Introduction
With its strategic location, skilled labor force, and favorable trade agreements, Mexico is becoming an increasingly attractive destination for nearshoring. Foreign corporations, particularly those in the manufacturing sector, are eyeing Mexico as a prime location to expand their operations. If you're considering incorporating a business in Mexico, this guide will provide you with all the essential information you need to know.
Also consult the Doing Business in Mexico: A Manufacturer's Guide for additional details.
Investing in Mexico
Foreign investors can fully own businesses in most sectors in Mexico. However, certain key industries are reserved solely for the Mexican government or its citizens. These include oil, electricity, and public transportation. For other activities, there are limitations on foreign ownership. You might need special permission or be restricted on the percentage of a company you can own. Before you invest, check the regulations for your industry.
A helpful starting point is the Mexican Foreign Investment Law:
- Article 5: Lists activities completely off-limits to foreign investors.
- Article 6: Lists activities restricted to Mexican citizens (like some professional services).
- Article 7: Lists activities with specific foreign ownership percentages (like fishing or broadcasting).
- Article 8: Lists activities requiring special permission for foreign ownership exceeding 49% (like airlines or education).
There are three ways that foreigners may invest in Mexico:
- Foreign individuals wishing to invest through the opening of an establishment or acquisition, expansion or relocation of an existing one
- Foreign corporations created in accordance with the law of a foreign country, wishing to invest through the opening of an establishment or acquisition, expansion or relocation of an existing one
- Incorporation of a Mexican legal entity or acquisition of shares in the capital stock of Mexican companies
Consult the government's full Manual of Procedures to Invest in Mexico for a full explanation.
To incorporate a business in Mexico, foreign corporations must adhere to several requirements. Some of the primary ones are listed below.
Beneficial Owners
Since 2022, Mexican companies must identify and document the real people who ultimately own the company (beneficial owners). This information needs to be kept on file at the company's address. The law requires following a chain of ownership, even if it involves other companies or trusts.
Power of Attorney (POA) / Legal Representative
Foreigners can own 100% of a company’s equity in Mexico. However, you will need a person representing the company to operate. This person can be a foreigner or a Mexican citizen. However, if he is a foreigner, he would need to obtain his Mexican residency visa, his Mexican tax I.D. and his Unique Population Registry Code (CURP) to be able to represent the company. You must start looking for this person when you begin your expansion if you wish to establish a legal entity.
Visas
Foreign investors and employees may need temporary or permanent resident visas, depending on the length and nature of their stay. Foreigners from applicable countries that wish to visit Mexico may enter on a Tourist Visa that is good for 180 days. This visa allows you to enjoy tourism or business meetings, for example. You cannot work in Mexico with a Tourist Visa.
The Mexico Investor Visa is a residency card that allows foreigners who have investments in Mexico to stay in the country for up to four years. There is a minimum capital investment in equity, assets for business use, or developing business activities and hiring employees in Mexico.
Incorporating an Entity in Mexico
If the operating structure requires the incorporation of an entity, consider up to 3 months in your timeline for the process. You will require the Articles of Incorporation, Bylaws, Power of Attorney, Proof of Citizenship, Proof of Residency, Proof of Capital. Additionally, you may need to obtain a tax ID number and an electronic signature required by the tax authority in Mexico (SAT).
Obtain Legal Representative: As a foreign company, you are required to appoint a legal representative in Mexico who will act on your behalf and ensure compliance with local laws and regulations.
Company Name Registration: Obtain approval for your company name from the Ministry of Economy. You may choose to pursue a trademark as part of your investment plan.
Articles of Incorporation: Draft and notarize the company's articles of incorporation, which must include the company's name, address, purpose, capital stock, and management structure.
Company Bylaws: Your company bylaws, which need to be legalized by a notary public, outline your business goals, how it operates, and decision-making structures. Public companies must file financial statements, while private ones don't.
Company Registration: Register with the National Registry of Foreign Investments (RNIE). Authorization from the National Foreign Investment Commission may be required for certain investments. Additionally, an annual registration in the Mexican Business Information System (SIEM) is required for all individuals and legal entities with business activities, subject to a taxation regime.
Obtain Notarized Public Deed and Tax ID: The first step is to incorporate your entity in Mexico. This involves obtaining a notarized public deed and registering for a Tax ID (RFC) with the Mexican Tax Authorities (SAT). A public notary in Mexico will require an on-site power of attorney to process the incorporation.
Obtain Bank Accounts: Set up business bank accounts to manage your finances efficiently and to comply with local financial regulations. The bank account must be in the name of the Mexican entity and will require a minimum capital deposit to open.
Note - for other, specific business activities such as the acquisition of land, there are additional procedures, requirements and verification processes that are not outlined in detail in this article.
Types of Business Entities in Mexico
Employer of Record (EOR) - a Mexican EOR legally hires and administers employees that you wish to hire in Mexico. No business incorporation is needed for this model.
Individual Business "Persona Física" - individual business-owners need to be residents of Mexico
Setting up a Trust - a legal corporation that can be used to hold assets, real estate and even businesses
Branch or Franchise - franchises in Mexico are regulated by Article 245 of the new Industrial Property Law, and franchising agreements must be recorded with the Mexican Institute of Industrial Property ("IMPI")
Representation Office - establishing a representation office without an income
New Mexican Entity - Mexico offers several business entity options, each with its own advantages and requirements. Here's a simplified breakdown of the most common ones:
Sociedad Anonima (S.A.) - Similar to U.S. Corporations
- Ownership: Limited liability for shareholders (owners).
- Management: Board of Directors or Sole Administrator.
- Shares: Freely transferable and tradable.
- Minimums: 2 shareholders, 1 Director.
- Benefits: No minimum capital requirement, good for attracting investment.
- Drawback: Requires a Statutory Auditor (additional cost).
Sociedad de Responsabilidad Limitada (S. de R.L.) - Similar to U.S. LLCs
- Ownership: Limited liability for partners (owners).
- Management: Directors (fully liable for administration).
- Shares: Not freely transferable or publicly traded.
- Minimums: 2 partners, 1 Director (maximum 50 partners).
- Benefits: No minimum capital requirement, simpler structure than S.A.
- Drawback: Less attractive for outside investment.
Sociedad por Acciones Simplificada (SAS) - Simplified Stock Company
- Ownership: One or more individuals (cannot be a legal entity).
- Management: Similar to S.A.
- Shares: Similar to S.A. (with limitations).
- Minimums: No minimum capital requirement.
- Benefits: Very simple and inexpensive to set up.
- Drawbacks: Limited annual income threshold (must convert to another type if exceeded).
Sociedad Anónima Promotora de Inversión (SAPI) - Similar to U.S. Private Equity
- Structure: Similar to S.A. with additional benefits.
- Ownership: Easier to attract investment through flexible partner agreements.
- Management: Board of Directors required.
- Minimums: No minimum capital requirement, simpler structure than S.A.
- Benefits: Easier access to capital, opportunity for growth, ability to repurchase shares.
- Drawback: More complex structure than S.A.
Choosing the right entity depends on your specific needs. Consider factors like ownership structure, investment goals, and future growth plans.
There are many ways to structure the operation in Mexico that depend on different criteria in the business plan. Review different graphics of potential operational models on The Mexico Journey page.
Doing Business in Mexico
The incorporation is just the first step to getting up-and-running in Mexico. There are many additional pre-operative activities and milestones. Each operation will employ different strategies; some of the more applicable requirements are listed below:
Permanent Establishment (PE)
Any foreign resident, person or company, that is generating wealth through operations in Mexico, by itself or through others must tribute income tax upon the generated wealth that is attributed to the operation in Mexico. The 2020 tax reform in Mexico solidifies the requirement for all foreign residents to obtain a tax ID in Mexico, even despite previous exemptions for shelter service providers.
Foreign companies operating in Mexico through an agent (such as a shelter service provider) can now be considered to have a physical presence (PE) in two new situations:
- The agent habitually plays a leading role in finalizing contracts for the foreign company.
- The contracts are made in the foreign company's name, involve property rights, or require the foreign company to provide a service.
A non-resident can avoid triggering a PE by engaging in maquiladora operations, as long as certain requirements are maintained. The requirements include the conditions that the non-resident be resident in a tax treaty country and that the Maquiladora complies with the transfer pricing provisions (‘safe harbor’) to determine its tax profit, as provided in the Mexican Income Tax Law.
Parties resident abroad and engaged in Maquila operations through shelter Maquila companies may not be considered as creating a PE in Mexico when certain requirements are met and certain information is provided to the Mexican Tax Administration in relation to the gross revenues earned and income taxes paid by its non-Mexican-related party.
Corporate Taxes in Mexico
Income Tax: Income tax in Mexico is a federal tax payable at a flat 30% rate for corporations, like a direct tax on the profit obtained. Residents in Mexico, residents abroad with a permanent establishment in Mexico or sources of wealth in Mexico, are compelled to do monthly prepayments under certain business conditions to the Mexican SAT authority. Transfer pricing regulations in Mexico are ruled by the Income Tax Law and control transactions between related companies at local and international level. Maquila operations are specifically ruled by the Safe Harbor methodology which is to determine the taxable profit out of the higher amount between 6.9% of the total value of assets and inventories or 6.5% of the total amount of cost and expenses of the operations must be considered.
Value-Added tax is payable at a general rate of 16% on sales of goods and services, import of goods and lease payments. Some exemptions apply. Declarations must be done monthly, and taxpayers can apply for a credit on the VAT paid on purchases and expenses versus VAT collected from clients on sales. Refunds of VAT are available for companies showing higher credits than collections.
Payroll Tax is a state fee that is paid when carrying out transactions in the company’s labor relations. It is declared monthly to the Finance Secretary of the corresponding state, and ranges from 2-3%.
Profit-Sharing: Employers in Mexico are obligated to pay workers a share of the profits based on their annual tax declaration. The amount to be distributed among the workforce is 10% of the profits before income tax. It must be paid within 60 days of the annual declaration of taxes to the authorities.
Interests, Royalties and Technical Assistance Fees: interests paid to a resident abroad with permanent establishment in Mexico are subject to a withholding tax rate of 4.9% to 35%. Royalties paid to a resident abroad are subject to a withholding tax of 35% and the rate may be reduced with a tax treaty. Technical Assistance paid fees are subject to a 25% withholding tax, unless the tax is reduced with a treaty.
Property / Real Estate Tax: in Mexico, the acquisition is between 2-4% of assessed value of the property at the moment of the purchase. Then it will be paid annually and is calculated at a fraction of the value of the property.
Tax Incentives in Mexico
VAT payments on temporary imports can only be exempted if the taxpayer has the IMMEX Program and the VAT Certification. It works as a temporary VAT credit granted by the SAT to the taxpayer for a specified period that the raw materials and machinery will be in Mexico.
Mexico’s Northern and Southern borders receive a benefit that consists of a tax credit equivalent to 50% of VAT, thus an 8% tax. The taxpayer must reside in said regions. These regions also enjoy an Income Tax credit, allowing these companies to be subject to only 2/3 of the tax caused by the income carried out from activity in these regions.
Government & Business Regulations
The legal frameworks in Mexico are complex and constantly evolving. The Mexican Constitution is the supreme law of the land and holds the highest authority. All laws, regulations, and actions of the government much comply with the provisions of the Constitution. The Mexican Constitution establishes basic principles of government. The Constitution is supplemented by more than 2,600 federal, state and local laws and regulations, including the Federal Civil Code, the Federal Criminal Code, the General Law of Commercial Companies and the Federal and the Commercial Code.
If any law contradicts the Constitution, it can be declared unconstitutional and invalid. Additionally, the Mexican legal system incorporates principles of international law and international treaties that Mexico has ratified. In certain cases, international treaties may have precedence over national laws.
Mexico has a legal system known as Civil Law (also known as the Roman-Germanic system), and is very formal and bureaucratic. The notary public office in Mexico holds a lot of weight and responsibility. Many legal acts must be conducted in front of them. For foreign companies, this will most likely require a power of attorney and a local partner to facilitate.
Labor Laws: The Mexican Federal Labor Law was reformed in 2019, with most notable changes to labor laws that protect workers’ rights. These laws govern everything from minimum wage and overtime payments to freedom of association and labor conciliation requirements.
Tax Laws: Mexico has a complex tax system that includes a variety of taxes, such as income tax, value-added tax (VAT), and property tax. Manufacturers must register with the Mexican tax authorities and file tax returns on a regular basis.
Intellectual Property Laws: Mexico has strong IP Laws that protect patents, trademarks, and copyrights. Manufacturers must register their IP in Mexico to protect them from infringement.
Data Protection Laws: This applies to government, individuals and entities that obtain, use disclose and store personal data.
Trade Laws: Mexico has a complex system of trade laws that govern imports, exports and investment. Manufacturers have access to a network of trade programs designed to promote trade and investment, under strict compliance standards.
Environmental Laws: Mexico has a number of environmental laws. These laws include governance on air pollution, water pollution, and waste management. There are fines and penalties associated with non-compliance by manufacturers.
Corporate Laws: Mexican corporate law are primarily governed by the General Law of Mercantile Societies. This legal framework is based on civil law principles and establishes the rights and obligations of shareholders, directors and officers within corporations operating in Mexico.
Permits & Licenses
There are a number of permits and licenses required to launch and operate a business in Mexico. They vary greatly depending on industry, type of operation, type of procedure, and location. Some of them include:
- Real Estate: Required for obtaining land outside of the restricted zone. Other requirements apply for sensitive or restricted transactions.
- Environmental Permits: Required for manufacturing businesses due to their potential environmental impact.
- Construction Permits: for any alteration to the building or grounds, a construction permit is typically required. The environmental impact assessment of the construction project is also most-likely required.
- Health and Safety Permits: Occupational health and safety permits ensure compliance with local labor laws.
- Mexican Institute of Social Security Registry: Register with the Mexican Institute of Social Security (IMSS) to provide social security benefits to your employees.
- Import Registry Permits: Depending on the trade activity, there may be trade deferral or special sectorial programs in which to obtain authorization. These may include: the IMMEX Program, PROSEC, VAT Certification, Authorized Economic Operator, etc
Read about the key milestones of setting up a maquila manufacturing operation in Mexico.
Compliance & Reporting
Once your company has been incorporated, the notary public will give you your company’s corporate books. If he does not, then you would have to buy your own. Corporate books in Mexico are physical books with sequenced sheets of paper that, by law, companies must fill and update.
The corporate books of a Mexican company consist of the following.
- Shareholders’ Registration Book
- Shareholders’ Meetings Minutes Book
- Changes In Stock Capital Book
The information provided in this blog post is for general informational purposes only and should not be construed as legal advice. While we strive to provide accurate and up-to-date information, laws and regulations are subject to change. Please consult with a qualified attorney for advice on your specific situation.
Conclusion
Incorporating a business in Mexico offers numerous opportunities but requires careful navigation of local laws and regulations. By understanding the requirements, foreign ownership implications, and necessary permits and licenses, you can establish a successful enterprise in Mexico.
Ready to take the next step? Contact our experts to help you with every aspect of incorporating your business in Mexico. Let's make your nearshoring venture a success!