A guide to establish your business in Mexico

To set up a business in Mexico, one will probably need to hire an attorney and/or accountant, who will be able to guide the company through the process and help to determine the best corporate accounting and tax structures for the company.

Ownership of equity

Under the Foreign Investment Law of 1993 and the North American Free Trade Agreement (NAFTA) most economic activities in Mexico, whether in manufacturing or services, are 100 percent open for participation by foreign investors. Only a few areas are completely restricted or limited to minority participation. Some areas which previously have been reserved to the government, especially in the infrastructure sectors, are now being opened to private investment. Also, certain areas such as financial services, which previously have been reserved to Mexican investors, are now also available to foreign investors.

Common types of companies limited liability stock corporation (Sociedad Anónima, S.A. de C.V.)
This is the most common type of business entity used in Mexico. The principle advantage of an S.A. is that the shareholders only are liable for an amount up to the value of their shares for the obligations and debts of the company. However, as in the U.S., the board members are personally responsible for the prudent management of the company. This company must have at least two, and can have up to an unlimited number of shareholders, whose shares are freely transferable by endorsement. The minimum fixed capital required to establish this type of company is $ 50,000 pesos (US $ 4 500) of which only 20 percent needs to be paid at the time of incorporation. This type of company is also required to have an examiner (usually an accounting firm) that is in charge of ensuring the proper and legal management of the company.

Limited liability company (Sociedad de ResponsabilidadLimitada, S. de R.L.)
This is similar to a closed corporation in the U.S. This type of company has the same limited liability as an S.A. The minimum capital is only $ 3,000 pesos (U.S $ 270) of which 50 percent needs to be paid at the time of incorporation. This company must have at least two partners and can have no more than 50. Further, a limited liability company is not forced to have an examiner, which can reduce costs associated with hiring an accounting firm. Unlike an S.A., the S. de R.L. does not have as many legally established corporate formalities. For both the S.A. and the S. de R.L. the option of variable capital (capital variable) can be established, thus permitting the increase or decrease of capital with minimized formalities.  

Civil enterprise (Sociedad Civil, S.C.)
Professional service providers, such as lawyers and accountants, use this form of corporation, which has no minimum capital requirements.  There are no limits on the number of partners in a Civil Enterprise, but each one is jointly and personally liable for obligations and debts.

Branch sucursal
Instead of incorporating an entity in Mexico, some companies choose to register their existing foreign company as a branch in Mexico. To register, the foreign company must obtain approval from the Foreign Investment Commission, which is under the Economy Ministry (Secretaría de Economía) and the Ministry of External Affairs (Secretaría de Relaciones Exteriores).

The branch must also be registered with the Public Registry of Commerce (Registro Público de Comercio). Once registered, the branch will be required to file taxes in Mexico for its Mexican-source income. The foreign company will also respond, with all its assets, for any liabilities that it incurs in Mexico.  For this reason, many larger foreign corporations choose to incorporate a separate entity in Mexico, as discussed above, so that the liability is limited to the assets of the Mexican company.                            

Subsidiary (Subsidiario)
Unlike a branch, a subsidiary is actually a separate legal entity from the parent company.  Establishing a Mexican subsidiary shields the parent company from liability.

Company formation
Once the company form and ownership issues have been resolved, the investor will need to follow the steps below:

Corporate Name.  The investor will need to select a corporate name and register with SRE (Ministry of external affairs). Before SRE grants a permit for the name, it will check that no identical name is already registered.

Proforma Agreement.  Under Mexican Law, the foreign company will have to enter a proforma agreement whereby any non-Mexican shareholder is deemed to agree to be bound by Mexican laws and not invoke the diplomatic protection of his government.

Charter and By-laws.  An attorney can help the investor to prepare these documents that spell out corporate governance, corporate purpose, duration of existence, domicile, capital stock provisions, management powers and special provisions for liquidation.

In addition, one needs to decide how capital will be subscribed, how the Board of Directors and officers will be appointed and what powers will be specifically granted to individuals.  Also, it is a regular practice in Mexico to grant power of attorney. The charter and by-laws must be taken, along with the permit from SRE, to a notary public (notario público) to formalize the incorporation; which may take from 10 days to a month depending on the notary’s workload and his relationship with the attorney. If the incorporating shareholders are non-Mexican individuals, they may legally sign the charter if they hold and FM-N, FM-2 or FM-3 visa (see immigration section below). If some of the shareholders are corporate entities, an individual with power of attorney for these entities must sign the document.                    

Starting operations
Once the company has been formed in Mexico, it may start operations. The following requirements should be kept in mind:

Zoning Permit.  In most urban areas the company will need to obtain zoning permits, identifying use of land, from municipal authorities. In the metropolitan area of Mexico City many industrial activities are restricted, and business operations in residential areas are strictly controlled.

Environmental Regulations.  To carry out manufacturing activities, the company must first submit an environmental impact statement with the Ministry of the Environment Natural Resources and Fisheries (Secretaría de Medio Ambiente, Recursos Naturales y Pesca, SEMARNAP). The company may also need special permits for air or noise emissions, water discharge or solid waste.

Health or Sanitary Licenses.  Any activities that involve food preparation or manufacturing of medicines or health products require licenses from the Ministry of Health (Secretaría de Salud) and local health authorities.

Immigration.  Foreigners must secure a business visa to work legally in Mexico. FM-3 (Non Resident) and FM-2 (Resident) visas may be obtained through the Ministry of Interior (Secretaría de Gobernación) or through Mexican consulates abroad. The process usually takes 20 to 40 business days. Both visas allow you to receive income in Mexico. Note that lately business visa procedures have become quite restrictive and time consuming.

 A tourist visa is not legitimate for conducting business in Mexico.       

Commercial intermediary
A commercial intermediary is a limited agency, avoiding a permanent establishment in Mexico. The intermediary can perform market research, promotion, solicitations, negotiation of sales, and will provide Mexican clients with information, prices, payment policies and forwarding and processing of orders.

However, the intermediary should not have the power to enter into contracts on behalf of the foreign resident. Thus, the intermediary acts as a showcase, performing “preparatory or auxiliary” services for the foreign resident. This activity will avoid a permanent establishment or fixed base.

It is customary to advise the commercial intermediary to refrain from using the name and logo of the principal in his office, business cards and letterhead. This will avoid the appearance of impropriety.                                    

Distributorship agreement
A distributorship agreement provides the foreign company with an opportunity to further develop sales. Further, it offers service through a Mexican company or individual who acquires the products from outside Mexico, and resells the product in Mexico. The distributor only functions as a purchaser and wholesaler/retailer of foreign company. This mechanism therefore, avoids being a permanent establishment.                                 

Licence of techonology
Other available alternativies for doing business in Mexico is to enter into agreements for:

- The license or authorization of exploitation of trademarks, patents or improvements, or industrial designs and utility models

- The assignment of trademarks or patents; the supply of technical know-how, and, technical assistance in any form

- The supply of basic or detailed engineering

- The rendering of advisory, consulting and supervisory services

- The license of copyrights that include industrial application

- The licensing of computer programs

Taxations: Foreign companies should keep tax issues in mind as they plan their cross-border operations, ensuring the lowest tax rates possible.

Foreigners may do business in Mexico by employing a subordinate agent, establishing a Mexican company or acquiring stock in an existing Mexican company. The use of any of these methods will create a permanent establishment, and has the following tax and regulatory consequences:

A)    Corporate Tax
A corporate tax must be paid annually on the company’s taxable profits.  Such profits are calculated by deducting certain allowed expenses from the total accruable income.  Most of the company’s income is considered accruable for income tax purposes at the time invoices are issued, or when goods or services are delivered to the buyer if no invoice is issued.  Basically, the allowed deductions are all discounts and/or expenses “strictly indispensable” for the business operation.                                                                                         

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 annual income tax returns.

B)    Tax on Dividends
Companies that distribute profits or dividends must, in principal, pay a tax on distributions when the rate is higher than 34 percent. However, if the company maintains a tax free Net Fiscal Profit Account, the tax on such distributions will be zero percent.                      

C)    Tax on Assets
There is a federal tax on corporate assets. This tax is applied on the fixed, financial and current assets of Mexican companies. The tax must be paid on an annual basis through monthly provisional payments. Payment of taxes on assets is not required during the preoperational period of a company, the first two years of its operation or when liquidated.   

D)    Value Added Tax
When the Mexican company transfers or leases goods, or renders services in Mexico, it will be obliged to pay Value Added Tax (Impuesto al Valor Agregado, IVA). This tax is 15 percent of the price of the goods or services and can be transferred to the clients by including the tax on its billing invoices. The tax rate is 10% within 20 kilometers of the border of Mexico and for Baja California. Also, if such goods and services are to be exported from Mexico, the IVA is zero percent.                                                                                   

E)     Payroll Taxes
The company is subject to a local state payroll tax, at a rate that depends on the location of the working facilities. The Federal Government also taxes corporations with social security fees that amount to a minimum of 17.42 percent of the payroll, to be paid by the employer for sickness, maternity, old age, death, child care and retirement. The employer must also contribute to a Worker’s Housing Institute fee with the amount of 5 percent for each worker’s salary. The payroll taxes and fees are deductible for corporate income tax purposes.

In addition to the tax provisions discussed above, there are also various provisions under Mexican law and different tax treaties that apply specifically to foreign companies earning income in Mexico. These provisions cover areas such as withholding obligations with respect to the tax authorities of each country, available tax credits, and taxes on dividends and royalties.

Starting operations
Once the company has been formed in Mexico, it may start operations. The following requirements should be kept in mind.

Zoning Permit.  In most urban areas the company will need to obtain zoning permits, identifying use of land, from municipal authorities. In the metropolitan area of Mexico City many industrial activities are restricted, and business operations in residential areas are strictly controlled.

Environmental Regulations.  To carry out manufacturing activities, the company must first submit an environmental impact statement with the Ministry of the Environment Natural Resources and Fisheries (Secretaría de Medio Ambiente, Recursos Naturales y Pesca, SEMARNAP). The company may also need special permits for air or noise emissions, water discharge or solid waste.

Health or Sanitary Licenses.  Any activities that involve food preparation or manufacturing of medicines or health products require licenses from the Ministry of Health (Secretaría de Salud) and local health authorities.

Immigration.  Foreigners must secure a business visa to work legally in Mexico. FM-3 (Non Resident) and FM-2 (Resident) visas may be obtained through the Ministry of Interior (Secretaría de Gobernación) or through Mexican consulates abroad. The process usually takes 20 to 40 business days. Both visas allow you to receive income in Mexico. Note that lately business visa procedures have become quite restrictive and time consuming.

A tourist visa is not legitimate for conducting business in Mexico.

Source: Swedish Trade Council


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