Mexico has a rigid legal system, where codification is the first and main instrument, with the Federal Constitution being the pre-eminent source of law. Mexico is a federal republic, where the federation and the states have specific jurisdiction (Competencia) determined by the Federal Constitution.
The Federal Judicial Branch is organised with the Supreme Court of Justice at the top, followed by Circuit Courts, one magistrate court (appeal courts) and district courts (first instance).
The Supreme Court is a constitutional court, and the direct interpreter of the Federal Constitution.
The states are organised with an executive, judicial and legislative branch, each with their respective codes.
As a rule, the Foreign Investment Law (FIL) allows foreign investors and Mexican companies controlled by foreign investors to do the following without prior approval:
The only exceptions to this general rule are those expressly established in the FIL itself, and certain limitations concerning the direct ownership of real estate in the country.
Such exceptions refer to economic activities that are:
Activities Reserved to the Mexican State
The FIL reserves certain strategic areas to the Mexican State. No private investor may engage in:
Activities With Foreign Investment Equity Limitations
The FIL establishes foreign ownership limits in certain companies, activities and types of shares, as set forth below:
These limits may not be exceeded either directly or through any type of agreement or corporate structure or scheme, except through a particular type of shares, called “neutral” shares, which are regulated by the FIL.
Under the FIL, prior approval is required for foreign investors to own more than 49% of a company engaged in any of the following activities:
Some of the limitations identified in this section may be overruled by express provisions in free trade or other commercial treaties entered into by Mexico.
Articles 8 and 9 of the FIL provide that prior authorisation from the Foreign Investments Commission must be obtained when foreign investors intend to participate, directly or indirectly, with more than 49% of the shares of a Mexican company whose assets exceed a certain amount determined each year by the Commission. At the time of writing, this amount is approximately MXN22.6 billion.
In order to obtain authorisation from the Commission, an application must be filed. The application mainly consists of a filing explaining the details of the underlying investment, together with responses to a standard questionnaire providing certain information to the Commission with respect to the type of investment to be made in Mexico, and evidence of the benefits for the Mexican economy. Certain support documentation must be enclosed with the application, such as:
After these documents have been filed, the Commission will issue a resolution within four months.
Parties that fail to notify and go on to implement a transaction without obtaining previous authorisation from the Commission are subject to fines ranging from MXN103,740 to MXN518,700 (approximately). In addition, pursuant to Article 37 of the FIL, transactions can be nullified and will not have any legal effects on the parties or third parties.
The Commission construes the obligation of obtaining this authorisation to apply only when foreign investment will participate in an entity for the first time. Thus, if the target company has foreign investment participating in excess of 49%, no authorisation is required for the transfer of such participation to another foreign investor.
On the other hand, if the foreign investor is seeking to acquire real property in a Mexican restricted zone through a trust agreement, approval from the Ministry of Foreign Affairs (Secretaría de Relaciones Exteriores) is required for banks to acquire, as trustees, rights to real estate located within the restricted zone – namely the zone within 100km of borders and 50km of the Mexican coast, when the main purpose of the trust is to allow the use and exploitation of such assets without constituting real estate rights over them, and the beneficiaries are (i) Mexican companies without a foreigner’s exclusion clause, and (ii) foreign individuals or foreign legal entities.
Also, all foreign investors and Mexican companies with foreign investment are subject to registration with the National Registry of Foreign Investment (Registro Nacional de Inversiones Extranjeras or RNIE). Upon registration with the RNIE, periodic reporting obligations arise, and failure to comply with these obligations may trigger the imposition of fines.
Upon filing the required authorising documentation with the Commission, the target company must complete an application under which it commits to comply with the following obligations.
After the target company files the corresponding application containing the above-mentioned commitments, the Commission will either approve or deny the investment.
As a general rule, any entity (understood as natural or legal persons) who is established or located in Mexican territory can challenge any resolution issued by the Mexican authorities that constitutes a legal substantive violation or a human rights violation.
The competent judicial branch to resolve the dispute can be determined following a case-by-case analysis. The judicial branches that can resolve denials of authorisations by the Commission are as follows.
Administrative Ordinary Remedies Before Federal Courts
Regarding federal administrative ordinary remedies, the affected party may file an appeal for revocation or a nullity trial, as follows.
Constitutional Appeal (Amparo) Procedure
If the investment denial resolution violated human rights/constitutional guarantees under the Mexican Constitution, the affected party can file a constitutional appeal before the competent Collegiate Circuit Courts (Tribunales Colegiados de Circuito). The affected party can file the following extraordinary remedies.
In Mexico, the General Law on Commercial Companies (Ley General de Sociedades Mercantiles – GLCC) provides for several types of structures that may be adopted by a company. However, the main – and most commonly used – forms are:
Pursuant to the GLCC, each of the foregoing must be incorporated by at least two individuals or entities, each of whom/which must subscribe at least one share/partnership interest.
In addition, pursuant to the GLCC, each of the above-mentioned forms of companies may adopt the variable capital form, whose amount may be unlimited. Generally, adopting such modality will allow companies to increase and decrease their variable portion of the capital stock through an ordinary shareholders’ or partners’ meeting, as applicable, in which case an amendment to the by-laws would not be required.
As a general formality, the incorporation of a company is formalised by appearing before a Mexican notary public who attests to the incorporation (as briefly described in 3.2 Incorporation Process). Pursuant to the GLCC, for each of the above-mentioned forms of companies, the liability of the shareholders/partners and management are generally as follows.
Together with the SA, the SAPI is widely used as a vehicle to invest in Mexico because of its flexibility in corporate governance.
The main steps regarding the incorporation process of a company (the “NewCo”) are as follows:
Once the notary public has all the information requested (eg, KYC information), it could take roughly one to three weeks for the incorporation deed to be issued and recorded in the Public Registry of Commerce by the notary public.
As provided for in the GLCC, companies must hold an annual shareholders’ or partners’ meeting; for the SA and SAPI specifically, such annual meeting should take place within four months following the end of each fiscal year (ie, from January through April of each year).
Likewise, as provided in the GLCC, the board of directors shall submit an annual report to the shareholders’ meeting on the operations and the accounting policies observed by the NewCo and include financial statements at the end of each fiscal year.
Companies that have foreign investment need to be registered with the RNIE and comply with the annual economic report and quarterly report filings, if applicable.
From a tax perspective, non-resident shareholders of a Mexican resident company may use a generic tax identification number for purposes of shareholder registry records. In this case, the company must file the list of non-resident partners or shareholders who choose not to register with the RFC, within the first three months immediately following the close of each fiscal year.
Pursuant to the provisions of the Federal Fiscal Code (FFC) and the Miscellaneous Tax Ruling for 2022, when incorporating the NewCo, the identification of the controlling parties (as provided in Article 32 B quater of the FFC) of the shareholders/partners of the NewCo is mandatory. In most of the corresponding cases, the person in charge of applying this rule will be the notary public, who will assist those who wish to incorporate a Mexican legal entity.
As a supreme body, the shareholders’ or partners’ meeting is empowered to elect, re-elect and remove the sole director/manager or the board of directors/managers, as applicable. While management of an SA and an S de RL may be entrusted to either a sole administrator or a board of directors, whose members may or may not be shareholders/partners of the company, management of a SAPI shall always be entrusted to a board of directors.
The sole director/board of directors may establish committees to support and aid the board in its various duties (eg, audit committee, compensation committee).
In general terms, directors are bound to follow and implement the instructions received from the shareholders’ or partners’ meeting, and to comply with the duties imposed on them under the applicable law and the by-laws of the company. Directors have a general duty to perform their activities prudently and with the same care they would ordinarily take in their personal affairs. Any director who, in any given matter, has a conflict of interest in relation to the company must disclose the nature of the conflict to the other directors and refrain from participating in any resolution in connection therewith.
In addition, directors have confidentiality obligations with respect to non-public information of the company.
Regarding the corporate veil, any legal entity recognised by Mexican law has a different and independent legal personality and capacity, assets and liabilities from those of its shareholders/partners or holding entity. However, a few judicial precedents suggest that the corporate veil might be pierced under certain specific circumstances.
The rules governing the employment relationship are enshrined in law, collective bargaining agreements and employment agreements.
Under the Mexican legal framework, an employment relationship can be established without the need for an employment contract, generating the same effects and consequences. An employment relationship can be established when there is a relationship of superordination and subordination, and when there is remuneration. An employment contract is a contract whereby a person agrees to work for another person in a subordinated manner, in return for remuneration.
Working conditions should be in writing, and the document should contain the following details, among others:
It is important to emphasise that the lack of a written document containing the above-mentioned working conditions will not deprive the employees of the rights arising from the labour laws and the services rendered to the employer. In any case, the employer will be considered responsible for the lack of a written document.
An employment relationship may be for specific work, a fixed period, a seasonal period or an undetermined period. It may also be subject to a trial period or initial training.
The Federal Labour Law regulates working sessions (jornada de trabajo) of eight hours per day maximum, with the following stipulations:
It is important to note, however, that the law also contemplates the payment of a salary per worked hour.
Overtime hours should be paid at double the regular hourly rate of the working period.
The Federal Labour Law stipulates the following causes for the termination of an employment relationship:
The employer or the employee may terminate the employment relationship at any time without responsibility only under the specific circumstances mandated by the Federal Labour Law. In this case, the employer shall pay the corresponding indemnification to the terminated employee.
If the employer terminates the employment relationship outside any of the specific circumstances contemplated by the Federal Labour Law, they must also pay outstanding salaries after the date of the termination, for up to a maximum period of 12 months.
The Federal Labour Law refers to collective redundancies as a consequence of the closing of businesses or the definitive reduction of a workforce. Pursuant to Article 434 of the Federal Labour Law, collective redundancies may occur in the event of a force majeure or fortuitous event that is not attributed to the employer, inability to pay, the depletion of the natural resource in the case of extractive industries, and bankruptcy and insolvency. In these cases, employees are entitled to receive an indemnification of three months’ salary and the seniority premium.
Employers are not obliged to consult employees regarding the organisation of the company, business model, etc. Nonetheless, employees must be informed of relevant decisions that may affect their job conditions, etc.
Individuals receiving income in the context of an employment relationship are subject to income tax at progressive rates that range from 0% to 35%.
Employers are required to withhold the corresponding tax from salary payments and remit it to the Mexican tax authority on a monthly basis.
Social Security Quotas
Employers and employees are required to make contributions to the social security system.
To that effect, employers must withhold the applicable quotas from salaries and remit such quotas to the Mexican Social Security Institute (IMSS) and the Institute of the National Fund for Workers’ Housing (INFONAVIT).
These contributions are determined based on specific percentages applicable to items of social security coverage (ie, labour risks, maternity and illnesses, life and disability, retirement and severance due to old age, childcare and social benefits, and contributions to INFONAVIT) and daily salary amounts, which are subject to caps.
Local Payroll Taxes
Employers making payments to individuals under an employment relationship are obliged to pay a local payroll tax to the state in which the employment relationship occurs or labour is performed. Such tax is determined by the total salaries paid by the employer in the respective state. Payroll tax rates vary from 0.5% to 3%, depending on each state.
Mexican resident companies are required to pay a federal income tax on worldwide income, regardless of the location of its source. The current corporate income tax rate is 30%. There are no local or municipal income taxes.
Income tax is determined by applying the corporate tax rate to the company’s tax result. The tax result is determined by subtracting the authorised deductions from all items of taxable income.
To be deemed as deductible, expenses must satisfy general requirements (ie, being “strictly indispensable” for the business activity of the taxpayer) and specific requirements based on the nature of each expense.
Authorised deductions include returns, discounts and rebates on sales, the cost of goods sold, expenses and capital expenditures (ie, depreciation or amortisation of fixed assets, deferred expenses and deferred charges), among others.
Non-resident companies are required to pay income tax in Mexico on all income that is attributable to a permanent establishment located in Mexico or on all income obtained from Mexican sources.
In general, Mexican source income obtained by non-Mexican tax residents is subject to withholding tax. In the absence of tax treaty provisions, the following withholding tax rates apply:
The income tax must be paid on an annual basis; however, taxpayers are obliged to submit monthly estimated income tax payments, which are calculated based on the current year’s revenues multiplied by a “profit factor” determined by the prior year’s figures (taxable income/total revenues).
Once a corporation has paid the income tax, after-tax earnings may be distributed to the shareholders with no additional tax charge at the corporate level. However, if the distribution is made in favour of an individual or a non-Mexican tax resident, the payment will be subject to an additional 10% dividend tax, which must be withheld by the distributing company.
Net operating losses may be carried forward for a period of ten years. No carry-back is allowed.
Value-Added Tax (VAT)
Mexican VAT is a consumption tax that is applied to the importation of goods, the sale of goods, the rendering of independent services and the use of goods. The general VAT rate is currently set at 16%.
VAT is meant to pass along each phase of any good’s production process. Thus, taxpayers will, in general terms, be entitled to credit the input VAT against the output VAT. VAT-favourable balances or VAT due must be submitted to the tax authority on a monthly basis by filing a VAT return. VAT-favourable balances may be requested in a refund or may be credited against future VAT collections.
Special Tax on Goods and Services
This excise tax sets forth a specific tax rate per each type of good, comprising the production, sale or import of goods, including tobacco, alcoholic beverages, certain fuels, pesticides and food with high caloric content.
Incentives and tax credits are as follows.
There is an optional income tax consolidation regime that allows a partial consolidation of income of corporate groups. However, due to its restrictions and limitations, most companies in Mexico do not elect to file consolidated tax returns.
There is a three-to-one debt-equity ratio limitation on the deduction of interest deriving from intercompany loans. Interest that exceeds such ratio is non-deductible.
In line with BEPS Action 4 (Limiting Base Erosion Involving Interest Deductions and Other Financial Payments), a fixed ratio rule applies in Mexico, limiting a company’s net interest expense deduction to 30% of the company’s EBITDA. Interest that is non-deductible pursuant to this rule may be carried forward for ten years. A de minimis rule applies under which this limitation is applicable only to annual net interest exceeding MXN20 million.
As an OECD member, Mexico has adopted transfer pricing legislation recognising the arm's length principle. In general, Mexico has been an active adopter of the OECD’s transfer pricing standards as set forth in the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations and in BEPS Action 13 (Transfer Pricing Documentation and Country-by-Country Reporting).
General Anti-avoidance Rule
The Mexican Federal Tax Code contains a general anti-avoidance rule, which sets forth a business purpose test as a standard to be applied by tax authorities in the tax review of transactions that generate tax benefits. Under this rule, tax authorities may recharacterise transactions that lack a business reason or may disregard such a transaction if they consider that it does not have real economic substance.
Mandatory Disclosure Requirements
Taxpayers and tax advisers are obliged to disclose certain transactions to tax authorities if they generate a tax benefit in Mexico and meet any of the hallmarks listed in the Federal Tax Code. The mandatory disclosure requirements are based on the European Union’s DAC6, with significant differences.
In Mexico, the Federal Competition Law (FCL) sets forth that a Concentración is a merger, acquisition of control or any act by virtue of which companies, associations (JVs), shares, trusts or assets in general are made between competitors, suppliers, customers or any other economic agent.
When certain parameters are reached, and before a merger is fully executed, the Antitrust Commission must approve the operation.
Pursuant to the FCL, the approval of the Antitrust Commission is required in the following scenarios:
The parties must file a petition with the Antitrust Commission, which must review the relevant market to rule out a possible anti-competitive effect. The Commission can request any information from the filing parties or even third parties regarding the Concentración. When all the information is rendered to the satisfaction of the Antitrust Commission, a ruling is approved with certain conditions, or a denial of the Concentración is rendered within 60 working days.
Once a Concentración is approved, the ruling will be valid for a period of six months, which can be extended once for the same duration.
The FCL sets forth that any agreement between competitors is forbidden (competitors’ agreement) and will be punished. The specific conducts covered are:
It is important to point out that the legal framework sets forth that an anti-competitive agreement must be deemed unlawful per se. Thus, there is no room for an interpretation in favour of pro-competitive effects around an anti-competitive agreement (rule of reason).
The sanction for carrying out a competitor’s agreement could be a fine of up to 10% of gross revenue in the specific year, or criminal and administrative sanctions for the individuals who committed or were instrumental to the competitor’s agreement.
Under the FCL framework, there will be an abuse of dominant position involving an economic agent with substantial market power (as determined on a case-by-case basis by the Antitrust Commission) in the event of:
It is important to differentiate from the cartel or competitors’ agreement where the sanctioning does not take possible efficiencies into consideration; in a case of abuse of market power, the economic agent has the burden of proof for showing that its conduct provides efficiencies to the relevant market in order to avoid sanctions.
A patent confers on the patentee an exclusive right to use an invention, and is granted for a non-renewable period of 20 years. The application for registration of a patent should be filed with the Mexican Institute of Industrial Property (IMPI), which will carry out an initial examination of the formal requirements of the application, and will publish the application in the Official Gazette if it is approved and the corresponding fees are paid.
For a period of two months after the application is published, the IMPI may receive observations from any person regarding the compliance of the application with the requirements established in the law. Once the application is published, the IMPI will initiate a revision of the merits of the application, considering, if necessary, the information received as a result of the publication of the application.
Where there is no impediment, the IMPI will grant the patent to the patentee, which will be subject to the payment of the corresponding fees. Once granted, the patent will be published in the Official Gazette. The IMPI may initiate a “Procedure of Administrative Declaration” ex officio or upon the request of a party and impose sanctions. The Federal Tribunals will have jurisdiction over civil, commercial or criminal controversies, without prejudice to the right of the parties to agree to an arbitration procedure.
Trade mark holders are given the exclusive right to affix the trade-marked sign to the goods and offer them for sale or during trade. The registration will be valid for ten years and can be renewed for the same duration. To obtain the registration, an application should be filed with the IMPI alongside the payment of the corresponding fees.
The IMPI will publish the application in the Official Gazette and grant a period of one month to receive observations or comments from any person regarding the application. When the deadline for observations and comments expires, the IMPI will analyse the merits of the application and grant a period of two months to the petitioner to state its position. Once the proceeding is concluded, the IMPI will issue a resolution granting or denying the trade mark. The resolution should be published in the Official Gazette.
The IMPI may initiate a “Procedure of Administrative Declaration” ex officio or upon the request of a party and impose sanctions. The Federal Tribunals will have authority over civil, commercial or criminal controversies, without prejudice to the right of the parties to agree to an arbitration procedure.
The holder of the registration of an industrial design has a temporary exclusive right to use the industrial design. The registration is valid for five years and renewable for up to 25 years.
The application for registration of an industrial design should be filed with the IMPI, which will carry out an initial examination of the formal requirements of the application and publish it in the Official Gazette if the application is approved and the corresponding fees are paid. Once the application is published, the IMPI will initiate a revision of the merits of the application. Where there is no impediment, the IMPI will grant the registration of the industrial design; once granted, it will be published in the Official Gazette.
The IMPI may initiate a “Procedure of Administrative Declaration” ex officio or upon the request of a party and impose sanctions. The Federal Tribunals will have authority over civil, commercial or criminal controversies, without prejudice to the right of the parties to agree to an arbitration procedure.
A copyright grants the author of a literary, artistic or scientific work exclusive moral and economic rights over the work. The economic rights over the work will be valid during the author’s life, and for 100 years after their death and 100 years after being published. Moral rights are granted to the author in perpetuity.
The application for registration should be filed with the National Institute of Copyrights (INDAUTOR), which is in charge of the Public Registry of Copyrights. The INDAUTOR will determine the resolution of the application within 15 days. The inscription in the Registry is only declaratory, and not constitutive of rights. Once the inscription is made, the applicant will have 30 days to request the corresponding certificate.
The INDAUTOR oversees the enforcement of copyrights. Federal Tribunals will have authority over copyrights; however, when controversies arise between private parties, they may choose State Tribunals or an arbitration procedure to solve the controversy. When the controversy relates to an official communication or act of the INDAUTOR, the Federal Tribunal of Administrative Justice will have authority.
IP rights over software are protected by the Federal Law of Copyright under the same terms as for literary works. Unless otherwise agreed, economic rights over computer software belong to the employer when the software is created by one or several employees in the performance of their functions or following the instructions of the employer. The holder of the economic rights of the software may, among others, authorise or prohibit:
Databases that constitute intellectual creations are protected by the Federal Law of Copyright under the same terms as compilations; such protection does not extend to the data and materials contained in the database. However, databases that do not constitute original work are protected in their exclusive use for a period of five years. The holder of economic rights over the database may, among others, authorise or prohibit:
Trade secrets are protected by the Federal Law for the Protection of Industrial Property. The person in control of the trade secret may convey the trade secret or authorise the use of it. The authorised person is obliged to maintain the confidentiality of the trade secret. A person or entity that obtains information containing a trade secret by any immoral or unlawful means will be held accountable.
Article 6, Section A, Subsection II of the Constitution of Mexico recognises data privacy as a human right and protects all information that relates to a person’s private life and personal data through the laws of Mexico.
Likewise, in Article 16, paragraph 2, the Constitution establishes that “every person has the right to the protection of their personal data, the access, rectification and cancellation of such data, and to express their opposition, in the terms established by law, which will establish the exceptions to the principles that govern the data processing, for reasons of national security, public order, public safety and health or to protect the rights of third parties”.
However, the laws that regulate data privacy specifically are recent. Data protection is mainly regulated through two federal laws.
Mexico considers that the right to the protection of personal data includes the right of the owner of such data to access, rectify, cancel and oppose their data. These are known as the ARCO rights.
The FLPPDRE only applies to Mexican regulated entities; as such, its purpose is to establish the basis and procedures for granting the right of protection of personal data in Mexico. A foreign company targeting customers in Mexico would not have to abide by this law. However, an international company that has business in Mexico and provides information to a Mexican regulated entity must comply with the FLPPDRE.
The FLPPDPP, conversely, and according to its rules of procedure, will apply to any company that:
Thus, any company that falls within the three above-described categories will have to abide by the FLPPDPP and will have to grant the right of protection of personal data in accordance with the ARCO rights.
The National Institute for Transparency, Access to Information and Personal Data Protection (the INAI) is the autonomous constitutional agency that guarantees access to public information and the protection of personal data.
In relation to access to public information, the INAI guarantees that any federal authority, autonomous body, political party, trust, public fund or union, or any person who receives public resources or performs as an authority, delivers the public information to anyone who requests it. It also guarantees the proper use of personal data and the exercise and protection of the ARCO rights that anyone has in relation to their information.
The role and authority of the INAI is set forth in Chapter VI, Section I of the FLPPDPP.
Article 38 of the FLPPDPP provides that the INAI has the purpose of disseminating knowledge of the right of protection of personal data in Mexico, promoting its exercise, and monitoring the compliance of provisions set forth in the FLPPDPP and those that derive from it – particularly those related to the fulfilment of obligations by the entities regulated by this law.
Furthermore, Title 8 Chapter I of the FLPPDRE establishes the way in which the INAI should be organised, and the laws that regulate it. It provides that, “the integration, appointment procedure and operation of the Institute [the INAI] and the Council shall be in accordance with the General Law of Transparency and Access to Public Information, the Federal Law of Transparency and Access to Public Information and any other applicable regulations”.
The current Federal Administration is about to enter its final year. There may be a possible tax-related legal reform, but important reforms are unlikely in 2023 and 2024, due to the fact that Mexico will change its Presidency and Congress in 2024, and an impasse on substantial legal reforms is likely.
New Technologies Disrupting the Mexican Market – IP Legal Overview
Over the years, technology has changed the world we live in and transformed the way industries operate. The exponential growth of breakthrough technologies in the fields of data and computer sciences has accelerated innovation, enabling the transformation of businesses across sectors.
Considering the rapid evolution of technology, it is no surprise that legal frameworks struggle to advance at the same pace as the newest technological developments. This phenomenon has multiple legal and regulatory fronts and, without question, intellectual property (IP) is one of them.
Advanced technologies posing challenges from a legal standpoint have been gaining ground. IP has proved to be essential for the protection of business assets through the allocation of innovation incentives and a fair playground for the agents involved.
In spite of Mexico lacking specific legislation on IP protection within the context of rapid technological progress, there is a national and international legal system in place that is applicable to solve potential and existing claims involving new technologies.
For example, IP technology-related protective measures have been introduced in the current Mexican Industrial Property Law (Ley Federal de Protección a la Propiedad Industrial) and the amended Mexican Copyright Law (Ley Federal del Derecho de Autor) as a result of the United States-Mexico-Canada Agreement (USMCA).
This article addresses some of the trending technological topics, their regulation from an IP Mexican perspective, and their impact on the manner in which businesses are conducted.
Mexican legal treatment of the metaverse – the virtual gold mine
The metaverse refers to a collective virtual shared space where users can interact with each other and with virtual objects in a fully immersive environment. The concept of the metaverse has been gaining popularity in recent years in Mexico, particularly with the rise of virtual and augmented reality technologies, so it is important that both agents and users are aware of the IP legal implications governing this new tool.
Virtual assets and uncertainty over ownership
One of the key points that arises in relation to the metaverse and IP is the ownership of virtual assets. In this virtual space, users can create and own virtual objects such as clothing, luxury goods, works of art, weapons and even real estate, which are created and sold as codes that will materialise in the digital world once they are executed by hardware. However, the issue of who retains ownership of the IP rights over those virtual creations is not always clear.
For example, if a user creates a unique virtual object in a metaverse platform, there might be uncertainty as to whether such user should be considered the owner of the IP rights to that object. Could the platform, as the provider of the world itself that allows the users to create virtual assets, assert ownership?
According to the Mexican Copyright Law, only natural persons are recognised as authors of copyrightable works, and will retain economic rights over their creations unless explicitly agreed otherwise. With this in mind, a user of the metaverse could own their virtual creations if there is no agreement stating the contrary, which seems unlikely if acceptance of the terms and conditions of the metaverse platform is required before becoming part of the world.
Where to draw the line for infringement?
Another issue is the potential infringement of IP rights in the metaverse. For instance, if a user creates a virtual object that mirrors or freerides IP forms protected in the physical world (ie, trade marks and copyrighted works), would it be infringing or should freedom of expression and artistic creativity be privileged?
In terms of Mexican legislation, the metaverse is to be considered a virtual course of trade where IP rights can also be enforced, and competent authorities are responsible for solving any conflicts that arise. Also, prima facie the platform should be held liable for facilitating the distribution of infringing content, and users would also face legal consequences for their actions.
Protective measures in the digital world
Mexican domestic legislation has now embraced some technological precautionary measures, such as the notice-and-takedown mechanism that enables IP owners to request the removal or disabling of infringing content in the digital realm. It can also be used by the metaverse service provider to avoid liability if they promptly remove or disable access to the identified infringing content.
Presence of brands in the metaverse
Brand owners have an interest in the metaverse not only because it provides a portal for their consumers to know and engage with their brand, but also because they are able to monetise and sell branded virtual assets. For many, owning a virtual shop means opening the door to new angles on how to conceive a business with competitive advantage, and allows the building of brand equity in the digital borderless world.
Companies developing their own virtual worlds should keep in mind that rule of law must prevail and will be enforced under the scope of the Mexican current legal framework. According to the activities carried out in the metaverse, both service providers and users will be required to observe and comply with any applicable legal provisions as they would in the physical world.
In that regard, the lack of national specific metaverse regulation should not be construed as an absolute legal gap, and the agents involved should always keep in mind the obligations under Mexican law. It is advisable to embrace a preventative culture rather than a corrective action.
Interest in digital environments has increased especially in the fields of virtual and augmented reality. In recent years, the adoption of these technologies has been growing in sectors such as education, entertainment and gaming, with various Mexican companies and institutions implementing VR and AR solutions to enhance their operations and services, and offer their customers a new alternative to traditional methods and conceptions.
For example, the National Autonomous University of Mexico (Universidad Nacional Autónoma de México – UNAM) has used VR to create immersive experiences that allow students to explore historical sites, while entertainment companies have developed AR apps to enhance their TV programming and engage current and new audiences generationally speaking (millennials, Gen Z, etc).
These issues are still being explored and debated by legal scholars, policymakers, practitioners, courts and authorities, and industry stakeholders. However, the intersection of the metaverse and IP will continue to be a key area of concern as virtual worlds and immersive technologies are becoming an increasing part of our daily lives.
Generative artificial intelligence tools – the next phase of AI
Artificial intelligence (AI) is also a rapidly growing field that involves developing computer systems that can perform tasks that normally require human intelligence, such as understanding language, recognising images and making decisions based on data analysis. These AI systems rely heavily on substantial amounts of data to learn, be trained and improve their performance over time.
Considering the current trends on automated systems sophistication, AI is being used more frequently to replace tasks that were previously performed by humans. AI implements a faster and less expensive way for businesses to perform certain duties, from simple routine assignments to more complex undertakings.
Collision with IP
AI has been used to create original works of art, music, literature and more, and this is where it collides with IP law, particularly copyright law. This raises several legal issues as creators, consumers and regulators struggle to determine who owns the IP rights to these AI-generated works. Is AI to be considered a subject so it can have rights and obligations, or is it a mere tool?
As stated above, in terms of Mexican copyright law, only humans can be recognised as authors and hold the so-called moral rights over their creations. A legal entity would not be entitled to authorship, and a vast majority of IP practitioners would add “let alone an AI machine”. As the landscape of AI-powered technologies becomes more complex, raising issues such as ownership over creations made by AI artefacts, the law and most importantly its interpretation by the Mexican courts will play a relevant role in defining the rights pertaining to AI-generated devices or appliances.
For instance, generative AI tools and algorithms are increasingly being used to generate content or to assist in the creative process. For example, ChatGPT is a generative AI tool capable of developing complex documents such as articles, essays and even legal contracts in minutes, based on the information it obtains from the internet, and that only requires the end user to give a short instruction and request. However, due to its complex nature it is difficult to determine if ChatGPT takes IP protected information to create its own deliverables, and therefore end users can be held liable for it if they do not observe and comply with the corresponding IP legal provisions.
AI and artistic expression
There are also ethical considerations surrounding the use of AI in the creation of artistic works. For example, some experts argue that using AI to create art or music diminishes the value of human creativity and could lead to a devaluation of these forms of artistic expression. Others argue that AI-generated works represent a new form of creativity that should be celebrated and protected in the same way as traditional works.
Legal framework and enforcement
While AI can benefit businesses when it comes to saving time and expense, the lack of regulation and the prevailing traditional concept of copyright ownership can expose them to legal problems if AI is used irresponsibly or without the proper legal guidance.
In view of this, the existing Mexican IP laws are currently being applied to protect AI and technology-generated works. However, technology has made the enforcement of existing laws more difficult. There are still some uncertainties as to how the IP rights around them should be enforced in practice.
To this day, there is no case law from Mexican courts involving the use of AI-generated works. Moreover, depending on the nature of the product or service to be offered, whether it is meant for the finance world or for a hospital, the AI-generated deliverables might be subject to compliance with additional regulations (banking, health, consumer protection, privacy and data protection, etc).
Mexican AI development
Despite the lack of precedents from the judiciary, Mexico has experienced investment increases in AI research in recent years, with both the private and public sectors showing growing interest.
For example, the Mexican Industrial Property Office (IMPI) has developed a tool – MARCia – that serves as a valuable resource for trade mark matters. It helps applicants to conduct comprehensive and figurative clearance searches for existing trade marks in seconds, and to confirm if a certain mark is available for registration or if it will collide with existing rights owned by third parties.
Designed to streamline and facilitate the trade mark prosecution, MARCia employs advanced technology and database capabilities to enhance efficiency and accuracy. It also provides a convenient means of filing trade mark applications online, simplifying the administrative and robust load that such process would normally entail.
Other initiatives; legislative and academic efforts
In the same spirit, a bill regarding AI was presented to the congress for discussion in March 2023. This proposal is aimed at creating ethical and legal standards for AI development, creation and implementation, including the formation of a Mexican Council of Ethics for Artificial Intelligence and Robotics.
As for other sectors, Mexican universities and research institutions have been conducting AI-related research and collaborating with international organisations to advance the field. For instance, the Monterrey Institute of Technology and Higher Education (Instituto Tecnológico y de Estudios Superiores de Monterrey – ITESM), which is well known in the country for promoting an entrepreneurial culture among its students, has created an AI centre.
Although there are still legal and ethical challenges related to the use of AI in Mexico and there is currently no specific law that addresses the ownership and licensing of IP rights for AI-generated works, for the time being such matters will be governed under the traditional, yet modernised, approach of the Mexican Copyright Law to provide a certain level of protection to the agents involved.
Spicing up your Mexican NFTs
Non-fungible tokens (NFTs) are a type of digital assets that are stored on a blockchain, which is a decentralised digital ledger that records transactions, or even IP in this case, in a secure and transparent manner. NFTs are unique and indivisible, which means that each NFT represents a one-of-a-kind item that cannot be replicated or divided into smaller parts.
NFTs have become popular in the art world, as they allow companies to sell their digital products as unique, collectible items. Likewise, they can be used to represent a variety of digital assets across all industries, such as images, videos, music and even tweets.
Unit of data with a work attached
One of the most relevant issues related to NFTs and IP is the ownership and licensing of the underlying IP rights. For example, in the sale of an NFT containing a digital artwork, it may be questioned if the buyer of the NFT would own the copyright linked to the embodied artwork or just the digital asset.
Similarly, if a musician creates a song and sells it as an NFT, would the buyer of the NFT own the copyright relating to the song? Some would say that the musician retains ownership of the copyright, while granting the buyer a licence to play the song in certain ways.
These questions are still being discussed and will likely continue to evolve as the NFT market keeps growing exponentially, not only in the art and entertainment industries, but across all types of businesses, as “anything” can be turned into an NFT.
Are the IP authorities shedding some light?
IMPI has been working to provide guidance on the protection of IP rights in the digital environment, including the metaverse, and has embraced the World Intellectual Property Organization guidelines for the registration of trade marks for products offered in virtual environments as NFTs, encompassing them in international class 9.
This becomes relevant, since although NFTs are still at a relatively early stage in Mexico, some Mexican companies and artists have already started selling their digital art and other virtual goods through this technology, while having procured the registration of such digital assets.
It is a matter of fact that NFTs accrue an appealing potential by offering disrupting opportunities to monetise products in the virtual world – eg, by making an art collection available to the public regardless of their purchasing power, as opposed to keeping it reserved for the influential sector as traditional methods for monetising art have done in the past.
Overall, the legal framework for IP rights related to these emerging technologies is still evolving in Mexico. However, it is certainly solid and safe enough to offer opportunities for doing business in Mexico using these new technologies.
As these technologies become more prevalent and expand at a faster pace, it will be important for Mexico to develop a more comprehensive legal framework that addresses key factors like the ownership and licensing of IP rights, as well as the overall consequences and scope for these new forms of digital assets.
In addition to domestic efforts, international treaties adopting standards for the protection of IP rights are important to foster technological advancements with clearer rules, improved enforcement mechanisms, and collaboration in the digital space. These measures will foster a safer environment for any company that is switching to a technology-driven business model.
Given the challenges posed by the rapidly growing technology, law practitioners need to embrace and understand the function and nature of the technologies so they can better assess the legal implications of its usage.
The concern is not that AI and technology will replace human labour per se; this is only likely to happen if a workforce refuses to learn how to properly use and maximise the benefits of these technologies. In fact, those workers and companies that embrace technology and learn how to use it, protect it and comply with the applicable legal regulations are already gaining an advantage over those that do not.