Ways to invest in Mexico
A) Company with separate legal personality
There are two main types of companies: the sociedad anónima (“S.A.”)1 or public limited company, and the sociedad de responsibilidad limitada (“S. de R.L.”), or limited liability company. 1 An S.A. may also be incorporated as a sociedad anónima promotora de inversión (“S.A.P.I.”), or private equity frm. S.A.P.I.s are used for mutual funds or similar entities, given that they offer greater rights to minority shareholders and allow for more flexible mechanisms in respect of shareholders’ profit-sharing rights.
S.A.s and S. de R.L.s may be incorporated either as fixed-capital companies or as variable-capital companies (in the latter case, attaching the letters “de C.V.”). The primary difference is that variable-capital companies may increase or reduce their capital within the limits established in their bylaws, through a resolution taken at the general shareholders’ meeting and without having to modify their bylaws or take additional administrative steps. In view of this flexibility, the majority of companies are incorporated with variable capital.
In broad terms, S.A.s and S. de R.L.s are subject to the same legal and tax obligations. Characteristics of both types of company include:
- Incorporation by individuals and/or legal entities, whether Mexican or foreign, subject to certain prohibitions and restrictions on foreign investment.
- At least two shareholders, one of which may be a minority shareholder (except for in the case of the sociedad por acciones simplifcada, or simplifed joint stock company, which can be solely owned providing its shareholders are individuals).
- Shareholder liability up to the amount of their respective capital contributions.
- The minimum capital will be that established by the shareholders in the bylaws (no minimum is stipulated by law).
- Deed of incorporation must be signed before a public authenticating official and subsequently entered in the Public Registry of Property and Commerce.
Nevertheless, there are significant differences between S.A.s and S. de R.L.s, including the following:
- The shares representing the capital of S.A.s are negotiable securities that can be transferred through endorsement, while shares of a S. de R.L can only be transferred with the prior approval of the general meeting, thereby affording the shareholders in general meeting the right of first refusal.
- Unlike in an S.A., in a S. de. R.L., approval of the shareholders in general meeting is required in order to admit a new shareholder.
- Also unlike in an S.A., the number of shareholders in an S. de R.L. is limited to 50.
- Furthermore, S. de R.L.s are not legally required to have a statutory auditor, which can reduce the costs of engaging an accounting firm.
- S. de R.L.s are more flexible than S.A.s in terms of mandatory administrative requirements. By way of example, S.A.s must publish: (a) the call to general shareholders’ meetings; (b) the final liquidation balance sheet; and (c) financial statements when so required by the shareholders in general meeting.
Entity without separate legal personality. No limit on the liability of the parent company.
Procedural formalities for incorporating a company
- Authorization to use the corporate name of the company.
- Notarized powers of attorney for incorporation of the company.
- Deed of incorporation signed before a public authenticating offcial and registration at the Public Registry of Property and Commerce.
- Registration of the company in the Federal Taxpayer Registry (Mexican RFC).
- Registration of the company in the Foreign Investment Registry (Mexican RNIE) (if foreign investment is involved).
General matters regarding investment
- Foreign investment controls: Mexican legislation does not establish any restrictions on the remittance of dividends or the repatriation of capital.
- Mexican companies having received foreign investment must register with the Foreign Investment Registry and may be required to submit quarterly and annual filings.
A) Direct taxation
Income tax (Mexican ISR): Resident companies
Nature: Tax levied on worldwide income of companies resident in Mexico.
Tax residence: Companies are resident in Spain if their place of effective management is in Mexico.
Tax base: Taxable income or tax loss, calculated as gross income less authorized deductions (business expenses).
Tax rate: 30%
Dividends and capital gains: No tax is levied on dividends or share profits received from other companies resident in Mexico. Dividends received from nonresident companies are considered taxable income. However, subject to certain requirements, a tax credit is allowed for foreign income tax paid by companies distributing dividends, both at the first and second corporate tier.
Capital gains and losses are treated as ordinary income and ordinary losses, except for the majority of losses derived from the sale of shares.
Offset of tax losses against future profits: Tax losses can be offset progressively to zero during the ten years following the year in which the loss was recorded.
Rules on related-party transactions: In line with OECD transfer pricing guidelines, related-party transactions must be carried out at arm’s length. Companies are required to maintain supporting documentation in that regard.
Main anti-avoidance rules:
- Sham transactions: As part of a tax inspection, the tax authorities may qualify a transaction as a sham transaction for tax purposes, providing it was a cross-border transaction between related parties. In these cases, the taxable event must be the transaction effectively carried out by the parties.
- Taxation of and disclosure requirements in respect of income taxed in tax havens or obtained through foreign flow-through legal vehicles or entities over which the Mexican taxpayer has effective control.
- Thin capitalization rules limiting the deductibility of finance costs (interest barriers).
- Non-deductibility of expenses incurred abroad on a pro-rated basis (i.e., those assigned on the basis of objective criteria, such as asset values, sales figures and number of employees) with non-Mexican residents.
Inflation adjustment: Among other obligations, corporate income tax regulations require that companies calculate an annual inflation adjustment. This restatement could generate taxable income or a deductible expense, depending on the balance of the taxpayer’s debts and credits.
A company is deemed to have obtained a gain when, as a result of inflation, the value of its borrowings (third-party financing) has decreased. In contrast, the company has incurred a loss when the value of its monetary assets (financing granted to third parties using own funds) decreases due to the effect of inflation.
Formal obligations: Among others, monthly prepayments, fling of an annual corporate income tax return within three months after year-end, informative returns, keeping and presentation of electronic accounting records and official tax receipts.
Income tax (Mexican ISR): Resident individuals
Nature: Tax levied on the worldwide income of individuals resident in Mexico for tax purposes, regardless of the residence of the payer.
Tax residence: An individual is a tax resident in Mexico if he or she has a permanent home in Mexican territory. If an individual also has a home in another country, he or she is considered a Mexican resident if his or her center of vital interests is in Mexico.
Tax base: Gross income received in cash, kind or credit, accrued, through services or through any other means.
Tax rate: Progressive tax (minimum rate of 1.92% and maximum rate of 35%), applicable as from MXN$3,000,000.
Dividends: Dividends or other profit-sharing income received from Mexican resident companies are included in the gross income of individuals resident in Mexico, although these individuals may claim the underlying corporate income tax paid (30% corporate income tax rate) as a credit against their ultimate tax liability.
As from 2014, in the case of both Mexican and foreign individuals, dividends received from Mexican resident companies are subject to an additional tax of 10%, to be withheld by the Mexican company. This is a final tax.
Income tax (Mexican ISR): Nonresidents
Nature: Tax levied on the Mexican-source income of nonresident individuals and companies.
Permanent establishment (PE): Income attributed to the EP is taxed in accordance with corporate income tax rules (Title II of the Mexican ISR Law), subject to certain exceptions (for example, royalties, fees, commissions and interest paid to the parent company are non-deductible).
Income obtained without a PE:
Main tax rates:
- Wages and salaries: 15%/30%.
- Fees: 25% of gross income.
- Rental income: 25% of gross income.
- Sales of real estate: 25% of gross income/35% of net gain, subject to certain requirements.
- Sales of shares: 25% of gross income/35% of net gain, subject to certain requirements.
- Dividends: 10% of earnings distributed.
- Royalties: 25% know-how/35% use of patents, invention certificates, trademarks, etc.
- Interest: 4.9%-35%.
Rates may be reduced or taxes may be eliminated upon application of tax treaties.
B) Indirect tax
Value added tax (VAT)
Nature: Indirect tax levied on sales of goods, provision of independent services, rentals of goods, and imports of goods and services. In certain cases, VAT is paid through a withholding made by the payer.
VAT is primarily borne by consumers and, in general, is neutral for companies that act as collection agents, given that they charge output VAT to their customers and receive a credit for input VAT paid to their suppliers. VAT is not neutral in sectors that carry out VAT-exempt activities. In general, the VAT liability is triggered when payment is effectively collected (cash basis).
In the case of expenses incurred in the period prior to commencing activities subject to VAT, a VAT refund can be fled in the month following that in which the subject expenditure or investment was made. However, the maximum duration for this period is one year from the date the first VAT refund request is fled, unless the taxpayer evidences that its start-up period was longer due to the underlying investment project.
Tax rate: 16% and 0% (the latter for the import of goods and services and sales of foodstuffs and medicines, among others).
Excise tax (Mexican IEPS)
Nature: Indirect tax levied on the sale or definitive import of certain products (alcoholic beverages, beer, tobacco products, gasoline, energy drinks and soft drinks, high-calorie foods, etc.).
Tax rate: Rates vary according to product.
Property tax: Levied on real estate ownership and, in certain cases, possession. Property tax is calculated on the basis of the assessed registry value, obtained from the unit value of land and buildings, multiplied by the surface area of the built property.
Property transfer tax (Mexican ISAI): Levied on the purchase of real estate and on the creation of certain rights in rem. This is a state tax and therefore each state (and the federal district) determines the tax rate applicable to the value of the property.
Tax on earned income: Levied on salaries and other income paid to employees. This is a state tax and therefore each state (and the federal district) determines the applicable tax rate.
Employee profit sharing (Mexican PTU)
Article 123 of the Mexican Constitution establishes that employees have a right to a share of profits of Mexican companies. Employers are required to distribute to employees 10% of the company’s taxable profits calculated in accordance with the ISR Law.
Profits received by each employee vary on the basis of their length of service in the company, their salary and the number of days worked during the year.
Social security contributions
Maximum base: 25 times the Mexican “unit of measure and update” (UMA).
Employee and employer contributions are calculated by applying the current tables approved by the Mexican social security authority (IMSS) and the Mexican federal institute for workers’ housing (INFONAVIT) tables.
Labor and employment matters
Regulation: The labor relationship is governed by the employment contract and, where applicable, any collective labor agreements, as well as by the Federal Labor Law.
Types of contracts:
- Indefinite-term (general rule)
- For contracted works and fixed-term
Salary: May be established in the employment contract or in the collective labor agreement. May not be less than the minimum wage (MXN$88.36 per day in 2018).
Working hours: As established in the employment contract. May not exceed 48 hours per week.
Vacation: Structured as follows: 1 year worked = 6 business days; 2 years worked = 8 business days; 3 years worked = 10 business days; 4 years worked = 12 business days; 5-9 years worked = 14 business days; 10+ years worked = additional 2 business days for every additional 5 years worked.