assets for companies whose turnover did not exceed Ps$7 million in 1995, a 100% deduction of the value of investments in fixed assets acquired from 1 November 1995 to 31 December 1996, and a job-creation tax credit of 20% of the annual minimum salary for each net new job created, provided that certain conditions are met.
Through a draw back mechanism, importers are refunded import taxes paid on raw materials, parts, packaging, fuel, lubricants, and other materials incorporated in exports.
Investors in the northern border zone, in free trade zones, and in the border municipality of Cananea, Sonora, may obtain a number of import tax reductions and exceptions if specified requirements are fulfilled. Special treatment with respect to import taxes is also available to companies known as maquiladoras. These companies may import raw materials, components, machinery, and equipment on a temporary basis free of import taxes and take advantage of Mexico's low labor costs. Maquiladoras are usually set up on the northern border to assemble or convert raw materials into exportable goods and may be 100% foreign owned. Maquiladoras may apply for authorization to sell a percentage of their production on the domestic market.
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.
For further information contact Deirdre Silberstein, Deloitte & Touche, Washington on +1 202 955 4000 or enter a text search 'Deloitte & Touche' and 'Business Monitor'.
