The Income Tax in Mexico: Study on the criteria of permanent establishment and source of wealth in Mexico

In a previous article (http://tmclegal.com/el-impuesto-sobre-la-renta-en-mexico-investigacion-sobre-el-criterio-de-la-residencia-fiscal/?lang=en ), the Income Tax in Mexico (Impuesto Sobre la Renta) (ISR) was presented through a study focus on the tax residency criterion.

As a reminder, the income tax is generally defined as a direct tax based on income, profits and capital gains. It is established on the alleged or real income of a natural or legal person.

The Income Tax in Mexico is regulated by the same law for both natural and legal persons, the Law on Income Tax in Mexico (Ley del Impuesto Sobre la Renta) (LISR)[1].

Article 1 of LISR sets forth the principle that natural or legal persons are obliged to pay IRS in Mexico when they are in one of the following situations:

  • They are considered as tax residents in Mexico,
  • They are not tax residents, but they have a permanent establishment in Mexico,
  • They are not tax residents and do not have a permanent establishment, but have incomes which sources of wealth are located in Mexico.

Tax residency on ISR  implies  that persons considered as tax residents an unlimited tax liability obligation. On the other hand, both permanent establishment and sources of wealth located in Mexico drive to a limited tax liability obligation, concerning just some incomes.

The purpose of this second article on ISR focuses on these two criteria of permanent establishment and the sources of wealth which are located in Mexico, by studying their definitions (I) and then, their tax effects on ISR (II).

I. Definition of the concepts of permanent establishment and sources of wealth which are located in Mexico

A) The permanent establishment

The definition of permanent establishment is established in Article 2 of the LISR:

” It Should be considered as permanent establishment to any place of business in which, partly or wholly, business activities or independent personal services are provided in an independent way

The same article states that it should be considered as a permanent establishment, among others the subsidiaries, agencies, offices, factories, workshops, installations, mines, quarries or any place of exploration, extraction or exploitation of natural resources.

On the other hand, Article 3 of the LISR states that should not be considered as permanent establishment some activities which are mainly auxiliary or preparatory such as storage or delivery of goods.

The philosophy of permanent establishment criterion is based upon the principle of the exercise, by a foreign resident, of an economic activity with some autonomy in Mexico. The definition of permanent establishment of the LISR expressively states the word independent.

Under both Articles 2 and 3 of the LISR, even the concept of permanent establishment is quite accurate, despite its accuracy, it is still a broad concept as for the distinction between the auxiliary or economically independent activities that can be difficult to qualify sometimes.

B) Incomes which sources of wealth are located in Mexico.

Unlike the permanent establishment, the LISR does not give any definition of the incomes which sources of wealth are located in Mexico. Incomes which sources of wealth are located in Mexico are only mentioned by Article 1 of the LISR as generating a tax liability without any details.

The Tax Administration Service of Mexico (Servicio de Administración Tributaria) states that “In simple terms, source of wealth refers to the place where the incomes  are originated or generated”[2].

In the light of this definition, it should be considered as incomes which sources of wealth are located in Mexico, real incomes from real state located in Mexico, incomes from Mexican securities and the incomes from the performance of services and sales of services in Mexico.

The determination of the tax liability of a foreign resident with incomes which sources of wealth are located in Mexico should be determined case by case by the study of each of its incomes which could potentially be considered as a source of wealth located in Mexico according to the Mexican tax legislation.

Therefore, both concepts of incomes which sources of wealth are located in Mexico and permanent establishment are not defined as precise as the notion of tax residence in Mexico is,  established in  Article 9 of the Tax Code of the Federation (Código Fiscal de la Federación[3]). For the foregoing, it is necessary to study each individual situation in order to determine in advance its tax liability related to the payment or ISR in Mexico.

II. Tax consequences of the permanent establishment and income source of wealth in Mexico

 A) Impact of the national legislation

Article 1 of the LISR sets the principle that foreign residents with permanent establishment in Mexico are subject to the payment of ISR on the income attributable to that establishment.

The same article establishes that foreign residents who do not have a permanent establishment in Mexico but who perceive incomes which sources of wealth are located in Mexico are subject to the payment of  ISR on these incomes.

Therefore, the permanent establishment leads to a limited but generally determined tax liability by assessing all incomes of the permanent establishment and, on the other hand, foreign residents with incomes which sources of wealth are located in Mexico, also have a limited tax liability, cause they have a fiscal obligation which should be determined case by case.

In both situations, these dispositions concern the tax liability of a foreign resident and it is necessary to study the provisions of international tax treaties concluded between Mexico and the country of residence of the foreign resident.

B) The impact of international tax treaties on the permanent establishment and incomes which sources of wealth are located in Mexico

The purpose of international tax treaties was presented in the previous article about tax residence in Mexico (http://tmclegal.com/el-impuesto-sobre-la-renta-en-mexico-investigacion-sobre-el-criterio-de-la-residencia-fiscal/?lang=en ).

As a reminder, the scope of these treaties for both residents in Mexico and foreign residents with a permanent establishment or a source of wealth located in Mexico is the same: avoiding double taxation on the same income.[4]

For example, through an international tax treaty, the foreign resident who has a permanent establishment in Mexico will not pay income taxes on the permanent establishment’s income in Mexico and in its residence country. The tax treaty will spread the tax liability between the two signatory countries. The logic is the same for the incomes which source of wealth is located in Mexico.

For these purposes, tax treaties generally provides a definition of the permanent establishment and of source of national wealth in order to spread the tax liability on a common definition for each country. This definition given by international tax treaties is applicable to the determination of the tax liability of the person conducting economic activities in the countries which signed a tax treaty in order to avoid double taxation. The definitions provided under national law will be subsidiaries.

In fact, the definition of these concepts by the LISR is close to the definition given by most of the international tax treaties which are all mostly based on the same model. However, the definitions established by the international tax treaties should be studied carefully in order to recognize the  tax situation in the case that  an economic activity is conducted in Mexico.

 

TMC legal has supported for more than 15 years entrepreneurs, investors and individuals who wish to settle in Mexico in order to advise them on legal and strategic planning.

 

[1] Law on Income Tax in Mexico: http://www.diputados.gob.mx/LeyesBiblio/ref/lisr.htm (spa).

[2] http://www.sat.gob.mx/english/Paginas/fuente_de_riqueza.aspx (spa)

[3] Tax Code of the Federation of Mexico: http://www.diputados.gob.mx/LeyesBiblio/ref/cff.htm (spa).

[4] The list of international tax treaties ratified by Mexico on: http://www.sat.gob.mx/informacion_fiscal/normatividad/Paginas/tratados_fiscales.aspx (spa).

Trademark Opposition Proceeding Approved in Mexico

On April 28th, the Mexican Congress, approved the amendment of several articles and new articles also included into the Mexican Industrial Property Act (hereinafter “LPI”), including the implementation of a trademark opposition proceeding that pointed out the following amendments and new provisions.

The Reform will come into force within the next 90 calendar days after its publication in the Federal Government Gazette. The specific publication date is still unknown, since it will be necessary that the Tariff of the Mexican Institute of Industrial Property (IMPI) is also amended to include the official fees for filing of or response to an opposition.

All Mexican trademark applications filed should be published by the Mexican Industrial Property Institute (hereinafter “IMPI”), in the IMPI´s Gazette, within a maximum term of 10 days (Article 119 LPI). So, according to the text of such reform the Opposition proceeding will be applicable in the following cases:

  • If there is a Registrant or Applicant in Mexico who considers that an owned a previous application or registration mark is invaded or infringed by a third party the Registrant or Applicant could file an opposition before the IMPI in the term of one month (30 calendar days) without extensions, as of the publication date of the new mark application come in force into the IMPI´s Gazette. (art. 120 LPI).
  • If an Applicant was notified by IMPI that a third party has filed an opposition against its mark application. In such case the Applicant could give response to the opposition claim in the term of one month (30 calendar days) without extensions, since the publication date of the opposition come in force into the IMPI´s Gazette. (art. 123 LPI).
  • Please be informed that once the term of (one month) mentioned above has expired, the IMPI must published all applications which had received an opposition in the term of 10 days. On this regard, IMPI will grant a term of one month without extensions to the Applicant in order to reply or giving response to the third parties opposition claim.

It is important to consider that the new “Mexican Opposition System” would not be encumber to the IMPI´s Examiners as a new step on the prosecution of a trademark application in Mexico. On the other hand, the Applicant subject of an opposition process is not undertaking by the Mexican Laws to give response to an opposition filed.

The new Mexican Opposition System will help to prevent or avoid the registration of trademarks that could invade or infringe an Applicant or Registrant´s rights granted.

Our clients will timely receive our watch notices so they can assess whether to oppose an application or respond to an opposition, depending on each specific case.

Finally, we will inform our clients once the publication of this reform is published in the Federal Government Gazette.

Pamela Moscosa

               For further information on the content of this newsletter, please contact Luis Mojica luis@tmclegal.com; Mario Antuñano mario@tmclegal.com, Pamela Moscosa pamela.m@tmclegal.com

Or call (5255) 52551111

 

The Income Tax in Mexico: Study on tax residency criterion

Attribute of real power of the state, the tax is a fundamental source of income for exchequers.

Nowadays, very few countries are the that do not contemplate the income tax in their regulations. The income tax is generally defined as a direct tax based on income, profits and capital gains. It is established on the alleged or real income of natural or legal person.

The Income Tax in Mexico (Impuesto sobre la Renta) (ISR) is regulated by the same law for both natural and legal persons, the Law on Income Tax in Mexico (Ley del Impuesto Sobre la Renta) (LISR)[1].

Article 1 of LISR sets forth the principle that natural or legal persons are obliged to pay IRS in Mexico when they are in one of the following situations:

  • They are considered as tax residents in Mexico,
  • They are not tax residents, but they have a permanent establishment in Mexico,
  • They are not tax residents and do not have a permanent establishment, but have incomes whose sources of wealth are located in Mexico.

The purpose of this paper is to study the first paragraph of article 1 of the LISR: the criterion of tax residence in Mexico and its tax consequences on ISR.

The two other situations mentioned will be discussed on a later article (http://tmclegal.com/el-impuesto-sobre-la-renta-en-mexico-investigacion-sobre-el-criterio-de-la-residencia-fiscal/?lang=en).

After studying the criteria for determining tax residence in Mexico (I) its tax effects on the ISR will be studied (II).

 

I. The criterion of tax residence in Mexico

The definition of tax residence is established in Article 9 of the Tax Code of the Federation of Mexico (Código Fiscal de la Federación) (CFF)[2]  which establishes the different criteria for natural (A) and legal persons (B).

A) Natural person

In accordance with Article 9 of the CFF, natural persons are considered as tax residents in Mexico when they meet one of the following assumptions:

  • More than 50% of their annual incomes have their source of wealth in Mexico,

The law does not give definition of “source of wealth in Mexico”[3], therefore it is understood as the income originated or generated in Mexico.

  • They have the center of their professional activities in Mexico,

This general approach will be determined by several factors such as the investment destination of the person, the headquarters of the companies that own the place in which its economic activities are developed.

  • They have Mexican nationality and they are functionaries or workers of the government and they have the center of their vital interests in Mexico.

This criteria is economic and social, and is characterized to be defined by  an objective criteria in order to determine whether the individual is stronger in Mexico than in other countries about its professional and personal relationships.

B) Legal persons

The CFF states that legal persons are considered as tax resident in Mexico when they meet one of the following assumptions:

  • They have their principal business management in Mexico,

This criterion refers to the registered office of the company. A company with establishments in different countries, but whose holding is located in Mexico, will be considered tax resident in Mexico.

  • They have their effective management in Mexico.

Effective management is a criterion used by tax authorities once the location of the administrative headquarters (registered office) is different from the place of effective management of the company.

Article 9 of the CFF establishes a presumption of tax residence for any person with Mexican nationality.

 

II. Effects of having tax residence in Mexico

Tax residents in Mexico will be subject to ISR about all their incomes (A) which can arise to double taxation (B).

A) The principle of unlimited liability of the ISR

Article 1 of LSR requires that persons considered as tax residents an unlimited tax liability obligation. Such persons are subject to the IR on “all income, regardless of the location and the source of wealth in which they arise”.

As  tax residency requirements, the LISR distinguishes between the taxation of natural persons (which will be the subject of ISR calculated on a progressive rate based on income)[4] or legal persons (who will charge a fixed rate of 30% on all income above 1 million pesos)[5].

Therefore, a French national regarded as tax resident in Mexico will be subject to pay ISR despite its income in Mexico but also in France under the provisions of international tax treaties.

B) The challenge of international tax treaties

It follows the general obligation of the payment of ISR under an unlimited tax liability of tax residents in Mexico which represents a controversy as residents have economic interests in other countries.

In fact, incomes earned abroad may also be taxed abroad, the principle of unlimited tax liability provided by LISR does not generate an obligation to forgo tax revenue for the others countries.

For example, a French national which is a tax resident in Mexico, who rents real estate in France will be taxed in France about its income of rented property (French tax law imposes the land income of properties located in France) and also in Mexico for the ISR due to the unlimited tax liability principle.

The person would be taxed in both France and Mexico on its land income, it is called double taxation.

To promote foreign investment, Mexico has ratified many international tax treaties with several countries in order to avoid double taxation.

These international treaties allow to pay a single tax for the same income that could potentially be taxed in both countries.

Although most tax treaties are based on the same model, they all have differences and one must be careful for their terms in order to anticipate imposing the model which result more convenient.

In the previous example, the French national tax resident with land incomes in France, will, through the international tax treaty between Mexico and France, be exempt from the tax burden on land income in Mexico and pay these taxes in France.[6]

The list of international tax treaties ratified by Mexico on: http://www.sat.gob.mx/informacion_fiscal/normatividad/Paginas/tratados_fiscales.aspx (spa).

International tax treaties generally define the criteria of tax residence and their provisions compliment the national tax laws of each country.

 

Therefore, tax residence in Mexico leads to significant tax liability on ISR and it is convenient to study this situation before installing in Mexico in order to comply with the tax obligations.

As mentioned in the previous paragraph, it is also necessary to study the international tax treaties provisions of the countries in which economic interest may be set forth, since those provisions will apply instead of the national tax law.

TMC legal has supported for more than 15 years entrepreneurs, investors and individuals who wish to settle in Mexico in order to advise them on legal and strategic planning.

[1] Ley del Impuesto sobre la Renta http://www.diputados.gob.mx/LeyesBiblio/ref/lisr.htm (spa).

[2] Código Fiscal de la Federación http://www.diputados.gob.mx/LeyesBiblio/ref/cff.htm (spa).

[3] http://www.sat.gob.mx/english/Paginas/fuente_de_riqueza.aspx (spa)­­.

[4] http://www.sat.gob.mx/informacion_fiscal/tablas_indicadores/Paginas/tarifa_anual.aspx (spa).

[5] Article 154 of the Ley Sobre la Renta of Mexico.

[6] Artículo 6 del Convenio Fiscal entre México y Francia (spa).

Analysis of the Simplified Joint Stock Company

On March 14th, a decree was published on the Official Gazette of the Federation (Diario Oficial de la Federación), amending and supplementing various provisions of the General Law of Trading Companies (Ley General de Sociedades Mercantiles) (LGSM).[1]

Such reform includes the creation of the Simplified Joint Stock Company (Sociedad por Acciones Simplificada) (SAS), which provides various benefits same as will be explained later. However, it is important to highlight that this type of company seek specific purposes, and has special features to be taken into consideration, prior to its recommendation.

It is presumed that the SAS will speed up and simplify the process of incorporation for micro and small companies, and that shareholders will give their consent through the electronic system of incorporation, without needing the intervention of a public notary, expediting and simplifying the process.

However, it must be taken  into consideration the characteristics of the SAS, same that may not be the most effective option for shareholders seeking to establish a company in Mexico.

The constitution of the SAS, is based on the following compliance with the following requirements in particular:

  1. Externalize the will of the shareholders (only physical persons liable for their contribution), through the same bylaws that will be electronically signed by all shareholders, using the electronic signature certificate in force, through the electronic system for the constitution of the SAS which will be in charge of the Ministry of Economy (Secretaría de Economía). The system will generate digitally ballot registration of the simplified joint stock company in the Public Registry of Commerce (Registro Público de Comercio); (This system will be implemented within 6 months following the publication of the decree mentioned).
  2. Shareholders should have the certificate of advanced electronic signature (FIEL) as an essential requirement.
  3. The Shareholders, natural persons in any case can be simultaneously shareholders of other trading companies referred to at sections I to VII, Article 1 of the LGSM, if their participation in these corporations allows them to have control the company or its management (Article 2, section III of the Securities Market Law of (Ley del Mercado de Valores)).
  4. The total annual income cannot exceed 5 million pesos (if that amount is exceeded, the company must be transformed into other corporation type provided in the LGSM).

It is important to highlight, that although there are no limitations on foreign investment in Mexico even if the reform is mute on this issue, it is a prerequisite that shareholders have the FIEL, which can only be requested by nationals or persons with residence visa.

In the same way, the total annual income is capped, and the administration of the company should be managed by a shareholder, is for these particularities, that the constitution of this type of company seems  to be focused for certain scenarios.

The President of the Association of Notaries of Mexico (Presidente del Colegio de Notarios) issued its opinion regarding the approval of the reform LGSM on 3 March 2016 and highlighted the following:

“… Our country needs more and better companies, promoting competitiveness and streamline procedures while reducing costs, but needs above all have solid, safe and effective tools to promote economic activity. The risks associated with the opinion stated that generated public notaries (fedatarios públicos) have pronounced the review of this bill, although if it comes from good intentions, given to its omissions and weaknesses is risky and regressive.

…Concerning the payment of taxes or tax compliance, it does not create incentives to misuse it. But now, it will not be surprising that companies register the names of people who will not even be aware of that act.

…Moreover, the “one day and at zero cost” advertising its misleading because,
first, you must have the FIEL, which requires time, being optimists it could be given in 24 hours.
Then you have to start the process before the Ministry of Economy to have the corporate name of the company, which takes at least 48, if not 72 hours more. We’re coming in three or four days. The World Bank itself notes that in several of the cities of greater economic activity in our country, a company is incorporated in six days. Finally, we will spend that period to four or five days, but with the added difficulty of the huge gap that opens for money laundering plus the fact that no longer will the more than 4,000 public notaries in the country to use their resources and infrastructure for these purposes but one (or two?) office inside the Ministry of Economy, with the consequent cost to the notary public.
[2]

In conclusion although the constitution of a SAS is an innovative type of company and could say “faster”, it should be taken into consideration that it cannot be the best model of society to choose, this will depend on the shareholders to decide if this type of company results optimal according to their needs, due to the above mentioned.

TMC, lawyers, will stay attentive and look forward to answer any questions or comments regarding this newsletter, and will continue to report information regarding the same.

 

[1] http://www.dof.gob.mx/nota_detalle.php?codigo=5429707&fecha=14/03/2016 (spa).

[2] http://www.elfinanciero.com.mx/opinion/ni-en-un-dia-ni-a-cero-costo.html (spa).

 

Professional migration in Mexico: The VISA for job offer and investor’s VISA.

Migration in Mexico requires a VISA (except for tourism for some foreigners, traveling less than 180 days[1]).

Article 52 of the Migration Act of Mexico (hereinafter “MAM“)[2] provides that foreigners can stay in Mexico in the status of:

  1. Visitor for a residence period of less than 180 days;
  2. Temporary resident to stay for longer than 180 days until 4 years; and
  3. Permanent Resident to stay for and indefinitely period. The permanent resident status requires the temporary resident status during 4 years.

These residence conditions can be given for various reasons (family reunification, job offer, investment, adoption, education, travel, humanitarian reasons, asylum ….).[3]

Various VISAS allow the applicant to perform an economic activity in Mexico, such as the following:

  • The visitor VISA to perform remunerated activities for less than 180 days (especially used in case of: board meeting, temporary work, liberal profession);
  • Border worker VISA;
  • The VISA for job offer; and
  • The investors VISA.

This article aims to study the characteristics of the VISA for job offer and the investor’s VISA. These VISAS permits to obtain the  temporary residence in Mexico for any person from a foreign country for economic reasons.

The job offer VISA and investor’s VISA have their own characteristics (II) although they grant common benefits (I).

 

I. The common regime  of the job offer and investor‘s VISAS

These common characteristics concerns in a more general way to all temporary residence VISAS.

Duration

Temporary residency VISAS are issued for a period of one to four years and may be renewed within 30 days before the expiration date  (for a maximum total duration of 4 years).[4]

After 4 years of staying as a temporary resident in Mexico, the VISA holder can apply for obtaining permanent resident status.[5]

Procedure to obtain the VISA       

Article 41 of MAM states that VISA applications are introduced before a Mexican consular office and, as a consequence, these applications can’t be held directly in Mexico before the National Institute of Migration (hereinafter the “NIM” )[6].

As an illustration, a French citizen in Mexico without VISA (tourist staying for less than 180 days) who wish to obtain a job offer VISA would have to leave Mexico territory in order to introduce  the VISA application within a Mexican consular office (not necessary a consular office located in his home country).

As an exception of the previously mentioned rule, the same article states that for family reunification purposes, the application for the VISA for job offer may be filled directly in front of the NIM in Mexico.

After the application before a consular office, the applicant will receive a migration document and will have visit Mexico within 6 months after the issuance of the document. Once in Mexico, the applicant will have 30 days to get before the NIM his temporary resident card which attests a regular migratory situation.[7]

Family and departure of the territory

Article 52 VII of the MAM establishes, that the migrant wife or partner, his children and his parents could migrate into  Mexico, during the period of validity of his or her  VISA, as temporary residents with the possibility to obtain a work permit.

The temporary status VISA allows the holder to freely enter and departure the territory.

Changing circumstances    

Article 63 of the MAM provides that foreigners are obliged to communicate to the NIM any change about civil status, nationality, domicile or workplace within 90 days after such change.

 

II. Specific characteristics of the job offer and investor‘s VISAS

1. The VISA for job offer

The VISA for job offer allows the holder to carry out a remunerated activity in Mexico.[8]

The Employer shall be a Mexican company. Thus, foreign companies wishing to establish a company in Mexico and sending foreign staff must first incorporate the company (the incorporation of a company in Mexico is open to foreigners in most of the business areas. For more information: http://tmclegal.com/la-inversion-extranjera-en-mexico-en-camino-a-muchas-y-mejores-oportunidades/?lang=eng) and then, hire the foreign staff through the Mexican company.

The employer must be registered as such before the  NIM in order to be able to hire foreigners.[9]

The company making a job offer shall indicate the following elements:

Position, contract term, remuneration, workplace and the registration of the employer before the NIM.[10]

2. The investor‘s VISA

This VISA allows the temporary residence in Mexico to the person who invested in the following areas[11]:

  • Participation in the capital stock of Mexican companies;
  • Fixed assets or capital assets for economic or entrepreneurial purposes; and
  • The development of economic and business activities in the national territory which are job-creating.

The minimum investment amount required for the grant of the VISA varies according to the consular offices.

Contrary to the VISA for job offer, the investor‘s VISA does not allowed his titular to carry out a subordinated activity which is remunerated in Mexico.

 

In order to conclude, if these two VISAS correspond to different purposes, they grant various common benefits.

These temporary residence VISAS may become permanent residence VISAS, after 4 years. It is recommended to be duly diligent with the renewal procedure of the VISA in order to not be deprived of the prior benefit and have to restart the migration process from the very beginning.

TMC Legal advice and accompanies its clients in all their migration process before the consular offices and the National Migration Institute of Mexico.

 

[1] http://www.inm.gob.mx/gobmx/word/index.php/paises-no-requieren-visa-para-mexico/ (spa).

[2] Migration Act of Mexico (spa) and Regulation of the Migration Act of Mexico (spa).

[3] Migration Act of Mexico, title IV, Chapter 2, Article 52.

[4] Regulation of the Migration Act of Mexico, Article 156.

[5] Regulation of the Migration Act of Mexico, Article 157.

[6] Migration Act of Mexico, title IV, Chapter 1, Article 41.

[7] Migration Act of Mexico, title IV, Chapter 2, Article 59.

[8] Ibid., footnote 3.

[9] Regulation of the Migration Act of Mexico, Article 115.

[10] Ibid., footnote 9.

[11] Regulation of the Migration Act of Mexico, Article 107.

Foreign Investment in Mexico: On the Way to More and better Opportunity

Mexico is now ranked as the 38th Best Place for Business according to World Bank Doing Business 2016 Report and continues to climb the ranks annually. [1]  This shows Mexico’s efforts to lure foreign investment in order to create additional employment and to increase industrial output.

This openness to foreign investment has resulted from a constantly evolving legal framework, as per ratification of international free trade agreements—for example, the North American Free Trade Agreement in 1992 and the Mexico-European Union Free Trade Agreement in 1997—and pro-foreign investment federal legislation.

Nowadays, foreign investors can choose to freely invest in Mexico (I). However, they may encounter restrictions in certain areas, which will be summarized hereafter (II).

 

I. Absence of restrictions for foreign investors

Articles 25 to 28 of the Political Constitution of the United Mexican States (hereinafter the “Constitution“)[2]  and the Law on Foreign Investment of Mexico (hereinafter the “LFE“)[3] are the most important basis of Mexico’s legal framework for foreign investment.

This legal framework has been modified constantly, to demonstrate a drive towards liberalization—for example, the opening of the oil and gas sector to foreign investors in 2014— these dispositions reflect changes in Mexico’s economic policy.

Article 4 of LFE stipulates that foreign investors may hold 100% of the capital stock of a Mexican corporation or association. The previous law restricted this participation to 49%.

These stipulations are not applying to neutral investment (financial investment without control rights) which belong to a specific title of the FIL.[4]

LFE grants to every foreign investor the same rights. There are no restrictions according to the investor’s nationality.

However, a State which entered into a Free Trade Agreement with México may have less restrictions on investment on some reserved activities according with the dispositions established in the treaty.

Except for reserved activities, foreign investors are free to invest in or set up companies in Mexico.

However, all foreign investors that aims to incorporate a company in Mexico,  require  to comply with specific obligations (as the registration before the National Registry of Foreign Investment of Mexico “Registro Nacional de Inversiones Extranjera”).

 

II. The ​​reserved activities

The Constitution provides in Articles 25 to 28, that foreign investors cannot hold freely 100% of the capital stock on some strategic activities in Mexico. The LFE applies the provisions of the Constitution and outlines the activities in which investment is limited and their regime.

These reserved activities are therefore an exception to Article 4 of LFE.

There are different legal regimes applicable according to the activities:

  • The activities which are reserved exclusively for the State both listed by the Constitution and Article 5 of LFE (exploration and extraction of oil and hydrocarbons ; electricity ; nuclear power ; radioactive minerals ; telegraph and radiotelegraph services ; postal services ; minting of coins ; supervision control and surveillance of ports, airports and heliports (…)[5]).
  • The activities which are reserved exclusively for Mexican investors listed by Article 6 of LFE (domestic land transportation for passengers, tourism and freight not including messenger or courier services ; development banking institution ; rendering of professional and technical services provision expressly defined by the applicable legal provisions (…)[6]).
  • The activities subject to a specific participation percentage listed in Article 7 of LFE where foreign investment is authorized up to the following percentages: (up to 10% in cooperative companies for production; up to 25% in Air transportation and up to 49% in firearms, explosives, newspaper, series “T” shares in companies owning agricultural, fresh and coastal water fishing (…)[7]).
  • The activities requiring prior approval defined in Article 8 of LFE. This approval must be given by the Foreign Investment Committee for a higher stake to 49% (port and marine services; air terminals; private education; legal services; construction; exploitation and operation of general railways (…)[8]).

This list may change according to legislative reforms.

 

As an outgrowth of its legal and structural changes, Mexico stands today as a reference country for foreign investment.

For several years, TMC Legal has advised many clients throughout investing in Mexico in order to develop and realize their projects both legally and strategically.

For more information, ProMéxico[9] (English website) https://www.promexico.gob.mx/ is a federal entity responsible for attracting foreign investment.

 

 

[1] World Bank Doing Business 2016 Report is available in both English and French.

[2] Political Constitution of the United Mexican States of 1917 (Spanish).

[3] Law on Foreign Investment of Mexico (Spanish).

[4] Ibid., footnote 3, FIL, Title 5 “Neutral Investment”

[5] To see the full list: Ibid, footnote 3, FIL, Article 5.

[6] To see the full list: Ibid, footnote 3, FIL, Article 6.

[7] To see the full list: Ibid, footnote 3, FIL, Article 7.

[8] To see the full list: Ibid, footnote 3, FIL, Article 8.

[9] ProMéxico website is available on French, English and Spanish.

An innovative type of Company in Mexico

The Congress adopted an opinion whereby it proposes to amend various provisions of the General Law of Commercial Companies (GLCC) in Chapter XIV about “the Simplified Stock Company”

 The following reform seeks to create the Simplified Stock Company (SAS), which grants the following benefits:

  • It can be constituted by one or more shareholders, who are only required to pay their contributions it is important to underline that it is only for individuals.
  • It simplifies the process for the establishment of micro and small companies.
  • There are no limitations for foreign investment, therefore the shareholders may be foreign, highlighting that the shareholder(s) must be individuals.
  • Shareholders should express their consent through the electronic system of incorporation, without the intervention of a notary public for such purpose, speeding up and simplifying the process of incorporation.

How does a (SAS) operate?

The SAS may be constituted as a company with variable capital, which shall be registered in the Public Registry of Commerce.

  • The shareholder(s) of the company, shall express their consent to establish the SAS, through the bylaws available through the electronic incorporation system, streamlining the process. This electronic system established for the incorporation of the SAS is in charge of the Ministry of Economy, functioning and operation is governed by the rules issued by the Secretariat itself.
  • The supreme body, the SAS will be integrated, by the shareholder(s) themselves who must have the certificate of advanced electronic signature as a prerequisite. This reform provides that under no circumstances individuals may be simultaneously shareholders of other companies as referred in sections I to VII , Article 1 of the GLCC , if it is the case that their involvement in these corporations allows them to have control of the company or its management  in the light of (Article 2 , section III of the Securities Market Law).
  • The total annual revenues of SAS, may not exceed 5 million Mexican pesos, and in case of exceeding this amount, it must be transformed into another corporate scheme as established in the GLCC.

TMC Legal lawyers, will continue to report in relation to the present newsletter, and likewise, we will keep attentive to any questions or comments regarding the latter.