Maquila Manufacturing in Mexico: Key Milestones

Manufacturing in Mexico

Manufacturing in Mexico presents a range of benefits that make it an attractive destination for businesses looking to enhance their global competitiveness. With a well-established industrial base, competitive labor costs, and proximity to key markets like the United States and Canada, Mexico provides significant opportunities for cost savings and operational efficiency. The country’s favorable trade agreements, such as the USMCA, and government incentives for foreign investment further boost the appeal for manufacturers. Additionally, Mexico's growing skilled labor force and advanced infrastructure make it a prime location for industries ranging from automotive to electronics.

Overview of Mexico's Manufacturing Landscape

Mexico has emerged as a major manufacturing hub in North America, attracting a diverse range of industries due to its strategic location, competitive labor costs, and favorable trade agreements. The country's manufacturing sector is characterized by a strong automotive industry, as well as significant production in aerospace, electronics, and medical devices. Mexico's proximity to the United States and Canada provides easy access to a vast North American market, making it an attractive destination for companies seeking to expand their operations.

This blog post will guide you through the key milestones  maquila manufacturing company requires to start operations in Mexico.

Milestones for Maquila Manufacturing in Mexico

This blog post will guide you through the key milestones  maquila manufacturing company requires to start operations in Mexico.

Pre-Operative Phase: Setting the Groundwork

A startup manufacturing project in Mexico is divided into two different phases:

• Pre-Operative Phase
• Operative Phase

The pre-operative phase involves all the steps required to set up a maquila operation in Mexico until it’s ready to begin production and perform its first export. During the pre-operative phase, the readiness of the business, facility, permitting and workforce are of utmost importance. In this phase, most of the paperwork for incorporation, permits, studies, agreements, registrations and policies like compensation are defined.

Here's what you need to accomplish. Consult below for a generalized timeline of the milestones and activities for the startup of a maquila manufacturing operation in Mexico.

Note - Studies and permitting authorizations such as EHS Pre-operative Studies, Importer of Registry, IMMEX Program and VAT Certification are based on Environmental and Customs Law, however, could extend due to current change of administration.

Mexican Entity Incorporation

Obtain Notarized Public Deed and Tax ID: 

The first step required to start up a maquila manufacturing operation in Mexico is to incorporate an entity (later referred to as "Mexican Entity"). This involves obtaining a notarized public deed and registering for a Tax ID ("RFC" for its acronym in Spanish) before the Mexican Tax Authorities ("SAT" for its acronym in Spanish). Additionally, an on-site Power of Attorney (POA) is required by a public notary in Mexico to process the incorporation. There are two main types of corporations: "sociedades anónimas" which are similar to U.S. corporations and "sociedades de responsabilidad limitada" which are similar to LLC's in the U.S.

Obtain Bank Accounts:

Additionally, in order to efficiently manage the project finances in full compliance (including payroll payments and suppler payments), the Mexican entity must set up business bank accounts with local banking institutions.

Acquiring Legal Possession of the Facility 

Obtain Purchase or Lease Agreement of the Facility:

In order to accredit legal possession of the manufacturing facility the Mexican entity, the POA in Mexico must accredit the purchase or lease agreement before a notary public.

Finalize Tenant Improvements:

From a permitting perspective, in order to accredit that the productive processes can be performed at the site, the facility is required to have administrative offices, restrooms, dining rooms, and designated areas for warehouse storage of temporary imports.

Hook Up Utilities Services:

Finally, from a permitting and hiring perspective, services like electricity, water, and natural gas must be hooked up and ready for use.

Accounting and General Administration Set-up

In order to setup all administration, accounting, fiscal and tax configurations effectively and in full compliance, the following activities must be fulfilled:

Obtain Mexican Institute of Social Security (IMSS) Registry:

To hire the project's first employee by the Mexican entity, it must obtain the registry before the Mexican Institute of Social Security (IMSS) to provide social security benefits to its employees.

Implement ERP System for Accounting Compliance:

In order to track financial transactions, the Enterprise Resource Planning (ERP) system is to be implemented to comply with Mexican fiscal laws, ensuring accounting practices meet all local standards. 

Implement Purchasing Module:

Finally, in order to keep track of purchase orders, invoices, payments and receipts, a purchasing module needs to be implemented to guarantee compliance of transactions specifically for VAT refund purposes, a key benefit of the IMMEX program.

Read more about the IMMEX program requirements.

Human Resources Configurations

There are many key functions and activities that are both legally required and commonly provided for engagement and retention of talent within a manufacturing facility in Mexico.

Define Salaries and Benefits Packages for Workforce:

First,  its important to outline a competitive salary and comprehensive benefits package to attract and retain qualified personnel. A salary benchmark is very important as industrial parks in Mexico are very competitive with companies offering nearby opportunities. Other important perks to consider including: uniforms, cafeteria service, private transportation service, private security, or other perks in the community.

Hiring of Salary and Operative Personnel:

After the Social Security (IMSS) registration, start recruiting for both administrative and operational roles, ensuring you have the right team in place for your startup. Its important to have a project management methodology that contemplates recruitment time, transition, onboarding and training in order to meet production or ramp-up KPIs. Outsourcing in Mexico is no longer permitted, so understanding the types of employment contracts and their limitations is important for business continuity.

For additional information, consult our free labor law e-book.

International Trade Compliance

"Maquiladoras" or "Maquilas" are factories in Mexico owned and operated by foreign companies without permanent establishment in Mexico. They develop products, with raw materials imported on a temporary basis through the IMMEX Program, owned by the foreign company, with finished goods destined for the export market. They operate under a preferential tax and fiscal program called "Safe Harbor", granting them advantages for operation such as exempting 30% of income tax law caused by the sale of products issued by the foreign entity from products developed at the maquila operation in Mexico.

Read more about the IMMEX Framework.

The following activities are required to perform the first export of products developed by the maquila in Mexico.

Obtain Importer of Registry:

First, the Mexican entity must register as an importer of record with the Mexican Tax Authority. This registration enables the permanent importation of machinery, equipment, tools and raw materials, ensuring compliance with Mexican import regulations. Additionally, a Customs Broker must be designated for customs procedures, as their contact information and company details are required during the registration process. 

Obtain Sectorial Importer of Registry:

If the project requires the import of lubricants, steel or textiles, a sectorial registry is required to import sensitive materials. This is done after the Importer of Registry is obtained. Its recommended to obtain HTS Codes of the machinery and equipment, tools and raw material prior to shipping the machinery. Regulations or Mexican standards could apply that delay the import process.

Install Main Machinery and Equipment:

Additionally, the project requires the setup of primary machinery and equipment that will be used in the production process for development of finished goods. It can be either imported via consignment by the Mexican entity (thus owned by the foreign company) or purchased locally by the Mexican entity.

Obtain IMMEX Program:

Further, the Mexican entity must apply for the IMMEX program, an instrument which allows the temporary importation (between 8 and 16 months) of goods that are used in an industrial process or service to produce, transform or repair foreign goods imported temporarily for subsequent export. The primary goal of the IMMEX Program is to enable foreign companies to manufacture in Mexico through cost-efficient methods and incentives while still focusing on the quality of goods being produced. 

Consequently, the following benefits are not required to be obtained to perform the first export of products, however, they are benefits that could reduce operations costs: 

Obtain PROSEC Program:

If applicable, the Mexican entity may apply for the Sectorial Promotion Programs (known by its Spanish acronym, "PROSEC"). This program allows the entity to obtain preferential ad-valorem tariffs (General Import Tax) on the importation of raw materials and components used in the manufacturing process, reducing the rate from 25% to 0%, regardless of whether the finished goods are intended for export. This benefit is available only if the imported raw materials used in the product's development are listed in the PROSEC Decree.

It is important to note that, to request the PROSEC Program, the Mexican entity must accredit that the productive process is conducted on-site before submitting the request.

Obtain VAT Certification:

In Mexico, Value-Added Tax (VAT) is set at 16% and is applied to either the sale or import of goods. Mexican entities operating under IMMEX Program are subject to this 16% VAT rate when importing machinery and equipment, tools and raw materials.

However, if the Mexican entity exports at least 60% of the value of these imports and has more than 10 employee registered before Social Security (IMSS), it can apply for a VAT Certification from the Mexican Tax Authority to use the VAT from these imports as credit, effectively exempting them from paying the VAT.

In order to accredit a 60% return rate, the Mexican Entity is required to submit on a monthly basis the discharge reports obtained from Annex 24 Inventory Control System.

Environmental Health and Safety Compliance

It is crucial to maintain a safe and healthy working environment for all employees. Compliance with Mexican Environmental Health & Safety (EHS) laws are important for the well-being of your team, as well as avoiding penalties or fines.

Submit Environmental Impact Study:

To connect machinery and equipment used for productive processes, the Mexican entity must obtain an Environmental Impact Study issued by the Ministry of the Environment, assessment developed and authorized by an accredited environmental party, to ensure compliance with local environmental regulations. This includes obtaining both facility-related and construction-related permits, such as a construction license, construction environmental impact study, and land use/change permit.

The process requires the submission of a Preventative Report and/or Environmental Impact Manifestation including technical studies and describing the environmental conditions prior to commencing the project.

Additionally, to submit an Environmental Impact and Risk Assessment, it is necessary that the Phase 1 and Phase 2 Environmental Site Assessments are conducted.

Health and Safety Compliance:

In order to comply with NOM-002-STPS-2010 a study must be performed to determine the risk of fire. It aims to classify the fire risk of the workplace, including inventories of combustible solids or liquids. It allows the determination of the most effective extinction method for the existing type of fire risk.

For more information, consult our free EHS Regulation in Mexico e-book.

Conclusion: Manufacturing in Mexico

Starting a maquila operation in Mexico involves several critical milestones that span from company incorporation to obtaining the corresponding permits, registries, and hiring of personnel to develop a product in Mexico that is then exported abroad. By meticulously planning and executing each activity, global manufacturers can capitalize on the numerous benefits of manufacturing in Mexico, in full compliance of the law.

Remember, success in the maquila industry doesn’t just happen—it’s built through careful preparation, diligent compliance, and continuous improvement. If you’re ready to embark on this journey, start with understanding these key milestones and ensure each one is met with precision and care.

For more information on how to navigate these milestones, or to get personalized guidance tailored to your business needs, feel free to reach out to us.

Let’s make your maquila operation a success!

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