Reprinted from North American Free Trade & Invesment Report, with permission of the publisher, WorldTrade Executive, Inc.

Corporate Obligations

Foreign investors may freely establish a Mexican company or acquire stock in an already established one. The most common corporate form chosen by investors is the "Sociedad Anónima" (S.A.) or "Sociedad Anónima de Capital Variable" (S.A. de C.V.) - Variable Stock Corporation. Other forms of corporations are the "Sociedad de Responsabilidad Limitada" (S. de R.L. or S. de R.L. de C.V.) - Limited-Liability Company, the "Sociedad de Nombre Colectivo" (S. en N.C.) - General Partnership or the "Sociedad en Comandita Simple" (S. en C.S.) - Limited Partnership. Because the S.A. and S.A. de C.V. are the most common corporate forms, this article will focus on obligations related to these corporations.

Incorporation of an S.A. or S.A. de C.V. Corporate structure

The capital stock of an S.A. or S.A. de C.V. is divided into shares and the shareholders are liable only to the extent of their contributions. This corporation may exist under any kind of name, followed by the words, "Sociedad Anónima (de Capital Variable)", or its abbreviation "S.A. (de C.V.)." The shareholder’s obligation is limited by their amount held in stocks. At least two shareholders and a minimum capital of fifty thousand Mexican pesos are required to form the company. Each shareholder should purchase at least one share of stock. The charter for the entity ("Acta Constitutiva" or "Estatutos") is a combination of what in the U.S. is known as articles of incorporation and by-laws. This document will designate the initial shareholders, members of the board of directors or the sole administrator of the Mexican company, its principal officers and the statutory auditor ("Comisario"). The charter will also approve the issuance of powers of attorney to one or more key representatives of the Mexican company. The charter must contain a clause to the effect that foreign shareholders of the Mexican company waive any right to seek the protection of their own governments in the event of any dispute regarding the Mexican company ("Calvo Clause"). A public notary who will register the company with the Public Registry of Commerce ("Registro Público de Comercio") must ratify the charter.

The shares are divided in titles ("Títulos"), which are used to credit and transmit shareholder’s rights. In general, shares have the same value and confer equal rights. Relative ownership of share value defines the distribution of profits and capital among the shareholders. Shareholders can be represented and need not take part in the shareholder meetings. However, company directors are not allowed to represent shareholders.

The main difference between the S.A. and the S.A. de C.V. is that the capital amount for an S.A. is fixed and specified in the articles of incorporation and by-laws. Any increase or decrease requires modification of the articles of incorporation and by-laws. In contrast, the capital of an S.A. de C.V. differentiates between minimum fixed capital and an unlimited variable capital. Increase and decrease of variable capital does not require a modification of the articles of incorporation and by-laws.

Either company is obliged to keep accounting books and corporate records such as (i) a Daily Book, (ii) a Ledger, (iii) a Book of Shareholder’s Assembly Minutes, (iv) a Shareholder’s Record and, in the case of an S.A. de C.V, (v) a Book of Increases and Decreases in Capital.

Powers of Attorney

Special care must be given to powers of attorney granted to local directors. Shareholders who want to retain control over the company should issue specialized powers of attorney to the members of the board of directors or the sole administrator. Powers of attorney, which include authority to grant sub-powers of attorney and to sell company assets, are usually too broad. In addition, with the exception of powers for labor and judicial issues, powers of attorney should be granted as joint powers only to company directors.

The most important powers of attorney necessary to operate a company are:

  • General power of attorney for acts of administration This power allows representation of the company in all extra-judicial actions that are necessary for the operation of the company such as hiring and firing employees.
  • General judicial power of attorney for cases and collections This power of attorney allows the bearer to represent the company before courts and litigate for the company.
  • General power of attorney for acts of ownership This power entitles to sell, buy, encumber, or impose ownership limitations on the assets that belong to the company.
  • General power of attorney to approve bonds and contracts of credit
  • This power of attorney grants representation of the company for the fulfillment or endorsement of payment of obligations as well as the signing of checks and contracts that can encumber the company.

Other Important Obligations

Companies should also be aware of the following obligations:

  • Registration with the National Registry of Foreign Investments ("Registro Nacional de Inversiones Extranjeras", "RNIE") of any foreign capital participating in the company;
  • Application for a federal tax identification number, ("Registro Federal de Contribuyentes, R.F.C.") in order to open bank accounts, sign leases, keep records of tax-deductible expenses and write invoices;
  • Registration with the Mexican Social Security Institute ("Instituto Mexicano del Seguro Social", "IMSS"). Each time the company hires or terminates an employee, it must give notice to the IMSS within 15 days;
  • Registration with the National Institute for the Workers’ Housing Fund ("INFONAVIT) and the Retirement Savings System ("Sistema de Ahorro para el Retiro", "SAR"); and
  • Application for environmental and other necessary licenses.

Administration of the S.A. or S.A. de C.V.

All S.A. and S.A. de C.V. are administered by its highest corporate body, the General Shareholders Assembly ("Asamblea General de Accionistas", "Assembly"). The assembly is responsible for the ratification of all operations and for taking resolutions. Shareholders must meet at least once a year and within four months following the end of the reporting period in an ordinary assembly meeting. The shareholder’s main obligation is to approve the annual financial report and the election or ratification of the administrator or board of administration. Shareholders might also conduct extraordinary assemblies in which they decide upon (i) the continuation or the dissolution of the organization, (ii) an increase or decrease of the capital, (iii) a merger or any other modification of the company’s articles and by-laws

In order to constitute an ordinary assembly, half of the company’s capital must to be represented and any resolutions must be approved by the majority of the participants in the assembly. In general, three-quarters of the company’s capital must be represented in an extraordinary assembly and resolutions have to be approved by half of the corporate capital.

The shareholders designate one or several temporary and revocable executives, who may be partners, in order to manage the company. While a sole administrator is named the General Manager, two or more administrators form an Administrative Board ("Consejo de Administradores"). All their powers and responsibilities are regulated within the articles of incorporation and by-laws. Sole administrator’s meetings or members of the board of administrators’ meetings may be held inside or outside of Mexico. Foreign sole administrators or directors that act in Mexico need a work visa.

The Administrators are also responsible for presenting a financial report at the annual shareholder_s annual assembly that includes the following information:

Financial statement for the past fiscal period;

  • Balance sheet;
  • Income statement;
  • Statement of changes in financial position and equity.

Labor Obligations

Foreign investors must pay special attention to Mexican labor law. Mexican labor law was last reformed in July 1970 and there has only been minor changes since. Labor obligations are based on the existence of an employment relationship. While U.S. labor relationships are guided by the principle of "hire at will and fire without payment of an indemnity," Mexican labor relationships are based on the principle of "stability of an employment relationship and the payment of an indemnity." Although a comprehensive reform is overdue, it is not expected to happen during this new administration.

Mexican labor law, ("Ley Federal del Trabajo") emphatically protects employee rights. It presumes the existence of a labor relationship, regardless of a written employment agreement, if the professional service is rendered personally and the employee is subordinated and dependent. This is usually the case when the employee follows directions and is economically dependent on the employer. The law goes even further and considers a commercial agent an employee of one to whom he renders his services if services are rendered permanently. Employment relationship are considered by law to last permanently if not expressly stated otherwise in the agreement. The law allows time limitations only if it is in the nature of the service. Employment agreements must include the following minimum information:

  • name, nationality, age, sex, marital status, address of the employee;
  • employment period;
  • services to be rendered;
  • site where services are rendered;
  • work shift;
  • salary; and
  • training and development programs.

Once a labor relationship is established, a number of obligations towards employees and governmental institutions have to be observed and which can substantially add to labor costs.

Minimum Wage

The law requires that Mexican employees receive at least the minimum wage for their services rendered. The minimum wage is fixed by the Minimum Wage Commission ("Comision Nacional de los Salarios Minimos "), which published on December 29, 2006 in the Official Gazette of the Federation the minimum wages applicable for 2007. For this purpose, Mexico is divided in three geographical areas with different minimum salaries:

Area "A" $50.57 per day

Includes the Federal District and Adjacent zones as well as the states of Baja California y Baja California Sur, Chihuahua, Guerrero, Sonora and Tamaulipas.

Area "B" $49.00 per day

Includes the states of Jalisco, Nuevo Leon, Sonora, Tamaulipas and Veracruz.

Area "C" $47.60 per day

Includes the remaining states.

Work Schedules

Employees have the right to one day of rest for every six days of work. In case the employee has to work on a Sunday, he has the right to receive a bonus of at least 25% of the daily salary. The duration of a working day is of eight hours for a day shift between (6 am to 8 pm), seven hours for a night shift (8 pm to 6 am) and seven and a half hours for a mixed shift.


By law, employees do not have the right to request vacations during their first year. Only after one or more years of service, they will have an annual paid vacation period of six days. The vacation period extends according to a seniority: eight days after two years, ten days after three years, twelve days after four years, and increases subsequently by two days for every four years until reaching twenty-two days vacation per year after thirty-two years. In case the employment does not last longer than a year the employee has the right to remuneration for the vacation time accrued. In addition to paid vacations, the employee has the right to a vacation bonus that should not be less than twenty-five percent of the monthly salary.

Christmas Bonus

The employer must pay the employee a Christmas Bonus ("Aguinaldo") before December 20 of each year and which must be equivalent to at least fifteen days of salary. The employee receives a proportional part of the bonus if he has not finished a year of professional service.

Seniority Bonus

The current law introduced a seniority bonus and a retirement account, which include the payment of twelve days of salary for each working year to be paid upon termination. In case an employee resigns voluntarily, he will be paid the bonus and retirement account if he fulfilled fifteen years of service. On the other hand, employees who resign for justified causes or are fired, independently of a justified or unjustified cause, must be paid even if they did not complete fifteen years of service.

Employee Housing

Furthermore, employers must pay a 5 percent fixed payroll tax to finance the Institute for the National Fund for Employee Housing (Instituto Nacional del Fondo de la Vivienda para los Trabajadores, INFONAVIT). INFONAVIT resources are used to grant credits and finance low cost housing.

Profit Sharing

Companies are obliged to share yearly profits. Payment must be done within sixty days following the date on which the income tax is due. Employees receive ten percent of the yearly profits. Distribution must consider the number of days worked during the year and the salary received. The share is distributed between all permanent and temporary employees who worked more than 60 days that year. Managers, company directors and administrators do not receive a share in profits. However, an important exception is made for companies only during their first year of operation. In order to avoid sharing profits, companies often establish so-called "service companies" that hire employees and lend them to the company that does not make profits.

Mexican Institute of Social Security

Employers must register every new employee within 15 days of the start of services with the Mexican Institute of Social Security:

Hiring and Firing

Mexican employers may not freely dismiss employees without cause. If they do dismiss an employee without cause, the employer must make severance payments equal to three months of salary, 20 days of salary for each year of service rendered, a seniority premium equal to 12 days salary per year and a back salary from the date of the dismissal through to the date of payment and accrued benefits. An employee dismissed without just cause may elect to be reinstated to his former job instead of receiving severance payment, provided he is not an employee of ‘trust’ as described below in "Employees of ‘Trust’".

If the employer rescinds the employment agreement for a just cause, the employee has the right to receive the following payments: (i) in all cases, the salary until the rescission date; (ii) if the employment relationship lasted less than a year, an amount equivalent to half of the time worked or, (ii) if the employment relationship lasted longer than a year, six months salary and twenty days salary for the rest of the years. If the employment relation was to continue indefinitely, the indemnity payment consists of twenty days salary for each year worked. Furthermore, the employee receives the corresponding holiday bonus.

Lastly, an employee who quits his employment relationship receives the following payments: (i) salary until the termination date; (ii) corresponding vacation payment and vacation bonus; (iii) Christmas bonus and, (iv) 12 days salary per year if the employment relationship lasted longer than 15 years.

It is imperative that all salary payments and working hours be properly documented for evidence purposes in case of a judicial proceeding. Employee rights prescribe that these documents should be saved for at least one year. In addition, companies should have company handbooks describing work procedures and duties. These handbooks and guidelines not only serve as internal regulation but also as evidence in judicial proceedings.

Judicial procedures pose a special threat to employers. Statements of employees are considered proven by the labor court ("Junta Local de Consiliacion y Arbitraje") until the employer proves the contrary. In order to achieve this, the employers should have employees, including senior personnel, sign control sheets, work records, payment receipts and other important documents. If an employee fails to attend work three times within a period of thirty days, the employer may terminate the employment agreement only after filing a detailed report and an internal administrative file with access control documentation. An employer must notify the employee within 30 days of discovering the absences. If the employee rejects the notification, the employer has five days to inform the local labor court.


Taxes are an important issue when considering investing in Mexico. Several federal and local taxes may apply to companies doing business in Mexico. Following is a brief overview of the most important fiscal obligations companies encounter in Mexico.

Current Income Tax ("Impuesto sobre la Renta") rates are at 28% for the year 2007. It must be paid annually to the tax authorities on the company’s taxable profits.

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 the annual income tax return.

There is also a federal Tax on Corporate Assets, established at a 1.25% rate. This tax is applied on certain current assets and on fixed assets of Mexican companies and foreigner’s assets within Mexico. This tax will be paid on an annual basis through monthly provisional payments. Deductibility of debts was eradicated for this year.

The tax on assets is not due during the pre-operational period, the first three years of operation, and during the liquidation of the company unless this liquidation lasts for more than two years.

A company doing business in Mexico will be obligated to withhold and remit the Value Added Tax ("I.V.A.") when it carries out any of the following activities:

  • alienates or leases goods;
  • renders independent services; or
  • imports goods and/or services.

This tax is calculated by applying the general rate of 15% to the price of the goods or services. If residents in defined border areas of Mexico (North America and Central America) perform the foregoing activities, the applicable rate will be 10%. The VAT must be stated separately in the invoice of the goods or services.

The employer must also pay a premium for each employee, which is based on a percentage of the employee’s salary and varies according to the risk level of a particular job. Payroll fees and taxes are deductible for income tax purposes.

Companies are subject to a local state payroll tax at a rate that depends on the location of the working facilities. In addition, the federal government requires companies to make social security and other labor related contributions, which can amount to up to 35% of the payroll. Such contributions are as follows (see chart):

Besides local taxes, tax treaties should also be considered when investing in Mexico as they often limit the tax jurisdiction of Mexico and substantially lower the applicable withholding taxes. The aim of the U.S.-Mexico Tax Treaty (the "Treaty") is to avoid double taxation and prevent fiscal evasion. The Treaty applies to taxes on income and is directed to persons, who are residents of either the United States or Mexico. According to the Treaty, Mexico and United States nationals engaged in the same activities as local entities must be treated equal and without discrimination.

Although the Treaty does not apply to the Mexican asset tax, which is a non-creditable tax for U.S. foreign tax purposes, it provides some relief by generally granting a tax credit against the Mexican asset tax equal to the Mexican income tax that would have been imposed under the Mexican income tax law. In general, this tax credit assures that U.S. companies doing business in Mexico will not have a Mexican asset tax liability. In addition, the Treaty limits the circumstances under which a U.S company is subject to the Mexican asset tax (e.g., Mexican permanent establishments, Mexican real property or Mexican assets producing royalties).

Such contributions are as follows:


For 2007




Sickness and Maternity

2.29% and 19.75% based on 30 minimum salaries in force for the Federal District1



Medical Care Retired




Disability, Life




Infant care, Social Security Expenses



Senior Aid














i The calculation of this tax is divided into two parts; the first part is based on the gross salary of the employee and the second one is based on a 30 days minimum salary paid in the Federal District. By way of example: If a company has 20 employees, the total sickness and maternity tax that the company has to pay to the corresponding entity encompasses a) 2.29% of the 20 different monthly salaries paid to its employees and b) 19.75% of 20 hypothetical salaries that are equivalent to 30 days minimum salary for the Federal District (currently $50.57 per day * 30 days = $ 1517.1 pesos).

The Treaty also describes and limits the concept of permanent establishment. This is particularly important for US investors, as Mexican domestic law tends to have a broader definition of permanent establishment, which subject to Mexican taxation a greater variety of activities carried out in Mexico by U.S. companies.

An important provision of the Treaty is the Limitation on Benefit Clause, which is common in modern U.S. tax treaties. In general, this provision aims to prevent treaty shopping and to ensure that a U.S. company claiming treaty benefits have substantive nexus to the United States in addition to be a resident of the United States (e.g. publicly traded companies, the owners are qualified persons or active trade or business in the United States).

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.