Doing Business In Mexico

O
OLIVARES

Contributor

Our mission is to provide innovative solutions and highly specialized legal advice for clients facing the most complicated legal and business challenges in Mexico. OLIVARES is continuously at the forefront of new practice areas concerning copyright, litigation, regulatory, anti-counterfeiting, plant varieties, domain names, digital rights, and internet-related matters, and the firm has been responsible for precedent-setting decisions in patents, copyrights, and trademarks. Our firm is committed to developing the strongest group of legal professionals to manage the level of complexity and interdisciplinary orientation that clients require. During the first decade of the 21st century, the team successfully led efforts to reshape IP laws and change regulatory authorizations procedures in Mexico, not only through thought leadership and lobbying efforts, but the firm has also won several landmark and precedent-setting cases at the Mexican Federal and Supreme Courts levels, including in constitutional matters.
The growth Mexico offers from a business, cultural and social perspective is in constant evolution as well as the legal framework and opportunities for business consolidation and continued growth.
Mexico Corporate/Commercial Law

Introduction

The growth Mexico offers from a business, cultural and social perspective is in constant evolution as well as the legal framework and opportunities for business consolidation and continued growth. Ingredients such as sustained economic growth, demographic mix, structural reforms in key industries and Mexico's long standing legal tradition give Mexico the opportunity to be a desired jurisdiction to do business. Mexico offers many grants and incentives to encourage business development. Foreign owned companies are eligible for the same incentives as Mexican owned companies. Incentives are focused on promoting employment, technological research and development, construction, and the growth of small and medium-sized enterprises (SMEs).

The Business environment

Nowadays Mexico has a broad free trade agreement network that includes North America, Europe, Japan, the Transpacific Partnership and throughout Latin America, allowing for an attractive international trade platform between countries with substantially reduced tariff and non-tariff requirements. There have been strong government efforts to reduce inflation in order to place Mexico on a level that is comparable to the top economies in the world.

Likewise, Mexico is party to more than 60 international treaties to avoid double taxation with countries all across the world.

Mexico's strategic geographic location and work force capabilities have, for the past decades, allowed Mexico to consolidate and to be placed as an ideal jurisdiction for near shoring operations to service the world's markets resulting in increased economic and industrial activity across the country.

Private investment is dominant in the banking, manufacturing, construction and hospitality industries as well as in wholesale and retail trade operations.

Forming a company

When thinking of doing business in Mexico, the first set of questions that come to mind is whether there is a need to form a Mexican company, and the requirements and implications of this. Foreign companies incorporated under laws of other jurisdictions may have legal status in Mexico. The formal registration of foreign companies in Mexico as opposed to the incorporation of a local company has certain advantages but also disadvantages that require detailed analysis. An alternative method to allow companies to undertake commercial activities in Mexico is for the company to establish an agency, branch, or representation in Mexico. Foreign companies may proceed to choose one or both of the following options in order to undertake commercial activities in Mexico:

  • establish an agency, representation or branch in Mexico
  • incorporate a new Mexican company

Establish an agency, representation or branch in Mexico

An agency, representation or branch is not a separate legal entity but an extension of a foreign company. Such foreign company will be responsible for its liabilities. Agencies, representations or branches are taxed as Mexican companies, and this requires for the tax implications to be carefully reviewed.

Pursuant to our Code of Commerce (Código de Comercio), General Company's Law (Ley General de Sociedades Mercantiles) and Foreign Investment Law (Ley de Inversión Extranjera), (all together the 'Legal Framework') to establish a presence through an agency, representation or branch in Mexico, the following requirements and procedure must be complied with:

  • foreign companies must register in the Public Registry of Commerce ('Company Registry'). In order to do so, it is necessary to obtain an authorisation from the Ministry of Economy (Secretaría de Economía by its initials in Spanish 'SE'). The authorisation will be issued if the company complies with all of the following requirements:
    • an application must be submitted to the SE, whether it is online or in person. The application shall be filed in original and two copies, with the applicant's general information and the purpose of establishing such an agency, branch or representation in Mexico
    • the company must submit sufficient evidence of incorporation to prove it duly incorporated in accordance with the law of its country. Such proof must be notarised and legalised either by apostille or by the Mexican consular or diplomatic authority in such country
    • the foreign company must submit an authentic copy of its by-laws or articles of incorporation, and any amendments thereof, and the documents in which evidence of authority or power of attorney is provided to the legal representatives. If the documents are written in a foreign language, they must be exhibited with a certified translation to Spanish made by an official translator authorised in Mexico, such translation must be notarised
    • payment of the corresponding governmental fees
    • upon submission of all these requirements, the authorisation shall be granted within the following 15 business days. If the application has not been approved within this period, it will be deemed as approved
  • once the authorisation is obtained from SE, it will be necessary to register the company with the Company's Registry. It is until that moment, that the agency, representation or branch will be able to commence its commercial activities in Mexico

However, if the foreign company is from one of the following countries, no authorisation from the SE is required:

  • United States
  • Canada
  • Chile
  • Costa Rica
  • Colombia
  • Nicaragua
  • El Salvador
  • Guatemala
  • Honduras
  • Uruguay
  • Japón
  • Perú
  • Panama
  • Australia
  • New Zealand
  • Singapore
  • Vietnam
  • companies incorporated under the laws of a country member of the World Trade Organisation

In such cases, the foreign company must evidence to SE that it has been incorporated under the laws of their country, and that their legal representatives have sufficient authority to establish a branch in Mexico, in order for the company to file and obtain a tax I.D. and designate a tax address for its branch.

Notwithstanding, it is always a good practice to seek legal advice as there can be adverse tax consequences for the foreign company opening a branch or a representative office in Mexico.

Incorporate a new Mexican company

The following steps must be complied with to incorporate or create a new Mexican company:

  • it is necessary to choose the legal form the new company will have; the Mexican General Company's Law (the 'Company's Law') contemplates seven different forms of entities. The most common forms that are used in Mexico are: limited liability stock corporation (Sociedad Anónima – S.A.) that may have fixed or variable capital and the Limited Liability Company (Sociedad de Responsabilidad Limitada – S.de. R.L.). These entities are the most common vehicles for foreign investors, since they allow for limited liability of shareholders to the amount of the capital contributed to the vehicle so personal assets of the owner are not put in risk

    Any company may adopt the variable capital form and increase or reduce its paid in capital after incorporation without the need to amend its by-laws

  • submit a company name application to the SE, with three different options for the new company's name, in the order of preference desired by the applicant. Such entity will search in its data base if there is no other company with a similar name, and if the proposed name is available, the SE will grant the authorisation to use such name for the new company. This authorisation must be used by the new company within the following 180 days; otherwise, the name application and search process must be done again
  • Prepare and adopt the company's by-laws, which must contain the following information:
    • the company's purpose
    • the duration of the company
    • the new company's corporate address
    • the amount of the capital stock and the number of shares/equity interest in which the company's capital will be divided
    • the number of shareholders - partners that the company will have (at least two shareholders - partners are required to incorporate either an S.A. or an S. de R.L., except for the S.A.S. - Sociedad de Acciones Simplificadas which can be incorporated by a single person) shareholders/partners may be Mexican or foreign entities
    • shareholders/partners' information:
      • personal data (name, nationality, parent's nationality, date and place of birth, marital status and address)
      • official ID (passport, citizenship or voting card, etc)
      • percentage of participation in the company
      • in the case of individuals immigration status in Mexico

        Last October 2023 an amendment was enacted in the Company's Law in which it is established that the partners meetings may be held by electronic means.
    • if one of the partners is an entity, the following information will be required:
      • the original by-laws—articles of incorporation, and any amendments thereof duly registered with the Public Registry of Commerce
      • if it has foreign investment, evidence to prove registration at the National Register of Foreign Investments (see comments below)
      • power of attorney of its legal representative
      • -personal data and official ID of the representatives
      • entity's Tax I.D.
      • percentage of its participation
    • management designation for the new Mexican company, appointing either a sole manager/director or a board of managers/directors, the names and charges of such manager(s), and the authorities to be granted to each of them
    • specify the circumstances under which the company may be dissolved prematurely
    • specify the procedures for carrying out the company´s liquidation and the method under which the liquidator will be elected in case he has not been designated in advance
  • the incorporation of a Mexican company must be made before a notary public (except for the SAS) and it requires the presence of the new company's partners or of their designated representatives
  • after the incorporation has been made, the following must be complied: (i) obtain a Federal Taxpayers Registry (RFC), (ii) register the new company at the Public Registry of Commerce and (iii) within the next 40 business days, a notification of the New Mexican Company has to be sent to the Foreign Investment Registry by the public notary. Such foreign investment registration must be renewed every year

    If the new company will have employees, a registration at the Mexican Social Security Institute (IMSS) will have to be made. Depending on the business activity to be developed by the company, multiple registrations apply, for example Export–Import Registry in case the activities are import and export

Financing a company

Even when a company may be financed by its partners or shareholders through capital contributions or shareholder´s loans, the Mexican financial market offers many alternatives for funding via financial institutions such as banks, savings and loan associations, FinTechs, specialised banks and credit unions. There are other specialised institutions, such as leasing, finance and factoring companies as well as bank-non-banks. As other jurisdictions, private funding is available in all its categories: venture capital, private equity, incubators, crowd funding and others. Government funds and financing are also available with financial aid, tax incentives and sponsorship programs for SMEs involved in certain industries and sectors.

In order to, emphasize more on the subject, the most common types of legal financing for companies in Mexico:

  • Banking: Banks are the most important suppliers of funds to businesses. Banks offer short, medium or long term loans. The rate of interest may be fixed or variable. In some cases, short term financing can be arranged as a bridge line of credit. As a condition to these loans, the companies are asked to provide certain requirements, such as: the execution of notes and formal loan agreements, personal guarantees and audited financial statements, mortgage over real estate owned and business assets.

    Apart from these services banks can offer foreign investors one of the following options (materialised in financial agreements): (a) credit instalment; (b) leasing; and (c) factoring and invoice discounting.

    The entities called Sociedad Financiera de Objeto Multiple (SOFOM) so-called bank-non-bank entities are devoted to providing financing through direct loans, microfinance, payroll discounted loans, financial leasing and factoring, and do not need to obtain authorisation from the Ministry of Finance to carry out business operations, however, they are not allowed to receive savings funds from the public, as these entities are not a banking institutions per se

  • Government: the government offers finance and funding programs through the small company investment scheme which supports SMEs (for its initials in Spanish 'PYMES'), through low-rate financing. To be eligible for these programs, the company must be incorporated in Mexico, have its taxable income in Mexico and carry a qualifying trade and purpose

Opening a bank account

Although banks in Mexico offer many types of accounts, the most common type of account that companies open is a 'checking account'. In order to open a checking account the company needs to submit to the bank the following documents:

  • certificate of incorporation and by-laws
  • evidence of the company's address (utility bill)
  • official identification and power of attorney of those persons who will have sufficient authority to represent the company and sign on its behalf in order to open bank accounts and sign checks
  • official identification of the company's majority shareholders with control
  • evidence of address of the company's majority shareholders with control
  • Federal Taxpayers Registry
  • in case of Mexican entity, evidence of Public Registry of Commerce registration of the company
  • in the case of foreign companies doing business in Mexico, a copy of the Ministry of Economics (Secretaría de Economía in Spanish) authorisation, if applicable

In certain cases, banks require that the company has operated at least one year from its incorporation.

Once the documentation is delivered to the bank personnel, a customer review process will begin in order to determine if the account can be opened to the company.

In most checking accounts you have to maintain a minimum monthly capital so, there will be no monthly payments and commissions for issued checks, but if the minimum monthly capital is below, then (depending on the minimum capital) a monthly payment will be imposed, and the issue of checks will only be free up to a certain amount.

Banks in Mexico are similar to other jurisdictions, therefore, it is necessary to comply with know-your-customer requirements and other information.

Utilising office space

Access to office space is made in two ways, either by acquiring or leasing the space. It is more common that new companies prefer leasing commercial real estate since they are uncertain how the business, they are operating is going to respond in the Mexican market. If the company has profits and is certain to keep on doing business, then acquiring an office space becomes a possibility.

In order to lease an office, the customary leasing agreement must be executed between a landlord and the tenant (that in this case will be the company). The general terms and conditions for customary commercial real estate leasing in Mexico are:

  • the area to be leased will need to be negotiated and reviewed by both the landlord and the tenant
  • the tenant will be obliged to pay a rent. The price is given per square meters on a monthly basis without including VAT, which is 16%
  • usually the lease term is negotiated in accordance to the following: if the space to be leased is below 500 square meters, a three-year lease would be accepted. If the space to be leased is bigger than 500 square meters or above this measurement, normally a five-year agreement is executed. Annual leases are very hard to close
  • it is common to use a real estate company to close the lease deal. If this happens, a commission is paid to the real estate company by the landlord and normally it is between 4 and 5% of the total amount of the lease agreement
  • the agreement may include free rent months that can go between two to six months depending on the size and term of the lease
  • early termination may be an option in the agreement, however, a penalty of three to six months of rent could be applied to the tenant if they choose to end the agreement
  • normally, the date in which the payment of the leasing will start is after the free month period
  • with respect to the parking space the tenant will have right to the following: one parking space for every 30 rentable square meters in new buildings or one every 50 or 70 square meters in older buildings. Some 10 or 20 % are individual and assigned spaces, the rest would be first come first served service either individual or in tandem
  • the access to the parking space is commonly seven days per week, 24 hours per day, 365 days per year. Landlord shall provide this logistics to the tenant, and it may be different from one building to another
  • tenant obligations: on 95% of the leases the tenant is responsible for improvements, the project and fit-out of the premises inside the building, maintaining the standards of quality of the building. In very few occasions the landlord is willing to finish out of the space
  • an annual adjustment is made on the agreements. The rent is normally adjusted annually according to the Consumer Price Index of USA (US CPI)
  • usually, when signing the lease agreement, a security deposit must be made by the tenant. The amount of two months of rent (normally without VAT) is paid to the landlord as a security deposit. This shall be returned no later than 60 days after termination of the lease agreement
  • operating expenses: the tenant pays its proportionate share of the operating expenses. Such expenses are around US $3,50 per rentable square meter. Annual increases are determined according to US CPI or based on a pro rata cost analysis. This cost can go up to US $5 per square meter. US CPI is preferable, since it is more accurate. Sometimes, the landlord accepts that during the months of free rent the tenant do not pay this amount, or it can be negotiated to a smaller amount
  • if agreed, the tenant may have the right to sublease, assign or transfer the premises to a related entity, subsidiary, parent or affiliate company, in any moment of the lease agreement, without requiring the landlord's approval. For sublease or assignment to any other company, the landlord's consent will be required (not to be unreasonably withheld)
  • warranties in the agreement: the landlord expects agreements to be secured either with a corporate letter from the company's (tenant's) headquarters, a bond or in very specific cases a letter of credit from a commercial bank. If the tenant cannot give the landlord one of the described warranties, extra months of deposit can be provided

Immigration controls

Generally foreigners are not required to obtain a visa to visit Mexican territory if their visit is shorter than 180 days; however, there is a list of countries whose citizens require a visa for entering Mexico. When entering the country, foreign visitors will receive from the immigration authority an FMM form (Multiple Migratory Form) which will credit their legal visit in Mexico and that will grant them with some rights such as:

  • acquire fixed or variable assets
  • participate as stockholders in Mexican companies
  • do business or develop economic activities
  • appear before any authority to solicit any permit, right, service or product in compliance with any applicable dispositions and/or laws

If the foreign visitor pretends to do paid activities in Mexico, they will need a previous authorisation issued by the National Migration Institute (INM). In order to obtain such authorisation from the Institute a labour offer must be made to the foreign visitor and the contracting company must be registered at the INM. Without such registration the contracting company will not be able to apply for the working permit for the foreign visitor they wish to employ.

Once the authorisation has been granted by the INM it is sent to the Mexican consulates around the world, so they can stamp a provisional visa on the employee's passport as a temporary resident with paid activities. When the employee arrives in Mexico, they will obtain a FMM form that will need to be exchanged within the next 30 days at the INM for the official card of temporary residence valid for one year. This card can be renewed up to four years depending on the labour offers in Mexico.

If the foreign person has lived in Mexico with the temporary resident card for five years, they will be able to apply for permanent residency which has an indefinite term. The change of such status takes approximately 35 to 40 business days, time in which the foreign visitor can apply for an 'in and out' permit, so they can travel if necessary.

To view the full article, click here.

Originally published by LexisNexis

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.

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