Laws and Regulations Related to Investment in Mexico

Mexico has been privatizing state-owned enterprises since 1982, resulting in the privatization of state-owned enterprises across various sectors, including telecommunications, mining, TV, fishing, automobiles, and steel.
Subsequently, the Mexican government introduced the new Ley de Inversión Extranjera (Foreign Investment Law) in December 1999, which underwent partial amendments on January 16, 1999, June 4, 2001, July 18, 2007, and August 20, 2008.
Additionally, in September 1998, the Reglamento de la Ley de Inversión Extranjera (Regulation of the Foreign Investment Law) outlined specific details regarding investments, encompassing requirements for corporate establishment applications, activities of the investment committee, and registration procedures.

Furthermore, the Foreign Exchange Management Act, established in December 1961, underwent a revision to become the Foreign Exchange Transaction Act in April 1999.
The primary objective of this legislation is to ensure the facilitation of foreign exchange and other external transactions.

Through these revisions to the investment laws, foreign investment of up to 100% is permitted in all sectors, except for specific cases of foreign investment bans and restrictions that are outlined in the Constitution and specialized laws.
In essence, foreign investors are granted the freedom to hold shares in Mexican companies, possess fixed assets, and partake in business activities such as initiating new enterprises, developing novel products, managing facilities, and relocating existing establishments.
Additionally, the Mexican Foreign Investment Act dictates that for a foreign corporation to establish a presence in Mexico, it must adhere to the provisions specified in international treaties and agreements of which Mexico is a signatory, and subsequently obtain authorization from the Ministry of Economy (Article 17).
To secure approval from the Ministry of Economy, the following prerequisites must be satisfied (Article 17-A):

• The foreign corporation must demonstrate its legal establishment in accordance with the laws of its home country.

• Documents concerning the formation of corporate articles and other pertinent entities must not conflict with the regulations stipulated in Mexican statutes regarding public order.

• If the foreign corporation intends to establish a local subsidiary, branch office, or representative office, it must acquire authorization and assume the responsibilities imposed in this context.

Local Government Incentives

Each local government administers a distinct incentive system designed to attract corporate investment.
Typically, these systems encompass provisions for education and training expenses as well as reductions in social security taxes.
The extent of incentive benefits, however, should be deliberated and verified with the relevant local authorities for each investment endeavor.
The range of foreign investment incentives offered by local governments can vary based on factors such as the project's scale, nature, and even the officials within the governing body.
Consequently, when reaching out to local governments for information, responses often diverge depending on the inquiring company, and the advantages granted for modest investments might not be substantial.
Moreover, even if tax benefits are secured, it's advisable to temper expectations regarding incentives during investment feasibility assessments due to the substantial paperwork involved and the extended timeframe required.

Nonetheless, despite the comparatively modest investment incentives, Mexico may present appealing export incentives.
The Mexican government administers a variety of programs aimed at promoting exports, which could prove advantageous for enterprises establishing operations within Mexico.
Instances of such programs include the Manufacturing, Maquiladora, and Export Service Industry Promotion Program (IMMEX), the Industrial Sector Promotion Program (PROSEC), the Export Company Import Tax Refund Program (Drawback), and Rule 8 (Regla Octava).
Manufacturing Macilladora Export Service Industry Promotion Program (IMMEX)

The Manufacturing Macilladora Export Service Industry Promotion Program (IMMEX) is a system that allows companies that produce products for export or related service providers to temporarily import various goods used to manufacture export products.
To benefit from this program, sales must be more than $500,000, or export products must be more than 10% of total sales.

Promotion Program by Industry Sector (PROSEC)

The PROSEC (Programa de Promoción Sectorial) is a system that imposes 0-7% ad valorem tariffs on machinery, equipment, parts, and materials imported to be used in the production process of a specific industry, regardless of whether the goods to be produced are for export or not.
The program can be used in conjunction with IMMEX, and can be used by companies that import machinery, equipment, parts, and materials from countries that have not signed a free trade agreement with Mexico, produce finished products, and then export them or supply them to the Mexican market.

In addition, companies can receive benefits such as a 20% reduction in income tax and a 8% reduction in value-added tax (VAT) collection in the Northern Border Free Trade Zone, the Southern Border Free Trade Zone, and the Chetumal Free Trade Zone.

Restrictions and Prohibitions (By Industry)

1) State monopoly (Article 5 of the Foreign Investment Act)

The PROSEC (Programa de Promoción Sectorial) is a system that imposes 0-7% ad valorem tariffs on machinery, equipment, parts, and materials imported to be used in the production process of a specific industry, regardless of whether the goods to be produced are for export or not.
The program can be used in conjunction with IMMEX, and can be used by companies that import machinery, equipment, parts, and materials from countries that have not signed a free trade agreement with Mexico, produce finished products, and then export them or supply them to the Mexican market.

In addition, companies can receive benefits such as a 20% reduction in income tax and a 8% reduction in value-added tax (VAT) collection in the Northern Border Free Trade Zone, the Southern Border Free Trade Zone, and the Chetumal Free Trade Zone.

• Basic petrochemical products

• Electricity

• Nuclear power generation

• Radiation mineral

• Full body

• wireless telegraphy

• Postal service

• Currency issuance and coin casting

• Supervision and supervision of ports, airports and heliports

• Special provisions under the provisions of other relevant laws

2) Areas monopolized by Mexicans or Mexican corporations (Article 6 of the Foreign Investment Act)

• Ground transportation of domestic passengers, tourists, and cargo, excluding courier or parcel shipping services

• Development financial institutions

• Specialized technical projects specified in the provisions of the relevant laws

3) Projects Regulated by Special Regulations (Article 7 of the Foreign Investment Act)

• Business with up to 10% stake: Joint venture (co-production company)

• Business with up to 49% stake
  * Insurance companies, creditor companies, foreign exchange trading companies, bonded warehouses, companies falling under paragraph 12 of the Securities and Exchange Act, mutual fund fixed capital investment, mutual fund management, retirement pension management companies
  * Manufacturing and distribution of explosives, acquisition and use of explosives for industrial and blasting, manufacturing and selling of explosives, printing and publishing domestic distribution newspapers, T-affiliated stocks of companies owning farmland, livestock or forestry, Companies, aviation services under Articles 11 and 12 of the Federal Communications Act

4) Areas that allow foreign investment of more than 49% under Mexican Investment Commission approval (Article 8 of the Foreign Investment Act)

• Port facilities for anchoring ships in domestic operations a shipping company that operates only deep-sea fishing vessels

• Public aerodrome licensee

• Comprehensive educational institutions of elementary, middle, and high schools and universities in private kindergartens in the education sector

• Legal services

• Operation of public rail transportation and public rail transportation services

On the other hand, if the total amount of fixed assets of Mexican companies that want to acquire a stake of 49% or more exceeds a certain amount (20,184,671,346.26 pesos), they must obtain approval from the Investment Commission.
The criteria for the amount to be approved shall be determined and notified by the committee.(In accordance with Article 9 of the Foreign Investment Act)

Special Economic Zones and Free Trade Zones

Mexico can be seen as having four major industrial bases.
The first base is the central region, with the capital, Mexico City, alone accounting for 15.8% of the country's GDP and neighboring Mexico State accounting for 9.1% of the country's total production.
The second stronghold is the high-quality central region states (Jalisco, Guanajuato, Puebla, and Querétaro), which account for about 15.4% of total production.
The third stronghold is the northern region (Baja California, Sonora, Chihuahua, Coahuila, Nuevo León, and Tamaulipas), which account for 22% of the total GDP.
The last four strongholds are the crude oil producing regions of Campeche and Tabasco, which account for 8.9% of domestic GDP.
In addition, tourism accounts for a large portion of the economy in Quintana Roo, Baja California Sur, Colima, and Nayarit, while Chiapas, Querétaro, Oaxaca, and Tlaxcala are centered on agriculture.

North Border Free Trade Area

The Northern Border Free Trade Zone program began on January 1, 2019, and remained in effect until 2020.
However, it was decided to extend the validity of the Financial Incentives Act for the Northern Border to 2024.
This includes 43 regions bordering the United States, including Baja California, Chihuahua, Nuevo León, and Tamaulipas.

The main benefits include reducing value-added tax (VAT) from 16% to 8%, cutting income tax (ISR) from 30% to 20%, and providing incentives for special taxes (IEPS) on production and services on gasoline.
However, when hiring workers in this region, the minimum wage is higher than in other regions.
Instead of giving tax breaks, it is expected to induce wage hikes for workers to revitalize the economy.

South Border Free Trade Area

The poor socio-economic region shows a large difference in socioeconomic indicators compared to other regions.
As a result, 22 regions, including Chiapas, Tabasco, and Campeche, will be subject to the same incentive system as the northern border free trade zone from January 1, 2021.

Cheumal Free Trade Area

In addition to reducing VAT from 16% to 8% and income tax from 30% to 20%, the Chetumal Free Trade Zone, which took effect on January 1, 2021, exempts the General Import Tax and Customs Procedures Act.

Mexico City

Mexico City is the capital of Mexico and is located at 2240 m in the Mexican Gorge.
Mexico City is the most important political, economic, administrative, social, cultural, and industrial place in Mexico, along with the surrounding satellite city called Zona Metropolitana.
The metropolitan area, including the capital, is the ninth largest city in the world.

• Area: 1,494.3( (0.1% of total area in Mexico)

• Population: 9,209,944 (7.3% of Mexico's total population)

• GDP: $3,127,840 million (17.7% of Mexico's total GDP)

• Unemployment rate: 7.2%

• Climate: Gentle but large daily temperature difference (average 16-18°C per year, summer high 30°C, winter low 0°C)

• Industrial composition: 0.1%, 10.3% in the second, 89.6% in the third, and major industries based on total income in Mexico City are financial insurance (28%), retail (23.1%), corporate management (9.65%), and wholesale (7.88%)

• Transportation:

  • Location of Mexico City Benito Juarez International Airport (AICM), one of Latin America's busiest airports, and new airport Felipe Ángeles International Airport (AIFA)

  • From public transportation such as subways, buses, and public bicycles to public taxis such as Uber and Didi, there are various transportation options

• Training:

  • Mexico City has the lowest literacy rate in Mexico, and many people have a middle or high school education

  • National Schools: the National Autonomous University of Mexico (UNAM), one of Latin America's most historic universities, as well as the Metropolitan Autonomous University (UAM), and the National Technical University (IPN)

  • Private schools: Universidad Iberoamericana, Mexican Autonomous University of Technology (ITAM), Collegio de México (Colmex), etc

• Security: Mexico City ranks first among 32 states in the country, with 220,000 crimes occurring annually, according to statistics released by the Mexican government

The Nuevo Leon

Nuevo Leon, located in northern Mexico, is a state bordering the United States and is called the "industrial capital of Mexico" because it is located at the headquarters of a major Mexican conglomerate.
Monterey, the capital, is one of the most populous places in Mexico and is considered one of the largest cities along with Mexico City and Guadalajara.
It is divided into a total of 51 administrative districts, and the surrounding satellite urban area (Zona metropolitana) is formed around Monterey, the capital.

• Area: 64,156.2 ( (3.3% of Mexico's total area)

• Population: 5,784,442 (4.6% of Mexico's total population)

• GDP: 1,353,875 million pesos (7.8% of Mexico's total GDP)

• Leadership: Monterrey

• Unemployment rate: 4.4%

• Climate: May-October rainy season due to dry weather

• Industrial composition: Manufacturing (47.2%), retail (13.5%), wholesale (11.8%), and financial insurance (8.37%), followed by manufacturing (47.2%)

• Transportation:

  • Monterey International Airport is one of the hub airports of Mexico's largest airlines, Aeromexico, and logistics giants (DHL, FedEx, UPS, Estageta, etc.) and is active in both passenger and logistics

  • Easy to move to the United States by land as well as by air, and more than 12,000 trucks cross the Meg-U.S. border every day through the Bernardo Reyes Bridge

• Training:

  • Along with Mexico City, it is one of the most educated areas, with 30% of the population being students, 13% of whom are college students

  • National University: located at the headquarters of the State Autonomous University of Nuevo Leon (UANL), one of the prestigious universities in Mexico

  • Private schools: the location of the main schools of the University of Monterey (Universid de Monterrey), the University of Monterey (Tec de Monterrey), etc

  • Efforts to raise human resources levels, especially in the state of Nuevo Leon, through cooperation between government, private enterprise and educational institutions

• Security: According to the national crime count statistics released by the Mexican government, Nuevo Leon is sixth out of 32 states in the country, with 90,000 crimes occurring annually

Baja California

The capital of Baja California is Mexicali, but Tijuana is the city with the largest population because Tijuana borders the United States for 24 kilometers, and there are more jobs than the capital due to the high demand for companies and labor.
About 50 million people have been moving and doing business through the border every year before the COVID-19 pandemic because crossing this border can lead to San Diego, California.

In addition, the well-established infrastructure such as roads and railroads made it easier to connect to central Mexico, and many goods exported from Mexico to the United States passed through this area.
In addition, with low wages, many U.S.
companies crossed borders and set up factories in Mexico, leading to the growth of manufacturing.
Tijuana is the 13th largest manufacturing industrial city in Mexico, with about 600,000 people out of one million being economically active.
It stands out in aerospace & defense (A&D), medical devices and components, electronics, and electricity.
The fisheries industry was developed as it borders the Gulf of California to the east and the Pacific Ocean to the west, and the marine-related tourism industry is also developed as it is along the sea.

• Area: 71,450 ( (0.1% of total area in Mexico)

• Population: 3,769,020 (3.6% of Mexico's land area)

• GDP: 565,895 million pesos (1.8% of Mexico's total GDP)

• Mexicali (The largest city is Tijuana)

• Unemployment rate: 2.4%

• Industrial composition: 2.8% in the first round, 41.7% in the second round, and 55.5% in the third round

• Transportation:

  • It borders the United States, has seven strategic points within the border, three of which can accommodate 2,500 daily trailers, and has an express system that can move the border on foot

  • Excellent infrastructure, including water resources (Colorado River), energy (average price per MW of 24 hours for industrial use, $118 per MW, natural gas terminal), ports, airports, and more than 100 industrial complexes and industrial areas

• Training:

  • About 60% of the state's budget is invested in the educational environment, producing high-quality and competitive labor

  • 92 universities, 127,000 or more students, 30,000 or more engineering students

  • About 150,000 people receive higher education, and the most popular departments are law, industrial engineering, corporate management, business trade, and electronic and electrical engineering suitable for industrial and business development

• Security: According to the national crime count statistics released by the Mexican government, Baja California ranks fifth out of 32 states nationwide, with more than 100,000 crimes occurring naturally.

Jalisco

Jalisco is the third most populous state after Mexico and Mexico City.
It is divided into five metropolitan areas, including the Guadalajara and Zapopan metropolitan areas, as well as the Puerto Vallarta metropolitan area, the Ocotlán metropolitan area, the southern metropolitan area, and the Autlán metropolitan area.

• Area: 78,595.5 (4% of Mexico's total area)

• Population: 8,348,151 (6.6% of Mexico's total population)

• GDP: 1,207,897 million pesos (6.9% of Mexico's total GDP)

• Leadership: Guadalajara (Guadalajara)

• Unemployment rate: 4.7%

• Industrial composition: 5.7% in the first round, 32% in the second round, 62.4% in the third round

• Transportation:

  • Air infrastructure: Miguel Hidalgo i Costilla International Airport and Gustavo Dias Ordas International Airport, Mexico 3rd by domestic arrival (41,161 times a year, domestic arrival nationwide (8.62%), Mexico 3rd by international arrival (26,953 times a year, 14.34% nationwide)

  • Hallisco's road network covers a total length of 6,616 km, 2,196 km of federal roads and 599 km of toll highways

  • There is a port of Puerto Vallarta, but it is used for tourism (cruise anchoring, etc.) rather than cargo transportation

  • For railways, the freight rail is 1,147 km, connecting Mexico City, Colima, Mansanillo and northern Mexico

• Training:

  • There are about 11,280 national and private elementary and middle schools, of which 2,185 are private schools

  • There are about 180 university institutions, a total of 294,000 registered students as of 2020, of which 45,600 are in engineering, manufacturing, and architecture, and 69,700 are in accounting, management, management, and marketing

• Security: According to national crime count statistics released by the Mexican government, Hollys Coco is the fourth of 32 states in the country to have 130,000 crimes per year.

Querétaro

Located in the heart of Mexico are the Pánuco River, which flows mainly into the Gulf, and the Lerma River, which flows into Lake Chapala.
The weather is generally mild, with some humid areas and some dry areas, but it is a good climate for farming.

• Area: 11,690.6 ( (0.6% of total area of Mexico)

• Population: 2,368,467 (1.9% of Mexico's total population)

• GDP: $38,439 million (2.3% of Mexico's total GDP)

• Leadership: Santiago de Queretaro

• Unemployment rate: 5.7%

• Industrial composition: 2.4% in the first round, 42% in the second round, 55.6% in the third round,

• Climate: Maximum temperature within 35 degrees Celsius, even in winter -1 to 5 degrees Celsius

• Transportation:

  • Located in the heart of Mexico, it has good connectivity with Mexico City and other states, making it important for national logistics and transportation

  • Keretaro International Airport connects to all parts of the country and directly to the United States (passengers and cargo)

  • 512km of railways and 940km of highways extend to the southern United States, making logistics easy and fast

• Training:

  • More than 100 education centers, 13 technical universities, and about 30 technical high schools are located to produce high-quality labor and strive to cultivate professionals through educational institutions specialized in specialized fields such as automobile universities and aviation universities

  • About 99,000 students are enrolled in about 70 university institutions, including national and public higher education institutions such as Keretaro Autonomous University (UAQ), Keretaro Institute of Technology (UTEQ), and Keretaro Institute of Technology (ITQ)

  • The establishment of Sejong Institute in Keretaro Technical University (second in engineering) (2022.9)

• Security: According to the national crime count statistics released by the Mexican government, Queretaro is 11th out of 32 states in the country, with more than 50,000 crimes occurring annually

The Mexican Commercial Code (LGSM) specifies a total of six corporate types, including stock companies (Sociedad Anónima, S.A.), limited liability companies (Sociedad de Responsabilidad Limitada, S. de R.L.), joint ventures, joint stock companies, and cooperatives.
Except for cooperatives, they can be operated as variable capital companies.

In order for foreign investors to establish a corporation in Mexico, they must first obtain permission from the Ministry of Foreign Affairs to establish a company, then complete the registration as a foreign investment company in the SI-RNIE after preparing the articles of association and registering as a taxpayer.
Foreign-invested companies established in Mexico are subject to the same treatment as domestic corporations, that is, national treatment, regardless of whether the investment country signs a free trade agreement (FTA).

A branch is a foreign company that establishes a branch in Mexico to conduct business activities.
In the case of branches, business activities can be conducted in Mexico, and if profits are generated, the same tax obligation applies.
Since the branch's legal responsibility belongs to the foreign headquarters, it is a defense against all legal lawsuits occurring in Mexico.
Therefore, in the case of labor lawsuits that frequently occur due to the nature of the labor law of the host country, the foreign headquarters is subject to the lawsuit and is responsible for all legal responses.

On the other hand, according to Mexican tax law, the Mexican Treasury has the authority to impose taxes not only on branches but also on the parent company of the headquarters.
Therefore, if no profit is generated at the branch, theoretically, the Mexican government can also impose taxes on the profits earned by the foreign headquarters.
Of course, a double taxation prevention agreement is signed between the foreign country and Mexico, which makes this unlikely to happen, but there is a risk of unnecessary administrative costs.

Since 1996, the requirements for permission from the Ministry of Economy (SE) have been applied to the establishment of branches of foreign companies, but now it has been changed to a notification system.
However, the submission of preparatory documents and review of documents related to the establishment of the branch are strictly carried out as in the existing permit system.

A liaison office is a foreign company that performs non-commercial activities such as liaison work or market research work for the headquarters.
Before the establishment of the liaison office, it can be established through the process of proving that the foreign headquarters is a legally established company and checking whether it violates Mexican domestic law.
All documents submitted to the Mexican government in this process are recognized only in Spanish, so documents written in languages other than Spanish must be translated into Spanish and apostilled, and then submitted with the Ministry of Foreign Affairs and International Trade's apostille certification.

A corporation is the most preferred form of company for foreign companies investing in Mexico.
A corporation consists of two or more shareholders, and one person may hold more than one share.
There is no restriction on the minimum amount of authorized capital, but by custom, the minimum capital is set at 50,000 Mexican pesos (MXN) at the time of establishment, and at least 20% must be paid at the time of establishment.
In the case of in-kind investment, the entire investment must be immediately paid and held by the company for two years.
If the valuation value falls by more than 25% during this period, the investor must compensate for the difference.
In the case of promoters, all investments stated in the articles of incorporation must be paid within one year.

The company must set aside 5% of its profits as legal reserves each year until it reaches 20% of its authorized capital.
Shareholders hold investment preferences in proportion to their holdings.
Under the law, a corporation must have three institutions:

• The general shareholders' meeting, the highest decision-making body.

• The board of directors and representative directors, who are responsible for managing the company.

• The supervisory agency, the audit, which is responsible for overseeing the management of the company.

• In this way, the authority of the institution is professionally divided, and the employee qualifications and institutional qualifications are separated

A limited liability company refers to a company in which the investors of the company are only liable for the capital they invested to the creditors.
For establishment, two or more and 50 or fewer investors are required, and there is no obligation to appoint an audit committee member.
The initial capital is generally more than 3,000 Mexican pesos (MXN), and 50% of the investment must be paid at the time of establishment.
In principle, since securities cannot be issued, the status of the investor according to the share ratio cannot be freely transferred.
Unless otherwise stipulated in the articles of incorporation, the membership of a new investor is determined by approval of a 50% or more share ratio, and existing investors can exercise their investment priority within 15 days.

A private business operator (Persona Física con Actividad Empresarial) is a natural person who carries out commercial or industrial activities.
The Mexican Commercial Act allows individual businesses to register with the Mexican Treasury (Secretaría de Hacienda y Crédito Público) and comply with tax-related requirements.
There is no minimum necessary capital, and foreigners can do business through agents or legal representatives of Mexican citizenship.

A cooperative (Sociedad Cooperativa) is an organization established for the benefit of its members without the purpose of making a profit, and there are no restrictions on the field of activities.
The company law does not specifically stipulate the operation of cooperatives, but it is separately stipulated by the Ley de Sociedades Cooperativas (Cooperative Societies Law).
Autonomy is recognized so that it can be regulated through the articles of association and bylaws of the cooperative itself.

Article 7, Paragraph 1 of the Mexican Foreign Investment Law (Ley de Inversión Extranjera) limits foreign shares to 10% when a union or association is established.
In addition, foreigners cannot participate in cooperative management rights.

In a Sociedad en Nombre Colectivo (SNC), two or more unlimited partners directly participate in the operation of the company.
All partners have unlimited liability to jointly repay the company's obligations or debts to the company's creditors.
And unless otherwise stipulated in the articles of association, all partners have the authority to execute the company's business and represent the company.
Due to this unlimited liability nature, it is not used very much in Mexico.