Doing Business in Mexico / Legal Framework 2014

= DOING BUSINESS IN MEXICO / LEGAL FRAMEWORK 2014 =

In this essay, TELLAECHE & ARRANGOIZ provides you with basic and relevant information regarding direct foreign investment in Mexico and its legal framework, including formalities and processes for investing and doing business herein.

Mexico will have with no doubt a successful 2014, after a year of mayor financial and energy reforms, a fact that will strongly impulse the arrival of direct foreign investment. According to the Ministry of Economy, Mexico expects to increase the arrival of direct foreign investment up to 30,000 million dollars between 2014 and 2015.

CERTAIN FACTS ABOUT MEXICO
Mexico offers a solid and secure legal framework, as well as economic and social security and stability to foreign investors, and it is essential to be appropriately advices as regards Mexican laws and regulations, and to understand tax obligations in order to avoid unnecessary obstacles or unfortunate surprises.

Today, Mexico is within the top fifteen largest foreign direct investment receptors and a relevant exporter in the World. Our Country offers several appeals for investors, such as its skilled and competitive labor force, and naturally its privileged geographic location, which allows for direct access to the U.S. and Canada, and to all Latin American markets. Moreover, investors and companies established in México can make the most of this enviable location thanks to the largest network of Free Trade Agreements that the Mexican Government has achieved throughout the years.

Furthermore, Mexico is a country with a unique history and strong traditions which undoubtedly have an effect in the ways of doing business. If you are interested in investing in Mexico, establishing and developing your business, or else you are planning to increase your presence in the Mexican markets, you would want to be familiar with its people, its infrastructure, its economic activity, the political and economic context, trade agreements executed by Mexico, high-tech industrial parks, and the Mexican Bureaucracy, among others.

In addition, being part of the Mexican market requires bearing certain knowledge concerning its characteristics; its size, its context, the applicable informal rules for doing business or the strengths and weaknesses of the different sectors. Other useful information concerns the strategies to take when approaching partners or competitors, the manner on which profits should be gathered or understanding investment issues.

DOING BUSINESS IN MEXICO
From a legal point of view, there are different ways for foreign entities and individuals to set up and develop a business in Mexico. Indeed, this can be done through the establishment of a subsidiary, a branch office or a representation office, or through a joint venture agreement, among other legal vehicles.

Establishment of a wholly-owned subsidiary
Foreign investors tend to use as their investment vehicles in Mexico either corporation (Sociedad Anónima – S.A.), or limited liability company (Sociedad de Responsabilidad Limitada – S. de R.L.), since such investment vehicles provide limitation of liability to its partners

Authorization from the Ministry of Economy

An authorization from the Ministry of Economy is required in order to secure the corporate name of the subsidiary. This authorization is a routine procedure and to obtain is quite simple.

Capital stock

For the incorporation of a wholly-owned Mexican subsidiary, a minimum of two shareholders or partners is mandatory at all times. Unless otherwise limited by Foreign Investment provisions, shareholders or partners can be both Mexican and foreign individuals. Under Mexican law, today there is no minimum capital fee.

Bylaws and Deeds of Incorporation

The incorporation of a subsidiary requires the protocolization by a Mexican Public Notary of the company’s bylaws, which shall be registered afterwards at the Public Registry of Commerce. Among others, the bylaws generally contain provisions regarding the following matters:

a) Additional Capital Contributions

The possibility of performing additional capital contributions is to be decided at the Shareholders/Partners Meeting. However, the bylaws can establish otherwise.

b) Shareholders/Partners Meeting

The supreme authority of a Mexican corporation lies in the Shareholders/Partners Meeting, and even the authority of the Board of Directors stems from it. It is such the preeminence of the Meeting that, under Mexican law, certain matters can only be decided thereat.

There are two types of Shareholders/Partners Meeting; ordinary and extraordinary. The extraordinary Shareholders/Partners Meeting deals primarily with all those matters that involve an amendment to the bylaws. The ordinary Shareholders/Partners Meeting deals with operational matters and annual operations approvals.

c) Transfer of Shares/Partnership

By law, shareholders have a right of first refusal over the partnership co-partners wish to transfer.

According to Mexican law, provisions banning the shareholders or partners to transfer their shares or partnership are unenforceable. However, the bylaws can contain provisions limiting the transfer of shares or partnership to certain entities or individuals, such as competitors, as part of the right of first refusal provisions.

d) Board of Directors

The ordinary Shareholders/Partners Meeting is in charge of the appointment of the members of the Board of Directors, doing so by a majority of votes.

The Board of Directors must be composed of at least two members. Shareholders or partners representing more than 25% of the capital stock are entitled to appoint one director. Traditionally, provisions stating the right of each group of shareholders or partners to appoint a number of directors which is proportional to their holding are established.

The first Board of Directors must be appointed in the bylaws. It is important to mention that the appointment of foreigners requires an authorization by the Ministry of the Interior of Mexico, through the National Immigration Institute.

e) Surveillance of the Subsidiary

In order to obtain a better protection of the shareholders or partners, Mexican legislation provides for the existence of a Statutory Examiner (Comisario) to be appointed by the Shareholders/Partners Meeting. Its main task and duty will be to survey the subsidiary’s management for the benefit of the shareholders.

f) Transitory Clauses

The information related to the capital structure, integration of the Board of Directors, appointment of Statutory Examiners, officers and attorneys-in-fact of the subsidiary, must be contained in a section called "Transitory Clauses" which is attached to the bylaws of the subsidiary at its incorporation before Notary Public.

Special powers of attorney for the incorporation o a new commercial entity

Should the future shareholders or partners of the subsidiary not be in Mexico at the time of the incorporation, they must grant powers of attorney in favor of the individuals who will appear before a Mexican Notary Public to execute the deed of incorporation, to register the company at the Registry of Commerce, at the Foreign Investment Registry and at the Ministry of Economy, among other authorities.

Mexico is one of the countries where the incorporation of a company is briefer. We estimate the time required is of approximately 5 business days from the date we receive the permit from the Ministry of Economy, assuming the shareholders or partners have approved a format of bylaws and have provided us with the respective powers of attorney for the incorporation.

Branch Office
The procedure for the establishment of a branch office in Mexico of a foreign entity is similar to that for the establishment of a Mexican subsidiary.

Authorization from the Ministry of Foreign Affairs

The application must be filed by a duly authorized representative of the foreign entity, and it must be accompanied by; (i) corporate resolution approving the establishment of a Mexican branch (ii) certificate of good standing of the foreign company; (iii) deed of incorporation and bylaws of the foreign company; and, should the representative of the foreign company not be present when filing the application, (iv) a power of attorney conferred by the foreign entity enabling the certain the individuals to carry out all necessary actions related to the registration of the branch office.

All of the above documents must be intervened by a Notary Public, and duly apostilled according to The Hague Convention of 1968.

Authorization from the Ministry of Economy

Once the authorization from the Ministry of Economy has been obtained, all the documentation of the foreign entity mentioned above, must be notarized before a Mexican Notary Public and registered in the corresponding Public Records Office of Commerce.

Considerations comparing a Subsidiary versus a Branch
Herein please find certain considerations that we believe should be carefully reviewed, prior to determining which investment vehicle suits you most for your particular business purposes.

The procedure for the registration of a branch office normally involves substantial time and effort, since it requires the translations into Spanish and issuance of certified copies of documents such as the foreign company’s bylaws or certain corporate resolutions. However, a Mexican branch should, in principle, allow for offshore consolidation.

Under Mexican law, the branch of a foreign company is subject to limitations, such as the prohibition to own land in Mexico within certain areas of the territory (100 km from the border and 50 km from the shores). Also, the parent company is held liable for the operations of its branch, and has to pay all of the Mexican employee benefits of the branch, including profit sharing. On the opposite, the subsidiary shall only be liable for its operations (corporate veil), including profit sharing. Because of this, most branches of foreign companies registered in Mexico are branches of newly and specifically created companies for the Mexican project.

Both Mexican branches and subsidiaries must keep corporate records of its operations in Mexico following Mexican Accounting Principles. In this respect, please note that subsidiaries and branches should have their operations audited by local certified public accountants.

As regards taxes, please note that the Mexican Income Tax, Value Added Tax and Asset Tax obligations would be substantially equivalent for a branch and for a Mexican subsidiary.

Finally, the branch and the subsidiary will be required to designate an official domicile for tax purposes and others. This normally results in the practical necessity to have an office to allow for the adequate performance of the business and to maintain tax files and accounting records.

FOREIGN INVESTMENT LAW
According to the Foreign Investment Law, foreign investors can participate in any portion of the capital stock of certain Mexican companies and acquire assets, among other activities. Additionally, all foreign investment, whether subject to prior approval from Foreign Investment Commission or not, must be registered with the Foreign Investment Records Office.

The Foreign Investment Records Office requires, for statistic purposes and under a confidentiality basis, certain economic, accounting and financial information of every fiscal year to be reported, as well as any exchange of capital among the principal and the Mexican subsidiary or branch office.

MIGRATORY
The entrance and legal establishment of foreigners who come to Mexico to accomplish businesses activities whether they are profitable or not, are regulated by the Migration law and its legal framework, consequently such foreigners can stay in Mexico under either one of the following legal conditions; (i) Visitor (ii) Temporary Resident (iii) Permanent Resident.

Such conditions confirm the legal status of foreigners in Mexico and set the visa’s classification that the Mexican grants in accordance to the activities the foreigners carries out.

A. CERTIFICATE OF EMPLOYER REGISTRATION

Any individual or legal entity who hires foreigners or holds job offers to foreigners must obtain, from the National Institute of Migration, the certificate of employer registration.

To obtain this certificate, it is mandatory to enter the legal domicile of the employer as legal entity, as well as all the domiciles of its subsidiaries and/or offices where foreigners work or intend to work, also all relevant data and contacts from the legal representatives, of each subsidiary and/or related office must be entered.

B. VISITOR

This status provides a foreigner the authorization to stay in Mexico for an interrupted period of time, no longer to 180 (one hundred and eighty) days since the date of entrance, without the possibility to work in Mexico.

Visitors can not modify this term of stay, and must leave the country at the end of the period described above, except those foreigners who stay in Mexico due to humanity reasons or those who have a relation with any Mexican or foreigner with regular residence in Mexico.

C. TEMPORARY RESIDENT

This status authorizes the foreigner to stay in Mexico for a period of time no longer to 4 (four) years with the possibility to work in Mexico as long as it holds a job offer, and allows the right to enter and leave the country as often as desired as well as to the possibility to enter accompanied with any of the following persons which could stay in Mexico for the period of time established for this status:

''a)	The children of the temporary resident, the children of the wife, husband, or concubine of the temporary resident as long as they are teenagers and they are not married. b)	Husband or wife. c)	Concubine or equivalent as long as it can be proved such relation in accordance to the Mexican law. d)	Mother or father of the temporary resident.''

The persons mentioned above will be authorized to stay in Mexico under the status of temporary resident with the possibility to work in Mexico as long as it holds a job offer, and allows the right to enter and leave the country as often as desired.

The foreigners who hold this status will be allowed to introduce their goods in the terms established by the Mexican law.

D. PERMANENT RESIDENT

Authorizes a foreigner to stay in Mexico for an undefined period of time, with the allowance to work as long as any of the following happens:

''a)	Due to political asylum reasons, it is recognized the refugee condition along with the complementary protection in accordance to the law. b)	The necessity to preserve family union. c)	Pensioner o retiree from a foreign government or international agencies or private companies for services rendered abroad. d)	By decision of the Institute. e)	The pass over time of four years since the foreigner had a temporary residence permit. f)	By having children in Mexico and g)	By being ascending or descending in a straight line in the second degree of a Mexican national by birth.''

Permanent residents will be able to obtain a permit to work and the right to enter and leave the country as often as desired.

WORK CONDITIONS
Labor relationship in Mexico is governed by the Federal Labor Law, which applies to all employees in Mexico regardless of nationality. Among others, the Federal Labor Law mandates the following:

Minimum Wage

The minimum wage that must be paid to employees for their daily service, based on economic conditions, the National Commission of Minimum Wages established the following minimum salaries for 2014:

Zone “A”	$ 67.29 Pesos	5.17 USD. Zone “B”	$ 63.77 Pesos	4.90 USD.

Labor Days

For every six days of work, employees must have one day of rest. A day of work consists of 8 hours (day shift 8 hours; night shift 7 hours; mixed shift 7:30 hours).

Holidays

Employees with one or more years of service have an annual vacation period according to their seniority, form 6 labor days per year of work on.

Profit Sharing (PTU)

Pursuant to the Federal Labor Law, as of the second year of operations all companies must distribute among their employees an amount equal to ten percent (10%) of the employer’s pre-tax profit. This does not apply to directors, administrators and general managers.

ENVIRONMENTAL LAW
The General Law of Ecologic Balance and Environmental Protection is the principal legal disposition which regulates all matters regarding the environment. Among its chapters we can find the general provisions instruments of environmental policy, regulations of air, water, soil, toxic waste, noise, energy, and visual pollution, among others.

All companies which operate in Mexico must limit the amount of pollution between the limits and scope determined by the corresponding authority, depending on the needs of the specific industry, and must request a license to operate, and a Statement of Environmental Impact, along with other administrative authorizations to legally operate industrial facilities.

TAX CONSIDERATIONS
Tax legal provisions can be found in different legal instruments; nevertheless, they are mainly gathered in the following:

Federal Fiscal Code

This legal body contains the administrative proceedings applicable to federal taxes, unless specific provisions concerning such taxes are contained in other legal bodies. It also regulates matters related to legal domicile, residence, registry, devolutions and limitations, fiscal periods, actualizations, etc. Nullity Trials and other resources against taxes are also foreseen in this legal instrument.

Income Tax Law

This law defines concepts like residence and source of wealth for purposes of determining those individuals and companies subject to this tax. All individuals or companies who, according to the Fiscal Code, are considered “residents” in Mexico, must pay tax for all income they perceive in a general scale. Specific provisions of this Law define the cases in which income obtained by a non-resident in Mexican territory qualifies as a wealth source in Mexico.

The permanent establishment and permanent base concepts were incorporated into this legal instrument as well, in order to be able to tax those non-residents when they are established in a permanent manner in Mexico.

Corporations must calculate this tax on a 30% rate over their final fiscal result on their income.

Value Added Tax Law

All individuals or companies on national territory, who sell goods, provide their independent professional services, allow for the temporal use of goods, or import goods and services, must pay this tax.

The applicable rate is 16% national-wide, including border zone. Nevertheless, those subject to pay this tax transfer it in an express manner to those who acquire the goods, use or are benefited from them, or receive the services.

The Mexican Government has established a special treatment for particular products and services. In the case of exporters of goods, since they do not charge the tax to their customers, they may request a refund from the government of the full amount of the tax that they paid. Other goods such as medicines and basic foods have also a special treatment under this law.

The zero rate is applicable to all goods that sell or import basic foods in their natural state, the international transportation of goods destined for exportation, etc.

INTERNATIONAL TRADE
Individuals or companies whishing to import goods or services into Mexico must previously be registered at the Importers Records Office. Upon registration, the Federal Tax Registration Number of the importer is included the integration of to the data base of the Customs Authority.

Additionally, there are certain sectors and industries protected by the Mexican State, requiring for certain importers to be registered at Specific Sector Importer’s Record, depending on the goods or services they wish to import.



We expect that you find the foregoing information and brief guide of assistance for initiating your enterprise in Mexico. Please do not hesitate to contact me should you need further assistance or require additional information.

For more information about our Firm please visit www.tyaabogados.com.mx

Contact:

Gonzalo Arrangoiz Email garrangoiz@tyaabogados.com.mx Tel. (5255) 52765050 Cell. (52155) 34335060

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