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1995
MEXICO
BUSINESS OPPORTUNITIES
AND
LEGAL FRAMEWORK
Editor and Contributors:
Bill F. Kryzda
Partner
Editor and Supervisor
José Luis Gutiérrez-Azpe
Partner
Adriana de Aguinaga Girault
Partner
Eugenio Hurtado Segovia
Associate
Shaun F. Downey
Legal Consultant
GOODRICH, RIQUELME
Y
ASOCIADOS
ACKNOWLEDGMENTS
Mention should be made of the following partners and
attorneys of the firm who participated in reviewing various
Sections of this document: David H. Brill, Alvaro González
Ocampo, and Agustín Urdapilleta R. (general review and comments);
Raúl Moreyra and Alejandro Calderón (preparation of the draft of
the Tax Section); Jaime Delgado (preparation of the draft of
Intellectual Property Section); Jorge León-Orantes (review of
Competition Law, Court System, Dispute Resolution, Securing
Transactions, and Dissolution of Business Entities Sections);
Julio Flores (review of Labor Section); Salvador Rangel
(assistance in the preparation of the Immigration Section);
Francisco Velázquez (review of Direct Sales and Real Estate
Sections); Enrique Ramírez (review of Investment Framework,
Financial System, and Direct Investment Sections); Cheryl
Schechter (review of Telecommunications and Transport
Subsections); and Stephanie Lejonc (review of Maritime Activities
Subsection). We would also like to thank Roberto Rendón, Gustavo
García-Cuenca, Lorenia Espinosa, Eduardo Rodríguez, Luis Héctor
Trujillo, Mónica Ramírez, Claudio Rodríguez, and Margarita
Sancristóbal for their comments.
Special gratitude is extended to Mary J. Ramírez who worked
tirelessly at the computer processing the various drafts of the
Sections. Without her hard work and dedication, the completion of
the project would surely not have been possible. Appreciation is
also extended to Sergio García Rodríguez (Fulbright Scholar, 1994
research and teaching) for assisting in the preparation of the
first rough draft and to Gloria D. Jollymore (Canadian
Postgraduate exchange student) for her contribution. Finally,
recognition should also be made of secretaries and legal clerks
for their assistance.
Reproduced with permission by the National Law Center for
Inter-American Free Trade
All Rights Reserved
©1995 Goodrich, Riquelme y Asociados
México, D.F.
Printed in Mexico
July, 1995
1st Edition 6,000 copies
Olimar Servicios
This guide offers a general panorama of the current legal
framework in Mexico and does not intend to be specific legal
advice. Goodrich, Riquelme y Asociados, as well as the Editor,
Contributors and participants, accept no legal responsibility for
any errors, irrespective of their cause, that may be contained
in this guide, or for any loss however caused, sustained by any
person that relies on the information contained herein.
GOODRICH, RIQUELME Y ASOCIADOS
MEXICO CITY
Paseo de la Reforma 355
Col. Cuauhtémoc
06500 México, D.F.
MEXICO
Telephone: (525) 533-00-40 to 55
Fax: (525) 525-12-27
P.O. Box 93-Bis
06000 México, D.F.
MEXICO
TIJUANA
German Gedovius No. 10489-201
Zona del Río
22320 Tijuana, Baja California
Telephone: (52 66) 84-72-61
84-29-43
Fax: (52 66) 84-03-82
U.S. Mailing Address:
P.O. Box 43-4307
San Diego, CA 92143-4307
PARIS
15 Rue Greuze
Paris 75116
FRANCE
Telephone:47-27-03-10
Fax: 47-27-37-81
Associated with
BOMCHIL CASTRO GOODRICH CLARO
AROSEMENA & ASOCIADOS
Globe House 4 Temple Place - 3rd Floor
Telephone: 240-17-55
Fax: 240-18-08
London WC2R 3HP
ENGLAND
An Association of 17 Independent Latin American Law Firms
Member of
LEX MUNDI
A Global Association of 126 Independent Law Firms
Founders of
LEX MEX
A countrywide Association of Independent Mexican Law Firms
THE FIRM
Goodrich, Riquelme y Asociados, founded in 1934, based in
Mexico City, is one of the country's largest law firms, serving
an international clientele, as well as leading Mexican companies
in every facet of the manufacturing, trade and service
industries. We are a full-service law firm, not only providing
our clients with complete legal services, but also helping them
achieve their business objectives.
As Mexico began industrializing after World War II, the firm
grew substantially by handling the rising tide of direct foreign
investment and assisting companies to form joint ventures in
Mexico before and after the 1973 law governing and restricting
direct foreign control of businesses. Mexico is now
simultaneously liberalizing restrictions on foreign investment
and privatizing industry. We represent clients in many varied
fields, taking advantage of both of these trends to make new or
expand existing investments in Mexico.
Today the firm has a professional and administrative staff
just over 200. As creative problem-solvers, we help our clients
address their changing needs so they can prosper in the Mexican
business environment, which itself is continually changing. Our
main office is next to the Independence Monument in the heart of
Mexico City, the center of the political, financial, commercial
and industrial life of Mexico.
The firm has earned the high regard of officials at all
levels in the Mexican government, as well as the Mexican Bar. In
fact, our partners are routinely asked by government officials to
comment on proposed legislation.
Since the firm has a strong international orientation, a
number of attorneys have lived, trained and are qualified to
practice, and indeed have practiced law, in other countries.
Thus, as interpreters and arbiters, we are able to assist foreign
business people to better understand "doing business in Mexico",
as well as help Mexican business people and government officials
comprehend and evaluate the foreigners' objectives.
The firm has a branch office in Tijuana, Baja California, a
city of commercial importance on the Mexico-United States border,
an office in Paris and correspondent offices in other major
cities throughout Mexico.
As a leading member of Bomchil Castro Goodrich Claro
Arosemena & Asociados, an association of independent Latin
American law firms, and a member of Lex Mundi, an alliance of
laws firms worldwide, we are able to give our clients immediate
access to top quality legal services in over 100 countries
throughout the Americas, Europe, the Mediterranean, Asia and the
Pacific Rim.
Each client's legal affairs are personally handled by a
partner, referred to as an account-attorney, heading a dedicated
team of professionals. Goodrich, Riquelme y Asociados, in fact,
was among the first Mexican law firms to stress a
client-oriented, pragmatic service approach. The account-attorney
works closely with other partners and lawyers within our firm
having specialized expertise, as well as accountants, bankers,
economists, other business advisors and correspondent attorneys
in cities where we do not have offices, to ensure the prompt
completion of work and avoid duplication of effort. This partner
keeps clients informed, and advises them on legal and business
developments and legislation that may impact their businesses.
We speak our clients' language, both literally and
figuratively. Not only are virtually all of our attorneys
multilingual, but as lawyers who have long served the business
community, we understand and speak the language of business.
Our practice covers international commercial and civil law,
including the following areas: Corporate, Foreign Investment,
Joint Ventures, Mergers, Acquisitions, Privatization, In-Bond
"Maquiladora" Industries, Anti-Dumping, Competition, Trade,
Environmental, Real Estate, Project Financing, Construction,
Tourism Investment and Development, Food Processing and Corporate
Agricultural Investment, Government Procurement, Tax, Labor,
Mining, Petrochemical, Energy (Electricity, Gas, Oil), Banking
and Finance, Insurance, Arbitration, Immigration, Customs,
Admiralty, Aviation, Transportation, Telecommunications,
Intellectual Property, Licensing, Franchising, Estates and
Trusts, and representation in all Courts and Administrative
Agencies throughout Mexico.
We take pride in the role our firm has played in Mexico's
past and look forward to being part of the country's dynamic
future.
NOTE
This guide has been written for those business people
who believe that, above all, there are profitable opportunities
for their companies in Mexico. Business people familiar with
doing business outside of their home country know that
preparation and planning for entry into international markets is
essential. This guide will alert those who approach the Mexican
market, and their legal counsel, to the existing legal and
regulatory framework. Although the guide is accurate at the time
of its completion, June 30, 1995, it is important to bear in mind
that reforms to the legal and regulatory systems are on-going
and, thus, users of this guide are urged to ensure that
regulations are current and, therefore at the time of decision
making, to obtain competent legal advice.
The structure of this document followed a general
outline of the main Section headings prepared for Lex Mundi for
"Doing Business" Guides, which has been, as of this date, used
by more than 50 member law firms and supplemented by Sections XIX
through Conclusion added by the Editor.
MEXICO
Business Opportunities
and
Legal Framework
TABLE OF CONTENTS
MACRO-ECONOMIC FRAMEWORK
(by Roberto Salinas León) I
I. THE COUNTRY AT A GLANCE 1
A. INTRODUCTION 1
B. GEOGRAPHY 2
C. POPULATION 2
D. LANGUAGE 2
E. TIME ZONES 2
F. CULTURE 3
II. INVESTMENT - GENERAL CONSIDERATIONS 4
A. POLITICAL SYSTEM 4
B. LEGAL SYSTEM 4
C. ECONOMIC SYSTEM 5
D. COURT SYSTEM 5
1. Federal judicial system 6
a) The Supreme Court of Justice 6
b) Collegiate Circuit Courts 7
c) Unitary Circuit Courts 7
d) District Courts 7
e) Federal Jury of Citizens 7
f) Federal Judicial Board 7
2. Local courts 7
3. Other courts and tribunals 8
E. FINANCIAL SYSTEM 8
1. Credit institutions 8
a) The Bank of Mexico 8
b) Development and commercial banking 9
2. Financial groups 10
3. Insurance companies, reinsurance
intermediaries, foreign reinsurers 10
a) Insurance companies 10
b) Reinsurance intermediaries. 11
c) Foreign reinsurers 11
4. Insurance agents 11
5. Auxiliary credit organizations and
activities. 11
6. Credit information companies 12
7. Special purpose financial entities (non-bank
banks) 12
8. Bonding companies 12
9. Affiliates of foreign financial entities
13
10. Investment companies 13
11. Stock exchange 14
12. Brokerage houses and stock specialists 14
13. Companies regulated by Art. 12-Bis of the
Securities Exchange Law 15
14. Institutions for the deposit of securities
15
15. Investment Units (UDI's) 15
III. INVESTMENT FRAMEWORK 16
A. NEW FOREIGN INVESTMENT LAW 16
1. Activities reserved for the State 16
2. Activities reserved for Mexican investors.
17
3. Activities subject to specific participation
percentage 17
4. Majority interest 18
5. Acquisition of existing Mexican companies
19
6. Real estate 19
7. Neutral investment 19
B. NAFTA 20
1. NAFTA key features 20
2. NAFTA principles regarding investment 20
3. Tariff reduction 21
4. Professional services. 21
5. Land transportation of cargo and passengers
22
6. Automobile sector 22
7. Immigration 22
8. Government procurement 23
9. Financial services 23
10. Safeguards 24
11. NAFTA Supplemental Agreements 25
a) NAFTA Labor Supplemental Agreement 25
b) NAFTA Environment Supplemental
Agreement. 26
C. PRIVATIZATION 26
D. INVESTMENT OPPORTUNITIES 27
1. Energy. 28
a) Petrochemicals and natural gas 28
b) The electric power sector 29
2. Telecommunications 30
3. Agribusiness 33
4. Mining 34
5. Fisheries 35
6. Tourism 35
7. Aviation. 36
8. Railroads 37
a) Content of new regulations 37
b) Concessions. 37
c) Permits 38
9. Ports 38
a) History of investment restrictions 38
b) The new Law of Ports 39
10. Environmental equipment and services 40
11. Automotive industry 41
a) History of investment restrictions 41
b) Automotive industry Decree of 1989 42
c) Relevant NAFTA provisions 42
12. Construction 43
13. Trucking. 43
a) The Transportation Law 43
b) Participation in the Mexican market
under NAFTA 44
c) Access to the frontier zone 44
14. Maritime activities 44
a) Foreign participation 44
b) Navigation regime 45
IV. SENSITIVE AREAS 46
A. ZONING 46
B. ENVIRONMENTAL REGULATION 46
1. Environmental impact 47
2. Air emissions 48
a) Fixed sources 48
b) Mobile sources 48
3. Water pollution. 49
4. Hazardous materials and toxic wastes 49
5. Other pollutants 50
6. Inspection and sanctions 50
C. COMPETITION LAW 50
1. Monopolistic practices 50
2. Mergers and acquisitions 51
D. CONSUMER PROTECTION 52
1. Product liability 53
2. Price Control 53
V. DIRECT SALES 55
A. NOMS 55
B. HEALTH 55
C. LABELING 56
D. GENERAL IMPORT REGIME 56
1. Shipping documentation and insurance 57
2. Broker requirement 57
E. TAXATION OF DIRECT SALES 57
1. Tax, exchange incentives, free trade zones
57
2. Income tax 58
3. Value added tax. 58
F. TEMPORARY IMPORTS 58
G. TRANSFER PRICING 59
H. THE VIENNA CONVENTION 59
I. TRADE DISPUTES UNDER MEXICAN LAW 60
1. Unfair practices of international trade 60
2. Safeguards 61
3. Procedures 61
a) Unfair practices of international trade
61
b) Safeguards 61
J. TRADE DISPUTES UNDER NAFTA 62
VI. EXPORTS FROM MEXICO 63
A. TEMPORARY IMPORT PROGRAM FOR EXPORT (PITEX) 63
B. FOREIGN TRADE COMPANIES (ECEX) 63
C. HIGHLY EXPORTING COMPANIES (ALTEX) 63
D. IMPORT TAXES DRAW-BACK PROGRAM 64
E. MAQUILADORA PROGRAM (IN-BOND PROGRAM) 64
1. Domestic sales 64
2. Tax advantage of maquiladoras 65
VII. REPRESENTATIVES, DISTRIBUTORS, FRANCHISEES 66
A. REPRESENTATIVES 66
B. DISTRIBUTORS 66
C. FRANCHISEES 66
D. CONSIDERATIONS 67
VIII. INTELLECTUAL PROPERTY. LICENSING 68
A. PATENTS 68
B. UTILITY MODELS 69
C. INDUSTRIAL DESIGNS 69
D. INDUSTRIAL SECRETS 69
E. TRADEMARKS AND SERVICE MARKS 70
F. COLLECTIVE TRADEMARKS 71
G. COMMERCIAL SLOGANS 71
H. TRADE NAMES 71
I. APPELLATIONS OF ORIGIN 71
J. ROYALTY PAYMENTS 71
K. TRADEMARK LICENSE AGREEMENTS 71
L. COMPARATIVE ADVERTISING 72
M. PARALLEL IMPORTS 72
N. COPYRIGHTS INCLUDING SOFTWARE 72
O. FRANCHISES. 73
IX. DIRECT INVESTMENT 74
A. COMMON FORMS 74
1. Purchase of stock or assets 74
2. Registration of a branch 74
3. Registration of a representative office 74
4. Creation of a subsidiary 74
5. Joint venture companies 75
a) "Joint venture company". 75
b) "Joint venture agreement" 75
6. Associations 76
B. GENERAL COMMENTS 76
X. PURCHASE BY FOREIGN CORPORATIONS OF A BUSINESS IN
MEXICO 77
A. COMMENTS 77
B. TAXES IMPOSED ON TRANSFER OF ASSETS OR STOCK 77
XI. BRANCHES 79
A. GENERAL STATUS OF BRANCHES 79
B. APPROVAL REQUIREMENTS 79
C. TAXES 79
XII. SUBSIDIARIES AND COMPANIES 81
A. TYPES OF MERCANTILE COMPANIES 81
1. "Sociedad en nombre colectivo." 81
2. "Sociedad en comandita simple" and "sociedad
en comandita por acciones. 81
3. "Sociedad de responsabilidad limitada. 81
4. "Sociedad anónima." 82
a) General comments 82
b) Capitalization requirements 82
c) Incorporation and registration
requirements 83
B. COOPERATIVE COMPANIES 84
C. ASSOCIATIONS 84
XIII. EXCHANGE CONTROLS 85
A. EXCHANGE CONTROL REGIME 85
B. CAPITALIZATION AND PAYMENT OF DIVIDENDS 85
XIV. THE TAX SYSTEM 86
A. GENERAL COMMENTS 86
B. ADMINISTRATION 86
C. INCOME TAX 86
1. Residency. 86
2. Mexican residents. 87
3. Foreign residents. 87
4. Resident Mexican companies. 87
a) Object of taxation. 87
b) Inflationary gains. 87
c) Taxable base. 87
d) Fiscal year. 88
e) Rate of tax. 88
f) Authorized deductions. 88
g) Requirements for deductibility. 88
h) Deductibility of interest. 88
i) Deductibility of investments. 89
j) Non-deductible items. 89
k) Lump-sum deductions. 90
l) Fiscal losses. 90
m) Dividends. 90
n) Payment of tax. 91
o) Returns for loans from foreign
residents. 91
p) Liquidation, merger and split-off 91
5. Taxation of individuals resident in Mexico
91
6. Taxation of foreign companies and
individuals. 91
a) Salaries and fees. 92
b) Leasing of real estate and property.
92
c) Sale of real estate. 92
d) Sale of shares. 92
e) Dividends. 92
f) Interest. 93
g) Financial leases. 93
h) Royalty payments. 93
i) Construction services. 94
7. Special regimes. 94
D. PERMANENT ESTABLISHMENT AND FIXED BASE 94
1. Definition of permanent establishment. 94
2. Agency relationship. 95
3. Definition of fixed base 95
4. Tax rules. 95
a) General requirements. 95
b) Remittances to head office 96
c) Computation of taxable income 96
E. OTHER TAXES ON CAPITAL AND TRANSACTIONS 96
1. Business Asset Tax. 96
2. Value Added Tax. 97
a) Transfers 97
b) Temporary use 97
c) Imports 98
d) Services. 98
e) Exports 98
f) Computation of tax and miscellaneous.
99
F. MEXICO'S TAX TREATIES 99
XV. LABOR 100
A. UNIONS 100
B. LOCAL EMPLOYEE REQUIREMENTS 101
C. GENERAL LABOR REGULATIONS 101
1. Wages 101
2. Working hours 101
3. Rate of overtime 102
4. Rest days 102
5. Benefits 102
a) Paid vacations 102
b) Christmas bonus 102
c) Housing fund 103
d) Retirement savings fund 103
e) Profit sharing 103
6. Social security 104
D. LABOR REGULATIONS AND FOREIGN EMPLOYEES 104
E. EMPLOYMENT CONTRACTS AND TERMINATION 104
XVI. DISSOLUTION OF BUSINESS ENTITIES 106
A. DISSOLUTION AND LIQUIDATION 106
1. Legal causes for dissolution. 106
2. Liquidation 106
3. Tax consequences 107
4. Labor consequences. 107
B. MERGER AND TRANSFORMATION 108
1. Tax consequences. 108
2. Labor consequences. 109
3. Industrial property 109
C. SPLIT-OFF 109
1. Tax consequences. 110
2. Labor consequences 110
3. Industrial property 110
D. SUSPENSION OF PAYMENTS AND BANKRUPTCY 110
1. Suspension of payments 111
2. Declaration of bankruptcy 111
3. Bankruptcy procedure 112
4. Criminal liability in bankruptcy 113
5. Termination of bankruptcy procedure 113
6. Comments 114
XVII. INTERNATIONAL RELATIONSHIPS 115
A. GATT AND THE WORLD TRADE ORGANIZATION 115
B. NAFTA AND OTHER FREE TRADE AGREEMENTS 115
C. ASIA-PACIFIC ECONOMIC COOPERATION MECHANISM 115
D. ORGANIZATION FOR ECONOMIC COOPERATION AND
DEVELOPMENT 116
E. OTHER INTERNATIONAL CONVENTIONS 116
XVIII. DISPUTE RESOLUTION 117
A. COURT PROCEEDINGS 117
1. Choice of jurisdiction 117
2. Choice of law 118
B. ARBITRATION 118
C. EXECUTION OF FOREIGN JUDGMENTS AND ARBITRAL
AWARDS 119
XIX. REAL ESTATE 121
A. ACQUISITION OF REAL ESTATE BY FOREIGNERS 121
B. AGRICULTURAL, LIVESTOCK AND TIMBERLAND 121
C. FORMALITIES CONCERNING THE TRANSFER OF PROPERTY
122
1. Verification requirements 122
2. Legal formalities. 122
3. Immigration status of the foreigner 123
D. TAXES 123
1. Income tax 123
2. Real Estate Acquisition Tax 124
3. Value Added Tax 124
XX. SECURING TRANSACTIONS 125
A. MORTGAGES/LIENS 125
1. Real estate mortgages 125
2. Maritime mortgage 125
3. Mortgages/Liens on aircraft 126
4. Industrial mortgages 126
5. Chattel mortgages 126
B. PLEDGES 126
1. Commercial pledges 127
a) Warehousing 127
b) Confidential warehouse receipts 128
c) Equipment-operating and financing
credits. 128
2. Civil pledges 129
C. GUARANTY 129
1. Fianza 129
2. Aval 129
D. CONDITIONAL SALES - RESERVATION OF TITLE 130
E. TRUSTS 130
F. LETTERS OF CREDIT 131
G. LEASES 131
1. Lease with purchase option 131
2. Financial lease 131
XXI. GOVERNMENT SALES AND CONTRACTING 132
A. RELEVANT LAW SOURCES 132
B. GRANTING OF CONTRACTS 132
C. FOREIGN PARTICIPATION 133
XXII. IMMIGRATION 134
A. NON-IMMIGRANT 134
B. IMMIGRANT 135
C. PERMANENT RESIDENT 136
D. GENERAL COMMENTS 136
E. TEMPORARY ENTRY OF BUSINESS PERSONS UNDER NAFTA
137
F. NATURALIZATION 137
XXIII. HUMAN RIGHTS 139
CONCLUSION 141
MACRO-ECONOMIC FRAMEWORK
AN OVERVIEW OF THE MEXICAN ECONOMY IN 1995
Problems and Prospects for Macroeconomic Stabilization
by Roberto Salinas León
Executive Director
Centro de Investigaciones Sobre la
Libre Empresa
"1995 will be a year of adjustment ..."
Ernesto Zedillo Ponce de León
This declaration is a tacit admission that 1995 will be
characterized by contraction in economic growth, rising inflation
and null access to credit. In business terms, this signifies a
decline in profit margins, acute unemployment, bankruptcies all
across the private sector, low stock market performance, and
higher debt servicing costs. The financial crisis brought about
by the currency collapse in December 1994 has not diminished in
the wake of strong emergency initiatives to neutralize a nervous
market, including the availability of extensive credit lines
supplied through the massive US$52 billion package. The second
phase of austerity measures entail draconian fiscal and monetary
policy to neutralize inflation expectations associated with a
lower parity. This implies a severe contraction of credit. In a
word, the challenge in 1995 is: survive.
The Economics of the Currency Crisis
The attempts to explain the intensity of the financial
crisis generally fail to note the role of one crucial but
unquantifiable variable: confidence. The major factor behind the
volatile behavior of exchange and financial markets in the first
quarter of the year was the loss of credibility with respect to
the long-term reliability of the domestic investment regime. The
emergency program sought to remedy the short-term adjustments,
but still require a basis in a new parity regime and a long-term
economic framework. The latter has been produced in the form of
the National Development Plan 1995-2000.
The Zedillo administration inherited a strategic dilemma in
exchange-rate policy. The growth of the current account deficit,
projected at US$31 billion for 1995 and higher thereafter, was
assumed a constant factor for forthcoming years in light of two
variables: strong private capital flows and trade liberalization
under NAFTA. However, political turbulence in 1994 had shifted an
excessive reliance on high interest rates as the primary
mechanism to sustain strong capital inflows. This generated a
decision-making problem associated with the following
alternatives:
* A "big-bang" macrodevaluation to reduce the increasing trade
deficit, remove currency overvaluation and stimulate a gradual
decrease of interest rates.
* An adjustment or microdevaluation in the maximum limit of
the fluctuation band.
* An unambiguous commitment with the practice of using high
interest rates as the "variable of adjustment", i.e., as an
important engine to sustain capital inflows.
* A strong push for wholesale liberalization of restricted
sectors in the economy, such as energy generation and financial
services, to stimulate greater direct investment flows.
The Zedillo administration opted for the second alternative,
but the strategy backfired. The collapse of confidence forced the
central bank to switch to a floating exchange-rate, thus
effectively bringing about a sharp 40% devaluation of the peso
vis-à-vis the U.S. dollar. The Wall Street Journal encapsulates
the principal damage of this phenomenon: "... with the
devaluation, the government sacrificed its most valuable,
forward-moving asset: market confidence." According to the
central bank, the day after the decision to amplify the
fluctuation band, the country experienced the largest amount of
capital flight observed in a 24 hour period: some US$5 billion in
cash.
The collapse of market confidence caused uncontrollable
panic in financial sectors and vitiated the positive results
obtained since 1989 in macroeconomic stabilization. In the first
days of the Zedillo administration, stability has been replaced
by stagflation.
> The rate of inflation will increase from 7.05% in 1994 to an
official estimate of 42% in annual terms
> The peso-dollar parity will increase, year to year, from
3.44 in mid-December 1994 to an estimated 6 in 1995
> The average interest rates will increase from 14% in 1994 to
an average of 40% in 1995
> The rate of unemployment has jumped from 3.2% in 1994 to
5.3% in the first semester of 1995; this is equivalent to
1,000,000 post-devaluation layoffs.
In retrospect, the financial crisis engendered by the
devaluation appears to have an origin in the simultaneous
combination of three fundamental errors:
1. In 1994, fiscal and monetary policy witnessed a departure
from the principles of strict discipline and stability observed
in earlier years - mostly for political reasons. The fiscal
slippage derived from "financial intermediation" of state-run
development banks amounted to 4.4% of GDP. In addition, the
central bank opted for an expansion of internal credit (an
estimated increase of 14% in real terms) instead of a hike in
interest rates to compensate negative capital outflows resulting
from falling international reserves. In short, too many pesos
were chasing too few U.S. dollars.
2. An excessive reliance on short-run debt and volatile
short-term capital flows to finance external accounts. In the
period 1990-1994, it is estimated that over 70% of new capital
inflows were channeled through securitized financial markets and
short-term instruments. This made the large requirements of the
capital account highly vulnerable to sudden shifts in investor
perception.
3. A poor policy approach to a delicate situation. The
absence of a new exchange-rate regime to substitute the band
system, coupled with the lack of specific strategies designed to
neutralize the negative impact of devaluation, sent financial
markets into a frenzy of panic-driven capital flight.
Problems and Prospects
The early failure to stabilize macroeconomic indicators, as
well as the exchange and financial markets, has led the Zedillo
administration to project three different consecutive outlooks
for 1995. In general, urgent stabilization is required before
some of the principal long-term problems can be properly
addressed. So far, the administration has not produced a more
stable exchange-rate regime, although it foreshadows a managed
band system similar in spirit and structure to Chile's
exchange-rate regime, where policy targets a relatively
undervalued real exchange-rate.
The immediate problems involved in the successful
implementation of the austerity measures announced in early March
are three:
* The renegotiation of short-term debt and interest
obligations in light of the dramatic rise in interest rates. The
total of dollar-denominated tesobono securities has been cut by
some 65%, as outstanding obligations for 1995 have gone from $29
billion to $12 billion. In the absence of debt renegotiation,
commercial banks will begin to face acute liquidity problems
derived from a strict monetary policy for 1995 and an immense
rise in bad-performing loans. Total foreign debt (public and
private) is US$153 billion.
* The successful implementation of anti-inflation policy. The
central bank has, so far, been unable to short-circuit the
inflationary expectations resulting from the currency collapse.
The first official target of 4% was revised to a 19% target after
the devaluation, then again revised to an annual rate of 42% in
light of the dramatic increases in the CPI observed in the first
six months of 1995 (an accumulated 33%). It is essential for the
success of macroeconomic adjustment that the central bank
neutralize the possibility of a vicious circle of
devaluation-inflation-devaluation.
* The government must fashion emergency programs to ameliorate
the social costs of the austerity program, particularly problems
associated with the large increase in the rates of unemployment
and potential bankruptcies in the small and medium size sector of
the economy. The introduction of interest-bearing accounts
indexed to inflation (the so-called UDI system) is one of many
strategies required to protect the purchasing power of agents
from the erosion effects of stagflation.
The success of the austerity measures is a source of debate
in private organizations worried about a drastic 4% to 5% fall in
total net output. Despite the devaluation and the destabilizing
effects of the currency crisis, there are important structural
and economic differences from the 1982 collapse which yield a
more reliable basis for the adjustment program to absorb the
effects in the financial markets and the macroeconomic scenario.
* The annual growth rate during the last six years has averaged
2.7%, which represents an important advance from the stagnation
observed in the 1980s.
* The inflation rate witnessed a decrease from 160% in 1987 to
single-digit as of 1993. In 1982, the inflation rate was 98.9%.
* The stabilization of public finances enabled the government to
reduce the fiscal deficit from 13% of GDP in 1988 to a surplus
from 1992 onwards. In turn, public debt decreased from 68% of the
GDP in 1988 to 22% in 1993. In 1982, the deficit was 16.1% of GDP
and public debt was 51.2% of GDP.
* In 1982, Mexico was one of the most protected economies of the
world; today, it is one of the most open economies. This means
that companies which have survived competition have the
flexibility to adapt to difficult situations such as those
present for 1995. In 1982, 78% of exports were derived from only
one product: oil. Today, manufacturing goods represent 82% of
all sales abroad.
To date, despite recession and instability, foreign
investment flows have improved. In the first semester, new
foreign inflows reached US$3.12 billion. The Zedillo
administration continues to emphasize a commitment to increase
direct foreign investment by new privatization and property
ownership laws. This will help ameliorate the bitterness of the
austerity program and the harsh conditions imposed by the Clinton
administration and the IMF in order to guarantee the success of
the US$52 billion bailout package. The strictness is evident in
the rubrics of monetary and fiscal policy:
1. A restrictive monetary regime with negative growth in the
money supply. This implies a sharp increase of interest rates to
soak up liquidity in domestic markets until the parity is
stabilized.
2. A reduction in public expenditures equivalent to 1.2% of
GDP in 1995. This implies less funding for social spending and
soft credits for depressed sectors.
3. The privatization of government enterprises and
concessions of public services in order to generate a windfall
revenue of US$16 billion in 1995. The areas slated for
privatization include railway transportation, ports, airports,
infrastructure, energy generation plants, and telecommunications.
4. A 50% increase in consumer VAT tax in order to raise the
revenue required for the government to comply with a balanced
budget for 1995 (0.5% surplus).
The latest phase of the emergency plan involves the
following targets:
ECONOMIC EMERGENCY PLAN 1995 (SECOND PHASE)
GDP Growth: -2%
Inflation: 42%
Wage Ceiling of 10%
1.2% reduction in public expenditures
"Second Wave" of Privatization: US$16 billion
Strict limits on internal credit expansion: NP$10 billion
Exchange-rate: NP$6 to US$1
Interest rates (Floor): 35%
Current Account deficit: US$2.5 billion
The immediate macroeconomic challenge of this austerity
program is to mitigate the contractionary economic consequences
of a tight credit policy. A promising strategy is tax
simplification and future tax reductions on income to offset the
bitterness of the adjustment process. The other is a commitment
to broaden deregulation in transportation, labor markets and
business requirements. The broad-based plan to sell state-owned
assets and "concession" important public services to private
parties is also encouraging. The breakdown, in its first phase,
is as follows:
SECOND WAVE OF PRIVATIZATION 1995 (IN US$ BILLIONS)
> Ports and Airports: $1.2
> Satellites: $1.5
> Petrochemicals: $1.3
> Railroads: $2.0
> Energy Generation Plants: $6.0
> Telephone Concessions: $1.5
> Highway Infrastructure: $1.5
> Bancomer Stock: $1.0
> Others: $0.5
The partial privatization of the railroad system and the
permits for private management of satellites required
modification in constitutional provisions governing state
ownership of these services. The Zedillo government plans to
encourage private capital participation in the form of joint
ventures and other contracting out mechanisms consistent with
exclusive state ownership of energy assets.
A New Trade Scenario
The first quarter results place special emphasis on the
reversal of the trade deficit as a sign that the strict measures
of austerity and devaluation are "working out." Thus, the Zedillo
administration is citing success on the basis that the current
account deficit, the alleged culprit behind the devaluation and
the ensuing financial and exchange-rate crisis, has been
transformed into a balance. On the other hand, a sharp drop in
demand for foreign goods is inevitable in an economy
characterized by recession and rising unemployment. So construed,
a current account surplus is not necessarily a reflection of a
healthy economy. For instance, the auto industry, a standard
barometer of economic activity, has experienced its worst crisis
in seven years: first quarter sales are down 63.7% in comparison
to 1994 - even despite the advantages of lower trade barriers due
to phase out periods in NAFTA. It is expected that 30% of all
dealerships will close down. This is equivalent to a net loss of
75,000 lots.
The international consensus expects Mexico to come out of
recession by early next year. The Zedillo administration reports
that the first semester registered a trade surplus of US$2.8
billion. In addition international reserves rebounded from a low
in January of US$3.4 billion to some US$14 billion by the end of
July. The sharp fluctuations in reserve figures owe to the impact
of payments on public debt, amortizations on outstanding
tesobonos and funds diverted to capitalize emergency funds for
the ailing banking sector. The increase in international reserves
and the conversion of the trade deficit into a trade surplus has
resulted in renewed optimism. On the other hand, this optimism is
substantially misplaced; a trade surplus reflects the impact of
large capital flight and the artificial advantages of a cheaper
currency, which are gradually short-circuited by rising inflation
and high interest rates. The last time the country ended with an
annual trade surplus was 1987 - a year better remembered for
acute recession, unemployment and the largest rate of inflation
in the nation's history (159%).
On the other hand, earlier concerns of a debt moratorium
have been minimized. The concerns mostly surround the status of
the peso. Although technically undervalued, most analysts have
expected the peso to fall further because of sharply rising
inflation levels. If the current exchange rate target of 6=1 can
be maintained throughout 1995, then the economy will be able to
preserve a level of competitiveness with the U.S. while keeping
inflation close to the 42% target. This is possible, according to
the central bank, because current monetary policy has been
significantly restrictive and inflation will fall off sharply
after the first semester - thereby making independent monetary
policy the main anchor of macroeconomic stabilization. The new
peso futures contract in the Chicago Mercantile Exchange will
help to minimize risk and convert a future variable cost to a
fixed cost, which will help to lock in gains and add stability to
a long-term planning.
The Banking Sector
A precondition of recovery is the stabilization of the
banking system. Salomon Brothers reports that, according to an
analysis using FASB accounting standards, the entire banking
system shows a status of insolvency on an adjusted basis. In
fact, according to Salomon Brothers, the third largest bank Banca
Serfin lost 3.3 billion new pesos or the equivalent of 81% of
1994 year end equity. The difference is that the Mexican
accounting standards allow for the creation of loan loss reserves
against equity and deferred taxes instead of subtracting from net
profits on the income statement.
Not surprisingly, mergers and acquisitions is becoming a
crucial mechanism to neutralize problems with increasing defaults
and past due loans in the second and third quarters. El Grupo
Banco Bilbao Vizcaya bought 70% of Probursa, setting a precedent
to follow. The same Salomon Brothers report claims there will be
numerous mergers in order to consolidate and repair the system.
In effect, nonperforming loans among commercial banks were up by
45% for the first quarter. The total value of damaged portfolios
is N$80 billion pesos. In addition, quarterly bank earnings n the
same period also witnessed a sharp downward turn. Thus, net
profits for Bancomer were down 38.2%, for Banamex 35% and for
Bancrecer 94.2%. High interest rates continued to neutralize
business and the banking system. It is expected that six local
banks will receive a total of N$6.5 billion pesos from the
government through the Procapte mechanism. This program is
designed to help the banks with capital shortages during this
period of high interest rates. Slated for aid in this program
are the following banks:
1. Banca Serfin - N$3.2 billion
2. Multibanco Comermex - N$1.4 billion
3. Banco Internacional - N$700 million
4. Banca Confía - N$452 million
5. Banco del Centro - N$452 million
6. Banco de Oriente N$311 million
The National Development Plan
The 1995-2000 National Development Plan has five parts:
sovereignty; citizen's rights; democratic development; social
policy; and economic growth. The latter chapter is designed to
promote a minimum of 5% GDP growth every year, and includes
fiscal reforms to increase domestic savings, control of public
spending and inflation, stabilize the peso, and address
fundamental macroeconomic issues. This chapter is pivotal for the
overall success of the plan. The country will not be able to
improve its position vis-à-vis sovereignty or social growth
without stabilizing the economy and providing for high growth.
This, in turn, is based on the following set of reforms:
1) Increase domestic savings through reforms in the labor
markets and the social security system.
2) Create stability and certainty in the financial markets,
avoiding an overvaluation of the peso and/or spiraling inflation.
3) Ensure efficient use of resources by improving local
infrastructure, continuing the path of privatization and
increasing productivity.
4) Achieve a balanced environmental policy that is
pro-growth but protects natural and environmental resources.
5) Promote growth of small and medium sized businesses as
well as important sectors such as agriculture, fishing,
manufacturing, mining and tourism.
Institutions like Centro de Investigaciones Sobre la Libre
Empresa (CISLE) usually restrict their range of activities to
either academic goals or public policy goals. At CISLE, we do
both. Academically, our aim is to foster a proper understanding
of the market system. This is a long-term task. At the level of
public policy, our aim is to propose solutions and creative
strategies to transform the current system of mixed economy into
a system approximating a market regime as far as possible. This
is a short-term task, which concentrates on issues like
privatization, deregulation, tax reform, legal reform, free
trade, and the like.
MEXICO
BUSINESS OPPORTUNITIES
AND
LEGAL FRAMEWORK
I. THE COUNTRY AT A GLANCE
A. INTRODUCTION
As the twentieth century comes to a close, the world is lead
decreasingly by a dominant state or states and increasingly by
the business world and the developing, dynamic economic global
interdependence. The end of the Cold War and the military
disarmament of super powers, coupled with the globalization of
markets means "might" is measured, not in the historical terms of
military power, but by a country's strength in international
markets. Because markets are the domain of business, economic
strength depends on the ability of a country's companies and
industries to do business internationally. To this end, countries
around the world are forming international trade relationships to
facilitate their competitiveness.
Mexican leaders recognized this world trend and the
necessity of creating the conditions under which business and
industry could flourish, by membership in the General Agreement
on Tariffs and Trade (GATT, 1986, now the World Trade
Organization), the Asia-Pacific Economic Cooperation Mechanism
(APEC, 1993) and the Organization for Economic Cooperation and
Development (OECD, 1994). It also opened trade negotiations with
the United States and Canada that culminated in the North
American Free Trade Agreement (NAFTA) in effect on January 1,
1994, establishing the largest free trade area in the world, a
US$6.5 trillion market of over 360 million consumers, creating
opportunities for Canadian, Mexican and United States companies
by removing barriers to commerce.
Trade treaties with Chile, Colombia, Venezuela, Costa Rica
and Bolivia have been recently entered into and are in effect. A
preliminary agreement with the European Union has been signed to
enter into negotiations which are expected to terminate in a free
trade agreement in approximately three years.
Tax treaties with Canada, France, Germany, the Netherlands,
Spain, Sweden, Switzerland, the United Kingdom and the United
States have been entered into and various others are under
negotiation.
In addition to economic reform over the past decade, Mexico
has also undertaken massive reform of its political, legal and
regulatory systems. The reform process is not yet complete, but
the Mexican government is committed to it, and reform continues
to proceed regardless of economic changes. Not only does reform
proceed, but the changes that have been made to date are
irrevocable and Mexico will not return to a closed economy.
Notwithstanding Mexico's current problems triggered by the
sudden outflow of short-term capital in December 20, 1994, many
of the conditions that make Mexico a good business and investment
opportunity before the devaluation still hold:
- a strategic geographical location including a 3,107
kilometer border with the United States, coastlines facing Europe
and Asia, and a gateway to Latin America;
- access to the United States, the world's largest
consumer market;
- a relatively young workforce of 34 million people that
has proven capable of delivering quality at a fraction of the
labor costs common in the advanced industrialized economies;
- plentiful natural resources;
- a rapidly growing and increasingly affluent domestic
market of 91 million people; and
- a liberalized public policy climate which becomes
increasingly supportive of private business activity and
investment.
B. GEOGRAPHY
Mexico (officially "the United Mexican States"), is bounded
by the United States on the north, Guatemala, Belize, and the
Caribbean Sea on the southeast, the Pacific Ocean on the west and
south, and the Gulf of Mexico on the east. The country has an
area of 1,970,000 square kilometers (760,000 square miles) and
shares 3,107 kilometers of common border with the United States,
with 11,592 kilometers of coastline. Mexico is the third largest
country in Latin America, after Brazil and Argentina and the
thirteenth largest country in the world.
C. POPULATION
Mexico's population is approximately 91 million, with an
annual estimated growth rate of 2.1%. Mexico has roughly
one-half the population of Brazil, and well over twice that of
Argentina, the Latin American country with the next-largest
population after Mexico. Eighty percent of the population is
under 40 years of age, and 48% of the population is under 20
years, and the average age is 26.
Because of the growth of the population and its composition,
it is foreseen that 800,000 to 1,000,000 jobs must be created
each year, which in turn requires substantial investment.
Mexico City, among the largest cities of the world, is the
capital and largest metropolitan area, including certain
municipalities of the neighboring State of Mexico and has over 20
million inhabitants. The capital city is the commercial,
industrial and cultural center of the country. However, the
government is engaged in efforts to decentralize industry and
commerce to foster the growth of regional, industrial and
commercial centers. The second largest city in Mexico is
Guadalajara, northwest of Mexico City, with a population of 3.5
million. Mexico's third largest city, Monterrey, located in
northern Mexico close to the U.S. border, just south of Laredo,
is the second most important industrial city and has a population
of 3 million.
D. LANGUAGE
Spanish is the national language of Mexico; however many
indigenous groups speak their own dialects in their own towns and
villages. English is understood and spoken by many in Mexico City
and other large cities, as well as in the northern border region.
Many of the younger generation have been educated abroad,
including in the United States, and are fluent in English and
other languages. Many of them occupy high positions in business
and government.
E. TIME ZONES
Most of Mexico is on Greenwich Mean Time minus six hours
(U.S. Central Standard Time). The far northwest of Mexico is on
U.S. Mountain Time (minus seven hours Greenwich Time) and the
peninsula of Baja California is on U.S. Pacific Time.
Mexico does not follow a daylight saving system, except the
peninsula of Baja California.
F. CULTURE
Mexico has a unique national character and a distinctive
culture built on centuries of dynamic history.
It has long been recognized that culture plays a distinct
role in defining ways of living which vary from culture to
culture. Although the use of generalizations may appear to
stereotype people, they are useful as a tool for developing an
awareness of the differences existing between people of diverse
cultures, and for reducing misunderstandings between them. In the
Mexican culture, the importance of the family, the deeply rooted
Roman Catholic religion, the nationalistic pride, and the high
degree of personal sensitivity of Mexicans, the importance given
to time, all have implications in communication styles,
decision-making, negotiating, contracting and in planning and
business etiquette.
II. INVESTMENT - GENERAL CONSIDERATIONS
A. POLITICAL SYSTEM
Mexico is a constitutional democracy under a federal system
of government with separation of powers between the executive,
legislative and judicial branches. The national territory is
divided into 31 states and the Federal District. Each state has
its own constitution, governor and legislative chamber. The chief
governing official of the Federal District is appointed by the
President.
The chief executive of the Federal Government is the
President, who is elected for a six-year term. Under Mexico's
Constitution, the President may not run for reelection.
The federal legislative branch is comprised of two chambers,
the Chamber of Representatives and the Senate, with 500 and 128
members, respectively. The Representatives are elected for 3 year
terms coinciding with the Presidential election and his mid-term.
The Senators are elected for 6 year terms, one half coinciding
with the Presidential election and the other half also at his
mid-term.
The states have a Chamber of Representatives. Governors are
elected for six years. The judicial system is composed of federal
and local courts, each with its own jurisdiction.
On the political side, Mexico surprised the world by having
the most transparent elections in its history in August, 1994,
with the participation of 77.7% of the voting population. The PRI
party (Partido Revolucionario Institucional) once again, after 65
years of continuous dominance, won the Presidency and 95 out of
128 senatorships, and 300 out of 500 representatives. The PRI
candidate, Ernesto Zedillo, received 51% of the votes,
comfortably outdistancing his closest rival, Diego Fernández of
the PAN party (Partido de Acción Nacional) receiving 32% of the
votes, and Cuauhtémoc Cárdenas of the PRD party (Partido de la
Revolución Democrática) receiving 11% of the vote. For the first
time the candidates held TV debates, outside observers
participated in the election process, and an Electoral Commission
was appointed composed of non-partisan citizens.
Further political reform is foreseen as a result of the
greater participation of various civic organizations, and the
population in general, demanding a separation between the
dominant PRI party and the government, greater democratic
selection of candidates including the presidential candidate,
perfection of the electoral process, reform of campaign funding,
equitable access to media and an independent relationship between
Congress and the President. In conclusion, a full reform of the
Mexican political system.
B. LEGAL SYSTEM
Mexico's legal system is based on the civil law system,
originating in Roman Law, as further developed and evolved in
continental Europe, and more recently influenced by Anglo Saxon
law. The civil law system is based on "written law," that is, the
codes or statutes that present the general principles governing
broad areas of law. The judiciary in civil law countries such as
Mexico, therefore, do not play the central role in interpreting
and "making" the law as it does in common law jurisdictions.
All laws regulating commerce, investment and trade in Mexico
are federal in nature and apply throughout the country to
entities operating therein. The statutes or codes most relevant
to firms doing business in Mexico are the Companies Law, the
Civil Code, the Banking Law, the Competition Law, the Foreign
Investment Law, the Labor Law, the Commercial Code, and tax laws,
mainly the Income Tax Law and the Value Added Tax Law.
C. ECONOMIC SYSTEM
The Mexican Constitution governs many aspects of the
country's regulatory regime for economic development and foreign
investment. Constitutional authority for the enactment and
implementation of economic policy is shared between the Congress
and the President. Article 73 of the Constitution authorizes the
Congress to enact laws to encourage the promotion of Mexican
investment and the regulation of foreign investment. Under
Article 89, the President must ensure that the laws passed by
Congress are faithfully executed.
The State is in charge of guiding national development and
has the authority to plan and coordinate national economic
activity. The Constitution provides that the public, private and
social sectors will participate in the national economic
development.
The Federal Congress is authorized to legislate on the
national plan for economic and social development and the
President is authorized to enforce laws and to establish the
procedures of participation and consultation in national
planning.
In past decades, the Mexican Government pursued an
inward-looking, statist model of development characterized by
pervasive import restrictions, strict regulation of foreign
investment and a national economy dominated by government-owned
or -operated enterprises with highly regulated private Mexican
investments. By the mid-1980's, however, Mexico decided to change
its economic model through a transformation of the existing and
regulatory framework. The first indication of such changes was
the liberal interpretation of the 1973 foreign investment law
which as its title indicated was a "Law to Promote Mexican
Investment and Regulate Foreign Investment." With a series of
specific resolutions in the mid 1980's, a more liberal
interpretation of the 1973 Law was given. Such liberalizing
criteria was followed by the 1989 Regulations to the 1973 Law,
which encompassed such criteria and extended liberalization,
including neutral investment, and provided for specific
performance requirements to permit the increase of foreign
participation over 49% without prior authorization, in most
economic activities.
Finally the December 1993 Foreign Investment Law was enacted
to further liberalize and permit direct foreign investment, in
most economic activities.
The Mexican Government has established new economic policy
initiatives that have resulted in elimination of trade barriers,
reduction of tariff levels, massive privatization of
government-owned entities, new rules governing foreign
investment, accession in 1986 to GATT, succeeded by the World
Trade Organization as of January 1, 1995, the ratification and
implementation of NAFTA and membership in the OECD.
D. COURT SYSTEM
Mexico's court system is divided into federal and local
courts, which apply their own laws related to civil and criminal
matters and in commercial matters the applicable federal laws.
1. Federal judicial system.
The federal judicial system is headed by the Supreme Court
of Justice and is composed of Collegiate Circuit Courts, Unitary
Circuit Courts, District Courts and since constitutional
amendments in effect as of January 1st., 1995, of a Federal Jury
of Citizens and of a Federal Judicial Board.
a) The Supreme Court of Justice.
It is composed of eleven justices, one of which is its
president, and is divided into two chambers; the Supreme Court
may on certain matters act in a plenary session.
The Supreme Court of Justice reviews the following matters:
i) Constitutional controversies arising among others,
between the Federal Government and other states or the Federal
District, the Federal Government and the municipalities,
Executive and Legislative powers, states, and states and the
Federal District. (See Article 105 of the Mexican Constitution).
If a decision from the Supreme Court in these matters is
approved by a majority of eight votes, the decision is "stare
decisis."
Other decisions may be rendered by the vote of the majority
of the members of the Court. Decisions so rendered will produce
effects only for the parties to the controversy and will not be
considered "stare decisis."
ii) Claims asserting unconstitutionality raising
contradictions between a law, regulation or other disposition of
general application and the Constitution.
These claims may be filed within 30 days of publication of
the decision upon resolution of 33% of the Chamber of
Representatives or Senate, depending on the issue, or upon the
request of the Attorney General or other authorities as provided
by law. (See Article 105 of the Mexican Constitution).
The Supreme Court of Justice may declare the invalidity of
the law, regulation or disposition only by decision of at least
eight members. Upon the issuance of a decision declaring
unconstitutionality, such disposition is considered to be
overturned. The application of an invalid law or disposition by
any authority will be an illegal act.
Prior to constitutional amendments in effect as of January
1st., 1995 a decision of unconstitutionality did not invalidate
the law, although after five similar decisions ("jurisprudence")
future decisions would be expected to be almost automatic, under
the same circumstances, and would be binding upon the lower
courts.
iii) Revision of Judgments of District Courts and Unitary
Circuit Courts, in certain cases, and revision of certain
judgments issued by the Collegiate Circuit Courts in "direct
amparo" suits.
The "direct amparo" suit may be filed against final
judgments and decisions rendered by judicial, administrative or
labor courts.
b) Collegiate Circuit Courts.
As a result of an excessive number of suits, these Courts
were created in 1950 to assist the Supreme Court to resolve
cases.
Each one of these Courts is composed of three magistrates
who hear and resolve "direct amparo" proceedings against final
decisions because of violations during the procedure or caused by
the decision.
Also they resolve appeals for review against decisions of
District Courts and Unitary Circuit Courts in amparo suits.
c) Unitary Circuit Courts.
They are courts of appeal in matters pertaining to the
federal jurisdiction. A magistrate sitting alone hears appeals
against decisions issued by District judges, as well as some
specific cases of amparo proceedings.
d) District Courts.
They are composed of a single judge and have dual
jurisdiction:
i) to hear amparo suits brought against acts of authorities
which infringe individual guarantees and which are not final
decisions, and
ii) to intervene in suits concerning the application of
federal laws.
e) Federal Jury of Citizens.
The Federal Jury of Citizens may decide situations of fact
submitted by the district courts, and is also competent to decide
on crimes committed by the press against the public order, or the
external or internal security of the country. However, the jury
system is not generally provided for in civil or criminal trials.
f) Federal Judicial Board.
The Federal Judicial Board is in charge of the management
and surveillance of the judicial power, except of the Supreme
Court. It is also in charge of appointing and removing
magistrates and judges.
2. Local courts.
The court structure of the Federal District in Mexico City
is taken as a model by the other states, and consists of:
a) Supreme Court of Justice of the Federal District, which
hears appeal cases for local, civil or commercial matters,
arising usually from the application of local or federal laws
when applicable;
b) Court of First Instance, deciding cases governed by local
laws. There are specialized First Instance Courts for civil and
commercial, family, criminal, leasing and bankruptcy cases; and
c) Courts of Justice of the Peace with jurisdiction over
cases in which minor amounts are involved.
3. Other courts and tribunals.
Mexico's court system also includes specialized courts
ruling on labor, tax, administrative matters, as well as
electoral disputes.
E. FINANCIAL SYSTEM
Mexico's financial system includes not only the Bank of
Mexico, the Stock Exchange and credit institutions, but also
holding companies of financial groups, brokerage houses,
insurance and bonding companies, financial factoring and leasing
companies, stock advisors, credit unions, general deposit
warehouses, savings and lending companies, exchange houses,
non-bank banks, portfolio management companies, investment
companies, companies operating investment companies, stock
specialists, and others.
Financial services are regulated by a series of laws,
regulations and circular letters from the Bank of Mexico,
National Banking Commission (NBC), National Securities Commission
(NSC), National Insurance and Bonding Commission (NIBC) and the
Ministry of Finance.
As of April 29, 1995, the NBC and NSC merged and created the
National Securities and Banking Commission (NSBC).
1. Credit institutions.
The Mexican banking system is formed by the Bank of Mexico,
the National Savings Fund, public trusts, development banks and
commercial banks.
a) The Bank of Mexico.
The system is regulated by the government-owned central
bank, the Bank of Mexico (BM). In 1994 BM was granted autonomy in
the formulation and implementation of national monetary policy.
Its primary, but not only objective, is, as in any central
bank, to provide the Mexican economy with currency as legal
tender to achieve stability of its purchasing power, and to
exclusively issue bills and mint coins. Additionally, the Bank of
Mexico must promote a healthy development of the financial
system, the correct operation of the payments system and
participate in the Exchange Commission which establishes the
exchange policy.
The BM is administered by a Governing Board of five members,
one of whom is appointed Governor by the Federal Government.
As provided by Article 28 of the Mexican Constitution, BM
may unilaterally determine the extension and control of credit
within the financial system of the Federal Government.
b) Development and commercial banking.
Credit institutions, which may be development or commercial
banks, are the only authorized institutions to accept deposits
from the general public and in turn extend credit based on such
deposits.
i) Development banks.
Development banks are those established for special
objectives, such as promotion of foreign trade, financing housing
and agricultural development, for example Nacional Financiera,
S.N.C., which operates as the principal government bank for
promotion of industry in Mexico, Banco de Comercio Exterior,
S.N.C., which promotes exports, Banco Nacional de Obras y
Servicios Públicos, S.N.C., which promotes construction and
housing projects, among others.
Foreigners may not participate in the equity of development
banks.
ii) Commercial banks.
To operate as commercial banks, authorization from the
Ministry of Finance and opinions from BM and the NSBC are
required. The activities which they may perform are listed in
Article 46 of the Law of Credit Institutions.
As per decree dated February 15, 1995, capital stock of
commercial banks must be represented by series "A" or "B" shares.
Series "A" shares must account for at least 51% of the ordinary
capital stock of the commercial bank and may be subscribed only
by Mexican individuals or Mexican majority-owned entities, the
Federal Government and the Savings Protection Banking Fund
(FOBAPROA), holding companies of financial groups and
institutional investors authorized by the Ministry of Finance.
The remaining 49% may be represented either by series "A" or "B"
shares. Series "B" shares may represent up to 49% of the ordinary
capital stock of the bank and may be subscribed by foreigners.
The February 15, 1995, amendments allow commercial banks to
issue special series "L" shares representing contribution of
"additional" capital complementing its ordinary capital stock
represented by series "A" and "B" shares. "L" shares have limited
voting rights, and a preferred and cumulative dividend which can
be greater but not less than the dividend on common stock. These
shares may be issued for up to an amount equal to 40% of the
ordinary capital stock and may be acquired by foreigners.
No person or entity may hold more than 5% of the capital
stock represented by "A" or "B" shares but may hold up to 20%
with prior authorization from the Ministry of Finance. Exceptions
to such limitations on holdings of ordinary capital stock are
listed in Article 17 of the Law of Credit Institutions which
include the Federal Government, certain institutional investors,
FOBAPROA, holding companies of financial groups, shareholders of
banks participating in a merger program approved by the Ministry
of Finance, and foreign financial institutions when participating
in a program approved by the Ministry of Finance converting a
Mexican bank into an affiliate under applicable treaties. (See
paragraph 9 of this Section).
Except for the period between 1982 to 1992, Mexican
commercial banks were historically privately owned. Three large
national banks (Banamex, Bancomer and Serfin), operating through
more than 2,000 branches throughout the country, dominate this
sector of the economy.
2. Financial groups.
Financial groups are governed by the Law of Financial Groups
enacted on July 18, 1990, and are formed by a holding company and
by any of the following financial entities: general deposit
warehouse, leasing company, financial factoring company, exchange
house, bonding company, insurance company, non-bank bank,
brokerage house, commercial bank, and company operating
investment companies.
Financial groups may be formed by at least a commercial
bank, a brokerage house and/or an insurance company. If the
financial group does not include two of the aforementioned
entities, it must include at least three of the financial
entities mentioned in the above paragraph, except for companies
operating investment companies. The Ministry of Finance may
authorize the participation of other institutions.
To establish and operate a financial group, authorization
from the Ministry of Finance is required. Each of the financial
institutions that form part of the financial group must also
receive authorization from various authorities such as the
Ministry of Finance, BM, NSBC or NIBC.
The holding company must own at least 51% of the paid-in
capital stock with voting rights of each of the financial
institutions forming the group, and its corporate purpose must be
the acquisition and administration of the shares issued by the
financial institutions. The holding company may never engage in
the activities of each of the financial institutions.
The February 15, 1995 Amendments to the Law of Financial
Groups refer to limitations on holdings and types of shares to be
issued which are essentially the same as those discussed in
paragraph b) ii) of Section II.E.1 immediately above.
3. Insurance companies, reinsurance intermediaries,
foreign reinsurers.
a) Insurance companies.
Insurance companies are regulated by the Law of Insurance
Institutions and of Mutual Companies and the circular letters
issued by the NIBC.
Only insurance companies authorized by the Ministry of
Finance may engage in any of the following insurance or
reinsurance activities: i) life, ii) injuries and illness; and
iii) damage in any of the following areas, among others: (1)
civil liability and professional risks, (2) maritime and
transport, (3) fire, (4) agriculture and animals, (5)
automobiles, and (6) credit.
Insurance companies must have a minimum paid-in capital
stock for each of the above mentioned operations determined by
the Ministry of Finance during the first quarter of each year. If
the insurance company has variable capital, shares representing
the minimum capital required by the Ministry of Finance may not
be voluntarily retired whether or not any of such shares
represent the variable portion of the capital.
Certain financial institutions are limited in their
participation in insurance companies. (See Section II.E.9
hereinafter for affiliates of foreign financial entities).
No person or legal entity may hold more than 15% of the
capital stock of an insurance company, except the Federal
Government, companies subject to NIBC surveillance, investors or
other insurance companies participating in the Ministry of
Finance approved merger programs, banks acting as trustees and
holding companies of financial groups.
b) Reinsurance intermediaries.
Insurance companies engaged in reinsurance operations may
use the services of intermediaries residing in Mexico or abroad.
Reinsurance intermediaries residing in Mexico must be authorized
by the NIBC. Reinsurance intermediaries residing abroad must be
registered in the Registry created for such purpose by the NIBC.
c) Foreign reinsurers.
To participate in reinsurance operations, foreign reinsurers
must be duly registered in the General Registry of Foreign
Reinsurers of the Ministry of Finance.
Foreign reinsures may open representative offices in Mexico
which may only accept or assign reinsurance liabilities in the
name of their main offices.
4. Insurance agents.
Insurance agents may be individuals or legal entities
regulated by the Regulations for Insurance Agents, and, in the
case of legal entities, additionally, by the Law of Insurance
Institutions and Mutual Insurance Companies which defines
insurance agents as all persons or legal entities intervening in
the contracting of insurance through the exchange of offers and
acceptances as well as the advising regarding execution,
preservation or modification thereof for which the authorization
from the NIBC is needed.
Individuals acting as insurance agents may be Mexican or
foreign. Legal entities must be incorporated as corporations and
may be 100% foreign owned, subject to authorization from the
Foreign Investment Commission. The following entities may not
participate in their capital stock: credit institutions, mutual
insurance companies, bonding companies, brokerage houses,
auxiliary credit organizations, investment companies, companies
operating investment companies, exchange houses and financial
commission agencies, foreign governments, holding companies of
financial groups, and reinsurers of insurance and bonds.
5. Auxiliary credit organizations and activities.
The General Law of Auxiliary Credit Organizations and
Activities considers the following as auxiliary credit
organizations: general deposit warehouses, financial leasing
companies, savings and lending companies, credit unions, and
financial factoring companies, and others considered as such by
any other law. The Law also considers the purchase and sale of
currencies as an auxiliary credit activity, therefore the
operation of exchange houses is regulated by this Law.
The above institutions are subject to authorization of the
Ministry of Finance except credit unions which are subject to
authorization of NSBC. All except the savings and lending
companies must be incorporated as corporations and have capital
requirements established by the Ministry of Finance.
Exchange houses and auxiliary credit institutions, except
savings and lending companies, may issue preferential, limited
vote or no par value shares.
Foreign governments, other auxiliary credit institutions or
exchange houses, except when participating in merger programs
approved by the Ministry of Finance, and bonding and mutual
insurance companies may not participate in the capital stock of
auxiliary credit institutions or exchange houses.
No person or entity may hold more than 10% of the paid-in
capital stock of these organizations, except for the Federal
Government, credit institutions, insurance companies, stock
brokerage houses and financial group holding companies,
shareholders of auxiliary credit organizations and exchange
houses, or those institutions when participating in a merger
program approved by the Ministry of Finance. Such Ministry or the
NSBC may in special cases authorize the purchase of more than the
10% limit to persons or entities with no connection to other
shareholders of the respective company, and, provided such
approval does not create an undue concentration of share
ownership.
As per FIL, foreigners may participate up to 49% in the
paid-in capital stock of general deposit warehouses, leasing and
factoring companies and exchange houses, upon prior authorization
from the Ministry of Finance.
6. Credit information companies.
Credit information companies are regulated by Article 33 of
the Law of Financial Groups and by the General Rules Applicable
to Credit Information Companies effective as of February 16,
1995. The purpose of these companies is to render information
services on credit and analogous operations performed by
financial entities. Their operation is subject to authorization
from the Ministry of Finance with the opinion of BM and NSBC. As
per FIL foreign participation in the paid-in capital stock may
exceed 49% prior approval from the Foreign Investment Commission.
7. Special purpose financial entities (non-bank banks).
Article 103 of the Law of Credit Institutions expressly
prohibits any one other than credit institutions from rendering
banking services, with few exceptions, such as non-bank banks,
which may obtain resources from the placement of securities
registered in the National Registry of Securities and
Intermediaries and grant credits for determined activities or
sectors. Foreigners may participate only up to 49% of the capital
stock of such entities, except affiliates of foreign financial
institutions. (See Section III.B.9. hereinafter).
8. Bonding companies.
Bonding companies are regulated by the Federal Law of
Bonding Institutions. Incorporation is subject to authorization
from the Ministry of Finance. The capital stock of bonding
companies may be controlled by foreign financial institutions or
affiliate controlling companies which should own at least 99% of
the capital stock (affiliates), or controlled by Mexicans who
should own at least 51% of the capital stock thereof, as per FIL.
In the latter case, no person or entity may acquire more
than 10% of the paid-in capital stock of a bonding company except
as otherwise authorized by the Ministry of Finance. No person may
own more than 15% of the paid-in capital stock of bonding
companies, except: the Federal Government, entities subject to
surveillance by the NSBC, individuals and other bonding companies
purchasing shares in accordance with the merger programs approved
by the Ministry of Finance, credit institutions acting as
trustees, shareholders of merging bonding companies (subject to
restrictions), holding companies of financial groups, and other
authorized persons fostering technical development and
commercialization of bonds.
The following institutions may not participate in the
capital stock of Mexican-owned bonding companies: credit
institutions, mutual insurance companies, brokerage houses,
auxiliary credit organizations, and companies operating
investment companies.
9. Affiliates of foreign financial entities.
Since January 1, 1994, by virtue of amendments to the
respective laws governing various financial institutions, foreign
financial entities may establish affiliates upon prior approval
of the Ministry of Finance and provided the countries of such
entities have entered into a treaty providing for such financial
affiliates. NAFTA contemplates the establishment of foreign
financial affiliates including market participation limits,
individual and aggregate. (See Section III.B.9. hereinafter).
Foreign financial institutions must perform in their
countries of origin the same activities authorized for the
affiliate in Mexico. Their operations will be regulated by
national legislation and the provisions of the corresponding
international treaty.
The capital stock of affiliates of credit institutions,
holding companies of financial groups and brokerage houses, shall
be represented only by "F" and "B" shares. "F" shares must
represent at least 51% of the capital stock and may be held only
by an affiliate holding company or foreign financial institution.
"B" shares are of free subscription, and are regulated by the
provisions for "B" series contained in the corresponding laws.
In the case of affiliates of insurance companies, the
capital stock shall be represented by "E" and "M" shares. "E"
shares must represent at least 51% of the capital stock and may
be held only by an affiliate holding company or a foreign
financial institution. "M" shares are of free subscription.
In the case of special purpose financial companies (non-bank
banks), auxiliary credit institutions, exchange houses, bonding
companies, the capital stock will be represented by a single
series of shares, 99% of which must be held by an affiliate
holding company or a foreign financial institution.
In the case of investment companies or companies operating
investment companies, 99% of the fixed capital stock must be held
by an affiliate holding company or a foreign financial
institution.
10. Investment companies.
Investment companies are entities incorporated for the
purpose of purchasing securities and documents selected in
accordance with risk diversification criteria, using funds
obtained from the placement among the investment public of shares
representing their capital stock.
Incorporation of investment companies is subject to the
authorization from the NSBC, and may be divided into: a) common
investment companies, which operate exclusively with fixed and
variable interest rate instruments, b) debt instruments
investment companies, which operate exclusively with fixed
interest rate instruments, and c) capital investment companies,
which operate with securities and instruments issued by companies
requiring long term funding and whose activities are related to
the National Development Plan.
Management of investment companies, and purchase and
distribution of their shares, may be performed by companies
operating investment companies, brokerage houses and credit
institutions.
Foreign participation on the fixed capital stock is limited
to 49% by FIL.
Individual participation in the capital stock is limited to
10% except for: a) founding members and those purchasing shares
during a six-month term from the date of incorporation who shall
resell their shares in accordance with the investment plans
approved by NSBC, b) brokerage houses and credit institutions,
companies operating investment companies and shareholders of
capital investment companies, and c) any other person authorized
by NSBC.
11. Stock exchange.
Stock exchanges are principally regulated by the Securities
Exchange Law and the circular letters issued by the NSBC.
Although the Law contemplates the possibility of a stock exchange
in any city, currently, the only authorized stock exchange is the
Mexican Stock Exchange located in Mexico City. The Mexican Stock
Exchange is operated by a corporation whose shareholders must be
brokerage houses or stock specialists. The Mexican Stock exchange
includes an auction hall divided in two trading floors, one for
Capital Markets destined for trading of shares and options and
the other, the Money Market, destined for trading of debt
instruments.
As of July 7, 1993 the Intermediate Market initiated
operations destined for the sale and purchase of shares issued by
middle-sized companies not complying with the requirements
established by the Mexican Stock Exchange.
Mexican companies have been authorized by Mexican
authorities to place their securities in foreign markets.
Furthermore, a Peso Futures Market is operating in the City of
Chicago, U.S., and is soon expected to operate in Mexico City. In
the near future securities of foreign companies may be registered
on the Mexican Stock Exchange.
12. Brokerage houses and stock specialists.
Brokerage houses and stock specialists are considered in the
Securities Exchange Law as intermediaries in the stock market and
may perform intermediation activities, such as: a) brokerage,
commission and other activities with the purpose of creating a
supply and demand, b) operations for their own account of public
offerings of securities issued or secured by third parties, and
c) administration and handling of third parties portfolios.
Brokerage houses and stock specialists must be registered in the
Intermediaries Section of the National Registry of Securities and
Intermediaries.
The February 15, 1995, amendments to the Law refer to the
limitations on holdings of shares and types of shares to be
issued which are essentially the same as those discussed in
paragraph b)ii) of Section II.E.1 hereinabove.
The persons listed in Article 17 paragraph II of the Stock
Exchange Law may not participate in the capital stock of
brokerage houses or stock specialists. The acquisition of more
than 10% of "A" or "B" shares by a single person is subject to
authorization from the NSBC, but in no case may own more than 20%
expect as provided for in Article 19 of the aforementioned Law.
13. Companies regulated by Art. 12-Bis of the Securities
Exchange Law.
Companies regulated by Article 12-Bis of the Securities
Exchange Law may handle security portfolios in the name of third
parties without registering in the National Registry of
Intermediaries, as long as they comply with the following
requirements: a) they must be Mexican corporations or
associations in which foreign participation in the capital stock
and in the board of directors is limited to a minority position;
b) its administrative partners or members of the board of
directors and officers may not have relationships with brokerage
houses, stock specialists, companies operating investment
companies, credit institutions, securities qualifying
institutions, issuers of securities traded in the securities
market; c) all operations must be documented in the name of the
respective client and must be carried out through brokerage
houses, stock specialists, companies operating investment
companies or credit institutions; and d) may not receive funds or
securities in custody or for the development of their activities.
Foreigners may participate in up to 49% of the capital stock
of these companies.
14. Institutions for the deposit of securities.
Institutions for the deposit of securities operate through a
concession granted by the Ministry of Finance to hold for
safekeeping, administering, compensating, liquidating and
transferring securities. Only one concession is granted per city.
The shareholders may be only the Bank of Mexico, brokerage
houses, stock specialists, stock exchanges, credit institutions,
insurance and bonding companies.
15. Investment Units (UDI's).
To offset inflationary pressures, the Mexican government has
created Units of Investment (UDI's) which are units of account
that may be used to express the value of investments, credits or
commercial transactions. The value of the UDI's is calculated
daily by the Bank of Mexico based on the National Consumer Price
Index. (The value of one UDI was equal to N$1.00 on April 4,
1995, date of enactment of the corresponding decree. The value of
that same UDI was N$ 1.1749 on June 30, 1995, reflecting the
inflation index to that date).
UDI's may be used to denominate the value of obligations in
credit instruments, except checks. They are voluntary and when
due, payment must be made in New Pesos by multiplying the value
of the UDI's in which the obligation is denominated by the number
owed.
III. INVESTMENT FRAMEWORK
Over the last several years, Mexico has removed significant
foreign investment barriers as part of an ambitious economic
development plan which aims to achieve, and sustain, industrial
development and expansion. The government has recognized that
substantial private capital is needed to create additional
employment and to increase industrial output which also results
in attracting an influx of modern technology, management
techniques and financing.
Consistent with NAFTA, Mexico has enacted a new Foreign
Investment Law (FIL), effective December 28, 1993, which
abolishes restrictions on foreign investment in most areas. FIL
repeals several statutes which strictly regulated the
participation of foreign investors in certain activities. The
Foreign Investment Commission is the exclusive authority for the
application of FIL.
A. NEW FOREIGN INVESTMENT LAW
FIL establishes, as a general rule, that foreign investors
may hold 100% of the capital stock of any Mexican corporation or
partnership except in those few areas expressly subject to
limitations under the Law. The repealed law stated as a general
rule that foreign investment was limited to 49% unless expressly
authorized to exceed this percentage. FIL grants all investors
from NAFTA and non-NAFTA countries the same investment advantages
in Mexico. In certain activities limited by FIL, investors from
NAFTA countries enjoy greater access. However, in spite of the
dynamic liberalization of previous restrictions in FIL (by
modification to various specific laws, applicable generally, as
well as to specific provisions in NAFTA applicable to NAFTA
Parties), recent economic developments have seriously limited
capital flows. To attract further flows of capital, changes have
been accelerating to allow even greater foreign capital
participation, for example, in railroad services, ports,
airports, telecommunications, and certain financial services.
The following are the major categories of limitations
contained in FIL. Where applicable, NAFTA provisions relevant to
each sector are noted as well.
1. Activities reserved for the State.
The constitutionally defined "strategic activities"
continuing to be reserved exclusively for the State are the
following, as per Article 5 of FIL:
a) oil production and oil refining;
b) basic petrochemical production;
c) sale of electricity to the public (see Section
III.D.1.b);
d) nuclear power;
e) telegraph and radiotelegraph services;
f) local postal service;
g) bill issuance and coin minting; and
h) control, supervision and surveillance of ports,
airports and heliports.
Consistent with FIL, Mexico has reserved these activities
from NAFTA application.
2. Activities reserved for Mexican investors.
FIL in Article 6 reserves the following activities of the
Mexican economy for national investors:
a) domestic land transportation of passengers, tourists
and cargo not including passenger, or package delivery services;
b) retail gasoline sale and distribution;
c) radio broadcasting and television services (except
cable television, where foreign participation may reach up to
49%);
d) credit unions;
e) development banks;
f) professional and technical services expressly defined
by the applicable legal provisions;
g) Transitory Article Sixth reserves to national investors
activities of international land transportation of passengers,
tourists and cargo between points in Mexican territory, and
services of administration of central stations for passenger and
auxiliary automotive service vehicles.
Foreign investment may participate in these activities
as follows:
i) beginning December 18, 1995, up to 49% in the
capital stock of Mexican companies;
ii) beginning January 1, 2001 up to 51% in the capital
stock of Mexican companies;
iii) beginning January 1, 2004, up to 100% in the
capital stock of Mexican companies.
3. Activities subject to specific participation
percentage.
FIL in Article 7 establishes the following four categories
where foreign investment is authorized up to 10, 25, 30 or 49%:
a) 10% in cooperative production companies;
b) 25% in domestic and specialized air transportation and
air shuttle services;
c) 49% in holding companies of financial groups,
commercial banks, brokerage houses and stock specialists, as per
the Amendments to the Law for Financial Groups, Law of Credit
Institutions and the Securities Market Law in effect as of
February 16, 1995, which increased this percentage from 30% to
49% and automatically modified the provisions of FIL. NAFTA
provides phasing for NAFTA parties. (See Section III.B.9.
hereinafter).
d) 49%, which is the most extensive category, includes the
following activities:
i) insurance and bonding institutions, exchange
houses, general deposit warehouses, financial leasing and
factoring companies, special purpose financial companies
(non-bank banks), companies mentioned in Article 12-Bis of the
Securities Market Law which handle security portfolios in the
name of third parties, investment companies' fixed capital and
companies operating investment companies;
ii) manufacture and commercialization of explosives,
firearms, cartridges, munitions and fireworks, excluding their
acquisition and use for industrial or extractive activities, or
the production of explosive mixtures for consumption in these
activities;
iii) printing and publication of newspapers for
circulation exclusively in Mexico;
iv) ownership of series "T" shares of companies which
own agriculture, cattle raising and timberlands;
v) cable television, basic telephone services;
vi) video text and package changeover services. As of
July 1, 1995 foreign investment may participate up to 100% in
these activities without the favorable decision of the Foreign
Investment Commission;
vii) fishing in fresh water, along the coast and in the
exclusive economic zone, except aquaculture;
viii) integral port administration, piloting port
services for interior navigation operations, shipping companies
commercially exploiting vessels for interior and coastal
navigation, except for tourist cruise ships and for exploitation
of dredges and naval artifacts for port construction,
conservation and operation;
ix) supply of fuel and lubricants for ships, aircraft
and railway equipment; and
x) Transitory Article Seventh of FIL establishes that
49% foreign investment is allowed in the manufacture and assembly
of auto parts for the automotive industry and beginning January
1, 1999, foreign investment may be up to 100% without the
requirement of prior authorization.
4. Majority interest upon approval.
Finally FIL in Article 8 establishes categories of
activities in which foreign investors may hold greater than a 49%
interest subject to approval of the Foreign Investment
Commission. These activities include the following:
a) port services such as piloting, dock services, mooring
and lighterage;
b) naval companies engaged in exploitation of vessels used
exclusively for high-seas traffic;
c) administration of air terminals;
d) private educational services;
e) legal services;
f) credit information companies;
g) institutions for categorization of securities;
h) insurance agencies;
i) cellular telephone services;
j) construction of pipelines for transportation of
petroleum and derivatives thereof. As of May 11, 1995, 100%
participation is permitted by special law without specific
authorization;
k) oil and gas well drilling;
l) erection, construction and installation of public
works. Beginning January 1, 1999, foreign investment may
participate up to 100% in these activities without prior
authorization. (Transitory Article Ninth of FIL).
5. Acquisition of existing Mexican companies.
Foreign investors may acquire up to 100% of the shares of
any company unless one of the limitations previously mentioned
applies to such company. A resolution from the Foreign Investment
Commission is only required when foreign investors wish to
acquire more than 49% of the capital stock of existing Mexican
companies when the total value of the assets of the Mexican
company is greater than N$85,000,000. NAFTA provides phasing for
NAFTA parties. (See Section III.B.2. hereinafter).
6. Real estate.
The Mexican Constitution establishes a "restricted zone"
(100 kilometers wide from the borders and 50 kilometers wide from
the coastal shores) in which direct foreign ownership is
prohibited.
FIL for the first time authorizes foreign participation in a
Mexican company owning real estate within the restricted zone for
non-residential purposes; if for residential purposes, title of
the real estate must be held through a trust by a trustee which
must be a Mexican bank. Approval of the Ministry of Foreign
Affairs is required.
Long term leases of real estate are no longer prohibited.
7. Neutral investment.
Neutral investment is a carryover from the 1989 Regulations
to the 1973 Foreign Investment Law. FIL regulates said mechanism
to allow foreigners to hold greater percentages of the capital of
Mexican companies in restricted areas.
Neutral investment may be done either in Mexican companies
or in authorized trusts.
a) The Ministry of Commerce may authorize companies to issue
special series of shares with limited or no voting rights.
b) Banks acting as trustees may be authorized by the
Ministry of Commerce to issue instruments of neutral investment
granting holders economic and limited voting rights, with the
restriction that no voting rights may be granted for ordinary
shareholders or partners meetings.
c) The Ministry of Commerce may also approve neutral
investment in the acquisition of ordinary participation
certificates issued by banks from series "B" shares of the
capital of holding companies of financial groups, banks, or
series "A" shares of brokerage houses.
d) The Foreign Investment Commission may authorize neutral
investment in the capital stock of Mexican companies by
development international financial companies.
B. NAFTA
1. NAFTA key features.
The following are among NAFTA's key features:
a) Eliminates tariffs and non-tariff barriers to trade in,
and the facilitation of cross-border movement of, goods and
services among the three Parties. (NAFTA Chapters III and XII);
b) Creates strong "North-American-made" rules of origin to
ensure that non-NAFTA countries do not also gain duty-free access
to the free trade area. (NAFTA Chapter IV);
c) Opens Mexico's services market, including its financial
services sectors, to U.S. and Canadian firms, as well as other
foreign-owned firms that meet a North American residency test.
(NAFTA Chapters XII, XIII and XIV and Annex VII sections A, B and
C, Mexico);
d) Loosens Mexico's restrictions on foreign investment,
including "performance requirements" that regulate the operations
of foreign firms in Mexico. (NAFTA Chapter XI and Annex I,
Mexico);
e) Strengthens North American protection of patented,
trademarked and copyrighted goods. (NAFTA Chapter XVII); and
f) Establishes an expert-based panel system to resolve trade
conflicts among the NAFTA parties. (NAFTA Chapters XIX and XX).
2. NAFTA principles regarding investment.
For Mexico NAFTA is a treaty with the United States and
Canada and provides certain protections to investors. Each Party
must treat other NAFTA investors and their investments no less
favorably than it treats its own investors and their investments
(national treatment) or investors and investments of third
parties (most favored nation treatment) under similar
circumstances. A Party is obliged to grant the more advantageous
of either national or most favored nation treatment. (Articles
1102 and 1103).
These obligations apply to the "establishment, acquisition,
expansion, management, conduct, operation, and sale or other
disposition of investments." These basic obligations ensure
that, subject to agreed exceptions in the NAFTA Annexes, a Party
may not subject enterprises to different, or more onerous
operating conditions, simply because of foreign ownership. In
addition to these general provisions, the Chapter expressly
prohibits certain commonly encountered forms of discrimination
such as requirements that a minimum level of equity be held by
local nationals, or that certain senior management positions be
reserved to local nationals. Finally, the foregoing comparative
standards and explicit prohibitions are supplemented by the
incorporation of customary international law principles
obligating the host government to accord "fair and equitable
treatment" and "full protection and security" to investments in
its territory.
In a broad reservation clause contained in the trade
agreement, Mexico maintains the right to review the acquisition
of more than 49% foreign ownership in Mexican enterprises, but
only if the gross assets of the entity exceeds a threshold level
(US$25 million, increasing to US$150 million after the tenth year
of the entry of NAFTA).
Regarding performance requirements, the parties obligate
themselves not to condition the establishment, operation or
expansion of an investment to the fulfillment of certain
requirements of behavior or performance, such as commitments
concerning export programs, degrees of national integration,
foreign currency balance and transfer of technology. (Article
1106).
Currency convertibility at market rates is guaranteed. NAFTA
prohibits expropriation, except for public purposes, on a
non-discriminating basis, in accordance with due process of law
and with compensation paid without delay and at a
pre-expropriation fair market value with applicable interest.
(Articles 1109 and 1110).
3. Tariff reduction.
Under NAFTA, U.S. and Canadian firms shall enjoy tariff-free
treatment on all NAFTA-made goods that enter Mexico on a phase-in
schedule. 50% of all tariffs on U.S. and Canadian exports to
Mexico have been eliminated as of January 1, 1994, the day NAFTA
entered into force. By January 1999, Mexico will discontinue
tariffs on 65% of all U.S. and Canadian goods entering the
country, and by January 2009 all tariffs on NAFTA imports shall
disappear.
Depending on the import-sensitivity of each of the
approximately 9,000 goods covered by NAFTA, specific categories
were placed in one of four tariff transition lists:
A List: Cuts tariffs to zero immediately,
B List: Phases out tariffs in equal cuts over five
years,
C List: Phases out tariffs in equal cuts over ten
years,
C+ List: Phases out tariffs in equal cuts over fifteen
years.
4. Professional services.
Under NAFTA, Mexico is committed to eliminate, by 1996,
citizenship and permanent residency requirements in the area of
professional services. However, NAFTA does not require Mexico to
recognize foreign professional degrees, but it is committed to
provide a procedure under which foreigners may obtain a
revalidation.
Accordingly, Mexico amended its Regulatory Law of Article 5
of the Constitution relevant to the exercise of professions in
effect as of January 1, 1994. Said modifications eliminate the
requirement that only Mexican nationals may exercise a profession
in the Federal District and grants the same right to foreigners,
subject to what has been agreed to in international treaties to
which Mexico is party, or in the absence of such treaties,
subject to reciprocity and to compliance of other requirements
established by Mexican laws. Also the amendments to the law
provide that professional degrees or titles issued abroad may be
registered at the Ministry of Education if the studies covered by
such degree are equal or similar to those of institutions forming
part of the National Education System.
5. Land transportation of cargo and passengers.
Mexican companies already established, or to be established
in Mexico, engaged in the operation of bus or truck terminals,
and bus or truck depots, may have foreign participation up to 49%
from January 1, 1997, 51% from January 1, 2001, and up to 100%
after January 1, 2004. (NAFTA Chapter XI)
With respect to urban, suburban and interurban passenger
transportation services by bus, school bus, taxi, and other
public transportation services, as well as cargo and tourism
transportation services, foreign investment is not permitted.
Therefore these activities are reserved to Mexican individuals
and companies with an exclusion of foreigners clause.
6. Automobile sector.
Foreign investors in the automobile sector have the same
treatment regarding percentage ownership in Mexican auto parts
companies as NAFTA Party investors, especially after the recent
amendments to the Automotive Decree. (See Section III.D.11.
hereinafter).
7. Immigration.
NAFTA provides that each of the Parties will authorize the
temporary entry of business persons, without requiring an
employment permit. Therefore citizens from each of the Parties
may cross borders under four different categories which are:
a) business visitor,
b) traders - investors,
c) intra-company transferees, and
d) professionals.
Each one of these categories contemplates specific
activities to be performed by persons going into another country.
For example, business visitors are persons wishing to carry out
activities related to research and design, cultivation,
manufacturing and production, marketing, sales, distribution,
after sales services and general services.
To facilitate the temporary entry of persons on a reciprocal
basis, NAFTA creates the "FMN", a special immigration form issued
by the Consular offices of Mexico in Canada and the U.S., to
nationals of another Party crossing the border to develop an
activity non-remunerated in Mexico for a maximum period of 30
days, after which if the visitor wishes to extend his stay in
Mexico, he shall obtain from the Ministry of the Interior the
normal business visa (FM-3), which is granted for a duration of
one year, renewable four times, enabling multiple entries and
exits. (See Section XXII. hereinafter).
8. Government procurement.
Chapter X of NAFTA, called "Purchases by the Public Sector,"
is applicable to contracts executed by governmental entities of
Mexico, United States and Canada, which are specifically listed
in the Annex to Chapter X, with respect to goods, services and
construction services enabling investors from a Party to
participate in public bids if the value of such contract is
beyond certain fixed US currency thresholds.
Said thresholds are: for entities of the Federal Government
(such as Ministries), US$50,000 for contracts concerning the
acquisition and lease of goods and for the rendering of services,
and US$6.5 million for contracts of public works; for
governmental entities (such as PEMEX and the Federal Electricity
Commission), US$250,000 for contracts concerning the acquisition
and lease of goods and for the rendering of services, and US$8
million for contracts of public works.
For more information on government sales and contracting in
Mexico, see Section XXI.
9. Financial services.
Chapter XIV of NAFTA sets out the rules governing the
treatment each NAFTA Party must accord to those financial
institutions in its territory owned by investors from other NAFTA
Parties. Annex VII sections A, B and C contains the reservations
adopted by each Party.
Section A of Annex VII contains existing federal measures
that are reserved. Mexico has reserved the right to apply its
current investment restrictions as mentioned in Section II.E.
hereinabove. NAFTA section B contains a list of financial
services sectors in which the Parties have reserved the right to
maintain existing inconsistent federal measures or adopt new
ones. Section C contains specific additional commitments that
individual NAFTA Parties have undertaken.
Under Sections B and C, Mexico has committed to liberalize
its investment requirements to foreign investors investing
through foreign financial affiliates (See Section II.E.9
hereinabove). Foreign credit institutions, stock brokers,
insurance companies and financial leasing companies are subject
to limits on the aggregate percentage of capital in the Mexican
market they are permitted to hold. Foreign credit institutions,
stock brokers and insurance affiliates are also subject to
individual capital limits. The percentages, aggregate and
individual, increase during the transition to full liberalization
of investment in this sector by January 1, 2000. (NAFTA Annex VII
sections B and C).
It is important to mention that, as of February 15, 1995,
the Law of Credit Institutions was amended in order to increase
the percentage limit which a foreign bank affiliate may hold, to
6% of the aggregate capital of the banking system. Transitory
Articles to the Amendments of the Law of Credit Institutions
further impose a new aggregate limit on the total net capital of
all affiliates, equal to 25% of the aggregate net capital of all
Mexican banks.
10. Safeguards.
Under Chapter VIII of NAFTA, NAFTA Parties establish the
principles by which they may impose temporary protections to a
specific industry which has been seriously injured by imports
from the other parties. This Chapter includes two procedures, one
for bilateral emergency actions against the imports of another
Party, and the other, for multilateral emergency action under
GATT.
Regarding bilateral actions, NAFTA Article 801 establishes
that if a good originating in the territory of a NAFTA Party, as
a result of the reduction or elimination of a duty provided for
in NAFTA during the transition period (ten years commencing
January 1, 1994), is being imported into the territory of another
NAFTA Party in such increased quantities, in absolute terms, and
under such conditions that the imports of the good from that
NAFTA Party alone constitute a substantial cause of serious
injury, or threat thereof, to a domestic industry producing a
like or directly competitive good, the NAFTA Party into whose
territory the good is being imported may remedy the injury as
follows:
a) temporary suspend further reductions under NAFTA of the
duty rate on the good;
b) increase the duty rate on the good to a level not to
exceed the lesser of:
i) the most-favored-nation (MFN) duty rate in effect
at the time the action is taken, or
ii) the MFN duty rate in effect prior to January 1,
1994.
The following conditions shall apply to an emergency action
proceeding described above:
a) a NAFTA Party taking emergency action shall notify the
other Party and request consultations thereon;
b) any safeguard measure shall be imposed no later than
one year after initiating the proceeding; and
c) as a general rule, the duration of such emergency
action shall not exceed three years, or extend beyond the
transition period.
The NAFTA Party taking the emergency action shall provide
the other Party, against whose good the action is taken, mutually
agreed compensation in the form of concessions having
substantially equivalent trade effects, or equivalent to the
value of the duties expected to result from the action. If the
NAFTA Parties concerned are unable to agree on compensation, the
NAFTA Party against whose good the action is taken may take
tariff action having trade effects substantially equivalent to
the action.
These emergency actions do not apply to textile and apparel
goods, which have special treatment under NAFTA.
Under NAFTA, irrespective of the safeguard provisions
contained therein, each NAFTA Party retains its rights and
obligations under Article XIX of GATT, or any safeguard agreement
pursuant thereto, with few exceptions.
11. NAFTA Supplemental Agreements.
The governments of the United States, Canada and Mexico
executed on September 14, 1993, Labor and Environment
Supplemental Agreements.
a) NAFTA Labor Supplemental Agreement.
Its purpose is to promote the economic development of each
NAFTA Party based on high standards of training and productivity
in North America.
Its objectives will be achieved through:
- The investment in the permanent development of human
resources.
- The promotion of employment stability.
- The strengthening of the cooperation of workers and
employers in order to promote a dialogue among work organizations
as well as to promote creativity and productivity in the work
force.
- The promotion of higher living standards and
consultations among workers' organizations, companies and
governments of each Party.
Each Party to this Agreement shall guarantee that its laws
and regulations contain high labor standards consistent with work
forces of high quality and productivity.
The Parties agree to monitor the compliance and enforcement
of their respective labor laws and to guarantee, in their
respective countries, a free access to administrative and
judicial courts, as provided by their own laws related to the
application and enforcement of labor laws.
Furthermore, each Party shall guarantee that labor
procedures be just, transparent and equitable.
The Parties create the Commission for Labor Cooperation in
charge of supervising the application of the Agreement, preparing
recommendations for its application and future development, and
resolving controversies over the interpretation and application
of the agreement.
Also the Commission is in charge of establishing cooperation
measures consisting of programs of technical assistance such as
seminars, conferences, preparation of joint investigations and
training courses.
In case of controversy, the Parties will first seek solution
through consultation; also they may submit such controversy to
the Council of the Commission. If the controversy is not solved
further procedures are established.
The Party refusing to comply with the resultant
recommendations or with the plan of action agreed to, may be
subject to the payment of monetary fines, which may not be higher
than 0.007% of the total trade volume of the goods between the
countries.
b) NAFTA Environment Supplemental Agreement.
The basic purpose of this Agreement is to protect and
improve the environment by supporting the environmental
objectives referred to in NAFTA. Each of the parties to the
Agreement commits to provide high levels of environmental
protection, enforce environmental regulations and follow all
procedures according to their respective laws.
In this Agreement, the Commission for Environmental
Cooperation is created, whose purpose is to formulate
recommendations on environmental issues, promote the drafting of
laws and cooperate in the fulfillment of the environmental
objectives.
The Parties further agree to furnish any other Party any
environmental information requested. The Agreement also includes
a procedure for the consultation and resolution of environmental
controversies based on a consistent pattern of non-enforcement by
a Party of its environmental legislation regarding manufacture of
goods or services traded, or manufacturing by one Party in the
territory of the other.
Dispute resolution procedures are complex and provide for a
series of steps, such as consultation, mediation, consulting with
advisors and experts, creation of a panel, all of which
ultimately lead to the formulation of action plans to remedy the
alleged deficiencies of enforcement. The sanction of
non-compliance of such action plan is that the NAFTA benefits to
the accused Party may be suspended, and said Party may be forced
to make monetary contributions in an amount not to exceed US$20
million.
The NAFTA Parties created two other institutions that should
help to alleviate the environmental problems Mexico faces: the
Border Environmental Commission and the North American
Development Bank (NAD Bank). The former is to assist states,
local communities and non-governmental organizations in finding
solutions to environmental problems in the Northern border region
and may arrange financing for environmental projects in and
outside the region upon request from the United States or Mexico.
The NAD Bank is a source of funding for the projects of the
Commission.
C. PRIVATIZATION
In 1982, during the period of former President Miguel de la
Madrid, the Mexican Government started a privatization process of
government-owned enterprises, but it was not until 1988 with the
administration of President Carlos Salinas that this process was
intensified. The new Zedillo administration is continuing the
process and further breaking down areas of taboo.
To date, more than 1,150 government-owned enterprises of
what once were approximately 1,400, have been privatized
contributing an amount of over US$24 billion to the government's
coffers.
Government-owned enterprises ranging from hotels, airlines,
all of the banks, the telephone company (TELMEX), mining (Minera
Cananea), TV channels (TV Azteca), theaters, sugar mills, fishing
companies, automobile assembly, steel companies, to an incredible
diversity of activities, were privatized.
The privatization process is part of the policy to
liberalize the economy, allowing at the same time foreign
participation in most economic activities. For example, the
banking system which until 1982 was owned by Mexican investors,
was expropriated by the government and now, once again,
privatized to Mexicans starting in 1990 and just recently
expanding to allow foreign participation, even control.
Another example is TELMEX which was privatized in 1990 with
foreign participation in special series of shares, bringing in
over US$7 billion. Again foreign participation will be allowed in
the telecommunications industry during 1997 when Mexico will open
long distance telephone markets.
Depending on the specific characteristics of the
government-owned company which is in process of privatization,
special rules in the bidding process are applied. Each
privatization requires the approval of the Intersecretarial
Committee on Privatization, created on April 7, 1995, consisting
of the Ministers of Finance, Commerce, General Comptroller and
Labor, with the participation of the President of the Competition
Commission.
The current administration is expected to privatize, among
others, Almacenes Nacionales de Depósito, S.A. (warehousing
company), El Nacional, S.A. de C.V. (newspaper), Ocean Garden,
Inc. (seafood distributor) and PIPSA (paper company).
Additional areas for privatization are ports, petrochemical
plants, highways, airports, telecommunication services,
railroads, among others, as further mentioned in the following
Subsection D.
Out-sourcing part or all of the activities of the company
without changing its ownership (sometimes referred to as
"indirect privatization"), is another form of privatization,
without the necessity of direct ownership of companies engaged.
Privatization in this form opens a whole new vast area of
business opportunities to national and foreign enterprises. Such
contracting may be for operations to be performed separately from
the facilities of the government-owned company or actually
within, i.e., maintenance contracts, statistical processing,
management of a given production line, and operating computer
systems.
D. INVESTMENT OPPORTUNITIES
To enable Mexican economic growth, substantial private
investment is needed in the expansion and modernization of
infrastructure, education, transportation, communications, among
others.
As previously mentioned, Mexico's government has entered
into a process of economic modernization by adopting
unprecedented actions to reduce governmental intervention in the
economy and open the country to international competition.
These objectives have been pursued through an intensive
deregulation program directed towards promoting legal and
administrative procedures favorable to private investment,
national or foreign.
New dispositions have been issued in the following areas:
1. Energy.
a) Petrochemicals and natural gas.
One of the most sensitive issues to Mexican nationals is the
privatization of the oil industry which is operated by Petróleos
Mexicanos (PEMEX). The petroleum sector, developed and operated
primarily by British and American companies, was expropriated in
1938.
The Law Regulating Article 27 of the Mexican Constitution
referring to petroleum, reserves to the Mexican State the
following strategic activities, including investment and
rendering of services, together defined as the "oil industry:"
i) exploration, exploitation, refining, transportation,
storage, distribution and first hand sales of oil and products
derived from its refinement;
ii) exploration, exploitation, elaboration and first hand
sales of natural gas, as well as transportation and storage
indispensable for its exploitation; and
iii) elaboration, transportation, storage, distribution, and
first hand sales of oil derivatives that are considered basic
industrial petrochemicals, and, with respect to natural gas,
those that are considered to be basic petrochemicals.
As a result of Amendments to the above mentioned law on May
11, 1995, the transportation, storage and distribution of natural
gas was no longer included in the definition of the oil industry
and therefore can be carried out by the private sector, including
foreign participation, subject to prior authorization of the
Ministry of Energy. Foreign investors are entitled to construct,
operate and own pipelines, installations and equipment for such
purpose. Authorizations can be assigned upon prior approval from
the Ministry of Energy, therefore the limits contained within
NAFTA Chapter VI (Annex 602.3) are no longer applicable. This
evidences the desire of Mexico to open its economy to private and
foreign investment, even in hitherto sensitive areas.
As per FIL the drilling of oil and natural gas wells is
still subject to the 49% limitation on foreign ownership, unless
authorization is obtained to exceed such limit.
Regarding the petrochemical industry, private participation
was first permitted in 1971 with the publication of the first
resolution that classified petrochemical production into
basic/primary and secondary activities, with the former being
restricted to PEMEX and the latter permitting private
participation, requiring Mexican control and a permit from the
Petrochemical Commission. The list classified twenty products as
primary and 64 as secondary. It was revised in 1989, reducing the
list of primary and secondary petrochemicals, and finally in
1992, currently classifying only eight products as primary and
twelve as secondary, further opening the door for private
participation in the petrochemical industry. The list of
basic/primary petrochemical activities contains the production of
the following: ethane, propane, butanes, penthanes, hexane,
hepthane, raw material for carbon black and naphtas.
The list of secondary petrochemical products includes
production of the following: acetylene, ammonia, benzene,
butadiene, butylene, ethylene, methanol, n-paraffins,
orto-xylene, para-xylene, propylene, and toluene.
FIL gives foreigners the right to own up to 100% of a
company engaged in secondary petrochemical activities.
Recently, the Mexican government announced plans to
privatize its sixty-one secondary petrochemical plants located in
nine petrochemical facilities, including the Morelos, Cangrejera
and Pajaritos facilities. The terms and conditions for the
bidding process to be followed by interested parties are expected
shortly, and recent information suggests that six Mexican and two
foreign companies have interest in obtaining one or more of such
facilities. The Intersecretarial Committee on Privatization will
be in charge of the process.
PEMEX is also expected to enter into contracts with the
private sector, both Mexican and foreign, for the exploitation of
basic petrochemical products. This would be the first time that
foreign participation would be allowed in any manner in the
primary petrochemical sector, a form of indirect participation.
In sum, the Mexican government is moving quickly directly and
indirectly to privatize the oil industry sector.
b) The electric power sector.
Articles 27 and 28 of the Mexican Constitution contain
provisions reserving to the Mexican State the supply of
electricity as a "public service", which is considered a
strategic activity. Until recently, the Mexican government
controlled all facets of the electric power industry.
This sector is regulated by the Law for the Public Service
of Electric Power which was amended on December 23, 1992,
redefining "public service" to open areas for private investment
for up to 100%. The law excludes the following activities from
the definition of "public service:"
i) self generation; when companies acquire, establish or
operate an electricity generating facility to satisfy their own
needs. Any excess production must be sold to the Federal
Electricity Commission (CFE);
ii) co-generation; electricity generated associated with
industrial process using heat, steam or other energy sources.
Owners of the industrial facility need not be the owners of the
co-generating facility. Once again, any excess production must be
sold to the CFE;
iii) independent power production is an enterprise that
generates over 30 megawatts for sale to the CFE;
iv) export of electric power, derived from co-generation,
independent production or small production (note that the CFE
must be part of the contract negotiations);
v) importation of electric power, by individuals or
companies, exclusively to supply their own needs;
vi) production of electric power for emergency use arising
from the interruption of the public service of electric power as
required by the CFE; and
vii) small production; generation of electricity of less
than 30 megawatts.
All of the above activities require a permit issued by the
Ministry of Energy based on prior opinion of CFE. The permits run
for an indefinite period, except those for independent
production, which run for 30 years, with a possibility of
multiple extensions.
Permit-holders must adopt the proper methods to comply with
"Official Mexican Standards" (see Section V.A.) related to public
works, installations, industry services and delivery of electric
power to the public service network and will be subject to
transmission and operation regulations of the National Electric
System. Permit-holders may assign to third parties their rights
derived from permits, upon prior approval of the Ministry of
Energy.
With respect to rates, the Ministry of Finance, with the
participation of the Ministry of Commerce and the Ministry of
Energy, sets the rates for the sale of electric power, determines
any adjustments, amendments or restructuring, within the
guidelines dictated by the public interest and the requirements
of public service of electric power.
The new Regulation to the Law for the Public Service of
Electric Power was published on May 31, 1993, in the Official
Daily Gazette and establishes a procedure whereby the Ministry of
Energy must act upon the application for a permit within seventy
working days; lack of a decision within such period shall be
considered as approval.
The Ministry of Energy may request that the CFE carry out
the public bidding process for the acquisition of electric power
for public service. The CFE executes contracts with i) the
holders of permits for production, after a public bidding process
for electric power is held, and ii) with holders of permits with
excess production of 20 megawatts or less pursuant to
regulations.
The Intersecretarial Committee on Privatization of the
Ministry of Finance is currently studying the privatization of
electric plants of the CFE, such as the Rosarito plant located in
Baja California and the Samalayuca plant in Chihuahua. Recently a
consortium of General Electric, ICA-Fluor Daniel, Bechtel
Enterprises and El Paso Natural Gas received a concession to
build Samalayuca II, which will be the first independent power
production project. The expected total investment outlay for the
project is currently estimated at US$650 million. Mérida III
could be the second independent power production project. The
expected investment necessary is approximately US$600 million.
At the end of 1996, the CFE has announced that it will not
participate in the construction of electricity generating plants,
thus opening the door for foreign and national investment in this
area. The Federal Government expects that private investors will
construct at least eight electricity generating plants within the
next several years and estimates that private investment will be
the mechanism for future expansion of electricity generating
capacity for Mexico's growing population.
Chapter VI of NAFTA, in particular Annex 602.3, Section 5,
provides that Parties thereto may produce electricity for its own
use, establish or operate co-generation facilities and acquire,
establish or operate plants dedicated to independent power
production as described above. Actually, as amended, the
applicable Mexican law referred to above goes somewhat beyond the
original liberalization of NAFTA.
2. Telecommunications.
The Mexican legislature enacted the first Federal
Communications Law effective on June 8, 1995. The stated purpose
of the Law is to promote efficient development of
telecommunications and to foster healthy competition to provide
better prices, diversity in quality of service for users without
conceding the regulatory role of the state and its dominion over
the electromagnetic spectrum.
Concessions will be required:
1. To use, develop or exploit radio frequencies in Mexican
territory;
2. To install, operate or exploit public telecommunication
networks;
3. To occupy geostationary orbital positions and satellite
slots assigned to Mexico and to exploit the respective radio
frequencies, and
4. To exploit the right to send or receive signals through
radio frequencies associated with foreign satellite systems that
cover and have capacity to render services in Mexico.
(Reference to points 1, 3 and 4 hereinafter will be
collectively "concessions of use of radio frequencies").
The grant of concessions will be done through a public call
for bids in all cases except that of the public telecommunication
network which can be requested through direct application to the
Secretary of Communication and Transportation (SCT).
The concessions of radio frequencies will be granted for a
specific use and modality covering a limited geographic area.
Interested parties may solicit a particular use and geographic
area in addition to those offered from time to time by SCT.
There will be a five year period from the date a concession
is granted to place a satellite in orbit. The satellite control
center must be located in Mexico. A preference that the center
be operated by Mexican nationals is expressed in the Law.
The concessions for commercial use of radio frequencies will
have a 20-year term, renewable for an indefinite number of
additional terms. Concessions for public telecommunication
networks will be granted for a 30-year renewable term.
Successful bidders will be required to pay for concessions
for the use of radio frequencies.
The concessions referred to above shall be granted to
Mexican individuals or corporations. Foreign investment is
permitted up to 49% of the capital stock of such corporations,
except for cellular telephone services where foreign
participation of more than 49% of the capital stock is permitted,
upon prior authorization from the Foreign Investment Commission.
A permit is required:
1. To operate as a "reseller" of telecommunication
services, without being a public telecommunication network, and
2. To install, operate or exploit land transmission
stations.
A "reseller" of telecommunication services is defined as an
entity providing telecommunication services to third parties
through the use of capacity of a concessionaire of a public
network without itself owning or possessing transmission
infrastructure.
A concessionaire of a public telecommunication network
cannot directly or indirectly own an entity authorized as a
reseller without prior authorization from SCT.
The parameters to establish and operate a reseller will be
described in the regulations.
A permit is not required for installation, operation or
exploitation of downlink satellite earth stations, nor for
rendering value added services in which case only registration
before the Ministry of Communications is required.
Private networks for intra-company communications do not
require any authorization except when using a frequency band that
is not considered as free use or official spectrum.
Telecommunication tariffs can be fixed freely by the
corporations holding concessions or permits with the only
requirement being registration of the tariff before the Ministry
of Communications.
The concessionaires of telecommunication public networks
must adopt adequate network designs to allow interconnection by
third parties to permit the development of new telecommunication
services on a non-discriminatory basis.
Concessions do not grant holders exclusive access to rights
of way such as electric and telecommunication power, cable ducts
and other public networks.
Interconnection agreements with other countries can only be
established through prior authorization from the Ministry of
Communications.
As per the Resolution for Long Distance Interconnection of
Networks published in the Official Daily Gazette on July 1, 1994,
concessions for public networks of basic long distance telephone
services will be granted beginning August 10, 1996. Operations
for interconnection to the TELMEX public network to render
national or international long distance telephone services will
be granted beginning January 1, 1997.
The government shall create a commission to regulate and
promote the development of telecommunications in Mexico before
August 10, 1996.
Chapter XIII of NAFTA refers to telecommunications and
ensures that Parties have access to and use of any public
telecommunication transportation network or service (including
private leased circuits), offered in its territory or across its
borders for the conduct of their business on reasonable and
non-discriminatory terms and conditions.
Each NAFTA Party shall ensure that any licensing, permit,
registration or notification procedure that it adopts or
maintains relating to the provision of enhanced or value added
services is transparent and non-discriminatory, and that
applications filed thereunder are processed expeditiously. Also
any measure taken related to standards for the attachment of
terminal or other equipment to the public telecommunications
transportation networks may be established only to the extent
necessary to prevent technical damage to the networks or
interferences.
When a monopoly exists in a NAFTA Party, such Party shall
ensure that the monopoly does not use its position to engage in
an anticompetitive conduct in the market.
3. Agribusiness.
The Amendments to Article 27 of the Mexican Constitution and
the enactment of the Agrarian Law of 1992 constitute a new legal
framework for the ownership of agricultural land in Mexico. The
new rules repeal legislation regulating private investment in
agricultural, livestock and forestry activities.
One of the causes of the Mexican Revolution of 1910 was the
unequal distribution of land among peasants, consequently, the
Constitution of 1917 empowered the executive to distribute land
to any newly formed "commune" for which purpose the executive
could order the expropriation of land from private owners whose
land exceeded the constitutionally defined "individual
landholding," and through land grants, constituting "ejido
communes."
An extension of "ejido" land may be worked collectively by a
group of "ejidatarios" or each peasant may work his designated
parcel.
To protect lands of the ejido and to ensure that large
landholdings were not formed, the existing legal framework did
not permit the sale, lease or mortgage of tracks of ejido land;
the peasants or ejidatarios could not execute contracts with
other "ejidatarios," private farmers or companies; and ejido land
could not be used as collateral for loans. Also stock companies
could not own or manage agricultural land for these purposes.
These restrictions resulted in factors which restrained the
ejidatarios from progressing efficiently. Furthermore, they did
not guarantee certainty for producers to invest and for financial
institutions to provide credit, resulting in limited
opportunities, low levels of investment and productivity and the
utilization of old technology.
The 1992 Amendments to Article 27 of the Constitution
provide the framework for security in land ownership for the
"ejidos" and private landowners which encourages investment and
productivity.
Also the new Agrarian Law eliminates the previous
governmental excessive intervention in the process of
decision-making of the farmers, and recognizes the peasants
liberty to produce and organize themselves in the manner they
consider convenient. This enables the peasants to buy, sell or
rent land, to hire labor or to associate with other producers and
with third parties. Also the new framework provides that peasants
may enter into any type of association or contract including
joint-venture schemes, with domestic or foreign private
investors, through contracts of a maximum duration of 30 years,
renewable.
One of the major reforms provides that any Mexican company
may own land for agrarian, livestock or forestry purposes with a
maximum extension of land equivalent to 25 times the limits of
the individual landholdings. (See Section XIX hereinafter).
Companies investing in land for agrarian, livestock or
forestry purposes must issue a special series of shares or
partnership interests, identified with letter "T" which represent
the capital invested in the acquisition of land or the value of
the land contributed. Foreign individuals or companies may not
acquire more than 49% of series "T" shares or partnership
interests.
In addition to series "T" shares, or partnership interests,
such companies may issue an unlimited number of common shares or
partnership interests through capital contributions which may
include 100% foreign participation.
The agrarian sector with the reformed legal structure
represents an opportunity for foreign investors, who would like
to enter into joint-ventures with farmers, either private or
peasants, and with domestic companies. Projects to raise animals,
or for the production of cereals, fruits and other agricultural
products have been successful.
The modernization of the agricultural sector is under way;
Mexico is looking towards the creation and solidification of the
conditions necessary for an efficient allocation of resources and
for increased investments.
4. Mining.
The Mexican Mining Law regulating Article 27 of the
Mexican Constitution in the mining sector, establishes the
requirements that must be complied with in order to obtain a
concession for exploration and/or exploitation of minerals and
substances listed in this Law.
The Law establishes that concessions to perform the above
mentioned activities may be granted by the Ministry of Energy to
Mexican individuals, Mexican companies and agrarian communities.
Although traditionally exploitation of natural resources has been
a cornerstone of statist and nationalistic policy, foreign
investment may now participate up to 100% in the capital stock of
mining companies.
The concessions for exploration and/or exploitation are
given on "free land" to the first applicant if the conditions and
requirements of the Mining Law are fulfilled. The applicants
offering the technical or economic conditions for the public
interest shall have preference over other applicants.
The Law defines "free land" as all Mexican territory,
except for: a) islands, keys, reefs and seabeds; b) national
mining reserves; c) lands covered by a prior concession, and d)
lands covered by a concession in process.
The mining concessions grant the holder of the concession
rights to explore and exploit all minerals and substances covered
by the concession and to sell such minerals.
Exploration concessions are granted for a period of six
years, non-renewable. Exploitation concessions are granted for a
period of fifty years, non-renewable. The term of each concession
commences upon registration of the concession in the Public
Registry of Mines.
Among the most important obligations that the holder of this
type of concession must comply with are the following:
a) to execute the works of exploration and/or
exploitation;
b) to pay the taxes on mining activities imposed by the
Ministry of Finance;
c) to advise if radioactive minerals are discovered;
d) to provide statistical, technical and financial
information of the company to the Ministry of Energy; and
e) to permit inspection visits by the Ministry of Energy
to the mining site.
Mining activities performed on lands assigned to PEMEX
require prior authorization of the Ministry of Energy and a
favorable resolution by PEMEX, which shall establish the
technical conditions to be followed.
5. Fisheries.
Modernization is also under way in the fishing sector. A new
legal framework has been in effect since June, 1992, to
contribute to the construction, improvement and equipment of
ships and tools for fishing, to build infrastructure in order to
promote the use, transformation, distribution and
commercialization of aquatic natural resources, to promote the
development of fisheries as well as research and study.
Foreigners may request permits to conduct scientific expeditions
and explorations.
A permit is needed to fish for commercial, investigation or
sporting purposes, fishing activities necessary to support
application for a commercial fishing concession, and foreign
vessels fishing in waters within the exclusive economic zone. A
concession is required to capture, extract or cultivate aquatic
natural resources.
Concessions or permits may be granted to interested persons,
Mexican individuals or companies. As per FIL foreign investment
may participate up to 49% in Mexican companies engaged in fishing
activities. Concessions or permits to operate manufacturing-ships
and floating plants may be granted to Mexican individuals or
companies.
Another major area for development is aquaculture,
consisting of cultivation of water species by using methods and
techniques for their controlled development in all types of
biologic and water environments and in any type of installation.
The Federal Government is promoting the development of this
activity, by rendering advice on the construction of necessary
infrastructure and for the acquisition and operation of plants
for industrial conservation and transformation. There is no need
for a permit or concession, except if these activities are done
in federal waters. An authorization is needed only to collect
seeds and other natural products from the environment to be used
in this activity.
Foreigners may invest in Mexican companies engaged in
aquaculture up to 100%.
6. Tourism.
A new federal Tourism Law was enacted on January 30, 1993,
to promote and facilitate investment in the tourism sector. The
purpose of the Law is to define a legal framework for providers
of tourism services, which will create employment, encourage an
increasing inflow of foreign currency, improve the quality of
tourism services and introduce modern technologies in management,
communication and commercialization of services.
The Law provides for the coordination of activities of the
Federal Government, state governments and municipalities, to
avoid duplication of procedures.
The new Law repealed existing regulations and focuses mainly
on guaranteeing the physical security of tourists, the respect of
terms of reservations and of contracts executed between the
provider of tourism services and the client.
Prices and tariffs are no longer fixed by the State. Rating
of tourism services will no longer be done by the Ministry of
Tourism, but by public and private consultation committees.
Promotion of low budget tourism accessible to persons with lower
income is also envisaged through the construction of vacation
resorts.
Foreign investment may participate without limits or
restrictions in the following tourism services: hotels, motels,
parks for camping and recreational vehicles, travel agencies,
tour operators, tourist guides, restaurants, cafeterias, bars,
tourism exchange service companies, scuba organizers, car rental,
ports and marinas.
Time-share projects are another area open for foreign
investment. A compulsory technical standard in effect since
November 30, 1993, contains new rules for suppliers and users of
time-share facilities. Persons dedicated to the commercialization
of time-share projects and/or the rendering of this type of
service must notify the Ministry of Tourism before initiating the
sale of time-shares.
The service provider must be domiciled in Mexico or must
have a representative, subsidiary or branch office. The contracts
for the sale of time-shares must be recorded at the Consumer
Protection Agency.
It is possible to commercialize foreign time-share projects,
as long as there is compliance with the legal requirements.
7. Aviation.
A new Aviation Law in force since May 13, 1995, regulates
air transportation services and simplifies administrative
procedures.
The Ministry of Communications is the authority in charge of
issuing concessions to Mexican companies to provide regular
domestic air transportation. Concessions are granted for a period
of 30 years and may be renewed. Air transportation service is
considered to be regular when subject to schedules, itineraries
and flight frequencies.
Other air transportation services are only subject to
permits issued by the Ministry of Communications in accordance
with international treaties: to Mexican companies, for domestic
irregular air transportation; to foreign companies, for regular
international air transportation; to Mexican or foreign companies
for international irregular air transportation; and to
individuals and companies, Mexican or foreign, for private
commercial air transportation.
FIL limits foreign investment in companies rendering
domestic air transportation services to 25% (See Section III.A.3.
hereinabove).
All aircraft shall comply with the regulations regarding
insurance policies, airworthiness certificates and navigation
license in force.
Foreign aircraft rendering private, not commercial air
transportation services, may fly over Mexican territory, land in
and take off from Mexico upon prior approval from the Ministry of
Communications.
Also the owners or the crew of foreign aircraft rendering
private, not commercial, air transportation services shall
demonstrate upon request from the Ministry of Communications,
that the crew and the aircraft comply with technical requirements
on airworthiness and that licenses are issued by the country of
registration.
8. Railroads.
a) Content of new regulations.
Amendments to Article 28 of the Mexican Constitution on
March 2, 1995 changed the railroad services from a strategic
activity reserved to the State to a prioritary area, paving the
way for increased private participation in the railroad sector.
Prior to the modifications mentioned above, Article 5 of FIL
provided that the railroad sector was reserved to the State, but
further provided in Article 7 that up to 49% foreign investment
would be permitted in service areas related to the railroad
sector, such as passenger services, maintenance and repair of
railway lines, bypasses, repair stations for engines and towing
equipment, the organization and commercialization of unit trains
and the operation of railroad terminals.
In spite of FIL limitations related to the railroad sector,
the Mexican Congress, pursuant to the changes in the
Constitution, on May 12, 1995, passed the Regulatory Law for
Railroad Services further opening the railroad sector to both
national and foreign investment consistent with the current
policy of increasingly privatizing directly or indirectly
State-owned industries.
b) Concessions.
The Law provides that foreign investment may participate in
up to 49% of the capital of Mexican companies dedicated to such
activities, with the possibility of 100% foreign participation
subject to approval from the Foreign Investment Commission. The
Ministry of Communications may grant concessions for the
following activities:
i) construction, conservation, maintenance, management and
operation for profit of railways that are considered common
thoroughfares;
ii) the providing of public rail service, which encompasses
both passenger and cargo traffic; and
iii) the providing of auxiliary services related to the
areas listed under i) and ii) above.
In the near future, the Ministry of Communications is
expected to begin a public bidding process to grant concessions
to interested parties for 26,000 kilometers of railways. The
concessions will be granted for a maximum of fifty years, and
those granted for less than fifty years may be renewed as long as
the total time period covered by all concessions does not exceed
fifty years.
Those companies receiving concessions will have the right to
subcontract with third parties for the construction, maintenance
and conservation of railways covered under such concession.
However, in the eyes of the Mexican Government, the company
receiving the concession will be held solely liable for any
breach of obligations contained within the concession.
In addition, concession holders will have the right, upon
approval of the Ministry of Communications, to encumber the
rights derived from the concession, but, without exception, the
concession holder will not be able to encumber railways, rights
of way, communication centers or switching equipment. Concession
holders will also have the right to assign part or all of the
rights granted under the concession provided that the assignee
agrees to carry out the pending obligations and to assume the
conditions imposed by the Ministry of Communications.
Moreover, upon termination of the concession, the related
common thoroughfare, and all property transferred thereunder,
will once again become part of the federal public domain. During
the term of the concession, holders will be allowed to replace
assets if by virtue of the use or nature of the asset such should
be replaced.
c) Permits.
The Ministry of Communications may grant permits to provide
auxiliary services. The Law defines auxiliary services as the
construction of passenger or cargo terminals, the transshipment
or transfer of liquids, the construction of repair shops for
railroad equipment and the construction of supply centers for the
operation of the equipment. The Law also provides that permits
must be granted to construct access ways, crossing or signal
gates in the right of way of the respective railway, as well as
to place any type of promotional billboard or advertisement along
the right of way. In addition, the concessionaire must also
request and receive a permit to construct and operate bridges.
Foreign investment is allowed to participate in up to 100%
of the capital stock of a Mexican company rendering services
subject to the above mentioned permits.
9. Ports.
a) History of investment restrictions.
The Mexican Constitution provides the basis for the State
operation and control of ports. Article 27 provides, inter alia,
that the Nation shall be the owner of all territorial waters.
Prior to recent amendments described below, the General
Communications Law classified coastal and international waters as
general ways of communication thus subjecting such to the terms
contained therein. The General Communications Law provides that
activities in areas considered to be international ways or means
of communication shall be controlled by the Federal Government
including auxiliary services, works and construction projects.
The Transportation Law enacted on December 22, 1993, amended
the General Communications Law to exclude territorial waters from
the list of activities considered to be general ways of
communication and henceforth there is a move to privatize certain
port activities.
However, restrictions on investment in port activities are
still contained in other legislation. FIL, enacted five days
after the Transportation Law, provides in Article 5 that the
control, supervision and surveillance of ports shall be reserved
to the State, but further provides in Article 7 that up to 49%
foreign investment is permitted in integral port administration
and port services related to internal navigation. The same
Article also provides that upon favorable resolution of the
Foreign Investment Commission, foreign participation may reach
100% in companies providing port services such as piloting, dock
services, mooring and lighterage.
b) The new Law of Ports.
i) Content of the new Law.
The Law of Ports was enacted on July 13, 1993, and has as
its purpose the regulation of ports, terminals, marinas and port
facilities, their construction, use, beneficial utilization,
exploitation, operation and manner of administration. The Law
also regulates the providing of auxiliary port services.
The Ministry of Communications is empowered under the Law to
grant concessions or permits for the exploitation, use and
beneficial utilization of property within the federal public
domain, defined as the lands and water which are part of the
harbor enclosure and the works and facilities acquired or
constructed by the Federal Government when located within harbor
enclosures; (a) concessions are granted for integral port
administration and the construction, operation and exploitation
of terminals, marinas and port facilities; and (b) permits are
granted for the rendering of port services which are defined as
those services rendered at ports, terminals, marinas and port
facilities to serve vessels, as well as those rendered in the
transfer of people and goods between ships, to land, or to other
means of transportation. In addition, a permit shall also be
required to build piers, wharves, launching docks and other
similar facilities on the general waterways outside of ports,
terminals and marinas.
Under the Law of Ports concessions for integral port
administration may be granted to Mexican companies when the
planning, programming, development and other actions relating to
the property and services of a port are entrusted wholly to a
corporation, for the use, beneficial utilization and exploitation
of the respective property and services. Equity will initially be
underwritten by the government and through an international
public bidding process, its divestiture will follow.
ii) Foreign investment.
The Law of Ports also provides that concessions and permits
shall only be granted to Mexican nationals and Mexican
corporations and that foreign investment in port activities shall
be governed by FIL. As mentioned in subsection a) above, FIL
provides that up to 49% foreign investment is permitted in
integral port administration and piloting services related to
internal navigation, while further providing that upon favorable
resolution of the Foreign Investment Commission, foreign
participation may reach 100% in companies providing port services
such as piloting, dock services, mooring and lighterage. Foreign
participation may reach 100% in Mexican companies that carry out
the activities covered by the concessions and permits mentioned
above, unless limited by FIL as hereinabove mentioned.
On February 20, 1995, the Mexican government published the
first call for bids to supply port services. The concessions
cover two multiple use terminals, and three container terminals
for a period of twenty years. The investors response to the call
for bid was strong, and granting of the concessions is in
process. Moreover, as this activity is not restricted in FIL,
foreign participation may reach up to 100% in Mexican companies
receiving the concessions.
iii) Limitations of rights granted.
The Ministry of Communications, upon request, may grant
authorization for the assignment in full of all the obligations
and rights resulting from the concessions, provided the
concession has been in effect for a term not less than five
years, the assignor has complied with all its obligations, and
the assignee meets the same requirements existing at the time the
concession was granted.
Concession holders shall have the right to create liens and
encumbrances on the rights conferred under the concession, the
property related thereto including buildings thereon and
appurtenant facilities as long as the liens and encumbrances are
not executed with foreign governments or states. Buildings and
port facilities built on public property by concession holders
shall be considered the property of the concessionaire during the
effective term of the concession. At the termination of the
latter or of any extension thereof, only those works and
facilities affixed permanently to such public property shall
become property of the Nation, at no cost and free and clear of
any lien.
10. Environmental equipment and services.
With a relatively new environmental legal framework, Mexico
intends to rapidly implement various regulations for the dynamic
commercial and industrial sectors. The laws, regulations and
technical standards are in most cases comparable with those of
the developed countries, and further changes are foreseen.
The government has created the Ministry of Environment, the
National Institute of Ecology and the Environmental Protection
Agency, in charge of formulating environmental policy and
enforcing the law.
The government is increasing enforcement of environmental
laws by assigning more qualified inspectors and broadening the
environmental audit program. Under this scenario, environmental
compliance has become an important issue for industries searching
for improved and expanded environmental services and equipment.
Some of the government's priorities for investment in
environmental equipment and services are hazardous and
non-hazardous waste collection and disposal, and water treatment
and supply activities in which foreign investment is permitted.
Another important area for development of environmental
services are the needs of large government-owned companies, such
as, PEMEX, Mexican National Railway and power generating plants,
where opportunities will be increased with the current
privatization process.
Environmental infrastructure to handle hazardous waste is
urgently needed because only one-third of the hazardous waste
generated annually is disposed of in authorized facilities, with
the rest being illegally dumped. The Law requiring adequate
disposal and treatment of hazardous waste creates opportunities
for companies investing in commercial recycling plants,
confinement facilities, waste stabilization and treatment
facilities and incinerators.
According to U.S. experts, Mexico is failing to treat 85% of
its industrial waste water discharge and more than 80% of
municipal waste water. Mexico's market for water pollution
control equipment and services is expected to hit US$1.55 billion
in 1996. Investment in industrial waste water treatment plants is
expected to reach US$540 million in 1996, and municipal waste
water treatment plants will require an investment of US$380
million in the following two years.
Waste water treatment and recycling is foreseen as one of
the growth areas in the environmental sector. Major producers of
waste water are, inter alia, automotive parts manufacturers, food
and beverage processors and the mining industry, which are
already under pressure to comply with the new regulations.
Increasingly stronger regulation and enforcement require
companies to update their pollution control procedures, in turn
increasing the demand for products and services such as equipment
designed to reduce human error with the accompanying technical
support, equipment designed to reduce the production of sludge,
advanced monitors and instruments to measure pollution output,
service programs developed to provide companies with waste
management plans and engineering services to assist in the
construction of waste treatment plants.
Important opportunities also for environmental services are
the performance of environmental impact studies, equipment for
air pollution control, disposal of state and municipal solid
waste, and finally in alternative energy sources such as
geothermic, solar and wind power.
11. Automotive industry.
a) History of investment restrictions.
The basis of the restrictions on foreign investment stem
from numerous laws and regulations that have been passed this
century in Mexico with the objective of promoting the development
of the domestic automotive industry.
On August 25, 1962, the Mexican government enacted a Decree
which prohibited the importation of motors for automobiles and
trucks and mechanical parts, destined for use therein as of
September 1, 1965. This Decree provided, inter alia, that motors
and transmissions to be installed in vehicles in Mexico be
produced therein with at least 60% of the content coming from
parts produced within Mexico. In addition, the Mexican government
prohibited the importation of vehicles in the same year.
Another Decree was passed in 1972 to limit foreign
participation in the automotive parts industry. The decree
established that foreigners could not hold greater than 40% of
the capital stock of companies dedicated to the production of
auto parts. The Law to Promote Mexican Investment and Regulate
Foreign Investment, published on March 9, 1973, further
reinforced the prohibition, providing that foreign participation
could not exceed 40% for companies producing automotive parts.
Further decrees and regulations were passed during the 1970's and
early 1980's which slightly modified the existing regime while at
the same time reinforcing the emphasis on Mexican majority
capital in the automotive industry.
b) Automotive industry Decree of 1989.
In line with other market opening policies, the Mexican
government passed the Decree for the Development and
Modernization of the Automotive Industry. This Decree took effect
on June 15, 1990, and provided that the enterprises comprising
the automotive sector would be identified either as final
assembly plants or auto parts manufacturers. The Decree defined
final assembly plants as those which produced automobiles or
those carrying out the final assembly thereof. Auto parts
manufacturers were defined as those companies whose sales to
final assembly plants of components and parts for use as original
equipment comprised greater than 60% of their total sales. Auto
parts manufacturers were also required to register with the
Ministry of Commerce. The Decree discussed the concept of
national supplier, defined as enterprises dedicated to the
production of specific parts for the automotive industry
satisfying a national value added content requirement. Moreover,
the Decree further provided that the classification of national
supplier would not be granted if the shareholder owning a
majority of the capital of such enterprise was a company
dedicated to final assembly of automobiles. However, in the case
of enterprises registered as national suppliers, the Decree has
been interpreted to permit foreign investment up to 100%.
The Decree also permitted a special regime for the
importation of new vehicles. Basically, enterprises dedicated to
the final assembly of autos must keep a positive balance in their
foreign exchange account, which may then be utilized, within
limits, to import new vehicles for sale in the domestic market,
or the positive balance may be sold or assigned to another
similar enterprise for its own use.
In answer to several inquiries, the Foreign Investment
Commission confirmed that foreign participation could reach 100%
in companies dedicated to final assembly or in enterprises
classified as national suppliers, and confirmed the 40% limit on
foreign participation in companies producing auto parts as well
as 100% foreign investment indirectly through trusts.
As mentioned in Section III.A.3.d).x) hereinabove,
Transitory Article Seventh of FIL, increased the allowable level
of foreign investment in companies producing auto parts from 40%
to 49%. The Article further provides that up to 100% foreign
participation will be allowed in these companies beginning on
January 1, 1999.
It should also be noted that maquiladoras have also been a
popular alternative for foreign investors sourcing auto parts in
Mexico. Maquiladoras are discussed in Section VI.E. hereinafter.
c) Relevant NAFTA provisions.
NAFTA provides that Mexico may adopt or maintain measures
limiting the importation of used vehicles. Mexico is committed to
allowing the import of vehicles that are at least ten years old
on January 1, 2009. For each two year period thereafter, Mexico
will increasingly open its used car market by providing for the
increased import of vehicles via lowering of the minimum age
requirement for importation, i.e. on January 1, 2011, Mexico must
allow the import of vehicles that are at least eight years old,
January 1, 2013, six years old, etc. Thus, Mexico is not
committed to allowing the unrestricted importation of used
vehicles until the year 2019.
12. Construction.
The Mexican government is focusing on promoting extensive
participation of private investment, both domestic and foreign,
in infrastructure because of the limited resources of the public
sector. The National Development Plan 1995-2000 foresees private
sector participation in the construction of highways, railroads,
telecommunications, ports, airports, electric power plants and
transportation and distribution of gas, among other areas.
To increase the country's industrial development over the
coming years, emphasis on investment in the above mentioned areas
is essential. Also the improvement of such infrastructure is
required to strengthen development of the most underdeveloped
areas.
Mexico's government is looking for the consolidation of
urban development in cities that, from a national perspective,
present alternative investment and residential options for the
population. This will be accomplished by promoting
decentralization and the development of medium size cities, with
the goal of a better demographic distribution. The focus of the
State will be on promoting and coordinating the efforts of
private, public and social sectors for the construction of houses
for urban and rural families. Housing promotion agencies will be
strengthened, actions will be taken to continue the
simplification of administrative procedures to meet housing
demands. Innovative building methods and materials will be
promoted and used in order to provide better results in terms of
quality and price.
13. Trucking.
Trucking in Mexico has been significantly deregulated since
1989. Prior to the recent deregulation, motor carrier transport
was permitted only under concessions and permits which gave
carriers exclusive routes and fixed tariffs.
Deregulation ushered in an era of greater facility in the
administrative process of granting operating authorizations via
non-exclusive permit; the establishment of rates is now entirely
governed by supply and demand of the market place.
The motor carrier industry is primarily composed of small
and medium-sized companies which are being forced to overcome
problems associated with costly financing and outdated operating
procedures. The new era of deregulation has brought greater
competition, which is expected to result in modernization in all
aspects of motor carrier transportation.
The federal Transportation Law of December 22, 1993, governs
the granting of operating authority and the rights and
responsibilities arising therefrom.
a) The Transportation Law.
Motor carrier transportation regulated under the Law is
defined as the carriage of merchandise for third parties on roads
of federal jurisdiction.
The Ministry of Communications issues operating permits to
operate as a motor carrier and to haul large loads. Said permits
are granted for an indefinite period of time to Mexican
individuals and entities. The Ministry of Communications must
resolve an application for an operating permit within 45 calendar
days from the date it is deemed filed and complete.
Vehicles employed to render motor carrier transportation
services may be leased or owned, but in any event must be duly
inspected and licensed. The carrier must comply with weight and
load rules.
The Law contains a special provision for international motor
carriers which gives recognition to the terms and conditions
established in international agreements. Vehicles utilized by
international carriers must meet the safety requirements
contained in the Law. Likewise, drivers must have a valid
license. The Law establishes limited carrier liability.
Motor carrier and land transportation is currently among the
six economic activities exclusively reserved under FIL to Mexican
investors and Mexican entities containing an exclusion of
foreigners clause.
b) Participation in the Mexican market under NAFTA.
NAFTA will open the Mexican border to U.S. and Canadian
motor carriers transporting cargo to and from Mexico. The
expansion of services into Mexico will be permitted in accordance
with the following schedule:
i) beginning on December 17, 1995, cross-border truck
services to or from the territory of border states (Baja
California, Chihuahua, Coahuila, Nuevo León, Sonora and
Tamaulipas), with entry and departure through different ports of
entry; and
ii) beginning on January 1, 2000, cross-border truck
services to or from Mexican territory.
c) Access to the frontier zone.
Mexico entered into a Memorandum of Understanding with
Canada regarding the exchange of cargo at contracted Mexican
terminals within twenty kilometers south of the northern border
of Mexico. Canadian transportation companies are required to
register with the Ministry of Communications in order to enter
the Mexican frontier zone for cargo exchange.
The United States protested said Memorandum of Understanding
arguing that the bilateral agreement constituted an acceleration
of the agreement regarding land transportation under NAFTA and
therefore the same treatment must be accorded to U.S. carriers
pursuant to the most favored nation status.
After an initial announcement of an agreement between the
United States and Mexico at the Transportation Summit on April
29, 1994, there has been no progress towards finalization of the
terms of frontier access for U.S. carriers.
14. Maritime activities.
a) Foreign participation.
The new Mexican Navigation Act, published in the Official
Daily Gazette on January 4th, 1994, considerably opened
navigation operations to foreign companies.
Mexican shipping companies can be 100% foreign owned. The
Mexican Navigation Act provides foreigners may flag, record and
register tourist or sports vessels for private use.
Mexican shipping companies may register in the National
Maritime Public Register and flag as Mexican vessels owned by
them or in their legal possession under any bare boat charter
with option to purchase.
However, masters, pilots, engine room and deck hands and all
personnel on board on any Mexican flag vessel must be Mexican by
birth.
The general shipping agent is the person or company acting
on behalf of shipping companies or operators as agent or business
representative to represent his principal in the bills of lading,
and to perform other business his principal may request.
To act as shipping agent, one must be a Mexican citizen or a
Mexican company with domicile in Mexico and duly registered as
shipping agent in the Public Maritime Registry. A shipping agent
company can be 100% foreign owned.
b) Navigation regime.
Navigation in Mexican territorial waters and use of Mexican
ports is open to any foreign vessel.
International maritime transportation and towing is open to
foreign shipping companies and vessels of all countries with
which there is reciprocity.
Operation on inland waterways is reserved to Mexican
shipping companies with Mexican vessels.
Either Mexican or foreign shipping companies may navigate in
coastal waters provided a permit from the Mexican Ministry of
Transportation is obtained which is subject to reciprocity and
equal conditions with the country in which the vessel is
registered and with the country where the shipping company has
its corporate domicile.
IV. SENSITIVE AREAS
The following is a selection of possible problem areas often
not given the attention merited when planning an investment in
Mexico and which could suddenly become critical in the course of
operations.
A. ZONING
Most municipalities within Mexico have areas designated for
residential, commercial, office and industrial purposes, and each
state has the authority to enact administrative general rules for
their operation. In most states the rules require an operations
license issued from the corresponding municipality and in those
cases when the license is not required, depending on the type of
establishment, an opening notice must be given.
For example, in the Federal District, hotels, restaurants
and sport clubs require an operations license, whereas only a
notice of opening is required for the operation of an office or a
commercial establishment.
Several official documents are required to obtain the
operations license, such as a zoning permit, license for the use
and occupancy of the premises, construction permit and
authorization from the health authorities.
In the case of an opening notice, it is necessary to file
some of the above mentioned documents.
The municipality can close and/or impose fines on those
establishments operating without the required operations license
or failing to file the opening notice.
B. ENVIRONMENTAL REGULATION
Environmental regulation is a relatively new and significant
area of concern for businesses with operations in Mexico.
During 1982, the Ministry for Urban Development and Ecology
was created with the purpose of regulating urban development,
housing, use of land and ecology; it was substituted in May,
1992, by the Ministry of Social Development.
On December 28, 1994, the Organic Law for the Federal Public
Administration was amended creating a new Ministry of
Environment, which includes the National Institute of Ecology and
the Environmental Protection Agency. While the Institute is
basically in charge of formulating regulations and legislation,
the Agency is in charge of enforcement.
In 1988, Mexico enacted the Environmental Law with the
purpose of defining the environmental policy and regulation;
preserving and restoring the environment; establishing
environmental protection areas for flora and aquatic and wild
fauna; promoting rational use of natural resources; preventing
and controlling water, soil and air pollution and regulating the
competence of the federal, state and municipal authorities
regarding the environment.
The Law is divided into six titles which address: general
dispositions, protected natural areas, rational use of natural
elements, protection of the environment, social participation and
safety and control measures and sanctions. The Law defines the
faculties of federal and local authorities, granting federal
authorities competence in the development of the national ecology
policy, enforcement of federal regulations, drafting of technical
standards, and drafting legislation regarding hazardous
activities and toxic wastes. State and municipal governments are
charged with developing state environmental policy, the standards
of which must be equal or above federal policy; regulation of
non-hazardous activities; and regulation, handling and
disposition of solid non-toxic wastes; prevention and control of
activities within their respective territory, and regulation of
water discharges to non-federal bodies of water.
The Law is supplemented by the Regulations on: Environmental
Impact, Toxic Wastes, Prevention and Control of the Atmospheric
Pollution, Vehicles circulating in Mexico City and the
Metropolitan Area, and Generation of Noise. In addition to the
Law and Regulations, 21 of the 31 Mexican states have adopted
their own environmental laws.
The environmental legislation also includes the technical
standards determining the parameters to secure health of the
population and preservation and restoration of the ecological
equilibrium and the protection to the environment.
There are other relevant laws which contain dispositions on
specific subjects related to the environment, such as, the Health
Law which regulates the negative effects of the environment as an
influence on human health, the Communications Law which provides
that the establishment and exploitation of general means and ways
of communication must be made in a manner not affecting the
ecosystems and the ecological equilibrium, and the Law of
Population Centers which provides that population centers must be
established taking into account the prevention, control and
monitoring of ecological risks and emergencies and the
preservation and improvement of the environment, among others.
1. Environmental impact.
Before initiating operations, any person engaged in the
execution of public or private activities that may cause
ecological imbalances or exceed the limits established in the Law
or in the standards, must file an Environmental Impact Statement
with the Ministry of Environment, or with state and municipal
authorities.
This statement is a document based on technical studies,
outlining the significant and potential environmental impact that
may be caused by a project or an activity, is filed with the
environmental authorities along with the manner to avoid or
diminish such impact.
The Ministry of Environment is the competent authority to
evaluate the environmental impact caused by the following
activities, considered federal jurisdiction: those related to
federal public constructions; hydraulic systems; general ways of
communication; pipelines and carbolines; chemical, petrochemical,
siderurgy, paper, sugar, beverages, cement, automotive and
electric power generation and transmission industries;
exploration, extraction, treatment of mineral and non-mineral
substances; installation, treatment and disposal of toxic waste;
tourism developments in federal areas; radioactive waste
treatment or disposal facilities; exploitation of forests;
hazardous activities; and any activity that may cause ecological
imbalance in two or more states, countries or international
jurisdiction zones.
There are three levels of Environmental Impact Statements:
general, intermediate or specific. A general impact statement
must be filed regarding the activities mentioned in the preceding
paragraph, intermediate or specific statements must be filed only
upon request of the authorities when the characteristics of the
construction or activity, or its magnitude or impact on the
environment, require more precise information.
Once filed, the authority may authorize, modify or reject
the performance of said activity.
If the applicant considers that the construction or activity
will not cause environmental imbalance nor that the corresponding
standards will be exceeded, a preventive report may be filed
before initiating activities.
In the case of hazardous activities, it is also necessary to
submit a risk study with a description of the activity to be
performed, the risk that said activity represents to the
environment, and the preventive and corrective technical safety
measures to be taken in case of an accident during normal
operations.
Local authorities will be competent in those activities not
reserved to the Ministry of Environment.
2. Air emissions.
Air emissions to the atmosphere are released either by fixed
or mobile sources.
a) Fixed sources.
All facilities releasing pollutants to the atmosphere
located in a fixed place in which industrial, commercial and
service activities are performed, are considered as fixed sources
and their emissions must not exceed the maximum levels
established in the corresponding standards.
Fixed sources must comply with several requirements, such as
maintaining systems and equipment to control atmospheric
emissions, keeping an inventory of emissions and installing
measuring equipment.
The regulation considers the following to be within federal
jurisdiction: a) constructions; commercial or industrial or
services activities performed by federal public administration
entities; b) industries related to asbestos, chemistry,
petrochemicals, siderurgy, paper, sugar, beverages, cement,
automotive industry and generation and transmission of
electricity; c) industries located within the metropolitan area;
d) activities located in one state that may pollute other states;
e) activities that may pollute other countries; f) vehicles
before they leave the plant; g) federal public transport; and h)
any other which may require the intervention of the Federal
Government. These fixed sources require an operations license
from the Ministry of Environment.
Once the operations license has been obtained, the holder
must submit to the Ministry of Environment, during the month of
February of each year, an inventory with information regarding
the company and its operations.
When applicable, the facility must comply with local or
municipal requirements.
b) Mobile sources.
The Law includes mobile sources which must comply with the
limits established in the corresponding standards.
Vehicles rendering federal public transportation services
must comply with emission control standards. Passenger vehicles
in Mexico City and the metropolitan area must comply with a
verification program carried out twice a year and are barred from
circulating once a week depending on their license plate number.
3. Water pollution.
The discharge of residual waters into any body of water or
on terrain is subject to authorization of the National Water
Commission. If discharges are made into the sewer system, the
authorization must be obtained from the municipal authorities,
unless toxic wastes are discharged, in which case, the Ministry
of Environment would be the competent authority. Industries with
water discharges must also comply with the corresponding
technical standards.
4. Hazardous materials and toxic wastes.
Hazardous materials and toxic wastes are considered as such
depending on their toxicity, reactivity, flammability, and
corrosiveness or if included in the list of the corresponding
technical standards.
Toxic wastes, as determined by applicable official technical
standards, generated from a transformation or production process,
must be disposed of pursuant to applicable regulations. If toxic
waste results from processing imported materials under temporary
import permits and finished products are exported, such toxic
wastes must be returned to the country of origin.
Individuals or companies intending to construct or perform
public or private activities that may generate, or in which the
handling of toxic wastes are involved, must obtain authorization
from the Ministry of Environment, and comply with the following:
a) register in the Registry for toxic waste generating
companies, controlled by the Ministry of Environment;
b) keep a monthly record of all toxic wastes generated;
c) handle and dispose of the toxic wastes in accordance
with the corresponding standards; and
d) prepare a semi-annual report containing all the
movements of toxic wastes.
Transport, storage and final disposal of toxic wastes or
rendering of related services are subject to authorization from
the Ministry of Environment in addition to compliance with any
other health or hygiene regulations.
The generator of toxic waste may contract handling services
with any company authorized to render such services which must
comply with the respective standards.
Vehicles utilized for transport of hazardous materials and
toxic wastes must comply with the requirements established by the
Ministry of Communications contained in the Regulations for the
Land Transport of Toxic Materials and Wastes.
All importers and exporters of hazardous materials must file
a declaration to obtain the necessary authorization (Ecological
Guide) from the Ministry of Environment, and must guarantee
compliance with the relevant regulations and indemnification of
the damages that may be caused, either in Mexico or abroad, by
posting a bond.
5. Other pollutants.
The emission of noise, vibrations, thermic and luminous
energy, odors and visual pollution is subject to compliance with
the corresponding standards. The Ministry of Health may conduct
visits and inspections to determine whether any of these
emissions are hazardous to human health.
6. Inspection and sanctions.
The competent authorities, who must have a written order
issued by the Verification Unit of the Environmental Protection
Agency, may perform inspection visits to verify fulfillment of
the Law, regulations and technical standards. Once the inspection
has taken place, the inspector must issue an inspection report
which is the basis for the application of sanctions, if any.
In case of non-compliance, sanctions range from seizure of
pollutant substances, partial or total, temporary or definitive
closing, fines, administrative arrest, cancellation of
authorizations or imprisonment for up to six years.
Mexico, however, lacks adequate environmental enforcement
personnel to enforce the Law throughout the country. To foster
compliance, Mexico has instituted a system of voluntary
self-inspections supported by random government audits.
C. COMPETITION LAW
The Competition Law effective as of June 1993, is a new
antitrust and unfair trade practices law. The Competition Law is
the first comprehensive legal regime for the protection and
promotion of full and open competition in Mexico. The Law also
establishes an autonomous administrative body, the Competition
Commission, to enforce the Law, conduct investigations, issue
administrative rulings, and prohibit anticompetitive market
practices. The Competition Law is divided into two principal
areas: monopolistic market practices and mergers and
acquisitions.
1. Monopolistic practices.
The Law prohibits so-called, a) "absolute" monopolistic
conduct, such as agreements among competitors to fix prices,
restrict production and distribution of goods or services, divide
markets or rig bids on contracts; and b) "relative" monopolistic
practices which consist of vertical agreements, i.e., among
non-competing businesses with substantial market power for the
purpose of unfairly driving competitors from the market. These
include market allocation agreements, resale price maintenance,
and "tie-in" arrangements.
A "relative monopolistic practice" will be sanctioned if it
is proven that the responsible party has substantial power in the
relevant market and the practice relates to goods or services
corresponding to such relevant market.
The relevant market will be determined taking into account
the possibility of substituting the product or service,
acquisition costs, opening of the economy to foreign markets and
restrictions of access to alternate suppliers or to other
markets.
Substantial power is considered, among others, as having the
ability to fix prices unilaterally, depending on the strength of
competitors, the existence of barriers to the entry of products,
and recent behavior.
The Law's distinction between "absolute" and "relative"
anticompetitive practices is roughly analogous to the distinction
in U.S. antitrust law between "per se" violations and market
practices subject to analysis under the "rule of reason."
Sanctions for engaging in an absolute monopolistic practice
may be up to the equivalent of 375,000 times the minimum daily
wage in Mexico City, currently N$18.30 (N$6,862,500 or US$980,357
(exchange rate of N$7.00/US), and for engaging in a relative
monopolistic practice up to the equivalent of 225,000 times the
minimum wage in Mexico City (N$4,117,500 or US$588,214).
2. Mergers and acquisitions.
The other principal area of concern under the Law is merger
regulation. The Commission has broad authority to dissolve a
completed merger, order a purchaser to dispose of all or some of
the purchased assets or shares, or block the parties from
proceeding with all or part of a proposed merger when the
enforcement agency determines that a proposed merger lessens,
impairs or hampers competition in a relevant product or
geographic market. In making such a determination, the Commission
considers a number of factors, including the degree of
concentration in the market, barriers to entry of competing
firms, the availability of substitute products, whether the
transaction would give the resulting entity the power to set
prices or restrict output unilaterally, and any other factor
relevant to competition.
The Law also contains a pre-merger notification regime which
is triggered if one of three thresholds is met:
a) the value of the transaction is the equivalent of
twelve million times the general minimum daily wage in effect in
the Federal District or more (currently N$18.30 per day), that
is, the equivalent of N$219,000,000 (US$31.2 million at the
exchange rate of N$7.00 per dollar);
b) the transaction involves the accumulation of 35% or
more, of the assets or shares of a business with assets, or
shares, in excess of the amount of N$219,000,000 as determined in
a) above; or
c) when merger partners' joint assets or annual sales
exceed forty-eight million times the general minimum daily wage
in effect in the Federal District, and the transaction involves
the additional accumulation of assets exceeding the equivalent of
forty-eight million times the general minimum daily wage in
effect in the Federal District.
The initial notification filing must include a copy of the
proposed agreement, the most recent financial statements of the
parties, their market share, and "any other data" relevant to the
Commission's evaluation of the proposed merger. The Commission
may request additional information within 20 days after receipt
of the initial notification, to which the interested parties must
respond within 15 days. The Commission is obliged to make its
determination within 45 days from the date of receipt of the
additional information. If it fails to render a decision within
the statutory time period, it is deemed to have consented to the
transaction.
Once a transaction has been approved, it may no longer be
challenged except on the grounds that the parties provided false
information to the Commission.
D. CONSUMER PROTECTION
The Consumer Protection Law is very strict and protective of
consumers in their commercial relationships with suppliers. A
supplier is defined by the law as any person who temporarily or
permanently offers, distributes, sells, leases or grants the use
or benefit of goods, products, or services. According to this
definition, the supplier may be the manufacturer of products, a
distributor, or even a sales person.
Suppliers of goods and services must respect their prices,
guarantees, terms and conditions of the corresponding operation;
they shall also respect prices and tariffs agreed to with the
Ministry of Commerce (See No. 2. below), and shall not use
misleading or erroneous publicity.
Consumers may present a claim either to the manufacturer or
the seller of a product if, for example, the product does not
correspond to the terms offered; its net content or amount
delivered is less than what is indicated in the package or
container; or if once repaired, the product is not adequate for
its normal use or destiny, within the period of the guarantee.
In such case consumers are entitled to receive a substitute
product, a discount or refund of the amount paid, at their
option, to be paid by the supplier or distributor. In turn, the
seller or distributor, sanctioned, may obtain reimbursement from
the person who sold the product or from the manufacturer, who
shall pay the cost of repair or of substitution, except if the
cause of the claim is attributable to the consumer or the
supplier.
When a supplier hampers or damages the rights of a consumer
under the Law, the latter may bring an administrative action
before the Consumer Protection Agency acting as conciliator and
arbiter, or may initiate an action directly before Mexican
courts. The Agency, as a sanction, may close the establishment
and may impose fines up to the equivalent of 2,500 times the
minimum daily wage in effect in the Federal District (currently
at N$18.30 per day, therefore the fine might amount to N$45,750
or US$6,536 at N$7/US Dollar). In case of reoccurrence the fine
can amount to twice this figure.
Suppliers who render maintenance or repair services shall
indemnify the consumer if the product is lost or damaged in such
a way that it is no longer useful for the purpose for which it is
destined due to the deficiency in the service.
If a product or service may be considered dangerous for the
consumer or the environment, or when its dangerousness can be
predetermined, the supplier shall include instructions describing
characteristics, potential effects and recommended use of the
product or service. The supplier will be liable for the damages
caused for failure to comply with this disposition.
A supplier who uses legends restricting or limiting the use
of the product or the service must clearly state the limitations
or restrictions truthfully and without ambiguities. Legends
regarding "warranties" can only be used if they describe their
coverage and the procedure to be effective.
Said guarantees shall be in writing, shall specify their
duration, conditions and mechanisms to make them effective and
shall be delivered to the consumer upon receipt of the goods or
service.
Guarantees may not be inferior to those determined by
applicable dispositions, and may not include conditions or
limitations reducing the legal rights of the consumer, who may
demand compliance thereof by the manufacturer or by the importer
of the goods or the service provider, as well as by the
distributor, except, if one of them or a third party, in writing,
has assumed this obligation.
Suppliers must respond to the substitution of spare parts
and of repairs during the term of the guarantee. The Ministry of
Commerce may require certain products be covered with a guarantee
of longer duration with respect to the supply of spare parts,
taking into account the life of the product.
The Law contains a specific chapter regulating adhesion
contracts (drafted by one party which may not be negotiated by
the other party). Said agreements shall be in Spanish. The
Ministry of Commerce may determine, through compulsory official
standards, that certain agreements of this type be registered at
the Agency when they contain disproportionate or abusive
obligations for the consumers. Failure to register a contract
when a standard requires its registration will entail an economic
fine to the responsible party.
1. Product liability.
Mexican law does not contain specific provisions governing
product liability. Notwithstanding the protection granted under
the Consumer Protection Law (See paragraph D immediately above),
the local Civil Codes provide general rules applicable to
damages, either to persons or their property, which encompass
those caused by products. For example, the Civil Code of the
Federal District states: a) that those persons who, acting
illegally or against good customs, cause damage have to indemnify
unless it is proven that the damage was caused as a consequence
of fault or negligence of the injured party; and b) that if a
person uses apparatus, instruments, mechanisms or dangerous
substances (explosive or flammable, for example) he has to repair
the damage caused unless it is proven that the damage was caused
as a consequence of fault or negligence of the injured party.
The damage shall be repaired either by reestablishing the
prior situation or by indemnifying. Note that Mexican law does
not include some of the damage concepts developed in Anglosaxon
law, and therefore damages award are in general low by
comparison.
2. Price Control.
Consistent with Mexico's deregulation policy, only a limited
number of products are subject to price control, such as products
of general consumption indispensable for nutrition of the
population, i.e., bread, corn, tortillas, sugar and milk;
electricity which is a public service granted by the Federal
Government; gas and water subject to controlled tariffs, and oil
and gasoline.
Prices of public transportation services such as buses, the
metro, collective transportation and taxi cabs are also
controlled by the government.
The Ministry of Commerce may enter into agreements with
private entities, such as Chambers of Industry and Commerce and
companies to limit increases in prices for the benefit of
consumers. These agreements only bind the parties and are not
mandatory for those companies or members of the chamber who are
not signatories of the respective agreements.
V. DIRECT SALES
Sellers of products imported into Mexico must comply with
all commercialization requirements, such as, the Consumer
Protection Law (See Section IV.D. hereinabove), official
technical standards, health and labeling regulations, and should
be aware of, among others, applicable tax regulations (See
discussion of permanent establishment in Section XIV.D.),
regulations concerning government procurement (See Section XXI.
hereinafter), possible labor law consequences, (See Section XV.
hereinafter) requirements to protect intellectual and industrial
property (See Section VIII. hereinafter), other options for doing
business in Mexico (See Sections VII. and IX. through XII.
hereinafter), and should be aware of dispute resolution
mechanisms (See Section XVIII. hereinafter).
A. NOMS
Certain products, processes, services, emblems, and methods,
sold, used or rendered in Mexico must comply with technical
standards issued by the Ministry of Commerce describing their
characteristics or specifications.
In the absence of a standard for a certain imported product
or service, such product or service must include a legend
indicating that it complies with the corresponding specifications
of the country of origin, international specifications or the
manufacturer's specifications.
The fulfillment of the standards contained in the NOMS must
be verified and certified by the corresponding authorities or by
an authorized certifying entity. A product subject to compliance
with standards must carry a statement of such compliance.
B. HEALTH
Mexico has many legal provisions prescribing sanitary
measures designed to promote and preserve the health of the
community. Only those which may be more likely to be of interest
to businessmen or their counsel planning to enter the Mexican
market are referred to herein.
Sanitary control consists in the verification and
application of safety measures or sanctions to manufacturers and
sellers of certain products. The Health Law regulates sanitary
control of either national or imported products such as food,
alcoholic or non-alcoholic beverages, perfumes, cosmetics,
tobacco, pesticides, fertilizers and hazardous or toxic
substances used in their manufacture as well as certain health
products such as medical, odontological and surgical equipment,
prosthesis, and hygiene and healing products. What constitutes
each of the products covered by the Law is defined therein.
The manufacturing process and specifications that must be
complied with by some of the products are described in technical
standards. Medications and their preparation are regulated by the
Mexican Pharmacopoeia Book.
Facilities dedicated among others, to the manufacture and
distribution of health products, pesticides, fertilizers, sources
of radiation and toxic or hazardous substances require a health
authorization. Labeling requirements must also be complied with.
First time imports of food, alcoholic and non-alcoholic
beverages, perfumes, beauty products and tobacco as well as
materials used in their manufacture, are subject to sampling and
analysis by certified laboratories in order to determine
compliance with official standards. Certain products contained in
a listing published in the Official Daily Gazette may require
import permits depending on the risks they may represent to human
health.
In the event that no such permit is needed, these products
may be imported under the health certificate of the country of
origin or from authorized Mexican or foreign laboratories.
Import and export of drugs and psychotropics is subject to
authorization from health authorities which may be granted to
pharmacies or authorized manufacturers of medicines. Import
permit for health products and medicines is needed for those
established by the health authorities and published in the
Official Daily Gazette. Import of fertilizers, pesticides and
toxic substances is also subject to authorization.
C. LABELING
The Ministry of Commerce has enacted several dispositions
requiring precise information on the packaging or labels of
products for their commercialization. The information required
varies depending on the product, but in most cases it refers to
its content and net weight, safety measures and instructions of
use from the manufacturer.
Imported products must include a counter-label in Spanish
containing specific commercial information, data of the
manufacturer and of the importer.
Products imported into Mexico from a NAFTA Party shall
comply with the rules regarding marking of the country of origin,
to determine when these products must be considered as NAFTA
products.
D. GENERAL IMPORT REGIME
Mexico has substantially simplified its import
classification regime by converting to the "Harmonized System for
Merchandise Classification and Codification", rendering its
import classification system compatible with that of most
industrialized countries. The Harmonized System has taken on
added importance with the passage of NAFTA since the rules of
origin, which determine whether goods are eligible for
preferential tariff treatment under NAFTA, are keyed to changes
in tariff classifications for goods incorporating non-NAFTA
components.
Moreover, Mexico has adopted GATT-approved valuation rules
which enable the foreign supplier to determine the "normal price
levels" for goods shipped to its Mexican importer.
Before Mexico's accession to GATT, most imports were subject
to prior import permit requirements. GATT accession has
dramatically reduced the number of products requiring an import
permit. Since GATT and even prior to NAFTA, tariffs were reduced
from highs of 100% to a maximum of 20% with many products free of
tariff. The average weighted tariff is approximately 11%. In
those few cases where permits are required, the Ministry of
Commerce reviews the applications, and relies on Mexican industry
associations for advice regarding the local availability of the
product and may reject applications if the product is already
available.
Under NAFTA and other trade agreements, certain products
enjoy favorable tariff treatment. (See Section III.B.3.
hereinabove).
Quantitative prohibitions and restrictions on imports, such
as quotas and licensing requirements, are prohibited with few
exceptions and reservations, i.e., firearms, certain
pharmaceuticals, endangered species, used computers, printers,
and peripherals. Certain Mexican import restrictions will be
phased out over a ten-year period, such as those on automobiles.
Importers must be registered with the Importers Registry operated
by the Ministry of Finance.
1. Shipping documentation and insurance.
Apart from the import permit, an import declaration is
always required and must be completed by a customs broker or
forwarding agent. Other shipping documentation includes the
commercial invoice, packing list and bill of lading, and may also
include a certificate of origin of the goods, especially when
referred to in trade agreements, if the goods are imported from a
country with which Mexico has a trade agreement. Due to Mexico's
attempts to eliminate corruption, customs officials now emphasize
the accuracy and completeness of all shipping documentation.
If goods are shipped by land, a bill of lading shall be
executed. This bill of lading is the contract between the shipper
and the carrier. If the carrier is to be liable for the value of
the goods, the shipper must pay an additional charge equivalent
to the insurance premium. The full value of the goods must be
expressly declared in the bill of lading. If no declaration is
made, the carrier's responsibility will be generally limited to
an amount equivalent to fifteen times the daily minimum wage per
ton.
If goods are shipped by sea, a bill of lading must be
executed and issued by the ocean carrier to the shipper. This
bill of lading is a title representing the goods and is a receipt
for the goods on board the vessel. The ocean carrier or operator
issuing the bill of lading will be responsible for the
merchandise from the moment received until delivered to the
consignee. The ocean carrier or operator may limit their
responsibility in an event of loss or damage to the goods up to
an amount determined by the applicable legal provisions.
If the goods are shipped by air, an airbill must be issued
by the carrier to the shipper upon receipt of the goods. The
carrier will be responsible for the goods from the moment
received until delivery to the consignee. In the event of loss or
damage to the cargo, when the value of the shipment is not
declared, the carrier will be responsible for up to an amount
equivalent to ten times the minimum general daily wage in Mexico
City per gross kilogram. The carrier will be liable for the total
value of the goods even in the event of force majeure, when the
shipper declares the total value and pays an additional charge to
the carrier equivalent to the cost of the insurance premium.
2. Broker requirement.
Mexico requires the intervention of a customs broker to
withdraw merchandise from the customs house when the total value
of the shipment is more than US$1,000.
E. TAXATION OF DIRECT SALES
1. Tax, exchange incentives, free trade zones.
Until December 31, 1991, geographic areas had been
established in Mexico as free trade zones to which merchandise
and equipment could be shipped free of customs duties. Since
January 1, 1994, customs duties are being phased out, and
therefore free trade zones will no longer be necessary in a
general free trade regime. Special transition provisions are in
force according to which the importation of certain goods to the
following places is partially or completely free of customs
duties: the state of Baja California, the cities of Agua Prieta,
Cananea and Salina Cruz, a number of ports in southern Mexico in
Quintana Roo, an area in the state of Sonora and the southern
border area with Guatemala.
Mexico offers no special tax concessions to encourage
foreign entities to establish operations in Mexico, nor are there
any special exchange rates in effect for trade.
There are no exchange controls on funds moving in or out of
the country, however foreign currency accounts are not allowed
except in special cases.
2. Income tax.
In most cases, direct sales originating outside of Mexico
are not taxable in Mexico, especially when orders are accepted
outside of Mexico, merchandise is delivered and accepted FOB
outside Mexico. However, the activities of an individual or legal
entity acting on behalf of a foreign seller may result in the
non-resident incurring in a taxable transaction as a "permanent
establishment."
Foreign residents who have merchandise in Mexico on a
consignment basis for sale are considered to have a "permanent
establishment" for tax purposes.
Goods can be delivered to one of many bonded warehouses
found in most Mexican cities under the fiscal deposit regime.
Under this regime import duties, taxes and compensatory duties
are calculated but not paid until the purchaser actually
withdraws the goods delivered from the warehouse, and which in
such bonded warehouse is not considered a "permanent
establishment."
Delivery from a warehouse within Mexico will mean that the
seller may be deemed to have a permanent establishment, and in
such case would be subject to Mexican income tax on profit earned
on the sale. However, tax treaties may allow delivery to be made
locally without triggering the concept of a permanent
establishment (example U.S.-Mexico Tax Treaty).
3. Value added tax.
VAT is imposed on most imported goods at the rate of 15%
payable by the purchaser.
F. TEMPORARY IMPORTS
A buyer may wish to temporarily import components, raw
materials and equipment. Companies with a maquila program are
allowed to import into Mexico the materials, components, and
equipment needed to manufacture their products without paying
import duties (See Section VI.E. hereinafter). Other programs
facilitating temporary duty imports are described in Section VI.
hereinafter. Mexican companies without a maquila or other special
program that only temporarily import such goods on a case by case
basis may receive authorization for the importation of such
products for, in most cases, up to two years, or as per specific
authorization.
With regard to temporary imports not subject to these
special programs, the importer is allowed to deposit the amount
of the import duty in a special bank account, referred to as
"cuenta aduanera." When the goods are exported within the term
provided by law for such particular goods, the importer will be
allowed to recover the deposit, plus the interest earned. The
foregoing is not applicable to the VAT, which must be paid in
full when machinery and equipment are imported in this manner,
but such payment may be refundable or accreditable in accordance
with VAT provisions. (See Section XIV.E.2. hereinafter).
In addition, NAFTA mandates that each Party allow duty-free
entry of certain goods imported on a temporary basis, including
professional equipment, press equipment, equipment for sound or
television broadcasting, cinematic equipment, sporting equipment,
goods intended for display or demonstration, commercial samples
and advertising films.
G. TRANSFER PRICING
Effective as of January 1, 1993, Mexico introduced a new
system for the valuation of goods before customs (consistent with
the GATT Code), the purpose of which is to simplify the
determination of the basis for imposition of import duties. This
system must be used by importers of goods in order to establish
the taxable basis upon which the import duty (Ad Valorem) will be
applied.
The Ministry of Finance is authorized to determine,
presumptively, the price at which taxpayers acquire or sell
goods, as well as the amount of the consideration in case of
other types of operations, in several cases mentioned in the
Income Tax Law. For example, when the price of the corresponding
operation is lower than market value, or the acquisition cost is
higher than said price, or when the sale of goods in import and
export operations is at cost or less than cost, or whenever a
payment abroad is made.
By determining the price the Ministry of Finance may modify
tax profit or loss in operations entered into by and between
individuals, companies, residents in Mexico or abroad, permanent
establishments, if they are interrelated, as long as the
requirements specified in the Law are complied with. (Article
64-A of the Income Tax Law).
The Ministry of Finance issued on March 31, 1995, Temporary
Rule Number 248 stating that maquiladoras must elect to use a
transfer pricing "safe harbor" rule or apply for an advance
pricing agreement if they want to retain their U.S. parent
company's exemption from Mexico's Asset Tax. Traditionally,
maquiladoras were not operating as a profit center and therefore
paid little or no income tax and little or no asset tax since
most assets were temporarily leased. As of the date mentioned
maquiladoras and their parent companies must review their
previous mode of operation from this new tax point of view.
H. THE VIENNA CONVENTION
The International Sale of Goods Convention (Vienna
Convention) has been in force in Mexico since January 1st. 1989.
Its objective is to establish a standard regime for international
commercial agreements which shall be applied in lieu of national
commercial legislations, therefore facilitating commercial
operations relating to goods in a world moving towards
globalization of commerce.
Since Mexico is a signatory, this Convention applies to any
international commercial agreements for goods unless the parties
expressly waive application of such Convention or any part
thereof. If the Convention is applicable, Mexican commercial
legislation applies only in a supplementary manner.
The Convention itself establishes the application of Mexican
legislation in the following cases:
1. validity of the contract,
2. acquisition of title to the merchandise,
3. extra-contractual liability arising from the nature of
the merchandise,
4. type of interest paid over due amounts, and
5. any other matter not covered in the Convention.
The Convention excludes the following types of purchase and
sale operations:
1. goods for personal consumption,
2. bids or judicial sales,
3. money and securities,
4. ships and aircraft,
5. electricity,
6. requirements contracts, and
7. services.
Although there is no formal international convention,
Incoterms are often used in commercial transactions by business
people and their use is becoming a customary international
convention.
I. TRADE DISPUTES UNDER MEXICAN LAW
The adherence of Mexico to GATT in 1986 was followed by the
adoption of several Codes of Conduct, such as, the Dumping Code
which came into effect in 1988. This Code served as a framework
for the Regulatory Law of Article 131 of the Constitution
Regarding Foreign Trade, substituted on July 27, 1994 by the
Foreign Trade Law, which is supplemented by the Regulation to the
Foreign Trade Law effective as of January 1st, 1994. Mexico is a
member of the World Trade Organization which came into effect on
January 1, 1995, and adopted the Agreement on the Application of
Article VI of the General Agreement on Tariffs and Trade of 1994.
Since the early 1990's, Mexico has become much more
aggressive in enforcing its international trade laws initiating
numerous antidumping and subsidies procedures against countries,
such as, the United States, China, Brazil, Argentina and Korea.
1. Unfair practices of international trade.
The Mexican legal definition of unfair practices of
international trade includes discriminatory pricing and foreign
government subsidies which cause or threaten injury to the
national production.
To offset the effect of the imports of goods under unfair
practices of international trade, the Law establishes the
imposition of compensatory duties which may only be imposed if
there is a price discrimination practice or a subsidy, injury, or
threat of injury, and a cause-effect relationship between them.
Discriminatory pricing is defined as introducing goods into
the country at a price below their "normal" value. Subsidies are
defined as a benefit granted by a government, or, its entities,
directly or indirectly to manufacturers or exporters for specific
goods to strengthen their international competitive position
unless it involves internationally accepted practices.
If goods are imported from a country with a centrally
planned economy their "normal value" will be taken from an
identical or similar product manufactured or sold in a substitute
market-economy country.
2. Safeguards.
Safeguards are temporary measures taken to regulate or
restrict imports of goods to prevent or remedy a serious injury
to national production of similar or like products, and to
facilitate market adjustment of national manufacturers.
Safeguards may consist in specific or ad-valorem import duties,
permits or quotas.
3. Procedures.
The procedures regarding unfair practices of international
trade and safeguards are different, however, they take place
before the same Bureau of Unfair International Trade Practices
which is the authority for the filing of all complaints which may
trigger an investigation.
In both cases the complaint may be filed by any national
manufacturer, individually or as part of an association of
manufacturers, representing at least 25% of the national
production of a similar or like product to those imported
accompanied by documents supporting the allegations. An
investigation may also be started by the Bureau when it has
gathered sufficient elements to presume the existence of unfair
practices of international trade or safeguards.
a) Unfair practices of international trade.
The Bureau will publish the initiation of the investigation
and directly notify all interested parties accused by the
manufacturer, who may respond within the term granted.
A provisional resolution containing its preliminary findings
must be published 130 days after the publication of the
initiation of the investigation wherein the Bureau may impose a
preliminary compensatory duty, continue the investigation without
provisional compensatory duty or terminate the investigation.
The Bureau will publish the final resolution containing its
findings 260 days after the publication of initiation of the
investigation. A final compensatory duty may be imposed, the
provisional compensatory duty revoked or the investigation
concluded without the imposition of compensatory duties.
Thereafter, any interested party may: i) request the
revision of the final resolution at the anniversary month of the
final resolution; ii) initiate an administrative repeal action,
or iii) request the initiation of an alternative dispute
settlement procedure under NAFTA Chapter XIX, or GATT.
b) Safeguards.
Once a petition is filed, the Bureau will proceed to analyze
the information in order to determine the possible existence of
an injury or a threat thereof.
Safeguards must be installed 260 days after the publication
of the initiation of the corresponding investigation. The
measures adopted may continue up to four years provided the
national manufacturer fulfills the adjustment programs adopted.
Provisional safeguard measures may be taken 20 days after
the date of initiation if, from the circumstances, a delay in the
imposition of the safeguard measures would cause an injury
difficult to repair and there is sufficient evidence of the
threat of a serious harm resulting from the imports. These
measures may not last more than six months.
J. TRADE DISPUTES UNDER NAFTA
The Trade Law allows interested parties to initiate an
administrative repeal action or request the application of an
alternative dispute settlement procedure contained in any treaty
whereby Mexico is a signatory. If an alternative mechanism is
invoked, the remedies under Mexican legislature are not
applicable, except the "amparo" proceeding which may apply as a
last resort.
The remedies established under Mexican law (nullity suit
before the Superior Chamber of the Fiscal Court of the
Federation) for the revision of the conformity of the final
determination with the Law, may be replaced under NAFTA Chapter
XIX by a binational panel. The panel may confirm the Bureau's
final resolution or make recommendations for modification.
Panelists must apply the standard of review and the general
legal principles that the Fiscal Court of the Federation would
otherwise apply.
VI. EXPORTS FROM MEXICO
One of the priority objectives of the Mexican foreign trade
policy is to promote exports, especially non-oil exports. This
has been made possible through the adoption of several programs
which grant additional administrative advantages to exporting
industries.
A. TEMPORARY IMPORT PROGRAM FOR EXPORT (PITEX)
This program may be adopted by individuals or entities
directly or indirectly exporting goods. In order to be eligible,
annual exports must exceed US$500,000 or its equivalent in other
currencies or represent at least 10% of total sales. Application
may be done for an industrial plant or specific export project.
Exporters who adopt this program may be authorized to
temporarily import duty free: 1) raw materials, parts and
components destined to integrate export goods; 2) containers and
packaging and bottling materials, trailer containers; and 3)
fuel, lubricants, spare parts and consumable goods used in the
manufacturing process.
If exports represent at least 30% of total sales of the
respective product or products, exporters in addition may
temporarily import duty free: 4) machinery and equipment,
instruments, molds and durable tools to be used in the production
process, equipment for the handling of materials related to the
exported goods; and 5) equipment for investigation,
communication, industrial safety, quality control environmental
control, and other equipment related to the manufacturing
process.
Exporters under this program will be further entitled to
benefit from the simplified customs dispatch system and to obtain
authorization for a percentage of imported materials to represent
losses and waste, which may be allowed to be freely disposed of
by the exporter.
The goods manufactured with such imported materials may be
sold in Mexico in an amount up to 30% of the value of the
previous year's exports or the value estimated for the first year
of operation. This authorization is subject to the maintenance of
at least an equal balance between exports and imports.
B. FOREIGN TRADE COMPANIES (ECEX)
This program may be adopted by entities whose corporate
purpose is the promotion and commercialization of exports. To be
eligible it is necessary to have a fixed capital equivalent to
US$100,000 and to export, for its own account, at least
US$3,000,000 and maintain at least an equal balance between
exports and imports for two years after its registration, as an
exporting company.
Foreign trade companies have ready access to ALTEX
registration (See C. below) and PITEX programs (See A. above).
C. HIGHLY EXPORTING COMPANIES (ALTEX)
To be eligible for this program, the applicants must
evidence direct exports of at least US$2,000,000 or 40% of the
company's total sales or indirect exports of at least 50% of
their total sales.
ALTEX companies are granted benefits such as special
treatment before administrative authorities, access to import
quotas compensated with exports, customs advantages, and access
to the value added tax automatic crediting system.
D. IMPORT TAXES DRAW-BACK PROGRAM
This program may be adopted by persons or entities
performing direct or indirect exports. Companies within this
program are eligible for refund of import taxes paid for imported
parts incorporated into the exported goods.
E. MAQUILADORA PROGRAM (IN-BOND PROGRAM)
Under the Maquiladora Decree, maquiladoras are industrial
enterprises which are dedicated to the assembly, transformation
or manufacture of foreign inputs temporarily imported free of
customs duties and subsequently exported after having undergone
assembly or processing. The Decree establishes four categories of
authorized duty free imports: 1) raw material, containers,
packing material, labels and brochures necessary to complement
production; 2) tools, equipment and accessories for industrial
production and security, products necessary for hygiene and
sanitation, pollution control equipment, work manuals, industrial
plans and telecommunication and computation equipment; 3)
machinery, apparatus, instruments and spare parts for the
production process, laboratory and testing equipment, and
information and products necessary to ensure quality control,
train personnel and manage the business; and 4) trailer bodies
and containers.
The imports listed in category 1) above may remain in the
country up to one year from the date of import. Those listed in
categories 2) and 3) may remain in the country as long as the
authorized maquiladora program is still in effect. The imports
listed in category 4 also may remain in the country as long as
the program is still authorized, but for a period not to exceed
twenty years.
1. Domestic sales.
Consistent with NAFTA, the 1994 amendments to the
Maquiladora Decree authorize maquiladoras to sell a specified
percentage of production in the domestic market. In 1994, 55% of
the total volume of exports for the previous year could be sold
domestically. These percentages will increase 5% annually until
the year 2000, when the percentage will be 85%. Beginning in the
year 2001, the Mexican government will remove all restrictions on
maquiladora sales in the domestic market. Maquiladoras must
report domestic sales on a bimonthly basis as provided in
regulations of the Ministry of Commerce.
Domestic sales have important tax consequences. When a
maquiladora sells products in Mexico, it is subject to the
general import duty on the foreign parts and components
originally imported duty free.
Under NAFTA, these performance based duty waiver programs
are prohibited, and all such existing programs will terminate by
the year 2001.
2. Tax advantage of maquiladoras.
The maquiladora program allows inputs to be imported
duty-free and processed in Mexico as explained above. The
maquiladora entity in Mexico is subject to an income tax on its
profits as normally determined. (See Section XIV. hereinafter).
In practice, many maquiladoras reported minimum profits but,
at present, tax legislation has been enacted to regulate transfer
pricing between affiliates. (See Section V.G. hereinabove).
VII. REPRESENTATIVES, DISTRIBUTORS, FRANCHISEES
A. REPRESENTATIVES
A foreign vendor can sell goods or services in Mexico
directly through its own employees. In other cases, a vendor may
decide for various reasons to use other methods to dispose of his
merchandise, either through representatives or intermediaries,
who may be commission agents, distributors or franchisees.
When dealing through a commission agent, the vendor should
be careful to have the agent considered an independent
contractor, and not an employee.
The employee could claim a labor relationship exists under
Mexican law for services while in Mexico, independently of the
nationality or residence of the employer, and thereby entitlement
to the benefits of an employee provided thereunder. Further, it
is important to keep in mind that the Labor Law states that any
person conducting sales, subject to direct supervision, is
considered as an employee of the person for which he conducts the
sale.
Mexican laws do not regulate the amount to be paid as
commission. For tax purposes the agent's commission will be
considered as his normal income. The sale by the foreign vendor
could be subject to Mexican taxes. (See Sections XIV.D. and XXII.
hereinafter).
B. DISTRIBUTORS
Distributors are independent vendors who purchase on their
own and resell products, also for their own account.
Distributors, unlike commission agents, derive their income
from the difference in the wholesale price at which they
purchase, and the retail price at which they sell, whereas income
of commission agents is the commission received, which usually is
fixed as a percentage of sales. The risks of loss are suffered by
the distributor upon accepting the purchase of products.
Commission agents do not suffer risks of loss of products, acting
only as intermediaries.
C. FRANCHISEES
Mexican law defines franchises broadly as when along with
the license to use a trademark, technical knowledge is
transferred, or technical assistance is granted, to produce, sell
goods or render services in a uniform manner and with the same
commercial, administrative and operative methods established by
the owner of the trademark, with the purpose of maintaining the
quality, prestige and image of the products or services therein
distinguished.
Since a franchise agreement implies the licensing of a
trademark, it has to be recorded before the Mexican Institute of
Industrial Property to gain protection of the trademarks against
third parties. The franchisee will then be authorized to exercise
all legal actions necessary to impede the illegal use of the
trademark, as if he were its owner unless otherwise agreed.
The parties of a franchise agreement enjoy full contractual
freedom. Their respective obligations include among others, the
granting of a trademark license and technical assistance,
protection of confidential information, compliance with quality
and operational standards, payment of royalties, and access to
the franchisor's system of operations.
Franchise agreements are not subject to governmental
approval. In accordance with the Intellectual Property Law,
franchisors must deliver to potential franchisees before
execution of the franchise agreement, technical, economic and
financial information regarding the franchise and its system.
D. CONSIDERATIONS
Representatives, distributors and franchisees are subject to
the Competition Law. It is important to avoid geographical
distribution of market, agreements to fix prices, and agreements
to eliminate competitors from the market.
The agreements governing the above relationships may be
terminated by either party, in accordance with their terms.
Mexican law does not contain specific provisions for the payment
of damages or remuneration upon termination of the agreement
except as may be provided in the agreement.
The vendor may prefer other ways to either enter the Mexican
market or expand market penetration by creating a subsidiary or
opening a branch in Mexico, in place of, or in addition to having
a representative, distributor or franchisee. Rules are different
in each case and give the foreigner different advantages. (See
Sections X. XI. and XII. hereinafter).
VIII. INTELLECTUAL PROPERTY. LICENSING
The Industrial Property Law as amended on August 2, 1994 was
the last of a series of amended laws which in their earlier
versions acted as obstacles to foreign investment: Foreign
Investment Law, Transfer Technology Law and the Patent and
Trademark Law of the 1970's.
The Industrial Property Law created the Mexican Institute of
Industrial Property, an independent entity dedicated to the
enforcement of industrial property rights. The content of the Law
may be summarized as follows:
A. PATENTS
A patent is a right granted to an individual to exclusively
exploit an invention for a twenty year non-renewable period
beginning from the date of filing the related application.
An invention to be patentable must meet the following
requirements:
1. must be novel, not be comprised in the state of the
art, which is defined as the technical information generally
available to the public through a written or oral description,
through working or through any information means in Mexico or
abroad; there is no loss of novelty if an invention is exhibited
in a nationally or internationally recognized industrial or trade
show;
2. it must be the result of an inventive activity not
readily deduced from the state of the art or which may be evident
or obvious to an expert in the subject matter;
3. it must be capable of industrial application, that is,
it must be useful to manufacture a product or to use a process in
any type of economic activity; and
4. it must be a human creation which allows the
transformation of matter or energy in a manner which may be used
to satisfy a concrete need.
All inventions are patentable except for:
1. biological processes for production or reproduction of
plants or animals,
2. biological or genetic material as found in nature,
3. animal breeds,
4. the human body and the parts or organs thereof, and
5. vegetal varieties.
The Law incorporates the first-to-file principle. Mexico is
a party of, among others, the Paris Convention, and the Patent
Cooperation Treaty, thus the date of filing a patent application
in another country member is treated as the date of filing in
Mexico.
There is no express obligation to work an invention, but the
Law does provide that anyone may apply to the Institute of
Industrial Property for a compulsory license if the patent is not
worked within the longer of three years following issuance of the
patent application or four years following the filing of the
application, provided the applicant or patentee has not worked it
without a valid reason.
B. UTILITY MODELS
Utility models are objects, utensils, apparatus or tools
that, as a result of a modification to their arrangement,
configuration, structure or form, perform a different function
with respect to the parts forming them or represent advantages
with respect to the usefulness of said parts.
Utility models may be registered before the Institute of
Industrial Property if they are absolutely new and capable of
industrial application. Protection is granted for a non-renewable
term of ten years from the date of filing.
C. INDUSTRIAL DESIGNS
Industrial designs include industrial drawings and
industrial models. Industrial drawings are any combination of
figures, lines or colors incorporated to an industrial product as
an ornament giving it a peculiar aspect of its own. Industrial
models are tridimensional models that serve as molds to
manufacture industrial patterns giving a special appearance,
provided they do not imply technical effects.
Industrial designs may be registered before the Institute if
they are new and are used as a type or mold to make industrial
products and are granted protection for fifteen non-renewable
years.
D. INDUSTRIAL SECRETS
Industrial secrets are defined as any information capable of
industrial application maintained in confidence which may be
useful to obtain or to maintain a competitive advantage in the
performance of economic activities, which confidence the owner
has taken measures to preserve, by labeling information as
"confidential" "secret", or in a similar other manner. An
industrial secret must necessarily relate to the nature,
characteristics or purposes of products, to production methods or
processes, or to the means or forms of distribution or marketing
of products, or the rendering of services.
Information in the public domain, information which may be
obvious to an expert, or information which must be disclosed by
law or by court order, is not considered an industrial secret.
Any confidential information shall not be deemed to be in
the public domain if such information is disclosed to any
authority for the purpose of obtaining any permits, registries,
authorizations or similars.
The protected information may be set forth in documents,
electronic or magnetic media, optical discs, microfilms, films or
other similar instruments.
Industrial secrets may be transferred or licensed to third
parties. Individuals with access to industrial secrets may not
reveal same without justified cause or consent from the owner or
licensee. Individuals or entities hiring employees, or
contracting services from competitors, with the purpose of
obtaining industrial secrets may be liable for damages.
Individuals unlawfully obtaining industrial secrets may also be
liable for damages.
E. TRADEMARKS AND SERVICE MARKS
A trademark is defined as a visible sign or symbol which
distinguishes products or services from others of the same
species or class in the marketplace.
Trademarks may be:
1. any name or visible design which is sufficiently
distinctive or any other means which may identify certain
products or services from other products of the same class;
2. tridimensional forms;
3. trade name and corporate names;
4. personal names unless there is a homonym previously
registered.
Some marks are not registerable, such as:
1. words or designs which are not sufficiently distinctive;
2. the proper, technical or commonly used names of products
or services as well as words which are the usual or generic
designation of the products to be covered;
3. descriptive names or designs;
4. geographic names or any name designating the place of
manufacture of products or rendering of services; names of places
which are known for the manufacturing of certain products;
5. names, figures or designs which are well known in Mexico;
6. any name, form or design confusingly similar or identical
to a previously registered name, trade or service mark or design
to cover the same products or services; and
7. the translation to other languages of unregisterable
marks.
Trademarks and service marks must be registered in order to
grant exclusive right of use thereof.
As a general rule, registration is granted to the first
applicant; however, the first user in Mexico or abroad has a
preferential right to register. Trademarks may be registered for
up to 10 renewable years from the date of filing of the
registration application with the Institute. Use of a trademark
may not be discontinued for more than three consecutive years
without justification, otherwise the registration could expire.
Trade or service marks cover only specific goods or services
within a single class of products. There are no multiple class
registrations.
F. COLLECTIVE TRADEMARKS
Collective trademarks may be registered by legally
incorporated associations of producers, manufacturers, business
people or service providers in order to distinguish their
products or services from those of non-members.
A collective trademark may not be transferred to third
parties, and its use is reserved for the members of the
association.
G. COMMERCIAL SLOGANS
Commercial slogans are phrases or legends that have the
purpose of announcing businesses, commercial, industrial or
service establishments to the public, to easily distinguish them
from others of their kind.
H. TRADE NAMES
Commercial names of companies and trade names of commercial,
service or industrial establishments are protected without need
for registration. The protection is granted in the geographic
zone of the effective clientele of the company, or establishment,
using the trade name and may be extended throughout the country
if there is massive and constant diffusion thereof at national
level.
User may apply for publication of the trade name in the
Gazette of the Institute thus establishing a presumption of good
faith in the use of such name.
Trade names are protected for a specific class of goods or
services. The publication is valid for ten years and it may be
renewed.
I. APPELLATIONS OF ORIGIN
Appellations of origin are names of geographic regions used
to designate a product that originates from said region, and
whose qualities or characteristics stem exclusively from the
region. Mexico is a party to the Lisbon Convention.
J. ROYALTY PAYMENTS
Mexican law does not provide any specific rules governing
minimum or maximum royalties. However, tax authorities have the
right to adjust the taxable profit of the payer if such royalties
are excessive and do not reflect "market value."
K. TRADEMARK LICENSE AGREEMENTS
Trademark license agreements must be notarized, legalized
before a Mexican Consul, and translated into Spanish for
registration purposes. The agreement may provide for payment of
royalties in foreign currency.
Generally, licensing practices may have significant
antitrust implications, i.e., including efforts by the seller or
licensor to restrict by territory purchases and sales of the
licensee. (See Section IV.C. hereinabove).
L. COMPARATIVE ADVERTISING
Comparative advertising is permitted in Mexico if the
comparison of products or services covered by a trademark is done
for information purposes. The Institute may impose fines, close
the business, or place under arrest, for up to 36 hours
individuals who use comparative advertising and publicity that is
misleading, false, or exaggerated, with the purpose of
discrediting or trying to discredit products, services or a
competitor.
In addition the Consumer Protection Agency may also impose
sanctions if the comparison of products is false, misleading or
exaggerated, even if it does not have as a purpose to discredit
or to try to discredit products, services or a competitor. The
sanction in this case could be a fine up to 2,000 times the
minimum daily wage in the Federal District.
M. PARALLEL IMPORTS
Any person may legally import into Mexico products covered
by a registered trademark, for their use, distribution or
commercialization.
The legal licensee of a trademark registered in Mexico which
covers products being imported does not have any action against
the lawful importer.
N. COPYRIGHTS INCLUDING SOFTWARE
Copyright is protected for original intellectual creations
without need for registration. There are two types of rights
granted to authors:
1. patrimonial rights to use or reproduce the work of the
author for profit. This right is effective during the author's
lifetime and 75 years after his death. The protection of
posthumous works lasts 75 years counted from the day of first
publication; and
2. moral rights, which include recognition of authorship
and opposition to any deformation, mutilation or modification
made of the copyrighted work without authorization or opposition
to any action which may decrease the value or prestige of the
work or the reputation of the author. This right is perpetual,
non-transferable, non-waivable and does not expire when an action
to enforce it is not exercised.
The protection of author's rights is granted on the
following types of works: literary, scientific, technical,
legal, pedagogic, didactic, musical, pictorial, design,
engraving, lithographic, sculptural, plastic, architectural,
photographic, cinematic, audiovisual, radio and television,
titles of periodicals, computer programs and on any other work
which could be considered comprised within the generic types of
artistic or intellectual works mentioned above.
The Copyright Law was amended in 1991 to include computer
software within the protected items against unauthorized
commercial exploitation or reproduction in the same terms as the
rest of the items mentioned in the above paragraph.
Invasion of copyrights may be sanctioned with imprisonment
for up to 6 years, and a fine. Violation of moral rights which do
not constitute a criminal offense will be sanctioned by the
General Bureau of Copyrights with a fine of up to the equivalent
of 500 times the daily minimum wage in the Federal District.
Mexico is a party to the Universal Copyright Convention, the
Interamerican Copyright Convention and the Berne Convention.
O. FRANCHISES.
(See Section VII.C. hereinabove).
IX. DIRECT INVESTMENT
A. COMMON FORMS
Private and public Mexican and foreign, investors may invest
in Mexico through different vehicles.
It is important to analyze tax advantages, relationships
with the parent company, need of technical assistance and
technology, availability of deductions, type and size of market,
competitors, suppliers, importance of imports and exports,
projected business and financial plan including growth
expectations, as well as limitation of liability and similar
other factors, before choosing an appropriate vehicle or
structure.
1. Purchase of stock or assets.
Investors may purchase stock or assets of an existing
company, which will enable them to enter into the Mexican market
immediately, taking advantage of the existing operation and its
infrastructure.
2. Registration of a branch.
The investors may decide to open a branch of the parent
company to simplify communication and accounting and consolidate
advantages between the branch and the parent company (See Section
XI. hereinafter).
3. Registration of a representative office.
Frequently foreign investors act as intermediaries or engage
in promotion or similar activities in Mexico, from which they
will not obtain income. Therefore they may decide not to register
a branch but only a representative office without income.
At present FIL provides that foreign companies wishing to
perform commercial activities in Mexico must obtain prior
authorization from the Ministry of Commerce and must register at
the Registry of Foreign Investment. Upon obtaining authorization,
they will be able to register their foreign charter and by-laws
in the Public Registry of Commerce and operate a branch.
Whether a representative office without income in fact
performs commercial activities, i.e., intermediation, and
therefore should request authorization from the Ministry of
Commerce to open a branch and register subsequently in the Public
Registry of Commerce, currently is subject to differences of
opinion.
4. Creation of a subsidiary.
For a variety of commercial and legal reasons and
advantages, foreign investors may prefer to incorporate a new
company in Mexico, enabling them to limit their liability, as the
activities of the subsidiary are legally independent from those
of the parent company (See Section XII. hereinafter).
5. Joint venture companies and agreements.
Foreign investors may enter into a business together with
other persons or companies which often, in a generic way, is
called a joint venture. Partners usually enter into a joint
venture agreement which may either provide for:
a) the creation of a new separate entity or entities, or
restructuring of an existing entity with additional shareholders,
among other modifications ("joint venture company"), or
b) the creation of a "joint venture" whereby one party
(either individual or company) is active and the other inactive
(either individual or company) ("asociación en participación")
that does not lead to the creation of a new entity.
a) "Joint venture company".
Various persons may decide to incorporate a joint venture
company to take advantage of the partners' knowledge of the
Mexican business and industrial sectors, and to join efforts by
bringing capital, technical assistance and technology together.
The new entity or entities, formed or restructured company or
companies, will be used precisely for the purpose determined, for
example, to commercialize products, render services, or build
infrastructure.
Each one of the shareholders, or partners, of the new or
restructured entities may contribute capital, goods, services,
and technology, thus enabling them by their efforts and knowledge
to comply with the corporate purposes. The new or restructured
entity or entities will be a Mexican company, operating in
accordance with the type of company chosen, will pay taxes and
comply with its obligations as a normal company. The types of
entities they may form are analyzed in Section XII.
b) "Joint venture agreement".
If the parties to a project decide not to engage in the cost
of creating a new company, but prefer to execute an agreement of
"asociación en participación" by which they agree to join efforts
for a specific purpose, when the identity of only one of the
partners holds himself out before third parties (active partner),
and the other is what often is referred to as a silent partner,
contributing to the execution of the agreement with capital,
services or otherwise. The parties will agree on how to
distribute profits or share the losses derived from the
operation.
Responsibility before third parties will be that of the
active partner; but he will share responsibility with the silent
partner if the agreement so provides. Therefore, there will not
be any relationship between the silent partner and third parties.
Upon completion of the work or the desired objective the
agreement will terminate. Such an agreement does not create a new
entity, and each of the parties is liable to the other, without
liability limits, as per undertakings in the contract.
For tax purposes the active partner will comply with tax
obligations of their common operation, including registration at
the Taxpayers' Registry and provisional tax payments. Every
fiscal year each one of the active and the silent partners will
have to accrue to their income, during the tax period, that part
of the taxable profit corresponding to each one of them, or if
applicable, they will deduct their proportional tax loss (See
Section XIV. hereinafter).
6. Associations.
Two other forms of entities are the "Asociación Civil" and
the "Sociedad Civil". (See Section XII.C. hereinafter).
B. GENERAL COMMENTS
The Companies Law requires that any company be legally
incorporated and registered in the Public Registry of Commerce.
The representatives of a non-registered company who enter into
operations with third parties will be liable for the execution of
the obligations assumed, jointly and severally, and unlimitedly.
A non-incorporated or non-registered company can obtain
government contracts, sometimes with the commitment to
incorporate thereafter; basically from a practical viewpoint a
non-incorporated company will be unable to, inter alia, hire
local workers, open a bank account, import equipment, obtain work
permits or import or export materials. Moreover, it will not have
a tax number which will make conducting business transactions
virtually impossible.
There are no financing restrictions on foreign owned Mexican
companies, i.e., required debt/equity ratio. Foreign companies
may freely grant financing to companies or individuals resident
in Mexico. Also intercompany agreements such as licenses, rental
agreements, technical assistance agreements, are permitted.
Incorporation and registration costs vary depending on the
complexity of the proposed structure and the type of investment
method chosen. The time to incorporate may run from one to four
weeks depending on availability of necessary documentation and
the domicile of the company.
Business entities must comply, among others, with water,
environmental, tax, federal housing, labor, health, consumer
protection and social security regulations.
X. PURCHASE BY FOREIGN CORPORATIONS OF A BUSINESS IN MEXICO
A. COMMENTS
A foreign investor may decide to enter the Mexican market by
acquiring stock or assets of an existing company.
The first consideration of such foreign investor desiring to
purchase shares should be possible restrictions on the purchase
of assets or stock in a given activity as provided by FIL or
bilateral or multilateral agreements on trade and investment,
i.e., NAFTA. (See Section III.A. hereinabove and for NAFTA
Parties see Section III.B). The Competition Law may also impact
the proposed purchase of shares or assets over a given threshold
level. (See Section IV.C. hereinabove).
Other corporate concerns should also be addressed. For
example, the investor should analyze possible methods of
financing the transaction. (See Section XX. hereinafter). There
also may be restrictive rights of first refusal or other limits
on transfer in the charter or by virtue of a shareholders
agreement, or the shares may be encumbered or pledged.
Apart from these concerns, among others, a standard due
diligence investigation should be conducted on, inter alia,
possible labor and tax liabilities; outstanding loans, liens or
encumbrances on the company and/or its assets; rights of
employees, i.e., seniority and fringe benefits; zoning or
environmental problems; consumer protection considerations; NOMS
and labeling concerns; export or import programs and related
permits; intellectual property rights; immigration
considerations; and contracts or leases. For discussion of the
above see other Sections herein.
The decision of whether to purchase shares or assets should
be analyzed from a tax perspective. For example, if a newly
formed company acquires only assets, not an on-going business,
instead of purchasing shares, a four year exemption from the
asset tax would apply.
The acquisition of an ongoing business (assets and
employees) entails the concept of "employer substitution" for
labor purposes. The purchaser of the business becomes liable with
the former employer for all labor compensations and obligations,
for a period of six months counted as of the date of notification
of the substitution to the employees or to the union; after the
six month period only the new employer will be liable. (See
Section XV. hereinafter).
B. TAXES IMPOSED ON TRANSFER OF ASSETS OR STOCK
A corporation that realizes profits derived from the sale of
assets or shares (often referred to as "capital gains" although
such income classification does not exist in Mexican law), is
subject to tax on the profit obtained. The tax depends on the
legal status of the seller. A Mexican corporation that realizes
gains as a result of sale of assets or shares will accumulate the
proceeds of the sale to other income derived from other concepts
and will pay tax at the rate of 34% on such total accumulated
amount less allowable deductions. (See Section XIV.C.4.
hereinafter).
In case of sale of shares whether seller is a Mexican
individual or a foreign resident, company or individual, such
sale is subject to payment of income tax at the rate of 20% of
the total price, without any deduction, which tax must be
withheld by the purchaser who is jointly liable for such
withholding. However the seller may elect to pay a lesser tax
(30% on the taxable profit) if certain requisites are fulfilled.
(See Section XIV.C.6. hereinafter).
In the case of a sale of assets, special attention should be
given to the price at which each of the assets is sold to avoid
tax problems resulting from application of transfer pricing
rules, and prices should reflect market values. It should also be
noted that goodwill is not deductible for income tax purposes.
The sale of shares through the Mexican stock market is a
non-taxable operation.
XI. BRANCHES
A. GENERAL STATUS OF BRANCHES
Mexican law has always authorized the establishment of
branches of foreign companies, although in practice the procedure
was difficult. With the enactment of the 1973 Foreign Investment
Law which, as a general rule required 51% Mexican capital, it was
practically impossible to obtain the required permit. Since
liberalization towards foreign investment, presently the
establishment of such branches is possible.
There are no income tax advantages to operate through a
branch rather than through a subsidiary; on the contrary, from a
liability point of view a foreign corporation acting in Mexico
through a branch is not a separate legal entity therefore the
foreign company may be liable for the branches obligations. A
parent company is a separate legal entity, unlike a branch, and
therefore, it has no liability for acts of its subsidiary.
B. APPROVAL REQUIREMENTS
As with all Mexican corporations with foreign shareholders
operating in Mexico, a branch must file a declaration with the
Ministry of Foreign Affairs stating that, in case of controversy,
the foreign entity shall be treated as a Mexican national,
agreeing therein not to invoke the protection of its home
government under penalty of forfeiting the subject investment to
the Mexican Nation. Consequently, the foreign entity cannot
invoke the assistance of its home government in a controversy in
Mexico (generally referred to as the Calvo Clause). (Also See
NAFTA Chapter XI Article 1102).
Further, a branch must obtain prior approval from the
Ministry of Commerce and upon compliance with all necessary
requirements, a ruling must be issued within 15 days.
Thereafter, the foreign company must file at the Public
Registry of Commerce the charter and by-laws, a document
detailing the location and its specific business activities,
audited income statements and balance sheets, an affidavit
confirming that the entity has been established in conformity
with the laws of the country of origin, and the permit from the
Ministry of Commerce.
If a foreign company performs commercial activities in
Mexico without having obtained prior approval, the Ministry of
Commerce may impose a fine from 500 to 1,000 times the minimum
salary (currently the daily minimum salary in effect in the
Federal District is N$18.30, therefore the fine may range from
N$9,150 to N$18,300 equivalent to US$1,307 to US$2,614 at the
exchange rate of N$7/US).
Branches cannot operate in activities requiring Mexican
participation, as required in certain activities under FIL. (See
Section III.A. hereinabove)
C. TAXES
Branches of foreign corporations have the same tax
obligations as Mexican companies. Branches are considered
"permanent establishments" for tax purposes and are not subject
to any additional taxes to those paid by Mexican corporations.
However, there is an important disadvantage with respect to
deductions. As a general rule the branch may deduct those
expenses which correspond to its activities in Mexico, but not
remittances made by the branch to the parent company, or another
establishment of the parent company abroad; even if these
remittances are made as royalties, fees or similar payments, or
as commissions for specific services or for services rendered, or
for interest payments for money sent to the branch.
XII. SUBSIDIARIES AND COMPANIES
Business entities are governed by two laws, the federal
Companies Law and the local Civil Code of the respective states.
As discussed in Section III.A., certain sectors are subject to
foreign participation limitations. Another type of company with a
different purpose, the cooperative company, is subject to
specific regulation as discussed in Subsection B. immediately
following.
A. TYPES OF MERCANTILE COMPANIES
Stock corporations are generally the vehicles for foreign
and national investments in Mexico, the most common of which is
the Sociedad Anónima (S.A.) The S.A. may have fixed or variable
capital, in which case the acronym "S.A." becomes "S.A. de C.V."
Any legal entity may adopt the variable capital form, and
may increase and decrease its capital after incorporation
pursuant to the conditions provided for in the charter and the
Law.
In most companies the minimum capital is fixed by law, and
generally, the variable capital is unlimited. Companies may
increase the capital to be subscribed by the shareholders or
partners, which shall be paid in the time periods provided for in
the charter or in the Law. In the event shares are issued, but
are not subscribed, they will be held by the company to be
delivered after the subscription is paid.
The types of business entities provided for in the Companies
Law are the following:
1. "Sociedad en nombre colectivo."
"Sociedad en nombre colectivo" is similar to a partnership,
in which the partners are ultimately and unlimitedly liable for
the company's obligations, jointly and severally.
2. "Sociedad en comandita simple" and "sociedad en
comandita por acciones."
"Sociedad en comandita simple" and "sociedad en comandita
por acciones", are similar to limited liability partnerships
(L.L.C.). These types of companies have one or more general
partners who will be ultimately unlimitedly liable for the
company's obligations, jointly and severally, with one or more
partners having limited liability, who are only liable for the
payment of their contributions. In the "sociedad en comandita por
acciones" the capital will be divided into shares which represent
the rights and obligations of each one of the partners. Such
shares cannot be assigned without the agreement of all of the
partners with unlimited liability and with the agreement of 2/3
of the other partners.
3. "Sociedad de responsabilidad limitada."
"Sociedad de responsabilidad limitada" (S.R.L.), is similar
to a limited liability company, although not currently commonly
used, this company may be incorporated with a minimum capital of
N$3,000 (whereas an S.A. requires N$50,000) and the partners'
liability is limited to the amount of their contribution. This
type of company is oriented toward the personal capacities of its
partners, therefore, to assign or transfer partnership interests
as well as to admit new partners, the consent of partners
representing the majority of the capital is necessary, except,
when the charter provides for a higher percentage. If the
assignment or transfer of partners' interests is to a third
party, the other partners have a right of first refusal to
acquire the partnership interest.
Since the S.R.L. appears to be similar to limited liability
partnerships in the United States (L.L.C.); some observers
comment that they may be considered partnerships for U.S. tax
purposes.
4. "Sociedad anónima."
a) General comments.
As per recent modifications to the Law, the minimum number
of shareholders required is two, with no maximum limit.
The S.A. provides limited liability to its shareholders. A
sole administrator or board of directors may manage the
corporation. The shareholders are the ultimate decision-making
body of the corporation. Shareholders may call ordinary or
extraordinary meetings, in certain cases under the Law or as
provided in the charter. The statutory quorum for shareholder
meetings is one-half of the outstanding shares for ordinary
meetings and three-fourths of the outstanding shares for
extraordinary meetings.
In an ordinary meeting, if a quorum is not present, a second
meeting may be called. The shareholders present at this second
meeting are considered to constitute a quorum. Resolutions in an
ordinary meeting require a majority vote of the shares
represented.
In an extraordinary meeting, if three-fourths of the
outstanding shares are represented, resolutions require the vote
of one-half of the outstanding stock. Even if the extraordinary
meeting is in response to a second call, resolutions are only
carried upon the vote of one-half of the outstanding stock.
Such voting requirements and quorum may be increased by
charter, often referred to as "veto" power.
Foreigners, residents or non-residents, may be members of
the board of directors. Meetings of the board of directors need
not take place in Mexico, however, shareholders meetings must be
held at the corporate domicile.
Resolutions adopted by directors or shareholders outside of
a meeting, by unanimous vote of all of the directors or the
shareholders of the company, by telephone or in any other manner,
shall be valid as long as the resolutions so adopted are
confirmed in writing and the charter so provides.
The shareholders must appoint at least one examiner whose
responsibility is to oversee the administration of the company on
behalf of the shareholders. The examiner may be any person except
the directors of the company, their relatives or employees.
Five percent of annual after-tax profits must be allocated
to a legal reserve account until it reaches 20% of the capital
stock of the company.
b) Capitalization requirements.
The minimum capitalization for the S.A. is N$50,000
(approximately US$7,000 at N$7 per dollar). The initial capital
must be at least 20% subscribed and paid-in, the remainder to be
paid as provided by the shareholders or decided by the board of
directors.
Increases of capital should be resolved at extraordinary
meetings and may not take place until all outstanding capital is
paid-in. The subscription and payment of later increases may be
either agreed to by the shareholders or left to the decision of
the board, if so provided in the charter. A capital increase or
decrease of an S.A. de C.V. does not require an amendment of its
charter, as does an S.A.
The shareholders have a preferential right, in proportion to
the number of their shares, to subscribe shares of any increase
in capital.
In the case of transfers of shares, the charter may provide
for shareholders' rights of first refusal including the terms and
conditions of its exercise, or may provide for board approval in
case of transfers, which can only be denied if the board
designates a purchaser of the shares at market value.
All shares must be registered since bearer shares are no
longer permitted.
Shareholders are liable for unpaid shares and may receive
dividends only in proportion to the amounts paid.
Should the payment for unpaid subscriptions lapse without
payment, the company may request the payment of the value of the
shares through a judicial process or may proceed to their sale.
After one month from the date fixed for the payment, if the
judicial process has not been initiated, or it has not been
possible to sell the shares at a price covering their value, the
company may proceed to reduce the capital accordingly.
Shares paid for in kind are considered fully paid-in.
However, such shares must be held in the treasury of the company
for two years to determine the exact value of such contribution.
If the value at which it was contributed is lower than 25% of the
value of the shares received at the time of such contribution,
the shareholder must pay the difference.
c) Incorporation and registration requirements.
To incorporate a company the shareholders have to agree on a
proposed charter and by-laws and must request prior authorization
from the Ministry of Foreign Affairs for the use of the proposed
corporate name. These documents must be protocolized by a Public
Notary. Foreign shareholders shall grant a power of attorney to a
resident in Mexico to represent them before the Public Notary for
such purpose.
The public instrument issued by the Notary shall be
registered at the Public Registry of Commerce of the domicile of
the company. Other corporate documents, such as, minutes of
shareholder meetings, amendments to the charter and by-laws and
general powers of attorney must also be recorded.
A newly formed company shall register at the Taxpayers'
Registry, as well as with other relevant federal or local
agencies, depending on the nature of the business.
The incorporation and registration procedure herein
mentioned for a "Sociedad Anónima" applies to all types of
commercial companies.
Under Mexican law, attorneys-in-fact acting for a company
must be granted specific powers of attorney. Since there is no
concept of "apparent or implied powers," such powers should be
granted in the charter or, by specific resolution of the
shareholders, the board or, by substitution and delegation from
an attorney-in-fact.
The Civil Code provides for powers of attorney for lawsuits
and collections, acts of administration and acts of dominion.
Each power may be general or special, limited or unlimited, with
respect to amounts or authority or term. To issue credit
instruments, the Law on Credit Instruments requires that the
attorney-in-fact be vested with a specific power for such
purpose.
Any person acting on behalf of the company without such
powers does not bind the company and becomes personally liable to
the company and to third parties.
Directors, acting individually, may also have powers if
granted as per above, i.e., by charter or specific resolution of
shareholders. Directors resident abroad may act as such and
exercise powers abroad. If they act as directors or exercise the
power in Mexico, they must have proper immigration status. (See
Section XXII. hereinafter).
B. COOPERATIVE COMPANIES
"Sociedad cooperativa", is a cooperative company. Although
this type of company is mentioned as another type of business
entity by the Companies Law, it is regulated in a separate law
called the Cooperative Companies Law. The cooperative company is
a type of entity formed by individuals who join their interests
and efforts with the purpose of satisfying their individual and
collective needs through the realization of economic activities
of production, distribution and consumption of goods and
services. These types of companies are used for example, for
fisheries and agribusiness.
C. ASSOCIATIONS
The Civil Codes of the states of Mexico generally follow the
Civil Code of the Federal District which provides for two types
of civil associations: the "asociación civil" (A.C.) in which the
partners decide to carry out a common purpose not prohibited by
law and without a preponderantly economic objective; and the
"sociedad civil" (S.C.) by which the partners join their
resources and efforts to achieve a common purpose, which might
have an economic objective but which should not have profit as
its primary motive.
Associations are incorporated following a procedure similar
to that of commercial companies. (See Subsection XII.A.4.c.
above).
XIII. EXCHANGE CONTROLS
A. EXCHANGE CONTROL REGIME
Convertibility is not restricted in Mexico nor was it ever
controlled except for a relatively short period after the decree
of December, 1982, which was totally abrogated in November 10,
1991. Moreover, no requirements exist for registering direct
foreign investment made in foreign currency to pay dividends or
repatriate capital investments.
The Monetary Law states that any dollar-denominated
operation payable in Mexico may be paid in pesos at the exchange
rate of the day of payment. For such purpose the Bank of Mexico
publishes the official exchange rate daily in the Official Daily
Gazette.
Nevertheless the parties may agree to make payments in
foreign currency to be paid outside of Mexico, in which case the
Monetary Law would not be applicable.
The official monetary policy of the government to date is a
floating peso. At present different alternative monetary regimes
are being discussed.
Foreign currency may be purchased from authorized banks and
exchange houses at quoted rates and upon availability of such
foreign currency.
Although there is no exchange control, bank accounts may not
be denominated in foreign currency, except in a few cases for
individuals and for maquiladoras on the border.
B. CAPITALIZATION AND PAYMENT OF DIVIDENDS
Apart from the general capitalization requirements
discussed in Section XII.A.4.b. hereinabove, no capitalization
requirements apply before a dividend is paid.
Dividends to foreign shareholders are not taxed when
distributed, if they are paid from a net taxed profit account.
(See Section XIV.C.4.m. hereinafter).
There are no limitations on capital remittances imposed when
operations are wound down or dissolved.
XIV. THE TAX SYSTEM
A. GENERAL COMMENTS
The Mexican Constitution contains provisions that govern the
separation of powers to tax among the Federal Government and the
states specifically enumerating the tax powers of each.
In line with such separation, the Federal Government
establishes the income and value added tax as well as all taxes
related to international commerce. Moreover, the Constitution
reserves to the states the right to tax real property and thus
the principal state taxes are the Real Estate Acquisition Tax and
the Real Estate Property Tax.
Any tax, either federal or state, must respect
Constitutional principles related to proportionality and equity,
also must be part of a law enacted according to valid procedures
that establishes with clarity the elements of the tax such as the
subject, object, taxable base, and the respective rate or tariff.
B. ADMINISTRATION
The Ministry of Finance administers federal taxes while the
respective Departments of Finance of each state administer state
and local taxes.
The Federal Government and the states have entered into
agreements providing for tax coordination and administrative
cooperation, and, as a result, each day more states are legally
empowered to collect and audit the correct payment of federal
taxes.
C. INCOME TAX
1. Residency.
The federal Income Tax, regulated by the Income Tax Law, is
the most important tax in Mexico as it produces almost 60% of the
total tax collected. The Law establishes two criteria crucial to
the imposition of tax: residency and source of income. The Law
contemplates these two criteria in three separate chapters
fundamental to taxation of individuals and corporations as
discussed below:
a) Mexican residents are taxed on all income, from
whatever source.
b) Foreign residents, with a permanent establishment or
fixed base in Mexico, are taxed on the income attributable to
such permanent establishment or fixed base. See discussion of
permanent establishment and fixed base in Subsection D. of this
Section, hereinafter.
c) Foreign residents with no permanent establishment or
fixed base are taxed on income attributable to Mexican sources;
and foreign residents, although having a permanent establishment
or fixed base and taxed as per paragraph b) above, are also taxed
on income attributable to Mexican sources not attributable to
such permanent establishment or fixed base. See discussion of
Mexican source income in Subsection C.6. hereinafter.
For tax purposes the Law defines resident as follows:
a) Individuals are considered to be residents of Mexico
when establishing their dwelling place therein, except if they
are in another country for more than 183 days, consecutive or
non-consecutive, and demonstrate acquiring residence for tax
purposes in that country.
b) Companies are considered to be residents of Mexico when
the principal management of the company is conducted therein.
2. Mexican residents.
The Law establishes specific provisions to tax companies
resident in Mexico, including rules for taxation of permanent
establishments; and also specific provisions to tax individuals
and fixed bases.
3. Foreign residents.
The Tax Law contains a specific section addressing the tax
treatment of both foreign individuals and companies, establishes
specific instances in which income shall be considered to be from
a Mexican source, and provides the applicable withholding rate
depending on the type of income.
4. Resident Mexican companies.
The following focuses on the specific structure of the Law.
a) Object of taxation.
Mexican resident companies are subject to tax on all income
received in cash, in kind, in services, in credit or in any other
form obtained during the relevant fiscal year. Mexican resident
companies are also subject to tax on income originating from
permanent establishments abroad. Moreover, inflationary gain is
also considered income.
b) Inflationary gains.
The tax laws of countries with high inflation rates commonly
contain provisions requiring that inflationary gain be included
within the concept of taxable income. Mexico's tax laws have
required that inflationary gain be included in taxable income
since 1987.
The Tax Law defines inflationary gain as income received by
virtue of a real "decrease" in indebtedness. In the calculation
of inflationary gains, which must be done on a monthly basis, the
taxpayer must employ the National Consumer Price Index. This
index measures price increases, i.e., inflation, on a bi-monthly
basis and is published twice a month in the Official Daily
Gazette.
c) Taxable base.
The amount subject to tax, the "taxable result", is
determined by subtracting the legally authorized deductions and
losses carried over from prior fiscal years, from income for the
given fiscal year. Authorized deductions and loss carry over are
more fully discussed in paragraphs f) and l) below, respectively.
d) Fiscal year.
The federal Income Tax must be calculated and paid each
fiscal year. However, taxpayers must still make provisional
monthly or quarterly payments. The fiscal year of companies must
coincide with the calendar year. When a company begins operations
after January 1st, the fiscal year is considered to be irregular,
as the period will not include an entire year, and such period is
considered to begin running on the date in which operations are
commenced and ends the following December 31st.
e) Rate of tax.
The Law provides for a flat rate tax of 34% on all taxable
income of Mexican corporations.
f) Authorized deductions.
In general, the Law allows deduction of all expenses and
investments for a given fiscal period that are indispensable for
the development of the business activity of the taxpayer.
g) Requirements for deductibility.
The Law is very formalistic and thus all requirements
established for deductions must be precisely observed. If the
rules provided are not observed, the deduction will not be
permitted for the related expense.
Some of the more prominent legal requirements for
deductibility are the following:
i) the taxpayer must possess documentation satisfying the
respective tax requirements and such documentation must be
included as part of the accounting records of the corporation;
ii) the taxpayer must withhold the proper amount of tax if
such is required; and
iii) the payment of the related expense must be made with a
nominative check or a bank transfer.
h) Deductibility of interest.
The Law contains specific provisions related to the
calculation of deductions for interest payments and the
accumulation of interest profits to be taxed.
It should first be pointed out that the concept of exchange
gain or loss is included within the definition of interest.
Another important element to consider in the deduction or
accumulation of interest is the fact that the respective
calculations are made monthly and interest is considered to be
accrued daily during the given period. In light of these
provisions, there is no relevance given to the date on which
interest payments are due and/or payable. Thus, interest is
accrued daily even though the calculations are made monthly.
The legal mechanism for the calculation of interests
consists of three fundamental elements:
i) interest receivable: considered to be nominal income of
the taxpayer;
ii) interest payable: considered to be the nominal payments
the taxpayer makes for the concept of interest; and
iii) the inflationary component: serves to measure the
effect of the inflation rate to eliminate from both interest
receivable and payable the distortions caused by inflation.
Thus, the "real" interest income can be calculated instead
of nominal interest income, and "real" interest payments can be
deducted instead of nominal payments.
In general terms, in order to calculate the inflationary
component, the total of all credits and debts of the taxpayer
during the month in question must be considered, averages
obtained, and then multiplied by a monthly adjustment factor,
based on the National Consumer Price Index. After the appropriate
calculations have been made the taxpayer shall accrue any
inflationary gains or deduct any inflationary loss.
i) Deductibility of investments.
The concept of investments includes fixed assets, deferred
payments and charges and payments realized during the start up
period. These investments may be deducted by applying in each
fiscal year the maximum percentage authorized by law which varies
depending on the type of investment.
For example, the maximum percentage authorized for
automobiles is 25% per year, for furniture and office equipment
the maximum is 10%, for pollution control equipment the maximum
is 100%, for buildings the maximum is 5% and for computer
equipment the maximum is 30%.
The respective annual depreciation percentage to be applied
is based on the "original investment amount" determined by
adding, inter alia, the importation, transportation, and
insurance costs, including commission fees, to the original cost
of the asset. The taxpayer may decide to begin taking deductions
in the year the asset is placed into use or in the following
fiscal year.
To reflect the effect of inflation on investments, the Law
permits the taxpayer to adjust the amount of the annual deduction
utilizing the inflationary index. The annual adjustment to the
deduction is considered to be the inflation that has existed from
the month in which the asset was purchased until the last month
of the first half of the fiscal period in which the asset has
been utilized.
j) Non-deductible items.
Certain other items are not permitted as a deduction.
Payments of employee profit sharing are deductible, but certain
specific requirements must be met.
Expenses related to non-deductible investments,
entertainment expenses, fines, indemnification for injuries,
interest for delayed payments, gifts which are not made to
governmental or charitable organizations and premiums which the
taxpayer pays in excess of the nominal value for the redemption
of its own stock are not deductible. Goodwill may not be deducted
or amortized.
The Income Tax, the Asset Tax and taxes paid on behalf of
third parties are not deductible. Payment of VAT and the payment
of the special tax on production and services paid by, or charged
to the taxpayer, are not deductible; however, these taxes are
deductible provided the taxpayer is not entitled to a tax credit
or refund and the expense incurred to carry out the transaction
is deductible.
k) Lump-sum deductions.
The Law establishes that the taxpayer may elect to deduct
the cost of new assets in a lump-sum fashion in a given fiscal
year instead of taking the respective annual deduction in
subsequent fiscal years.
The taxpayer may elect to take such lump-sum deduction in
the fiscal year in which the asset is purchased, the year in
which the asset is placed into use or in the year thereafter. The
deduction is calculated by applying a percentage, which varies
from 66% to 95% depending on the asset, to the amount invested in
the asset. The amount not captured by the percentage may not be
deducted in subsequent fiscal periods. The option is not
available for office equipment and supplies, automobiles, buses,
cargo trucks, motor carriers and aircraft.
This option may only be exercised in cases of investments in
assets used permanently in Mexico, but not in the metropolitan
areas, or areas of the Federal District, Guadalajara or Monterrey
determined by the Ministry of Finance, except for taxpayers whose
income, assets and number of workers do not exceed a given
threshold level. This restriction does not apply to construction
projects on properties declared or catalogued as archaeological,
artistic, historical or patrimonial monuments or to vessels or
containers used in the international transport of goods.
l) Fiscal losses.
A fiscal loss results when the allowable deductions for a
given fiscal period exceed gross income. This fiscal loss may be
used to offset income in the next five fiscal periods. However,
if in the fiscal period during which the loss occurred, there
also is an accounting loss, the period is extended to ten years.
The taxpayer may adjust losses pending amortization to
reflect the effects of inflation based on the inflationary index
for the period covering the first month of the second half of the
fiscal period during which the fiscal loss occurred until the
last month of the same period. The fiscal loss may also be
annually adjusted based on the inflation during the given year.
m) Dividends.
The Law establishes that companies distributing dividends or
profits must calculate and pay a tax of 34% on the result from
multiplying said dividends by a factor of 1.515. The tax on
dividends is the responsibility of the distributing company and
not the responsibility of the shareholder who receives the
dividend.
However, not all dividend payments trigger a tax. Any
distribution made from the Net Taxed Profit Account is exempt
from the above stated tax liability. The Law also provides that
the Account may be adjusted annually to reflect the rate of
inflation based on the National Consumer Price Index. Such
Account is increased by the net taxed profit of each period plus
the dividends received from other Mexican resident companies and
decreased by the amount of dividend distributions.
n) Payment of tax.
There is no obligation to make provisional payments in the
initial year of operations. In the beginning of the second fiscal
year taxpayers must make provisional payments either monthly or
quarterly. Taxpayers who in the prior year have accrued income of
less than N$4,000,000 (approximately equivalent to US$571,000 at
N$7/dollar) are required to make quarterly provisional payments
while those who obtain an accrued income in the prior year
greater than N$4,000,000 are required to make monthly provisional
payments.
Annual tax returns must be paid during the three month
period immediately following the corresponding fiscal year.
Taxpayers must also annually file in February an informational
return detailing activities carried out with the fifty largest
clients and suppliers.
o) Returns for loans from foreign residents.
Taxpayers, receiving loans granted from foreign residents or
guaranteed by foreign residents, must file in January and July of
each year a return setting forth the balance that will be
outstanding as of December 31st of the prior year or as of June
30th of the current year, respectively. The return must also
include the type of financing, the identity of the actual
beneficiary of the interest and the currency in which the loan
payments are denominated, the applicable interest rate, and the
due dates for payments of principal and interest.
p) Liquidation, merger and split-off.
For tax consequences of liquidation, see Section XVI.A.3;
for tax consequences of merger, see Section XVI.B.1; for tax
consequences of split-off, see Section XVI.C.1.
5. Taxation of individuals resident in Mexico.
Individuals resident in Mexico must pay a tax based on the
income obtained during the given calendar year regardless of the
location of the source from which the taxpayer obtained the
income.
The Law contains ten Chapters that provide rules for
authorized deductions in a given income category as well as rules
requiring provisional payments in some instances. The principal
Chapters cover salaries, fees, leases, transfer of property,
entrepreneurial activities, interest and dividends. Individual
taxpayers that receive income from fees, leases, transfers of
property or entrepreneurial activities must make provisional
payments.
The individual taxpayer's annual return must be filed
between the months of February and April of the year following
the year in which the income was obtained. The individual tax
rate for individuals resident in Mexico is progressive and runs
anywhere from 3 to 35%.
6. Taxation of foreign companies and individuals.
Non-resident companies, without a permanent establishment or
fixed base in Mexico, are liable for tax on any income that falls
within the definition of Mexican-source income. The term is
defined broadly and the specific activities included within the
definition will be discussed below.
As previously mentioned, the Law contains a specific Chapter
for taxation of foreign companies and individuals deriving income
from Mexican sources. The tax liability of the foreign resident
is generally satisfied through a withholding by the Mexican party
making the payment abroad who will be liable for the tax if not
withheld.
The withholding must be made on the date of payment or on
the date the debt becomes payable on demand. The withholding and
payment of the tax is considered to be a conclusive payment.
However, those foreign residents subject to tax, who thereafter
in the same calendar year acquire resident status in Mexico, or
constitute a permanent establishment therein, will be able to
classify such withholdings as provisional payments at year end
when preparing their annual return.
a) Salaries and fees.
When a service is provided in Mexico, the source of income
is considered to be Mexico. The first N$38,730 (approximately
US$5,533 at N$7/dollar) of salary earned in a given calendar year
shall be exempt from tax. A withholding tax of 15% is made on the
earnings from N$38,730 to N$311,991 (approximately US$44,570) and
a 30% withholding is made on earnings above this figure.
b) Leasing of real estate and property.
The source of income is considered to be Mexico when the
real estate or chattel is located within Mexico or when capital
goods are used therein. The income derived from the use of these
assets is subject to a 21% withholding tax and no deductions are
permitted. The maker of the payments is responsible for
withholding the tax.
c) Sale of real estate.
The proceeds from sale of real estate in Mexico is
considered to be Mexican source income. There are two manners to
pay the tax on the transaction. The first is through a
withholding of the purchaser of an amount equal to 20% of the
amount obtained without deductions. In the second scenario, the
foreign seller must appoint a representative resident in Mexico,
prior to the transaction, who shall be liable for the tax until
such time as a tax declaration is filed accompanied by an audited
statement of a registered accountant for such purpose. A tax rate
of 35% will be applied to the profit.
d) Sale of shares.
The proceeds from the sale of shares is considered to be
Mexican source income when the company issuing the shares is
resident in Mexico or when more than 50% of the accounting value
of the shares transferred represents real estate located in
Mexico.
The proceeds from the sale will be taxed at 20% unless the
foreign resident appoints a representative in Mexico as mentioned
above and in this case, the tax is 30% of the net profit on the
transaction.
e) Dividends.
The distribution of a dividend of a company resident in
Mexico is considered to be Mexican source income. As mentioned
earlier, the payment of the tax on dividends is the
responsibility of the company paying the dividend. When the
dividend is issued from the Net Taxed Profit Account, there is no
tax liability on the part of the recipient. Dividends are
discussed further in paragraph 4.m) above.
f) Interest.
When capital is invested or placed in Mexico, the interest
income derived therefrom is considered to be Mexican source
income as are interest payments claimed as a partial or total
deduction by a permanent establishment or fixed base in Mexico.
Depending on the liability underlying the credit and the specific
characteristics of both the creditor and debtor, one of three
withholding rates shall be applied to such interest income:
i) A 15% withholding tax is applied to interest payments
made to, inter alia, foreign banks upon compliance with
disclosure requirements imposed by tax authorities; however, the
Law, in Transitory Articles, establishes that a rate of 4.9%
shall be applied to interest payments falling within this
category until December 31, 1995.
ii) A 21% withholding tax is applied to interest payments
made to Mexican credit institutions or when the credit is used to
pay foreign suppliers for the sale of equipment or machinery and
in general for credits used to purchase inventory or for
marketing, provided that the tax authorities are furnished the
required financial information. However, the Law, in Transitory
Articles, establishes that a rate of 10% shall be applied to
interest falling within this category until December 31, 1995.
iii) A 35% withholding rate shall be applied to interests
deriving from credits used for other purposes.
In addition, interest payments for credits granted to the
Mexican government, or credits granted for terms greater than
three years guaranteed by financial institutions located abroad
dedicated to the promotion of exports when such institutions are
registered before the Ministry of Finance, or credits issued by
foreign financial institutions in favor of institutions
authorized to receive deductible donations, are exempt from
income tax.
g) Financial leases.
When the property leased under a financial lease, is located
in Mexico, the proceeds are considered to be Mexican source
income. The withholding rate is 15% of the amount considered to
be interest payments. However, Transitory Articles to the Income
Tax Law establish that until December 31, 1995, the applicable
withholding rate will be 10% rather than 15%.
h) Royalty payments.
The definition of royalty includes payments for the use or
exploitation of intangible goods as well as the payments for
information relative to industrial, commercial or scientific
know-how, and in general, for payments made for technical
assistance or transfers of technology. The source of income is
considered to be in Mexico when the property or rights for which
royalty payments are made are utilized in Mexico, or when the
payments are totally or partially deductible by a permanent
establishment or fixed base in Mexico.
Two withholding rates exist and are applied depending on the
concept for which the payment is derived. When the payment
derives from the right to use patents, invention certificates,
trademarks, trade names, commercial names or advertising, the
applicable withholding rate shall be 35%. When the royalty
payments are made for the use of commercial or scientific
information, technical assistance or the transfer of technology
and, in general, for the use and exploitation of works protected
by copyright or other intangible goods, the applicable
withholding rate shall be 15%.
i) Construction services.
When construction, maintenance, installation or erection
services are provided, or inspection or supervisory services
related thereto are provided inside Mexico, the source of income
is considered to be Mexico. The withholding rate will be 30% on
the total revenues obtained without the benefit of deductions.
However, there is an option, if a representative is named in
Mexico, as per procedures referred to in paragraph c) above, of
paying 34% on the net profit derived from the transaction instead
of 30% on the total revenues. The tax is payable on conclusion of
the work.
7. Special regimes.
The Law provides that certain Mexican companies will pay a
reduced rate of tax if engaged in activities in specific sectors.
There is a 50% reduction of the tax if the taxpayer exclusively
engages in farming, ranching, fishing or forestry activities; the
tax will be reduced only by 25% if these taxpayers also
commercialize their products, or carry out such commercial or
industrial activities from which they obtain as a maximum 50% of
their gross income. There is also a 50% tax reduction if the
company carries out editing or publishing activities.
D. PERMANENT ESTABLISHMENT AND FIXED BASE
Non-residents with a permanent establishment or fixed base
in Mexico are taxed on income attributable to such permanent
establishment or fixed base. Non-residents without a permanent
establishment or fixed base in Mexico are taxed on Mexican-source
income only.
1. Definition of permanent establishment.
For income tax purposes the term "permanent establishment"
means any place in which business activities are wholly, or
partially, carried on. The term incorporates branches, agencies,
offices, factories, workshops, installations, mines, quarries and
any other place of exploration for or extraction of natural
resources. The federal tax law stipulates that the following
activities do not constitute a permanent establishment:
a) the use of maintenance or facilities solely for the
purpose of storage or display of goods or merchandise belonging
to the non-resident;
b) the maintenance of a stock of goods or merchandise
belonging to the non-resident solely for the purpose of storage
or display, or for processing, by another person;
c) the maintenance of a place of business solely for the
purpose of acquiring goods or merchandise, or for collecting
information for a non-resident;
d) the use of a place of business solely for the purpose
of carrying on, for the non-resident, any activity of a
preparatory or auxiliary character, such as advertising, supply
of information, scientific research, preparation for loan
placements and similar activities; and
e) the deposit of goods or merchandise of a non-resident
in a bonded warehouse, or the delivery of such goods or
merchandise for import into Mexico.
2. Agency relationship.
The activities of an individual or legal entity acting on
behalf of a non-resident in Mexico may be considered a permanent
establishment or fixed base with respect to all the activities
performed on behalf of the non-resident. In the following
situations an agency relationship will lead to tax liability as a
permanent establishment or fixed base:
a) if the agent has and exercises authority to conclude
contracts in the name of the non-resident to carry out business
activities in Mexico or to render independent personal services;
b) if the agent has a stock of goods or merchandise out of
which he makes deliveries on behalf of the non-resident;
c) if the agent incurs risk on behalf of the non-resident;
d) if the agent acts under detailed instructions or under
the general control of the non-resident;
e) if the agent engages in activities that economically
correspond to the non-resident and not as a person acting
independently; and
f) if the agent receives a fixed remuneration which is not
dependent on the results of his activities, unless the agent is
truly an independent contractor.
3. Definition of fixed base.
A fixed base in Mexico through which a non-resident
individual, association or company renders independent personal
services is treated as a permanent establishment. Fixed base is
defined as any place in which independent personal services are
rendered or where an independent profession is exercised.
4. Tax rules.
a) General requirements.
Permanent establishments and fixed bases must keep records
separate from their head office and their net profits must be
determined on the basis of the accounting records of such
offices.
Business companies not resident in Mexico that have one or
more permanent establishments in Mexico must, in calculating
taxable profits, compute all receipts attributable to those
establishments and claim deductions attributable thereto,
including those incurred abroad.
Likewise, non-resident entities with one or more fixed bases
in Mexico may take the deductions corresponding to the activities
of such bases, whether incurred in Mexico or abroad, even if they
are allocated on a proportional basis between the Mexican base
and the head office or establishments located abroad.
b) Remittances to head office.
Remittances by a permanent establishment located in Mexico
to the head office or other establishments located abroad, are
not allowed as deductions even if they represent royalties, fees
or similar payment for patents or rights, commissions or
interests.
c) Computation of taxable income.
The cost of goods sold of permanent establishments in Mexico
is deducted under the general rules previously discussed for
resident entities. The cost of goods received from the head
office or from another foreign establishment of the taxpayer may
not be greater than the value declared for customs purposes.
The profits of permanent establishments of foreign entities
are subject to corporate income tax in a similar manner as local
corporations. Permanent establishments of foreign entities must
keep a special account known as a capital remittances account.
Distributable profits of each tax period and remittances received
from the head office or other establishment abroad are added to
this account. Conversely, cash payments and other remittances
made to the head office or other establishments are deducted from
this account.
All profits remitted to the head office or other
establishments located abroad, including those arising from
termination of activities, are exempt from income tax when
remitted out of the capital remittances account. However, they
are subject to a withholding tax when not remitted out of this
account.
Interest paid by a resident company or permanent
establishment of non-residents located in Mexico, to a resident
or non-resident company, may be treated as a dividend in certain
instances.
E. OTHER TAXES ON CAPITAL AND TRANSACTIONS
1. Business Asset Tax.
A tax on assets must be paid in addition to income tax.
Corporate and individual income tax actually paid on business
income during the same period may be credited against this tax.
This tax must be paid by; resident legal entities, resident
individuals engaging in business activity, non-residents with a
permanent establishment with respect to assets attributable to
the establishment, non-residents maintaining stock which has been
transformed or will be transformed by a taxpayer, and entities
granting the use or temporary enjoyment of assets used in
activities by the aforementioned entities but only with respect
to such assets (i.e. maquiladoras).
The tax is the annual average of assets less the annual
average of eligible liabilities with resident enterprises. A set
of rules exists to determine net worth for the purposes of this
tax.
The tax is not levied during the year in which activities
are started (independent of the year in which the company was
incorporated), and the following three years of operations, nor
during liquidation. Since the fiscal year must coincide with the
calendar year, the first year may be a partial year. This
exemption does not apply to companies that have simply changed
their corporate structure, for example, a company that is the
result of a merger (See Section X.A hereinabove). The tax is
levied at the rate of 1.8%. Taxpayers are required to make
advance payments on the same dates on which advance payments of
income taxes are due.
2. Value Added Tax.
Mexico has a value added tax (VAT) which is levied on the
transfer of goods, rendering of independent services, granting of
temporary right to use goods, and import of goods and services.
Exports and some other specified items are subject to the
zero-rate, such as basic foodstuffs (meat, milk, corn, wheat) and
medicine, agricultural services related to the production of
basic foodstuffs. The general VAT rate is 15%, except in the
border area in which the general rate is 10%.
a) Transfers.
A wide variety of transfers in Mexico are defined as
transfers of goods and thus are subject to VAT. Any transfer of
property leads to VAT liability, including sales where the seller
holds title from the outset as in installment contracts.
A transfer is considered to be carried out in Mexico under
the following circumstances:
i) if the transferor physically delivers the property in
Mexico;
ii) if at the time of delivery the property is located in
Mexico;
iii) if the property in question should be registered in
Mexico, regardless of the physical location of the property,
provided the transferor is a resident of Mexico or a permanent
establishment or fixed base of a non-resident; and
iv) with respect to intangible property, if both the
transferor and the recipient are domiciled in Mexico.
Several transfers are exempt from the VAT. Inheritances and
transfers of land are exempt as are gifts in certain instances.
Perhaps most importantly transactions involving foreign currency,
stocks and bonds may also be exempt.
b) Temporary use.
The temporary use of goods is also included and generally
incorporates the leasing of machinery or other intangible
property for consideration. Special rules exist for computer
programs and their transfer or use.
c) Imports.
A wide variety of imports are subject to VAT. Any use of
intangible property granted or transferred to a Mexican resident
by a non-resident is also subject to VAT, as well as services
rendered by non-residents that benefit companies or enterprises
inside Mexico.
Services provided with respect to international
transportation, imports in several instances, temporary imports,
goods in transit or transhipment, are not subject to VAT. Also
exempt are imported goods and services if such are exempt from
VAT inside Mexico or subject to the zero rate.
d) Services.
Numerous services are covered under the Law. Any act carried
out to discharge an obligation is taxed regardless of the
underlying obligation. Specific services are also covered, such
as, transportation of goods and individuals, insurance and
reinsurance, guarantees, mediation, agency, representation,
brokerage, technical assistance and transfer of technology.
A service is considered to be provided in Mexico if a
resident of Mexico wholly or partially provides the service.
A special case exists for international transportation. If
the trip begins in Mexico the service is considered to be
provided in Mexico regardless of the nationality of the operator.
For air transportation, including transportation to border areas,
only 25% of the service is considered provided in Mexico.
Numerous services are exempt, such as services provided by
employees, interest in certain instances, i.e. interest on the
financing of transactions not subject to VAT or those subject to
the zero rate and interest received for financing secured by
mortgage.
e) Exports.
Most exports are subject to the zero rate. Any enterprise
resident in Mexico qualifies for the exemption. The definition of
export is complex and includes the following transactions:
i) any export of a good which is listed in customs law;
ii) any transfer of intangible property from a resident to
a non-resident;
iii) any granting of the right to use intangible property
abroad by residents of Mexico;
iv) the providing of technical assistance, technical
services, or intellectual interchange abroad by residents of
Mexico;
v) any final preparation and packaging of goods destined
for export by residents of Mexico;
vi) the transportation of goods exported abroad by
residents of Mexico;
vii) the providing of services abroad related to publicity,
commissions and brokerage, insurance, reinsurance, guarantees and
other financial transfers by a resident of Mexico; and
viii) transfer of goods by residents to enterprises
exclusively engaged in the export of goods or to in-bond assembly
enterprises in compliance with rules established by the Ministry
of Finance.
f) Computation of tax and miscellaneous.
The computation of VAT is based on the value of the good or
service. Provisional payments must be made on the same dates as
provisional payments for income tax purposes. The amount of the
provisional payment will be the difference between the tax which
corresponds to the total of activities carried on in the period
for which payment is made and the amounts for which accreditation
is due.
Creditable tax is understood to be an amount equivalent to
VAT which has been transferred to the taxpayer, plus the VAT that
he has paid for the importation of goods or services in the
corresponding period. If the creditable tax is greater than the
VAT due for the period, resulting from the taxpayer's income from
transfers, services or use, the difference will be considered a
tax credit. The taxpayer may apply this credit to VAT due in
subsequent provisional payments or may apply for a refund.
The only instance in which a creditable tax may be
transferred is through merger.
Taxable persons are required to specifically and separately
shift VAT to persons in receipt of the goods, enjoying the use of
or right to use the goods, or receiving services subject to VAT,
indicating such tax on the invoice. Nevertheless, VAT must be
included in the quoted price of goods and services purchased by
the final consumer.
When tangible goods are imported they are subject to customs
duties and VAT. Both must be paid before customs clearance is
granted. If a sale is made on credit to consumers with terms
exceeding twelve months, and more than half the price is paid
after six months, regulations allow for the deferment of VAT
payments.
F. MEXICO'S TAX TREATIES
Mexico has executed treaties to avoid double taxation and
prevent tax evasion with Canada, France, Sweden, Germany, the
United States, Spain, Netherlands, the United Kingdom and
Switzerland. The treaties with Italy and Korea will be in effect
on January 1st., 1996.
Mexico's tax treaty with the United States, effective as of
January 1, 1994, among other things, reduces withholding taxes on
interest, royalties and capital gains.
The Mexican government has also initiated tax treaty
negotiations with Belgium, Finland, Norway, Singapore and other
countries.
XV. LABOR
The labor force in Mexico is generally young (one half of
the population is under 20) and readily available for unskilled
and semi-skilled work throughout the country. Skilled and
managerial level employees are also available in the large
metropolitan centers.
The economically active population in Mexico is
approximately 26 million. About 34% are employed in the service
sector, 13% in agriculture and fishing, 20% in commerce and
distribution, 17% in manufacturing, 6% in construction, 6% in
transportation and 4% in mining. A sizable portion (approximately
25%) of the labor force works in the informal sector, i.e.,
unregistered for tax purposes or for social security benefits.
The Federal Labor Law of 1970 governs all aspects of the
employer-employee relationship, including collective bargaining,
the right to strike, minimum wage rates, work hours and
compensation, and occupational health and safety. The Law
establishes employee rights that go well beyond the guarantees
provided in many industrialized countries. For example, employees
are entitled to mandatory profit sharing, may only be dismissed
for a limited number of justifiable causes and enjoy the right to
severance pay upon unjustifiable dismissal as well as seniority
pay.
Labor legislation is predominantly the province of the
Federal Government. However, state labor boards may enforce the
federal labor law within their jurisdiction, except for specific
cases in which the Federal Government maintains exclusive
enforcement jurisdiction.
Any individual rendering services to another individual or
entity, under supervision or subordination is considered an
employee. This is a concept not to be ignored in drafting
independent contracting agreements.
In a transfer of an on-going business, the transferee
becomes a substitute employer of the transferor and acquires all
the transferor's obligations towards the latter's employees. The
transferor is jointly obliged to such employees for six months
after notice of such transfer is served to the Labor Board. (See
Section X.A. hereinabove).
A. UNIONS
The Law provides that groups of 20 or more employees,
irrespective of whether or not they are employees of the same
company, may form a labor union. That is, if there is a company
with less than 20 employees, its employees may affiliate with
another union and request the companies the execution of a
bargaining agreement. Over one half of the nonagricultural labor
force is unionized. Labor unions are particularly strong in the
oil and petrochemical sector, mining, education, banking,
transportation, entertainment, textile, restaurant, electric
energy, soft drinks, automobile and communications. The largest
and most influential labor union in Mexico is the Confederation
of Mexican Workers (CTM).
The main unions frequently support the ruling party, the
PRI. Many of their members form part of the government as
municipal authorities, state governors, representatives and
senators.
Strikes are recognized and protected by law as a tool at the
service of the workers for obtaining improved benefits and
working conditions. Although legally the labor authorities may
only resolve the legality of a strike once started, they
vigorously intervene in order to conciliate interests in order to
avoid work stoppages.
B. LOCAL EMPLOYEE REQUIREMENTS
Pursuant to the Law at least 90% of a company's employees
should be Mexican nationals, except for directors, administrators
and other managerial level employees. In practice, this rule is
not significant since foreign nationals require proper
immigration documentation in order to be employed. Such
immigration authorizations are normally restricted to upper level
positions. (See Section XXII hereinafter).
C. GENERAL LABOR REGULATIONS
1. Wages.
The government is not empowered to mandate salary increases,
with the exception of the minimum wage. The National Minimum Wage
Commission periodically sets the minimum wage rate by
geographical area. At present, the daily minimum wage in Mexico
City is N$18.30. The Commission also sets specific ranges of
minimum wage rates for a number of occupations.
During the 1980's, spiraling inflation in Mexico led to
several minimum wage adjustments per year. During the last years
of the 1980's and until late 1994, inflation was tempered as a
result of labor management and the government establishing wage
parameters through national agreements such as the Economic
Solidarity Agreement and the Economic Stability and Growth
Agreement. While these national agreements kept wages in check,
their terms were a framework for the establishment of wages.
The last of the series of national agreements was renewed in
December 1994 and was to be in force until December 1995, but in
January 1995 the Unity Agreement to Overcome the Economic
Emergency was announced. This agreement was complemented by the
Action Program to Reinforce the Agreement to Overcome the
Economic Emergency which included a mandatory minimum wage
increase of 12%.
2. Working hours.
Under the Federal Labor Law, the maximum work week is
determined depending on the work shift.
There are three types of work shifts:
a) Day work shift.- From 06:00 A.M. to 08:00 P.M., with a
maximum of forty-eight hours per week.
b) Night work shift.- From 08:00 P.M. to 06:00 A.M., with
a maximum of forty-two hours per week.
c) Composite shift.- Includes hours of the day and night
shifts. The night shift hours must be 3 and a half hours at most.
If more, then it becomes a night shift. Maximum number of hours
per week amounts to forty-five hours.
Workers are entitled to at least a thirty minute break.
Overtime is permitted by the Law.
3. Rate of overtime.
Workers may only work up to three extra hours in a single
day for which they are entitled to a double pay.
If workers render their services on their rest day, they are
entitled to a double pay plus their salary corresponding to that
rest day.
If workers render their services on Sunday they are entitled
to a 25% premium.
4. Rest days.
Workers shall enjoy one fully paid day of rest for each six
days of work. Saturday working hours may be spread on the other
weekly working days.
Compulsory holidays are observed on January 1st, February 5,
March 21, May 1st, September 16, November 20, December 1st every
six years, December 25 and the day fixed by the Elections Law to
exercise the right to vote.
5. Benefits.
Fringe benefits are high relative to total payroll
costs. Employee benefits are compulsory under the Labor Law. The
most significant fringe benefits are the following:
a) Paid vacations.
After one year of employment, an employee is entitled to a
vacation of six working days, increasing by two days for each of
the next three years of service. Thereafter, the vacation period
increases by two days for every additional five years of service.
Years of Service No. of vacation days
1 6
2 8
3 10
4 to 8 12
9 to 13 14
etc.
Workers are entitled to a vacation premium of 25% over the
salaries of their respective vacation days.
b) Christmas bonus.
Employees are entitled to an annual bonus of not less than
fifteen days' salary payable on or before December 20.
c) Housing fund.
Employers must contribute 5% of payroll, up to a maximum
equal to ten times the statutory minimum wage, to the National
Workers' Housing Fund Institute. The housing contribution is
deposited in an interest-bearing bank account in the employee's
name. Employees may use the funds to purchase, repair, or remodel
their homes based on a preference policy followed by the
Institute. The net fund balance, if any, will be paid to the
employee in the case of total disability, retirement or death.
d) Retirement savings fund.
Employers must contribute 2% of payroll, up to a maximum
equal to 25 times the statutory minimum wage, to the Retirement
Savings Fund. This contribution is deposited in an
interest-bearing bank account in the employee's name. Employees
may use this fund once retired.
e) Profit sharing.
Profit sharing is compulsory for all businesses, regardless
of size or organizational structure (i.e. whether organized as a
partnership, corporation or sole proprietorship). Employees are
entitled to receive an amount equal to the percentage determined
by the National Commission on Profit-Sharing. This percentage
currently amounts to 10% of the taxable income as calculated for
income tax purposes under the terms of the Income Tax Law.
In businesses whose income is derived exclusively from
personal services, the amount of profit share is capped at one
month's salary.
The mandatory profit sharing does not apply in the following
cases:
i) newly established entities, during the first year of
operation;
ii) newly established entities engaged in manufacturing a
new product, during the first two years in operation;
iii) entities engaged in mining, during the exploration
period;
iv) public and private welfare institutions; and
v) businesses whose capital and/or gross income do not
meet certain minimums established by the Ministry of Labor.
Distribution of profit-sharing must be made no later than
May 30.
The officer with the highest level of authority is not
entitled to a share of the company profits. Workers holding
confidential positions will have a share in the company's
profits; however, if their salary is higher than that of the
highest paid unionized worker (or in the absence of a union, the
non-confidential worker), such salary plus 20% will be considered
as the maximum salary for profit sharing distribution which is
made on the basis of salary earned and days worked during the
fiscal year.
Temporary workers shall be entitled to their share of the
profits, provided they have worked at least sixty days during the
respective year.
6. Social security.
All non-governmental employers must register with the
Mexican Social Security Institute (IMSS) and register their
employees. Social security quotas are paid by both the employer
and the employee (via withholding) to the IMSS every month taking
as a basis the daily salary received by the workers. This
contribution basis has a cap equivalent to 25 times the minimum
wage. Social Security benefits cover work risks, general sickness
and maternity, disability, old age, unemployment at an advanced
age and death; children's nurseries and retirement. (See 5.d.
above).
IMSS maintains medical clinics and hospital facilities
throughout Mexico and provides services free of charge to
eligible employees and their families. IMSS pays 100% of an
employee's salary in the event of job-related accident or illness
in case of temporary disability. It also pays a percentage of an
employee's salary where the employee is permanently disabled and
remits benefits to heirs in case of death from job-related
causes.
The quotas regarding the work risks insurance depend on the
risk class applicable to the field of employment. Until 1995,
IMSS determined the risk class and applicable premium percentage
for employee classes in Mexico. Beginning in 1995, however, the
employee's risk class and the applicable percentage contributions
shall be determined by the employer, based on procedures set
forth in the Social Security Regulations.
An employee may obtain pension benefits upon retirement at
65 or earlier as per the Social Security Law. There is no legal
mandatory retirement age.
D. LABOR REGULATIONS AND FOREIGN EMPLOYEES
Foreign personnel is subject to the same legal requirements
as Mexican employees and are treated equally both in benefits and
sanctions.
E. EMPLOYMENT CONTRACTS AND TERMINATION
Apart from the requirements under the Law, the employment
contract sets the conditions for the employee's services,
especially a description of his or her services, compensation and
working hours.
Employment contracts are for an indefinite period unless
terminated for justifiable cause. An employer may only
justifiably dismiss an employee without liability if the latter
incurs in any of the causes foreseen in the Law, such as,
presenting false certificates misrepresenting his capabilities,
negligence, disclosure of manufacturing secrets, unjustified
absences in a 30 day period, and insubordination. The Law
obligates employers to give employees written notice of their
justified dismissal.
An employee may appeal his termination to an administrative
labor dispute board. At the administrative trial, the employer
has the burden of showing that the worker engaged in one of the
specific culpable acts contained in the Law, and that the
employer gave the employee written notice of such justified
dismissal. If the employer fails to meet this burden, the
employee may request either: 1) reinstatement to his previous
job, or 2) severance equivalent to three months plus twenty days
of wages per year of employment at integrated full salary, a
seniority bonus equivalent to twelve days of wages per year of
services rendered, with a cap of twice the minimum wage as well
as any fringe benefits accrued.
The right to reinstatement will not apply to certain
employees who occupy positions of trust with their employer or
who have been employed less than one year.
Employment may be for a defined term provided the purpose of
such employment is specific and has a determined timetable. If
the specific work is prolonged, the employee cannot be dismissed
or replaced until such work is terminated.
XVI. DISSOLUTION OF BUSINESS ENTITIES
The Companies Law provides for several cases of dissolution
of business entities, including dissolution and liquidation,
merger, transformation and split-off.
Another form of extinction of a business entity is a
consequence of bankruptcy proceeding.
A. DISSOLUTION AND LIQUIDATION
1. Legal causes for dissolution.
The Companies Law contains five causes for dissolution of
business entities:
a) expiration of the term provided for in the company's
charter;
b) impossibility to realize the principal purpose of the
company as per corporate charter, or completion of said purpose;
c) the agreement of all of the partners or shareholders
adopted in accordance with the company's charter and the Law;
d) reduction of the number of partners or shareholders to
less than the minimum provided for by Law or ownership of all
partnership interests or shares by one person; and
e) loss of two-thirds of the capital stock.
Once the company has evidence of the existence of the causes
of dissolution, the administrators should call for a general
shareholders or partners meeting in order that this situation be
noted and the proper measures taken. Although the Law seems to
call for an automatic dissolution, in practice there is no such
automatic procedure. The partners or shareholders shall adopt a
resolution at a meeting which will be recorded in the Public
Registry of Commerce. The legal personality of the company
continues until final liquidation. The auditors of the company
will usually put a note on the balance sheet of the company
reporting the cause of dissolution.
If the registration is not made, even though the cause for
dissolution exists, any interested party may appear before the
judicial authority in a summary proceeding in order that said
authority orders the registration of the cause for dissolution.
The directors or administrators of the company should not
engage in new operations after the expiration of the term of the
company, after the resolution of dissolution, or after having
evidence of the existence of a cause of dissolution. If they
breach these prohibitions, they may be jointly liable for the
operations they perform.
2. Liquidation.
After the dissolution of the company has been agreed by the
partners or shareholders, the company shall be liquidated. The
liquidation shall be in charge of one or more liquidators who
will be the legal representatives of the company and will be
liable for the acts performed in excess of their duties. The
partners or shareholders, by unanimous vote, should appoint the
liquidators when approving the dissolution. The administrators of
the company shall continue to discharge their duties until the
designation of the liquidators is recorded in the Public Registry
of Commerce.
Among the duties of the liquidators are the following: to
conclude the operations of the company pending at the time of the
dissolution, to collect all amounts due to the company and to pay
its liabilities, and to sell the goods of the company.
The liquidators shall prepare a final balance sheet in which
they determine the amount corresponding to each partner or
shareholder of the remaining capital account. The final balance
sheet of liquidation shall be published three times once every
ten days in the Official Daily Gazette of the company's domicile.
The shareholders may present their claims to the liquidators
within the following fifteen days counted from the date of the
publication. After this term is over, the liquidators will call a
general shareholders meeting for final approval of the balance
sheet. Once the balance sheet is approved the liquidators will
pay each partner or shareholder the corresponding amounts against
cancellation of their share certificates and will proceed with
the cancellation of the registration of the company at the Public
Registry of Commerce once the liquidation is concluded.
Liquidation in kind is possible and may include assets such
as patents and trademarks to which the shareholders may have
attached a value.
3. Tax consequences.
Within the month following the date of termination of the
liquidation, the liquidator shall file before the tax authorities
the final tax return of the fiscal year of liquidation. If the
total liquidation of the assets may not be terminated within the
six months following the date in which the company started its
liquidation process, the liquidator shall file tax returns every
six months until total liquidation of the assets.
The liquidator should request the cancellation of the
registration of the company at the Taxpayer's Registry.
The amounts received by the shareholders as reimbursement of
capital will be tax free, as long as they are paid out of the Net
Taxed Profit Account. (See Section XIV.C.4.m) hereinbefore).
Liquidators are jointly liable for tax amounts which should
have been paid on behalf of the company during the liquidation
process, except if the company filed all notices and information
in accordance with and as provided by Law.
4. Labor consequences.
The liquidator shall have to pay the workers compensation
calculated in the same terms as for termination of the labor
relationship. (See Section XV.E. hereinabove).
Provisions of the Labor Law contemplate the right of
employers to demand the termination of the collective labor
contract and of work relationships by bringing an action before
the competent board of conciliation and arbitration when there
are justified causes, including any clear evidence of
unprofitability in the operation.
The purpose of formally notifying the labor board is to
establish a basis for negotiation with the union or the workers,
to pay a reduced compensation to the workers. If the union or
workers object to said negotiation, they have the right to
request payment of the total indemnity calculated on the basis of
their "integrated" salary.
B. MERGER AND TRANSFORMATION
The merger of companies should be approved by an
extraordinary shareholders meeting of each company and the
resolution of merger should be recorded in the Public Registry of
Commerce and published in the Official Daily Gazette of the
domicile of each merging company. Each company shall publish its
last balance sheet and those companies which are merged into the
surviving company should also publish the manner in which their
liabilities will be satisfied.
The merger will produce effects three months after the
registration of the merger resolution in the Public Registry of
Commerce giving creditors of the merged companies the opportunity
to oppose such merger, in which case, the merger may be suspended
upon court resolution recognizing the opposition.
Upon expiration of the three month period the merger becomes
effective; the surviving company or the newly created company
shall acquire all rights and obligations of the merged companies.
However, the merger may produce effects upon the
registration at the Public Registry of Commerce if: 1. the
surviving company agrees to pay all liabilities of the merged
companies, or 2. if the amounts owed are deposited in a bank, or
3. the creditors have granted their consent to the merger.
A business entity may change its legal form to another type
of company by following the same procedure as herein mentioned,
i.e., a S.R.L. or S.C. to S.A. (See Section XII hereinabove).
1. Tax consequences.
The merger of companies shall produce the following tax
effects:
The surviving company shall present a notice of merger to
the tax authorities within the month following the date of the
merger.
It is necessary to present notices of cancellation of the
registration at the Taxpayers' Registry for each merged company,
attaching copy of the minutes of the shareholders meeting
containing the resolution of merger. The merger of companies
entails the obligation to audit the financial statements of the
surviving company and of the merged company by an independent
public accountant.
The surviving company shall present the last annual tax
return of the merged company.
The Income Tax Law does not consider for income tax purposes
that a merger produces transfer of property among the surviving
company and the merged companies if the shareholders owning at
least 51% of the shares with voting rights of the surviving
company, or of the newly created company do not transfer their
shares during a period of one year counted as of the date in
which the notice of merger is presented before the tax
authorities.
If real estate property is transferred as a consequence of
the merger, the surviving or newly created company shall pay the
Real Estate Acquisition Tax at the rate prevailing in each state,
which currently throughout Mexico is 2% on the value of the
property.
No VAT shall be paid in connection with property transferred
as a result of a merger of companies. The balance of the Net
Taxed Profit Account of the merged company may be transferred to
the surviving or newly created company. Fiscal losses pending
amortization in the merged company are not transferable to the
surviving company.
2. Labor consequences.
A merger entails the transmission of an economic entity,
therefore, for labor purposes, a substitution of employer takes
place. (See Sections X.A. and XV. hereinabove).
3. Industrial property.
The Industrial Property Law considers that a transmission of
the rights on registered patents and trademarks takes place as a
result of the merger of companies, except if the parties agree
otherwise, or the existing licenses prohibit such transfer. It is
necessary to register the resolutions of merger at the Mexican
Institute of Industrial Property in order for said office to take
note of the new authorized user or owner of patents or
trademarks.
C. SPLIT-OFF
A split-off takes place: 1. when a company, without
continuing in existence transfers all or part of its assets,
liabilities or capital stock to one or more new companies; or, 2.
when the company transfers part of its assets, liabilities and
capital stock to one or more new companies and continues in
existence.
A split-off can only be agreed by resolution of the partners
or shareholders meeting adopted by the majority required for the
modification of its charter.
Each one of the shareholders or partners of the original
companies must have the same proportion in the capital of the new
companies as they had in the original company.
The resolution approving the split-off shall contain a
description of the terms and mechanisms for the transfer of the
assets, liabilities and capital which correspond to each new
company. The original company shall present audited financial
statements. Also the obligations to be assumed by each new
company shall be determined.
If any of the new companies breaches any of the obligations
assumed by virtue of the split-off to creditors who did not
approve said split-off, the original and other new companies
shall be jointly liable for a three-year period counted as of the
publications mentioned hereinafter. If the original company
continues in existence it will be liable for all obligations.
The resolutions approving the split-off shall be
protocolized before a Public Notary and recorded in the Public
Registry of Commerce.
Also an extract of said resolution shall be published in the
Official Daily Gazette and in one newspaper of wide circulation
at the domicile of the original company together with a summary
of the information regarding transmission of assets, liability
and capital stock. After a period of 45 days counted as of the
registration in the Public Registry of Commerce and after the
publication, without any opposition from creditors or from
shareholders, the split-off will produce full effects. For the
creation of new companies it will be necessary to protocolize
their charter and to register it in the Public Registry of
Commerce.
If the split-off entails the extinction of the original
company, its registration shall be cancelled from the Public
Registry of Commerce, once the split-off produces effects.
1. Tax consequences.
The Tax Code considers that there is no transfer of property
in a split-off as long as the shareholders of at least 51% of the
shares with a voting right of the original and new companies did
not change in the year prior to or the year following the notice
of the split-off presented to the tax authorities. However, the
shareholders of the original company may transfer shares among
themselves as long as their percentage of ownership of the
capital stock of the new companies does not vary by more than 20%
as compared to the capital stock they had in the original company
at the time of the split-off.
Tax losses pending amortization may be divided between the
original and the new companies in proportion to the division of
capital. The balance of the capital account and the Net Taxed
Profit Account may be transferred by the split-off as well as the
right to credit VAT.
The exemption to newly formed companies of the 1.8% Asset
Tax is not applicable in this case. (For explanation of Asset Tax
see Section XIV.E.1).
A 2% Real Estate Acquisition Tax shall be paid in connection
with a transfer of real estate property as a consequence of
split-off.
2. Labor consequences.
Work relationships will be affected as the employer will
change. The employee rights and obligations cannot be modified as
a consequence of the split-off and such rights and obligations
continue against the original company and/or the new companies,
the latter as substitute employer. (See Section X.A. and XV.
hereinabove).
3. Industrial property.
Any industrial property rights or related licenses should be
modified to reflect the change in ownership or right to use.
D. SUSPENSION OF PAYMENTS AND BANKRUPTCY
Mexico's Federal Bankruptcy and Suspension of Payments Law
was enacted in 1943.
The suspension of payments requires a court judgment. When
debtors envision inability to meet payment obligations or already
have ceased payment, they can request their creditors for an
extension of time to pay debts and as a consequence enable such
debtor to normalize the course of business. It is an opportunity
granted to debtors in difficulties while permitting continuance
of the business.
Bankruptcies in Mexico must also be declared by a court
judgment. The debtor must be engaged in commerce and have ceased
meeting payment of his debts.
1. Suspension of payments.
Before the declaration of bankruptcy a debtor has the right
to request the suspension of payments.
If the judge grants the suspension the claims filed
requesting the declaration of bankruptcy will be suspended.
After the debtor's request for suspension of payments is
accepted, a creditor's hearing will take place at which time
creditor's rights will be recognized and classified in order of
preference.
During the procedure of suspension of payments the statute
of limitations and judicial terms will be suspended against the
debtor. However, it is possible to proceed judicially with those
actions necessary to prevent deterioration to the debtor's assets
or to preserve the rights of the parties. Judicial proceedings
regarding claims for labor debts, alimony and credits with in-rem
guarantee will not be suspended. During the procedure the
business continues to be operated and managed by the debtor under
the surveillance of the receiver.
The debtor can enter into an agreement with its creditors if
there is sufficient vote of the creditors, in accordance with the
percentages and requirements of the Law.
At any time of the procedure the judge may declare
bankruptcy if the debtor breaches its commitments or decreases
its assets or patrimony. Also, the judge may terminate the
procedure of suspension of payments, if the debtor is incapable
of continuing to comply with agreed obligations. The procedure
may also terminate with the approval of the agreement to be
executed by the creditors.
2. Declaration of bankruptcy.
Bankruptcy is presumed to exist in the following cases:
a) general failure to pay outstanding liabilities;
b) the non-existence or insufficiency of assets to seize in
order to carry out an attachment proceeding against the debtor;
c) the conveyance of the assets of the debtor in favor of
its creditors;
d) if debtor acts in deceptive, fictitious or fraudulent
manner or abandons the business;
e) failure to comply with obligations after requesting a
suspension of payments or failure to reach an agreement with the
creditors;
f) closing of the place of business; and
g) breach of obligations agreed to in the agreement of
suspension of payments.
The presumptions may be rebutted if the debtor demonstrates
ability to pay outstanding due accounts with its liquid assets.
The declaration of bankruptcy may be requested by the
debtor, creditors or Attorney General. Neither the debtor nor the
creditor who have requested the bankruptcy declaration may
withdraw the demand even when all creditors are in agreement.
3. Bankruptcy procedure.
The procedure starts before a bankruptcy judge who will
declare bankruptcy, immediately appoint a receiver, order seizure
of all assets and records and appoint up to five interventors for
surveillance of the creditors' interests. The creditors'
committee also has the right to select and remove interventors.
From this point forward all creditors must conduct business with
the receiver. The receiver is required to draft a list of fixed
assets.
The judgment will be notified personally to the debtor and
published three times in the Official Daily Gazette of the
debtor's domicile, thus notifying the creditors who shall also be
called to a meeting for the recognition, rectification and
prioritization of credits. The meeting will take place within 45
days. Any judge may extend the time period in which a foreign
creditor may file a claim and such foreigner should provide a
mailing address in Mexico to receive correspondence related to
the bankruptcy. Otherwise notification will be made via the
Attorney General.
The bankruptcy judgment deprives the debtor of the right to
administer and dispose of assets and prevents the debtor from
leaving the city, situs of the procedure, without judicial
authorization.
The judge and the receiver may authorize the continuance of
business operations if closing down the operation could adversely
prejudice the rights of the creditors.
From the moment of declaration of the bankruptcy, all
pending obligations of the debtor shall be considered due and
payable. Bilateral executory contracts may be honored by the
receiver with prior authorization from the judge. Those who have
contracted with the debtor may request the receiver to indicate
either compliance or rescission of the contract. There are
detailed rules concerning disposition of executory contracts,
such as leases, service contracts, labor agreements, and purchase
of goods not yet delivered.
All merchandise, credit instruments or any other types of
goods which exist as part of the bankruptcy proceeding and which
may be identified, whose property has not been transferred to the
debtor under a definitive and irrevocable legal title, may be
separated by the legal holders of title, through the exercise of
the corresponding action before the bankruptcy judge. If there is
no opposition to the request for separation the judge may declare
the requested exclusion.
Once the creditors have been notified, they must request
recognition in writing from the judge to exercise their rights
against the mass of assets. The receiver analyzes each credit and
issues a report. The bankruptcy law requires creditors meetings
in certain matters and sets out how votes shall be counted.
Secured creditors must attend the secured creditors hearing
to preserve their rights. Thereafter the judge issues a report
with a list of all secured claims classified by type and priority
declaring those claims that have been accepted, rejected or set
aside. Priority of creditors is as follows:
a) general labor liabilities;
b) privileged creditors such as creditors for the expenses
of the funeral of the debtor, expenses of the sickness which
caused the death of the debtor, and alimony payments;
c) creditors with mortgage guarantee who receive payment
from the proceeds of the sale of the mortgage goods, excluding
payment to any other creditors;
d) tax;
e) creditors with a special privilege (pledge);
f) common creditors for mercantile operations;
g) common creditors for civil obligations;
4. Criminal liability in bankruptcy.
Creditors not presenting their claims lose their privilege
and are classified as common creditors.
Bankruptcy is classified as follows:
a) Fortuitous: fortuitous bankruptcy occurs in the
ordinary course of business under a good administration. There is
no sanction.
b) Negligent or careless: negligent bankruptcy occurs when
the business is mismanaged. The merchant or administrators may be
imprisoned for up to four years.
c) Fraudulent: fraudulent bankruptcy occurs when the
administrators perform acts such as: i) increasing the
liabilities or decreasing the assets of the business, ii)
favoring special creditors, and iii) failure to maintain
accounting records in accordance to law. The sanction may be
imprisonment for up to five years and the payment of up to 10% of
the liabilities.
5. Termination of bankruptcy procedure.
Bankruptcy may be terminated in the following cases:
a) Payment of all of the liabilities and pending
obligations. Payments can be made fully or on a discounted
basis. As it is not normally possible to sell all the goods in
bankruptcy at the same time, the Law contains a system of periods
of four months to pay the creditors. The designated creditors or
their representatives will appear in court to collect the amounts
determined in the distribution. This procedure will be repeated,
as long as there are assets which can be sold or creditors who
have not been paid. Once all of the assets are sold the judge
will call a general meeting of recognized creditors in order for
the receiver to render definitive accounts.
In case of a debt payable in foreign currency or outside of
Mexico the judge will declare its payment in pesos in an amount
equivalent to the foreign currency, at the exchange rate
published for such purpose on the date of the declaration of
bankruptcy.
b) If the assets are insufficient to cover expenses of the
bankruptcy or part thereof.
c) If no more than one creditor appears to present
credits.
d) By unanimous consent of creditors whose credits were
recognized.
e) By agreement between the creditors and the debtor at
any time during the bankruptcy procedure, after the recognition
of the credits and before the final distribution.
6. Comments.
Because of deficiencies in the Bankruptcy Law, "informal
reorganizations" are common whereby the groups of creditors meet
together and reach an "extrajudicial solution" either for payment
or even continuance of all or part of the business.
Due to the prevailing economic difficulties of Mexico, the
problems of suspension of payments, bankruptcy and
reorganization, have been most prominent and both creditors and
debtors are seeking more expeditious solutions to their liquidity
and insolvency problems. There are currently various proposals of
modifications to the Bankruptcy Law being discussed, which may be
sent to the legislature in the very near future.
XVII. INTERNATIONAL RELATIONSHIPS
Mexico has been characterized as a country cooperating with
other nations in order to bring about a more stable world order.
In an international sense, Mexico has demonstrated this policy in
the United Nations and its related institutions, and, on a
regional scale, Mexico has been an active member in different
organizations such as the Organization of American States.
In a more interrelated and competitive world, Mexico has
adopted several measures to assure its place in the new world.
Mexico has also signed bilateral and multilateral commercial
agreements, the most important of which are described below.
A. GATT AND THE WORLD TRADE ORGANIZATION
Mexico signed GATT in 1986 with the goal of participating in
the consolidation of a system allowing a more equitable
distribution of international commercial benefits and the
perfection of the multilateral policies.
Upon signing GATT, Mexico committed to reducing its tariffs,
eliminating import permits and reducing non-tariff barriers.
Mexico also has signed various GATT supplementary agreements such
as the Agreement on Customs Valuation Procedures, Agreement on
Subsidies and Countervailing Measures, Agreement on Antidumping
(for implementation of Article VI of GATT), Agreement on
Technical Barriers to Trade and the Agreement on Import Licensing
Procedures.
In 1994, pursuant to the Uruguay Round, 124 governments and
the European Union signed the Marrakesh Declaration establishing
the World Trade Organization (WTO) with a target date for
implementation of the WTO and the Uruguay Round Final Act, in
January 1995. Mexico was a party to these agreements and is thus
considered to be one of the founding members of the WTO. The WTO,
successor of the GATT, is an organization responsible for the
functioning of the world international trade system providing a
forum for trade negotiations and the resolution of disputes among
members.
B. NAFTA AND OTHER FREE TRADE AGREEMENTS
Mexico has signed NAFTA with the United States and Canada
which entered into effect on January 1, 1994. (NAFTA is discussed
in Section III.B.). Mexico has also signed bilateral free trade
agreements with Latin American countries such as Colombia,
Venezuela, Chile, Costa Rica and Bolivia and at the present time,
as a NAFTA party, is participating in negotiations with Chile for
its incorporation into NAFTA. Negotiations are in progress for
bilateral trade agreements with several other countries as well
as the European Union.
C. ASIA-PACIFIC ECONOMIC COOPERATION MECHANISM
Mexico became a member of the Asia-Pacific Economic
Cooperation Mechanism (APEC) in November of 1993 and now has the
opportunity to conduct trade in one of the most promising areas
of the world.
As a member, Mexico has promoted commercial missions from
most of the countries in the Pacific Basin. Also, there have been
several meetings with government representatives of the Asian
Pacific Basin countries in order to negotiate the necessary steps
to improve market access for Mexican products.
D. ORGANIZATION FOR ECONOMIC COOPERATION AND DEVELOPMENT
The Organization for Economic Cooperation and Development
(OECD) was established in 1961, and Mexico became the 25th member
of the organization in 1994. Mexico was the first new member of
the OECD in 22 years.
Inviting Mexico to join this organization was, in a sense,
an acknowledgement of the far-reaching reforms the country has
implemented in recent years and that its economic legislation and
policies were consistent with that of other OECD member
countries, such as, liberalization of trade and investment, major
reform of the financial system, deregulation of the economy and a
commitment to the privatization process.
OECD membership gives Mexico access to more effective
channels of communication, along with a means to cooperate with
the world's major economies. Membership also guarantees the
continuity and consolidation of Mexico's economic, political and
social policies, as well as encouragement for capital inflow with
all the benefits this implies, including, for example, more and
better-paid jobs, training and state-of-the-art technology.
Some of the implications related to investment in Mexico as
a member of the OECD are, inter alia, non-discriminatory
treatment to investors, further liberalization of investment
regulations and increased accountability of the legal system.
E. OTHER INTERNATIONAL CONVENTIONS
Among the international conventions to which Mexico is a
party, the following are some of the most relevant: a) Sea Law
Convention, Official Daily Gazette (ODG) June 1, 1983; b) Vienna
Convention on Treaties, ODG May 10, 1988; c) Basel Convention on
Transborder Movements of Hazardous Wastes, ODG Feb. 22, 1991; d)
International Telecommunications Union Convention, ODG April 26,
1991; e) International Sales Convention on Prescription, ODG Feb.
22, 1991; f) Tax Treaties to Avoid Double Taxation (See Section
XIV.F. hereinabove); g) Treaties to Exchange Tax Information with
the United States and Canada (See Section XIV.F. hereinabove); h)
Paris Convention, Universal Copyright Convention, Interamerican
Copyright Convention and Berne Convention. (See Section VIII
hereinabove).
XVIII. DISPUTE RESOLUTION
Any controversy, irrespective of its nature, may be brought
before Mexican courts. The parties may also agree to submit their
differences to arbitration.
Conciliation is generally required by Mexican law, and is
specifically applied in special procedures, such as, divorce by
mutual consent where the judge will schedule two hearings to try
to reconcile the parties, procedures before the Consumer
Protection Agency and labor matters between workers and
employers.
Mexico does not have rules for enforcement of mediation
clauses or resolutions issued by mediators. If the parties agree
on a settlement, within the mediation procedure, they can execute
a settlement agreement which will be enforced before Mexican
courts.
Pursuant to mercantile rules, when an act has a commercial
nature for one of the parties to an operation, and for the other
is of a civil nature, the controversy will be settled in
accordance with mercantile laws.
As noted in Section II.D. there are special courts for
certain matters such as family controversies, lease contracts and
bankruptcies.
A. COURT PROCEEDINGS
1. Choice of jurisdiction.
The parties to a contract may waive forum applicable by law
and choose the courts of the domicile of any party, or the courts
of the place of performance of some of the obligations or those
of the location of the subject matter of the contract.
Jurisdiction shall be established in the place of the
domicile of the debtor in bankruptcy proceedings, and, in cases
of voluntary jurisdiction, in the place of the domicile of the
debtor.
If the parties to a contract do not expressly choose a
forum, as described immediately above, the Commercial Code
provides, irrespective of the basis of the cause of action, that
jurisdiction shall be established pursuant to the following forum
selection rules, in order of preference:
a) the place designated by the debtor to be judicially
required for payment;
b) the place designated in the contract for the
performance of obligations;
if the parties have not made the designations in a) or b),
c) the place of the domicile of the debtor, and, if the
debtor has various domiciles, that which the creditor so chooses;
d) if there is no fixed domicile, the place in which the
contract was executed when the action is in personam, and, when
the action is in-rem, the place of the location of the good; and
e) if the subject matter of the in-rem action is located
in different domiciles, the competent court will be that of the
place in which the plaintiff initiated the action.
2. Choice of law.
Mexican law is very liberal with respect to the choice of
the law governing a contract, enabling the parties to a contract
to choose in most instances the substantive law applicable
governing the interpretation and performance of their rights and
obligations.
Even if Mexican law does not require that the selected law
has a relationship to the parties or to the controversy, it is
implied by logical interpretation.
Mexican law will generally be applied to all persons located
in the Mexican Republic and to the acts and matters occurring
within its territory or jurisdiction, except in the following
instances:
a) Mexico recognizes legal relationships validly created
in the other states of the Republic or in a foreign country in
accordance with their own law;
b) the status and capacity of individuals is governed by
the law of their domicile;
c) the regime of property rights over real estate and
movable property is governed by the law of the place of their
location;
d) the form of legal acts is that of the law of the place
of execution; and
e) legal effects of acts and contracts will be governed by
the law of the situs of their performance, except if the parties
validly designate the application of another law.
The law of location of real estate property and the status
and capacity of individuals may not be waived.
B. ARBITRATION
As another step towards modernization, Mexico amended in
1993 the Commerce Code and the Federal and Local Civil Procedures
Codes to establish new arbitration rules similar to the UNCITRAL
rules.
Disputes of civil nature may be settled by arbitration,
pursuant to Mexican law, except disputes related to alimony,
divorces, actions regarding nullity of marriage, actions
regarding the civil status of individuals and others expressly
provided by law.
Also commercial disputes may be settled by arbitration
pursuant to the rules of the Commerce Code applicable to domestic
commercial arbitration, and to international commercial
arbitration, when the place of arbitration is Mexico. Under
Mexican law, the parties may decide freely which claims shall be
submitted to arbitration, the arbitration rules to be applied in
the proceedings (ICC, Mexico City Chamber of Commerce, Rules of
the AAA), applicable substantive law, language, the place of
arbitration, designation of arbitrators, and provide that the
arbitral awards shall be final. Arbitration agreements must be in
writing. They can be executed at any time, even during court
proceedings.
In past years, arbitration was not permitted in contracts
with the government. All disputes had to be submitted to Mexican
courts. However, in recent years, arbitration is becoming
increasingly acceptable in most contracts with governmental
agencies, including the acceptance of arbitration by
international arbitration organizations and in some cases even
the application of foreign law.
Mexico is a signatory to and has ratified the 1958 New York
Convention on the Recognition and Enforcement of Foreign Arbitral
Awards. Also Mexico has signed and ratified the 1975
Inter-American Convention on International Commercial
Arbitration, known as the Panama Convention.
C. EXECUTION OF FOREIGN JUDGMENTS AND ARBITRAL AWARDS
It is necessary to determine if the judgment or arbitral
award is issued in a country that is a party to an existing
convention with Mexico regarding this matter. If there is no
convention the execution of the foreign judgment or arbitral
award will be ruled by the Federal or Local Civil Procedures
Codes.
The following matters are the exclusive jurisdiction of
Mexican courts and therefore no judgments or awards of any other
authority will be executed in Mexico:
a) lands and waters located in Mexican territory,
including subsoil, air space, seas;
b) resources of the exclusive economic zone or related to
sovereignty rights of said zone, according to Mexican law;
c) acts of authority related to the internal regime of
Mexico or to Mexican governmental entities or its states; and
d) the internal regime of Mexican embassies and consulates
located abroad.
The foreign judgments and arbitration awards will be
executed in Mexico and their effects will be ruled by the Federal
or Local Civil Procedures Codes.
Execution must be requested before the court of the domicile
of the defendant, or the place of location of its assets in
Mexico.
Said court will analyze compliance with the following
requirements:
a) formalities regarding letters rogatory,
b) whether the judgment or arbitration award was issued in
a dispute over an in-rem action,
c) jurisdiction of the court or arbitrator issuing the
resolution,
d) notice to the defendant and right to a defense,
e) "Res judicata" (definitive judgment) in the country
where the resolution is issued,
f) there shall not be a pending lawsuit in any Mexican
court for the same matter,
g) execution is not contrary to the public order of
Mexico.
The execution of the foreign judgment or arbitration award
can be denied if in the country of origin, equivalent judgments
and arbitration awards may not be executed.
If a judgment or arbitration award cannot be executed
completely, the courts may declare a partial execution if the
interested party requests it.
The judgment approving the recognition or execution of a
foreign judgment or arbitration award may be appealed.
XIX. REAL ESTATE
Article 27 of the Mexican Constitution discusses the
ownership of lands and waters. The Article grants to the Mexican
Nation ownership of the land and water within the national
territory, and provides that the Nation shall have the power to
transfer ownership rights to such properties to private
individuals, thereby creating private property.
Section I of the aforementioned Article 27 grants the right
to acquire the dominion of land and water only to Mexican
individuals and companies, and grants to the State the
discretionary power to grant the same right to foreigners,
subject to the condition that the foreigners agree with the
Ministry of Foreign Affairs to consider themselves Mexican
nationals with respect to the property acquired and not to invoke
the protection of their home governments with respect to the
same. If said covenant is breached, all rights to such property
shall revert to the Nation.
Moreover, said Section prohibits foreigners from acquiring
direct ownership over land and water in the "prohibited or
restricted zone." (See Section III.A.6. hereinabove).
A. ACQUISITION OF REAL ESTATE BY FOREIGNERS
As a general rule, a foreign individual or company may
directly own land in Mexico. However, as stated, foreigners
(including individuals or companies) may not acquire direct
ownership over land and water located within the restricted zone.
Although foreigners may not acquire direct ownership in the
prohibited zone they can acquire other rights over real estate in
the following cases:
1. A 100% foreign-owned Mexican company may directly
acquire property within this zone to perform non-residential
activities, i.e., industrial, commercial or tourism activities.
The acquisition must be recorded at the Ministry of Foreign
Affairs.
2. If the real estate is for residential purposes, foreign
individuals or companies and Mexican companies with 100% foreign
capital stock may acquire the rights of use and benefit from the
real estate through a trust. The duration of the trust may be 50
years, and the term may be extended upon request of any person
having an interest in the property.
3. Foreign individual or companies may lease real estate
and other properties in Mexico without limitation.
B. AGRICULTURAL, LIVESTOCK AND TIMBERLAND
Foreign and Mexican individuals may acquire land for
agrarian, livestock and forestry purposes subject to the
restrictions and requirements mentioned above and the following
size limitations:
1. Individual agricultural property generally cannot exceed
100 hectares of irrigated land.
Land used for the production of cotton cannot exceed 150
hectares of irrigated land, and land used for the production of a
very few specialized crops, like coffee, bananas, cacao and fruit
trees may not exceed 300 hectares of irrigated land.
2. Individual property used to raise livestock cannot exceed
an amount of land necessary to raise a maximum of 500 large farm
animals or its equivalent in small farm animals.
3. Individual forest property can be any type of timberland,
as long as it does not exceed 800 hectares.
As a general rule a foreign company cannot directly own land
in Mexico for agricultural, livestock or forestry purposes.
However, Mexican companies may own agricultural, livestock or
timberland, in tracts not greater than twenty-five times the
factor of individual landholdings regarding each of the three
types of uses mentioned above.
A Mexican company owning land must have a sufficient number
of individual shareholders or partners to justify its total
landholdings. For example, if the company owns 2500 hectares of
irrigated land, and the individual irrigated landholding is
limited in size to 100 hectares, the company must have at least
twenty-five individuals as shareholders or partners.
In addition the capital stock of the company must include a
special series of shares or partnership interests identified with
the letter "T." Series "T" shares or partnership interests are
equivalent in par value to the value of the capital contributed
in agriculture, livestock or timberland, or those funds destined
for the acquisition of such land, depending on the value of the
land at the moment of the contribution or acquisition.
Foreigners, either companies or individuals, can acquire no more
than 49% of series "T" shares or partnership interests; the
remaining 51% must be held by Mexicans. In addition, the company
may issue an unlimited number of shares through capital
contributions, which may be subscribed 100% by foreigners.
Further, no individual, either directly or through a
company, may hold more series "T" shares or partnership interests
than those equal to one individual landholding.
C. FORMALITIES CONCERNING THE TRANSFER OF PROPERTY
There are several verification requirements to be carried
out before the sale of the property. Mexican law also requires
several formalities that must be satisfied to transfer real
property.
1. Verification requirements.
Prior to any sale, all individuals or companies, either
Mexican or foreign desiring to purchase real property should
verify the absence of any liens. If the property is mortgaged,
the lien will follow the property and therefore the new owner may
have the risk of forfeiting such property in case of the seller's
default on payment obligations.
Also, the prospective buyer should verify that the seller
has paid the Real Estate Property Tax and water contribution fees
for the previous five years.
2. Legal formalities.
a) Sales of real estate with an appraised value not
exceeding N$6,679.50 that is the equivalent of 365 times the
daily minimum wage (currently at N$18.30 daily), may be executed
privately between the parties to the contract, provided that two
witnesses sign the agreement before either a Public Notary,
competent judge or public property registrar.
b) Sales of real estate with an appraised value greater than
N$6,679.50 must be executed before a Public Notary, in a public
instrument.
c) The sale must be recorded in the public registry of
property with jurisdiction in order to produce effects before
third parties.
3. Immigration status of the foreigner.
All individual foreigners, independent of their immigration
status, may acquire real estate in Mexico, directly or acting
through an attorney-in-fact, without the need of a permit from
the Ministry of the Interior (which was required in the past).
Moreover, they can carry out any other act of dominion over real
estate, without need of a permit.
D. TAXES
Both the seller and purchaser are liable for taxes upon the
purchase and sale of real estate located in Mexico.
1. Income tax.
a) If a foreign individual or company is the seller, the
sale of real estate located in Mexico will be subject to a 20%
capital gains tax on the gross amount of the operation.
If the purchaser is resident in Mexico or resident abroad
with a permanent establishment in Mexico, he should have to
withhold the tax. Otherwise, the seller should pay the
corresponding tax by means of a tax return filed to the Ministry
of Finance within 15 days of obtaining the income. In practice,
this presents a problem to the seller resident abroad, as he does
not have his Taxpayers' Registration Number necessary to carry
out business in Mexico. Therefore, the withholding of the tax is
done by the Public Notary and is considered as final payment.
b) However, foreigners who conclude the sale through a
public deed may choose to pay 35% tax on the net profit obtained.
The Public Notary is responsible for calculating the income tax
and including it in the public instrument. The Public Notary must
also pay this tax to the Ministry of Finance within 15 days
following the execution date of the public instrument.
c) The Tax Code considers that a transfer of property has
occurred when a trust is created, if the grantor designates or
agrees to designate a beneficiary different from such grantor and
does not reserve the right to repurchase the property placed in
trust, or when the beneficiary looses the right to reacquire the
property from the trustee, if such right was reserved.
In addition, when the beneficiary assigns rights granted or
gives instructions to the trustee to transfer the property to a
third party, a transfer of property is considered to take place
upon the issuance of said instructions or upon the assignment of
rights.
Therefore, when a foreigner acquires beneficiary rights
through a trust, and thereafter sells or assigns them, the
foreigner will be subject to the payment of income tax in the
terms mentioned above.
d) Income generated by foreign lessors of real estate in
Mexico is subject to a 21% income tax on gross receipts. The
lessee shall withhold the tax and pay it to the tax authorities.
e) If a foreigner is the purchaser, the tax authority may
make an appraisal, and, if the value of the appraisal is greater
than the purchase price by more than 10%, the purchaser will be
required to pay a 20% tax on the difference between the two
amounts. The taxpayer shall pay this tax within fifteen days
following the notification.
2. Real Estate Acquisition Tax.
Individuals or companies purchasing real estate, consisting
of land, or land and its structures located in Mexico, as well as
the accessions related to them, are subject to the payment of a
Real Estate Acquisition Tax calculated at the rate of 2% of the
value of the property, when located in the Federal District, or
applicable rate in other states.
Purchasers of real property, irrespective of the nature of
their operations, must pay this tax. That is, the tax must be
paid whether the acquisition is carried out through, for example,
a purchase and sale agreement, donation, trust, merger of
companies, split-off, or payment in kind.
3. Value Added Tax.
VAT shall be paid by the purchaser of structures at the rate
of 15% calculated on the amount of the operation which shall
include taxes, other fees, interests or any other concept.
No VAT is triggered on the sale of land used for any purpose
and on constructions used for residential purposes. In the event
that only part of the construction is used for this purpose, VAT
will not be paid on such part.
XX. SECURING TRANSACTIONS
Many types of security measures are available in Mexico to
foreign or local lenders, which grant either rights in-rem or
rights in personam, among the prominent of which are:
A. MORTGAGES/LIENS
The most widely used security device in Mexico is the
mortgage. Mortgages may be established on real estate, vessels,
aircraft or industrial facilities.
1. Real estate mortgages.
This is a guaranty in-rem constituted on specifically
determined property and gives the creditor, in the event of
default, the right to be paid out of the proceeds of a
foreclosure proceeding.
Mortgages are regulated by the Civil Code of the situs of
the mortgaged property and may be created by agreement between
the parties, by voluntary unilateral acts, or pursuant to a legal
disposition.
The mortgage lien extends to the natural accessions of the
mortgaged property, any improvements and fixtures made by the
owner, the movable objects permanently attached to the property
which cannot be separated therefrom without damage to said
property, new buildings constructed by the owner of the mortgaged
land and additions to the mortgaged buildings.
For a mortgage to be effective against third parties, it
must be registered in the Public Registry of Property of the
situs of the property. The mortgage lien takes priority over all
other liens except liens for unpaid taxes and past due wages.
In an event of default under a mortgage, the mortgagee may
foreclose and enforce, through a judicial proceeding, the sale of
the mortgaged property. The mortgagor may bid in the
corresponding public auction. Once the sale takes place, the
mortgagee may have access to the proceeds. If the proceeds are
insufficient to cover the amounts owed a deficiency judgment will
be rendered.
2. Maritime mortgages.
The Law of Navigation provides that mortgages may be placed
on any vessel whether constructed or in the process of
construction and must be recorded in the National Maritime Public
Registry to be effective against third parties.
The mortgage established over a vessel will have preference
over any other lien on the vessel after the following priorities:
a) wages and amount owed to the crew; b) credits derived from
indemnities by death or injuries at sea, or on land in direct
relationship with the exploitation of the vessel; c) credits for
the compensation for the salvage of a vessel; d) credits to the
vessel derived from the use of port infrastructure, maritime
signaling, navigation fees and piloting; e) credits derived for
the indemnities for extra-contractual claims for loss, or
material damages caused by the exploitation of the vessel,
different from the loss or damage to the cargo, the containers or
belongings of any passengers transported on board the vessel.
3. Mortgages/Liens on aircraft.
The Communications Law as amended by the Civil Aviation Law
provides that mortgages may be established over aircraft, real
estate and chattels of an air transport company. Mortgages on
real estate and chattels are subject to previous authorization
from the Ministry of Communications.
The equipment of aircraft such as engines, spare parts and
instruments may be given in pledge. Constructive delivery is
recognized.
Mortgages and pledges must be recorded in the Mexican
Aeronautical Registry and a copy must be delivered to the Public
Registry of Property of Mexico City.
Mortgages on aircraft have preference except for tax,
salvage and maintenance credits.
4. Industrial mortgages.
Industrial mortgages are created in favor of banks over the
complete industrial, agricultural, ranching or service units of
the mortgagor and include all assets, movable and immovable, used
for exploitation of said unit. This mortgage includes any
concession or permission granted as well as moneys and credits in
favor of the mortgagor.
The mortgagor retains possession of the mortgaged assets and
continues to use and exploit the industrial unit. The mortgagee
must consent to a sale of any of the mortgaged assets, or to any
merger.
The mortgage must be recorded in the Public Registry of
Property to produce effects against third parties.
Some attorneys sustain the opinion that this type of
mortgage may be executed between private parties and is not
limited to banks.
5. Chattel mortgages.
Chattel mortgages are not commonly used as a security
measure; more often a pledge is used for chattels.
B. PLEDGES
There are two kinds of pledges under Mexican legislation:
the commercial pledge and civil pledge.
The Law of Credit Instruments defines and regulates
commercial pledges. A commercial pledge exists when the subject
matter of the pledge is commercial as defined per Article 75 of
the Commerce Code, or if a party to the pledge is a businessman
or engages in commerce, or is a company, as per Articles 3 and 4
of the Commerce Code. All other pledges are considered civil and
therefore regulated by the Civil Code.
Although commercial and civil pledges are similar in many
aspects, they have different means of creation and perfection.
1. Commercial pledges.
A commercial pledge is constituted by either of the
following: a) the delivery to the creditor of the goods or
negotiable instruments; b) endorsement of the negotiable
instruments in favor of the creditor, in the case of nominative
instruments, and by such endorsement and the corresponding
notation in the registry if the instruments are subject to
registration; c) delivery of the instrument or the document
representing the credit to the creditor, in the case of
non-negotiable instruments, and by recording the lien in the
applicable registry or by notification to the debtor; d) the
deposit of the goods or bearer instruments at disposal of the
creditor with a third party designated by the parties; e) the
deposit of the goods at disposal of the creditor in places to
which the creditor has keys, even though such places are owned by
or located within the establishment of the debtor; f) the
delivery or endorsement of the instrument representing the goods
that are object of the contract, or by the issue or endorsement
of a pledge bond relative thereto; g) the registration of the
contract for the equipment or operating credit (see paragraph c)
below) in the manner set forth in the Law; and h) compliance with
the requisites set forth in the Law of Credit Institutions with
respect to account receivables (book credits).
Pledges of fungible goods continue to be effective even when
the original goods are substituted by goods of the same type.
Although constructive delivery of pledged goods is not
recognized for commercial pledges, there are a number of cases in
which the pledged goods may be placed with a third party or under
the joint control of the debtor and the creditor. These pledges
produce effects against third parties upon registration of the
corresponding pledge in the Public Registry of Commerce of the
situs in which the pledged goods or instruments are to be kept.
The creditor may petition the court to authorize the sale of
the pledged collateral upon maturity of the principal obligation,
if the value of the collateral given in pledge drops below an
amount that is not sufficient to cover the original obligation
plus 20% and if the debtor does not provide for sufficient funds
to amortize the debt represented by the credit instruments.
The creditor may not become owner of the property given in
pledge without the express written consent of the debtor given
after the creation of the pledge.
a) Warehousing.
Goods may be granted in pledge through a deposit of those
goods in an authorized general deposit warehouse. After deposit
is made, a deposit certificate is issued by such warehouse
certifying ownership, along with a pledge bond, evidencing the
creation of a pledge on the goods placed in the warehouse.
Warehoused goods may only be released by the warehouse to
the holder of both the deposit certificate and the pledge bond.
A person holding a deposit certificate retains dominion over
the goods deposited in the warehouse; however, such goods may not
be removed without payment of all amounts due to the warehouse
and depositing the amount covered by the respective pledge. The
holder of the warehouse receipt will have rights in the pledged
goods superior to those of judgment creditors, and without a
court order to the contrary, superior rights in the proceeds of
such goods whether in the form of sale proceeds or insurance
proceeds as a result of damage or destruction.
b) Confidential warehouse receipts.
This type of security, although not recognized by the Law,
provides in practice a simplified method for security
arrangements. The confidential warehouse receipt is a personal
note from the warehouse that, when issued with a pledge bond, is
accepted by many banks as collateral for commercial financing
purposes. This receipt allows for the financing of goods kept in
warehouses, without the need of a federal warehouse license
avoiding stringent requirements of the law governing warehousing
in which the risks seem to be outweighed by the practical
advantages.
c) Equipment-operating and financing credits.
Since a commercial pledge requires that the pledgor gives up
possession of the assets given in pledge, alternative methods
that allow the debtor to retain possession of the collateral are
the equipment-operating credit agreement (crédito refaccionario)
and the financing credit agreement (crédito de habilitación y
avío).
The assets underlying these credit agreements are also
subject to the summary foreclosure proceedings provided in the
Commerce Code. Both liens continue attached to the equipment or
raw materials for which the credits were granted and/or to the
finished products produced therefrom.
These credits may only be used for the precise acquisitions
stipulated in the financing agreement. The creditor should verify
the proper use of the credit or risk loss of the lien. Improper
use of the credits by the debtor constitutes default and the
creditor may rescind the agreement or demand immediate payment
and can claim damages in either case.
Both credits are generally granted by the opening of a
credit line against which the debtor may draw. The agreements
must be in writing and recorded in the Public Registry of
Property when the security is on real property and in the Public
Registry of Commerce when the security is on personal property.
The agreement must establish the duration and the purpose of the
loan, the use of the funds and a precise description of the
collateral. The primary obligation of the borrower in both cases
is evidenced by one or more promissory notes.
The financing credit has priority status over
equipment-operating credit and both over a mortgage registered
second in time.
i) Equipment-operating credits.
The proceeds of this credit (crédito refaccionario) may be
used for the acquisition of tools, instruments, farming
equipment, fertilizer, cattle or breeding stock, the development
of farms and raising of crops, whether seasonal or permanent, the
preparation or developing of land or farming, the purchase or
installation of machinery and equipment and the construction
necessary for the business of the debtor. The proceeds of the
loan may also be used to pay for operating expenses, acquisition
cost of real and personal property and taxes incurred therewith,
provided that such debts were incurred in the year preceding the
date of the credit agreement.
These operating credits are secured simultaneously or
separately with real property, improvements, fixtures, machinery
and equipment and, in general, all that is acquired or improved
by the use of the proceeds of the credit.
ii) Financing credits.
This type of security agreement (crédito de habilitación y
avío) is used for the financing of the direct and immediate
production costs of a business. Financing credits are granted for
the acquisition of raw materials or for the payment of wages,
salaries and other direct expenses required for the operation of
the business. The financing credits are secured by raw materials
acquired with the proceeds of the credit, as well as the products
resulting therefrom.
2. Civil pledges.
The Civil Code defines a civil pledge as a property right
over chattel for the purpose of guaranteeing the performance of
an obligation and its priority in payments. Nearly every chattel
may be given in pledge and must be evidenced in a written
agreement and is perfected by actual or constructive delivery. In
the latter case, the pledge must be recorded in the Public
Registry of Property.
In the event of default by the debtor, the creditor may
demand and the judge shall order the sale of the pledged
collateral at a public auction. If the collateral cannot be sold
at a public auction it may be transferred to the creditor for
two-thirds of the legally required minimum bid. The debtor may
agree after default that the creditor may retain the collateral
in satisfaction of all or a portion of the debt or that the
pledged item may be sold extrajudicially.
Only tax debts and claims for unpaid wages have a preference
to the proceeds of the creditor's collateral. Priorities among
competing mortgages and pledges of property constructively
delivered are determined by the recording date, and by the
transaction date for pledges actually delivered.
C. GUARANTY
The guaranty is the simplest form of security in Mexican Law
and takes two forms: the "fianza" or the "aval."
1. Fianza.
A "fianza" is an agreement accessory to a principal contract
between the creditor and the debtor whereby the guarantor assumes
the debtor's obligation in the event of default. A fianza may not
exist without the existence of a valid obligation.
"Fianzas" may be granted by an individual, a legal entity or
a bonding company. However, a company may not guarantee
obligations of third parties unless provision is made in its
corporate object clause.
A guarantor under a "fianza" may not be called upon to meet
his obligations until the creditor has first exhausted his rights
of action against the debtor and his assets; however, this
benefit may be expressly waived.
2. Aval.
The "Aval" guarantees payment of specific obligations
evidenced by a negotiable instrument and is regulated by the Law
of Credit Instruments. The obligation appears on the face of the
instrument it guarantees. The "aval" is deemed to guarantee the
entire amount of the instrument unless otherwise established
therein.
The grantor of the "aval" is jointly and severally liable
for the debt, even if the principal debt is cancelled, totally or
partially, due to a defect and the creditor may not institute an
action against the debtor nor exhaust remedies against him.
The holder of a negotiable instrument is entitled to a
summary "executory commercial action" against the issuer or the
guarantor, attaching assets simultaneously with initiation of the
action of collection.
D. CONDITIONAL SALES - RESERVATION OF TITLE
Seller may reserve title to the goods sold until complete
payment by purchaser of the purchase price.
If the goods sold consist of real estate property or movable
goods which can be identified, the clause containing the
reservation of title shall be recorded in the Public Registry of
Property in order to produce effects before third parties.
If movable goods may not be identified, the parties may also
include in their agreement a clause of reservation of title,
however this clause will not produce effects before a third party
who purchased the goods in good faith.
When the seller rescinds and repossesses the goods upon
judicial order, payments received must be returned to buyer less
depreciation and fair rental.
If recorded in the Public Registry of Property and in the
event of bankruptcy of purchaser, seller may request the Judge
to separate the goods sold, whose price has not been paid, from
the assets of the bankruptcy proceeding.
E. TRUSTS
Although the trust is widely used for many different
purposes and a wide variety of transactions, such as to manage
assets, to transfer properties, to invest shares and other
securities and to creates a business concern, it may be used as a
vehicle to guarantee debts when the security involves a
substantial amount of property.
A trust is created through an agreement between the grantor
or grantors and the trustee which may only be a banking
institution. A beneficiary or beneficiaries are also named which
are the persons entitled to the benefits of the trust agreement.
Grantors may also be the beneficiaries.
The trustee will perform its duties through its agents which
may accomplish the purposes of the trust through a technical
committee which may be designated by the grantors. The trustee
will be personally liable for the failure to perform its
fiduciary duties.
Property and rights of all types may be placed in trust.
Trusts affecting real property must be recorded at the Public
Registry of Property of the situs in which the real property is
located. Trusts involving movable property will be effective
against third parties once the following requirements have been
fulfilled:
1. if on non-negotiable credit instruments, or personal
rights, from the date the obligor is notified of the trust; 2. if
on nominative instruments, from the date of endorsement of the
instrument to the trustee and the recording of such endorsement
in the registry of the issuer if applicable; and 3. if on
tangible property or bearer instruments, from the moment of
possession by the trustee.
Trust are extinguished: 1. by the fulfillment of its
purposes; 2. by the impossibility to fulfill its purposes; 3.
through the exercise by the grantors of the right to revoke, if
applicable; 4. the agreement between the grantors and the
beneficiaries; and 5. the removal or resignation of the trustee
without designation of its substitute.
Foreclosure may be achieved extrajudicially in a guaranty
trust by incorporating a conventional procedure in the trust
agreement or with the intervention of a court following the
procedure applicable to conventional pledges for the sale of
assets.
F. LETTERS OF CREDIT
Letters of credit are instruments used among other things,
to secure payment in the sale of goods. Letters of credit allow
the seller of merchandise to be paid by a bank or its agent upon
instructions from the purchaser or presentation of certain
documents such as invoices or bills of lading by the seller. The
bank or its agent will pay the seller with funds from a line of
credit extended to the purchaser.
G. LEASES
Lease agreements may be structured in certain cases to be in
effect, security arrangements.
1. Lease with purchase option.
These are governed by the general lease rules contained in
the civil codes for each State or the Federal District. A lease
agreement may grant the lessee an option to purchase the leased
merchandise either during the lease term or the expiration
thereof. The purchase price and payment conditions may be
determined in the lease agreement.
The local civil codes usually require registration at the
Property Public Registry of leases for real estate beyond a
certain duration (i.e. 6 years) to be effective against third
parties.
2. Financial lease.
Financial lease agreements are regulated by the General Law
of Auxiliary Credit Organizations and Activities and may be
granted only by financial leasing companies (See Section II E. 5.
hereinabove) which acquire the title of the merchandise and lease
same to individuals or legal entities for a compulsory period of
time. The lessee pays a determined amount which includes the
price of the goods, the financial and other costs. On termination
of the lease, the lessee may: a) purchase the merchandise at a
value lower than the original purchase price paid by the lessor
or market value; b) extend the agreement paying a lower rent in
accordance with the terms established in the agreement; c)
participate in the proceeds from the sale of the leased
merchandise to a third party as may be agreed.
XXI. GOVERNMENT SALES AND CONTRACTING
A. RELEVANT LAW SOURCES
The Law of Public Acquisitions and Works, effective January
1, 1994, regulates the acts related to planning, programming,
budgeting, cost, execution, conservation, maintenance and control
of the acquisitions and leasing of personal property, rendering
of services of any nature as well as public works and related
services contracted for by government entities, companies in
which the government has a majority ownership interest and
government-owned entities. Other laws and regulations in
specified activities sometimes detail, among others, the content,
form and obligations of the particular contract.
The Law specifies the internal procedure that must be
followed in the planning and programming of the corresponding
purchase or work, contracting procedures, information and
verification requirements, violations and penalties and dispute
resolution procedures.
Government entities and dependencies may make acquisitions,
enter into lease agreements, contract for services and carry out
public works by virtue of: 1. public bidding, 2.limited
invitation, or 3.direct awarding of such contracts.
B. GRANTING OF CONTRACTS
As a general rule contracts are awarded after a public
bidding process. The invitation to bid is published
simultaneously in the Official Daily Gazette, a newspaper of
national circulation and the gazette of the federal entity which
will purchase or use the property, provide the service or carry
out the project. The bid contains the specifics of the purchase
or project and the related requirements. If the bid is for a
public work, a model of the contract is also included. Any party
that satisfies the bid requirements may submit a proposal.
The bid must include both a technical proposal, and an
economic proposal, including guarantees depending on the nature
of the project. Bids are first evaluated to ensure that all
requirements are met, and any bid not satisfying the legal,
technical and economic requirements, including effective
guarantees, outlined in the invitation to bid, is disqualified.
If more than one bid satisfies the above mentioned
requirements, the bid proposing the lowest price is selected.
Contracts must be signed within 20 calendar days of the notice of
the awarding of the contract in the case of acquisitions, leases
or services, and within 30 calendar days in the case of public
works, or the contract will be awarded to the next lowest bidder.
Moreover, the supplier or contractor awarded the contract shall
grant a performance bond to assure compliance with the contract.
The Law also permits government dependencies and entities,
at their discretion, to conduct restricted bidding, in which case
invitations must be extended to at least three prospective
suppliers or contractors. Other Articles of the Law spell out the
requirements for the utilization of restricted bidding, for
example, restricted bidding is permitted when the contract can
only be executed with a determined individual because such
individual is the holder of patent or trademark rights, or other
exclusive rights.
If the entity or dependency concludes that restricted
bidding is not suitable, it may opt to award the contract
directly.
C. FOREIGN PARTICIPATION
The Law also distinguishes among national and international
bidding. In the case of acquisitions, leases and service
contracts, the bidding process is considered to be national if
only Mexican nationals may participate and the goods to be
acquired incorporate at least 50% national content. On the other
hand, the bidding process in these instances is considered to be
international if both Mexican and foreign nationals may
participate. Somewhat analogously, in the case of public works,
the bidding process is considered to be national if only Mexican
participation is permitted and international if both Mexican and
foreign nationals may participate.
Moreover, the Law further provides that an international
bidding process shall be carried out only when such is required
pursuant to treaty and one of the following situations exists:
1. the relevant entity or dependency determines, after a
market investigation, that the quantity or quality of national
suppliers is not adequate or that national contractors do not
have the capacity to perform the work contemplated;
2. when convenient based on price considerations; or
3. when required as a condition attached to the granting
of external credits to the Federal Government or its guarantor.
However, the Law expressly gives entities and dependencies
the right to deny participation of suppliers or contractors in
any international tender if they are nationals of nations with
which Mexico has no international treaty, or of nations in which
reciprocal treatment is not provided to either Mexican suppliers
or contractors, or Mexican products and services. Thus, nations
that have executed trade agreements with Mexico may hold a
distinct advantage in obtaining government procurement contracts.
(See Section III.B.8. hereinabove for NAFTA considerations).
XXII. IMMIGRATION
The General Law of Population establishes the rights and
obligations of foreigners and the immigration status permitting
foreigners to enter Mexico for the purpose described therein,
such as to carry out business and remunerative activities, which
are prescribed in individual authorizations granted by the
Ministry of the Interior.
The Law establishes the following three general categories:
non-immigrant, immigrant, and permanent resident.
A. NON-IMMIGRANT
Foreigners may enter the country temporarily within the
following subcategories:
1. Tourist: foreigners entering the country for amusement,
health, artistic, cultural or sporting activities, without
receiving remuneration, who will be granted a permit for a
non-renewable period of up to six months.
2. Traveler in transit: foreigners entering the country in
transit to another country who will be granted a permit for a
non-renewable period of up to thirty days.
3. Visitors: this is the most common subcategory for
foreigners entering the country for business meetings, market
studies, to carry out any technical or management activities in
Mexican companies, among others, who will be granted a permit for
up to one year, renewable up to four times, for a total time
period of five years. The permit shall specify the place and
activities to be carried out by the foreigner. When a remunerated
activity is performed for a Mexican entity, the latter shall be
jointly responsible for any sanctions imposed.
This subcategory includes investors and businessmen,
scientists or technicians, professional, confidential employees
and retirees as defined in the Regulations to the Law. Certain
requirements have to be complied with, for example, businessmen
are required to exhibit a letter evidencing the activities to be
performed and their economic solvency, or in other cases, they
must substantiate their technical or professional capabilities to
be performed.
4. Directors: foreigners attending corporate shareholders
or board of directors meetings who will be granted a permit for
up to one year, renewable four times, with maximum stays of 30
days each. Exhibit of minutes evidencing their appointment is
required.
5. Political asylum: at the discretion of the Ministry of
the Interior this authorization is granted to foreigners in order
to protect their lives or liberty from political persecution, who
will be allowed to remain in the country for the duration of
persecution.
6. Refugees: the refugee is a foreigner who is granted
entry into the country to protect his life, security or liberty
when the same has been threatened by general violence, foreign
aggression, internal conflicts or a massive violation of human
rights, who will be allowed to remain in the country while such
conditions continue.
7. Students: foreigners entering the country to study in
official or private educational institutions. To obtain
authorization to enter the country, students must prove economic
solvency and adequate accreditation, and will be granted a permit
for up to one year renewable for as long as they remain students.
8. Distinguished visitors: prominent individuals at
discretion of the Ministry, who will be granted entry for up to
six months.
9. Local visitors: foreigners visiting maritime ports and
border cities will be granted permits for a period not to exceed
three days.
10. Provisional visitors: foreigners landing in
international airports without the required documentation who may
be allowed up to thirty days to obtain proper documentation; such
foreigners must make a deposit or bond to guarantee their return
to their country of origin.
The Ministry of the Interior has implemented the "Joint
Instructions Manual" to facilitate entry into Mexico of the
following non-immigrants: tourists, travelers in transit,
visitors, technicians, directors and students by obtaining
permits at Consulates in certain countries, rather than at the
Ministry of the Interior.
Foreigners entering the country with immigrant or
non-immigrant status, in the latter case as refugees, students,
political asylum, scientific visitors, technicians and
confidential employees, are bound to register at the Domestic
Foreigners Registry within the next 30 days of the date of entry.
Also, notice of any change in their immigration status or
characteristics shall be given to the Registry.
B. IMMIGRANT
Immigrants are foreigners authorized to enter the country
with the purpose of establishing permanent residency. Immigrants
will be allowed to remain in the country upon satisfying various
requisites and will be granted a permit for up to one year
annually renewed for up to five years, provided they comply with
the proper requisites established by the Ministry of the
Interior. Upon completion of the five year period as an
immigrant, the foreigner will be authorized as a permanent
resident ("inmigrado"). Immigrants staying out of the country,
more than 18 months in a continuous or non-continuous manner
during the five year annually renewable period will not be
granted the permanent resident status until a new five year
period has elapsed thereafter. When such absences total more than
2 years, foreigners will lose their immigrant status.
Immigrant categories include the following:
1. Retirees: foreigners over 50 years of age engaging in
non-remunerative activities but receiving from abroad funds such
as interests from investments of their capital in certificates,
banking institutions, or from any income coming from abroad,
provided they receive a monthly income equivalent to 400 times
the daily minimum wage in force in the Federal District and 200
times the daily minimum wage per family dependent. There are
restrictions regarding residence in certain cities of Mexico in
which there already are a high number of foreign residents.
2. Investors: foreigners entering the country to invest
their capital in industry, commerce or services. The minimum
investment shall be the equivalent of 40,000 times the daily
minimum wage in force for the Federal District when the
investment is made in the Metropolitan area, or 13,333 times for
investments out of such area.
3. Professionals: foreigners entering the country to
exercise a profession. Educational requirements must be
fulfilled to exercise the corresponding profession.
4. Scientists: foreigners who enter Mexico to perform
scientific, training or educational activities. The Ministry of
the Interior shall request an opinion from the National Council
of Science and Technology.
5. Confidential employees: foreigners entering the country
to perform activities as sole administrators or any other
managerial position at the discretion of the Ministry of the
Interior, in a business established in Mexico.
6. Technicians: foreigners entering Mexico to render
technical assistance and services for resident companies.
Training of Mexican workers is required within 60 days from the
date they are authorized.
7. Relatives: dependent spouses or blood relatives
provided they are minors, full-time students in Mexico, or
handicapped children, of an immigrant or permanent resident.
8. Family dependent: foreigners married to Mexicans or
those who have children born in Mexico.
If the marriage ends or the foreigner does not comply
with the obligations imposed by civil law, such as alimony, the
foreigner will lose this immigration status unless the foreigner
already has permanent resident status.
9. Artists and sportsmen: at the Ministry's discretion.
C. PERMANENT RESIDENT
Immigrants residing in the country for five years may
acquire permanent resident status, if they have complied with the
respective legal immigration provisions. Permanent resident
status must be requested within six months following expiration
of the fourth renewal of their immigrant status.
D. GENERAL COMMENTS
Foreigners entering the country as non-immigrants may import
a vehicle during the term of their status complying with certain
requisites, such as periodic renewals and posting bonds.
Immigrants may not import a vehicle. Non-immigrants and
immigrants may import household belongings with certain
restrictions. Among the various requirements that may apply to
obtain immigrant status are possession of a valid passport,
demonstration of economic solvency, and presentation of a
certificate from the police authorities in the last place of
residency indicating there have been no criminal violations, and
payment of fees, personal appearance before the granting
authority.
The Labor Law may be applicable to foreigners entering under
the various categories referred to above (generally see Section
XV and specifically Section XV.D. and for Tax Law applicability,
see Section XIV.C).
E. TEMPORARY ENTRY OF BUSINESS PERSONS UNDER NAFTA
Chapter XVI of NAFTA explains general principles under which
a NAFTA Party may authorize temporary entrance of business
persons of another NAFTA Party, without the need for an
employment permit.
The term business person under NAFTA includes the following
categories: business visitor, traders-investors, intra-company
transferees, and professionals.
1. Business visitors: performing activities related to,
among others, research and design; cultivation, manufacturing and
production; marketing; sales; distribution; after-sales services
and general services. (See NAFTA Chapter XVI for detailed
description).
2. Traders-investors:
a) Traders: of goods or services principally among
NAFTA Parties.
b) Investors: establishing, developing, administering
or providing advice or key technical services to the operation of
an investment.
3. Intra-company transferee: business persons employed by
an enterprise to render services to that enterprise, or a
subsidiary or affiliate thereof, to fulfill management or
executive functions, or functions involving specialized
knowledge.
4. Professionals: business persons seeking to perform a
business activity professionally in one of several permitted
areas. The exercise of a profession is permitted only after
compliance with the educational requirements established in
Article Five of the Mexican Constitution and other related
regulations, including NAFTA measures.
Business persons entering as professionals are
expressly prohibited from performing any activity that involves a
professional practice, without previously obtaining a
professional license from the Ministry of Education.
The procedures and conditions to obtain the corresponding
authorizations are contained in NAFTA and relevant regulations
regarding immigration, health, and national security measures.
All the above authorizations shall be temporary, and thus
visitors shall be classified as non-immigrants. NAFTA creates the
"FMN", a special immigration document, issued by the consular
offices or at the airlines, to business persons crossing the
border to develop a non-Mexican remunerative activity for a
maximum of 30 days. Upon expiration, a business person shall
apply for an FM3 as a non-immigrant business person performing
non-profitable activities.
The provisions of NAFTA Chapter XX shall govern dispute
resolution when authorization for temporary entry is denied as a
pattern of practice and all other administrative remedies have
been exhausted.
F. NATURALIZATION
The granting of nationality status to foreigners is
exercised in a very selective manner. The requirements include
five years residency with immigrant status, which could be
reduced to two years under certain circumstances. The granting
of nationality is exercised in a discretional manner and often
depends on economic, business and social considerations and the
foreign effect thereon.
Persons with relationships defined in the law to Mexican
nationals could be granted nationality without fulfilling certain
requisites such as residency. Along with Mexico's entrance into
various multilateral and regional organizations, considerations
are being made regarding liberalization of policies toward
naturalization.
XXIII. HUMAN RIGHTS
Human rights are fundamental entitlements that all persons
enjoy as protection against state conduct prohibited by
international law or custom.
International human rights law became codified in a series
of declarations and agreements that set forth international
standards, including: the Universal Declaration of Human Rights,
adopted by the United Nations General Assembly in 1948; the
International Covenant on Civil and Political Rights, effective
1976; and the International Covenant on Economic, Social and
Cultural Rights, effective 1976. Regional agreements implementing
these worldwide instruments, include the European Convention on
Human Rights and Fundamental Freedoms (effective 1953), the
Helsinki Accords (adopted in 1975), the American Convention on
Human Rights (effective 1978), and the African Charter on Human
and Peoples' Rights (effective 1986).
International and regional forums exist for the examination
of alleged human rights violations, i.e., the European Commission
of Human Rights and the Inter-American Commission on Human Rights
which investigate abuses and refer particular cases to regional
courts. The United Nations Commission on Human Rights studies and
makes recommendations regarding individual instances of abuse and
generalized standards.
From the various Mexican organizations formed to address
human rights issues, the National Commission on Human Rights was
created by Decree on June 5, 1990 and is commonly known as the
Mexican Ombudsman. The creation of the Commission recognized the
tendency of modern democracies to respect the constitutional
rights of both nationals and foreigners in the legal system and
political willingness to act accordingly.
The Mexican Government has had great interest in perfecting
liberty, peace and social stability and in reinforcing the
legality principle, all of which are major objectives of the
current administration, especially the enforcement of the rule of
law. To assure achievement of those objectives, the Commission
was established as a decentralized organ of the Federal
Government. The initial members of the Commission appointed were
several leading writers and intellectuals, with the Chief Justice
of the Supreme Court as its President. It has been proposed that
the concept of the Commission as a protecting decentralized
independent organ be incorporated in the Constitution.
The Commission is dedicated to protect the population
against administrative violations by individuals or groups of
persons with authority or by other individuals with the
acquiescence of the authorities.
The Commission has the following specific areas of
responsibility, among others: monitoring and defense of human
rights; coordination of execution of national and international
policies on human rights; and preparation, execution and follow
up on human rights violations claims.
In practice, the Commission issues recommendations to the
authorities to correct violations committed and the government
has been cooperating in observing the corresponding
recommendations.
During the past five years the Commission has attended to
over 36,000 complaints out of which 97% have been concluded, in
most cases, issuing the respective recommendation to the
authorities.
State legislatures are authorized to create equivalent
organizations at the local level.
In the case of the Human Rights Commission for the Federal
District which initiated activities at the beginning of 1995, it
has already received approximately 4,000 complaints of which more
than 800 were filed against various police units.
Finally, one of the most important objectives of the
Commission is to create a social awareness for the protection of
human rights, to curb its abuses and promote greater respect
thereof.
CONCLUSION
Mexico has experienced dynamic and unprecedented changes in
the last thirteen years. The current administration of Ernesto
Zedillo is expected to carry forward the changes initiated during
the previous two administrations of Miguel de la Madrid and
Carlos Salinas de Gortari that have radically reorganized the
State itself and its relations with labor, capital, the Church,
the farmers, its neighbors to the north, and the rest of the
world. The process of legal reform also has been initiated and
the Mexican government realizes the importance of improving its
responsibility to the public and its respect of and protection of
rights granted under the legal system, not only in order to
further attract foreign investment, but to improve the well being
of the public.
In what remains of this century, and into the next, Mexico,
Canada and the United States, as well as the rest of the nations
of the Americas, will be engaged in the rational reorganization
of hemispheric relationships whose political components were put
together by European conquest and historical accidents.
The movement towards integration is not a recent phenomenon.
The nations of Western Europe have been struggling to implement
the commitments entered into since signing of the Treaty of Rome
in 1957. The nations of the Western Hemisphere are not laden
with the historical and cultural inhibitions and differences that
have complicated the economic, social and political union of
Europe. On the other hand Mexico, Central and South America share
a common historical Iberian heritage thrust upon them together
with a common religion, and thus perhaps in the Americas economic
and political union will more rapidly evolve with the
commensurate benefits in living standards. NAFTA, though not as
far reaching as the Economic Union process, could be a model for
the eventual extension of free-trade relationships with Central
and South America already initiated by Mexico paving the way for
economic integration of the developed and underdeveloped nations
of the Hemisphere. Such integration will require a good faith
effort on the part of each nation and a willingness to learn and
adapt to new and ever changing conditions.
Mexico is a nation very distinct from its largest trading
partner, the United States of America. In fact, Mexico is still,
in many respects, underdeveloped and the pains of the political
and social upheaval of the Mexican Revolution, initiated in 1910,
which in its early years resulted in millions dead and a wrecked
economy, were and are long in healing.
The three administrations mentioned above have promoted
economic change leading to the creation of what has been called
the "New" Mexico. However, before this change of policy, Mexico
suffered through 12 turbulent years: beginning in 1970, the
sharp turn to the left, with excessive nationalism, increased
land reform, statism, and the Foreign Investment and Technology
Laws, created havoc for both Mexican nationals and foreign
investors; and the Devaluation of '76, the brief oil boom,
massive foreign borrowing, and the bust of '82 further
exacerbated already looming problems.
We suggest that the changes initiated during the last
thirteen years far surpass any in Mexico since the changes
brought about as a result of the bloody Mexican Revolution.
Mexico has experienced slow, steadily increasing economic growth,
without the heavy hand of the military, but also without
democracy, U.S. style. We are witnessing in some parts of the
world, economic chaos where democratic reform is perhaps too
precipitous. How to manage orderly change in both, at the same
time, is a challenge, still awaiting clear answers.
The profound changes of the last thirteen years are
continuing, with the process becoming more dynamic as time
progresses. For example, the Mexican government has begun to
privatize sectors until recently considered taboo, such as the
banking system and telephone services; and has also approved
constitutional reforms allowing private investment in gas,
railroads, telecommunications and agribusiness; while at the same
time eliminating most trade barriers as per international trade
agreements. Mexico has also reestablished relations with the
Vatican and has modified the relationship between the Church and
State.
Furthermore, Mexico has also made great strides in
addressing other pressing issues by passing legislation on the
protection of the environment and human rights; establishing an
autonomous Bank of Mexico independent of the executive branch,
and improving the credibility of the election process. Mexico has
also witnessed the breakdown of the ruling PRI party's monopoly
on power as evidenced by recent opposition party victories in
gubernatorial and senate elections and the appointment of an
Attorney General from the opposition. Such changes are
consistent with the declared policy of modernization of Mexico to
become an active partner in the globalized economic world in
which Mexican major companies are already buying into large
foreign companies.
Will the reforms endure??? Many by their nature are
irreversible. Mexico cannot go back to an entirely closed
economy and an old style "ejido" agricultural system. New
governments may chip away, somewhat, but the bedrock of change
will be hard to destroy. The Mexican statists and radical
nationalists, the left in general, are not dead, example the
"Chiapas affair," and the government has kept them at bay, but
their constituency are workers and the poor. The approval of
NAFTA was important to keep the economy moving and to maintain
forward momentum.
Mexico has abandoned statism, adopted a neo-liberal economic
system, and has, despite its stormy past, agreed to lay the
foundations for what could be a hemisphere-wide community
together with the United States and Canada as a basis. The world
has recognized Mexico's commitment to free market reform and
integration into the global economic system as further evidenced
by the IMF and World Bank financial assistance at the moment of
recent economic crisis and its acceptance as a member of the
OECD. Mexico's experience has awakened the G-7 countries, among
others, to reflect on mechanisms to forewarn or prevent sudden
similar occurrences in an ever growing, interdependent global
economy. Currently, as begun in Miami in December, 1994,
resulting in a ministerial meeting in Denver in June, 1995, the
hemispheric goal to integrate a market of 800 million consumers
from Alaska to Argentina by 2005 is under way.