Subscription
Information | Documents
on Demand | User's
Guide | Guía
para Usuarios | NLCIFT Homepage
| Email
us
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 pet