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LATIN AMERICA: "Labor Law Reform: Mexican Federal Labor Law" Alert

LATIN AMERICA: "Labor Law Reform: Mexican Federal Labor Law" Alert. 5-page Alert by Baker & McKenzie.

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back to index backLATINtalk August,  2005

Setting up your business in Mexico

The basic procedures related to the organization of a new Mexican company with 100% of foreign capital participation are as follows:


The Mexican Companies Law (which is a Federal Law) provides for several types of companies that can be organized. There are various differences in their legal and tax treatment, depending on which form is chosen.

a. Sociedad Anónima. It is usually recommended to incorporate a limited liability stock corporation ("Sociedad Anónima"), which may adopt the form of a fixed capital company ("S.A.") or that of a variable capital company ("S.A. de C.V."). The principal difference between the two is that the latter may increase or decrease its capital within the limits established in the By-Laws by a mere Stockholders' Meeting resolution without the need to fulfill further formalities. Nevertheless, both types of companies must notify of any capital amendment to the National Registry of Foreign Investments.

The key characteristics of both types of companies are:

i. The shareholder's liability is limited to their stock interest in the company;

ii. the directors are fully liable for the loyal and diligent administration of the company;

iii. Must have at least 2 (two) shareholders and a minimum capital of $50,000.00 MexCy. (Fifty Thousand Mexican Pesos); 20% (twenty percent) of which must be paid at the time of incorporation; and

iv. Must appoint a statutory examiner who is a disinterested third party who supervises the operations of the company and represents the interests of the shareholders;

iv. The tax rate will be the normal corporate tax rate of 35%; and

v. The shares which represent the capital stock of the company are freely transferable and can be traded publicly, after the corresponding filings take place.

b. Limited Liability Company. Another form of limited liability corporation, the "Sociedad de Responsabilidad Limitada" or "S. de R.L.", has become popular among foreign companies. The key characteristics of the "S. de R.L." are as follows:

i. Like a "S.A." and "S.A. de C.V.", the partners' liability is limited to their partnership interest in the company and the directors will be fully liable for the loyal and diligent administration of the company;

ii. It must have at least 2 (two) partners to a maximum of 50 (fifty), and a minimum capital of $3,000.00 MexCy. (Three Thousand Mexican Pesos), for which 50% (fifty percent) must be paid at the time of incorporation;

iii. There is no requirement to appoint a statutory examiner;

iv. The tax rate will be the normal corporate tax rate of 35%;

v. Under U.S. Federal Tax Law a Mexican organization (legal entity) may affirmatively elect corporate or partnership tax treatment (absent which election it would be treated as a partnership) if it has two or more members and if any member has unlimited (personal) liability. If none of the members has unlimited personal liability, the entity (subsidiary in Mexico) will be classified as a corporation for U.S. tax purposes; and

vi. The shares which represent the partnership interests in the company must not be freely transferable and can not be traded publicly.

c. General Partnership. Another form of business entity is the general partnership or the "Sociedad en Nombre Colectivo" (the "SNC"). A distinct disadvantage of the SNC is that all of the partners will have unlimited liability with respect to the obligations and debts. This corporate form is not frequently used in Mexico.

d. Limited Partnership. The limited partnership or the "Sociedad en Comandita Simple" (the "SCS") has two types of partners: the active partner(s) who have unlimited liability, and the silent partner(s) who are liable only for their capital contribution. This corporate form is also not frequently used in Mexico.

e. Mexican Branch. Another possibility for a foreign company is to operate through branch offices in Mexico. As foreign companies are legally recognized in Mexico, they retain their liability characteristics from abroad. However, to carry out business operations, such branches must be approved by the National Commission of Foreign Investments and Ministry of Foreign Relations, and be registered at the Public Registry of Commerce.

For tax purposes, the foreign company will receive the same treatment as a permanent establishment in Mexico (see above) and will pay taxes on the income generated from such branch offices at the normal corporate tax rate of 35%. However, the foreign company should be careful to avoid the possibility of having the income generated by the foreign company outside of Mexico to become attributable to the operations in Mexico. This possibility is due to the "force of attraction" rules contained in Mexico's tax legislation, which will sometimes require a taxpayer to include in his taxable income, income generated from abroad.

f. Association in Participation. The Association in Participation ("Asociación en Participación" or "AP") is another common form of doing business "in" Mexico. Generally, an AP is an agreement in which one or more partners ("asociados") give goods or services to a managing partner ("asociante") in exchange for a right to participate in the profits of a commercial operation which is controlled by such managing partner.

For commercial purposes, the Association in Participation is not a separate legal entity. However, for tax purposes it is a separate entity and requires registration.

g. Joint Venture Agreement. Generally, a joint venture agreement is an association of persons (individuals or legal entities) for a limited period of time in which such persons jointly undertake a specific business enterprise. Although a joint venture agreement is sometimes mistakenly categorized only as an AP, a joint venture agreement can take many other forms. A joint venture agreement can take any form in which the parties agree to develop their business and agree to provide for their respective services and contributions of capital or resources, to the by-laws of a new independent company, or both. The exact type of business venture that is to be undertaken determines the liability and tax treatment of such agreement.


Similar steps are taken for other corporate forms. To establish a Sociedad Anónima or a Limited Liability Company (the two most common corporate forms), the steps will be the following:

a. File for an Incorporation Permit for the company under a proposed name before the Ministry of Foreign Affairs. This authorization will take around two to three working days.

b. Incorporate the Company before a Notary Public or Commercial Broker. The Company's initial capital contributions must be paid in full if it is paid in kind, or if in cash it can be partially paid at a minimum of 20%. In the case of the "S. de R.L.", the initial paid amount is 50%. The Company must issue registered share certificates, and the shareholders must be registered in the Company Stock Registry Book. -Shares Certificates are not necessary in SRLs.

c. Concurrent with the incorporation, the shareholders/partners must hold a General Ordinary Shareholder's/Partner's Meeting resolving on: (i) the structure of the capital stock; (ii) acknowledgment that the fiscal year will run together with the calendar year except for the first year which will be irregular; (iii) appoint a Sole Administrator or a Board of Directors; (iv) appoint at least one "Examiner" (statutory auditor) to monitor the Company's administration on behalf of the shareholders (In the case of the "S. de R.L." there is no requirement for an examiner); and (v) appoint a General Manager, and any other officers or agents.

d. The Sole Administrator or Members of the Board of Directors of the Company may be foreigners and the Board of Director's meetings may be held in or outside of Mexico. If the Sole Administrator or Directors are not Mexican citizens and will be acting in Mexico, they need a migratory permit.

e. The Examiner (in the case of a sociedad anónima) usually is an accountant from an accounting firm who regularly audits the Company. Also, an alternate Examiner should be appointed because this position cannot be delegated at will.


Besides obtaining prior approval from the Foreign Investments Authorities (if necessary), the incorporation date of the Company is dependent upon: 1) drafting of the By-Laws to be used for the Company; 2) execution and formalization of the special powers of attorney to incorporate the new Company (if any); 3) the approval of the corporate name by the Ministry of Foreign Relations; and 4) an appointment date from the Notary Public or Commercial Broker for signing the incorporation deed.

Source: - GAI

To download the "Doing Business in Mexico" Guide, click here.

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