It is important to analyze tax advantages, relationships with the parent company, need of technical assistance and technology, availability of deductions, type and size of market, competitors, suppliers, importance of imports and exports, projected business and financial plan including growth expectations, as well as limitation of liability and similar other factors, before choosing an appropriate vehicle or structure.
At present FIL provides that foreign companies wishing to perform commercial activities in Mexico must obtain prior authorization from the Ministry of Commerce and must register at the Registry of Foreign Investment. Upon obtaining authorization, they will be able to register their foreign charter and by-laws in the Public Registry of Commerce and operate a branch.
Whether a representative office without income in fact performs commercial activities, i.e., intermediation, and therefore should request authorization from the Ministry of Commerce to open a branch and register subsequently in the Public Registry of Commerce, currently is subject to differences of opinion.
- a) the creation of a new separate entity or entities, or restructuring of an existing entity with additional shareholders, among other modifications ("joint venture company"), or
- b) the creation of a "joint venture" whereby one party (either individual or company) is active and the other inactive (either individual or company) ("asociaci—n en participaci—n") that does not lead to the creation of a new entity.
Each one of the shareholders, or partners, of the new or restructured entities may contribute capital, goods, services, and technology, thus enabling them by their efforts and knowledge to comply with the corporate purposes. The new or restructured entity or entities will be a Mexican company, operating in accordance with the type of company chosen, will pay taxes and comply with its obligations as a normal company. The types of entities they may form are analyzed in Section XII.
Responsibility before third parties will be that of the active partner; but he will share responsibility with the silent partner if the agreement so provides. Therefore, there will not be any relationship between the silent partner and third parties.
Upon completion of the work or the desired objective the agreement will terminate. Such an agreement does not create a new entity, and each of the parties is liable to the other, without liability limits, as per undertakings in the contract.
For tax purposes the active partner will comply with tax obligations of their common operation, including registration at the Taxpayers' Registry and provisional tax payments. Every fiscal year each one of the active and the silent partners will have to accrue to their income, during the tax period, that part of the taxable profit corresponding to each one of them, or if applicable, they will deduct their proportional tax loss (See Section XIV. hereinafter).
A non-incorporated or non-registered company can obtain government contracts, sometimes with the commitment to incorporate thereafter; basically from a practical viewpoint a non-incorporated company will be unable to, inter alia, hire local workers, open a bank account, import equipment, obtain work permits or import or export materials. Moreover, it will not have a tax number which will make conducting business transactions virtually impossible.
There are no financing restrictions on foreign owned Mexican companies, i.e., required debt/equity ratio. Foreign companies may freely grant financing to companies or individuals resident in Mexico. Also intercompany agreements such as licenses, rental agreements, technical assistance agreements, are permitted.
Incorporation and registration costs vary depending on the complexity of the proposed structure and the type of investment method chosen. The time to incorporate may run from one to four weeks depending on availability of necessary documentation and the domicile of the company.
Business entities must comply, among others, with water, environmental, tax, federal housing, labor, health, consumer protection and social security regulations.
The first consideration of such foreign investor desiring to purchase shares should be possible restrictions on the purchase of assets or stock in a given activity as provided by FIL or bilateral or multilateral agreements on trade and investment, i.e., NAFTA. (See Section III.A. hereinabove and for NAFTA Parties see Section III.B). The Competition Law may also impact the proposed purchase of shares or assets over a given threshold level. (See Section IV.C. hereinabove).
Other corporate concerns should also be addressed. For example, the investor should analyze possible methods of financing the transaction. (See Section XX. hereinafter). There also may be restrictive rights of first refusal or other limits on transfer in the charter or by virtue of a shareholders agreement, or the shares may be encumbered or pledged.
Apart from these concerns, among others, a standard due diligence investigation should be conducted on, inter alia, possible labor and tax liabilities; outstanding loans, liens or encumbrances on the company and/or its assets; rights of employees, i.e., seniority and fringe benefits; zoning or environmental problems; consumer protection considerations; NOMS and labeling concerns; export or import programs and related permits; intellectual property rights; immigration considerations; and contracts or leases. For discussion of the above see other Sections herein.
The decision of whether to purchase shares or assets should be analyzed from a tax perspective. For example, if a newly formed company acquires only assets, not an on-going business, instead of purchasing shares, a four year exemption from the asset tax would apply.
The acquisition of an ongoing business (assets and employees) entails the concept of "employer substitution" for labor purposes. The purchaser of the business becomes liable with the former employer for all labor compensations and obligations, for a period of six months counted as of the date of notification of the substitution to the employees or to the union; after the six month period only the new employer will be liable. (See Section XV. hereinafter).
In case of sale of shares whether seller is a Mexican individual or a foreign resident, company or individual, such sale is subject to payment of income tax at the rate of 20% of the total price, without any deduction, which tax must be withheld by the purchaser who is jointly liable for such withholding. However the seller may elect to pay a lesser tax (30% on the taxable profit) if certain requisites are fulfilled. (See Section XIV.C.6. hereinafter). In the case of a sale of assets, special attention should be given to the price at which each of the assets is sold to avoid tax problems resulting from application of transfer pricing rules, and prices should reflect market values. It should also be noted that goodwill is not deductible for income tax purposes.
The sale of shares through the Mexican stock market is a non-taxable operation.
There are no income tax advantages to operate through a branch rather than through a subsidiary; on the contrary, from a liability point of view a foreign corporation acting in Mexico through a branch is not a separate legal entity therefore the foreign company may be liable for the branches obligations. A parent company is a separate legal entity, unlike a branch, and therefore, it has no liability for acts of its subsidiary.
Further, a branch must obtain prior approval from the Ministry of Commerce and upon compliance with all necessary requirements, a ruling must be issued within 15 days.
Thereafter, the foreign company must file at the Public Registry of Commerce the charter and by-laws, a document detailing the location and its specific business activities, audited income statements and balance sheets, an affidavit confirming that the entity has been established in conformity with the laws of the country of origin, and the permit from the Ministry of Commerce.
If a foreign company performs commercial activities in Mexico without having obtained prior approval, the Ministry of Commerce may impose a fine from 500 to 1,000 times the minimum salary (currently the daily minimum salary in effect in the Federal District is N$18.30, therefore the fine may range from N$9,150 to N$18,300 equivalent to US$1,307 to US$2,614 at the exchange rate of N$7/US).
Branches cannot operate in activities requiring Mexican participation, as required in certain activities under FIL. (See Section III.A. hereinabove)
However, there is an important disadvantage with respect to deductions. As a general rule the branch may deduct those expenses which correspond to its activities in Mexico, but not remittances made by the branch to the parent company, or another establishment of the parent company abroad; even if these remittances are made as royalties, fees or similar payments, or as commissions for specific services or for services rendered, or for interest payments for money sent to the branch.
Any legal entity may adopt the variable capital form, and may increase and decrease its capital after incorporation pursuant to the conditions provided for in the charter and the Law.
In most companies the minimum capital is fixed by law, and generally, the variable capital is unlimited. Companies may increase the capital to be subscribed by the shareholders or partners, which shall be paid in the time periods provided for in the charter or in the Law. In the event shares are issued, but are not subscribed, they will be held by the company to be delivered after the subscription is paid.
The types of business entities provided for in the Companies Law are the following:
Since the S.R.L. appears to be similar to limited liability partnerships in the United States (L.L.C.); some observers comment that they may be considered partnerships for U.S. tax purposes.
As per recent modifications to the Law, the minimum number of shareholders required is two, with no maximum limit.
a) General comments
The S.A. provides limited liability to its shareholders. A sole administrator or board of directors may manage the corporation. The shareholders are the ultimate decision-making body of the corporation. Shareholders may call ordinary or extraordinary meetings, in certain cases under the Law or as provided in the charter. The statutory quorum for shareholder meetings is one-half of the outstanding shares for ordinary meetings and three-fourths of the outstanding shares for extraordinary meetings.
In an ordinary meeting, if a quorum is not present, a second meeting may be called. The shareholders present at this second meeting are considered to constitute a quorum. Resolutions in an ordinary meeting require a majority vote of the shares represented.
In an extraordinary meeting, if three-fourths of the outstanding shares are represented, resolutions require the vote of one-half of the outstanding stock. Even if the extraordinary meeting is in response to a second call, resolutions are only carried upon the vote of one-half of the outstanding stock.
Such voting requirements and quorum may be increased by charter, often referred to as "veto" power.
Foreigners, residents or non-residents, may be members of the board of directors. Meetings of the board of directors need not take place in Mexico, however, shareholders meetings must be held at the corporate domicile.
Resolutions adopted by directors or shareholders outside of a meeting, by unanimous vote of all of the directors or the shareholders of the company, by telephone or in any other manner, shall be valid as long as the resolutions so adopted are confirmed in writing and the charter so provides.
The shareholders must appoint at least one examiner whose responsibility is to oversee the administration of the company on behalf of the shareholders. The examiner may be any person except the directors of the company, their relatives or employees.
Five percent of annual after-tax profits must be allocated to a legal reserve account until it reaches 20% of the capital stock of the company.
The minimum capitalization for the S.A. is N$50,000 (approximately US$7,000 at N$7 per dollar). The initial capital must be at least 20% subscribed and paid-in, the remainder to be paid as provided by the shareholders or decided by the board of directors.
b) Capitalization requirements
Increases of capital should be resolved at extraordinary meetings and may not take place until all outstanding capital is paid-in. The subscription and payment of later increases may be either agreed to by the shareholders or left to the decision of the board, if so provided in the charter. A capital increase or decrease of an S.A. de C.V. does not require an amendment of its charter, as does an S.A.
The shareholders have a preferential right, in proportion to the number of their shares, to subscribe shares of any increase in capital.
In the case of transfers of shares, the charter may provide for shareholders' rights of first refusal including the terms and conditions of its exercise, or may provide for board approval in case of transfers, which can only be denied if the board designates a purchaser of the shares at market value.
All shares must be registered since bearer shares are no longer permitted.
Shareholders are liable for unpaid shares and may receive dividends only in proportion to the amounts paid.
Should the payment for unpaid subscriptions lapse without payment, the company may request the payment of the value of the shares through a judicial process or may proceed to their sale. After one month from the date fixed for the payment, if the judicial process has not been initiated, or it has not been possible to sell the shares at a price covering their value, the company may proceed to reduce the capital accordingly.
Shares paid for in kind are considered fully paid-in. However, such shares must be held in the treasury of the company for two years to determine the exact value of such contribution. If the value at which it was contributed is lower than 25% of the value of the shares received at the time of such contribution, the shareholder must pay the difference.
To incorporate a company the shareholders have to agree on a proposed charter and by-laws and must request prior authorization from the Ministry of Foreign Affairs for the use of the proposed corporate name. These documents must be protocolized by a Public Notary. Foreign shareholders shall grant a power of attorney to a resident in Mexico to represent them before the Public Notary for such purpose.
c) Incorporation and registration requirements
The public instrument issued by the Notary shall be registered at the Public Registry of Commerce of the domicile of the company. Other corporate documents, such as, minutes of shareholder meetings, amendments to the charter and by-laws and general powers of attorney must also be recorded.
A newly formed company shall register at the Taxpayers' Registry, as well as with other relevant federal or local agencies, depending on the nature of the business.
The incorporation and registration procedure herein mentioned for a "Sociedad An—nima" applies to all types of commercial companies.
Under Mexican law, attorneys-in-fact acting for a company must be granted specific powers of attorney. Since there is no concept of "apparent or implied powers," such powers should be granted in the charter or, by specific resolution of the shareholders, the board or, by substitution and delegation from an attorney-in-fact.
The Civil Code provides for powers of attorney for lawsuits and collections, acts of administration and acts of dominion. Each power may be general or special, limited or unlimited, with respect to amounts or authority or term. To issue credit instruments, the Law on Credit Instruments requires that the attorney-in-fact be vested with a specific power for such purpose.
Any person acting on behalf of the company without such powers does not bind the company and becomes personally liable to the company and to third parties.
Directors, acting individually, may also have powers if granted as per above, i.e., by charter or specific resolution of shareholders. Directors resident abroad may act as such and exercise powers abroad. If they act as directors or exercise the power in Mexico, they must have proper immigration status. (See Section XXII. hereinafter).
Associations are incorporated following a procedure similar to that of commercial companies. (See Subsection XII.A.4.c. above).