Investing In... 2021 Comparisons

Last Updated January 20, 2021

Law and Practice

Authors



Becerril, Coca & Becerril, S.C. (BC&B) is an international law firm specialised in legal and business consultancy. With more than 50 years of experience, the firm has streamlined the way in which it offers its services, thus positioning itself as the first “law and business” firm in Mexico. The firm has further increased its portfolio by specialising in intellectual property. Its litigation experts cover a wide range of legal services, including corporate, civil, business, family, and commercial arbitration law, in order to provide legal solutions in these areas. As a result of BC&B's continuous quest to strengthen its service, in 2019 it became part of Velae Legal Group, an Ibero-American group of multinational legal firms with representation in many countries, who are committed to offering clients diverse services and solutions with the highest-quality standards and professionalism.

In Mexico the civil law legal system is applicable, which is divided into three categories:

  • executive;
  • legislative; and
  • judicial.

Federal judicial power is organised by the Supreme Court of Justice as the final instance of appeal, the federal circuit courts as second instance of appeal, and the district courts as first instance of appeal.

For their part, the judicial powers of the 32 state governments decide matters such as local civil and commercial matters and criminal controversies, while the federal judicial power decides federal matters, such as IP, foreign investment, commercial matters and criminal matters of the federal jurisdiction.

Mexico is generally open to foreign investment. However, in some cases it is necessary to obtain authorisation from the Ministry of Economy, which is a federal institution, for foreign investment to participate, directly or indirectly, whenever the foreign investment reaches more than 49% of the capital stock of companies engaged in the following economic activities:

  • port services to vessels to carry out their inland navigation operations, such as towing, mooring of ropes and launch;
  • shipping companies dedicated to operating vessels exclusively in high traffic;
  • concessionary or permitting companies of aerodromes serving the public;
  • private preschool, primary, secondary, upper secondary, higher and combined education services;
  • legal services; and
  • construction, operation and exploitation of railways that are a general means of communication, and provision of public rail transport services.

Some activities are closed to foreign investment, including:

  • those strategic activities reserved for the Mexican state, such as activities related to oil and hydrocarbon extraction and exploration; planning and control of the electric system, nuclear energy, radioactive minerals, the postal service, and currency and mint; control and supervision of ports and airports; however, private entities, including those with foreign investment, may execute agreements with the relevant government departments to carry out certain activities in such sectors; and
  • activities reserved for Mexican residents, whether individuals or companies, which do not accept foreign investment.

The following activities, on the other hand, allow a limited authorised percentage of foreign investment participation:

  • 10% in production co-operative companies;
  • 25% in national air transportation, air taxi service or in specialised air transportation; and
  • 49% in:
    1. the manufacturing and distribution of explosives, weapons, ammunition and fireworks;
    2. printing and publication of newspapers;
    3. fishing;
    4. port administration;
    5. port piloting vessels services;
    6. fuel and lubricant supplies for vessels, airplanes and train equipment; or
    7. radio broadcasting.

Mexico is the second largest economy in Latin America. The country’s largest trading partner and the destination of 80% of its exports is the United States, on which Mexico is greatly dependent.

In 2019 the economy recorded an estimated growth rate of -0.1%, compared to 2.1% the previous year, due to a climate of uncertainty following President López Obrador’s first year in office, as well as reduced domestic demand and investment.

According to the updated IMF forecasts from 14 April 2020, due to the outbreak of COVID-19, GDP growth is expected to fall to -6.6% in 2020 and pick up to 3% in 2021, subject to the post-pandemic global economic recovery.

Mexico’s unemployment rate increased to 5.2% in 2020 due to the negative economic impact of the COVID-19 pandemic, but this is expected to decrease to 3.5% in 2021.

According to the World Bank’s records of 2019, Mexico's economy is diversified, including hi-tech industries, oil production, mineral exploitation, and manufacturing. Agriculture accounts for 3.5% of Mexico’s GDP and employs over 12.4% of the country’s active population. Mexico ranks among the world's largest producers of coffee, sugar, corn, oranges, avocados and limes. Cattle farming and fishing are also important activities in the food industry. Mexico is also the world's fifth largest producer – and its largest exporter – of beer.

The main document in an asset/business sale is the asset purchase agreement. Subject to specific formalities that may be required under Mexican law in connection with the assets to be transferred, this is the main document that: i) transfers the seller's title and beneficial ownership in assets to the buyer, and ii) sets out all the substantive terms of the transaction.

In the context of a cross-border transaction involving the sale of assets/businesses in multiple jurisdictions, the main structures used in Mexico are the:

  • umbrella agreement structure; and
  • hive-down.

Umbrella Agreement Structure

In the case of an umbrella agreement structure, the parent entity of each company in the buyer group and seller group negotiate and enter into a framework purchase agreement, in which the parties set out the main terms and conditions of the transaction, including the key representations, warranties and covenants, and an express obligation on each parent entity to cause the sale and purchase of the relevant assets/business in each jurisdiction.

Hive-Down Structure

In the case of a hive-down structure, the seller transfers the target assets into a special purpose vehicle (SPV) so the buyer can make a more straightforward purchase, mainly by purchasing the stock of the SPV. This structure requires oversight by the buyer in connection with the transfer of the assets to the new vehicle and the execution of a stock purchase agreement.

If the transaction is bilateral, it is more common that the buyer will prepare the first draft, while in a competitive auction, the seller will typically draft the agreement.

Additional Agreements

Parties might also enter into:

  • a non-binding or partially binding letter of intent or memorandum of understanding that outlines the main commercial and legal terms on which the transaction and purchase agreement will be based; and
  • a confidentiality agreement (or non-disclosure agreement) before any information is disclosed in due diligence.

Documents

Depending on the type of assets being transferred, the following documents might also be required:

  • public instruments and liens evidence certificates;
  • corporate documents (ie, endorsement of shares and entries in ledgers, etc);
  • assignment of securities;
  • escrow or trust agreements as holdback and/or security mechanisms;
  • employment-related notices; and
  • internal and third-party authorisations and approvals (ie, board or shareholders' approvals, creditors' or government authorisation).

There are certain precedent conditions, some of which are listed below, that must either be fulfilled or waived by the respective party.

Common Types of Conditions

  • Due diligence – the buyer might request that closing be subject to satisfactory completion of legal, financial and commercial due diligence.
  • Antitrust approval – if the transaction's effect or likely effect would be the substantial reduction of competition in the market, authorisation from the Mexican Antitrust Commission may be required.
  • Other regulatory approvals – depending on the assets and the business industry or sector, assets/shares may not be transferred without the prior approval of certain regulators, eg:
    1. oil and gas;
    2. financial institutions;
    3. telecoms;
    4. aviation; and
    5. pharmaceutical sector.
  • Foreign investment approval – approval from the Foreign Investments National Commission may be required when a foreign entity participates in the capital stock of a Mexican company and the business activities of the Mexican company are included in the list of "limited activities" set out in the Mexican Foreign Investment Law.
  • Corporate approval – the approval of the buyer's or seller's shareholders is sometimes a condition to completion (eg, where the incorporation documents of the relevant party require shareholder approval for material acquisitions or disposals, or where the entity is listed and the applicable listing rules of the relevant exchange require shareholder approval of the transaction).
  • Material adverse change – buyers will often seek to include as a condition to completion that no material adverse change to representations and warranties may occur before closing. This can be a contentious topic in negotiations as, if it is included as a condition as opposed to a termination right of the buyer, the obligation will be on the seller to show that no material adverse change has occurred.
  • Third-party consents – it will be a condition that all necessary third-party consents to the transaction have been received. This will usually be from lessors or creditors, or from relevant clients that hold the right to terminate a specific agreement in the case of change of control of the target.
  • Legal opinion – the buyer will often make it a condition that a satisfactory legal opinion from external counsel be obtained before closing.
  • Delivery of bring-down certificate – it will often be a condition that the seller must deliver a specific model of letter certifying, among other things, that, as at the closing date:
    1. the representations and warranties are true and correct;
    2. all conditions precedent have been fulfilled; and
    3. no covenants have been breached.
  • Transfer of employees – if the employees are not employed directly by the target, their transfer to the buyer immediately before closing could be a condition to closing the transaction. (Under Mexican law, if a buyer buys all the assets relevant to the business operations of the seller, the buyer may be considered a "substitute employer".)

Generally, conditions will be valid and enforceable unless a court rules to the contrary (because the condition is illegal).

The main business vehicles or legal entity forms used in Mexico are sociedad anónima or SA, which is a stock corporation; sociedad de responsabilidad limitada or S de RL, which is a limited liability company; and SAPI, which is regulated by the Securities Market Law.

Sociedad Anónima (Stock Corporation)

The stock corporation may adopt the form of a fixed capital company (SA) or a variable capital company (SA de CV). The difference is that the variable capital company may increase or decrease its capital according to its by-laws through a shareholders’ meeting without any of the formalities applicable to an SA.

Each company in Mexico must be integrated by at least two shareholders (individuals or corporations). The shareholders' liability is limited to their shares or capital contribution and the directors are liable for the management of the company.

A statutory adviser who will supervise the operations of the company must be appointed. This statutory adviser may be integrated by one or more members, which may or may not be shareholders.

Sociedad de Responsabilidad Limitada (Limited Liability Company)

The S de RL is popular among foreign investors looking for a presence in Mexico, because they can reduce their tax liabilities in the place of residence.

The partners’ liability is limited to their partnership contribution and the directors will be liable for the management. However, in this corporation there is no legal requirement to appoint a statutory adviser.

The shares, which represent the equity interests, are not freely transferrable and/or cannot be traded publicly.

SAPI

This kind of corporation is regulated by the Securities Market Law. It is widely used by investors as a vehicle to invest in Mexico because of its flexibility in corporate governance in terms of the obligations and contractual arrangements used by equity investors.

Furthermore, all companies in Mexico require a minimum of two shareholders or partners and there is no maximum, except for the S de RL in which the maximum number of partners is 50.

As mentioned above, the General Law of Business Corporations provides that any company must be established by a minimum of two partners or shareholders.

In the S de RL, the partners will determine the amount that will represent the social capital, and in the SA, the shareholders will determine the social capital and the value of the shares.

The General Law for Business Corporations establishes the rights for minority investors, which vary depending on the percentage of representation of the minority:

The general shareholders' meeting, for a stock corporation (Sociedad Anónima or SA), is the supreme management body of any company and it operates through the shareholders.

This meeting gives those holding 25% of the capital stock of the company the right to appoint and remove the board of directors or sole director and statutory auditors.

There may be judicial opposition to the resolutions of the shareholders’ meeting by those holding 25% of the capital stock of the company.

Those holding 33% of the capital stock of the company have the right to convene a shareholders’ meeting.

Those holding 25% of the capital stock of the company may exercise civil liability action against the management body and statutory auditors.

Whenever an annual shareholders’ meeting has not been called in a period of two fiscal years, a sole shareholder may call for a meeting.

The laws restricting or regulating certain takeovers and mergers are the:

  • Foreign Investment Law (Ley de Inversión Extranjera);
  • Federal Antitrust Law (Ley Federal de Competencia Económica); and
  • Securities Law (Ley del Mercado de Valores).

The National Foreign Investment Registry

According to the Foreign Investment Law (FIL) and its regulations, the following must be registered in the National Foreign Investment Registry.

Those who habitually carry out commercial acts in the Mexican Republic, provided they are:

  • foreign individuals or legal entities; or
  • Mexicans who possess or acquire another nationality and who have their domicile outside the national territory.

In addition to registering, the following must be submitted:

  • a quarterly update notice, when modifications are made to: name, denomination or company name; economic activity; tax residence; and, the income and expenses report. In the case of the last modification (income and expenses report), it is only presented if the foreign investment exceeds the threshold established by the National Foreign Investment Commission (CNIE);
  • an annual economic report, if the foreign investment exceeds the threshold established by the CNIE; and
  • cancellation (where applicable).

Mexican companies in which the following participate, including through a trust:

  • foreign individuals or legal entities and Mexican companies with a majority of foreign capital;
  • Mexicans who possess or acquire another nationality and who have their domicile outside the national territory; and
  • the neutral investment.

In addition to registering, the following must be submitted:

  • a quarterly update notice, when modifications are made to: name; denomination or social reason; economic activity; tax residence; capital and/or shareholding structure; and an income and expenses report. In the case of these last two modifications (to the capital and/or shareholding structure and to the income and expenses report), this is only presented if the foreign investment exceeds the threshold established by the CNIE;
  • annual economic report – this is only presented if the foreign investment exceeds the threshold established by the CNIE; and
  • cancellation (where applicable).

Trusts of shares or equity interests, real estate or neutral investment, by virtue of which rights are derived on behalf of:

  • foreign investment; or
  • Mexicans who possess or acquire another nationality and who have their domicile outside the national territory.

In addition to registering, the following must be submitted:

  • notice of modification to the information previously presented, when modifications are made in: fiduciary; trust matter; and trustee in the first degree. In the latter case, this is only presented if the foreign investment exceeds the threshold established by the CNIE; and
  • cancellation (where applicable).

Mexico’s commercial banks offer a full spectrum of services ranging from deposit accounts, consumer and commercial lending, corporate finance, trusts and mutual funds to foreign exchange and money market trading.

Currently, 48 banks are operating in Mexico, seven of which (BBVA Bancomer, CitiBanamex, Santander, Banorte, HSBC, Inbursa, and Scotia Bank) control 78% of the market share by total assets.

Mexico’s commercial banking sector is open to foreign competition. All major banks, except for Banorte, are under the control of foreign banks.

Following the 1994 peso crisis, banks in Mexico had been very cautious in their lending, preferring to provide loans only to their most financially sound customers.

However, banks are now beginning to implement programmes for lending to a wider range of companies, although at relatively high rates.

In general, small and medium-sized enterprises (SMEs) have trouble accessing credit.

According to a third quarter 2019 BANXICO survey of established companies, the companies’ main sources of financing were:

  • suppliers (76.0%);
  • commercial banks (34.1%);
  • other companies and/or their own headquarters (22%);
  • foreign banks (5.6%);
  • development banks (5.1%); and
  • debt issuance (3.2%).

The National Banking and Securities Commission (Comisión Nacional Bancaria y de Valores or CNBV) is the main regulator of the Mexican Stock Exchange and the Institutional Stock Exchange (Bolsa Institucional de Valores or BIva).

Legal Framework

The main legal framework is the following:

  • Securities Market Law (Ley del Mercado de Valores);
  • general regulations applicable to issuers of securities and other participants in exchange markets (disposiciones de carácter general aplicables a las emisoras y a otros participantes del Mercado de Valores), issued by the CNBV (CNBV Regulations);
  • Mexican Stock Exchange International Regulations (Reglamento Interior de la Bolsa Mexicana de Valores);
  • BIVA Internal Regulations (Reglamento Interior de la Bolsa Institucional de Valores) still pending authorisation from the CNBV;
  • general regulations applicable to the stock exchange (disposiciones de carácter general aplicables a las Bolsas de Valores), issued by the CNBV; and
  • general regulations applicable to broker-dealers (disposiciones de carácter general aplicables a las Casas de Bolsa), issued by the CNBV.

Requirements for a Primary Listing

The following are the main requirements for a primary listing on the main markets/exchanges.

A registration statement issued by the CNBV is required for any securities to be publicly offered in Mexico. To be able to trade on the stock exchange, the following must be registered with the National Registry of Securities (Registro Nacional de Valores or RNV):

  • the relevant securities; and
  • any other information documents, such as the prospectus, legal opinion, financial statements and stock certificate.

The CNBV controls the RNV, which contains a database with relevant information concerning listed securities. All issuers must file information documents with the CNBV and the stock exchange. Filings are made electronically through the CNBV and the stock exchange’s proprietary systems and only the final filing of authorised documents is made in printed form.

Companies listed on the stock exchange can be either incorporated as a corporation (Sociedad Anónima Bursátil or SAB), which is the most common form for listed companies, or as a more flexible limited liability corporation created to support new business and ventures (Sociedad Anónima Promotora de Inversión Bursátil or SAPIB). SAPIBs are used to support new businesses and to raise capital for new ventures and have more flexible listing requirements. SAPIBs must be converted into SABs within two years of listing their shares.

All public companies must adopt the minimum corporate governance requirements set out in the Securities Market Law, the CNBV Regulations and the Stock Exchange Regulations, as well as complying with the commercial practices of financial markets.

Mexico attracts the most FDI in Central and South America:

  • in addition to being very open to foreign direct investment, the country is very well integrated into the world economic order: it is a member of NAFTA, OECD, G20 and the Pacific Alliance; and
  • it enjoys a strategic geographic location and acts as a transit platform to North America and Latin America.

According to Article 7 of the FIL, the percentage of FDI participation in investment funds is limited to 49%, and this is therefore subject to analysis and regulatory review.

Merger notification in Mexico is mandatory if any of the three notification thresholds established by the Federal Economic Competition Law are met. However, the parties might voluntarily notify their merger to the Federal Commission of Economic Competition (COFECE), in order to grant certainty to the process.

According to Article 86 of the Federal Economic Competition Law the following thresholds apply for merger notification:

  • when the value of the transaction, regardless of the place of execution, results in the direct or indirect amount in Mexico being equivalent to more than 18 million times the general minimum daily wage applicable in Mexico City (GMDW), which is approximately MXN2,550,600,000 orUSD127.53 million;
  • when the transaction or series of transactions involves 35% or more of one of the economic agents’ assets or stock, whose annual turnover in Mexican territory or assets in the country, is equal to more than 18 million times the GMDW, which is approximately MXN2,550,600,000 or USD127.53 million; or
  • when the transaction or series of transactions implies an aggregate of assets or paid-in capital within Mexican territory in excess of 8.4 million times the GMDW, which is approximately MXN1,190,280,000 or USD59.51 million, and two or more of the economic agents participating in the concentration have an annual turnover or assets in Mexican territory exceeding, jointly or separately, 48 million times the GMDW, which is approximately MXN6,801,600,000 or USD340.08 million.

The Standard Merger Control Procedure

The standard merger control procedure begins with a filing before the COFECE of a written merger notification, enclosing the proper documentation.

If the written notification fails to comply with the requirements established by the Federal Economic Competition Law, the COFECE has ten working days to issue a Request for Basic Information (RFBI). Parties must respond in the same period. This period may be extended once for an additional ten working days upon request.

Once the notification is admitted, the COFECE has 15 working days to issue an additional Request for Information (RFI). Parties must respond in the same period, although this may be extended in duly justified cases.

Thereafter, the COFECE may require additional information from other economic agents related to the concentration, to conduct the analysis of the concentration, without these being considered as parties under the procedure. The required parties must respond in ten working days, although this may be extended once for an additional ten working days upon request.

The merger control procedure may last 60 working days, following the date on which the parties responded to the RFBI or RFI, as applicable, until the merger unit has assessed the operation and the board has reached a final decision.

Upon conclusion of such period without the issuance of a resolution, it may be understood that the COFECE has no objection to the notified concentration.

This standard period can be extended once by 40 working days in exceptionally complex mergers. Where a merger raises competition concerns, the COFECE shall inform the parties of such concerns within 10 working days before the board session’s agenda is made public, which allows the parties to propose conditions or remedies. Remedy submission and modifications of submitted remedies may re-start the clock for another period of 60 plus 40 working days.

The average timeframe during which the COFECE analyses mergers is shorter than the maximum legal period.

The Mexican Antitrust Law does not establish any merger remedy or commitment: however, in practice the COFECE may require either structural or non-structural remedies.

Structural remedies usually involve the sale of one or more companies, physical assets or other rights to address the competitive harm.

While non-structural remedies, often referred to as “conduct” or “behavioural” remedies, are ongoing remedies that are designed to modify the future conduct of merging companies.

In practice, the COFECE would require whatever remedies, or combination of remedies, would most likely effectively address the competitive harm, while reserving the benefits of the merger.

Conditions can be imposed by the COFECE in both foreign-to-foreign mergers and cross-border mergers relating to non-compete provisions in scope and term, divesture of certain assets and/or business units, among others.

Those decisions rendered by the COFECE can only be appealed by a foreign investor by means of an “Amparo” appeal.

An Amparo appeal is a constitutional action the unique purpose of which is to revoke an administrative or jurisdictional ruling that has been unconstitutionally issued and which therefore contravenes a foreign investor's constitutional rights. The legal term foreseen in the Amparo Law to file the initial brief before a district court is 15 working days, which shall be counted from the day on which the foreign investor was served notice with the ruling to be challenged. 

In order to obtain authorisation for foreign investments, it is necessary to file the following documentation with the National Foreign Investments Commission before the Ministry of Economy:

  • articles of incorporation;
  • by-laws;
  • power of attorney of the legal representative;
  • general information of the legal representative;
  • questionnaire to request resolution from the Commission;
  • free writing letter, in which the main characteristics of the project are described, as well as the general identification data of the applicant;
  • proof of payment of government rights;
  • if the applicant is a natural person, an updated CV or biographical summary;
  • audited financial statements for the last fiscal year;
  • the articles of incorporation of foreign companies must be verified by a Mexican consul, or apostilled, as appropriate; and
  • those documents that come in a language other than Spanish must be accompanied by their corresponding translation by an expert translator.

The National Foreign Investments Commission has a maximum of 45 business days in which to issue its resolution. Where the authority denies authorisation, this means the agreements, by-laws and all actions carried out by the parties are null and void, and therefore not enforceable with third parties.

Furthermore, foreign investors can participate in any proportion in the capital of any Mexican corporation or partnership as set forth in Article 4 of the FIL, except for activities reserved for the state or activities reserved exclusively for Mexicans or Mexican companies (with the exclusion of the foreign person's clause).

The following are the restricted sectors for foreign investment in Mexico:

  • 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.

Foreign investment in producers' co-operatives is only allowed up to 10%.

There are also restrictions on foreign investment in the following sectors, where foreign investment is permitted up to 49%:

  • 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;
  • sweet water 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; and
  • national air transportation services.

The procedure is carried out before the National Foreign Investment Commission.

The following requirements need to be met:

  • questionnaire to apply for resolution by the National Foreign Investment Commission/Authorisation of the Ministry of Economy;
  • written application, original and copy;
  • receipt of payment of applicable fees;
  • proxy signed before a public notary on behalf of the person that is promoting on behalf of the applicant. If the proxy was granted abroad, it must be duly verified or apostilled and translated into Spanish by a professional translator;
  • if the investor is:
    1. an individual: an updated curriculum vitae or biographical summary;
    2. a foreign legal person: a constituent instrument, current corporate by-laws, and an annual report or a description of the activities of the last fiscal year;
    3. a Mexican company already constituted: constituent instrument, as well as its shareholders' constituent instrument, and financial statements for the last fiscal year;
  • other documents – if the company has changed its corporate name, undergone a merger or made any other changes to its by-laws, originals and copies of the documents attesting to such modifications must be attached.

The authority has 45 business days to complete the review and its review will establish the terms and conditions that must be fulfilled for the authorisation to be valid.

Any foreigner who, in the act of incorporation of any company in Mexico or who at any future time acquires an interest or participation in such company, shall be considered because of that simple act as a Mexican national regarding said interest or participation, as well as regarding the goods, rights, concessions, participations or interests which such company might acquire, or the rights and obligations derived from the agreements entered into by the company. Such foreigner therefore agrees not to invoke the protection of its government, under the penalty, for failure to comply with same, of forfeiting said interest or participations in favour of the Mexican nation.

The National Foreign Investment Commission may decline or refuse to authorise the FDI by means of the resolution it issues within the 45-business day period.

According to the Mexican legal system, all decisions rendered by the administrative authorities can be appealed by a foreign investor before the Federal Court for Administrative Affairs (FCAA) through a Nullity Claim or, before the same authority that rendered the resolution to be appealed, through a Review Recourse.

Review Recourse

The Review Recourse is optional and can only be filed within a term of no longer than 15 working days after being served with the administrative decision that is to be challenged. The timeframe to obtain a definitive decision within the Review Recourse is usually about six months. The decision of a Review Recourse can also be appealed through the ordinary appeal remedy (Nullity Claim) before the FCAA.

Nullity Claim

The Nullity Claim can only be filed by the foreign investor within a term of no longer than 30 working days after being served with the administrative decision that is to be challenged. The timeframe to obtain a definitive decision within the Nullity Claim ranges from approximately six months to one year. 

The decisions rendered by the FCAA on Nullity Claims can only be appealed by the foreign investor within one last stage of appeal, namely the Amparo appeal.

The Amparo appeal is a constitutional action the unique purpose of which is to revoke an administrative or jurisdictional ruling that has been unconstitutionally issued and which therefore contravenes a foreign investor's constitutional rights. The legal term foreseen in the Amparo Law to file the initial brief or complaint before a defendant authority is 15 working days, which shall be counted from the day on which the offended party was served notice with the ruling to be challenged, and afterwards, the defendant authority will render its reply and remit the file to a Federal Circuit Court (FCC). A final and definitive ruling is usually issued within a term of approximately six months to one year.

The FIL sets the specific rules that allow FDI into the country and encourage its contribution to national development.

According to Article 4 of the FIL, “foreign investment may participate in any proportion in the capital of Mexican companies, acquire fixed assets, enter new fields of economic activity or manufacture new product lines, open and operate establishments, and expand or relocate existing establishments, except as otherwise provided herein”. In other words, foreigners are free to participate or carry out any lawful economic activity, provided there is no restriction in the law.

Therefore, it is important to analyse the economic activities in which the FIL establishes a limitation, classified into the following four groups.

1 Activities Reserved for the State

Some activities are strategic for the country, and therefore only the Mexican State may carry them out. These activities, listed in Article 5 of the FIL, are the following:

  • exploration and extraction of oil and other hydrocarbons, as provided by Articles 27, paragraph 7, and Article 28, paragraph 4, of the Political Constitution of the United Mexican States and the respective secondary law;
  • planning and control of the national electric system, as well as the public services of transmission and distribution of electricity, as provided by Article 27, paragraph 6, and Article 28, paragraph 4, of the Political Constitution of the United Mexican States and the respective secondary law;
  • generation of nuclear energy;
  • radioactive minerals;
  • telegraph;
  • radiotelegraphy;
  • postal service;
  • banknote-issuing;
  • minting of coins; and
  • control, supervision and surveillance of ports, airports and heliports.

2 Activities Reserved for Mexicans or Mexican Corporations

  • Domestic land transportation for passengers, tourism and freight, not including messenger or courier services;
  • development banking institutions, under the terms of the law governing the matter; and
  • rendering of professional and technical services expressly set forth by applicable legal provisions.

3 Activities with Specific Regulations

These are companies and activities in which foreign investment may participate, but only up to a maximum limit of shareholding.

  • Up to 10% in co-operative companies for production;
  • up to 25% in domestic air transportation; air taxi transportation; and specialised air transportation;
  • up to 49% in:
    1. manufacture and commercialisation of explosives, firearms, cartridges, ammunitions and fireworks, not including acquisition and use of explosives for industrial and extraction activities, nor the preparation of explosive compounds for use in said activities;
    2. printing and publication of newspapers for circulation solely throughout Mexico;
    3. series "T" shares in companies owning agricultural, ranching, and forestry lands;
    4. fresh water, coastal, and exclusive economic zone fishing not including fisheries;
    5. integral port administration;
    6. port pilot services for inland navigation under the terms of the law governing the matter;
    7. shipping companies engaged in commercial exploitation of ships for inland and coastal navigation, excluding tourism cruises and exploitation of marine dredges and devices for port construction, conservation and operation;
    8. supply of fuel and lubricants for ships, airplanes, and railway equipment; and
    9. broadcasting – within this area, the maximum of foreign investment is subject to the reciprocity that exists between Mexico and the country of constitution of the investor or economic agent who exercises control, in the last instance, directly or indirectly.

4 Activities That Require Authorisation from the National Foreign Investment Commission

In principle, corporations engaged in certain activities may only be able to accept foreign investment up to a maximum of 49% of shareholding. However, if foreigners want to acquire a higher percentage, even up to 100%, they can do so if they previously obtain a favourable resolution from the National Foreign Investment Commission.

The activities included in this category are:

  • port services in order to allow ships to conduct inland navigation operation, such as towing, mooring and barging;
  • shipping companies engaged in the exploitation of ships solely for high-seas traffic;
  • concessionaire or permissionaire companies with airfields for public service;
  • private education services of pre-school, elementary, middle school, high school, college or any combination;
  • legal services; and
  • the construction, operation and exploitation of general railways, and public services of railway transportation.

Finally, a special provision is also contained in Article 9 of the FIL, which establishes that a favourable resolution from the National Foreign Investment Commission is also required for foreigners to participate, directly or indirectly, in a percentage higher than 49% of the capital stock of Mexican companies when the aggregate value of the assets of such companies at the date of acquisition exceeds the amount determined annually by such commission. This amount is published annually in the Official Gazette of the Federation and may be found at the website of the Secretariat of Economy. In this case, the General Resolution No 17, is the one that is currently in force.

Authorisation from the National Foreign Investment Commission is required for:

  • foreign investment to participate in a percentage higher than 49% in the economic activities and companies referred to in Article 8 of the FIL;
  • foreign legal entities, wishing to establish themselves in Mexico, to carry out the economic activities referred to in Article 8 of the FIL; and
  • foreign investment to participate, directly or indirectly, in a percentage higher than 49% of the capital stock of Mexican companies when the aggregate value of the assets of such companies at the date of acquisition exceeds the amount determined annually by such Commission, in accordance with Article 9 of the FIL.

An individual will be considered Mexican resident for tax purposes if such individual establishes residence in Mexico or if such individual’s centre of vital interests is in Mexico.

Companies will be liable to pay taxes in Mexico when (i) such companies are Mexican residents, or (ii) they are non-resident companies obtaining income from Mexican sources.

Taxes in Mexico are divided into federal and state taxes. Some of the federal taxes that Mexico has are: income tax, value added tax (VAT) and social security, among others.

Income Tax (Impuesto Sobre la Renta)

Income tax is paid on gross income less the applicable or authorised deductions, carryover losses, special reductions and certain taxation paid abroad (at a maximum rate of 30%).

Value Added Tax (Impuesto al Valor Agregado)

VAT at 16% is paid on the sale of goods, services, granting the use of certain goods and importation of goods. Some goods, like food and medicines, are not subject to VAT.

Local Taxes

These include:

  • Real Estate Transfer Tax paid on the purchase of real estate – on land and buildings. Each state has its own rate; and
  • Real Estate Holding Taxes paid annually by holders of real estate in the relevant state.

An additional 10% tax is levied on dividend distributions to individuals and foreign residents if the distribution corresponds to after-tax earnings, although tax treaties may reduce or eliminate this tax.

Also, dividends received from a foreign company by a Mexican tax resident must be included in the recipient's gross income and the relevant tax paid. The taxpayer can then receive credit on income tax paid abroad on those dividends.

Interest paid is subject to withholding tax at various rates, depending on a number of factors, with the maximum rate being 35%.

Double-tax treaties can reduce taxation or even eliminate it.

Tax consolidation is not available under Mexican regulations.

State taxes on transfers of real property cannot usually be avoided. However, certain transfers of real estate may not be subject to transfer of title tax in some states (eg, transfers made within a certain period following a prior transfer in which the transfer tax was paid, provided the price is unchanged). If the sale price is higher, then transfer of title tax will be paid on the increase in price.

Mexico still has a high corporate tax rate. Tax transparency treatment has been granted in Mexico to some vehicles since the end of the 1990s through particular rulings approved by the Mexican tax authority. Subsequently, and due to the growth of the sector, the tax authority incorporated a rule to grant such transparency to vehicles such as limited partnerships, provided that, among other things, they were created in a country with which Mexico had entered into a tax information exchange agreement.

In this regard, in the tax reform for 2020, Article 205 was added in order to maintain the transparency tax regime for foreign legal entities that manage private capital investments in legal entities resident in Mexico – only for interest, dividends, capital gains, and lease of real estate – and subject to compliance with specific requirements, as follows:

(i) the manager of the fund or its legal representative in Mexico, must file before the tax authorities a record of all the members of the entity in each year, including the documentation proving the tax residence of each member;

(ii) the fund has been set up in a country or jurisdiction with which Mexico has a tax information exchange agreement;

(iii) the members of the fund, including the manager, reside in a country or jurisdiction with which Mexico has a tax information exchange agreement;

(iv) the members of the fund, including the manager, should be the effective beneficiaries of the income received by the fund;

(v) the income attributable to members who are resident abroad should be effectively recognised by them as taxable; and

(vi) the income obtained by the members residing in Mexico should be recognised as taxable in accordance with the applicable tax provisions.

In the event that any of the requirements indicated above in points i, iii, iv, v and vi, are not met, the fund will not enjoy fiscal transparency with respect to the proportion of the member for whom the requirement could not be met.

According to the Income Tax Law, the rules for anti-evasion apply to interest and royalty payments made to foreign entities which qualify as tax havens.

Corporate Income Tax Law states that companies that take on operations with related parties that are local or resident abroad will have to keep records of the documentation that proves their income and deductions were made according to the prices charged or payments made by independent parties in similar transactions.

Taxpayers that undertake transactions with related parties are required to determine their revenues and deductions allowing for prices and amounts of consideration that would have been applied by or between independent parties in comparable transactions, applying the transfer pricing methods.

Among related parties, where one of them participates, directly or indirectly, in the administration, control or equity of the other, or when a person or group of persons participates, directly or indirectly, in the administration, control or equity of said persons, Mexican legislation requires the procurement and conservancy of evidentiary documentation, in the case of taxpayers that undertake transactions with non-resident related parties.

Mexican legislation recognises six methods for transfer pricing:

  • comparable uncontrolled price method (método de precio comparable no controlado);
  • resales price method (método de precio de reventa);
  • cost plus method (método de costo adicionado);
  • profit split method (método de partición de utilidades);
  • residual profit split method (método residual de partición de utilidades); and
  • transactional operating margin method (método de márgenes transaccionales de utilidad de operación).

The Federal Labour Law (FLL) provides that its mandatory to execute an employment agreement with all employees, since all terms and conditions, as well as both rights and obligations of employee-employer, are agreed upon.

The execution of an agreement is the sole obligation of the employer but even if an agreement between the parties has not been reached, the FLL provides that when an individual renders personal and subordinated services to another party in exchange for a contribution, it is an employment relationship with the same obligations as if an agreement had been reached.

The FLL provides that an employment relationship can be for a specific task or definite term, for a specific season or indefinite term, and as applicable, such employment relationship can be subject to a trial or training period.

The most common type of employment agreements are entered into for an indefinite period of time.

An employer can hire employees for a definite time or specific tasks or for an unlimited term and provided by the FLL.

A seasonal agreement is used when an employer has an increased workload during specific periods of the year.

Trial and training periods are limited to three months, and six months in the event of a managerial position. These conditions must be agreed in writing and the employer must guarantee social security obligations. In addition, trial periods may not be applicable simultaneously or successively to the same employee, whether in the same or different positions within the company.

Collective bargaining and labour union arrangements are very common, especially in the industrial sector.

The Mexican constitution and the Federal Labour Law outline the mandatory benefits that an employee is to receive. Also, there may be additional private benefits that the employee can receive as well.

  • Christmas Bonus/Aguinaldo – equivalent to a minimum of 15 days' remuneration, must be paid before 20 December each year;
  • vacation and vacation bonus – employees who complete one year of service will enjoy an annual period of paid holidays, six working days for the first year, which increases by two working days each year up to a total of 12 working days. After the fourth year of service, the vacation period increases by two days for every five years of service. The vacation bonus is 25% of the corresponding salary during the vacation period;
  • weekly rest day – for every six days of work, the employee will enjoy one day of rest with at least full salary;
  • Sunday bonus – if the employee works on their day of rest, they are entitled to a Sunday bonus of 25% on the salary of an ordinary day's work;
  • maternity leave – working mothers will enjoy a break of 84 days of rest for childbirth;
  • adoption leave – working women will have six weeks of rest leave in the case of adoption of an infant, counted from the day they receive the child;
  • breastfeeding period – up to a maximum term of six months, a mother may have two extraordinary rests per day of half an hour each to feed her child in a suitable and hygienic place, or the employee can agree with the employer to reduce the employee’s working day by one hour during the indicated period;
  • paternity leave – an employee who is a father can rest for five days when the child is born;
  • premium of seniority – this corresponds with the termination of a work relationship or voluntary resignation, as long as the worker has worked 15 years or more for the same employer at the time of resignation (also applies if the employee is unjustifiably dismissed);
  • benefits for voluntary resignation – consists of payment of the Christmas bonus, vacation bonus and accrued vacation days and the seniority bonus if the employee has worked for more than 15 years for the same employer;
  • severance pay – compensation of three months of salary plus the prorated mandatory federal benefits; and
  • profit sharing/PTU – 10% distribution of declared profits to be paid within 60 days after the federal tax filing deadline (30 May).

In case of an acquisition, change of control or other investment transaction, there is no obligation to consult employees or obtain their consent, if the sale will not affect employment conditions or result in a reduction in the workforce.

Following an acquisition or any investment transaction, an employer substitution process occurs, if the buyer is to continue the company's operations. The Federal Labour Law provides that such a substitution can be done if all employment conditions are at least matched by the new employer.

The date of the substitution must be established and notified to the employees, as well as to the labour authorities, such as the Social Security Institute, National Housing Agency and the local or federal Ministry of Labour, depending on the activity of the employer.

For such a substitution to be enforceable, the employee must agree to it by entering into an employers' substitution agreement. This must contain a clause reflecting Federal Labour Law requirements regarding employment conditions, ie, that all employment conditions are at least equal to those of the original employment relationship.

If there is a collective bargaining agreement (CBA), the substitution process will normally be negotiated with the relevant union. Unions normally require that the new employer should sign a CBA with the union, to protect the employees and secure the same working conditions.

If the foregoing is not possible, the new employer must negotiate termination of the CBA with the union.

In the event that an employee refuses to enter into the substitution agreement, full severance must be paid to that employee and their employment may be terminated.

The protection of intellectual property in Mexico is very important to the country’s ability to attract foreign direct investment.

The protection of intellectual property changed significantly when Mexico became a party to the North American Free Trade Agreement (NAFTA) in 1994, as well as entering into other international accords to ensure the protection of IP.

Mexico is a signatory to the most important IP treaties and a member of several international organisations protecting IP, such as the:

  • Paris Convention for the Protection of Industrial Property 1883 (Paris Convention);
  • Nice Agreement Concerning the International Classification of Goods and Services for the Purposes of the Registration of Marks 1957;
  • Lisbon Agreement for the Protection of Appellations of Origin and their International Registration 1958;
  • Patent Co-operation Treaty 1970 (PCT);
  • WIPO Vienna Agreement Establishing an International Classification of the Figurative Elements of Marks 1973;
  • Locarno Agreement Establishing an International Classification for Industrial Designs 1968;
  • WIPO Protocol Relating to the Madrid Agreement Concerning the International Registration of Marks 1989 (Madrid Protocol); and
  • Mexican Institutions of Industrial and Intellectual Property, as long as the courts are effective in duly protecting and enforcing IP rights.

Regarding industries or sectors, Mexico has one of the largest manufacturing sectors in the world. Mexico's automotive assembly plants are known to attract significant levels of FDI and its manufacture of consumer electronics and heavy machinery are notable FDI generators that take advantage of Mexico's unique location and trade network.

In Mexico, the sectors or industries generally seek to protect their IP rights in order to avoid infringing on any third-party rights and to avoid any contingency thereof, and to have proper protection to eventually enforce these rights.

Mexico has committed to modernising its regulations as proof of its support for business innovation. Moreover, Mexican intellectual property laws have evolved over time to benefit the protection and enforcement of invention copyrights and trade marks.

As a member of the World Intellectual Property Organisation, Mexico is subject to the provisions of a number of treaties on intellectual property and provides strong intellectual property protection to IP owners.

As a matter of fact, Mexico has recently executed treaties that guarantee its place in the forefront of international best practices, such as the United States–Mexico–Canada Agreement (USMCA), a totally new industrial property law, and recent reforms regarding copyrights that will definitely fortify Mexico's legal IP practice and the enforcement of rights in commerce and on the internet.

Mexico is quite effective regarding its timeframes in the granting of rights, and an IP right is obtained more quickly in Mexico than in most other jurisdictions in Latin America and the world.

The main regulations that safeguard individuals' data in Mexico are the Federal Law on the Protection of Personal Data Held by Private Parties (FLPPP) and its regulations, and the Privacy Notice Guidelines, with the latter being adopted by private parties in order to let their users know how their data will be treated.

The legal framework applicable to public federal government entities is the Federal Law on the Protection of Personal Data Held by Private Parties, as well as the General Guidelines for the Protection of Personal Data in the Public Sector.

The agency in charge of enforcing data protection regulations is the National Institute of Transparency, Access to Information and Protection of Personal Data, or the INAI for its initials in Spanish.

Any unlawful processing of personal data may be sanctioned by the INAI with fines ranging from 100 to 320,000 UMA (currently the value of one UMA is MXN86.88). Fines may double if the processing of sensitive personal data is involved. Finally, unlawful processing of personal data may give rise to civil liability and possible criminal offences.

There are no further issues at the present time.

Becerril, Coca & Becerril, S.C.

Leibnitz 117 Ph1, Col. Anzures
Alcaldía Miguel Hidalgo
Z.C. 11590, Mexico City

(5255) 5263 8730

(5255) 5263 8731

main@bcb.com.mx www.bcb.com.mx
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Law and Practice in Mexico

Authors



Becerril, Coca & Becerril, S.C. (BC&B) is an international law firm specialised in legal and business consultancy. With more than 50 years of experience, the firm has streamlined the way in which it offers its services, thus positioning itself as the first “law and business” firm in Mexico. The firm has further increased its portfolio by specialising in intellectual property. Its litigation experts cover a wide range of legal services, including corporate, civil, business, family, and commercial arbitration law, in order to provide legal solutions in these areas. As a result of BC&B's continuous quest to strengthen its service, in 2019 it became part of Velae Legal Group, an Ibero-American group of multinational legal firms with representation in many countries, who are committed to offering clients diverse services and solutions with the highest-quality standards and professionalism.