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Companies or Corporations

The General Corporations Law (Ley General de Sociedades Mercantiles) (GCL) recognises seven types of commercial structures, which are the:

• General partnership (Sociedad en Nombre Colectivo).
• Limited partnership (Sociedad en Comandita Simple).
• Limited liability company (Sociedad de Responsabilidad Limitada) (LLC).
• Limited liability stock corporation (Sociedad Anónima) (SA).
• Limited partnership with shares (Sociedad en Comandita por Acciones).
• Co-operative association (Sociedad Cooperativa).
• Simplified Joint Stock Company (Sociedad por Acciones Simplificada).
• Investment Promotion Company (Sociedad Anónima Promotra de Inversión) (SAPI). This is a type of limited liability stock corporation governed by the Securities Market Law and the GCL.

SAs followed by LLCs are the most commonly used structures, since they both provide limited liability to the partners/shareholders (up to the amount of their contributions). SAs operate under a company name and are formed exclusively by shareholders whose liability is limited to paying for their shares as capital contributions. SAs can be transformed into investment promotion companies which are flexible and ideal for JV companies in Mexico or in public companies.

The main advantages of an SA, among others, are:

• The company can admit new shareholder/partners at any time, who can help to contribute resources to make the company grow.
• In LLCs, shareholders’/partners’ liability is limited to the capital contributions made by each of them.
• Business that operated under a company structure provide reliability for clients and counterparties. This is because under the GCL, this type of company must have a fixed minimum capital to meet its obligations and its creditors.
• Commercial companies’ and corporations’ structures can be adjusted to suit small, medium or large businesses.
• Some clients or governmental agencies can only do business with a company (rather than an individual).

Compliance with statutory and other company obligations can be burdensome and expensive for small businesses. In addition, profits must be shared with partners and decisions must be agreed by all the participants, which gives the owner of a business less autonomy.

Professional Corporations (Sociedades Civiles)

Professional corporations are owned and operated by licensed professionals, such as doctors, lawyers and architects where two or more persons agree to perform a professional activity for profit on a permanent basis.

This abbreviation SC must be added at the end of the company name .Its operation is flexible and simple, and there are fewer requirements for its operation than for a commercial company. Partners are taxed individually on the debts and profits attributed to the entity. The administrators are jointly liable for any obligations of this entity.

Trusts

Trusts can be used for various reasons in Mexico including for the:

• Administration of personal property.
• Sale and purchase of real estate.
• Creation of a source of payment.
• Creation of a guarantee in favour of third parties.
• Through the trust, several investors can be represented in the same vehicle and the same vehicle can be used as a common representative.

The advantages of trusts include that:

• A trust:
  • establishes clear rules that can be adjusted to the business scope required (to the extent that the law allows).
  • offers transparency and certainty to the parties of the trust agreement.
• The assets are secured in a solid financial institution.
• Trustees are experienced and can advise on the investment of assets.
• Some trusts have tax advantages, such as income tax relief.

Some disadvantages are that:

• Management of a trust may be expensive, depending on the complexity of the transaction.
• Complex rules and structure of a trust may be difficult to understand for clients or third parties, resulting in business delays.
• Trustees’ responsibility is highly restricted under Mexican Law and consequently some trustees are not willing to take risks.

Unincorporated Partnership Consortium (Asociación en Participación)

This type of vehicle consists of:

• An industrial partner who manages the joint venture.
• Another partner who finances the operations.

Under the GCL, profits and losses are shared equally between the partners. An unincorporated partnership consortium, where only an agreement is entered into, is restricted to two parties.

In addition, the general rules for agreements apply, for example, only individuals with legal capacity can enter into an agreement, meaning individuals over 18 years of age without any physical or mental disability.

For tax purposes it is considered a separate entity, which is subject to corporate income tax.

Public Companies

Two types of publicly-traded companies used in Mexico are the:

• Stock market investment corporation (sociedades anónimas promotoras de inversión bursátil) (SAPIB), which is a company that is listed in the National Registry of Securities (listed company).
• Stock market company (sociedad anónima bursatil) (SAB), which is a publicly-traded stock corporation.

Both offer investors a wider range of rights that can be granted to shareholders and more structural flexibility compared to a regular SA.

Establishing a Presence from Abroad

3. What are the most common options for foreign companies establishing a business presence in your jurisdiction?

The most common way for an overseas company to establish its presence in Mexico is by incorporating a subsidiary. This gives it the protection of the corporate veil. Other ways of establishing a presence are to:

• Set up a local branch.
• Appoint a local agent, distributor, or franchisee.
• Acquire an existing local company/partnership.
• Enter into a joint venture (JV) with a local company or partnership.

The appropriate vehicle depends on the nature of the business to be operated in Mexico and the volume of operations to be carried out, which will influence foreign investors in their choice of the options available to them under Mexican legislation, for example:

• A subsidiary is more appropriate for a company that opens manufacturing facilities in Mexico, as the factory/facility must comply with various labour and commercial requirements necessary for its physical presence in Mexico.
• An overseas company selling products to Mexican clients does not need to incorporate a subsidiary provided that it does not need a physical presence in Mexico and its commercial relationship can be handled through a distributor agreement.

The most common vehicles used by foreign investors are set out below.

Incorporating a Subsidiary

This is usually an SA or an LLC so that foreign shareholders can avoid incurring liability for company-wide debts and expenses.

However, although the incorporation process is relatively easy and fast, a considerable amount of time and resources must be invested to understand Mexican law and its economic system and to penetrate the market for commercial success in Mexico.

Local Branch

The branch is to be considered an extension of the legal entity and share its assets and is generally used by foreign companies that wish to enter Mexico without incorporating a new legal entity and to the obtain a company registration number to enable them to carry out the same commercial activities that they perform in their country of origin.

One of the main advantages of this vehicle is that no new local shareholders/partners or bye-laws are needed, since the existing articles of incorporation/corporate documents of the foreign company apply to the branch.

However, because branches are a legal extension of a foreign company, investors may be exposed to liabilities generated by the local branch. In addition, branches are restricted from carrying out activities that are prohibited to foreign investors under the Foreign Investment Law (FIL) (see Question 19).

Distribution Agreement

Distribution schemes are common in Mexico and used by foreign investors that do not need to have a physical presence in the territory. The success of this type of structure depends on the appointment of an experienced and well-known local distributor that can help the client to develop their Mexican market. It is also advisable to ensure a detailed and solid distributor contract is drafted to protect know-how, intellectual property and ownership of the seller’s products and to establish clear commercial conditions (price, delivery, title, risk, guaranties and so on).

Such agreements are not expressly regulated by Mexican law, and therefore each agreement must be carefully negotiated to:

• Avoid giving unnecessary rights to the local distributor.
• Retain title over the products.

If there is not enough control over the local distributor, unfair or inaccurate prices might be imposed on local customers or the trademark may be used incorrectly.

Agency Agreement

Agency agreements in Mexico are agreements by which:

• An individual or a legal entity (agent).
• Assumes permanently or for an indefinite period.
• The task of promoting and/or arranging business and contracts in the name and on behalf of another company.
• In a defined territory.
• For consideration, usually referred to as commission.

The foreign investor does not need to incorporate a subsidiary in Mexico. but the foreign entity directly sells its products to the final customers. An agent is totally independent, having its own organisation and structure.

An agent is generally used for opening and developing Mexican markets and/or when the volume of operations is not great enough to make it worthwhile incorporating a company. In addition, the agent’s compensation depends on the results obtained for the company and is used to give an incentive to the agent to obtain more sales on behalf of the seller. Foreign companies usually engage well-established businesses and/or specialists as agents.

Because sales are affected by the foreign entity, the tax aspects must be carefully set out in each agency agreement so that the foreign seller avoids the risk of creating a permanent establishment in Mexico and consequently being liable for local taxation.

Franchise Agreement.

Franchise agreements in Mexico are governed by the:

• Terms agreed by the parties.
• Provisions set out in the Federal Law of Protection of Industrial Property Law (FLPIP) and its implementing Regulation.
• General rules of the Federal Civil Code and the Commercial Code (for aspects not regulated in the FLPIP).

Additionally, the franchisor must comply with legal requirements established in the FLPIP, such as providing a Disclosure Document and certain minimum provisions in the Franchise Agreement.

A franchise agreement is usually used where the:

• Franchisor has:
  • Experience in the relevant field/business sector;
  • Systems in place for granting licences to local franchisees to use its trade mark.
• Franchisee has:
  • technical knowledge to produce or sell goods or render services in a uniform manner; and
  • the operating, commercial and administrative methods established by the owner of the trade mark to maintain the quality, reputation and image of the products or services distinguished by the trade mark.

The advantage of a franchise agreement is that the franchisor provides the know-how of a proven functional and successful business model (by providing manuals, guidelines, standards, technical assistance and so on) which results in better and faster financial results than by using other vehicles.

Disadvantages include:

• Having to adapt the business model to Mexican local practice.
• Complexity of franchise rules which may present challenges for local franchisees and result in delays in trading in Mexico.
• Franchise rights, costs and expenses may not be accessible to many local investors.

Acquiring an Existing Local Company.

Large and sound foreign investing companies can choose to acquire an ongoing business that is already successful and/or has potential, instead of starting from scratch. Acquisitions are usually done thorough a purchase of shares or assets. This is a widely-used practice in Mexico, since a local established company already has the legal and commercial structure required to run the business, including a solid customer base, contacts and know-how that allows them to continue running the business.

Disadvantages include:

• The risk of acquiring past liabilities from the purchased business. A rigorous due diligence exercise is strongly advisable as well as appropriate representations and warranties in the corresponding purchase agreement.
• Purchasers must ensure appropriate mechanisms are in place to continue running the business without any harm resulting from its transfer.

4. How can an overseas company trade directly in your jurisdiction?

Under the provisions of the foreign investment regulations, legal entities that intend to carry out commercial activities in Mexico must obtain prior authorisation from the Ministry of Economy.

To obtain this authorisation, foreign companies must show that:

• They are incorporated in accordance with the laws of their home country.
• The agreement and other constitutional documents of the foreign entity are not contrary to the precepts of public order established in Mexican law.
• They have a representative domiciled in the place where they are going to operate, authorised to assume responsibly for the obligations under the contract(s).

Foreign companies can also trade directly by establishing a branch. The establishment of the branch must comply with the same requirements as those listed above. Trading directly by means of other vehicles (through an agency, distributor, or franchisee) neither requires a license nor is subject to any specific restriction.

5. What are the formalities for setting up a partnership?

General Partnership

The general partnership (Sociedad en Nombre Colectivo) fell into disuse several years ago in Mexico. This is due to the fact that in this structure:

• All partners are liable without limit for the business obligations of the partnership.
• There is a maximum number of 50 partners.

Civil partnerships (see below) are the most frequently used structure for partnerships.

Civil Partnership (Sociedad Civil)

Set up. The procedure for forming a civil partnership is very similar to those of a corporation (see Question 8). The difference is that there are no shares or a share distribution, but the contributions to the capital of the entity are reflected in a number of equity quotas instead of shares. This implies that there are no securities that are freely transferable as in the case of a SA.

Applicable legislation/regulation. Civil partnerships are regulated by the Federal Civil Code.

Partnership agreements. Partnership agreements are not required, however, all provisions and rules forming the basis of the business are included in the articles of incorporation.

Liability of partners. The liability of partners in a civil partnership is limited.

Assets. The assets for the civil partnership belong to the entity itself only.

Legal personality. The civil partnership has a separate legal personality from its partners.

6. What are the formalities for setting up a joint venture?

International joint ventures (JVs) are not expressly regulated under Mexican law. As a result, private parties can agree to form a JV either:

• Contractually.
• By creating a separate entity to operate the business or to implement the transaction.

Some types of JV agreements, such as co-ownership arrangements and JVs with unincorporated bodies, are not recognised by Mexican Law.

JV Company

The most used and advisable way to create a JV in Mexico is through a JV company where both parties can reflect their rights and obligations in the bye-laws of the JV company, which are registered at the Public Registry of Commerce. By this method, the rights of each party are protected under the bye-laws, the GCL or the General Market Values Law.

The SA and the SAPI expressly allow parties to agree and include in their bye-laws specific rights and obligations typical of a JV, such as (among others):

• Put and call options.
• Drag along and tag along rights.
• Rights of preference.
• Different voting rights.
• Sale and purchase mechanisms.

In addition, when a JV company is incorporated in Mexico, it is not mandatory to enter into an additional JV contract. Executing a JV contract is, however, good practice to complement the bye-laws of the company and to reflect rights and obligations that may not be regulated by the bye-laws due to the specific business or economic nature.

7. Are trusts (or a local equivalent) available in your jurisdiction?

The Mexican trust fund (Fideicomiso) is commonly used for complex and sophisticated transactions in Mexico and is regulated by the General Law of Credit Instruments and Operations (GLCIO). It is a flexible instrument that can be adapted to almost any type of business.

The trust fund is created through a trust agreement where the trustee receives specific instructions and rules to develop certain business in favour of its beneficiaries.

By law, trusts are considered irrevocable, unless otherwise provided in the trust agreement, and by law, trusts can hold most types of properties and rights on behalf of its beneficiaries. When properties and rights are transferred to a trust, the trustor can “hold-back” or “reserve” for itself, certain portions of a particular asset, or only do so under a partial or limited assignment. This means the trustor can also keep and maintain for itself, certain rights over the assets held in trust.

The main types of trust agreement in Mexico are the:

• Administration trust: under this, the trustor assigns, transfers and delivers in trust resources, securities, goods and/or rights to be used for lawful and determined purposes, entrusting the accomplishment of the purposes to the trustee. The main purpose of this type of trust is the administration.
• Guarantee trust: the trustor assigns, transfers and delivers in trust resources, securities, assets and/or rights to guarantee the trustee the fulfilment of an obligation and any associated payments, entrusting the realisation of the purposes to the trustee. The main purpose of this type of trust is to guarantee an obligation.
• Investment trust: the trustor assigns, transfers and delivers in trust resources and/or securities, the purpose of which is the investment of the trust’s assets, entrusting the accomplishment of the purposes to the trustee. The main purpose of this type of trust is to invest the trust assets.
• Real estate trust: real estate and/or financial resources are transferred to the trust so that the trustee can manage them for the development of a real estate project (for example in housing, commercial, industrial, tourism).

Forming a Private Company

8. How is a private limited liability company or equivalent corporate business vehicle most commonly used by foreign companies to establish a business in your jurisdiction formed?

Regulatory Framework

The main regulatory framework is found in the:

• GCL. This specifically regulates the terms of partnership agreements, the rights and obligations of the partners and the structure and operation of the company.
• General Corporations Law (Ley General de Sociedades Mercantiles) (LGSM). The LGSM regulates the incorporation of corporations, the obligations on the members and the structure of the corporation.
• Mexican Constitution. This establishes two fundamental rights: the right of assembly and the right of association. The latter right allows for corporate bodies to be formed.
• Commercial Code. This establishes the general guidelines for merchants, which also apply to commercial companies since they are “collective merchants”.
• General Law of Cooperative Societies, published in the Official Gazette of the Federation on 3 August 1994.
• Federal Civil Code (FCC). The FCC contains the general rules on the legal personality of legal entities. In addition, it establishes rules for partnerships (see Question 2).

Codes of Practice

The Business Co-ordinating Council (Consejo Coordinador Empresarial) (CCE) guidelines “The Code for Best Corporate Practices” (Código de Mejores Prácticas Corporativas) are commonly followed by companies in their corporate governance application.

In addition, in 1994 Mexico subscribed to the OECD Principles of Corporate Governance, which are non-binding principles that were used by CCE as the base for the Code of Best Corporate Practices and are followed by most Mexican companies that implement corporate governance in their corporate structure.

In 2006, the New Securities Market Law incorporated the Code for Best Corporate Practices as mandatory for publicly-traded companies which contain guidance on (among others):

• Requirements for an audit committee and independent consultants.
• Statutory rights of minority shareholders.
• Voting limitations.
• Shareholders’ duties.

Regulatory Authorities

These are the:

• Ministry of Economy.
• Public Registry of Commerce
• National Foreign Investment Registry.
• Tax Administration Service.

Tailor-made/Shelf/Numbered Companies

Shelf companies can be purchased but have not been widely used since the enactment of the Federal Law for the Prevention and Identification of Operations with Illicit Proceeds (Ley Federal para la Prevención e Identificación de Operaciones con Recursos de Procedencia Ilícita) (in force 2013)) (Anti-Money Laundering Law). In addition, they are unpopular because:

• There is a risk of unknown liabilities being transferred to the purchasers.
• The formation of a new entity is relatively fast and easy, enabling parties to create a company without exposure to risk and to adapt bye-laws to the needs of the business.

Formation Process

The incorporation process in Mexico is as follows:

• Authorisation of denomination: to carry out the incorporation of a company in Mexico, authorisation must be obtained from the Ministry of Economy for the incorporation and the corporate name. The Ministry keeps a list of previously-approved names, which cannot be used a second time. Dissolved or liquidated companies are not on this list.
• Industrial property search: to avoid any possible infringement of the Industrial Property Law by using a trade mark as a corporate name or as part of it, before obtaining the company authorisation, an industrial property search should be carried out to verify that the name does not constitute a trade mark. If it does, it should be registered in the trade mark registry. The procedures for verification and subsequent registration of the corporate name can be carried out at the Industrial Property Department (Instituto Mexicano de la Propiedad Industrial) (IMPI).
• Preparation and granting of powers of attorney (PoAs) by the foreign shareholders/partners for their representation in the incorporation of the new company in Mexico. For these to be granted:
  • the PoA must be executed before a notary public in the shareholders’ place of origin and legalised or apostilled in the place of origin;
  • the original PoAs must be sent to Mexico to be translated;
  • they must be notarised before a Mexican notary public.
• Preparation, review, and approval of the bye-laws: once the PoA is granted, the draft bye-laws can be prepared for review and comments.
• Appointment of the persons who will manage and oversee the corporation including the:
  • board of managers/board of directors (or sole administrator);
  • officers and commissioners (the commissioners are usually members of the external auditors’ firm).
• Granting of PoAs by the new corporation in favour of the persons who will be in charge of the daily activities of the corporation.
• Delivery of certain information and documents to comply with the Anti-Money Laundering Law. The following documents and information:
  • (where shareholders are from one or more legal entities), a document evidencing the incorporation of each one of the shareholders, information that reveals the shareholding structure, and documents identifying the respective shareholders or partners of each one of the shareholders;
  • (where the shareholders are individuals), a valid official identification card or passport, and the document evidencing the migratory status of foreign individuals;
  • proof of the domicile of each of the shareholders, which can be a utility bill or a bank statement (not older than three months).
• Execution of the articles of incorporation of the corporation before a Mexican Notary Public.
• Company formation from the date of filing all required documents is usually between one and two weeks.
• The applicable fees depend on the individual notaries and state tariff but are usually between MXN10,000 and MXN16,000.
• To change the name of a company, a new name is requested at the Ministry of Economy and once it is authorised, the shareholders must approve the change and notarise it, to be registered with the Public Registry of Commerce.
• The incorporation process is completed once the first deed is registered with the Public Registry of Commerce. The effect of the registration is that the corporation is considered a regular corporation. Before registration is complete, newly-incorporated companies are considered irregular and therefore the shareholders have shared liability.

Company Incorporation

During the incorporation process of a Mexican subsidiary with foreign investment, certain documents must be prepared. Although there are no public templates, certain requirements must be included in the documents which are:

• PoAs granted abroad by each shareholders/partners authorising local lawyers to appear before the notary public and sign articles of incorporation. These PoAs must be formalised and apostilled abroad. These powers avoid the need for shareholders to travel to Mexico to sign incorporation documents and although they are not mandatory, they are convenient in practice.
• Bye-laws of the company. These do not require a specific model however, the long-term practice of corporate lawyers has led to the vast majority of bye-laws used in Mexico being similar. There are no public templates for these but under the GCL they must include the:
  • name, domicile, and nationality of the shareholders;
  • corporate object(s);
  • corporate name;
  • duration;
  • domicile;
  • administration body;
  • how profits and losses will be distributed;
  • capital;
  • dissolution and liquidation clauses.
  • any other clause suitable for the specific company.
  The bye-laws must be recorded in a public deed issued by a Mexican notary public and recorded with the Public Registry of Commerce.
• Corporate Books, which must be opened as requested under Mexican law. Corporate books for LLCs in Mexico are:
  • shareholders/partners’ meeting minutes book;
  • board of directors/partners, book;
  • capital variation book (only for companies with variable portion of the capital); and
  • equity/stock registry book.
• Registration with the Foreign Investment Registry, as required by the FIL which requires certain questionnaires and forms to be completed for the Ministry of Economy.
• For SAs, share certificates must be prepared in favour of each shareholder to represent the capital contribution from each shareholder. Share certificates must include:
  • shareholder name;
  • name of the company;
  • domicile of the company;
  • date and place of incorporation of the company;
  • duration;
  • registration at the Public Registry of Commerce;
  • amount of shares and capital they represent;
  • date of the certificate.

Shareholders’ agreements are commonly used in addition to bye-laws but are not mandatory.

Financial Reporting

9. What financial or tax reports must the company submit each year?

Companies

Private companies are not obliged to appoint external auditors, but they can opt to use external auditors to prepare the financial statements. Companies with an accrued income in the prior year higher than MXN122 million and assets valued at more than MXN97 million must prepare financial reports in accordance with Article 32-A of the Federal Tax Code.

For public companies, the board of directors must contract an external auditor to evaluate the performance of its duties and to analyse the judgement opinions and reports. The board must request the presence of the auditor when deemed convenient, without prejudicing the annual meeting with the auditor.

The opinion of the external auditor must be prepared on the basis of auditing standards and procedures issued or recognised by the Tax Administration Service (Servicio de Atención Tributaria) (SAT)and, in any case, must relate to:

• The reasonableness of the financial information.
• Adherence to the applicable accounting principles.
• The financial statements prepared by the issuer.

Branches

For branches, as soon as commercial activities begin, the following must be filed with the National Registry of Foreign Investment (Registro Nacional de Inversión Extranjera) (NRFI) to comply with Mexican law, which is the applicable law:

• Registration in the NRFI, within the 40 business days following the date on which the Federal Taxpayer Registry numberwas requested from the SAT. Late filing can incur a fine of an amount to be determined by how late the filing is (currently between MXN2,688.60 and MXN8,962) (about USD135 and USD450).
• The branch must maintain the information provided to the NRFI, which means updating it on an annual and quarterly basis. Late filing of financial reports can incur a fine of between MXN2,688.60 and MXN8,962) (about USD135 and USD450).
• Annual reports must be filed containing accounting, financial, employment and production information, for maintenance of the recordal certificate with the NRFI.
• Quarterly reports must contain information on income and expenses derived from:
  • new contributions or withdrawals that do not affect the capital stock of the company;
  • retained earnings of the previous year;
  • disposal of retained earnings;
  • loans to from foreign subsidiaries, parent company and foreign investors residing abroad who are either shareholders or an entity in the same corporate group.
  This information must be filed within ten working days of the end of each quarter. This report must only be filed when quarterly income or expenses deriving from the above sources exceeds 3,000 times the minimum wage in force for Mexico City.

Trading Disclosure

10. What are the statutory trading disclosure and publication requirements for private companies?

To be recognised as an independent entity, a company must:

• Be enrolled in the Public Registry of Commerce after its incorporation.
• Register:
  • any change in the company’s structure;
  • amendment to the corporate bye-laws;
  • transfer of shares, merger, split, or any other extraordinary meeting resolution;
  • certain PoAs (granting of general powers for acts of administration, acts of ownership and subscription of negotiable instruments).

Filings are publicly available to any third party.

Other disclosures to which a private company can be subject:

• Advertising. Businesses that wish to have notices or advertisements at their premises; in must comply with the outdoor advertising law of the entity in which they are located. Depending on each specific case, authorisation and the payment of licence fees may apply.
• Invoices. Among others, invoices must contain the following elements to be valid:
  • Federal Taxpayer Registry Code of the person issuing them;
  • tax regime in which they are taxed under the Income Tax Law;
  • the folio number assigned by the SAT and the digital seal of the SAT;
  • digital seal of the issuing taxpayer;
  • place and date of issuance;
  • Federal Taxpayer Registry Code of the person in whose favour it is issued.
• Websites. Businesses websites are required to disclose their privacy notice or personal data privacy policy under the Federal Law for the Protection of Personal Data in Possession of Individuals.
• Legal Name. A Mexican business’s legal name must include words or abbreviations that indicate its legal form (SA, (Sociedad Anonima De Capital Variable) S de RL de CV, (Sociedad Anónima Promotora de Inversión de Capital Variable) SAPI de CV, among others).
• Regulatory Disclosures. In addition to the obligation to register in the Public Registry of Commerce, a company can be required to register in special registries, depending on its area of business, for example aeronautical, shipping, mining, agrarian and energy registries.

11. How do companies execute contracts or deeds?

Certain agreements (such as trusts, real estate sale agreements, partnership/corporate incorporation agreements, among others) must be recorded in a public deed issued by a Mexican notary public. Other agreements, such as promissory, pledge, lease, donation of personal property and insurance agreements, among others are required to be recorded in written form to be valid and enforceable.

The most common practice today is still for companies to sign their agreements in the original on paper and in ink in their own handwriting. However, over the past year, it has become increasingly common for companies to choose to execute agreements electronically.

Even though both civil and commercial legislation in our country generally provide for electronic signing (giving the same validity to electronic signatures as wet ink signature documents), it is not yet possible to sign all documents electronically. This is because some legislation is not yet compatible with the general provisions of the Civil and Commercial Codes and does not yet expressly contemplate the validity of electronic signatures. Among these laws are the:

• Notarial Law (Ley del Notariado) in each state.
• General Law of Credit Instruments and Credit Transactions (Ley General de Títulos y Operaciones de Crédito)

This leads to the conclusion that documents involving the participation of a notary public (wills, trusts, public deeds in general) and credit instruments and transactions (promissory notes, bills of exchange, checks, and their endorsements) cannot be signed electronically.

Membership/Shareholders

12. Are there any restrictions on the minimum and maximum number of members?

As a general rule, all Mexican entities must have at least two shareholders. However, as an exception, the simplified joint stock company (Sociedad Anónima Simplificada) can be wholly owned by a single individual. These types of companies, which a a relatively recent development, are used by entrepreneurs who need a legal vehicle with limited growth.

However, they are not widely used in practice because of the various restrictions placed on such a company.

In an LLC, the number of partners is limited to a maximum of 50 members.

Minimum Capital Requirements

13. Is there a minimum investment amount or minimum share capital requirement for company formation?

Historically, LLCs and limited liability partnerships used to have minimum capital requirements, however, the GCL was recently amended to eliminate minimum capital requirements for any type of company.

14. Are there restrictions on the transfer of shares in private companies?

In general terms, the GCL allows shareholders to dispose of shares as they please. Share disposal is effected by the endorsement of the share certificate and the consequent entry in the stock register The GCL allows companies to include specific rules for the transfer of shares in their bye-laws, such as pre-emptive rights, drag and tag along rights, put and call options. Such provision is however optional for shareholders.

Shareholders and Voting Rights

15. What protections are there for minority shareholders under local law? Can additional protections be given? Is liability limited to the value of shareholders’ shares?

The rights of minority shareholders in a Mexican corporation are granted either according to law or by the company’s bye-laws. The latter can give additional rights and/or can reduce the threshold required to exercise such rights. Among minority rights established under Mexican law are the following:

• Shareholders with at least 25% of the capital stock can appoint:
  • a member of the Board of Directors;
  • an examiner.
• Shareholders with at least 33% of the capital stock can:
  • appoint a member of the Board of Directors;
  • appoint an examiner;
  • request a postponement of the resolution for three days without having to formally call a new meeting;
  • object to a resolution before a court, provided the shareholders voted against the resolution or did not attend the meeting. The claim must be filed within 15 days from the closure of the meeting, establishing which provision or the law or bye-laws was violated;
  • request the Board of Directors to call a shareholders’ meeting if no meeting has been held for two consecutive years or if in the meeting, the issues on the agenda of the annual meeting were not discussed.

With respect to a SAPI the Securities Market Law establishes the following minority rights:

• Shareholders with voting rights that individually or jointly represent 10% of the capital stock can appoint a member of the board of directors and/or an examiner.
• Shareholders with voting rights that individually or jointly represent 10% of the capital stock can:
  • request the examiner or president of the board of directors at any time to call a shareholders’ meeting regarding issues related to their voting rights; and
  • ask to postpone the resolution on an issue on which they feel uninformed.
• Shareholders with voting rights that individually or jointly represent 20% of the capital stock can object to a resolution related to their voting rights taken in a general meeting.

In any case, in an SA, the liability for the shareholders is limited to the value of its shares and contributions.

Unlimited liability companies currently exist in Mexico but are very rarely used.

16. Are there any statutory restrictions on quorum or voting requirements at shareholder meetings? Must quorum or voting rights be proportionate to shareholdings?

Under the GCL, for an ordinary or extraordinary meeting to be considered legally convened, the following percentages must participate:

• Ordinary meeting: at least half of the capital stock (50%), and resolutions will only be valid when adopted by the majority of the votes present (50% + 1).
• Extraordinary meeting: at least three quarters of the capital must be represented (75%) and the resolutions must be adopted by the vote of the shares representing half of the capital (50% + 1).

17. Are specific voting majorities required by law for any corporate actions (for example, increasing share capital, changing the company’s constitution, appointing and removing directors, and so on)?

In an SA, the following matters must be resolved and approved in an extraordinary shareholder’s meeting, when at least 75% of the shares of the capital stock are present or represented by proxy and the resolutions are valid if adopted by the affirmative vote of at least 50% of all shares of the capital stock:

• Amendments to bye-laws.
• Dissolution.
• Increase or decrease of capital.
• Change of corporate purpose.
• Extension of the term of the company.
• Change of company nationality.
• Mergers.
• Corporate conversions.
• Issuance of special shares.
• Amortisation of company’s owns shares and issues of participating shares.
• Issues of bonds or debt certificates.
• In general, any change to the articles of incorporation.
• Any other matter for which the law requires a special quorum.

18. Can voting majorities required by law be disapplied to protect a minority shareholder (for example, through class rights, weighted voting or super-majority veto rights)?

When a minority shareholder does not reach the necessary percentage to vote on a certain matter that is essential for its interest, shareholders can agree in the applicable bye-laws to include a supermajority quorum for certain matters in which minority shareholders must vote to be valid, such as:

• Capital increases.
• Transfer of shares.
• Change of business’s scope.
• Directors’ appointment.
• Change of domicile.
• Merger.
• Disposal of assets.
• Acquisition of material debts.
• Appointment of a member of the Board of Directors.
• Granting of certain PoAs.
• Liquidation.
• Any other matters that may affect minority shareholders’ interests.

The law also allows the issuance of special shares with special voting rights, which allow their owners to vote for certain specific matters (usually material matters that could affect minority shareholders’ rights). Usually, these kind of shares have preference at the time of payment of a dividend and liquidation distribution.

In addition, a shareholder or group of shareholders owning at least 33% of the capital stock of the company can legally oppose the prejudicial action or transaction, provided that the action is derived from a previous shareholders’ meeting (GCL).

Sectoral Restrictions

19. What are the conditions or restrictions on establishing a business in specific industry sectors? Are there industry sectors in which it is not permitted to establish a business?

Certain activities are reserved under the FIL exclusively for the state, to Mexicans or to Mexican companies with a foreigner exclusion clause, as follows:

• Activities reserved to the state:
  • petroleum (including all other hydrocarbons);
  • electricity, nuclear energy, radioactive minerals;
  • telegraphs and radiotelegraphy;
  • control, supervision and surveillance of ports, airports and heliports and postal services;
  • bank note issuing and minting of coins.
• Activities reserved exclusively to Mexican or to Mexican companies with an exclusion of foreigners clause:
  • domestic land passenger transport, tourism and freight, not including messenger or courier services;
  • rendering of professional and technical services expressly set out in applicable legal provisions.

Other activities and acquisitions are subject to specific regulations as follows:

• Foreign investment in producers’ cooperatives is only permitted up to 10%.
• Foreign investment is only permitted up to 49% in the following sectors:
  • manufacturing and trading of explosives, weapons, and firearms;
  • printing and publication of newspapers for exclusive circulation in the national territory;
  • Series “T” shares in companies related to agriculture, farming and forest industries;
  • Freshwater fishing and border sea fishing;
  • port administration industries;
  • port services;
  • naval vessel industries, or shipping companies (with the exception of tourist cruises);
  • supply of fuels and lubricants for vessels, aircraft and railroads;
  • radio transmissions;
  • national air transportation services.

Foreign Investment Restrictions

20. Are there any restrictions on foreign shareholders/company members?

Under the FIL, the Foreign Investment Commission must authorise the following activities:

• Foreign investors holding more than 49% of the shares in:
  • port services involved in inland navigation operation, such as towing, mooring and barging;
  • shipping companies engaged in high-seas shipping;
  • concessionaire or permitting companies of airfields for public service;
  • private education services;
  • legal services;
  • construction, operation and exploitation of railways and public services relating to railway transportation.
• Foreign investors holding, directly or indirectly, of more than 49% of the corporate capital of Mexican companies whose aggregate assets value at the date of acquisition exceeds an amount determined annually by the Foreign Investment Commission (currently MXN20 million (about USD1 million).

In addition, the Ministry of Economy (or when applicable, the National Banking and Securities Commission) can authorise trustee institutions to issue “neutral” investment instruments which grant pecuniary rights to their holders and, if applicable, limited corporate rights, but not voting rights in ordinary shareholders’ meetings.

Neutral investment must not be taken into account for determining the percentage of foreign investment in the corporate capital of Mexican companies.

21. Are there any exchange control or currency regulations? Are there any registration requirements under anti-money laundering laws?

Exchange Control or Currency Regulations

Currently there are no exchange controls or currency regulations in Mexico. Therefore, profits can be remitted abroad without formalities.

Anti-Money Laundering laws

Anyone carrying out “vulnerable activities” must register the activity developed with the SAT and the Federal Taxpayer Registry and will be subject to various anti-money laundering procedures, such as know-your-costumer measures and filing reports. The Anti-Money Laundering Law sets out the activities to be considered as vulnerable to money laundering, which include

• Digital assets and currencies.
• Purchase and sale of vehicles
• Gambling.
• Real estate development.
• Arts, jewellery and donations.
• Gift and prepaid cards.
• Foreign trade and/or customs services.

22. Are there restrictions on foreign ownership or occupation of real estate, or on foreign guarantees or security for ownership or occupation?

The FIL provides a special legal framework to allow foreign investors to acquire and enjoy real estate in the “Restricted Zone” (that is, within 100 kilometres of any national border and within 50 kilometres of the coast), as follows:

• The acquisition of real estate by Mexican business entities with foreign shareholders:
  • outside the Restricted Zone: real estate can be acquired without any restriction;
  • within the Restricted Zone, for non-residential purposes: real estate can be directly acquired with prior written notice to the Department of Foreign Affairs;
  • for residential purposes in or outside the restricted zone: title to and enjoyment of real estate can be acquired only through a trust, where the trustee holds direct title, and the foreigner has the right to use and enjoy the property.
• The acquisition of real estate by foreign business entities:
  • outside the Restricted Zone: Real estate can be directly acquired, with the Department of Foreign Affairs’ prior authorization;
  • within the Restricted Zone, for residential and non-residential purposes: real estate can only be acquired and enjoyed through a trust.

Directors

23. Are there any general restrictions or requirements on the appointment of directors?

Directors of companies and partnerships must be individuals and the function cannot be performed through a representative (GCL).

Directors must be persons who are:

• Have the capacity to practice, that is, are 18 or older (GCL).
• Are not:
  • brokers;
  • bankrupts who have not been rehabilitated; or
  • convicted of crimes against property
  (Commercial Code.)
  • members of the supervisory body of the same company (GCL).

Foreign nationals can be directors and participate in shareholders’ meetings and can be administrators, partners or third parties, but the corporate agreement can require, any director (for example) to have certain qualities, to be a professional, or not to carry out competitive activities on their own account.

In any case, the administrator must provide a guarantee they will correctly perform their duties, however, this guarantee must be set out in the bye-laws to be effective.]. The appointment cannot be registered in the Public Registry of Commerce (to be effective against third parties), if the guarantee has not been formally provided.

Board Composition

24. What are the legal requirements for the composition of a company’s board of directors?

Structure

A company’s administration can be structured in one of two ways, as either of the following:

• A single director is appointed as a sole administrator.
• Two or more directors are appointed to form a board of directors.

Number of Directors or Members/Shareholders

The recommendation is to choose odd numbers for a board of directors, but this is not a legal requirement. There are no minimum or maximum number of directors required.

Employees’ Representation

Employees do not have a statutory right to board representation.

Re-Registering as a Public Company

25. What are the requirements for a business to re-register as a public company or when does an entity become a reporting issuer?

Membership

Under the Securities Market Law (Ley del Mercado de Valores) (LMV) , a company is deemed a public company when it requests, obtains and maintains the registry of their shares in the National Securities Registry (Registro Nacional de Valores) (RNV). Under Articles 19–22 of the LMV, the types of companies that can register their shares before the RNV are the SAB and the SAPIB (see Question 2).

Although a SAPI can register its shares with the RNV, it must adopt the structure of a public stock corporation (Sociedad Anónima Bursátil) within ten years of registration before the RNV or at the close of the fiscal year in which its total equity exceeds about USD86.2 million (LMV).

Both types of company must never have less than two shareholders while there is no limit on the maximum number of shareholders (GCL).

Share Capital

To be able to register their shares, the companies must comply with specific requirements in their bye-laws, under Article 11 of LMV. Such requirements include that the company must:

• Be manged by a Board of Directors formed by a maximum of 25 directors of whom at least 25% must be independent.
• Appoint a general manager.
• Set up committees to support corporate and audit practices. Such committees must be formed by at least three members all of whom must be independent from the company.

Public companies can issue shares with limited or restricted corporate rights, as long as such shares do not represent more than 25% of the paid-up capital stock that has been offered to the public (LMV).

Despite the above, foreign companies can request the registration of shares in the RNV for trading in the securities market, as long as they possess equivalent or superior minority shareholders’ rights and corporate governance schemes applicable to a public stock corporation (LMV).

Other key Requirements

If the National Banking and Securities Commission cancels the registration of the shares of a public company due to a breach of the applicable legal provisions, the corresponding entity cannot continue to carry out activities on the public market and the sanctioned entity cannot be registered as a public company (LMV).

Tax

26. What main taxes are businesses subject to in your jurisdiction?

Income Tax

Mexican tax resident legal entities are required to pay income tax on their worldwide income. Mexico does not have any corporations deemed as transparent for tax purposes. This means that corporate taxation is the same for all commercial entities, regardless of their internal structure.

Non-tax residents must pay income tax in Mexico at the 30% rate when they have a permanent establishment there or when the source of income is in Mexico.

Profits are calculated by reducing from their global gross income the:

• Allowed deductions.
• Employees’ profit shares.
• Tax loss carry-forwards.

Gross income includes all types of income received in cash, in kind, in services, in credit or in any other form earned during the corresponding fiscal year. Only certain express items of income are not included, such as (among others):

• Capital contributions.
• Dividends received from another Mexican company.
• Revaluation of assets.

The fiscal year runs from 1 January to 31 December except in the first fiscal year, when it runs from the date of incorporation to 31 December. In addition, companies are required to make monthly estimated payments to the SAT.

Tax losses can be carried forward for up to ten years to offset profits of subsequent years but no carry back is allowed.

Regarding income from foreign sources, Mexican tax resident legal entities can credit direct and indirect foreign income taxes capped to the Mexican corporate tax rate, provided that such income is subject to tax in Mexico (Income Tax Law).

Income earned by foreign residents from a Mexican source is in general subject to withholding tax at varying rates, which will depend on various factors, such as the:

• Type of income, for example:
  • interest;
  • capital gains;
  • royalties;
  • technical assistance;
  • dividends.
• Tax residence of the receiving party:
  • the withholding tax is generally 25% over gross income;
  • withholding tax for receiving entities on preferential tax regimes is 40%.
  Tax treaties can reduce taxation or even eliminate this withholding requirement.

In addition, employers in Mexico are required to pay workers a share of the profits based on their annual tax return. This means that a company must pay 10% of profits to employees, but not to directors and managers, within 60 days of making its annual tax return (except in the first year of operation).

Value Added Tax

Legal entities in Mexico, regardless of their tax residence, who carry out any of the following are obliged to pay Value Added Tax (VAT):

• Selling goods.
• Providing independent services.
• Granting the temporary use or enjoyment of goods.
• Importing goods or services.

The general VAT rate is 16%, applicable to the total amount of the transaction. In some cases, the VAT Law allows the 0% rate to be applied, as well as exemption from the tax.

Taxpayers must charge (transfer) VAT expressly and separately from the persons who acquire the goods and use or receive the services. In turn, taxpayers to whom VAT is passed on when acquiring goods or services to carry out their own activity are entitled to credit that tax against their own VAT liability, provided that certain requirements are met.

VAT is paid monthly at the latest on the 17th day of the month immediately following the month in which the activity subject to that tax is carried out.

The Mexican Law of Income Tax (Ley del Impuesto Sobre la Renta) (LISR) is divided into chapters with specific rules related to incomes from dividends, royalties, business profits, interest and capital gains, among others.

27. What are the circumstances under which a business becomes liable to pay tax in your jurisdiction?

A business vehicle is subject to tax if it is a:

• Mexican tax resident.
• Foreign resident with a permanent establishment in Mexico.
• Foreign resident with Mexican sourced income.

Tax Resident Business

A company is deemed to be a Mexican resident for tax purposes if its main administration or the seat of its effective management is in Mexico.

Non-tax Resident Business

Non-tax resident companies are subject to income tax at 30% on net income if they have a permanent establishment in Mexico.

If a non-tax resident company does not have a permanent establishment in Mexico, income from Mexican sources is taxed, although the rate varies. Generally, the rate is 25%, applied on a gross basis and is usually withheld by the payer, if the payer is either a Mexican tax resident or a foreign resident with a permanent establishment in Mexico.

28. What is the tax position when dividends or profits are remitted abroad?

Mexican issuers abroad that distribute dividends or profits to the holders of such shares must issue electronic invoices (comprobante fiscal digital por internet) (CFDIs) under the LISR, only where the holders of such shares request it, applying the 10% income tax withholding, and paying this tax together with the payment for the corresponding period.

The person requesting the CFDIs must prove their status as beneficial owner of the dividends and provide the Mexican issuer abroad with the necessary information for their issuance.

29. What thin-capitalisation rules and transfer pricing rules apply?

Mexican transfer pricing rules are based on the arm’s-length principle. These rules have adopted most of the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations 2001.

Thin capitalisation rules apply to any debt incurred with a foreign-related party. The limits must not exceed the 3:1 debt-to-net equity ratio, otherwise interest associated to the excess is not deductible.

Grants and tax Incentives

30. Are grants or tax incentives available for companies establishing a business in your jurisdiction?

There are some tax, labour, and trade incentives for foreign investors. The Department of Economy has created several programmes that promote investment in different areas.

Employment

31. What are the main laws regulating employment relationships?

The main laws that regulate employment relationships, which are applicable to both foreign and Mexican individuals working in the Mexican territory are the:

• Federal Labour Law 1970.
• Social Security Law 1997.
• Employees National Housing Fund Institute Law 1972.

These laws are mandatory and are applied regardless any choice of law in the employment contract if the employment is carried out in Mexico.

32. What prior approvals (for example, work permits, visas, and/or residency permits) do foreign nationals require to work in your jurisdiction?

Non-Mexicans must have a visa to do business or any kind or work in Mexico. Foreign nationals coming to Mexico to live and work must obtain a valid work permit or residence card.

A temporary residence card to perform gainful activities is most appropriate for non-Mexicans who come to Mexico to live and work but without intending to live there permanently.

The initial cost in government fees depends on the type of permit and varies from about USD20 to about USD300, while the annual cost of renewals is about USD100 to USD190.

The time for obtaining permits also varies but usually does not exceed 60 days.