Doing business in Mexico
Upcoming SlideShare
Loading in...5
×
 

Doing business in Mexico

on

  • 1,726 views

Como parte de las celebraciones con motivo de nuestro 60 aniversario hemos preparado una guía en inglés titulada "Doing Business in Mexico" la cual podrá ser descargada en formato pdf

Como parte de las celebraciones con motivo de nuestro 60 aniversario hemos preparado una guía en inglés titulada "Doing Business in Mexico" la cual podrá ser descargada en formato pdf

Statistics

Views

Total Views
1,726
Views on SlideShare
1,726
Embed Views
0

Actions

Likes
2
Downloads
48
Comments
0

0 Embeds 0

No embeds

Accessibility

Categories

Upload Details

Uploaded via as Adobe PDF

Usage Rights

© All Rights Reserved

Report content

Flagged as inappropriate Flag as inappropriate
Flag as inappropriate

Select your reason for flagging this presentation as inappropriate.

Cancel
  • Full Name Full Name Comment goes here.
    Are you sure you want to
    Your message goes here
    Processing…
Post Comment
Edit your comment

Doing business in Mexico Doing business in Mexico Document Transcript

  • Mexico City Monterrey Paseo de los Tamarindos 150-PB Ave. Ricardo Margain 444 Bosques de las Lomas Torre Norte Mezzanine A 05120, México, Distrito Federal 66265, San Pedro Garza García, N.L. Tel. +52 (55) 5091-0000 Tel. +52 (81) 8220-1500 DOING BUSINESS IN MEXICOPREFACE .................................................................................................................................................... 1I. ESSENTIAL FACTS ABOUT MEXICO................................................................................................ 2A. Geographic and Historic Information ....................................................................................................... 2B. Key Economic Information ....................................................................................................................... 2C. Federal Government................................................................................................................................ 3II. LEGAL SYSTEM ................................................................................................................................. 4A. General .................................................................................................................................................... 4B. Civil Law and Comparison to Common Law ............................................................................................ 4C. Federal and State Legislation .................................................................................................................. 4III. JUDICIAL SYSTEM ........................................................................................................................... 6A. Mexican Courts & Litigation ..................................................................................................................... 6 1. Federal Courts .................................................................................................................................. 6 2. The Federal Judiciary Council (Consejo de la Judicatura Federal “FJC”) ........................................ 7 3. State Courts...................................................................................................................................... 7 4. Court Clerks...................................................................................................................................... 8 5. District Attorneys .............................................................................................................................. 8 6. Administrative and Tax Courts ......................................................................................................... 8B. Criminal Law ............................................................................................................................................ 8C. General Comments about Litigation in Mexico ...................................................................................... 10D. Arbitration .............................................................................................................................................. 11IV. IMPORTANT POSITIONS TO KNOW ............................................................................................. 13 1. Lawyer ............................................................................................................................................ 13 2. Notary Public ................................................................................................................................. 13 3. Customs Broker ............................................................................................................................. 14 4. Accountants and Auditors ............................................................................................................. 14
  • V. PRACTICAL DIFFERENCES ABOUT DOING BUSINESS ............................................................. 15A. Introduction ............................................................................................................................................ 15B. Tips on Dealing with your Mexican Counterpart .................................................................................... 15 1. Avoid Misunderstandings ............................................................................................................... 15 2. Learn the Local Business Schedule ............................................................................................... 16 3. Dress Appropriately ........................................................................................................................ 16 4. Take the Time Necessary to Build Personal Relationships ............................................................ 16 5. Be Polite ......................................................................................................................................... 17 6. Expect Generosity and Be Prepared to Reciprocate ...................................................................... 17 7. Understand the Importance of Meals and Other Social Events...................................................... 17 8. Select the Appropriate Means of Communication .......................................................................... 18 9. Prepare for Uncertainty and Delay ................................................................................................. 18 10. Lack of Guidance.......................................................................................................................... 18 11. Need for Bureaucratic Approval ................................................................................................... 18 12. Develop Realistic Time Lines ....................................................................................................... 19 13. Need for Regular Follow-Up ......................................................................................................... 19 14. Allow More Time ........................................................................................................................... 19VI. TRADE AND INVESTMENT TREATIES ......................................................................................... 21A. Introduction ....................................................................................................................................... 21B. Free Trade Agreements .................................................................................................................... 21 1. General Overview ........................................................................................................................... 21 2. Free Trade Agreements in Effect ................................................................................................... 21 3. Fundamental aspects of existing free trade agreements. .............................................................. 23 4. Bilateral Investment Treaties .......................................................................................................... 24VII. REGULATION OF FOREIGN INVESTMENT .................................................................................. 28A. Foreign Investment ............................................................................................................................ 28B. Economic Activities that are Restricted under the FIL........................................................................ 28C. Investment by Foreign Corporations .................................................................................................. 29D. Neutral Investment ............................................................................................................................. 29E. National Foreign Investment Registry ................................................................................................ 29F. Acquisition of Real Estate .................................................................................................................. 30 1. Mexican Companies ....................................................................................................................... 30 2. Mexican Corporations without Foreign Investment ........................................................................ 30 3. Non-Mexican Individuals ................................................................................................................ 31VIII. CORPORATE STRUCTURES FOR DOING BUSINESS ............................................................... 32A. Representative Office ......................................................................................................................... 32 ii06.2011
  • B. Branch Office ..................................................................................................................................... 32C. Partnership Venture (a.k.a. “Contractual Joint Venture”) ................................................................... 33D. Corporate Presence ........................................................................................................................... 33E. Limited Liability Company (Sociedad de Responsabilidad Limitada “SRL”) ...................................... 33F. Stock Company (Sociedad Anónima “S.A.”) ...................................................................................... 33G. Variable Capital Companies (Capital Variable “CV”) ......................................................................... 34H. Process for Incorporating a Mexican Company ................................................................................. 34 1. Select Corporate Name .................................................................................................................. 34 2. Charter and By-laws ....................................................................................................................... 34 3. Appearance before a Notary Public. Registration .......................................................................... 34 4. Directors, Statutory Auditor and Officers ........................................................................................ 35 5. Post Incorporation Registrations .................................................................................................... 35 6. Operating a Mexican Company ...................................................................................................... 36 7. Minority Rights in a Stock Corporation (SA) ................................................................................... 38 8. Conflict of Interest .......................................................................................................................... 39 9. Distribution of Earnings and Payment of Dividends. Legal Reserve ............................................. 39 10. Accounting Records and Book-keeping ....................................................................................... 39 11. Mergers and Spin-offs .................................................................................................................. 39 12. Dissolution and Liquidation of a Mexican Company ..................................................................... 41 13. Corporate Governance Issues...................................................................................................... 41 14. Publicly Traded Companies ......................................................................................................... 42IX. GENERAL PRINCIPLES OF CONTRACT LAW .............................................................................. 44 1. General Principles of Contract........................................................................................................ 44 2. Construction of a Contract .............................................................................................................. 45 3. Termination of an Agreement ......................................................................................................... 46 4. Contractual Liability ........................................................................................................................ 48 5. Election of Jurisdiction .................................................................................................................... 49 6. Submission to Local Courts ............................................................................................................ 49 7. Arbitration ....................................................................................................................................... 49 8. Confidentiality Agreements ............................................................................................................ 49 9. Non-Compete Provisions ............................................................................................................... 50 10. Asset vs. Stock Acquisitions ......................................................................................................... 50X. E-COMMERCE .................................................................................................................................. 52A. Applicable Laws and Jurisdiction ....................................................................................................... 52B. E-Commerce Law .............................................................................................................................. 52C. On-line Consumer Protection ............................................................................................................. 53D. Electronic Invoices ............................................................................................................................. 53E. Electronic Evidence in Judicial Proceedings ...................................................................................... 53 iii06.2011
  • F. Domain Name Registration ................................................................................................................ 54XI. COMPETITION LAW ........................................................................................................................ 55A. General .............................................................................................................................................. 55B. Specific Practices or Restraints ......................................................................................................... 55 1. Absolute Monopolistic Practices (Horizontal Restraints) ................................................................ 55 2. Relative Monopolistic Practices (Vertical Restraints) ..................................................................... 56C. Concentrations ................................................................................................................................... 57D. Privatizations, Publications and Opinions .......................................................................................... 59E. Private Actions ................................................................................................................................... 59F. Leniency Program and Settlement ..................................................................................................... 59G. Statute of Limitations ......................................................................................................................... 60H. Possible Amendments to Competition Regulation ............................................................................. 60XII. LABOR ISSUES .............................................................................................................................. 61A. General .............................................................................................................................................. 61B. Legal Framework ............................................................................................................................... 61C. The Concept of the Employment Relationship ................................................................................... 61 1. Regulation of employment through written agreements ................................................................. 62 2. Subjects of Employment ................................................................................................................. 62 3. Term of Employment ...................................................................................................................... 62 4. Employer Substitution..................................................................................................................... 63D. Minimum Terms and Conditions for Rendering Services ................................................................... 63 1. Salary. Base Salary & Integrated Salary ....................................................................................... 63 2. Working Hours ................................................................................................................................ 64 3. Vacations and legal holidays .......................................................................................................... 64 4. Christmas bonus ............................................................................................................................ 64 5. Profit sharing .................................................................................................................................. 64 6. Contractual benefits ....................................................................................................................... 65E. Collective Labor Relationships ........................................................................................................... 65 1. Unions ............................................................................................................................................ 65 2. Collective Bargaining Agreement ................................................................................................... 65 3. "Contrato-Ley" ................................................................................................................................ 66 4. Internal Working Regulations ......................................................................................................... 66F. Health and Welfare of Employees at Work Sites ................................................................................ 67G. Labor Conflicts in Mexico ................................................................................................................... 67 iv06.2011
  • H. Individual Conflicts ............................................................................................................................. 67I. Collective conflicts ............................................................................................................................... 68J. Termination of Employment .............................................................................................................. 69 1. Individual labor relationships .......................................................................................................... 69 2. Collective Labor Relationships ....................................................................................................... 70K. Social Security System....................................................................................................................... 70L. Low Cost Housing Fund ..................................................................................................................... 71XIII. TAXATION ...................................................................................................................................... 72A. Income Tax ........................................................................................................................................ 72 1. Subjects of the Tax ......................................................................................................................... 72 2. Residency for Tax Purposes .......................................................................................................... 72 4. Determination of the Tax and Rate................................................................................................. 73 5. Offset or Credit of the Tax .............................................................................................................. 73 6. Taxable Income .............................................................................................................................. 74 7. Timing of Accruable Income ........................................................................................................... 75 8. Allowed Deductions ........................................................................................................................ 75 9. Net Operating Losses ..................................................................................................................... 77 10. Tax Consolidation ......................................................................................................................... 77 11. Regime Applicable to Dividends Distributed................................................................................. 78 12. Income Tax Applicable to Resident Individuals ............................................................................ 78 13. Non-Resident Taxation ................................................................................................................. 78 14. Tax Representative ...................................................................................................................... 80 15. Tax Treaties ................................................................................................................................. 81 16. Controlled Foreign Company........................................................................................................ 81 17. Related party Transactions; Transfer Pricing ............................................................................... 82B. Value Added Tax (“IVA”) .................................................................................................................... 83 1. General Characteristics of the VAT ................................................................................................ 83 2. VAT Rates ...................................................................................................................................... 83 3. Taxed Transactions ........................................................................................................................ 83 4. Persons Required to Withhold the Tax ........................................................................................... 85 5. Obligations of Taxpayers ................................................................................................................ 85 6. Filing of the Corresponding Tax Return.......................................................................................... 86 7. Crediting of the Tax ........................................................................................................................ 86C. FLAT RATE TAX (“IETU”) ................................................................................................................ 86 1. General Overview ........................................................................................................................... 86 2. Tax Elements ................................................................................................................................. 86 3. Related Issues ................................................................................................................................ 88D. Other Issues ....................................................................................................................................... 89 1. Obligation to Register with the Federal Taxpayersʼ Registry.......................................................... 89 2. Audits ............................................................................................................................................. 89 3. Late Payment Penalties ................................................................................................................. 89 4. Statute of Limitations ...................................................................................................................... 89 5. State Taxes .................................................................................................................................... 89 v06.2011
  • 6. Payroll Tax ..................................................................................................................................... 90 7. Real Estate Transfer Tax ............................................................................................................... 90 8. Excise Taxes .................................................................................................................................. 90 9. Tax on Cash Deposits ................................................................................................................... 90XIV. CUSTOMS ...................................................................................................................................... 91A. Background ........................................................................................................................................ 91B. Clearance of Goods ........................................................................................................................... 91C. Tariff considerations, Regulation Measures and Non-tariff Restrictions ............................................ 91D. Customs Regimes .............................................................................................................................. 92E. Customs Violations and Fines ............................................................................................................ 92F. Customs Brokers and Attorneys ......................................................................................................... 92G. Dumping ............................................................................................................................................. 93 1. Mexican Legal Framework ............................................................................................................. 93 2. What is Dumping Practice? ............................................................................................................ 93 3. Standing to Petition an Anti-dumping Investigation ........................................................................ 94 4. Injury ............................................................................................................................................... 94 5. Course of the Investigation ............................................................................................................. 95 6. Anti-dumping or Countervailing Duties ........................................................................................... 96 7. Appeals .......................................................................................................................................... 96 8. Review of Anti-Dumping Duties ...................................................................................................... 97XV. MAQUILADORA (IN-BOND ASSEMBLY PLANTS) AND EXPORT PROGRAMS ........................ 98A. Overview of Export Programs ............................................................................................................ 98B. Maquiladoras ...................................................................................................................................... 98 1. Overview ........................................................................................................................................... 98 2. Special Customs Treatment ............................................................................................................. 99 3. Process to Establish a Maquiladora ............................................................................................... 102 4. Maquiladora Sales to the Domestic Market .................................................................................... 103 5. Transfer or Sale of Merchandise .................................................................................................... 103 6. Value Added Tax (Impuesto al Valor Agregado) ............................................................................ 103 7. Transfer pricing in the Maquiladora Industry .................................................................................. 104XVI. SECURITIES ................................................................................................................................ 107A. General ............................................................................................................................................ 107B. Mexican Stock Exchange ................................................................................................................. 107C. Securities/Public Offers .................................................................................................................... 107D. Approval and Registration of a Public Offer ..................................................................................... 108 vi06.2011
  • E. Listing with the International Quotation System of the BMV ............................................................ 109F. Ongoing Reporting Obligations and other Relevant Information ...................................................... 110G. Minority Rights ................................................................................................................................. 110H. Underwriting Agreements ................................................................................................................. 111XVII. BANKING ..................................................................................................................................... 112A. General ............................................................................................................................................ 112B. Authorities ........................................................................................................................................ 112 1. Bank of Mexico ............................................................................................................................. 112 2. Ministry of Finance and Public Credit ........................................................................................... 112 3. National Banking and Securities Commission .............................................................................. 113C. Protection of the Interests of the Public ........................................................................................... 113 1. National Commission for the Protection and Defense of Users of Financial Services ................. 113 2. Institute for the Protection of Bank Savings.................................................................................. 113 3. Credit Information Entities ............................................................................................................ 114D. Financial Agents............................................................................................................................... 114 1. Commercial Banks ....................................................................................................................... 114 2. Affiliates of Foreign Financial Entities .......................................................................................... 114 3. Development Banks ..................................................................................................................... 114 4. Non-Banking Financial Agents ..................................................................................................... 114XVIII. SECURED TRANSACTIONS ........................................................................................................ 116A. Principles Applicable to Security Interests ....................................................................................... 116B. Personal Property ............................................................................................................................ 116 1. Personal Guarantee (Fianza) ....................................................................................................... 116 2. Pledge .......................................................................................................................................... 116 3. Trust Agreements ......................................................................................................................... 117 4. Chattel Mortgage .......................................................................................................................... 117C. Mortgage of Real Property ............................................................................................................... 117XIX. GOVERNMENT PROCUREMENT .............................................................................................. 119A. General Scope ................................................................................................................................. 119B. Contracting Procedures ................................................................................................................... 119 1. Competitive Bidding ........................................................................................................................ 119 2. Restricted Invitation and Direct Award ............................................................................................ 120C. Execution of a Procurement Contract .............................................................................................. 121D. Sanctions ......................................................................................................................................... 121 vii06.2011
  • E. Challenges and Remedies ............................................................................................................... 122F. Conciliation Process ......................................................................................................................... 122G. Dispute Resolution ........................................................................................................................... 122H. Pemex .............................................................................................................................................. 122XX. INTELLECTUAL PROPERTY ...................................................................................................... 123A. General ............................................................................................................................................ 123B. Copyright .......................................................................................................................................... 123C. Trademarks ...................................................................................................................................... 124D. Trade Names and Slogans .............................................................................................................. 125E. Patents ............................................................................................................................................. 125F. Trade Secrets ................................................................................................................................... 125G. Franchising and Transfer of Technology ......................................................................................... 126H. Enforcement ..................................................................................................................................... 126XXI. IMMIGRATION ............................................................................................................................. 127A. Introduction ...................................................................................................................................... 127B. Immigration Status ........................................................................................................................... 127 1. Tourist .......................................................................................................................................... 127 2. Working Visas for Non-Immigrant and for Immigrant ................................................................... 127 3. Permanent Resident (Inmigrado) ................................................................................................. 128C. Working Visa Options....................................................................................................................... 128D. General Procedures for Securing Immigrant or Non-Immigrant Visas ............................................. 129 1. Entrance Procedure...................................................................................................................... 129 2. Change of Immigration Status or Characteristic ........................................................................... 130E. Documentation Requirements .......................................................................................................... 130F. Extension of Stay in Mexico ............................................................................................................. 130G. Right to Import Personal Property .................................................................................................... 130XXII. ENVIRONMENTAL LAWS ........................................................................................................... 131A. Overview .......................................................................................................................................... 131 viii06.2011
  • B. Authorities ........................................................................................................................................ 132C. Areas of Exclusive Federal Jurisdiction ........................................................................................... 132D. Environmental Impact ...................................................................................................................... 132E. Air Pollution; the Sole Environmental License LAU .......................................................................... 134F. Hazardous Waste ............................................................................................................................. 135G. Soil Contamination and Remediation ............................................................................................... 136H. Water................................................................................................................................................ 137I. Environmental Audits and Voluntary Compliance .............................................................................. 139J. Sanctions .......................................................................................................................................... 140XXIII. TELECOMMUNICATIONS ........................................................................................................... 143A. General ............................................................................................................................................ 143B. Jurisdiction ....................................................................................................................................... 143C. Radio-frequency Spectrum............................................................................................................... 143D. Telecommunications Networks ........................................................................................................ 144E. Satellite Communications ................................................................................................................. 144F. Value Added Services ...................................................................................................................... 145G. Re-sellers (comercializadoras) ........................................................................................................ 145H. Dominant Carriers ............................................................................................................................ 146I. Broadcasting Services ....................................................................................................................... 146J. Foreign Investment Restrictions and Investment Mechanisms ........................................................ 146K. Special Tax ...................................................................................................................................... 147XXIV. ENERGY ....................................................................................................................................... 148A. Electric Sector .................................................................................................................................. 148 Areas of Private Participation .............................................................................................................. 148B. Hydrocarbons Sector ..................................................................................................................... 148C. Natural Gas .................................................................................................................................... 151 ix06.2011
  • D. Firedamp ........................................................................................................................................ 151E. Renewable Energy ......................................................................................................................... 152F. Bioenergies ..................................................................................................................................... 153G. National Hydrocarbon Commission .................................................................................................... 153H. Energy Regulatory Commission ..................................................................................................... 154I. Sustainable Use Of The Energy ........................................................................................................ 154XXV. MINING ......................................................................................................................................... 155A. General ............................................................................................................................................ 155B. Priority of Mining Activities ............................................................................................................... 155C. Agencies / Authority ......................................................................................................................... 155D. Mining Concessions and Assignments ............................................................................................ 156E. The Mining Public Registry ............................................................................................................... 158F. Inspection, Monitoring and Sanctions ............................................................................................... 159XXV. BANKRUPTCY ............................................................................................................................. 161A. Insolvency Proceedings ................................................................................................................... 161B. Causes for Declaration in Reorganization (Concurso Mercantil) ..................................................... 162C. Procedure for the Declaration of Reorganization ............................................................................. 162D. Judgment Declaring Reorganization (Concurso Mercantil) .............................................................. 163E. Existing Contracts ............................................................................................................................ 163F. Acknowledgement of Credits ............................................................................................................ 163G. Bankruptcy or Liquidation Proceedings (Quiebra) ........................................................................... 164Acronyms Most Commonly Used ............................................................................................................. 165 x06.2011
  • PrefaceWhether driven by national policies or new technologies, laws and regulations will frequently change, andas lawyers and counsel a firm is required to respond to the needs of our clients. Since it was founded in1948, Barrera, Siqueiros y Torres Landa, S.C. has been at the forefront in providing legal services withexcellence to its clients. At all times, we have endeavored to be in a position not only to respond, but tobe ahead and anticipate the needs of our clients.In the course of providing services, a multitude of areas have been addressed and legal specialties havearisen in the recent past. We have always attempted to be at the forefront of new legal developmentsaround investment, technology, financial services and products, export and trade programs,privatizations, government procurement, telecommunications, e-commerce, labor, competition/antitrust,securitization and financial structures, and more recently, energy. Some areas have continuously evolvedsuch as Taxation with such speed and depth that keeping–up has been both a necessity and a challenge.In celebration of our sixtieth anniversary in 2008 we endeavored to prepare for our clients and friends asummary of Mexican laws affecting business. Many lawyers from the firm have participated in theproject, contributing with their knowledge and expertise. We have committed to keep the summaryupdated.Although we trust you will find this summary useful, the purpose of this publication is not to provide legaladvise nor present a complete analysis of the issues covered. The authors that participated in thepublication, as well as Barrera, Siqueiros y Torres Landa, S.C., are not responsible in any form fordecision or actions taken based on the content of this summary. 106.2011
  • I. Essential Facts About MexicoA. Geographic and Historic Information• Name. Although the conventional short form is “Mexico”, the official name of the country is “United Mexican States.”• Population. Mexicoʼs population exceeds 112 million according to the 2010 census. The median age is 26 years. It is the most populous Spanish-speaking country in the world. The population of the metropolitan area of Mexico City alone is about 18 million, making it the largest urban concentration of people in the Western Hemisphere.• Flag and Seal. The flag consists of three equal vertical bands of green (hoist side), white, and red. The seal—an eagle perched on a cactus holding a snake in its beak—is centered in the white band. The symbol on the seal comes from a legend at the time of the Aztecs. Guided by their god Huitzilopochtli, the Aztec people sought a place where an eagle landed on a prickly-pear cactus, eating a snake. After years of wandering, they found the sign on a small swampy island in Lake Texcoco. They named their new home Tenochtitlan (“Place of the Prickly Pear Cactus”) and built a city, now Mexico City, on the site in A.D. 1325.• Area. Mexico is one of the largest countries in the hemisphere with an area of approximately 2 million square kilometers (1,972,500 square kilometers; 761,600 square miles).• Summary historical background. Mexico was originally inhabited by a number of Amerindian civilizations, including the Olmecs, Mayas, Toltecs and Aztecs. Mexico came under Spanish rule for three centuries before achieving independence early in the 19th century on September 21, 1821. Contrary to popular belief abroad, independence was not on “Cinco de Mayo”. Shortly after independence, a plan for a constitutional monarchy failed and a republic was proclaimed in December 1822.• In 1910, severe social and economic problems culminated in a revolution that lasted for ten years and gave rise to the 1917 Constitution. Although recent financial troubles in México and abroad threw Mexico into its worst recession in over half a century, the nation continues to make a recovery. Ongoing economic and social concerns include low real wages, underemployment for a large segment of the population, inequitable income distribution, and few advancement opportunities for the largely Amerindian population in the impoverished southern states.• Political Division. Mexico is a Federal Republic divided into 31 States and the Federal District (“Distrito Federal”). Mexico City is located precisely in the Federal District, although its metropolitan area extends into the neighboring State of Mexico. Guadalajara and Monterrey are two major industrial hubs. Other important cities include Tijuana, Ciudad Juárez, León, Querétaro, Puebla, Veracruz, Villahermosa and Mérida.B. Key Economic Information• In 2010, Mexico was the 12th largest economy in the world. It is an active member of the Organization for Economic Cooperation and Development (“OECD”) and the World Trade 206.2011
  • Organization (“WTO”). Likewise, Mexico has an important bilateral and multilateral trade network, including NAFTA, the European Community and the Asian Pacific Economic Council (“APEC”).• Mexico shares 2,000 miles of U.S. border, thus putting it in a unique strategic position for increasing its trade with the greatest single national market in the world.• Mexico has 7,000 miles of seashores that, as noted in the European Union Political, Cooperation and Free Trade Agreement, make it an ideal place to engage in trade regardless of the origin of materials or destination of finished products.• Among the most prominent industries in the country are oil, tourism, mining, and automotive, textile, steel and electronics manufacturing.• Expanding beyond its former export foundation in oil, Mexico has increased the size and variety of exports, which now include even sophisticated technical devices and services, including construction and financial services.• Reliance on oil has substantially been reduced. The basis of the Mexican economy is primarily manufacturing, although the recent prices in the price of crude oil have provoked a greater share of the exports to this commodity.• A large pool of Mexican companies participate in export-oriented activities. Foreign investors provide training and technology to upgrade Mexican companies and bring them up to international standards.C. Federal Government• The Federal Government is composed of three branches—executive, legislative and judicial—each with specific powers granted by the Constitution.• The President heads the Executive Branch and is assisted by 18 Secretaries or Ministers as well as by the Attorney General (whose appointment requires the consent of the Senate). The President is both the Head of State and government. There is no Vice-President.• A bicameral federal congress comprises the Legislative Branch and is divided into: (a) The Senate, with 128 members who serve six--year terms (b) The House of Representatives (Cámara de Diputados), with 500 members is completely renewed each three-year term.• The Mexican Supreme Court of Justice, comprised by 11 Justices, heads the Judiciary. After nomination by the President and appointment by the Senate, Justices serve 15-year terms. Under the Supreme Court sit federal Circuit Courts (Collegiate and Unitary) and District Courts. 306.2011
  • II. Legal SystemA. General• International business people and foreign-owned corporations doing business in Mexico must directly and indirectly deal with the Mexican legal system, even if they do not have a local physical presence. Businesses might encounter Mexicos system through an international contract—even one to be wholly performed outside of Mexico—if a Mexican company or individual is also a party. Such contracts may cover a wide variety of legal relationships, including distribution of products, the granting of franchises, or the transfer of technology.• Accordingly, people and entities doing business in Mexico should have at least a general working knowledge of its legal system. International legal counsel with clients doing business in Mexico should have a more detailed knowledge of Mexican practices, laws and courts. All should understand that if they are to accomplish their objectives they must work within the system, not against it.B. Civil Law and Comparison to Common Law• Mexico is a so-called “civil law” country, while some other countries such as the United States of America, Canada, and England are “common law” countries. Unlike common law courts, Mexican courts do not follow “stare decisis” or precedent in the common-law sense. Furthermore, under the Mexican system there are no trials by jury.• The origins of Mexicos legal system are both ancient and classical, based on the Greek, Roman, Spanish and French legal systems. Due to this background, our reliance in form over substance is usually over-estimated. Although the Mexican system shares more in common with other legal systems throughout the world—especially those in Latin America and continental Europe—than it does with the U.S. legal system, after NAFTAʼs adoption, Mexico has modeled certain legislation after U.S. law and practices (antitrust and environmental, among others). Likewise, Mexicoʼs participation in the OECD and other international groups (e.g. the United Nations Commission on International Trade Law “UNCITRAL”) has led to the to implementation of business practices and legislation in accordance with international standards. Some examples of the above are the adoption of the UNCITRAL Model Laws on International Commercial Arbitration, Transnational Insolvency and Electronic Commerce.C. Federal and State Legislation• The current Federal Constitution was enacted on February 5, 1917, and has undergone many amendments since then to adjust to the changing realities of the country. The Constitution has been amended continuously, especially during the last 30 years, adapting to Mexicoʼs full democracy integration into the world trade arena.• The Constitution outlines a system where most major areas—including commerce, natural resources, labor, mining, telecommunications, federal crimes and federal taxes—are reserved for regulation only 406.2011
  • by legislative action of the Federal Congress. Given that states may not implement laws in those areas, federal laws on such matters apply uniformly throughout the country. On the other hand, certain specific areas (education, health, environment, etc.) are subject to shared-authority among the federal, state and local level of government.• States have their own Constitution, as well as their own civil and criminal codes for local matters. Likewise, States legislate on local operating permits and environmental matters that are not otherwise reserved for federal legislation. Municipalities issue zoning and land use regulations and levy real estate taxes. 506.2011
  • III. Judicial SystemA. Mexican Courts & Litigation1. Federal CourtsMexican courts are divided between federal and state levels of government. The 11-Justice MexicanSupreme Court of Justice is the highest Court within our country. The Mexican Supreme Court sits eitherin bloc (Pleno) or as a 5-member Chamber. The First Chamber deals with civil and criminal issues whilethe Second Chamber deals with Administrative and Labor matters. One Justice is appointed amonghis/her peers as a 4-year President. The President of the Supreme Court also serves as President of theFederal Judiciary Council, which oversees and monitors ethical and administrative tasks of FederalJudges and Magistrates. The Mexican Supreme Court has reserved jurisdiction itself to the mostimportant issues of constitutional law: (i) unconstitutionality of laws, regulations and treaties in thoseparts where there has not been a previous and clear precedent; (ii) direct interpretation of theConstitution; (iii) constitutional actions or controversies brought by other powers of the state (Legislativeor Executive).Below the Supreme Court remain the Collegiate Circuit Courts, Unitary Circuit Courts and Federal DistrictCourts. Federal courts mostly deal with amparo actions, federal crimes, commercial and bankruptcycases and federal civil cases. Normally, federal courts have specialized subject matter jurisdiction but it isnot uncommon that they cluster all those subject within themselves. The constitutional suit or “amparoproceedings” is the federal lawsuit commenced by a person (natural or legal entity) when there is aviolation of rights by a governmental authority. Filing a constitutional action is a right of a person that issubject to high-technical scrutiny. The main principles of this action are: (i) it may only be assertedagainst acts of authorities; thus, (ii) it is an action of a person against abuse of governmental deeds in anyof its spheres—Legislative, Judicial or Executive; local, state or federal; (iii) it is exceptional in nature andnormally there has to be an exhaustion of ordinary means of challenge; (iv) the individual involved mustprovide evidence showing having been personal and directly “affected in its rights” or “expected rights.”Amparos deal with constitutional issues. The amparo proceedings may be “direct” or “indirect.” CollegiateCircuit Courts hear “direct amparos”. Direct amparos are filed against resolutions or judgments that end ajurisdictional (labor, administrative and civil) procedure. Direct amparos most closely resemble anultimate challenge. On the other hand, District Courts hear “indirect amparos,” which result in a speedytrial. Judgments rendered by District Courts may be challenged through a federal appeal that will beheard by a Collegiate Circuit Court. Indirect amparos are highly technical and, basically, will be filedagainst (ii) direct violations of individual rights; (ii) final resolutions not rendered by labor, administrativeand civil courts; (iii) irreparable harm caused in a judicial proceedings; and, (iv) acts or laws that havebeen applied for first time in detriment of the individual.The Federal Judiciary (through the Supreme Court and the Collegiate Circuit Courts) may create bindingprecedents known as “jurisprudence” (jurisprudencia). To create jurisprudence there must be five-non-interrupted cases resolved in the same sense. Likewise, jurisprudence is created when the SupremeCourt resolves a “contradiction” held between two or more Collegiate Circuit Courts to settle for once andall the proper binding precedent.One of the most attractive features of the amparo is the possibility of obtaining a stay of proceedings orcourt injunction. In no other area of law is a “stay of proceedings” more widely used with more precedentcreated than in amparo proceedings. Thus, to be able to obtain an injunction or “suspension” as called inMexico is normally the appeal for lawyers to file an amparo. Any litigation undertaken in Mexico, whether 606.2011
  • in the private or public sector, will inevitably expose the parties involved to an amparo—what it is and howit works.There has been a quite recent amendment to the Mexican Constitution related to amparoproceedings that will give rise to a new Amparo Law. The amendment is currently in theprocess of being approved by at least 17 States of the Federation before becoming effective. Ifapproved, a new amparo law will be enacted with important amendments in the following topics:(i) standing; (ii) jurisdiction of the circuits to create legal precedents; (iii) modifications of the 5-precedent rule of binding precedents or jurisprudence; (i) to incorporate those human rights setforth in international treaties.Mexico, particularly in its larger cities, is experiencing a trend of increasing judicial specialization: judgespresiding over specific areas. In larger cities, where this trend is more apparent—such as Mexico City,Monterrey and Guadalajara—there are specialized courts for civil and commercial, labor, criminal, andadministrative cases. Nevertheless, despite the shift towards specialization, all cities still have a multi-area judge or magistrate charged with resolving civil, commercial, criminal, labor, and administrativecases. Because multidisciplinary judges are responsible for presiding over such a broad swatch of cases,they often lack the comprehensive knowledge specifically necessary to be effective in any particularlyspecialized or highly regulated area.Furthermore, Federal District Courts also hear cases as trial courts in commercial and federal civil cases.Although commercial law is federal in nature, a constitutional provision authorizes dual-jurisdiction; i.e.that both local and federal courts can hear commercial cases. Consequently, it is very common for localcourts to try the majority of such cases due to the fact that local courts outnumber federal courts and thatfederal courts are devoted primarily to amparo proceedings. When federal courts hear federal civil orcommercial cases the Unitary Circuit Courts act as Court of Appeals.Finally, bankruptcy is another jurisdiction that Federal Courts have absorbed. Thus, trying a bankruptcycase (either as reorganization or bankruptcy) has to be filed before a federal court.2. The Federal Judiciary Council (Consejo de la Judicatura Federal “FJC”)The FJC monitors performance of all members of the federal judiciary, except for the members of theSupreme Court of Justice, to ensure propriety and compliance with ethics standards. There are 7members of the Council headed by the President of the Supreme Court of Justice.Unlike other countries, federal judges are not “elected” in Mexico but rather are appointed through aselection process conducted by the FJC. Being part of the full judiciary for an extensive amount of timetypically serves both as a baseline qualification and manner to flag potential candidates. Low-salaries forthe Federal Judiciary—a vital fact that informs oneʼs understanding or justifying corruption—is slowlybecoming a reminiscence of the past. Currently, the Federal judiciary at all levels is well-paid. This factoverrides the possibility for a Judge to have alternative sources of income that are currently forbidden.Judges can participate in academic activities and lecturing as such.3. State CourtsState or local courts (i.e., courts within the Federal District) are usually devoted to civil and commercialcases and they specialize depending upon the subject matter: family, leases, wills, and normal civil andcommercial cases. Depending upon the amount involved there are minor courts whose judgments arenot subject to appeal. 706.2011
  • Local Courtsʼ Judgments are subject to appeals before the Superior Court of Justice of each state and theFederal District. Local/State Courts depend upon the government of each state. Since the budget ofeach state so varies, then, salaries of Judges do too. Likewise, appointments differ form state to state.Most of the states have a surveillance authority to monitor ethical and proper performance of Judges.4. Court ClerksFederal or local judges have an extensive workload. It is not uncommon for a Judge to handle between800 and 1000 dockets every year that could last from simple collection cases to very complex issues oflaw. Likewise, proceedings are largely written and, therefore, the “day in court” as known in othercountries has not the same meaning in Mexico. Hearings are not normally presided by the Judge butrather by the Court Clerk or Secretary to record the appearances and arguments in a hearing or cancertify as to the content of a docket. This flaw will change in the near future at least in the criminal areadue to important amendments within the Mexican Constitution that makes compulsory for the Judge to bepresent in all hearings. Court clerks may prepare drafts of important rulings or the judgment itself.However, the content of the judgment is the Judgeʼs primary responsibility. This activity provides CourtClerks sufficient experience that serve them to escalate in the judiciary until such timing that they can beappointed as Judges.5. District AttorneysPublic prosecutors or District Attorneys (Ministerio Público) are relevant actors in criminal proceedings asshown below but they play certain role in bankruptcy, family, estate, and amparo proceedings. Theyspeak for the general public. In reality, it is odd that public prosecutors take a leading role in thoseproceedings since they usually devote their time to criminal cases and their importance is underestimatedin those areas outside such scope.6. Administrative and Tax CourtsAdministrative and Tax Courts have become more important since there has been an important growth ingovernmental activity in all spheres: federal, state and local. Likewise, there has been an increasingtrend to increase jurisdiction to administrative and tax courts in order to decrease the workload of thefederal district courts. The Tax and Administrative Justice Court (Tribunal Federal de Justicia Fiscal yAdministratíva “TFJFA”) is comprised of a Superior Chamber located in the Federal District and twenty-one Regional Chambers located within Mexico. The Tax and Administrative Court has jurisdiction to hearcases related to definitive resolutions rendered in administrative law and federal taxes and generalordinances different from regulations.It is worth mentioning that most administrative authorities can serve as self-review authorities if theindividual challenges the resolution so rendered through the review-recourse. After this challenge, theindividual could normally file an action/challenge before the Tax and Administrative Court as set forthabove. Likewise, most states have a State Administrative Court dealing or that deals with resolutionsrendered by local/State authorities.B. Criminal Law• Criminal law in Mexico has both Federal and State nature depending certain features provided by statute. Thus, there is a Federal Criminal Code and Criminal Codes for each of the thirty-one states and the Federal District. Notwithstanding, there are federal and state statutes that set forth criminal provisions although not inserted within the criminal code in such areas as tax, labor, trademark and 806.2011
  • copyrights laws. Likewise, there is the same number of Procedural Criminal Codes. State Criminal and Procedural Codes were mostly modeled after the Codes of the Federal District.• Mexican criminal law follows international standards and protects rights under the Constitution such as: (i) there is no crime unless specifically provided by law “nullum crime sine lege penale”; (ii) a Court of law is the only body entitled to impose punishment; (iii) no retroactive application of criminal laws “ex-post facto laws”; (iv) the benefit for the accused to receive better conditions derived from ex post facto laws; (v) all persons are innocent unless proven guilty (guilty beyond “reasonable doubt”); (vi) in case of doubt, the accused must be acquitted/“in dubio pro reo”; (vii) possibility to obtain bail when no serious crimes are involved; (viii) the right of the accused to remain silent during the proceedings; (ix) the burden of proof relies under the public prosecutor; (x) the right to be put face- to-face (careo) before the persons that testify against the accused; (xi) the right to offer all pertinent evidence available; (xii) the right of the accused not to provide statements before the police and not to remain for more than 48 hours under the District Attorneyʼs detention except for organized crimes. This also encompasses an express prohibition and severe punishment of any torture or similar practice (xiii) the right to receive from a competent Court of Law an order for holding a criminal procedure (auto de vinculación a proceso) before a Judge or to be released –subject to further investigation-; (xiv) the right to have a defense counsel and if defendant refuses to appoint one, then the State will appoint a public defense attorney; and (xv) the right to be judged between four months and one year.• Recently there was an important amendment to our Constitution to forbid the death penalty that was held for many years in our Constitution as a reminiscence of the past since neither the Federal nor the State Criminal Codes so implemented. Likewise, there is no life sentence as such. In the same context, Mexico has neither jury trials nor grand jury to make formal indictments.• The Constitution provides that a person that is accused for committing a crime has the right to obtain bail, subject to there being no serious crime involved. Federal legislature has followed a different path from certain State Statutes. For example, the Federal Procedural Criminal Code sets forth a detailed and exhaustive list of crimes that are considered serious where no bail will be allowed. On the contrary, the Federal District Code of Criminal Procedural follows a simpler rule whereby if the sum of the minimum and maximum imprisonment punishment divided into two neither equals nor surpasses five years, then, bail is allowed (i.e. 3 to 9 years /2 = 6 years; therefore, the Judge will deny bail).• Currently, the main parties within the criminal proceedings are the public prosecutor or District Attorney, the defense counsel (defending the accused) and the Judge. Public or state defense counsel are subject to workload and, unfortunately, time to defend effectively is minimal. Public prosecutors (Ministerio Público) play a key role in the criminal proceedings since they have a dual- role. Once a crime has occurred notice should be given to the Public Prosecutor that will act as an investigatory body and public faith authority. It has the authority to grant bail in those cases that no serious crimes are involved and the person is under his/her detention. The public prosecutor will have a group of policemen and investigators under his/her command. Once all investigations have been carried out (including depose witnesses, experts and sub-poena relevant persons), then, it will formally indict the accused person before a competent criminal Court. Once this indictment has occurred (ejercicio de la acción penal), a competent criminal court will issue an arrest warrant (orden de aprehensión), to detain the accused and put him/her before the trial-criminal court. 906.2011
  • • Mexican lawmakers have tried to modernize criminal law and have implemented several important amendments that tend to balance the rights of an accused person vis-a-vis the victim of a crime. Currently, the “victim of a crime” has the right to be informed, collaborate with the District Attorney in the proceedings, to offer evidence, to receive medical and psychological treatment and receive relief in the form of monetary compensation. In the same token, other important amendments are aimed to make federal criminal proceedings faster. As part of this speedy trial, there is a new emphasis in oral and Judgeʼs intervention to ensure that rights of the accused are duly respected. Other States are reproducing this model in order to guarantee the respect to the rights to a fair trial and due process.• Due to a recent constitutional amendment launched in mid 2008, the main features of criminal law will modify drastically to have a more accusatory (in contrast to inquisitive) and to favor orality rather than written proceedings.C. General Comments about Litigation in Mexico• Mexico is not per se a litigious society. Largely because litigation is quite expensive (even though courts do not charge filing fees), awarding damages and lost profits is not an easy endeavor, and there are no punitive damages; proceedings tend to be quite lengthy with a strong reliance on form rather than substance, and it is quite difficult to recover legal fees. Likewise, Mexican law provides a different source for trying cases: civil, commercial, administrative, criminal, etc. although trial practice has not reached the complexity and degree of specialization that other countries currently have. Thus, a civil trial-lawyer will cover family, monetary, real estate, estate, professional malpractice and related items. Commercial lawyers will encompass corporate litigation, bankruptcy, breach of contracts, collaterals foreclosures and alike. Notwithstanding, it is more common to find true specialists although they will also manage to handle other areas of law within certain degree of expertise. Thus, there are three main types of legal counsel: (i) general practitioners; (ii) small- litigation boutiques; and, (iii) one-stop or full-service law firms. Contingency fees are not uncommon and are mostly used for collection cases. Combined fix-rates are more used nowadays.• However, there has been an increasing trend towards specialization and trying new cases. Legislative changes have created a new kind of State liability (direct and objective) in federal, state and local spheres. Unfortunately, it will only encompass “irregular administrative acts” and do not include acts or omissions of the legislative and judicial errors. Another area that has experienced certain potential is actions for minority protection that are not followed under labor but rather civil laws. Likewise, there is a strong support to introduce newer and more effective rules for “class actions”. Beware of the fact that most civil and commercial cases could end in a criminal court since they could be subject to certain strategy from one of the parties to press the other to settle. One common adage under Mexican law is “a bad settlement is better than a good litigation”.• Litigation in Mexico differs from trying a case abroad. There are no jury-trials. Proceedings are written-based rather than holding the “day-in-court” as known in Anglo-Saxon countries. Pre-trial discovery is very limited and not even close to what the practice in other countries is. Rules of procedure are mostly considered a matter of public order, and, therefore, there is very little scope to modify the statutory rules. Preparing a complaint (or a response) is probably the most important activity during the proceedings since once filed it cannot be subject of subsequent modification or amendment, unless there has not been service of process to the other party (in the case of the complaint). The Court will not grant extensions to answer a pleading or otherwise since legal terms are mandatory. Cases are more written-based than oral, and therefore, it is important to write pleadings with clarity. There are no amended complaints or responses. 1006.2011
  • • Due to the fact that Mexican law has limited discovery and there are strict rules as to the filing of evidence and cross-examination and no prior deposition of witnesses, procedures therefore tend to follow more formal or legal defenses than important fact-disclosure. Among those formalities it is very frequent to challenge the authority of the attorney-in-fact appearing on behalf of one of the parties. In this token, powers of attorney coming from abroad are a common source of challenge and, therefore, it is important to pay special care when drafting them.• Another important difference from trying cases in other countries is the fact that Courts will not award punitive, consequential or indirect damages. Mexican law follows a “direct and immediate consequence” of the breach-test. This applies for both damages and lost profits. In practice, it is difficult to obtain multi-million dollar awards on damages unless there is a “liquidated damages clause” that will avoid proving the existence of damages and would rather be aimed to evidence the existence of the breach, and hence, the penalty application. Arbitration cases pose a little more damage-flexibility as to awarding damages but always subject to such “golden rule”.• Litigation in Mexico is not an easy task. Mexicoʼs statutes still rely heavily on formalistic issues over the substance of the dispute. Judges are work loaded and the time to be devoted to the case is minimal. Thus, there is a huge task for trial-attorneys to call the attention of the Judges and Court Clerks to address the merits of the case in order not to have the case dismissed for formalistic issues that will serve for the “statistic” but not for judgment-quality. Legal costs are outdated. Trying cases outside of the big three cities becomes much more difficult for the lack of experience of the judiciary for certain complex business contracts or torts. Thus, having all these ingredients altogether make it difficult for a business person (and even to non-Mexican legal counsel), to understand the inner works of litigation in Mexico. In fairness we must say that the Judiciary is making its best efforts to improve facilities to dignify administration of justice, as in the case of the Federal District.D. Arbitration• The complexities of a global world and the difficulties that may pose to convince a foreign party to have a forum choice-clause to Mexican courts, have led to choose arbitration to resolve disputes in commercial transactions. Mexico is an arbitration-oriented country that has modeled its Commercial Code to international standards (mainly the 1985 UNCITRAL Model Law. Mexico is a party to both the 1958 New York Convention for the Recognition and Enforcement of Foreign Arbitral Awards and the 1975-Inter-Amercian Convention on International Commercial Arbitration).• International treaties ratified and adopted by Mexico, current legislation and an increasing and open- minded support of the Mexican Courts will have to provide a growing confidence that arbitration agreements and awards are to be recognized and enforced. There is an increasing conscious that only in exceptional circumstances these will be either set-aside or their recognition and enforcement denied. Foreign judgments also can be indeed enforced although they follow different rules since there is no international treaty dealing with those issues as, by contrast, the 1958 New York Convention.• There are several domestic and foreign organizations specialized in arbitration such as the Mexican Arbitration Center (Centro de Arbitraje de Mexico “CAM”), Mexican Chapter of the International Chamber of Commerce (“ICC”), and the Arbitration Commission of the National Chamber of Commerce – (Cámara Nacionál del Comercio “CANACO”) that have been very active in fostering arbitration in our country. 1106.2011
  • • There has been a quite recent amendment in January 2011 to foster and improve arbitration – related issues, such as assistance of courts, referral to arbitration, provisional measures, setting aside proceedings and recognition and enforcement of arbitration awards. 1206.2011
  • IV. Important Positions to Know1. Lawyer• Mexican lawyers normally course a five-year law school program. While studying or immediately after graduating from law school, individuals usually work for a firm or government agency as a clerk (pasante) until they write a thesis and pass an oral exam to become licensed (Abogado or Licenciado en Derecho). After passing the licensing exam (that may be administered by the law school attended), individuals are addressed as Licenciado, abbreviated as "Lic." when written before the attorneyʼs name. There are no independent bar exams, and the Ministry of Education grants the licenses (cédula profesional) to practice law.• In Spanish “licenciado” is the first degree awarded at the university level; it corresponds to a bachelorʼs degree. Although there are “licenciados” in numerous academic disciplines such as economics, history, and business, the title is generally identified with the law degree.• Although teaching techniques are evolving, current teaching in law school is based on a modern version of the lecture method, which allows students to ask questions and engage in classroom discussion. Because case study is not part of the curriculum, the Socratic method is unknown, although there has been an increasing interest for such system and a new impetus for gathering a master degree-abroad and mainly in non-Spanish speaking countries. This is specially so in certain areas where oral skills and rethoric are essential (such as criminal law and arbitration).• Mexican lawyers are licensed to practice throughout Mexico, not in individual states. There is no integrated bar or requirement to join a bar association. Rather, bar associations in Mexico operate as voluntary associations. Thus, there is not a bar exam that has to be taken or admitted, but there is current discussion to that end. Therefore, the “disbarment” concept does not resemble to the US- English concept and rather has to be treated as a civil-criminal behavior. The Mexican Bar Association (Barra Mexicana de Abogados “BMA”) is the more serious and recognized bar association.2. Notary Public• Notary Publics in Mexico are empowered by local governments with the authority to assert “publica fides” upon the events they witness or as compulsory formality to certain legal acts.• Becoming a Notary Public is a lengthy process although in some states this may vary. In Mexico City becoming a notary public implies an approval exam of his “peers” and members of the government. In other entities, upon invitation by the government, a lawyer who has apprenticed for a number of years with another Notary Public takes an exam and, if he passes, receives a governmental permit to practice. 1306.2011
  • • A number of documents and agreements need to be created or validated by a Notary Public in order to be fully enforceable in Mexico - mainly real estate ownership transfers, real estate guaranties, incorporations, powers of attorney and wills.• Notary Publicsʼ actions are documented through the issuance of public deeds. In most cases, a Notary Public will issue a first true copy of a public deed and thereafter as many certified copies as necessary. First transcripts are of utmost legal importance and normally should be recorded with the Public Registry to produce effects vis-á-vis third parties and be guarded carefully.• In most of the Mexican territory Notary Publicʼs fees are subject to rates; however, within legal limits, fees may be negotiated on a case-by-case basis.• Mexico allows commercial public brokers (corredores públicos) to serve as “notary publics” for commercial transactions (i.e., creation of commercial companies), appraisers, and mediators and arbitrators. This alternative for providing legal form to certain commercial transaction had a new impetus after NAFTA entered into effect. Notwithstanding, commercial public brokers have not been able to become a true alternative to notary publics yet and for certain true-nature transactions will not ever be (i.e. real-estate purchase, creation of regular mortgages, etc.).3. Customs Broker• To the extent that companies involved in business in Mexico have some foreign trade operations, it is important that those operations strictly comply with applicable rules on imports and exports.• The customs broker is the person responsible for ensuring that the proper paper work and tariff classifications are used for products imported or exported by the company.• Thorough analysis of rules of origin is key to avoiding mistakes that may cause additional duties, fees and possibly even fines to be charged in the future.4. Accountants and Auditors• Although this should not come as a surprise, it is important for companies to keep proper accounting books and records and to, inter alia, file tax returns in a timely matter. Under Mexican law accounting records must be kept for no less than five years for tax matters, and ten years in respect to that information of a commercial nature.• As a general rule, a formal external audit of financial statements is voluntary; however, if a business exceeds certain thresholds of income or number of employees, such audit will become compulsory for tax purposes. 1406.2011
  • V. Practical Differences about Doing BusinessA. IntroductionDespite Mexicoʼs openness to trade and investment, it has its own unique traditions, culture, and way ofdoing business. Some differences have a tremendous impact on the day-to-day aspects of doingbusiness with Mexico and inevitably give rise to certain clashes on the part of both the businesspersonfrom abroad and his or her Mexican counterpart.At worst, these clashes mount to the point where otherwise-desirable ventures fall apart, at great cost toall participants. By recognizing and understanding the differences in conducting business in Mexico wecan keep cross-cultural clashes to a minimum, and increase the chance of success.This chapter does not attempt to provide a complete answer to all cross-cultural issues that arise whenpersons from other countries do business in Mexico. Such a definitive work would require an extensivestudy and hundreds of pages. Rather, it provides an overview of some of the cultural differences that maybe encountered and offers some simply suggestions to guide around some of the most common pitfalls.B. Tips on Dealing with your Mexican Counterpart1. Avoid MisunderstandingsMisunderstandings between businessmen and women from abroad and their Mexican counterpartsgenerally fall into two categories: substantive and incidental misunderstandings. A substantivemisunderstanding arises when one party fails to agree on the general purpose of a joint activity or ignoresthe consensus that it reached. The classic and most extreme example occurs when one party acts tobuild a successful long-term enterprise out of the venture, while the other treats the investment as avehicle for short-term profit.Substantive misunderstandings also typically occur when the parties fail to perform reasonable duediligence or fail to take the normal precautions that would prevail in a purely domestic commercialrelationship. Surprising numbers of sophisticated business people tend to drop their guard whenapproached by a cultured foreigner speaking fluent English and promising great riches. Substantivemisunderstandings generally can be avoided by realizing that doing business in Mexico poses the samerisk, as does anywhere else, and acting accordingly.Incidental misunderstandings are far less significant, but much more likely to occur. Incidentalmisunderstandings generally flow from the different perspectives that each party brings to therelationship, and the fact that one party will be dealing in a foreign language.The best remedies tend to be time, flexibility, and seeing that key personnel in both countries havesufficient contact with their counterparts to become familiar with each otherʼs way of doing business. Thecomparatively nominal investment of bringing key Mexican personnel to oneʼs home office from time totime can pay handsome dividends, as can periodic travel in the other direction.As for language, the first step toward solving the problem is to recognize it exists. Many Mexicanprofessionals speak English with such a high degree of fluency that persons from other countries, say the 1506.2011
  • United States, lose sight of the fact that a language barrier, albeit a very slight one, exists. This oversightcan be dangerous. While everyone may appear to be on the same level in a fast-paced discussion, allparties may not always understand certain points. As a result, parties sometimes leave the conversationwith different understandings of what is to occur.There are at least two simple ways to minimize potential misunderstandings. First, before holding animportant conversation (particularly where the conversation will occur by telephone), provide theparticipants in advance with a written outline of the points to be covered. This gives everyone anopportunity to think about the same issue – as opposed to figuring out what the issues are – when theconference begins. Second, following up with a written confirmation of the plan of action agreed upon,the advice given, etc. ensues that no miscommunication has occurred and that all parties are on the samepage.2. Learn the Local Business ScheduleAlthough businesses in Mexico operate on a fairly standard schedule, it is one that is different from thatfollowed in many other countries. The normal business day in Mexico City begins around 9:00 a.m.Lunch runs from 2:00 p.m. to 4:00 p.m. The day ends at 7:00 p.m. or later. Other cities within Mexicoeven closed their business during lunch time. Likewise, the “sense of responsiveness” may be quiterelaxed in cities different from Mexico City, Monterrey and Guadalajara.Persons doing business in Mexico are well advised to obtain a Mexican calendar to prepare fordifferences in holidays observed; business tends to slow down significantly during the school holidaysaround Easter and Christmas.3. Dress AppropriatelyMexicans generally tend to dress formally and are well groomed. If you wish to make a good impression,it is important that you follow suit. This is particularly true at the outset of a relationship when each partyis extremely attuned to the nonverbal signals given off by his or her potential partner. In Mexico, itgenerally is appropriate for men to wear suits to most events including informal, social gatherings. Whenin doubt, it is better to overdress.4. Take the Time Necessary to Build Personal RelationshipsThis point cannot be stressed enough. The businessperson who fails to establish solid personalrelationships in Mexico typically also fails to establish successful business relationships. The businessperson from abroad usually is ready to get down to business without establishing a personal relationshipwith his or her counterpart. This approach is complemented by a devotion to extensive contracts thatseek to cover every possible contingency and is facilitated by the comparative ease with which one canobtain information about companies in other jurisdictions such as the United States or Western Europe.Business in Mexico is less an objective in and of itself and more an extension of the businesspersonʼs lifeas a whole. The Mexican businessperson is uncomfortable doing business with someone with whom heor she does not also have a personal relationship. The Mexican will rely less on negotiating a contractthe size of a phone book and more on a simple contract coupled with a personal relationship of trustwithin which problems can be resolved.Developing this trust can be somewhat difficult in light of the comparative dearth of information that isavailable about Mexican companies. In the end, a decision on risk may need to be taken and have faiththat any problems that arise can be worked out amicably. 1606.2011
  • Therefore, it is imperative that the non-Mexican business person takes the time at the outset of arelationship to get to know his or her counterpart personally. This requires showing a genuine interest inyour counterparts and in the personal aspects of their lives, such as their families. A chance to visit acounterpartʼs home, or to entertain in your own home, should not be missed.The value of personal relationships extends far beyond a particular transaction or piece of business. Arelationship with one person will extend to that personʼs circle of friends and business contacts. Thus,credibility established with a single person can expand itself exponentially, opening many doors for furtherventures. Conversely, a bad relationship with a single businessperson can poison many other wells.A personal relationship provides more than just credibility and trust. It also provides access and a specialwillingness to help. This can be particularly important when you need to cut through delays orbureaucracy. The more people you know personally, the more circles of contacts you will have access toin times of need.Having explained the above, on the other side, please acknowledge that Mexican business people maytend to see business as a matter of personal friendship than mere and pure business. Thus, it is likelythat at the end there could be some sort of abuse in either side of the table based on the personalaffection rather than the objective and reasonable business. As a matter of fact, certain litigation held inMexico is sometimes more personal than business biased.5. Be PoliteMexicans are extremely polite people. For example, it is considered generous to pick up a restaurantcheck or gracious to let some go through the door before you. It is therefore particularly important for thebusinessperson from abroad to recognize the need to be more gracious than usual.It is also appropriate for the businessperson to make an effort to speak some Spanish. Even if yourSpanish is quite limited, it is polite to try. Just about any gesture of politeness will be well received solong as it is sincere.The emphasis on politeness in Mexico makes for a very pleasant existence, but can result in frustrations.The need to be polite, and a genuine desire to be helpful, may sometimes make it difficult for yourcounterpart to say “no” or “I donʼt know” in as blunt a fashion as we are used to. Thus, the businessperson from abroad may feel an agreement has been reached when it has not or may experienceuncertainty as to where he or she stands. This becomes less of a problem as one learns the culture andgets to know oneʼs counterparts.6. Expect Generosity and Be Prepared to ReciprocateMost Mexicans are very generous people. You may be provided with a car and driver to show you aroundthe area, or entertained lavishly. It is important that you show them the same courtesies that they extendto you when your Mexican counterpart makes a visit and you have the opportunity to serve as the host.7. Understand the Importance of Meals and Other Social EventsIn keeping with the importance of personal relationships, meals and other social events play a prominentrole in the process of doing business in Mexico. What better way to develop a personal relationship thanto share leisurely meal, during which the parties can talk at length about the things in life that are mostimportant. 1706.2011
  • Lunch is the big meal of the day in Mexico and fills this function beautifully. While not as leisurely, the“power breakfast” has become quite popular as well. Dinners tend to occur late in the evening and areless popular for meeting business associates. Opportunities to share a meal or attend a social event witha business colleague should be sought out and will generally prove highly productive over the long run,even if business is never discussed.8. Select the Appropriate Means of CommunicationPersons doing business in Mexico must learn to employ different means of communication than thosethey are used to in their home country. This difference is perhaps most pronounced in the role played bythe postal service. In Mexico, the postal system is, quite rightly, regarded as inherently unreliable. Cross-town deliveries can take up to two weeks and international mailings may take longer.E-mail is probably simplest and most effective way to routinely communicate.For delivering documents, there are a number of good alternatives to the postal system whencommunicating with a Mexican firm. Federal Express, UPS, DHL and analogous courier companies alloffer prompt and reliable service to and from Mexico. As with all international shipments, however, largepackages sent via private courier services may be subject to inspection by customs.Finally, personal meetings are used as a vehicle for communication with greater frequency in Mexico thanother places. If the subject is at all important, a personal meeting, even if it is just to deliver significantdocuments, may be appropriate. Remember, this is another way to strengthen your personalrelationships.9. Prepare for Uncertainty and DelayOne of the most common frustrations expressed by persons from abroad doing business in Mexico is thedifficulty in obtaining immediate and definitive answers from their Mexican counterparts. What they do notunderstand is that there are myriad reasons for the delays and uncertainties. The better that the businessperson understands the reasons for these delays and uncertainties the easier it will be to plan for themand lessen the attendant frustration.10. Lack of GuidanceOther countries may have a well-developed body of commercial laws and procedures that make it easy toobtain concrete guidance about what one can and cannot do in virtually any situation. By contrast,Mexicoʼs body of commercial laws and procedures may be far less specific. Thus, in Mexico, getting aconcrete answer to a specific question may require obtaining an opinion from the appropriate bureaucrat.While the foreign businessperson cannot change this lack of guidance, he or she, through propercommunication with his or her Mexican counterpart, can at least understand that the problem exists andgain a sense of comfort in knowing how it is being resolved.11. Need for Bureaucratic ApprovalMany actions in Mexico require bureaucratic approval, creating yet another source of uncertainty anddelay. Improvement is noticeable in the past years, however. For example, many applications are nowdeemed approved if they are not acted on within 45 working days.The best antidote to this problem is knowing what bureaucratic approvals are required; budget the timenecessary to accommodate the process and, where appropriate, to work through agents having the 1806.2011
  • necessary personal relationships with the suitable officials to get the approval process handled asexpeditiously as possible. Decisions in Mexico, whether governmental or in the private sector, often haveto be made at higher levels than a businessperson may be accustomed to.12. Develop Realistic Time LinesForeigners doing business in Mexico often get frustrated because they do not have a good understandingof all the steps necessary to carry a plan into action. Sitting down with your Mexican counterparts oradvisors prior to implementing a transaction and developing a comprehensive list of all of the major stepsthat must occur to put the plan into action can put the process into proper perspective.Once you have such a list, it is a simple matter to come up with realistic deadlines for the completion ofeach step. While certain steps may involve inherent uncertainties, such as obtaining bureaucraticapprovals, at least you will know what is involved and will have budgeted realistically or potential delays.13. Need for Regular Follow-UpIf not watched over carefully, even the best-laid plans of action have a tendency to slip. This isparticularly true in a culture such as Mexicoʼs where politeness makes it difficult to say no to someoneʼsrequest, even if it means deviating from the schedule assigned to a preexisting obligation. In order tomake sure that your project will be completed on time, it is important to monitor the matter carefully.Whether the matter is as simple as getting your car repaired, or as complicated as carrying out a largetransaction, you will be better served by checking on the status of the matter periodically, well before theactual deadline arrives.14. Allow More TimePersons doing business in Mexico need to realize that things may take longer to accomplish than in otherplaces. This is no reflection on your Mexican counterpart who, if you have selected him or her carefully,will be extremely capable and hard working. Rather, there are simply certain hurdles that must beovercome that may not exist abroad.The first hurdle to international business is that you will be dealing with two sets of holidays instead ofone. Persons doing business in Mexico need to plan around the Mexican holidays. On those days, evenif the professionals and business people are working, the bureaucrats whose approval you need probablywill not be.A second hurdle is that official documents must be presented in Spanish, and time must be allowed fortime-consuming translation.A third hurdle is the role occupied by the Notary Public (Notario Público) in Mexico. Unlike other countriessuch as the United States, where notary publics merely attest to the authenticity of a signature, in Mexicothe Notary Public is a quasi-public official who plays a very substantive role. For many actions to havelegal effect, the Notary Public must review the relevant documents and certify that they have beenprepared in accordance with Mexican law, an additional step that adds processing time. These actionsinclude the granting of powers of attorney, the formation of corporations, the purchase of real estate, toname a few.A fourth hurdle is the dense traffic that exists in some of Mexicoʼs larger cities, and Mexico City inparticular. You must allow sufficient time to get to meetings. Most Mexican business people carry a 1906.2011
  • mobile telephone so that travel time can be used productively. Many hotels and mobile telephonecompanies have rental services that provide visiting business people with the same capability.Finally, the foreign businessperson needs to be aware that meetings may not start or finish exactly asscheduled. It is important you arrive in a timely fashion. It you get caught in traffic, the polite thing to dois to call ahead by cellular telephone and notify your appointment of the delay. No matter what you do,the possibility still exists that the person you are scheduled to meet with will not be ready on time,particularly if the meeting is with a government official. Accept this gracefully and come prepared with abriefcase full of work to occupy you in the event of a delay. 2006.2011
  • VI. Trade and Investment TreatiesA. Introduction• Perhaps no country in the world has signed more free trade agreements than Mexico. Free trade agreements now cover over 90% of Mexicoʼs trade, and Mexico enjoys bilateral accords with 32 countries, including the two biggest markets in the world: the U.S. and the EU. All together, these countries make up a preferential market of about 850 million consumers. The Mexican Supreme Court has placed international treaties above federal laws but below the Constitution. Thus, rules provided under treaties have substantial relevance within the Mexican legal framework.• The most publicized and commonly known free trade agreement is the North America Free Trade Agreement (NAFTA). Trade with the U.S. and Canada has tripled since the implementation of NAFTA in 1994. However, Mexico has also executed a Cooperation, Political and Free Trade Agreement with the European Community that came into effect on July 1, 2000, and another with Japan which became effective on April 1, 2005.• According to recent official sources, Mexicos most significant export partners were the U.S. (80.2%), Canada (2.1%) and Spain (1.7%). Likewise, Mexicos most significant import partners were the U.S. (50.8%), Japan (5.0%), China (10.7%) and Canada (3.0%). (Source: Ministry of the Economy. www.economia.gob.mx).• Mexico has a strategic network of free trade agreements with various countries in its region, including Chile, Colombia, Costa Rica, Nicaragua, El Salvador, Honduras, and Guatemala. Additional treaties are being negotiated, including a regional agreement with the APEC.• Bilateral Investment Treaties (BITʼs) have been executed with most capital exporting countries.B. Free Trade Agreements1. General OverviewThe various free trade agreements entered into by Mexico give preferential access to more than onebillion consumers located in North, Central and South America, as well as Japan, Europe and Israel.A larger development of the Mexican manufacturing industry is expected, with great quality suppliers whoare in a position to increase production chains and create more added value, as well as better paid jobs.Companies must carefully analyze the reach of these free trade agreements because of the greatdiversity of opportunities to gain access to the U.S., European, Japanese and other markets, as well as toevaluate the competition that could be increased in many sectors, with the corresponding need to adjustin light of new market circumstances.2. Free Trade Agreements in EffectThe free trade agreements currently in effect and the countries comprised in the same are the following: 2106.2011
  • Agreement Contracting Party / Member Entry into Force Countries North American Free Trade Agreement United States of America January 1, 1994 and Canada Free Trade Agreement Costa Rica January 1, 1995 Colombia January 1, 1995 Free Trade Agreement [Note: Venezuela was also a party until November 19, 2006] Free Trade Agreement Nicaragua January 1, 1998 Free Trade Agreement Chile August 1, 1999 Free Trade Agreement Uruguay July 15, 2004 Free Trade Agreement with the June 1, 2001 El Salvador, Guatemala and Honduras Triangle of the North Austria, Belgium, Bulgaria, Cyprus, Czech Republic, Denmark, Estonia, July 1, 2000 Finland, France, Germany, Greece, Political, Cooperation and Free Trade Hungry, Ireland, Italy, Leetonia, [Note: The agreement has become effective as Agreement with the European Lithuania, Luxembourg, Malta, The other countries have Community Netherlands, Poland, Portugal, acceded to the Union] Rumania, Slovenia, Slovakia, Spain, Sweden, and United Kingdom Island, Norway, Liechtenstein and July 1, 2001 Free Trade Agreement with the Switzerland European Free Trade Association Free Trade Agreement July 1, 2000 Israel Free Trade Agreement April 1, 2005 JapanA Free Trade Agreement with Bolivia was in effect since 1995 and until June 2010. Thereafter anEconomic Complement Agreement has been implemented.In addition, preferential customs treatment is granted to countries belonging to the Latin-AmericanDevelopment and Integration Association (“ALADI”), along with Cuba. Under the respective ALADItreaties, only customs benefits are granted to product imports from the member countries.On the other hand, negotiations for a free trade agreement with the members of Southern CommonMarket (Mercado Común del Sur “MERCOSUR”) (Uruguay, Argentina, Brazil and Paraguay) are currentlybeing held, although a treaty with Uruguay is already in effect. 2206.2011
  • 3. Fundamental aspects of existing free trade agreements.Agreements in effect comprise a diversity of matters affecting trade in goods and services , as well asinvestment issues.Due to the fact that Mexico is a party to the World Trade Organization, it adopted regulations derivedtherefrom. These may be summarized as follows:(a) National treatment. Grant national treatment to imported goods, which means no less favorable treatment than the most favorable treatment granted to similar goods or competitors of the country of production or commercialization.(b) Elimination of customs tariffs. Elimination or reduction of customs tariffs on goods, and inability to be increased as of the date in which the agreements become in effect.(c) Import Taxes/Duties. Restriction to adopt or maintain customs duties on goods that are exported and which are covered by the agreements.(d) Origin of goods. The only way to achieve access to the benefits negotiated under the agreements on trade of goods is for such products to be considered as goods originating in one of the countries that is a party to the particular agreement. With the purpose of protecting Mexico and its commercial partners from being used as platforms for exporting goods of third countries by using the benefits of the agreements, the general criteria include the following: i) goods obtained completely or entirely in the area of one or more of the parties; ii) goods produced entirely in the area of one or more parties with original materials only; iii) goods produced entirely in the area of one or more of the parties, using non-original materials that would produce a change of their customs classification due to their sufficient transformation or that they additionally comply with certain regional content value, or iv) unassembled goods. Also, other criteria may be used to qualify the origin of a goods, such as de minimis, intermediate materials, accumulation, fungible goods, indirect materials, accessories, spare parts and tools, bottles and packing materials for retail sales, containers and crating materials for shipping. It is important to point out that as a protectionist measure, even though a certain good may be considered as original, it may lose such character and all the agreementsʼ benefits shall be denied to it when such good suffers any further processing or, in general, is involved in operations apart from unloading, reloading or any other that is necessary to maintain it in good condition and ready for transport in a country that is not part of the agreements.(e) Certificate of origin and customs procedures. Certificates of origin, or similar instruments, are used to ensure that the goods are original. Depending on each agreement, the certificate of origin may be issued by an exporter or by the authorized government authority of the exporting country. There are exemptions for the importation of goods which value does not exceed certain amount. Prior to the issuance of a certificate, the exporter must make sure, and sometimes evidence, that the good is qualified as original. National laws establish severe sanctions for the application of the benefits of a treaty to goods that do not qualify as original, as well as criminal sanctions in the event of perjury regarding origin statements. 2306.2011
  • To determine if a certain good is original, the importing country may request, through its corresponding customs authorities, to verify the origin of the good through mechanisms such as: i) requesting information related to the origin of the good to the corresponding authority of the exporting country, ii) sending questionnaires directed to certain exporter or producer; iii) requesting the exporting country to collect information, including the potential ability for the authorities to inspect the facilities used for production of the goods, iv) making direct visits to the exporter or producer in the other country. Authorities involved in an inspection are required to keep the information as confidential. They also have the obligation to protect such information any disclosure that may harm the competitive position of the persons that provide it. Regarding the review and appeal procedures geared towards the origin of goods, the treaties ensure access to an administrative review body, as well as a judicial or quasi-judicial review of the corresponding resolution. In Mexico, review and appeal procedures consist of a motion for reconsideration, the annulment procedure and, finally, the amparo procedure.(f) Investment. Mexico grants foreign investors and their investments a no-less favorable treatment than the one granted to its own investors and investments. Nevertheless, the treaties establish certain sensitive economic activities over which investment is not allowed. Also, Mexico may not expropriate or nationalize investments made by foreign investors, whether directly or through measures that are similar to expropriation or nationalization, unless for public use, over non-discriminatory basis, subject to the legality principle, and through the payment of a fair market value compensation. Additionally, no special requirements may be imposed regarding the performance or operation of a given investment made by an investor. In the event of dispute with a foreign investor, the same may be submitted to a complaint or arbitral procedure.(g) Public Sector Purchases. With respect to any measures regarding government purchases, Mexico provides all foreign goods, services and providers from other countries, a no-less favorable treatment than the one granted to its own goods, services and providers.(h) Antitrust and Antidumping Policies. Collaboration among authorities to avoid unfair competition practices in benefit of companies and consumers of both countries. Provisions regarding non- discrimination, transparency in the application of laws and regulations, confidential information treatment, as well as technical cooperation among the corresponding authorities is also included.(i) General Exceptions. Within the general exceptions for application of treaties, several activities regarding national security, taxes, payments and transfers and restrictions to protect the balance of payments are comprised. In regards to taxation, the agreements may not interfere with internal taxes that are not considered customs tariffs, except when a law is amended so as to impede investment by a foreigner.4. Bilateral Investment TreatiesMany Bilateral Investment Treaties (“BITʼs”) have been entered into by Mexico. As of mid 2011, thefollowing BITʼs were in force: 2406.2011
  • Country Entry into Force Switzerland March, 1996 Argentina July, 1998 The Netherlands October, 1999 France October, 2000 Finland August, 2000 Denmark September, 2000 Portugal September, 2000 Austria March, 2001 Germany February, 2001 Sweden July, 2001 Korea 2002 Greece September, 2002 Cuba March, 2002 Uruguay July, 2002 Italy December, 2002 Belgium-Luxemburg Union March, 2003 Czech Republic March, 2004 United States of America 2004 Iceland April, 2006 Panama December, 2006 United Kingdom July, 2007 Australia July, 2007 Trinidad and Tobago September, 2007 India February, 2008 Spain April, 2008* Peoples Republic of China June, 2009 Slovakia April, 2009 Belarus [Pending] * Replaced a prior treaty of 1996 Source: Ministry of the Economy. www.economia.gob.mxNotwithstanding certain differences that may exist from one to the other, the content of BIT treaties is byand large homogeneous, generally including two sections: (a) investment protection disciplines; and (b)dispute resolution mechanisms. These can be summarized as follows, although care should be given todifferences that may be found within such treaties.(a) Investment Protection Disciplines (i) Treatment. Establishing a treatment threshold is considered of fundamental importance. To do so, three different standards have been devised: minimum, national and most favored, as explained below. • National Treatment 2506.2011
  • Mexico is required to accord investors and their investment a treatment no less favorable than that granted, in like circumstances, to investments of its own investors. Simply put, foreign investments may not be discriminated because of their origin. • Most Favored Nation Treatment This principle requires Mexico to confer foreign investors a treatment no less favorable than the most favorable treatment accorded to investments in like circumstances from any other country. • Minimum Standard of Treatment Mexico shall afford foreign investments and investors a fair and equitable treatment, in accordance with international law, including full protection and security. (ii) Expropriation and Measures tantamount thereto. Expropriations, nationalizations and measures equivalent to the same are required to only take place provided the following requirements are met: • For public purpose reasons; • On a non-discriminatory basis; • That due process be observed; and • Compensation be paid, which need be the fair market value of the investment. (iii) Performance Requirements. Performance requirements are frequently forbidden. Generally, performance requirements are economic conditions that directly influence the activities of a company. Mexico may not condition the receipt, or continued receipt, of an advantage or incentive to the meeting of any of the mentioned requirements. Examples of performance requirements are: (a) minimum levels of exportations of goods or services; (b) minimum level of domestic content; (c) purchasing, using or giving preference to domestic goods or services; (d) transferring technology; (e) imports or exports quotas/minimums; (f) restrictions of sales or goods or services; (g) conveyance of know-how; (h) exclusivity. (iv) Transfers of Currency. Profits, dividends and any type of cash stemming from, or involving, the investment shall be freely transferable without delay, in hard currency. Nonetheless, certain exceptions have been envisaged, such as bankruptcy or insolvency proceedings, protection of creditors, criminal offenses, judgment satisfaction, and balance of payment measures. (v) Senior Management and Board of Directors. The requirement that senior management positions be occupied by Mexican nationals is prohibited.(b) Dispute Settlement Mechanisms The described investment treaties network generally grant foreign investors the right to bring action against the United Mexican States in the event a breach of the disciplines described above exists, or is believed to exist. Dispute resolution mechanism is though arbitration. A panel will be established, composed of private arbitrators chosen by the parties. The goal is ensuring an equal and non-discriminatory treatment between the foreign investor and the Host State, impartiality, in addition to due process. 2606.2011
  • Seeking redress is subject to fulfilling certain conditions: (i) Prior negotiations: a notice that details the circumstances giving rise to the dispute must be provided. To the best possible extent, parties are required to attempt to settle their differences amicably. (ii) Cooling-off period: should no solution be obtained within a certain period (usually six months), formal action may be brought. (iii) Local Remedies. Fork in the road: the need to exhaust local remedies is subject to varying requirements. No general rule can be established, albeit the scenarios can be catalogued as: (a) provisions that require exhaustion; (b) treaties that require waiver of domestic remedies; (c) provisions that are indifferent to past claims, but impede future parallel proceedings; and (d) treaties that are silent. 2706.2011
  • VII. Regulation of Foreign InvestmentA. Foreign InvestmentThe Foreign Investment Law (Ley de Inversión Extranjera “FIL”) and its regulations define “foreigninvestment” as:• Participation by foreign investors (defined in turn as an individual or entity of any nationality other than Mexican, and foreign entities with no legal standing) - in any percentage - in the capital stock of Mexican companies;• Investments by Mexican companies in which foreign capital has a majority interest; or• Participation by foreign investors in activities and acts contemplated in the FIL.Foreign investors may participate in any proportion in the capital of Mexican companies, acquire fixedassets, enter new fields of economic activity or manufacture new product lines, open and operateestablishments, and expand or relocate existing establishments, except as otherwise provided in the FIL(as discussed below).B. Economic Activities that are Restricted under the FIL• Some strategic areas are reserved exclusively for the Mexican State, such as petroleum and other hydrocarbons, electricity and postal service, among others;• Foreigners exclusion clauses reserve exclusively to Mexicans or Mexican companies some economic activities and companies, such as credit unions, gasoline retail sales, distribution of liquefied petroleum gas, radio broadcasting services, and other radio and television services other than cable television, among others. Such clause implies an express agreement or covenant forming an integral part of the corporate by-laws, setting forth that such cooperation shall not admit, directly or indirectly, foreign investors or corporations as partners or shareholders;• Specific regulations of the FIL establish participation limits for foreign investment in some activities and acquisitions, such as: cooperative companies for production (up to 10%), domestic air transportation, air taxi transportation and specialized air transportation (up to 25%), and insurance companies, bonding companies, and bonded warehouses (up to 49%), among many others. Foreign investment participation limits in the activities and companies mentioned may not be surpassed directly nor through trusts, contracts, partnerships or by-law agreements, pyramiding schemes or other mechanisms granting any control or higher participation than the one established. However, these limits could be surpassed just by neutral investment. Additionally, a foreign investor must obtain the approval of the Foreign Investment Commission (Comisión Nacional de Inversiones Extranjeras “CNIE”) in order to participate in a percentage higher than 49% in some activities, such as: legal services, credit information companies, cellular telephony, insurance agencies, and construction of pipelines for the transportation of petroleum and products derived there from, among others. 2806.2011
  • C. Investment by Foreign CorporationsAs provided by the FIL, a foreign company must obtain authorization from the Ministry of Economy(Secretaría de Economía “ME”) if it intends to engage in business on a regular basis in Mexico, such asby way of establishing a branch. The approval will be granted when the following requirements are met:• That the company proves that it is duly organized in accordance with the laws of its country;• That its charter and other organizational documents are not contrary to Mexican public policy or law; and• That the company sets-up itself or maintains an office or branch in the Mexican Republic.In addition to satisfying the above, the foreign corporation must submit an application in writing, statingthe general identification of the applicant and describing the economic activity it intends to carry out in thecountry.D. Neutral InvestmentNeutral investment (inversión neutra) is investment made in Mexican companies or in trusts authorized bythe ME that is not taken into account in determining the percentage of foreign investment in thecompaniesʼ capital stock.The ME may authorize trustee institutions to issue neutral investment instruments that shall grant solelyeconomic rights to their holders and, if applicable, limited corporate rights, but not voting rights in ordinaryshareholderʼs meetings.Investment in non-voting stock or with limited corporate rights is considered neutral, provided thatauthorizations from the ME and, when applicable, from the National Banking and Securities Commission(Comisión Nacional Bancaria y de Valores - “CNBV”) are granted.The Ministry shall also resolve upon the investment intended to be made by international financialdevelopment institutions in the capital stock companies.E. National Foreign Investment RegistryThe National Foreign Investment Registry (Registro Nacional de Inversión Extranjera - “RNIE”) has beencreated for statistical purposes in foreign investment, but specific information about investors andinvestments is not generally available to the public, except for the statistical data available throughpublications or the website of the Registry.However, significant statistical information is available in their website.The following must register with the RNIE: (i) Mexican companies in which there is participation, including through trusts, of: foreign investment; Mexicans who have or acquire another nationality and who have their domicile outside Mexican territory; or neutral investment. 2906.2011
  • (ii) Those who regularly engage in business acts in Mexico (such as, for example, a branch office), if they are: foreign individuals or companies; or Mexicans who have or acquire another nationality and who have their domicile outside Mexican territory; and (iii) Trusts, shares or corporate equity interest in real estate or neutral investment whereby rights shall be derived in favor of foreign investment or of Mexicans who have or acquire another nationality and who have their domicile outside Mexican territory.Upon registration with the RNIE, periodic notices are required; failure will trigger fines.F. Acquisition of Real EstateThis section will address generally the legal requirements for the acquisition of real property in Mexico byMexican companies with foreign investment, and directly by non-Mexican individuals or companies.1. Mexican Companies• Urban Real Estate: No restrictions exist for Mexican commercial companies seeking to acquire real property of this nature, even if non-Mexican shareholders participate in the capital stock, whether in a minority or majority position.• Rural Property: Article 27-IV of the Constitution states: "Corporations can own rural land, but only to the extent necessary for the fulfillment of the corporate purpose." In no event may these corporations acquire real property dedicated to agricultural, cattle or forest activities in an amount greater than an established threshold.• Restricted Border and Coastal Zones: The area known as the restricted zone is a “belt” surrounding the territory of Mexico – 100 kilometers wide in the border regions and 50 kilometers wide along the coast.In those cases, it will be deemed by Law that foreign shareholders agree to consider themselvesnationals as regards that property, and also agree not to invoke the protection of their governments,under the penalty of forfeiting their property for the benefit of the Nation if they do so. Such agreementsare referred to as “Calvo Clause”. Mexican Companies with a Calvo Clause included in their by-laws areauthorized to acquire real properties located in the “restricted zone” as follows: (i) For non-residential purposes, provided the corporation registers the acquisition with the SRE; or (ii) For residential purposes, subject to the requirements that must be fulfilled by Foreigners (as explained below).2. Mexican Corporations without Foreign InvestmentNo restrictions exist for buying real property in Mexico even if located within the restricted zone, nor is aprevious permit of the Ministry of Foreign Affairs (Secretaría de Relaciones Exteriores “SRE”) required. 3006.2011
  • 3. Non-Mexican Individuals• The general rule is foreigners can acquire real property only if they agree to consider themselves nationals vis-à-vis that property and agree not to invoke the protection of their governments, under the penalty of losing such property for the benefit of the Nation.• Foreign citizens cannot by any means acquire real property within the “restricted zone”; however, they can hold beneficiary rights in trusts established for the purpose of holding ownership of the real estate, subject to the SREʼs prior authorization (granted upon the partyʼs agreement to the Calvo Clause principles). 3106.2011
  • VIII. Corporate Structures for Doing BusinessSelecting a corporate vehicle to carry out operations in Mexico is key to reaching the desired businessresults, including those related to taxes, and to avoid the risk of liability.An investor may wish to deal directly through a representative office or branch operation, or establish anew company in Mexico that shields him from liability (other than in extraordinary instances of fraud,including tax). Several alternatives for doing business in Mexico exist, and only a few of the basic andmost utilized structures are presented below.A. Representative OfficeThis structure allows carrying certain limited activities towards doing business in Mexico, such aspreparatory work for distribution of information and advertising materials, but will not permit the actualbusiness operation where income is earned. In the case of several financial services (such as insuranceor banks), their establishment is regulated under specific legislation and will require the prior approvalfrom the relevant regulator. In other cases, notices or even a permit from the CNIE will be required.This option assumes that there will be no income sourced in Mexico, and hence no tax obligations, exceptfor withholding taxes that could potentially arise in the event of salaries and benefits paid to localemployees. Thus no permanent establishment for tax purposes will be triggered.B. Branch OfficeThe concept of a branch (sucursal) of a corporation established outside of Mexico that shall performbusiness activities in the country is regulated by several bodies of law such as the Commercial Code(Código de Comercio “CC”), the General Law of Commercial Companies (Ley General de SociedadesMercantiles “GLCC”) and the Foreign Investment Law. A prior authorization must be secured from theMinistry of the Economy and subsequent registration in the RPC.Under this structure the investor would be acting directly in Mexico, and not through a separate legalentity. The registration of a branch and not merely opening a "representative office" is an importantdifference insofar as the intended activity would be of an income generating nature. Hence, the investorcould carry out actual business activities in furtherance to its corporate charter and purposes.Once authorized, the branch office may perform any business activity not otherwise limited to the MexicanState, to Mexican nationals or companies.To secure the approval and subsequent registration, the investor must file an application before the MEand meet the following requirements: (i) evidence that it is legally incorporated in its country of origin; (ii)prove that its corporate purpose and the terms of its charter do not contravene provisions of Mexicanpublic policy; and (iii) confirm its petition to establish a local branch office.For tax purposes the branch operation would be deemed to create a "permanent establishment", andhence payment of taxes on the income attributable to the source, less deductions, will need to be paid. 3206.2011
  • Although the biggest advantage of this alternative lies in the fact that it may be set-up without the need offorming a new company in Mexico, this may turn out in practice to be a time consuming option due to thenature of authorizations needed to be secured.C. Partnership Venture (a.k.a. “Contractual Joint Venture”)Pursuant to the Participation Venture Contract (Asociación en Participación) contract, there is one person(individual or legal entity) that will carry out transactions in its own name, but on behalf of and for thebenefit of itself and one or more silent partners (asociados). This structure does not create a differentlegal entity, insofar as it is the lead partner (asociante) who will be conducting business vis-à-vis thirdparties in its own name. The obligations of the lead partner will include distributing the profits or lossesamong the silent partners, without losses exceeding the amount of contributions made.In exchange for a share of profits or losses the parties utilize this structure in those instances where avery specific project or business transaction, normally of short duration, requires contributions.Contractually, the parties may address issues as adoption of certain decisions relating to the project, timefor the distribution of earnings, etc.In spite of its contractual nature, for tax purposes, the structure is treated as if it were a commercial entity.D. Corporate PresenceThe main advantage of the subsidiary is that as a general rule it "shields" the investor from any claimrelated to the activities undertaken in Mexico.A branch office may be better suited for a specific short term project, but the creation of a new entity willprovide the investor a corporate presence in Mexico that will allow a long-term vehicle for expanding orsimply continuing its operations in México. Two corporate structures are commonly utilized for non-publicly traded companies: the sociedad de responsabilidad limitada (SR) and the sociedad anónima(SA). In certain instances, primarily when a joint venture relationship exists, a sociedad anónimapromotora de inversión (SAPI) may be used.E. Limited Liability Company (Sociedad de Responsabilidad Limitada “SRL”)In a limited liability company, the equity participants or partnersʼ liability is limited to the value of theircontributions. Members of a SRL are not issued shares transferable by means of endorsement, althoughthey may nonetheless transfer their equity holding. The SRL is designed primarily for joint venturerelationships or closely held companies, where super majorities and restrictions on transfers of equity aredesired. Under tax laws of certain jurisdictions (and this may be the case of the United States of America)this company may have a “pass-through” treatment that could bring certain tax benefits.F. Stock Company (Sociedad Anónima “S.A.”)The SA is an entity having all the main characteristics and elements of a corporation, i.e.: • limited liability of shareholders (up to the amount to cover the par value of the shares of the outstanding capital stock); • the shareholdersʼ meeting as the ultimate source of corporate power; • a board of directors in charge of the over-all management and operation; 3306.2011
  • • corporate officers who handle the day-to-day operations; and • ownership of freely transferable shares.Every SA must comply with the following additional requirements: • have a minimum of 2 (two) shareholders; and • have a fully subscribed minimum capital stock of $50,000 Mex.Cy.Another type of stock corporation known as Sociedad Anónima Promotora de Inversión (or itsacronym “SAPI”) was introduced a few years ago into Mexican law, and afford the possibility ofincorporating into its charter typical joint venture covenants.G. Variable Capital Companies (Capital Variable “CV”)All commercial companies may have the characteristic of adopting a variable capital status (andreferenced as “C.V.”, such as “S.A. de C.V.”) which, simply put, allow the shareholders to increase ordecrease capital in the variable portion without major formalities such as notarization and the requirementof registration in the RPC.H. Process for Incorporating a Mexican Company 1. Select Corporate NameTo formally incorporate a Mexican company, a prior permit must be secured from the SRE authorizing theuse of a precise corporate name. The purpose of this administrative measure is two fold: (i) on the onehand, formally accept the “Calvo Clause” (see Section on Regulation of Foreign Investment above), and(ii) avoid having companies within Mexico with identical or confusingly similar names. 2. Charter and By-lawsThe charter of incorporation and corporate by-laws (estatutos sociales) should include at least thefollowing information: • corporate purpose, name, duration and domicile; • manner in which each shareholder will pay his/her/its shares; • names, nationality and domicile of all shareholders; • amount of capital stock; • authority of the Board of Directors or Sole Administrator; • rules for distribution of profits and losses; • rules regarding the dissolution and liquidation; and • appointment of the Board of Directors, officers and Statutory Auditor (comisario). 3. Appearance before a Notary Public. RegistrationOnce the foregoing permit is secured, the company is formed through the appearance of all shareholders(directly or through an attorney-in-fact) and the execution of the charter of incorporation and by-lawsbefore a Notary Public (or a commercial broker). Any of those will issue an instrument that will be filed forregistration with the RPC of the corporate domicile. 3406.2011
  • 4. Directors, Statutory Auditor and OfficersDirectors may or not be Mexican nationals; if not, they must enter Mexico to hold a meeting with theproper business visa. Business visas may be easily secured for directors for NAFTA and EU residentsand other countries with which Mexico holds investment treaties. These are available normally uponentry. From other countries the process may be more complicated.Except for the case of regulated activities such as financial services, there is no limitation for the numberof board members to be nationals and/or residents of Mexico, or even in the particular domicile of thecompany.It is common for the charter and by laws to provide for the holding of unanimous consent resolutions ofshareholders and directors, which would allow for the adoption of resolutions without need of a physicalmeeting.A statutory auditor (comisario) will require to be appointed, which position is normally a representativefrom the firm of outside auditors. 5. Post Incorporation RegistrationsSeveral notices and filings must be secured in order to be in full standing.(a) Public Registry of Commerce (Registro Público del Comercio “RPC”)All commercial companies must be registered, and failure to do so will render all shareholders ormanagement acting on behalf of the company jointly and severally responsible for the companyʼsoperations. Subsequent events must be registered as well, such as fixed capital increases, appointmentand removal of Board Members, legal representatives and attorneys in fact, any security interests overthe companyʼs assets, liens, issuance of bonds or debentures, and bankruptcy proceedings, amongothers.The RPC is available for public consultation but in practice only excerpts are truly available.(b) Foreign Investments National RegistryInformation to be filed with the RNIE includes nationality of investors, amount of capital stock of thecompany and percentage owned by foreign investors, and amount of capital invested and participationowned by each foreign investor. Economic information regarding results of the company must beprovided on an annual basis and depending on the specific quarterly performance, quarterly informationmay need to be submitted to the RNIE.(c) Federal Taxpayersʼ Registry (Registro Federal de Contribuyentes - “RFC”)The RFC is one of the most important registrations to secure by a newly created company. This RFC willallow the company to engage in operations and is required not only to pay taxes but also to open bankaccounts, issue invoices, and secure other registrations.As part of its registration, the “electronic tax signature” (firma electronica or “FIEL”) must be secured inorder to make electronic filings and payments. 3506.2011
  • (d) Importersʼ RegistryAny company that engages in foreign trade transactions and seek to import assets, goods, materials orsupplies, will require an importerʼs registration. This process may take several weeks to complete.(e) Business Information SystemThe Mexican Business Information System (Sistema de Información Empresarial Mexicano ”SIEM”) is aninformation statistics system that intends to gather and process business information. While theregistration and filing of information with the SIEM is mandatory, there is no current sanction for notregistering with the SIEM. While the SIEM could become an important information database, which couldhelp identify potential clients and suppliers in effect, Mexican business culture still resists to the sharing ofinformation. This results in small updating activity. 6. Operating a Mexican Company(a) Shareholdersʼ Meetings.All shareholdersʼ meetings must be held within the corporate domicile of the company and must be legallycalled. At least one shareholdersʼ meeting is required to be held on a yearly basis, which meeting iscalled to approve on the annual financial statements of the company, distribution of earnings,appointment or ratification of board members and statutory auditor, and compensation to be paid to thelatter.Provided the corresponding by-laws allow it, unanimous consent resolutions may be adopted in lieu of ashareholders meeting provided such resolutions are confirmed in writing by all of the shareholders.(b) Board of Directors.Companies are managed either by a board of directors (board of managers in the case of Limited LiabilityCompanies) or a sole manager.The board of directors is entrusted with executing the shareholders decisions and directing the activitiesof the company. The Board is vested with the necessary authority to fulfill the corporate purpose of thecompany and therefore holds the representation of the company. The board may appoint managers andother officers to handle day-to-day business.The appointment as a director is a personal appointment and therefore board members are to performtheir duties personally and may not be represented in any manner. Alternate directors may benonetheless appointed as well.(c) Main obligations and liabilities of Directors.Mexican law requires board members to have duties of diligence and loyalty to the company. They mustact in the best interest of the company, and not necessarily of the shareholder, even when these aremembers appointed by a minority group of shareholders as explained below. The concept of “fiduciaryduty” has been incorporated from the Roman law notion of actions taken by a prudent businessman orfamily parent, but may differ from current regulation of such duty in other jurisdiction. The directors mustabstain from participating in a decision in which they may have a personal interest. In case of breachthereof, they shall be liable for any damages and losses caused to the company. 3606.2011
  • Some specific obligations and liabilities of Board members are included under corporate law. Amongstthese: (i) To remain in their office until their successors have been appointed and taken office. (ii) To ascertain the accuracy of shareholdersʼ contributions. (iii) To verify that all legal requirements are fulfilled before distributing dividends. (iv) To verify the existence of all accounting books and records, and prepare an annual report to the Shareholdersʼ Meeting which shall include: ! A report from management, regarding the business of the corporation and the main policies used to prepare financial information. ! A balance sheet and statements (i) showing the profits or losses of the corporation, and (ii) the financial changes in the company during the prior fiscal year, together with any notes deemed necessary to clarify the foregoing information.The members of the Board will be jointly liable with those directors who preceded them if, whenappointed, they become aware of irregularities and fail to notify them to the statutory auditor.This annual report must be submitted annually for approval of the Shareholdersʼ Meeting, within the firstfour months following the end of the fiscal period.(d) Surveillance.Stock corporations are required to appoint one or more statutory auditors or comisarios, whose function isto verify the correct operation of the company, undertake an internal audit of the companyʼs operations,documents, registries, entries, and other information in order to reasonably ensure that the financialinformation and management of the company is being conducted in accordance with the law and with thecompanyʼs internal policies.Statutory auditors must be called and attend any board of directorsʼ meeting (although they will not have avote therein) and must also prepare an annual report addressed to the shareholders of the company inwhich report the statutory auditors render their opinion with regard to the correct management of thecompany.In addition, statutory auditors may call a shareholdersʼ meeting in those cases in which the Board refusesto do so at the request of shareholders that meet specific requirements. Statutory auditors shall bepersonally liable to the company for compliance of their obligations set forth by the law and the by-laws ofthe company.Unless otherwise required, statutory auditors need not guarantee the legal performance of their duties,shall abstain to act in those cases in which they have a conflict of interest, and shall be jointly liable withthose preceding in case they detect any irregularities of prior statutory auditors and fail to disclose them tothe shareholders.The limited liability companies may, at their option, include in their by-laws the right and/or obligation toappoint a statutory auditor or Surveillance Board, although this is not required. 3706.2011
  • As a practical matter, statutory auditors accept to undertake such a position as long as their firms are alsoretained to perform annual audits for the companies. The reason behind this requirement is to be in aposition to better comply with their duties. 7. Minority Rights in a Stock Corporation (SA)Minority shareholders in a stock corporation have certain statutory rights as follows: (a) Calls to Meetings. Right to request from the board of directors that an ordinary or extraordinary stockholders meeting be held to discuss certain matters of their interest (holders of at least 33% of the capital stock); (b) Annual Ordinary Meetings. Right to request from the board of directors that an annual ordinary stockholders meeting be held to discuss the approval of financial statements and designation of members of the board when no such annual meeting has been held for two consecutive years (any shareholder); (c) Deferral of Vote. Right to request that voting on a certain subject matter brought up in a stockholders meeting be postponed for up to three days, when such minority shareholders deem they are not sufficiently informed on the particular issue (33% of the capital stock present at the corresponding meeting); (d) Claims against Directors. Right to request liability from the board of directors or management of the company, as long as their claim is made on behalf and for the benefit of the company, and that the opposing shareholders did not vote in favor of releasing directors from liabilities in a stockholders meeting, if any, which may have been held to resolve thereon (33% of the capital stock of the company); (e) Opposition to Resolutions. Right to oppose resolutions contrary to the charter, by-laws or legal provisions which are adopted at the shareholders meetings, as long as the shareholders either did not attend such meeting or voted against the corresponding resolution (33% of the capital stock of the company, and 20% of the capital stock in the case of opposition to a spin-off). Resolutions determining liability of directors may not, however, be challenged other than in the case listed in paragraph (d) above; (f) Withdrawal of Investment. Right to withdraw their investment, when such shareholders voted against a shareholders meeting resolving on a change of corporate purpose, nationality of the company, its transformation into a different type of company, spin-off, or in the case of shares corresponding to the variable portion of capital (any shareholder); (g) Appointment of Directors. Right to appoint one director in the event the Board of Directors is composed by three or more members (25% of the capital stock); and (h) Appointment of Statutory Auditor (comisario). Right to appoint a statutory auditor (25% of the capital stock).Note that different forms of entities (e.g. publicly traded companies and sociedad anónima promotora deinversion “SAPI”) may have different minority rights for its share or equity holders. 3806.2011
  • 8. Conflict of InterestShareholders of a Mexican corporation are specifically legally required to abstain from deliberation at ameeting which is to resolve an item in which they may have a conflict of interest. Directors are furtherrequired to: (i) disclose the conflict, (ii) abstain from deliberation; and (iii) abstain from voting on thesubject. Failure to abstain from deliberation and/or voting may trigger liability to pay damages caused tothe relevant corporation. 9. Distribution of Earnings and Payment of Dividends. Legal ReserveOnce taxed at the corporate level, profits are distributable without additional taxation. The dividends,however, may only be paid based on a shareholders resolution approving a financial statement, whichreflects the existence of profits.The only limitation existing for the distribution of profits is the legal reserve. This reserve consists on thecreation of a contingency fund by way of separating 5% of the profits corresponding to each fiscal period,until it reaches 20% of the capital stock of the company.Directors are personally responsible for any dividend distributed that are not properly supported andfulfills all legal requirements. 10. Accounting Records and Book-keepingThe Commercial Code provides that all business companies are required to maintain an adequateaccounting system that at least: • Allows for the proper identification of individual transactions and their characteristics and the corresponding support documents; • Allows for the proper tracking of transactions in order to reach the accounting results; • Allows the creation of the financial statements; and • Allows for control and verification systems necessary to prevent the omission of entries.All accounting records must be be kept in Spanish, and all supporting documents must be kept for aperiod of 10 years. Likewise, companies are required to maintain the original correspondence pertainingto agreements reached.Companies are further required to keep and maintain four corporate books: (i) Shareholdersʼ Meetingsminutes; (ii) Board of Directorsʼ Meetings minutes; (iii) Capital Variations (in the case of variable capitalcompanies); and (iv) stock ledger or Shareholdersʼ Registry book. 11. Mergers and Spin-offs(a) MergerA merger is the combination of two or more companies into an existing company or a new companycreated as a consequence of the merger. The surviving entity assumes all assets and liabilities of themerging entities. A merger requires both of a merger agreement between the merging entities and thecorresponding corporate resolutions. 3906.2011
  • A merger agreement along with a balance sheet must be submitted for approval of an ExtraordinaryShareholders Meeting of each company. The signed agreement along with the minutes of theExtraordinary Shareholders Meetings of the companies are notarized, then published in an Official Daily,and registered with the RPC. The merger will become effective three months after the above registrationis made. During that period any creditor may oppose the merger before a Court on the ground that itsdebt is jeopardized by that transaction. If a suit is filed, the merger will not become effective until theCourt decides to dismiss the action. The deferred effectiveness rule can be overridden, and thus themerger may become effective immediately if one of the following three things happens: (i) all creditorsgrant their express written consent; (ii) all creditors are paid out; or (iii) a bank deposit is made to securepayment of all existing debts. As you may gather, it might be convenient to negotiate with creditors earlyin the process to allow for the merger to become effective immediately.As a result of the merger, all government agencies with which the merged companies had approvals from,registrations or any other obligation must be served notice of the merging entity becoming theirsuccessors. Among notices required, of special relevance are those to be submitted with tax authoritiesand the Foreign Investments National Registry.Under the Federal Labor Law (Ley Federal del Trabajo), as a consequence of the merger all employeesof the merged company will become employees of the surviving entity, which will act as a substituteemployer. All salaries, seniority, benefits, etc., which are received by the employees of the merged entitywill need to be acknowledged by the merging entity. There is no consent required on the part of theemployees, who will be deemed duly transferred automatically, and the merging entity will becomesubstitute employer.A merger is considered a concentration for antitrust purposes, and prior clearance from relevantauthorities may be required (See section X below).(b) Spin-offçA spin-off occurs when part of a company is separated to form a new entity. This separation includesassets, liabilities and capital stock. In order to effectuate a spin-off, an extraordinary shareholdersʼmeeting is required to approve the resolution. The corresponding resolution shall contain: (i) a description of the manner, terms, timing and mechanism under which the assets, liabilities and capital stock will be transferred; (ii) a description identifying the specific assets, liabilities and capital stock that will correspond to each entity; (iii) the financial statements of the spun-off company, for the last fiscal period, duly certified by external public accountants; (iv) the determination on the obligations/liabilities assumed by each entity; and (v) the proposed by-laws for each entity.These resolutions must be notarized, published in one of the major newspapers and registered with theRPC. Within a period of 45 days from registration, any shareholder or group representing at least 20% ofthe capital stock or any creditor with a legal interest may oppose the spin-off, which will be suspendeduntil such time the Court decides on the merits of the case.During the three years following the spin-off if any of the new entities is unable to comply with theobligations vis-à-vis creditors that did not expressly approve the spin-off, the other new entities shall bejointly responsible for such obligations up to the amount of net worth that corresponded to each in thespin-off. If the spun-off company survives, it shall be responsible for all obligations of the new entitiesduring such three-year period. 4006.2011
  • Under the Federal Labor Law, as a consequence of the spin-off, the employees that are transferred to thenew entity will become employees of such entity, which will act as a substitute employer. All salaries,seniority, benefits, etc., which are received by the employees of the spun-off entity will need to beacknowledged by the new entity. There is no consent required on the part of the employees, who will bedeemed duly transferred automatically, and the new entity will become substitute employer.The spin-off is not taxed as long as (i) the shareholders holding at least 51% of the voting stock of thecompanies are the same for a period of three years starting from the year prior to the spin-off becomingeffective; and (ii) in the case the spun-off company disappears, one of the new entities assumes theobligation to file the final tax returns of the disappearing entity. 12. Dissolution and Liquidation of a Mexican CompanyMexican companies will dissolve and enter into liquidation for the following reasons: (a) Expiration of the term of their duration without being renewed or extended; (b) Impossibility of fulfilling the corporate purpose of the company, or accomplishing its purpose; (c) Agreement of the shareholders; (d) Because the company has less than the minimum shareholders; or (e) If losses exceed two thirds of the capital of the company;An extraordinary shareholdersʼ meeting (in the case of a stock corporation) will be required to approve thedissolution and liquidation of a Mexican company. The corresponding resolution along with theappointment of liquidators shall be notarized and registered with the RPC. To carry out the objective, theliquidators shall: (i) conclude any pending transactions; (ii) collect any accounts collectable and pay anyamounts payable; (iii) sell any remaining asset; (iv) distribute among each shareholder the correspondingamounts due (prior approval of the corresponding distribution proposal); (v) prepare a final liquidationbalance sheet to be approved by the shareholders which shall be filed with the RPC; and (vi) securecancellation of the registration with the RPC.The liquidators shall maintain all liquidation information and documents for a period of 10 years after theliquidation is concluded. 13. Corporate Governance IssuesCorporate Governance is defined by the Code of Best Corporate Practices (Código de Mejores PrácticasCorporativas) as “the system under which corporations are directed and controlled” and it implies a directrelationship among the administration of the corporation, its board, its shareholders, and any interestedthird parties. In Mexico, corporate governance is dealt with in two main bodies of law, the General Law ofCommercial Companies GLCC and the Securities Market Law (“Ley del Mercado de Valores “LMV”). TheMexican traditional model provides that corporate governance will be the responsibility of one or moredirectors who may or may not be shareholders of the corporation. A board will be created in cases wherethere are two or more directors. Ownership of at least 25% of stock creates the right to appoint a directorto serve in the corporationʼs board (the ownership percentage is reduced to 10% in case of publicly tradedcompanies and SAPIʼs).Aside from adopting the general framework provided by the GLCC and the LMV, Mexicoʼs corporatecontrol in private corporations in quite weak. Given that the concern for corporate governance hasincreased throughout the world and Mexico is no exception, since 1999 a group of leading Mexicanbusiness people (Consejo Coordinador Empresarial), supported by the Mexican Stock Exchange 4106.2011
  • published the Code of Best Corporate Practices which provides a set of recommendations for corporatepractices and governance. Although the provisions of this code are not mandatory, they provide valuableinsight and a solid framework directed to improve corporate governance in Mexican entities. In Novemberof 2006 the Code was updated with both the results obtained after six years of its creation and with theapplicable international considerations that update and complement the original recommendations.According to the above Code a good corporate governance system will be that which includes: • Equal treatment and protection of the interests of all shareholders. • The recognition of the existence of interested third parties with respect to the activities and permanence of the corporation. • The issue and responsible provision of information; as well as transparency in administration. • Assurance of the existence of strategic guidelines for the corporation, and the effective monitoring of the fiduciary duties of the administrators. • The proper identification and control of risks. • The existence of ethical and social principles. • The prevention of illegal activities and conflicts of interest. • The disclosure of illegal actions and protection of whistleblowers. • Compliance of the regulations applicable to corporations. • Give assurance and trust to investors and interested third parties over the honest and responsible administration of the corporationʼs business.Given the importance and growing concern for corporate governance in Mexico the above principles willbe surely implemented by more corporations in Mexico in order to be competitive both with other Mexicancorporations and abroad.A new Securities Market Law (Ley del Mercado de Valores – “LMV”) became effective since June of2006. Notwithstanding the fact that it seemed to be a legal framework for listed Mexican corporations, itcan now also be seen as a framework for non-listed companies which are open and willing to adoptcorporate governance practices. The publication of the new LMV is a significant step in terms of corporategovernance; this because it forces publicly traded companies to comply with corporate governancepractices. In addition, it creates 3 new kinds of corporations, (i) stock corporation that promotes privateequity (Sociedad Anónima Promotora de Inversión “SAPI”), (ii) stock corporation that promotes equitythrough public trading (Sociedad Anónima Promotora de Inversión Bursatil “SAPIB”) , and (iii) Publiclytraded stock corporation (Sociedad Anónima Bursatil “SAB”).Besides bringing new possibilities for the operation and management of non-public corporations the newLMV has taken an important step towards the enforceability of corporate governance provisions inMexico. 14. Publicly Traded CompaniesPublicly traded companies in Mexico are subject to the provisions of the LMV. The LMV states that anyentities that are incorporated or adopt the SAPI modality, as well as any entities that obtain theregistration of their shares or the negotiable instruments that represent their shares in the NationalSecurities and Intermediaries Registry will be subject to its provisions. All publicly traded companies willneed to be structured as a publicly traded stock corporation (SAB).Public offers of stock issued by companies in Mexico can be for initial subscription, for sale of shares orfor the acquisition of shares. According to the CNBV or National Banking and Securities Commission(which is the entity in charge of supervising and controlling all activities that are carried out in the Mexican 4206.2011
  • Stock Exchange) a “public offer” is an offer made in the territory of México, whether or not with a definedprice or compensation, through mass media communications and to an undetermined person tosubscribe, sell or acquire securities. The types of offers that publicly traded companies can carry out inMexico are: • Primary: When the resources coming from a capital increase enter directly into the company. • Secondary: When the offer is carried out by one shareholder or group of shareholders that receive the proceeds of said offer. • Mixed: When part of the resources obtained through the offer go to the company and another part to the shareholders. • International: The offer of Mexican entitiesʼ shares internationally, generally done through American Depository Receipts (ADR´s). • Simultaneous: Offers done in Mexico and internationally at the same time. • Tender Offer: Offer carried out by an entity or by the publicly traded company itself to partially or totally acquire its shares, generally with the goal of gaining control of the entity or de-listing it. • Exchange Offer: Offer carried out by an entity by means of which it offers to purchase the shares of a specific publicly traded company conditioning said purchase to the subscription of the shares being sold.In order for Mexican corporations to be considered as publicly traded companies, thus being able to issuepublic offers, or have their stock traded, must comply with the following basic requirements: • Be registered with the National Securities and Intermediaries Registry. • File a request form to the CNBV and the Mexican Stock Exchange Market through a brokerage house, attaching the corresponding financial, economic and legal information. • Comply with the provisions of the Internal Regulations of the Mexican Stock Exchange. • Comply with the listing and maintenance applicable requirements. • Comply with the provisions of the LMV.Some of the important concepts that publicly traded companies will have to comply with are: the newlycreated duties of (i) diligence, (ii) loyalty and (iii) care of directors and the CEO, which are now part ofMexican governance practices and which refer to acting in the best interest of the corporation and theshareholders, confidentiality, avoidance of conflicts of interest, equal treatment to shareholders, review offinancial information etc. all these applicable to board members and officers. 4306.2011
  • IX. General Principles of Contract LawUnder general principles of Mexican law, a contract or agreement is defined as a meeting of minds(acuerdo de voluntades) that creates, assigns, amends or terminates rights and obligations. The mainprinciples of contract law are articulated in the civil codes for each State in Mexico, but also in federalstatutes – namely, the Federal Civil Code (Código Civil Federal) and the Commercial Code. Though thestate and federal rules are similar (but not identical, and distinctions exist), for simplicity in the followingpages we refer exclusively to provisions contained in the Federal Civil Code and the Commercial Code. 1. General Principles of ContractThe following principles, common in several jurisdictions, are the main principles of Mexican contract law:1. Freedom of Contract. Freedom of contract is the basic principle of all contract law in Mexico.According to the above Codes, the parties to an agreement may stipulate the terms and conditions of anyagreement they wish to enter, provided only that they do not: (i) breach any public policy statute; (ii) waivea statutory right that according to the law may not be waived; (iii) stipulate a term that is contrary to goodpractices; or (iv) affect third partiesʼ rights. Hence, contracting parties are bound in the manner and underthe terms in which they appear to have undertaken their obligations. No particular formalities are requiredfor the validity of an agreement except where the law specifies otherwise.2. Mandatory Provisions. Certain types of agreements – such as purchases, leases, agencyagreements, loans, contracts for professional services, and credit agreements – require mandatoryprovisions. Parties may not waive these provisions and the law will imply such provisions even if partiesdo not include them explicitly in their agreement.For certain kinds of agreements, the law also establishes a set of non-mandatory default rules; theserules establish so-called “natural clauses” that apply to agreements whenever parties omit to explicitlystipulate terms of a particular subject. For instance, if parties to an agreement fail to provide for a placefor payment, as a general rule the payment must be made at the debtorʼs address. Likewise, certainprovisions can supplement the partiesʼ will if they fail to establish the term for the fulfillment of anobligation.Agreements may also include “accessory” or “accidental” clauses. Accessory clauses are thoseprovisions that parties may, but are not required to, include in their agreement. The law will not implythese clauses if parties fail to include them in their agreements.3. No Unilateral Determinations. The validity or fulfillment of an agreement may not be left to theunilateral criteria of one of the parties. Thus, for example, a party may not unilaterally declare anagreement void but, rather, needs to secure a judicial pronouncement. Likewise, performance of theagreement cannot be left to the discretion of one of the parties, as such will render the agreement null andvoid.4. Restricted Application. As a general principle, an agreement is only effective between theparties privy to the engagement, or their successors and assignees; however, certain exceptions apply tothis principle. For instance, a third-party beneficiary may enforce stipulations in his favor after hebecomes aware of such stipulations. Likewise, if a party assumes an obligation on behalf of a third party,she must pay damages if the third party does not fulfill the obligation. 4406.2011
  • Certain kinds of agreements, mainly those relating to the transfer of property or the creation of securityinterests, must be recorded in the Public Registry of Property, the RPC, or other public registries, in orderto become effective vis-à-vis third parties.5. Performance is Critical. Parties must use their best reasonable efforts to fulfill an agreementʼspurpose, despite circumstances surrounding or hindering fulfillment. Thus, rebuc sic stantibus clauses orchanged circumstances are not valid in Mexico except in certain jurisdictions such as the Federal Districtand for contracts that are not commercial in nature (see below); even if economic or politicalcircumstances surrounding an agreement render its fulfillment more difficult than anticipated, the partiesmust fulfill the agreement.6. Good Faith. Parties should at all times - at the time of creating, complying with and performingtheir obligations – act in good faith. Parties must perform the contract not only pursuant to specificobligations that a particular agreement reflects, but also with any others that according to good faithshould also apply in the specific circumstances.Therefore, even in the absence of explicit terms, parties must act in good faith and do everything possibleto ensure their own and the other partiesʼ compliance with their agreement. Parties should not createobstacles to performance or lead other parties into an error about the facts necessary for execution of thecontract.7. Acts of God / Force Majeure. As a general rule, parties to an agreement may stipulate that actsof God or force majeure will excuse untimely performance of their obligations. An act of God is anyunavoidable natural disaster that makes the strict or timely compliance with an obligation impossible. Aforce majeure event is any unavoidable act of man that makes the strict or timely compliance with anobligation impossible. Nevertheless, the principle of good faith requires parties to do anything within theircapacity to comply with the agreement if, and as soon as, the act of God or force majeure passes.8. Non-regulated Agreements. Though specific regulations apply to certain kinds of agreements,other kinds of agreements lack a particularized legal framework including, for instance, distributionagreements and supply agreements. Such non-regulated agreements are governed by general rulesapplicable to all contracts, the partiesʼ stipulations, and in the absence of specific stipulations byprovisions of any analogous regulated agreement.9. rebus sic stantibus. Certain states of Mexico, including the Federal District, have enacted intotheir Civil Codes principles of rebus sic stantibus (teoría de la imprevisión) where the courts are permittedto adjust the terms of a term contract, or declare rescission, in cases where extraordinary and unforeseenevents have created the obligations of one the parties excessively burdensome. The principle wasintroduced in the Federal District in early 2010 with certain deficiencies. 2. Construction of a ContractThe Civil Code provides a system for construction of agreements based in the partiesʼ intent. If the termsof the agreement are clear and there is no doubt as for the intention of the parties, then the clause mustapply literally. Otherwise, this is, if the wording seems contrary to the evident intent, the intent will prevailover the wording.However, other principles apply: • If a clause permits more than one meaning, then the meaning most necessary for the agreement to be effective shall apply; 4506.2011
  • • Clauses shall be constructed together in order to give to those that appear doubtful a sense resulting from the collective construction; • Words with different meanings shall have the one that best fits to the nature and purpose of the agreement; • Course of trade and customs shall be considered for construction purposes; and • If it is impossible to resolve the doubts with the above rules, then if such doubts refer to accessory issues of the agreement and such agreement is gratuitous, then doubts shall be resolved in favor of the minor transfer of rights and interests. If it is not gratuitous, doubts shall be then resolved in favor of the better reciprocity of interests. If doubts pertain to the main purpose of the agreement and is not possible to know the intention of the parties the agreement will be null and void. 3. Termination of an AgreementIn the following section we will discuss the general principles for termination of agreements, with andwithout cause, which operate alongside causes for termination provided by the law and by agreement ofcontracting parties.1. Termination without CauseNeedless to say, the easiest and least costly way to terminate an agreement is by mutual consent of theparties. If mutual consent cannot be achieved, however, then the following principles must beconsidered.As a matter of freedom of contract, as well as custom and practices, parties are free to choose any timeperiod for the duration of an agreement. They may choose a definite or indefinite term or time period,although the former is the norm.If the parties choose a definite term, as a general rule the agreement will be terminated by operation oflaw when the term expires. However, it is always advisable to state through a written instrument - noticeto the other party, a termination agreement, or a release - that the term has expired. Even if anagreementʼs term expires, some agreements may be tacitly renewed through the partiesʼ conduct andthus become indefinite-term agreements.If parties choose an indefinite term, they can - and arguably should - stipulate a procedure for terminatingthe agreement. In the absence of such a stipulation, a court will consider local customs and the purposesof the agreement to determine an appropriate termination method. Absent a specific legal provision to thecontrary, according to accepted principles, the parties to an agreement are free to contractually stipulatethat both of them or just one of them has authority to unilaterally terminate the contract without cause orreason (i.e. at the partyʼs sole discretion).If the parties do not stipulate a method for terminating the agreement, a party seeking termination mustfirst investigate whether, according to the contractʼs nature, there are legal provisions either authorizing orbanning unilateral termination. For agreements without a fixed term or a method of termination, theunilateral renunciation of an agreement is supported by the general principle that sets forth that “nobodyshould be bound permanently.” 4606.2011
  • In any case, unilateral termination must meet the following requirements: • It must be done in good faith; • It must be done with prior notice to the other party; • It must not be done with the sole purpose of harming the other party; and • In some cases, the party terminating the agreement shall pay the expenses that the other party incurred in performance of the agreement. For instance, if a customer terminates a supply agreement with a manufacturer, the customer shall pay for raw materials and workmanship that the manufacturer already used to meet the next product delivery.The party responsible for termination shall be required to indemnify the harmed party if he does notsatisfy the aforementioned conditions.Although Mexican law does not clearly address the required form of the termination notice, the noticeshould be: (i) in writing, and (ii) delivered in the presence of witnesses, a notary public or a public brokerwho has public faith and credit, in order to prove that the notification was delivered and received by theother party.2. Termination with Cause / BreachThe Civil Code establishes that if one party to an agreement breaches its obligations, the non-defaultingparty may opt between: (i) suing for specific performance and (ii) rescinding the agreement. In bothcases, the non-defaulting party can seek payment of damages and lost profits.The authority to rescind agreements springs from a “rescission clause” (pacto comisorio). There are twoclasses of rescission clauses: (a) A tacit rescission clause, considered a natural clause of all agreements. Although parties may fail to explicitly include a rescission clause, the law always provides the authority to rescind due to a breach by the other party. (b) An express rescission clause, present when a clause of an agreement manifests specific consent of the parties regarding the right to rescind.In order to state a claim, however, and enforce the right guaranteed by Federal Civil Code, the non-defaulting party must be fully up-to-date in his compliance with the agreement at the time of the otherpartyʼs breach. Yet once the breach occurs, and so long as the non-defaulting party is in full compliancewith his own obligations, the party need not continue performing under the agreement.3. Judicial Enforcement of Rescission ClauseIn the case of a tacit rescission clause, it is not sufficient for the non-defaulting party to extra-judiciallydeclare to the breaching party that it is rescinding the agreement. Rather, the judiciary must intervene inorder for the non-defaulting party to terminate the agreement or sue for specific performance.With express rescission clauses, expressly agreed to by the parties, termination is ipso iure, without thecourtʼs participation -though the extra-judicial capacity to rescind does not prejudice a partyʼsconstitutional right to appear in court and challenge the action.4. Exception for Non-Performance 4706.2011
  • Non-performance of an agreement by a plaintiff may be the basis for a defense and/or a counterclaim onbehalf of the party from whom performance is sought. (a) As an affirmative defense. A party may defend itself against a claim of breach by showing that the complaining party was itself in breach of its related obligations. Due to the nature of bilateral agreements, no party need perform its obligations unless the other party fulfills its reciprocal obligations. B) As a counterclaim. Non-performance of an agreement may also be asserted as a counterclaim, seeking (i) specific performance or (ii) rescission. In both cases the affected party may claim damages and lost profits resulting from the breach. 4. Contractual LiabilityA party affected by a breach of an agreement may seek, in addition to rescission or specific performance,damages and lost profits arising out of the other partyʼs breach. Damages and lost profits may also beawarded for delay in the fulfillment of an obligation. Furthermore, even on a nullified contract, a party maysue for damages if that nullity was caused by the other partyʼs willful misconduct or bad faith.Parties to an agreement may include clauses limiting or increasing damages available due to breach,unless otherwise provided by law. However, parties may not waive liability arising out of willfulmisconduct, fraud or deceit.Alternatively, parties may stipulate liquidated damages, conceived as a pre-calculation of actual damagesarising out of a breach. Liquidated damages are in lieu of, not in addition to, awards for damages and lostprofits.1. Damages and Lost ProfitsDamages, as defined by the Federal Civil Code, are the loss or injury that affects the assets of the victimthrough a partyʼs failure to fulfill an obligation. Lost profits are the deprivation of any legal profit thatshould have been obtained were it not for the breach of an obligation.In order to be recovered, according to the Civil Code, damages and lost profits need to be a direct andimmediate consequence of the breach or the wrongful act. The party seeking such damages and lostprofits must prove that the only cause thereof was precisely the breach or wrongful act, and that anecessary connection existed between the act of the defendant and the resulting damages and lost profitssuffered by the victim. In other words, the party seeking damages must prove that those damages wouldnot have occurred “but for” the defendantʼs wrongful act or for the breach. Hence, under Mexican law,nominal, consequential, incidental and punitive damages may not be awarded.2. Moral DamagesThe Civil Code defines moral damages as the “damages that a person suffers in his feelings, sentiments,beliefs, status, honor, reputation, private life, configuration and physical aspects, or in the consideration ofthat person held by third parties.” Moral damages may be the basis of an independent action to damagesand lost profits in a contractual or tort claim.The amount of damages is determined by a judge, considering: (a) the damaged rights; (b) theresponsible partyʼs degree of responsibility; (c) the economic status of the responsible party and thevictim; and (d) other circumstances of the case, when the reputation, honor or image of the victim has 4806.2011
  • been damaged in any form. The judge may also order, as part of the redress and at the request of thevictim, that a summary of the judgment be published in writing. 5. Election of JurisdictionBased in the contracting freedom provided by the Civil Codes applicable to each State of Mexico and theFederal District, as well as by the Commercial Code, parties are able to subject an agreement to localcourts or arbitration. Certain exceptions might apply in contracts with Governmental entities or legal actsother than agreements between private parties.Furthermore, the Commercial Code recognizes that parties might agree a conventional procedureapplicable before Courts or through arbitration.Election of local courts or arbitration under agreements becomes then a matter of negotiation betweenparties based in facts proper of each transaction, such as costs, benefits of local courts vs. arbitration,value of the transaction, among others. 6. Submission to Local CourtsIn general, parties are able to subject an agreement to competent courts and laws. Courts may be federalor local depending on the civil or commercial nature of the transaction. If dealing with a commercialtransaction, local courts may be competent to solve disputes since they share jurisdiction overcommercial disputes with federal courts. (See the “Mexican Courts and Legislation” section). 7. ArbitrationAs commented above, based in the contracting freedom provided by the applicable Civil Codes, as wellas the Commercial Code, parties are able in general to subject disputes under an agreement toarbitration.Parties can agree to ad hoc arbitration or may subject themselves to specific arbitration rules includingthose under the International Chamber of Commerce. Additionally, all arbitrations proceedings sit inMexico, as well as the enforcement and recognition of awards in Mexico, are governed by the arbitrationstatute within the Commercial Code, which is inspired in the UNCITRAL Model Arbitration Law.Election of an arbitration clause might vary based in facts such as costs, benefits of local courts vs.arbitration, value of the transaction, search of a resolution issued by a collegiate body or with certainexpertise or the search of a more flexible process, among others. 8. Confidentiality AgreementsConfidentiality agreements are executed for protection of confidential information represented byindustrial and commercial secrets. The Industrial Property Law (Ley de la Propiedad Industrial) definesan Industrial Secrets as, “all information of industrial or commercial application that is kept by anindividual or entity that is of a confidential nature, which has as its purpose to achieve or maintain aneconomic or competitive advantage over third parties in the performance of economic activities, and forwhich efficient methods and systems have been adopted in order to preserve confidentiality and restrictedaccess”. This is, technical knowledge that is not registered as industrial property and which is used forthe development of a valuable economic or industrial activity that is undisclosed or of confidential natureand maintained in documents, electronic and/or magnetic mediums (optical discs, microfilms or films) andother similar instruments. 4906.2011
  • Information that is immaterial and abstract knowledge will not enjoy legal protection; nor will knowledge inthe public domain, common knowledge in the trade, or that knowledge which must be divulged by law orjudicial order.Notwithstanding the above, it should be considered that an authority is entitled to request information,subject to compliance of legal provisions. In order for a government authority to request confidentialinformation or industrial secrets it must, among others, be expressly authorized under a law, the requestmust be limited to the matter protected by such law, specify, in detail, which is the information requested.It must also duly ground the petition and fulfill the procedure provided for by the applicable law.Confidential information is protected by the federal and local criminal codes in addition to the IndustrialProperty Law. On the other hand, the Federal Labor Law (Ley Federal del Trabajo) deals with thatinformation or industrial property issues derived from or linked to a labor relationship.Protection of confidential information requires not only the execution of confidentiality agreements but theimplementation of other means such as marking documents as confidential; execute non-competeagreements, among others. 9. Non-Compete ProvisionsNon-competition agreements or clauses are a becoming common practice, specially under a laborrelationship with those individuals that have rendered services or may be under a labor relationship,limiting them as for the services and activities that might perform in a future to third parties, lookingforward to safe-keep, among others, information, technology and “know how”.In this regard, is commonly stated that non-compete provisions will only be enforceable during the time onwhich the work relationship is in force. Considering that the Federal Labor Law provides protectionthrough justified termination causes, it is difficult to enforce after the termination of a labor relationship.Consequently, is advisable to link the non competition with a confidentiality clause or agreementprohibiting the individual to disclose to a third party the confidential information or to use or compete withsuch information, technology and “know how” for a third party due to its confidential characteristics.Another important aspect to consider will be antitrust law. Non-competition agreements may be deemedas a vertical restraint (relative monopolistic practice) under the Federal Law of Economic Competition(Ley Federal de Competencia Económica) if considered as agreements that tend to reduce or eliminatefree competition and concurrence within the market.In order for such agreements not to be deemed as harmful to free competition and trade, these shouldhave a solid business reason, (e.g., upon sale of a business) with a specific territorial coverage and term(usually recommended not to exceed five years).The Federal Competition Commission may analyze these clauses case by case, under the criteria thatthese are valid if they are entered into by economic agents occupying different steps of the productionchain of a certain product or process (must not be competitors among themselves, otherwise might beconsidered an absolute monopolistic practice. 10. Asset vs. Stock Acquisitions 5006.2011
  • Mergers and Acquisitions are an important part of Mexicoʼs business playground. Although over timeMexico has lost its competitiveness as an investors paradise, there is still a significant amount of dealswith respect to Mexican entities that involve both Mexican and international investors. As in otherjurisdictions, investors and companies that participate in deals to purchase and sell existing businesseswork hard to structure all details in order to obtain the best results for both the selling and purchasingparties. A key aspect of all acquisition deals is whether to purchase the assets of the business or thestock of the business entity.An asset purchase involves the purchase of all or part of the companyʼs assets, including facilities,machinery, equipment, inventories, vehicles, intangible assets (trademarks) etc. A stock purchaseinvolves the acquisition of the companyʼs stock only.There are several aspects to be considered when deciding whether to purchase assets or stock, thefollowing is a brief list of general advantages and disadvantages to be considered. • In an asset purchase the buyer is able to determine what liabilities it wishes to assume whereas in a stock transaction the company may have liabilities that are unknown to the buyer. • In an asset purchase the buyer will not encounter any problems related to minority stockholders and rights of first refusal. • Re-titleing or registering assets in name of the buyer may be more complicated and burdensome when compared to corporate notations and requirements applicable to stock transactions. • In an asset purchase, assets will be subject to value added tax (VAT) at a rate generally consisting of 15%. • In a stock transaction the buyer can generally obtain sellers non-assignable contracts, permits, and licenses. • A stock transaction may in general terms be simpler when encountering a small number of selling shareholders or even a large number that is willing to sell. • Fewer formalities may be required in a stock transaction.Notwithstanding the advantages and disadvantages of either an asset or stock acquisition, it is importantto note that the specific terms and conditions of each deal must always be analyzed in order to determinewhat the best option is. 5106.2011
  • X. E-CommerceThe rapid growth of internet-based transactions has driven Mexican lawmakers to design a legalframework that attempts to grant legal certainty to those transactions.A. Applicable Laws and JurisdictionThe federal congress and local congresses of each state share authority to regulate electronictransactions. Hence, both local and federal laws may apply to an electronic transaction, depending onthe nature of the transaction itself. When a transaction executed through electronic means is of a civilnature, local congresses of each state have regulatory authority over the transaction, and local lawsapply. If, however, the transaction has a commercial nature, the federal congress has regulatoryauthority, and federal laws apply. Since most transactions executed through electronic means have acommercial nature, federal laws have greater impact, and have evolved faster, than local laws.Further, courts that hear disputes arising from an electronic transaction may be federal or local courtsdepending on the civil or commercial nature of the transaction. Even if dealing with a commercialtransaction, local courts may be competent to solve the dispute since they share jurisdiction overcommercial disputes with federal courts.B. E-Commerce LawUnder Mexican law, the validity of an agreement depends upon formal requirements dictating the mannerin which parties must express their consent and the terms of their contract. If an agreement lacks theform provided by law for such agreement, the agreement may be legally voided. Thus, it is important toconsider the degree to which Mexican law recognizes the validity of consent expressed through electronicmeans.Since the year 2000, a valid agreement may be formed and executed through electronic, optical or othertechnological means. Since the two parties that use electronic means may not sign an agreementsimultaneously, an agreement is formed when acceptance of an offer is received.A 2003 amendment to the Commercial Code includes provisions pertaining to electronic signatures and tothe issuance and receipt of data messages, mirroring the United Nations Commission on InternationalTrade Law (UNCITRAL) Model Law on Electronic Commerce of 2001. The main principles established bythe amendment are: • the equivalence between hand-written and electronic signatures; • the power of private parties in electronic transactions; • international compatibility; and • a technologically neutral approach.The Commercial Code provides a series of qualifications for an advanced or reliable electronic signature,which are to be attested by a certification service provider authorized by the ME.Both the electronic signatory and a relying party have obligations that can be summarized as follows:(a) Obligations of the Signatory: these are: 5206.2011
  • • Fulfill the obligations derived from the use of an electronic signature, as agreements or commitments executed through electronic means are enforceable against their signatories; • Act diligently and to use reasonable means to ensure that its electronic signature is not used without its authorization; • Verify that all the representations made with regards a certification of its electronic signature are true and accurate; and • Fulfill the obligations deriving from the unauthorized use of its electronic signature whenever the author of such signature did not act diligently to impede the unauthorized use.(b) Obligations of the Relying Party: • Verify the trustworthiness of the electronic signature whenever such signature is not certified; and • Whenever a certification of the electronic signature is secured, to verify that the certification—as well as any use restriction disclosed in the certification— is valid in full force and effect.Aside from authorizing the execution of transactions through electronic means the 2003 amendmentsauthorized commercial entities and individuals to file and store their information through electronic files orin data messages.C. On-line Consumer ProtectionThe recently enacted Personal Data Federal Protection Law (Ley Federal de Protección de DatosPersonales en Posesión de los Particulares), together with the Consumer Protection Law (Ley Federal deProtección al Consumidor) provide for obligations of on-line suppliers of goods or services. Suchobligations aim to protect customers from misrepresentations made by on-line suppliers regarding goodsor services, and to protect customers´ personal data shared in the course of on-line purchases. Thus,any on-line supplier that requests personal data from its customers while executing an electronictransaction may not use or share that information with third parties without the consent of the customer,which in some cases may need to be express consent. Likewise, suppliers need to use reasonablemeans to safeguard information secured from customers through a web site or other electronic means,and to disclose to customers the means used to protect their information.D. Electronic InvoicesThe Federal Tax Code allows for issuance of electronic invoices, provided they secure a certification ofadvanced or reliable electronic signature and that such invoices show the digital seal authorized by theTax Administration Service (Servicio de Administración Tributaria).E. Electronic Evidence in Judicial ProceedingsAny e-commerce law would be useless without provisions regarding the admission of electronic evidencein judicial proceedings. Hence, Commercial Code expressly contemplates that data messages shall beadmissible in court as evidence. In order to assess a fact proved through a data message, the judge orcourt must review and consider the reliability of the method used to create, communicate, store or file thatdata message. 5306.2011
  • The Federal Code of Civil Procedures provides that a data message may be submitted as evidence,provided the judge or court assesses whether it is possible to ascertain with certainty the author of saidmessage. Such party shall have the burden to prove the authorship of the message and that themessage remains unaltered.F. Domain Name RegistrationA non-governmental entity called NIC Mexico (www.nic.mx) is in charge of domain name registrationunder the Country Code Top-Level Domain (“CCTLD”) ¨.mx¨ This entity has its own procedural rules forregistration. However, any trademark dispute connected with a domain name will be resolved before andaccording to the rules of the WIPO Arbitration and Mediation Centre. 5406.2011
  • XI. Competition LawA. GeneralAlthough the prohibition of monopolies and concentrations had been included in the Mexican Constitutionand certain secondary laws for many years, it was not until the introduction of the Federal Law ofEconomic Competition (Ley Federal de Competencia Económica “LFCE”) in 1992 (in effect since June,1993) that Mexico applied competition law and policy. The law was substantially amended in 2006.The LFCE was designed to implement general prohibitions on monopolies, concentrations andmonopolistic practices included in Article 28 of the Mexican Constitution. To this end, the LFCE createdthe Federal Competition Commission (Comisión Federal de Competencia - “Cofeco”) to apply and monitorits provisions.The main objective of the LFCE is to promote economic efficiency and to protect competition and freemarket participation. In order to achieve these goals, the LFCE directs its attention to the behavior ofeconomic agents, sanctioning monopolistic practices and other restraints of competition. In addition, theLFCE outlines a preventive policy for controlling and regulating economic concentrations and participatingin certain public bids.The law applies to all economic agents. However, according to Article 28 of the Constitution, there arecertain strategic sectors in which the State operates in an exclusive manner. These activities are notconsidered monopolies. These include the following: postal service, telegraph and radio telegraphy, oiland petrochemicals, radioactive minerals, nuclear energy, electricity, and issuance of currency by theMexican Central Bank (Banco de Mexico - “Banxico”). A similar exception is granted to labor unions, andauthors, artists and inventors as to their works.B. Specific Practices or RestraintsThe LFCE bans monopolies and those monopolistic practices that harm or impede competition in theproduction, process, distribution or marketing of goods or services. The LFCE distinguishes between“absolute” and “relative” monopolistic practices.1. Absolute Monopolistic Practices (Horizontal Restraints)These are agreements between economic competitors that do not have an evident economic justificationand thus are prohibited per se with severe economic sanctions imposed. The size of the market or of theagents participating is unimportant.The LFCE sets forth an exhaustive list of four types of absolute monopolistic practices. Absolutemonopolistic practices are those agreements, covenants, arrangements or combinations amongcompetitors that have as a purpose or effect any of the following: (a) Price fixing. To fix, raise, arrange or manipulate the purchase or sale price of goods and services offered or demanded in the market, or exchange information with the same purpose or effect; (b) Output restriction. To establish the obligation of producing, processing, distributing, marketing or acquiring a restricted or limited volume of goods, or rendering a restricted or limited number, volume or frequency of services; 5506.2011
  • (c) Division of markets. To divide, distribute, assign or impose portions or segments of a current or potential market of goods and services, through determined or determinable clients, suppliers, times or spaces; or (d) Bid-rigging. To establish, arrange or coordinate bids.Furthermore, the Regulations to the LFCE consider the following as presumptive evidence of thecommission of absolute monopolistic practices: • Instructions or recommendations issued by chambers of commerce with the purpose or effect of committing any of the prohibited practices noted above. • Two or more competitors offering products at a price substantially lower or higher than the international reference price, except when the difference derives from the application of a tax provision or from transportation or distribution costs. • Price parallelism.In the context of the above circumstances, the burden of proof lies on the defendant rather than on theprosecuting authority.2. Relative Monopolistic Practices (Vertical Restraints)Relative monopolistic practices are also addressed under the LFCE, which generally occur amongeconomic agents—such as producers and distributors—at different levels of the distribution chain.Boycotts – which may occur between competitors horizontally – are also considered relative monopolisticpractices.The LFCE and its Regulations recognize that these practices may have legitimate competitive or anti-competitive effects, depending on their application. Thus the LFCE sets forth different criteria foranalyzing whether a practice will be considered monopolistic.Thus, in the context of relative monopolistic practices, it is necessary to first evaluate two main criteria:the relevant market in which the practice takes place and whether the economic agent in question hassubstantial power in that market. (a) Relevant Market. As in other jurisdictions, the relevant market is defined both geographically and in terms of a particular product or service. The definition of the market entails an economic analysis of the capacity to substitute goods or services, considering the costs of, as well as any legal or practical restrictions against, a consumer obtaining the good from other sources. (b) Substantial Power. The law requires the analysis of the following elements to determine whether an economic agent has substantial power in the relevant market: i) market share of the economic agent and of its competitors; ii) the power to unilaterally fix prices or restrict output of goods or services, without being effectively challenged by competition; iii) the existence of barriers to entry; iv) the access to supplies for components for the goods and services; and v) the recent competitive conduct of the economic agent in question.A third element to be considered is the requirement that the practice refer to the goods or services thatcorrespond to the relevant market. 5606.2011
  • Once these elements have been resolved, it is necessary to determine that the conduct in question hasthe purpose or effect of unduly driving competitors out of the market, substantially impeding their accessor establishing exclusive advantages in favor of one or more persons in the cases set forth in the LFCE.In other words, the practice in question needs to have an exclusionary effect. Specifically, the following asrelative monopolistic practices identified: • Vertical market division (exclusivity); • Resale price maintenance (including the imposition of other resale conditions); • Tying arrangements; • Transactions subject to the condition of not selling or using products of a third party; • Refusal to deal; • Boycotts; • Predatory pricing; • Discounts and incentives in exchange for exclusivity; • Cross-subsidies; • Price discrimination (including discrimination in other conditions); and • Increasing rivals costs, obstructing the productive process or reducing demand faced by competitors.Notwithstanding the foregoing, relative monopolistic practices may have different effects on the market.Therefore, the LFCE provides that in the analysis of the conduct referred to in the LFCE as relativemonopolistic practices, consideration shall be given to the efficiency gains resulting from such conduct,which may favorably affect competition. This process seems to be similar to the "rule of reason" analysisunder U.S. law.C. ConcentrationsThe LFCE seeks to protect the structure of the market through the regulation of mergers, referred to in theLFCE as concentrations. For purposes of the LFCE, concentrations include any merger, acquisition ofcontrol or other act whereby corporations, associations, shares, equity parts, trusts or assets in generalare joined by- and among- competitors, suppliers, clients or any other economic agents. Cofeco maychallenge concentrations that have the purpose or effect of lessening, damaging or impeding competitionwith respect to equal, similar or related goods or services.(a) Concentrations requiring prior notification.- The LFCE provides that there are certainconcentrations that require notification of Cofeco, prior to their closing: (i) Those transactions involving an act or a series of acts, regardless of the place of execution, amounting in Mexico the equivalent of 18 million times the minimum general wage in force for the Federal District or more. As of mid 2010 this amount is approximately MX$1,076 million pesos (approximately, US$91 million dollars). (ii) Transactions involving an act or a series of acts with an accumulation of at least 35% of the assets or capital stock of an economic agent, whose assets in Mexico or annual sales originated in Mexico involve more than the equivalent to 18 million times the minimum general wage in force for the Federal District. This amount is the same as above. (iii) Transactions involving an act or series of acts with an accumulation in Mexico of assets or capital stock higher than 8.4 million times the minimum general wage in force for the Federal District (as of early 2008 this amount is approximately MX$502 million pesos - approximately US$42.4 million dollars), and the transaction involves the participation of two or more economic agents 5706.2011
  • with assets or annual sales (worldwide), jointly or separately, are of 48 million times the minimum general wage in force for the Federal District. As of mid 2010 this amount is approximately MX$2,871 million pesos (US$242 million dollars).Except for the second part of paragraph (iii) above, the other thresholds would refer to the effects of thetransaction in Mexico.The amounts in US dollars mentioned above may vary depending on the actual minimum wage in Mexicoand the applicable rate of exchange.If any of the thresholds set forth above is reached, a prior notification of the transaction is required.Assuming that the transaction fails to reach the thresholds referred to above, this does not mean that theconcentration is valid, but rather not subject to prior notice, and the Cofeco could still challenge it within aterm of one year after it becomes effective.(b) Exceptions to the prior notification requirement. The Regulations to the LFCE provide that thefollowing acts do not require prior notification of the Cofeco: (i) Legal acts on shares or equity parts of foreign companies, when the economic agents involved in such acts do not acquire the control of Mexican companies nor accumulate in Mexican territory shares, equity parts, participation in trusts or assets in general, in addition to those, directly or indirectly, possessed prior to the transaction; and (ii) Transactions in which an economic agent holds, directly or indirectly, and has held for the last three years, 98% of the shares or equity parts of the economic agents involved in the transaction.(c) Notification Process. Generally stated, Cofeco notification process involves the following steps: • Submission of a document to the Cofeco along with the plan of the proposed concentration, broadly describing the transaction and the parties involved, and including financial statements for the last fiscal year, market shares (mainly for the Mexican component of the transaction), and other relevant information. To facilitate this process, Cofeco has issued a questionnaire outlining the information it requires for purposes of reviewing the competitive effects of the proposed transaction. The Regulations to the LFCE provide that the economic information of the questionnaire is not required when it is evident that the transaction poses no anti- competitive concern; this is known as a “simplified” filing. • Cofeco may request additional information within 15 business days following the date the notification is received. • Within the 10 business days following the filing of the concentration notice, if Cofeco determines that it needs the full waiting period to review the transaction it must issue an order stating that the transaction should not be closed until receiving formal clearance. If this order is not issued, the economic agents are free to close the transaction “at their own risk”. • Cofeco shall issue its resolution within 35 business days from the date of receipt of the notification or the submission of the additional information. If Cofeco has not issued a resolution at the end of this term, it shall be understood that Cofeco has tacitly approved the proposed transaction (afirmativa ficta). The period mentioned above may be extended in 5806.2011
  • exceptional cases for another 40 business days. From our prior experience, it is safe to say that the normal process takes approximately four to six weeks. • If the parties prove that it is notorious that a concentration does not have as its purpose nor its consequences to have the effect of diminishing, damaging or impeding competition, Cofeco shall resolve the filing within a term of 15 business days.For purposes of analyzing the merits of a merger, Cofeco shall consider: (i) the relevant market ormarkets involved in the transaction; (ii) the market power of the parties involved and competitors in therelevant market and related markets; (iii) the degree of concentration through the use of the HHI and a“Dominance Index”; and (iv) efficiency gains derived from the transaction.(d) Consequences for failing to notify. In the event that parties to a transaction that requires reportingfail to file the required notification, Cofeco may: • Order the suppression of the concentration. • Order divestitures; • Subject the transaction to certain conditions such as the transfer of certain assets, rights or shares, licensing of a trademark or patent, elimination a line of production, or any other condition with the purpose of protecting competition; • Impose fines.D. Privatizations, Publications and OpinionsThe LFCE requires Cofeco to determine the economic agents who may participate in privatizations,granting of concessions and permits, public auctions and bids, when so required by the nature thereof.The analysis followed by Cofeco in this context is similar to that used for concentrations. However, thebasis of these privatizations, auctions or bids may follow specific rules, including rules about timing toresolve.Several statutes also require the prior opinion of Cofeco for the issuance of concessions or permits oreven for the imposition of specific rules. Examples of these statutes include the Natural Gas Regulationsand the Federal Telecommunications Law, among others.E. Private ActionsPrivate parties may initiate civil actions if they establish during administrative proceedings that they havesuffered damages for illegal monopolistic practices or concentrations. The Court may take into accountthe estimation of damages and lost profits made by Cofeco.F. Leniency Program and Settlement(a). Leniency. The LFCE sets forth a leniency program designed to encourage members of cartels toreport the conduct to Cofeco in exchange for leniency. In order to qualify for a reduced fine, the applicantmust (i) be the first one to approach Cofeco; (ii) fully cooperate with Cofeco; and (iii) end its participationin the cartel. The leniency afforded the applicant includes a reduced fine and no judicial or administrativeprosecution action against the whistle-blower would proceed based on this resolution by Cofeco.Other agents not complying with the foregoing requirements may benefit from this program and obtainreduction in fines when they contribute elements to the investigation in addition to those previously held 5906.2011
  • by Cofeco. Fine reductions are also available to those agents contributing additional elements in theinvestigation (second, third and fourth applicants).(b) Settlement. In addition, an economic agent that voluntarily acknowledges its liability before therendering of Cofecoʼs resolution will be fined only the rough equivalent of $5 USD (one minimum wage inthe Federal District). The settlement/plea-bargaining process is only applicable for relative monopolisticpractices and prohibited concentrations, although in practice Cofeco is also trying to settle cartelprocesses. This plea-bargaining does not preclude injured parties from filing extra-contractual (i.e., tort)claims in order to recoup lost profits and other damages -- although such private claims are very difficultto assert under Mexican law. A party can only use this plea bargain right once every five years.G. Statute of LimitationsThe LFCE sets the statute of limitations for the prosecution of illegal acts at 5 years.H. Possible Amendments to Competition RegulationThe Mexican Congress has been discussing amendments to the LFCE and the Federal Criminal Codewith a view of strengthening the authority of Cofeco, mainly with respect to cartel investigations and thusimproving the competition landscape as a mean to foster Mexican economy.The main issues under discussion in mid-2010 in Congress are the following: 1. Criminalization of cartels (absolute monopolistic practices) 2. Significant increase in fines. 3. Surprise verification visits. (dawn raids). 4. Injunctions (i.e., suspension of practices during the process) 5. Joint dominance for assessment of relative monopolistic practices 6006.2011
  • XII. Labor IssuesA. GeneralOne of the most difficult aspects of doing business in Mexico is understanding Mexicoʼs laborenvironment, particularly when foreign companies are accustomed to doing business in a labor-lawframework that is consistently different from—and sometimes even contradictory to—that in Mexico.Mexican labor laws have always been perceived as overprotective towards the working force, both froman individual and collective standpoint; Mexican unions, in particular, historically inspire concern and evenfear in foreign companies.Nevertheless, the Mexican private sector, workers, and even some unions, have long understood thatoffering simple cures to foreign companiesʼ anxieties—such as by offering an inexpensive work force—isnot enough to entice foreign investment. Therefore, although Mexican labor laws continue to be anobstacle, a common objective for many Mexicans involved in labor issues is to present a country, andengineer a legal framework, with real and diverse alternatives that meet the needs of each company thatdecides to initiate operations in Mexico.Consequently—and as is true with many aspects of Mexico—the legal framework of labor is bound tochange, if not radically, at least by adapting to the increasingly globalized economy.B. Legal FrameworkThe basic provisions regulating labor relationships generated in Mexico are found in the FederalConstitution.Article 5 of the Constitution establishes the right of any person to engage in any profession, industry,trade or work, as long as it is lawful. This right can only be limited by a court order when the right of a thirdparty or of society is infringed, or by a governmentʼs decision. This article is the basis, in certain cases, forthe unenforceability, in Mexico, of covenants not to compete.Furthermore, Article 123 establishes the right of any person to a dignified and socially profitable work.This article consists of two sections: the first applying to all employees generally (Section A), and thesecond applying to bureaucratic employees rendering services to the federal and local governments(Section B).The provisions of Article 123 are developed through the Federal Labor Law (Ley Federal del Trabajo –“LFT”), and diverse Regulations and Mexican Official Standards that derive from the LFT, which includeprovisions on such issues as hygiene and security in the workplace, training of employees, andauthorizations for machinery usage, among others.In addition to the LFT, the Social Security Law (Ley del Seguro Social - “SSL”) and the Law of the Instituteof the National Housing Fund for Workers (Instituto del Fondo Nacional para la Vivienda del Trabajador -“Infonavit”) contain diverse regulations pertaining to special topics in their respective fields.C. The Concept of the Employment Relationship 6106.2011
  • The LFT defines an employment relation as the rendering of a personal subordinated service to anotherperson in exchange for the payment of a salary. Thus, any person that renders a subordinated service toanother, who in turn pays compensation, is considered an employee—regardless of the nature of theservice performed.It also contemplates the possibility of intermediaries, persons who hire other persons to render theirservices to an employer. In such a scenario the intermediary and the actual employer are jointly andseverally responsible for labor obligations related to the employee(s).The LFT considers directors, managers, officers and other persons that carry out direction ormanagement activities for a company as their employers representatives. The actions of suchrepresentatives bind the company in its relations with employees. According to the legal definition,however, such representatives are also, themselves, employees.Finally, LFT categorizes workers into two groups: confidential employees and all others. Confidentialemployees are those who perform general activities of management, inspection, supervision and reviewof other employees. Workers are usually grouped in unions.1. Regulation of employment through written agreements The work relation is generally created through the execution of an employment agreement, any document whereby a person undertakes to render a personal subordinated service to another person in exchange for payment of a salary or wages. In the event that an agreement is not made in writing, the employer is held responsible for that omission; the worker shall nevertheless have all the rights that stem from work rules and the services rendered to the employer.2. Subjects of Employment There are no specific requirements for—or limitations on—any individual or entity seeking to enter into a labor relationship as an employer. Employers must only meet the general standards for legal capacity under civil law. On the other hand, a person willing to provide services as an employee is prevented from doing so if: (i) he has not reached 14 years of age or (ii) he is between 14 and 16 years of age, but has not completed the obligatory level of education prescribed by law. Moreover, for individuals that fall in the latter class, prior parental authorization is required. The LFT permits anyone above 16 years of age to render services as an employee.3. Term of Employment The LFT classifies the term of employment relationships as follows: (a) For a specific task or service: what the nature of the relevant job or service demands for this type of relationship. After conclusion of the job or service, the employment relationship is also terminated. (b) For a fixed term: what the nature of the relevant work or service demands or in situations of employment substitution (e.g. when an employee is temporarily disabled to perform services). 6206.2011
  • (c) For a indefinite term: for those relationships that do not have express agreements as to their term, and as a general rule, the employment agreement is understood as lasting for an indefinite term. (d) Foreign Employees: Mexican employers may hire foreign employees. However, Section 7 of the LFT maintains that the ratio of Mexican to foreign employees must be no lower than nine to one; in other words, Mexican nationals must constitute at least 90% of the work-force of every business established in Mexico. There are two exceptions to the rule, however. First, foreign technicians or professionals may be exempted if there are no Mexican nationals with the expertise required to perform the relevant service. Finally, high-ranking foreign officers of Mexican entities are exempted at all times.4. Employer SubstitutionCorporate mergers and employer substitution do not affect employment relationships. The survivingentity or new employer inherits the contractual obligations of the former employer. From a labor andsocial security standpoint, the former employer is jointly and severally liable with the new employer for therights and obligations created before the employer substitution for a period of six months from theeffective date of substitution.D. Minimum Terms and Conditions for Rendering ServicesMexicoʼs labor laws also establish the minimum benefits that employees are entitled to receive as aconsequence of their services rendered to an employer.Although any employer may grant higher or additional benefits than those established by law, employeebenefits must at least include the following:1. Salary. Base Salary & Integrated SalaryThe LFT defines ”salary” as the compensation that an employer must provide to any employee for thepersonal and/or subordinated services the employee renders. Salary payments may be arranged by time,specific work, commission, fixed price, unit of time, or in any other way permitted by law. This kind ofsalary is commonly referred to as the “base salary.”Beyond simple “base salary,” the LFT also defines “integrated salary,” which is the measure consideredfor purposes of calculating any severance payment to which an employee may be entitled at the time aworking relationship is terminated. Integrated salary takes into account aggregate daily wages, gratuity,commissions or fees, housing contributions, fringe benefits and any other non-wage benefits tendered tothe employee as compensation for services rendered.As for the amount that any employee must receive for services rendered, the LFT provides: ”For equalservices, performed under an equal position, working schedule and efficiency conditions, an equal salaryshould be paid.”Although criticized, the LFT maintains among its provisions a "minimum wage," defined as the minimumamount in cash or currency that a worker must receive for services rendered within a working day. To alarge extent, the minimum wage has been established as a reference, and only a small percentage wouldactually earn such amount. A National Commission, with representation from the government, workersand employers, annually meets to establish minimum wages. 6306.2011
  • 2. Working HoursThe LFT establishes that working hours should not exceed eight hours for the day shift (between 6:00A.M. and 8:00 P.M.), seven hours for the night shift (between 8:00 P.M. and 6:00 A.M.), and seven andone half hours for the mixed shift (including hours from both the day and night shift, provided that thenight hours do not exceed three and one half hours).For every working day, employees must be granted a leisure period of at least 30 minutes, during whichthey may have a meal or rest. Additionally, for each six working days, an employee shall have one day ofrest each week, for which he must receive full payment of his daily wage.Work shifts should at no time exceed the limits set forth by law. Any amount of time exceeding the limitsset for ordinary working shifts must be recorded as extra time. The LFT permits only three hours of extratime per working shift and said extra time may not be performed on more than three working days a week.Salary received for extra time is paid at twice the rate paid for normal hours. Overtime in excess of threehours a day, three times a week must be paid at three times the wage rate for normal hours.Additionally, employees who render services on a Sunday as an ordinary workday (i.e., workers whorender services from Tuesday of one week until Monday of the following one and who have Wednesdayas their weekly day off) have the right to receive payment of a 25% premium in addition to their normalsalary for Sunday. Similarly, employees who work on their day off must receive, in addition to their normalsalary, a premium of two times such amount.3. Vacations and legal holidaysMexican law requires that workers with more than a year of service receive a paid vacation period of atleast six working days. Vacation periods are increased by two days for each subsequent complete year ofservice. After the fourth year of service, vacation periods are increased by two days for each five years ofservice.The LFT expressly prohibits the payment of unused vacation days. This means that a worker should notreceive any compensation if he/she decides not to use his/her vacation period in exchange forremuneration. Workers do have the right to a 25% premium in addition to their salary for work during therelevant vacation period.A total of eight obligatory holidays are recognized in the LFT. Employers often grant more days to theiremployees than those set forth by law, especially if a collective bargaining agreement is in place at theworkplace.4. Christmas bonusAll employees who render services in Mexico are entitled to a yearly Christmas bonus equal to at least 15days of their base salary. This bonus must be paid before the 20th of December of each year.5. Profit sharingEmployees have the right to participate in the profits that their company may earn in any given year.Currently, the National Commission for the Employeeʼs Profit Sharing Participation requires that 10% of acompanyʼs taxable income be distributed as profits to the employees. 6406.2011
  • 6. Contractual benefitsNotwithstanding the minimum benefits established by the LFT, employers usually grant higher oradditional benefits. Common additional benefits include medical and life insurance, savings funds, foodstamps, performance bonuses and the use of a company car. Usually, the individual labor agreement thateach employee enters into upon being hired reflects these additional benefits.E. Collective Labor RelationshipsIn order to participate in collective bargaining activities, a worker must be affiliated with a labor union.Unions are the only entities authorized to enter into collective agreements with employers on behalf oftheir members. Unions are also responsible for monitoring due observance of the “Contrato-Ley,” thespecial agreement between a group of workersʼ unions and a group of employers.1. UnionsThe LFT defines “union” as an association of workers or employers for the purpose of studying, improvingand defending their respective interests. Every worker is free to decide whether to join a union.Nevertheless, this right is commonly superseded by exclusion and separation clauses, which ordinarilyappear in all collective agreements. “Exclusion” clauses require a worker to join the union before theemployer hires him/her. “Separation” clauses oblige an employer to fire, without any further obligation,any employee who has been previously expelled from the union.There are different kinds of unions, created in several forms. Mainly they can be classified, according tothe nature of their members, as guild unions, entity unions, industry unions, conglomerated industryunions and unions encompassing different activities. Unions must have at least 20 members if they areworker unions and three members if they are employer unions.All unions must register with the Ministry of Labor or the corresponding Local Conciliation and ArbitrationBoard. Registration before either authority depends on the activity or line of business in which theemployer engages. Registration may be denied if the intended union does not: (i) present a legal orfeasible purpose; (ii) reach the minimum number of members required by law; or (iii) include requireddocuments with its application.Unions have as their main goal the protection of the collective and individual interests of their memberworkers. Unions may not deal with religious matters or perform commercial activities for profit. ThoughUnions have historically played a very important role in the political environment of Mexico, they havebeen increasingly losing influence in recent years.Unions can associate in larger organizations, such as federations and confederations, which must alsoregister with the above-mentioned authorities and satisfy similar registration requirements.Only a two-thirds vote of members or the lapsing of a term of duration stipulated in its by-laws candissolve a union. Registration is canceled by dissolution or if the union does not maintain or follownecessary legal requirements.2. Collective Bargaining Agreement 6506.2011
  • As defined in Mexican law, a collective bargaining agreement (contrato colectivo de trabajo) is anagreement between one or several unions of workers and one or several employers (or one or severalunions of employers), with the purpose of establishing the conditions under which work must be renderedin one or more enterprises or working establishments.Even if a company or enterprise can function without a collective bargaining agreement in place, it mustexecute such an agreement if requested to do so by its unionized workers. In such a scenario, thecontents of the agreement will apply to all unionizable employees rendering their services at the relevantenterprise or establishment, even if not all those employees are members of the Union that executed theagreement.The document must be in writing and be submitted to the competent Conciliation and Arbitration Board(Junta de Conciliación y Arbitraje) for review and approval in order to be binding and enforceable.Moreover, the agreement may never contain provisions for working conditions or benefits below theminimum standards established by the LFT.The collective bargaining agreement, by default, applies to both unionized workers and confidentialemployees. Generally, however, agreements include a specific clause or provision establishing that thecollective bargaining agreement is not applicable to confidential employees.Collective bargaining agreements are subject to an annual revision as to their salary schedules and a bi-annual revision as to their total contents. The Union must request such reviews, respectively, 30 daysand 60 days in advance of the agreementʼs expiration date. If the review is not timely requested and theright to strike is not exercised, the CBA is automatically extended for a period of time equal to its originalduration.3. "Contrato-Ley"According to the LFT, a “Contrato-Ley” is an agreement entered into by one or several unions of workersand one or several employers (or unions of employers), with the purpose of establishing conditions underwhich work must be performed in a particular industry branch in one or several states, economic zones,or in the whole Mexican territory.Unions that represent at least two-thirds of the unionized workers of any industrial branch may ask for theexecution of said type of agreement. If the competent authority considers the “Contrato-Ley” convenientand beneficial, it will notify the corresponding Unions of workers and the employers that can be affected,requesting their presence at a convention where the agreement will be discussed.As with collective bargaining agreements, “Contrato-Ley” agreements may include provisions excludingUnion non-members from the benefits of the agreement.4. Internal Working RegulationsInternal Working Regulations are mandatory provisions for workers and employers regarding workconditions in the enterprise or establishment; they typically include provisions relating to the hours atwhich employees start, suspend and finish their working schedules, the days and places for payment,leave of absence policies, etc.A joint commission of worker and employer representatives must discuss and prepare such regulations. Ifno union exists in the company (or for staff employees not represented therein), workers choose their ownrepresentatives. 6606.2011
  • In order for the regulations to be effective and enforceable, the Joint Commission must submit them to theappropriate Conciliation and Arbitration Board, which must approve of the regulationsʼ contents.Furthermore, copies of the regulations must be distributed to the workers and placed in visible places onthe companyʼs premises.It is mandatory for employers to have Internal Working Regulations in place. Such Regulations usuallyhelp to protect employersʼ interests, often establishing circumstances under which the employer maysanction or fire its employees.F. Health and Welfare of Employees at Work SitesBoth the Constitution and the LFT require employers to comply with legal standards for workplacehygiene and security, as well as to adopt adequate means of preventing accidents when employees usemachines, work instruments or other work-related materials. Employers are required to maintain at alltimes basic medicines and supplies in order to provide emergency assistance in case of an accident. Theemployer must also visibly display the conditions that are conducive to the employeesʼ health and welfareat the work site.Employers must also cooperate with employees to organize a Joint Commission for Health and Hygiene,composed of an equal number of persons representing management and workers. The Commissionshould monitor compliance with relevant legal provisions, investigate the causes of accidents and illnessin the workplace, and scrutinize proposed means for preventing said accidents and illnesses. Afterregistering with the proper labor authority, these Commissions are required to file monthly reportsconcerning the general health and hygiene of the workplace.Employers are primarily responsible for work-related accidents and illnesses, and must therefore provideappropriate compensation for each accident or illness resulting in an employeeʼs death or causing atemporary or permanent disability that prevents the employee from working. This obligation is substitutedby registration in the Mexican Social Security Institute (Instituto Mexicano del Seguro Social – “IMSS”).G. Labor Conflicts in MexicoConciliation and Arbitration Boards resolve all individual and collective disputes arising from laborrelationships between employer and employee or between an employer and a union. The Labor Boardssit at both the federal and local level. Federal Boards are supervised by the Ministry of Labor (Secretaríadel Trabajo y Previsión Social “STPS”), while local Boards are under the authority of local stategovernments.Both the federal and local Labor Boards in general, as well as the Special Boards, consist of threemembers: a representative of the government (the "President of the Board"), a representative of theemployer (appointed by companies engaged in the same industrial activity comprised by the SpecialLabor Board), and a representative of the workers (elected by workers through the Union). All three arecompetent in the industrial branch comprised by the Special Labor Board.H. Individual ConflictsAfter receipt of a claim containing the allegations of one or more workers, the Special Labor Board setsthe date and time for a first hearing. This first hearing includes the stages of conciliation, claims,objections, and surrender and acceptance of evidence. 6706.2011
  • During the hearing, the authority (the competent Labor Board) encourages the employer and the workerto reach a settlement to solve the relevant labor conflict. This agreement usually consists ofcompensation; the employer delivers a certain amount to the worker in order for the latter to withdraw thecomplaint. Such compensation takes the form of a certain percentage of the severance payment for thedismissal (with or without cause) of the worker.In the event that no agreement is reached, the hearing moves through the stages of claim and objections;the worker may ratify, modify or expand upon the allegations in his initial claim and the employer maypresent a written response to the claim. The parties then proceed to offer evidence in support of theirallegations.The following types of evidence are admissible in a labor proceeding: confessions; documentary evidence(public or private documents); testimonial evidence; expert evidence; presumptive evidence; records ofproceedings; photographs; and any other media that may be contributed by scientific research.After acceptance of the evidence, the parties have a limited time to present closing arguments, in whichthey review their actions, allegations and defenses in the suit.The record of the proceedings is turned over to the Board after the hearing. The Board issues apreliminary judgment, which must be approved by at least two of the three members of the Board. Ifapproved, the preliminary judgment becomes the decision of an arbitrator; the members of the Boardmust sign it and send it to each of the parties. Thereafter, the parties have a fifteen-day term to file anamparo proceeding if either feels that the Board lacked sufficient grounds for its judgment.I. Collective conflictsThere are mainly two types of collective conflicts: lockouts, instituted by employers, and strikes, institutedby employees or unions.1. The Lockout: The lockout consists of temporary suspension of work by the decision of anemployer. The LFT sets forth that such suspension is not attributable to the employer if it is due to: actsof God or force majeure not attributable to the employer; lack of raw material not attributable to theemployer; a production surplus with respect to economic and market conditions; a temporary and obviouslack of profitability; or a lack of proceeds for the normal operation of the business. An employer mustnotify the competent Arbitration and Conciliation Board about the lockout and the causes thereof; if theBoard approves of the lockout, the compensation payable to the workers shall be fixed.An unjustified suspension of work by an employer shall be construed as an unjustified termination of thelabor relationship, with consequences as discussed below.2. The Strike. A strike is a temporary suspension of work carried out by a group of workers.To call a strike, the union that executed the collective bargaining agreement must send a Strike Notice(emplazamiento) to the employer, laying out the Unionʼs demands and expressing intent to strike if suchdemands are not met. The notice must indicate the goal of the strike and the exact date and time whenwork activities will be suspended. The union must also file a copy of the Notice with the competentConciliation and Arbitration Board. The strike notice must be filed at least six days before the date andtime for the suspension of activities (ten days before, in the case of public services). 6806.2011
  • Once the strike notice has been filed with the employer, the employer is considered the depositary of theworkplace. Any and all actions against the assets of the workplace must be suspended; no attachment,repossession, eviction or other such action can proceed. Within 48 hours following receipt of the notice,the employer must file a written answer with the Conciliation and Arbitration Board.Before the strike can develop, the Board conducts a “conciliation hearing”, seeking a settlement betweenthe involved parties. This hearing may be rescheduled only once.Likewise, before the suspension of activities, the Board will establish the minimum number of employeesthat must continue working to perform services that, if suspended, would compromise the safety or well-being of the workplace, machinery, equipment or raw materials, or impede renewal of activities when thestrike ends. In the event the strike workers refuse to perform these services, the employer may usedifferent workers.J. Termination of EmploymentTermination of employment must be considered separately with regards to two types of laborrelationships: individual and collective.1. Individual labor relationshipsAn employer and employee may, at any time, jointly and voluntarily end their labor relationship. In thecase of a bilateral agreement to terminate, the employee is entitled to receive payment of all unpaidbenefits and, if he/she has been working for over fifteen years, to a seniority premium. When thetermination takes place, the employee should sign a resignation letter and a full receipt (Finiquito)reflecting the payment of all owed amounts by the employer.The LFT also contemplates that either the employee or employer might terminate the relationshipunilaterally without incurring any liability, provided a justified cause exists.Employers may legitimately rescind agreements with their employees for different limited causes. Theemployer must submit a written notice to the employee being terminated, indicating the date and thecause of termination. If the employee refuses to receive the notice, the employer has five working days tonotify the respective Conciliation and Arbitration Board, filing a brief indicating that the employee hasbeen terminated with cause and including the last registered address of the employee such that the LaborBoard can directly notify him of the rescission of the agreement.Lack of notice to an employee renders the firing of the employee unjustified. The employer has onemonth to terminate an employee from the date on which the termination cause is known.Likewise, the employee has different causes for which the employee may terminate the workingrelationship without liability. In this case as well, the employee has one month from the date on which heknows of the separation cause to terminate the relationship.In the event that an employer terminates the working relationship without cause, the employee that hasbeen terminated without cause has the right to reinstatement or receive a severance payment consistingof three months of integrated salary, in addition to owed salaries from the date of termination and until thedate when the Board declares the termination as being without cause. 6906.2011
  • In limited cases, the Board may not order reinstatement—as when an employee has less than one monthof work left; when the employee is in direct and permanent contact with the employer; and in the case ofstaff employees, domestic servants and temporary workers.In the event that a worker requests reinstatement and the employer refuses, that worker shall receive, inaddition to a severance package, 20 days of salary for each year of service rendered.Whether a termination is with or without cause, terminated employees have the right to receive a senioritypremium of twelve days of salary for each year of services rendered. All terminated employees also havethe right to receive unpaid salary up to the termination date, unpaid vacations and vacation premiums,and unpaid Christmas bonuses.2. Collective Labor RelationshipsWhen, as a consequence of the closure of a company or a definitive reduction of its activities, workingrelationships must be terminated, employees have the right to receive a severance payment consisting of3 months of integrated salary, in addition to a seniority premium. However, if the termination is a result ofthe introduction of new machinery or processes, the employer must first obtain the authorization of theConciliation and Arbitration Board and then provide fired employees with a severance payment of 4months of integrated salary, plus 20 days of salary per year of services rendered, along with the senioritypremium.It is important to note that, unlike in other countries, no unemployment insurance exists in Mexico.K. Social Security SystemMexico has a fairly comprehensive social security system, managed by the Mexican Social SecurityInstitute (IMSS). The IMSS works to guarantee workersʼ health, medical care, and pensions, and toprovide social services necessary to protect the well-being of individuals who render a personal andsubordinate service to an employer.This IMSS sits at the foundation of the Social Security Law which, according to its own regulations,provides public benefits and protects employees in five different areas of insurance benefits: workersʻcompensation; illness and maternity insurance; disability and life insurance; retirement and old agepensions; and day care centers and social benefits.Funding for the IMSS comes from fees that employers must pay on behalf of their workers. The employer-employee installments required for all five IMSS programs are calculated as a percentage of a basesalary for quotation (“Base Salary”), which includes all benefits received by the employee with respect tohis services rendered (with the exceptions and under the limits established by Article 27 of the law). Theemployer is required to determine, retain and pay the employer-employee installments on a monthly or bi-monthly basis.The main components of the insurance program provided under Social Security are: (a) Work Risk Insurance (Workerʼs compensation). The employer exclusively covers installments for this program. Fees are calculated as a percentage of employeesʼ base salary that varies depending on the inherent risks of the work performed, ranging from 0.50% to 15% of the base salary of the total number of workers that render services to the employer. 7006.2011
  • (b) Illness and Maternity. Joint employee-employer installment payments finance insurance for costs of illness and maternity. The government also contributes to the program. (c) Disability and Life Insurance. The employer must contribute 1.75% of base salary. (d) Retirement and Old Age Pensions. Premiums, covered jointly by the employer and employee, are calculated as follows: • Retirement: The employer shall contribute an amount equivalent to 2% of base salary. • Retirement Pension: The employer must cover 3.150% of base salary. Resources for this insurance are held in individualized employee accounts, administered by private entities known as Administrators of Retirement Funds (Administradora de Fondos de Retiro - “Afore”). (e) Nursery and Social Benefits. This insurance is completely financed by the employerʼs contributions, through the payment of an amount equivalent to 1% of base salary. (f) Benefits in kind. In order to cover non-economic benefits (medical assistance, surgery, pharmaceutical needs, hospital services, prosthetic implants, orthopedics, rehabilitation, etc.) of the illness and maternity insurance, invalidity and life insurance, as well as retirement and termination because of old age insurance programs, the employer must contribute 1.05% of the Base Salary.L. Low Cost Housing FundThe Mexican governmentʼs housing program – Infonavit, grants low-interest credit and loans to Mexicanemployees for the purposes of acquiring, constructing and remodeling housing. Mandatory employercontributions of 5% of employeesʼ base salaries fund the program.When Infonavit extends a loan to any employee, her employer is under the obligation to appropriatelydiscount her salary and transfer the money to the Infonavit fund in order to make the payments on thatloan. 7106.2011
  • XIII. TaxationThree taxes will be addressed below: (i) income, (ii) value added, and (iii) the recently enacted flat rate orminimum tax. In addition, some other issues related to taxation are examined.A. Income Tax 1. Subjects of the TaxThe principles under which the Mexican Income Tax Law (Ley del Impuesto Sobre la Renta – “LISR”) willdetermine whether or not there is an obligation to pay income taxes in Mexico will be based upon: a) Residency; b) Existence of a permanent establishment in Mexico; and c) Source of income.a). ResidencyIndividuals and corporate entities residing in Mexico are obligated to pay income tax with respect to allincome earned, regardless the source of income from which they arise, under a concept of worldwideincome.b). Permanent EstablishmentIndividuals and corporate entities that undertake a business activity through a place of business in thecountry will be subject to income taxes. The basis of the tax shall be determined considering incomeattributable to the permanent establishment, less allowed deductions, i.e., linked with the entrepreneurialactivities, incurred within Mexican territory or abroad, as long as deductions requirement are met.c). Source of IncomeIndividuals and corporate entities residing abroad will be subject with respect to income arising fromincome which source is located in México. This concept is further examined below.As detailed below, Mexico has executed an extensive list of treaties with other nations to avoid doubletaxation and to prevent tax evasion, which have as a consequence that residents abroad, uponcompliance with the requisites under the relevant treaty will have a right to the benefits contained therein.Since Mexico is a member of the OECD (Organization for Economic Co-operation and Development), itfollows the model tax treaty of such agency, as well as the comments to the model, which are a source ofinterpretation and construction of tax treaties executed by Mexico. 2. Residency for Tax PurposesSince residents in Mexico shall pay income tax over their income, regardless of the location of the sourceof income, it is important to define the concept of residency. The following shall be deemed to beresidents for tax purposes: 7206.2011
  • (a) Individuals, if they have established their home residence within Mexico. However, those who have their residence abroad shall also be deemed residents in Mexico, when they have in Mexico their “center of vital interests”, i.e., a subjective relationship or economic relationship within Mexico. (b) In the case of corporate entities, they shall be deemed to be residents when they have established within Mexico their businessʼ principal management, or the effective center of management.If a corporate entity resident of Mexico were to change its tax residence to another country, a liquidationfor tax purposes will be deemed to exist and relevant income tax be paid as if an armsʼ length sale ofassets would have occurred, taking into account the assets which were previously subject to theoperation in Mexico.3. Permanent EstablishmentIn accordance with the LISR, a permanent establishment shall be deemed to exist when businessactivities are carried out, whether in part or totally, or independent personal services are rendered withinMexico, such as a branch, agency, office, manufacturing facility, workshop, mine, or any other place ofextraction, exploration or exploitation of natural resources. Furthermore, permanent establishment shallbe deemed to exist when the taxpayer abroad does not meet the requirements to be an independentagent.In addition, a permanent establishment would be deemed to exist in Mexico in those cases wherebeneficiaries of trusts established abroad undertake activities within Mexico for a business trust. 4. Determination of the Tax and RateThe tax shall be 30% over taxable income in the case of corporate entities, to be reduced to 29% in 2013,and further to 28% in 2014.The taxable income shall be determined by deducting from accruable income for the period all authorizeddeductions. In addition, the statutory profit sharing to employees (see section XII.D.5 above) and theunamortized losses for prior years shall be deducted.For individuals, there is a scale where 30%, is the highest rate, although a salary credit (essentially asubsidy) may apply in accordance with the provisions under the law. The reductions in rate mentionedabove will also come into effect in 2013 and 2014.Even though the tax is determined by tax years or fiscal periods (coinciding with the calendar year), thereis an obligation to make provisional tax payments. 5. Offset or Credit of the TaxResidents in Mexico may offset the income tax which has been effectively paid abroad against the taxthat is payable locally, as long as these are income for which payment of tax is due under the LISR.Likewise, taxes paid abroad by Mexican residents on dividends or distributable earnings which have beenearned by resident abroad will be credited.Crediting is made pro rata to the amount of the tax paid, with a limit, which may not exceed the amountthat will result under the tax rate on income earned abroad. 7306.2011
  • Specific rules exist in the event of spin-offs, for tax consolidation in the event of corporate groups, andwith respect to individuals carrying out business activities abroad. 6. Taxable IncomeCorporate entities residing in Mexico, including partnerships, shall accrue all of their income earned incash, in kind and/or in services or credit.Companies residing abroad with a permanent establishment in Mexico, shall be required to accrue all ofthe income attributable to such establishment.As an exception to the general rule, the following shall not be deemed to be accruable income: incomereceived on account of increase of capital, contributions made by shareholders to offset losses, premiumearned on the issuance of stock, or through the use of the participation at the fair value in stock, as wellas that arising from the revaluation of assets and capital, and income for dividend or earnings earnedfrom other corporate entities established in Mexico.In the case of residents abroad with a permanent establishment, the amounts received by headquartersor other related establishment abroad will not be deemed to be taxable income.Tax laws and regulations also provide specific events which shall need to be deemed to be accrued theincome, in other cases where a gain shall need to be treated as such for tax purposes.Likewise, tax authorities shall have the right to presume accruable income that is to be accrued, whetheras a consequence of construction, permanent improvements in real estate, payments received onrecovery of credit which was previously deducted as uncollectible, earnings from loss recoveries oninsurance and bonds, or amounts to recover expenses received from third parties, interest earned andannual inflation adjustment.With respect to inflationary earnings, it is relevant to mention that the actual reduction in the value of debtshall be treated as income. Determination of the earnings shall be calculated on a monthly basispursuant to the Price Index published by the Central Bank (Banco de Mexico).Earnings shall also be accruable in cases of payment in kind, sale of fixed assets or land, securities, andthat which is earned as a consequence of a merger or spin-off, reduction of capital or liquidation ofcommercial entities.Amounts received in cash, either Mexican or foreign currency, that represent loans, future capitalincreases, or capital increases that exceed the equivalent of US$60,000 approximately will need to benotified to tax authorities under the penalty of being deemed to be taxable income.In the case of sale of securities, the LISR outlines a procedure to determine the profit earned in the sale,distinguishing that which has been earned for periods in excess of more or less than 12 months. Profitshall be determined by reducing the average cost of the securities sold from the total income earned onthe sale. This average cost is determined dividing the original amount of the investment, adjusted byinflation, and dividing it by the number of shares held by the taxpayer on the date of sale. The LISRprovides a procedure to determine the original amount of the investment, as well as concepts to be addedor reduced to the determine calculation.In the event of restructuring of companies incorporated in Mexico belonging to the same group of interest,tax authorities may authorize the taxpayer to sell shares at the “adjusted tax value”, which would implythat no taxable income is earned on the transfer stock until an unrelated party sale is made. 7406.2011
  • Reduction of Capital. The income distributed to shareholders upon a reduction of capital shall be deemedto be distributable profit. The applicable tax shall be assessed on the company making the reduction. Todetermine the tax to be paid, the following shall need to be defined:• Net Tax Profit Account (Cuenta de Utilidad Fiscal Neta – “CUFIN”). This account is composed of profits which have already been subject to and paid corporate income tax. If the reimbursement is made with a charge to such account, there will be no tax payable. Otherwise, the profit shall be determined and taxes paid thereon.• Adjusted Paid-in Capital Account (Cuenta de Capital de Aportación Actualizado - “CUCA”). The Income Tax Law requires corporate entities to regularly keep an update of this account, through which inflation adjustments are recognized on contributions made by the shareholders. No tax will be paid if capital distributed is accounted for the CUFIN or CUCA.The reduction of capital will imply for tax purposes a reimbursement of contributions or capital to therelevant shareholder, whether or not share certificates are cancelled. 7. Timing of Accruable IncomeThe LISR provides the moment on which the income shall need to be accrued, depending on the activityor operation. In most cases, income shall be accrued prior to or simultaneous to the moment in which thecompensation is actually collected, except in those cases dealing with rendering of independent services.In the case of sale of goods or rendering of non-personal services, income is accrued at the time theinvoice is issued, when the goods or services are physically delivered or sent, or collected or when theprice or compensation is due, in full or in part, even though these are not advances. However, in the caseof personal independent services, the income will be accruable when the price or compensation agreed isactually collected.In dealing with financial leases and term sales, taxpayers are granted the option to accrue the totalamount of the compensation in one single fiscal period, or only that part of the price actually collected,although once a taxpayer elects the option, it shall need to maintain such option for at least five years. 8. Allowed DeductionsAll those expenses and investments that are indispensable for undertaking the activity of the taxpayerduring the fiscal period in which they are made will be allowed. Among the most relevant:a). Requirements for a deduction The indispensable requisites to carry out any deduction are the following: - To be strictly indispensable. - To be covered by documentation meeting formal requirements established under law. - To be duly registered in the accounting books and records, and apply to a single charge. - When required under law, to comply with obligations in connection with withholding and payment of taxes to third parties.b). Cost of Sales 7506.2011
  • Purchases of goods for transformation made by the taxpayer shall be deductible upon subsequent sale. This cost system attempts to avoid companies to acquire excess inventory with the purpose simply of taking the deduction.c). Investment and Depreciation Investments (in fixed assets, cost and deferred charges, as well as pre-operative expenses) shall be deductible in such percentage as may be established under law, which will vary depending on each type of investment. In some cases, the LISR allows the taxpayer to accelerate the depreciation of the investments.d). Non-Deductible expenses and deduction limits There are certain expenses that are not deductible, or which may be limited to compliance of certain specific requirements. As an example of these: i. Payments of income tax made that correspond to third parties. ii. Penalties, indemnifications for damages, and contractual penalties. iii. Interest arising from loans or from the acquisition of government securities, as well as for negotiable instruments or loans, when the loan or the acquisition was made through individuals or non-profit entities. iv. Allowances for employment-related expenses. v. Goodwill. vi. Losses on account of force majeure, and act of God or the sale of goods.Other limits to the amounts of a deduction are the following:e). Sale of Stock Deduction of losses on account of the sale of shares may not exceed the amount of the profit earned by taxpayer during the period, or during the five periods after the sale of the security.f). “Thin capitalization” The LISR provides for limitations deductibility of interests arising from excessive indebtedness of taxpayers, primarily with related entities residing abroad, with the purpose that these operate simply with reasonable debt margins from a financial and tax standpoint. The limitation of the deductibility is made taking as a reference a comparison among the capital with debt, and if the proportion exceeds 3 to 1, then interest arising therefrom will not be deemed deductible. This is not applicable to financial services entities, provided they meet the applicable capitalization rules applicable, nor to those taxpayers which might have a special ruling on transfer pricing. To determine the annual average of debt to exceed three times capital-debt, those debts that arise from credits subject to distribution of profit or dividends, reduction of capital, sale of assets, contracting new credit, or transferring control shall be included. This is also the case in those instances where the creditor is allowed to restrict application of the loaned funds.g). Technical assistance and royalties 7606.2011
  • It will be necessary to evidence before tax authorities that that person who provides technical assistance has its own technical elements for such purpose; that the services provided directly and not through third parties (except in those cases where payments are being made to residents in Mexico); and that the technology is actually received, and not only the possibility of obtaining it. 9. Net Operating LossesTax losses will exist when the amount of authorized deductions exceed the amount of taxable income.Tax losses incurred in one particular fiscal period may reduce the taxable profit for the following ten (10)fiscal periods, it is fully amortized. In the event that the right to amortize is not available because there isno taxable gain in a specific period, the taxpayer shall loose the right to do so.NOLʼs are also subject to inflation adjustment from the date it was originally incurred until the date it isused to amortize taxable income.As a general rule, the right to amortize NOLʼs corresponds exclusively to the taxpayer that incurred suchloss, and may not be transferred, even as a consequence of a merger. 10. Tax ConsolidationCorporate taxpayers that belong to the same group of interest may present a consolidated tax return. Inorder to take advantage of this regime, certain tax requisites will need to be met. Entities that belong tothe same group will need to identify the controlling entity in those that are controlled. A controllingcompany (sociedad controladora) will need to be an entity resident in Mexico for tax purposes, whichowns more than 50% of the voting stock of one or more entities that are controlled, directly or indirectly,and in no case 50% of the voting stock of the controlled entities may be owned by one or more entities,unless such companies reside in a jurisdiction with which Mexico has a tax treaty for exchange of taxinformation.The advantages of this regime is to apply immediately in a single period in which they are generated taxlosses of one of the entities to off-set the profits earned by the others, thereby optimizing cash flow, anddeferring taxes on dividends paid among entities in the group which are not subject to the benefit ofCUFIN, and being perceived as a single group by tax authorities.The controlling entity will need to determine the consolidated tax result, file annual tax returns within theterm of tax consolidation, and meet the obligation to file audited tax returns.Controlled company: those in which more than 50% of their voting shares are owned, directly or indirectly,or both by a controlling entity.Requisites for consolidation a) The controlling entity will need to have a written approval by each of the controlled entities, b) A request shall need to be submitted to SHCP, c) The controlled and controlling entities will need to have their financial statements audited by a registered accounting firm for the fiscal period during which they consolidate, d) They shall need to include within the tax consolidation regime all of the companies which qualify as controlled entities.Although the controlling and controlled results of each company shall need to be taken into accountindividually, a single tax return shall need to be presented for the group. 7706.2011
  • The following entities may not consolidate (i) Corporate entities that are non-taxpayers. (ii) Financial service entities (banks, insurance companies, bonding companies, brokers, currency exchange, etc.). (iii) Entities residing abroad. (iv) Entities which are in process of liquidation. (v) Non-commercial entities. (vi) Those subject to simplified tax regimes (e.g., some transportation entities). (vii) Partnerships.Once the option is exercised, the controlling company shall continue to pay income taxes on theconsolidated tax results for a period of no less than five (5) years as from the date the option wasexercised, or until the SHCP authorizes to cease.Special rules exist to add or remove one of the entities and tax consequences arising therefrom. 11. Regime Applicable to Dividends DistributedDividends which are not paid out of a CUFIN account (that which has already been subject to tax) shall besubject to the payment of a tax at a rate of 28%, after applying a factor yearly determined. The tax ispayable by the entity distributing the profit; not by the recipient, except for individuals resident in Mexicothat are allowed to credit the tax paid by the entity. 12. Income Tax Applicable to Resident IndividualsIndividuals resident in Mexico are obligated to pay income tax on the income they receive worldwide,regardless of whether the source of income is located.The law provides for nine chapters addressing income which may be earned from carrying out activities.Particular rules exist for the timing of accrual of income, tax rates, withholding, authorized deductions,need to file provisional tax payments, and annual returns. The following categories for income arecontemplated: ! Salaries and the rendering of personal subordinated service ! Business and professional activities ! Sale of goods ! Purchase of goods ! Interest ! Prizes ! Dividends ! Other incomeAn annual tax return will need to be filed by the individual between the months of February and April ofthe year following that in which income has been received. Tax rates are progressive and are capped at28%. 13. Non-Resident TaxationResidents abroad without a permanent establishment in Mexico, or even if they have one, but receiveincome that is not attributable to such establishment, will need to pay taxes on such income which it is 7806.2011
  • deemed to have a source in Mexico. Tax is normally paid through a withholding to be made by theperson making the payments, and will be required to apply the relevant rate and pay either at the time theincome is due, or at the time it is paid, whichever is first.The following are among the most common commercial practices carried out by residents in Mexico withresidents from abroad:a). Salaries and income received from a subordinated personal service; in this case, it is deemed that the source of income is located in Mexico when the services are rendered within its territory. An exception is granted for the initial $11,000 dollars (approximately), and thereafter a rate of 15% and 30% depending on the amount. However, if the salary is paid by an entity or individual resident abroad, the employees are exempted for tax purposes when their stay is no longer than 183 consecutive days, during a period of twelve months.b). Professional services. In this case, the individuals are subject to a 25% tax rate. However, if the fees are paid by a foreign resident, the exemption would apply when the stay is no longer than 183 consecutive days during a twelve month period.c). Grant of temporary use of real estate. In this case the source of income will be deemed to exist when the real estate is located within the territory of Mexico. The tax rate shall be 25% over the total amount of the income, without deduction.d). Sale of real estate. In this case the withholding rate is also 25% over the amount of the price. However, if the seller appoints a representative in Mexico to calculate the profit earned and file the relevant returns, the tax will be assessed on the net income, and not the gross income.e). Sale of shares and other securities. A source of income will be deemed to exist in Mexico when the issuer of the stock is a resident corporation, or when the book value of such shares or securities relates directly or indirectly to more than 50% in real estate or other immovable property located in Mexico. In this case, the LISR provides for two options to determine the tax: (i) apply a rate of 25% over the total price, without deduction (gross income), or (ii) apply a 28% rate over the profit (net income) earned. In order to elect for payment based on a net profit basis, a representative shall need to be appointed who will be entrusted with calculating the tax through a registered public accountant and filing relevant tax returns. Sales of stock carried out through the Mexican Stock Exchange will be subject to a 5% flat tax, to be withheld by the relevant broker, although an option exists to pay the tax at 20% rate over the net income. In dealing with restructuring of economic groups, a deferral in the payment of the tax on a gain on the sale of stock may be made until such time as the securities are sold to a third unrelated party. A prior ruling is required for this purpose. When a tax treaty executed with Mexico applies, and the gains earned on the sale of shares as a consequence of corporate restructuring the benefit will be granted through a petition to receive a reimbursement of the tax. Taxpayers shall need to apply for the reimbursement and comply with relevant elements provided under the Regulations.e). Dividends 7906.2011
  • It will be deemed that source of income exist in Mexico when the relevant entity distributing the profit resides in Mexico. The tax applicable shall be 28%, after applying a certain adjustment factor, and provided that the profit to be distributed as divided has not already been subject to the payment of income taxes (CUFIN); when they are reflected in the CUFIN account, then the dividend will not be subject to income taxes.f). Interest paid by the Government Interest received by residents abroad from loans granted to the federal government or the Central Bank (Banco de Mexico) or securities issued by these entities that are placed abroad among public investor will be tax exempt, provided the effective beneficiaries are residents abroad. When it is not possible to identify the effective beneficiary of interest arising from such securities, brokers will not be required to make any withholding nonetheless.g). Financial transactions Likewise, Residents abroad shall not be required to pay income tax on profit earned from debt financial transactions when these are referred to be Mexican prime rate (TIIE) or securities issued by the federal government, the Central Bank (Banco de Mexico) or any other entity as may be determined from time to time by the SAT, provided these are placed among the public investor at large through relevant stock markets and such residents abroad are the effective beneficiaries.h). Interest to non-resident banks Foreign banks who are registered with the SHCP shall be subject to a flat withholding rate of 4.9% on the total interest, provided they are the effective beneficiaries thereof, and they reside in a jurisdiction with which Mexico has executed a tax treaty to avoid double taxation.i). Royalties In dealing with royalties for technical assistance or advertising, it is deemed that a source of income is located in Mexico when the goods or rights for which royalties or technical assistance are paid are taken advantage of within Mexico, or when the royalties, the technical assistance or advertising is made by a resident in Mexico or by a resident abroad with a permanent establishment in Mexico. In these cases, the tax rate is 25% over the total income without deductions.j). Premium paid to reinsurers In the case of premium paid or ceded to reinsurers, a source of income is located in Mexico when these are paid by a resident of Mexico, or by a foreign resident with a permanent establishment in Mexico. Tax rate is 2% to be withheld by the person making payments. 14. Tax RepresentativeWhen an option exists to appoint a tax representative resident in Mexico in order to take advantage of anoption to pay tax on the profit rather than the total compensation, the tax representative shall need to be atax resident (or non-resident with a permanent establishment), and shall need to maintain at the disposalof tax authorities all documentation relating to the transaction evidencing payment of the tax for five yearsas from the date in which the tax return was presented. 8006.2011
  • 15. Tax TreatiesResidents abroad without a permanent establishment in Mexico may apply the benefits contained indifferent tax treaties to avoid double taxation entered into by Mexico, provided the relevant provisions ofthe treaty are met, and other obligations contained under the LISR are complied with respect toregistration, filling of reports and appointment of tax representative.The main benefits contained in the treaties are with respect to a applicable rates that are lower than thoseotherwise provided under the LISR. Multiple international treaties have been entered into by Mexico.Those in force in 2008 are the following: Australia Italy Austria Japan Barbados Korea Belgium Luxemburg Brazil Netherlands Canada New Zealand Chile Norway China Poland Czech Republic Portugal Denmark Rumania Ecuador Russia Finland Singapore France Slovakia Germany South Africa Greece Spain India Sweden Indonesia Switzerland The Netherlands Ireland United Kingdom Island United States of America IsraelTax rates will vary depending on the relevant treaty, reservations and specific agreements.Construction or interpretation of treaties will be made through the OECD Model Tax Convention onIncome and on Capital. 16. Controlled Foreign CompanyResidents in Mexico or non-resident with a permanent establishment in Mexico shall be subject to a taxfor income earned abroad when the income is earned in a preferential tax jurisdiction, whether these arereceived directly, or through legal entities in which they directly or indirectly participate in their capitalstock.Income which will be subject to the tax is that received in cash, goods, services or credit, and these arenot subject abroad or are subject to a rate which is less than 75% of the tax rate which would otherwisebe due and payable in Mexico.Income which shall need to be accrued for these purposes will be due even though these are not actuallyreceived by the resident of Mexico, unless the persons who received do not have an effective control ofmanagement of the relevant entities subject to the preferential tax regimes, in which case they will pay thetax until it is received. 8106.2011
  • Income subject to this regime shall need to be determined each calendar year, and shall be accrued tothe rest of income of the taxpayer. A rate of 28% shall be assessed on the taxable income. 17. Related party Transactions; Transfer PricingCorporate entities that enter into transactions with related parties resident abroad must determine theiraccruable income and authorized deductions considering that the price and other compensation for thesetransactions is equal to what they would have paid to independent parties on a armʼs length basis.In this sense, two or more entities are deemed to be related parties when: a) One of them participates, directly or indirectly, in the management, control or capital or other means; b) A person or group of persons participates, directly or indirectly, in the management, control or capital of such entities; c) Transactions among residents in Mexico and entities located abroad residing in preferential tax regimes, are deemed to be transactions among related parties that do not meet the armʼs length principle.The methods provided under the LISR are essentially the same as those that are recommended by theOECD. Certainly, these methods are based in comparable use and analysis. In order to determine if onetransaction can be comparable to another, several factors will need to be taken into account such as: (i)characteristics of the transaction, (ii) functions, risks and assets used, (iii) contractual provisions, (iv)economic circumstances, and (v) commercial strategies. Others may apply.If it is not possible to secure information on comparables by reason of confidentiality, or simply becausesuch information is not available, then a reasonable effort needs to be made in order to evidence that theprice agreed is within “market”. Even in this case, “comparable” transactions will need to be examined inlight of factors mentioned above, and the corresponding adjustments made.To determine compensation that independent parties would utilize in comparable transactions, aneconomic study shall need to be made. Such study would need to follow one of the methods expresslyrecognized under law. Mention should be made to the fact that the “Better Method Rule” (Regla del MejorMétodo) shall apply in accordance with the terms of the LISR, which provides: (i) Non-controlled comparable price; (ii) Re-sale price; (iii) Cost-plus; (iv) Method examining earnings arising from specific controlled transactions. Such methods are: profit sharing method, residual profit partition, and transactional margins for transaction profit.If the taxpayer wishes to have legal certainty with respect to the method to be utilized in its transactionswith related parties, it may request an Advance Pricing Agreement (Acuerdo Anticipado sobre Precios deTransferencia) from Mexican tax authorities.There are certain penalties under the Federal Tax Code that may be imposed during the course of anaudit when taxpayer, in his annual tax return, were to report earnings or losses that do not reflect marketprices in the transactions carried out during the fiscal year. 8206.2011
  • In order to determine prices and compensation for transactions carried out with related partiescompanies shall need to utilize, in first instance, a non-controlled comparable prices method. However, ifthey evidence that this is not the most appropriate to determine that their transactions are agreed at armsʼlength market conditions in accordance with the Transfer Pricing Guidelines for multinational companiesand tax authorities approved by the OECD, and in this case they may utilize any of the other methods.B. Value Added Tax (“IVA”)Value Added Tax (Impuesto al Valor Agregado - “IVA” or “VAT”) is a tax assessed on consumption, and itis an indirect tax in the sense that the taxpayer carrying out the activities contemplated under law is theone who causes the tax, although the tax is transferred to the next consumer of goods and/or servicesand so forth until it reaches the final consumer who is ultimately responsible for the tax. 1. General Characteristics of the VATThis tax is calculated on a cash-flow basis, i.e., those transactions or activities that are assessed with thetax will be subject at the time compensation is effectively collected. This distinguishes VAT from incometax, where income is accrued.The VAT Law permits crediting of the tax paid by the company against that which the same entitygenerates, in such manner as only the net amount shall be paid. In the event the tax paid were to belarger than the amount collected, then the company may credit, offset or even request a return of suchexcess.One the characteristics of this indirect tax is that the taxpayer must expressly and by separate formtransfer the tax to those persons that acquire their goods, or services that are subject thereto. A transferis deemed to exist at the time the taxpayer subject to the tax collects it from the final consumer.The taxpayer that transfers and collects the tax shall be required to make payments of the net amount,normally during the calendar month following that in which the amount was collected. 2. VAT RatesAs a general rule, activities assessed with VAT shall be subject to a rate of 15%; however, it is possible toapply a reduced rate of 10% when transactions or services are carried out by residents along the borderregions of México (i.e., border with the United States of America and with Guatemala and Belize), as wellas certain other specified territories of México, provided physical delivery of the goods, or servicesrendered is carried out within said region.Other activities or services are subject to a 0% rate, or may be exempt. The difference between the 0%rate and the exemption of the tax lies in a benefit of those transactions subject to a 0% rate that allowsthe crediting of VAT paid, whereas this is not the case in exempt transactions. 3. Taxed TransactionsPursuant to the VAT Law the following activities are subject to the tax, provided they are carried out withinthe territory of México: ! Sale of goods, ! Rendering of independent personal services, ! Temporary use of assets (e.g., lease of goods), and 8306.2011
  • ! Importation of goods or services.a). Sale of GoodsAny transfer of ownership (of goods or rights) will trigger the value added tax at the applicable rate.Certain transactions are exempted, however, such as the sale of land, books, newspaper and magazines,used furniture, stock and other securities, as well as sales made to residents outside of México pursuantto a program under the maquiladora decree or certain auto parts manufacturers that import or exportgoods in accordance with specific custom rules. The sale of goods deposited in a strategic duty freewarehouse will also be exempted.Sales are deemed to be made within México if the goods are inside of the territory of México at the timedelivery is made to purchaser. In the case of intangible assets (such as, for example, royalties) thetransfer is deemed to be made within the territory of México when the seller and purchaser both residewithin. It is deemed that the sale is made at the time compensation is collected.The tax is determined based on the price or compensation agreed that are charged to or collected frompurchaser, additioned with applicable taxes, duties, interest and penalties.b). ServicesThe rendering of services is deemed to be any obligation to perform that is made by one person for thebenefit of another, including advances, transportation of goods or persons, insurance, bonding, agency,commissions, mediation, representation consignment and distribution, technical assistance and transferof technology, as well as obligations to deliver, to abstain from performing or to allow that are made byone person to the benefit of another.Some services are exempted from the payment of the tax. Among the most relevant: commissions andother compensation paid by a borrower to a creditor as a consequence of mortgage loans, commissionspaid for retirement fund administrators, services that are free, public land transportation (except railroad)among others.It is deemed that a service is rendered within México when such is carried out in full or in part by aresident in the country. In dealing with international air transport, it is deemed that only 25% of theservice is rendered within México.An obligation exists to pay the tax at the moment that compensation is effectively collected, except in thecase of interest; in this case, it is payable when interest is due.To determine the tax, the total amount of compensation agreed shall be considered, together with anyamounts that are charged or collected from that who receives the service, such as taxes, duties,expenses, reimbursements, interests, penalties and others.c). Importation of Goods or ServicesAn importation is deemed to exist upon introduction of goods into the territory of México, or the acquisitionby residents in the country of intangible goods sold by non-residents, the temporary use within México ofintangible assets provided by non-residents, or the use of tangible assets when physical delivery is madeabroad, or the taking advantage of any of services that have been previously mentioned, when these areprovided by non-residents.An importation is deemed to have been made: 8406.2011
  • a) At the time the importer delivers the import manifest for processing. b) The temporary importation becomes permanent. c) When compensation is effectively collected, in those cases of acquisition of goods by residents of México of intangible goods from non-residents, and the taking advantage within México of services rendered abroad.In the case of assets exported temporarily, it will be deemed that any addition is an import when theseassets return to the country repaired, improved or by any other means within value added.Imports which are exempted of the VAT, include those sales/imports that are not closed, are temporary,are returns of goods temporarily exported, or are in transit, as well as those that are introduced into a dutyfree bonded warehouse. Imports of household goods and vehicles will be permitted in accordance withcustoms regulations, provided requirements are met as provided by SHCP.To determine the tax in dealing with tangible goods the value used for purposes of the general import taxshall be utilized, but added with such tax, as well as all others that are due as a consequence of theimportation.In the case of importation of tangible goods, payment will be made jointly with import duties. In thosecases of goods for which import duties are not payable, taxpayers shall pay the VAT upon importation.d). Export of Goods or ServicesIt will be deemed that an export takes place in those instances where there is a sale of tangible orintangible goods carried out by a resident of México to a resident abroad, the temporary use abroad ofintangible goods provided by residents of México, taking advantage of services rendered abroad byresidents of México on account of technical assistance, services related thereto and information withrespect to industrial commercial or scientific experience, as well as maquila transactions, advertising,commissions, agencies, insurance or reinsurance, financing transactions, among others.Export transactions are subject to a 0% rate. The crediting is available when resident companies exporttangible goods to be sold or to allow their use abroad. 4. Persons Required to Withhold the TaxAn obligation is set for certain persons to withhold the tax that is transferred, and subsequently to pay thistax. Those under include persons who acquire tangible goods, or use them temporarily, or sell or grantresidents abroad a service without a permanent establishment entities which receive personalindependent services or use temporarily goods, or services provided by individuals, or which may acquiregoods to be used as a material in the industrial activities, the services rendered by agent, when the latterare individuals.The person who withholds the tax shall be jointly liable for the payment; will withhold at the time thecompensation or price is paid, and will be required to deliver tax during the following calendar month onwhich the withholding is made. 5. Obligations of TaxpayersThe obligations include maintaining accounting records in accordance with the provisions of the FederalTax Code, and to separate transactions for which the tax is payable. Likewise, an obligation exists toissue invoices that include the Value Added Tax expressly and separately identified to those who acquire 8506.2011
  • goods, or use them temporarily, or receive services, stating whether compensation is paid in full or ininstallments.When activities are carried out with the public in general, the tax will need to be included as a single unitwith the total price for the goods or services offered. 6. Filing of the Corresponding Tax ReturnThere will need to be monthly returns filed with tax authorities identifying information in connection withpayment, withholding, crediting and transfer. 7. Crediting of the TaxThe VAT tax is creditable in the amount that has been transferred to the taxpayer. Sales and expenseswill need to be registered when they are exempt and those subject to VAT, since only VAT on paidamounts will be able to be credited, pro rata to the taxable vis-à-vis total sales. VAT accrued as aconsequence of exempted purchases will not be able to be credited, and will be part of cost of goods.C. FLAT RATE TAX (“IETU”) 1. General Overview stThe Flat Rate Tax (Impuesto Empresarial a Tasa Única - “IETU”), has been in force since January 12008. The tax will be paid on the exceeding amount between the Income Tax (ISR) and the IETUdetermined by the taxpayer.The IETU is a direct tax and on a uniform rate. The base of this tax is: “the remnant flow of a companyused to compensate the production factors, deducting only the expenses for the gathering of capitalincluding machinery, equipment, land and buildings, as well as inventory.”The nature of the IETU is that of a minimum contribution regarding the total ISR, reason why the taxpayerwill pay either the IETU or the ISR, whichever is higher.It is important to point out that this new law refers to the Value Added Law in order to define the purposeof the tax and what should be understood as alienation of goods, rendering of personal independentservices and granting of temporal use of goods.The IETU was designed to broaden the taxpayerʼs base, avoid tax evasion and elusion, limit thedeductions and avoid harmful tax planning.Therefore, the Asset Tax ceased to be in force as of 2008, due to the fact that the IETU took over as acontrol tax to avoid evasion.The IETU law foresees the possibility that this tax may substitute taxation of corporate entities as well asindividuals with professional and entrepreneurial activities under the Income Tax Law by year 2011. 2. Tax Elementsa). Subjects 8606.2011
  • Individuals and entities with residence in Mexico are subject to the IETU for their income regardless of its source. Residents abroad are subject to the tax when they have a permanent establishment within the country, regarding the income traceable to such establishment. (i). Purpose. The object of the tax is constituted by the income effectively received from the alienation of goods, rendering of personal independent services and the granting of the temporal use of goods that are attributable to the production factors. (ii). Base. The tax base will be determined by deducting from the taxable income only those limited deductions authorized by the law. (iii). Rate. The tax rate will be of 17.5% applied on the tax base. Due to a transitory provision on enactment, the rate for 2008 will be of 16.5%, 17% for 2009 and finally the rate established on the law will take effect on 2010. (iv). Payment. The IETU is an annual contribution; however the taxpayer is obliged to make provisional payments in account of the annual tax.b). Income The income considered for the IETU is that effectively received by the tax payer from the taxed activities. When the compensation charged for the alienation of goods, rendering of personal independent services and granting of temporary use of goods, is in kind, the law states that the income received will be the market or appraisal value of the goods or services received.c). Deductions The deductions allowed by the IETU law consist in those expenses made by the taxpayer for the acquisition of goods, personal independent services or the temporary use of goods, linked to the activities taxed by the law, or related to the administration, production, marketing or distribution of goods and services that trigger the tax. In the same manner, taxes paid in Mexico will be deductible, except for the IETU, Income Tax, Value Added Tax, Special Tax on Products and Services, Tax on Cash Deposits, as well as social security. However the IETU law provides that the Value Added Tax and the Special Tax on Products and Services can be deducted when the taxpayer cannot credit these taxes. It is important to point out that the IETU law does not consider salaries paid as a deductible concept; however, as it will be analyzed below, the law grants the possibility of crediting such amounts in a proportion related to the tax rate. Finally, the interest from loans will not be deductible from the taxʼs base; the same applies for royalties paid to a related party abroad for the granting of use of goods, notwithstanding the fact that such payments may consist of a necessary expense to fulfill the main purpose of the entity, due to the fact that such concepts are not part of the object of the law. This particular issue has been deemed in legal analysis as unconstitutional and has been challenged before Mexican federal courts. A final decision is still pending. 8706.2011
  • Please keep in mind that on a strict interpretation of the law, the payments made for services as well as technical assistance are considered part of the object of the law and as such they will be deductible from the tax base.d). Crediting a). Tax Credit. The IETU Law grants a tax credit derived from the difference that may present when the authorized deductions are in fact higher than the recognized income. b). Payroll Credit. Considering payroll is not a deductible concept, a credit is given to the taxpayer for the salaries paid that were the base for determining each of its employees Income Tax and social security. The credit will be calculated by applying a 0.175 factor to the sum of the taxable income perceived as salary and the social security granted. Again, the use of a factor to calculate the offsetting has been deemed to be by some as unconstitutional, taking into account that there is no justification for limiting the credit when the expense is absolutely necessary for the activities of the taxpayer. Legal challenges have been filed before Mexican courts, but final resolution is pending. In addition, it is important to point out that the transitory provisions of the IETU Law prohibit the crediting of allowances set for such concepts before January 1, 2008, that will be paid after said date. This way, every allowance created in 2007 with the intention of covering labor expenses (such as bonuses). c). Credit on own Income Tax. In the same manner, a credit equivalent to the income tax effectively paid is granted to the taxpayer. In addition, the Income tax can be credited for dividends when the payment was made in the same fiscal year. The effectively paid tax for such concept in 2006 and 2007 can be credited against the IETU in 2008 if it was not credited before. 3. Related IssuesAs a consequence of the Asset Tax being abrogated, taxpayers that were obliged to pay Income Tax canrequest a refund for the amount paid for Asset Tax in the last 10 tax years.In compliance with the provisions of the IETU Law, the aforementioned refund cannot be higher than thedifference between the Income Tax paid in the exercise and the Asset Tax, and without exceeding 10% ofthe total Asset Tax to recover.In addition and derived from the deduction mechanic of the tax, transitory provisions give the taxpayer theopportunity to take deductions or credits for investments made before January 1, 2008.The first benefit is that investments made between January 1, 1998 and December 31, 2007 can beapplied as a credit against the tax. For applying such credit the taxpayer must determine the amountpending deduction from the investment and multiply it by the corresponding updating factor. To the resultthe taxpayer must apply the 0.175 factor. The final result can be credited for 10 years (only 5% per year)against the IETU. Such credit can be applied to provisional payments as well.For new investments (considering as such those that are used for the fist time in Mexico) made betweenSeptember 1 and December 31, 2007, the taxpayer is granted the possibility to take a deductioncorresponding one third of the investment amount annually until depreciated. 8806.2011
  • D. Other Issues 1. Obligation to Register with the Federal Taxpayersʼ RegistryCompanies and individuals that are required to file returns from time to time, or that are required to issueinvoices for the transactions they carry out will need to apply for registration with the Federal TaxpayersʼRegistry of the Ministry of Finance and Public Credit (Registro Federal de Contribuyentes – “RFC”). Thiswill be secured in the tax office corresponding to the domicile.As part of registration, the “electronic signature” will need to be secured in order to make electronic filingsof tax reforms and information, as well as payments.Individuals and non-resident companies without a permanent establishment in Mexico may request theirregistry providing the relevant registration number in their country of residence, although such registrationwill not enable them to recover taxes.Shareholders in a Mexican company, whether or not they are nationals or tax residents of Mexico will alsoneed to be registered in the Federal Taxpayersʼ Registry, even if this stock is acquired through stockmarket. Issuer companies will ensure that the shareholder of record in the Shareholdersʼ Registry isregistered. Failure to registry triggers an administrative fine. 2. AuditsMexican tax authorities may review any tax returns or the failure to make such filings, and regularly do so.Certain taxpayers whose taxable income or their number of employees exceed certain threshold arerequired to submit a tax return certified by a registered independent accountant. When a tax audit is to becommenced against these taxpayers, the tax audit will commence with the working papers of theaccountant. 3. Late Payment PenaltiesIn the event of failure to pay taxes when due, the relevant amount will need to be adjusted as per inflationand, in addition, a interest will be assessed over the inflation-adjusted amount.In addition, fines may be assessed in an amount that may vary between 55% to 75% of the adjustedamount. Fines may be reduced by the tax authorities in those cases where there is a voluntary paymentprior to the conclusion of an audit process. 4. Statute of LimitationsUnder the Federal Tax Code, the right of tax authorities to collect unpaid taxes, or to audit returns willlapse after five years from the date the tax should have been paid, or the relevant payment was made.Under certain circumstances, statute of limitations will be ten years instead of five , such as when therelevant taxpayer has failed to obtain Federal Taxpayersʼ Registration, failed to maintain accountingbooks and records or failed to advise address change. 5. State Taxes 8906.2011
  • Most taxes are assessed by the federal government, and these may be subject to coordination covenantsfor collection among the federal and state governments. However, states are allowed to collectessentially real estate property taxes, real property transfer taxes and, increasingly, a payroll tax. Insome jurisdictions there may be a local tax on games and raffles.States do not have the right to assess and collect taxes on income, and sales or value added tax isassessed exclusively by the federal government, although the Federal Government makes transfers tothe states. 6. Payroll TaxThe Federal District and most state governments will assess a tax based on the total payroll of employersestablished within a particular jurisdiction. The percentage will normally approximate 2%. 7. Real Estate Transfer TaxThis is assessed on the transfer of real property, whether such transfer occurs, inter alia, by reason of asale, donation, merger, liquidation, or inheritance. The tax will be assessed on both the value of land andany constructions built thereon at rate that is around 2%. Although the seller and acquirer of the propertyare jointly liable for the payment of the tax, typically the purchaser or acquirer of the land or rights agreesto pay the entire tax. 8. Excise TaxesThe federal government assesses different taxes on products that include not only alcoholic beveragesand tobacco products, but also gasoline and other oil derivatives. 9. Tax on Cash DepositsA recent measure to control money laundering activities and underground economy consists in theapplication of a tax on cash deposits exceeding a certain sum of money each month. The tax is to bewithheld by the bank and paid to the federal government, but is fully creditable by the depositor upon filingof an income tax return. 9006.2011
  • XIV. CustomsA. BackgroundThe Customs Law (Ley Aduanera) and the Foreign Trade Law (Ley de Comercio Exterior – “FTL”) are theprimary statutes governing the import and export of goods. Depending on the type of goods there may beadditional requisites in special laws or regulations..Customs Law provides the proceedings regarding foreign trade, such as the entry, exit, custody, storage,handling or holding of merchandises. The Foreign Trade Law, on the other hand, provides theproceedings that are carried out before the import of merchandises, especially regarding the complianceof non-tariff regulations and restrictions.B. Clearance of GoodsClearance of goods means all the actions and formal procedures related to the entry and departure ofmerchandises to and from national territory that are meant to be executed by the custom authorities, theimporters or exporters and their custom brokers.The most important actions in clearance of goods are: to submit them before custom authorities with acustoms manifest (pedimento), to activate the mechanism of automatic selection and the customsinspection, and finally the disposition the goods. The main steps to reach such disposition are:Once goods arrive into territory of Mexico they can remain temporarily deposited inside a tax or bondedwarehouse, while the decision about the custom regime is taken.Importers and exporters of goods must then file a customs manifest before the customs authorities thatshall include several attachments such as the commercial invoice of the merchandise, documentsevidencing compliance of non-tariff regulations and restrictions (such as capacities, permits, OfficialMexican Standards, etc.), as well as those that allow the identification, review and control of goods, anddocuments regarding their origin, either to obtain the benefits of free trade agreements or to prove thatmerchandises are not originating from a country subject to anti-dumping or countervailing duties.In order to be able to import goods, it is necessary to register before the General Customs Administrationto secure an “Importersʼ Registry” (Padrón de Importadores).Many rules and special treatment provisions may apply to ease or restrict the importation of goods.Dealing with counsel or a freight forwarder or customs broker is recommended.C. Tariff considerations, Regulation Measures and Non-tariffRestrictionsThe Ministry of the Economy issues from time to time regulations and non-tariff restrictions in order toaddress entry of products as well as to comply international conventions or treaties signed by Mexico, toavoid dumping, as well as to protect national safety, public health, phytosanitary measures and theenvironment. This may imply securing prior permits, confirm compliance with Mexican official standards,and payment of countervailing duties to avoid dumping practices. 9106.2011
  • Import or export taxes are normally assessed considering the customs value of goods. In mostimportations, customs value is based on the price that was paid or that should have been paid for goods,according to the commercial invoice, and it is called settlement value. If other expenses caused during theimportation increase such value, it would become a Cost, Insurance and Freight (CIF) base.D. Customs RegimesThe Customs Law provides the following primary regimes, although the other more specialized optionsmay exist (such as, for example, in transit, for repair, under tax bonded warehouse, etc.):1. Definitive. Whether import of foreign goods for permanence in national territory, after paying theforeign trade and antidumping duties (if any) and complying with non-tariff regulations and restrictions. Inaddition, they may deal with exports of merchandises; in these cases they are rarely subject to duties.2. Temporary. These are allowed when: • Imports to be returned abroad in the same condition: Allows the entry of goods for limited permanence for a specific purpose, to be subsequently returned to a foreign country in the same condition within the legal terms. • Imports shall be made for processing, transformation or repair. Allows the temporary importation of components in order to be manufactured or assembled to be returned abroad within the authorized term by IMMEX companies.E. Customs Violations and FinesCustom regulations provide for severe fines for those who obtain illegal benefits from free tradeagreements or any regime that concedes tax and custom tariff benefits.Aside from the precautionary attachment or confiscation of goods in favor of the federal treasury,Customs Law provides that fines may be assessed from 130% and up to 150% of the omitted taxes, or70% of the commercial value of such merchandises.Most custom violations are considered as contraband or tax fraud crimes as defined by the Federal TaxCode (Código Fiscal de la Federación).F. Customs Brokers and AttorneysForeign trade operations must be performed through the assistance of a customs broker (agenteaduanal), except when the value is not significant or international passengers carry out the importation.A customs broker is authorized by the Ministry of Finance and Public Credit, under a personal and non-transferable license. Such broker has several liabilities regarding the clearance of goods, including thosearising from breach of in a customs proceeding. 9206.2011
  • G. Dumping1. Mexican Legal FrameworkThe Foreign Trade Law and its Regulations set forth the rules governing, among others, measuresagainst unfair international trade practices (dumping and subsidies). The rules adopted by Mexico in theFTL and its Regulations are consistent with the most important international trade treaties entered byMexico with other countries, more generally the World Trade Organization (WTO) and other moreparticular the North American Free Trade Agreement (NAFTA) and the trade treaty entered with theEuropean Community (EC).The agency of the Mexican government entrusted with anti-dumping investigations is the Unit ofInternational Trade Practices of the Ministry of Economy (Unidad de Prácticas ComercialesInternacionales,, also known as “UPCI”).2. What is Dumping Practice?Dumping is an unfair trade practice whereby, for a certain period of time, the manufacturing industry of anexporting country consistently exports products to the market of an importing country at a price lower thanthe “normal value” of such products.“Normal Value” may be any one of the three following concepts: (i) The price used for sales in the domestic market by the industry of the exporting country to sell the same product that is exported to Mexico; (ii) The price used by the industry of the exporting country to sell the same product that is exported to Mexico, but to a third country market; and (iii) The reconstructed value of the product, which is basically the unit cost of production of the industry of the exporting country plus a market-consistent profit margin.The selection of any of the three “Normal Value” options (which is determined by the viability of eachoption), takes into account the following considerations: (x) whether or not the price is under ordinarycommercial conditions - i.e., whether or not prices are at or under cost; and (y) even if the prices areunder normal commercial conditions, sales must be of at least a certain percentage of the total sales ofthe product by the exporting industry so that they evidence the price used under normal circumstances bysuch exporting country. Thus, if option (i) is not viable, then option (ii) is looked at and if not availableeither, then option (iii) is used.If “Normal Value” is lower than, even to or higher than by no more than 2%, in comparison with the exportprice to Mexico, there will be no finding of dumping. If “Normal Value” is higher than the export price toMexico by more than 2%, then there will be a finding of dumping.The dumping practice must be “consistent”. Usually, a period of investigation of a dumping practice isbetween 6 to 18 months.Finally, when the exporting country is one with a “centralized” economy (versus a “market” economy),then the Normal Value cannot be determined considering the information of the exporting country. In itsplace, the Normal Value would be determined from the pricing information on the same product but from athird surrogate country. 9306.2011
  • Usually the third surrogate country selection is a battle between the Mexican petitioners and the exporterswho defend their cause during the investigation. Although the FTL establishes criteria for thedetermination of the third surrogate country (same levels between the centralized economy country andthe surrogate country of production, availability of materials, cost of production and other economicfactors), the Mexican petitioner usually looks for a surrogate country where the product underinvestigation has a high domestic price, whereas the exporter looks for a country where the domesticprice/export price to a third country/reconstructed value is low, but still has sound market conditions. TheMexican petitioner has the upper hand in the battle because it must propose the third surrogate countrywith its petition for initiation of the investigation. If the UPCI initiated the investigation, then the exporterhas the uphill battle of challenging a selection that has already been accepted by the UPCI and make theargument to convince the UPCI that there is another better option. The determination of third surrogatecountry becomes a highly important issue, as it will materially influence the calculation of the dumpingmargin.3. Standing to Petition an Anti-dumping InvestigationWhen the dumping practice carried out by the industry of an exporting country causes “injury” to theMexican industry that manufactures the same product, then the Mexican industry may request theinitiation of an anti-dumping investigation to the UPCI. The UPCI may initiate an anti-dumpinginvestigation ex-officio (i.e., without the need for the request of the industry of the importing country), if theUPCI becomes aware of strong indications of the possible existence of the dumping practice and theinjury caused to the Mexican industry of a certain product.The Mexican petitioner(s) must be “representative” of the Mexican industry that is being affected by thedumping practice. By “representative” the FTL establishes that the Mexican petitioner(s) must representat least 25% of the total domestic production in Mexico of the product under investigation.4. InjuryInjury is the actual adverse effect, o threat of adverse effect, caused to an industry for different reasons. Inthe case of a dumping investigation, injury is the actual or threat of adverse effect caused by theimportation of products with dumping prices. Injury could also be considered the undermining or delay inthe creation of a domestic industry caused by the importation of products with dumping prices.The injury related information that shall be gathered with respect to the Mexican industry and the relevantmarket is the following: • Total sales of the Mexican petitioner in the Mexican market; • Total sales of the Mexican petitioner to export markets; • Growth patterns of the Mexican petitioner (production capacity, labor force, participation in the “national apparent consumption”); • Level of inventories kept by the Mexican petitioner; • Growth of the “national apparent consumption”; • Survey of preference of supply from industries that use the product under investigation; • Trends on the cost of production factors of the product under investigation; 9406.2011
  • • Trends of pricing of the products under investigation in Mexico, for products manufactured domestically and for products imported from other countries; • Analysis of profits generated by the Mexican petitioner for sales of the product under investigation; • Trends of the industries that use the product under investigation in Mexico; and • Trends of growth of infrastructure in Mexico that relates to the industry of the product under investigation.5. Course of the InvestigationThe phases of an anti-dumping investigation are: (i) Filing and review of the petition (or review of market circumstances in case of an ex- officio investigation); (ii) If the petition is accepted by the UPCI, publication of the initial resolution in the Federal Official Daily; (iii) First discovery period, which is normally of 30 business days after publication of the Initial Resolution. During this period the parties that are interested in participating in the investigation may file arguments and evidence supporting their respective case. The presentation of arguments and evidence must be consistent with the questionnaires that the UPCI distributes; (iv) Publication of the preliminary resolution, where the UPCI may resolve (i) to continue with the investigation imposing provisional anti-dumping duties; (ii) to continue with the investigation without imposing duties; or (iii) closing the investigation if the record shows that there is not dumping or injury. (v) If the investigation continues, after the publication of the preliminary resolution there is a second discovery period, which constitutes a second opportunity for the parties to file additional arguments or evidence, or even a second opportunity for parties that have not appeared in the investigation to do so by filing a response to the official UPCI questionnaire. (vi) Verification of the information filed by parties. In this period the UPCI appoints verification teams that will conduct in situ review of the information filed by the parties (which is basically a review of the accounting and sales information). The party who receives a verification visit has the right to file comments to the events and actions taken by the verification team. (vii) Public hearing, which is an opportunity for the parties to express oral arguments and rebut those of the other parties. It is also an opportunity for the UPCI to direct questions to the parties seeking for clarification of the information that is in the record of the investigation. (viii) Filing of final arguments, which is an opportunity that the parties have to present the summons of the investigation. 9506.2011
  • (ix) Publication of the final resolution, where the UPCI will present the ruling on the merits of the investigation.During the course of the investigation the UPCI may request the parties filing of additional evidence,documents or information or the response to any question that the UPCI may have that is relevant andparticular to the investigation.Although the FTL establishes terms for each phase of the investigation (like the days the UPCI has toaccept or reject a petition of initiation of an investigation, or the term to public the preliminary and finalresolutions), the UPCI consistently fails to observe this terms. Usually an anti-dumping investigation takesbetween 12-16 months to complete.6. Anti-dumping or Countervailing DutiesIf the UPCI finds after the course of the anti-dumping investigation that there is dumping and injury to theMexican industry, then the UPCI will establish the anti-dumping or countervailing duty, which intent will beto equalize the export price to Mexico of the investigated exporting country. The rate of the duty will be,normally, the dumping margin found by the UPCI after review of all evidence filed by the parties thatparticipated in the investigation. There are rare occasions where the UPCI establishes an anti-dumpingduty lower than the dumping margin, if found that the lower duty will equalize the conditions of the marketand it is not necessary to impose a higher duty.However, if proven that any alleged injury suffered by the Mexican petitioner(s) was not caused by theexports to Mexico under dumping conditions, or if proven that there was no injury or just normaladjustments of the conditions of the relevant market, then the UPCI will not impose anti-dumping duties.If after the publication of the Initial Resolution and the presentation by the importers and exporters of theirdefense response, the UPCI finds that there is dumping and a injury o threat of injury that is causingmaterial adverse effects on the Mexican industry, then the UPCI has the authority to establish preliminaryanti-dumping duties. The preliminary anti-dumping duties would be assessed with the publication of thepreliminary resolution.From the publication of the preliminary resolution until the completion of the investigation (with thepublication of the final resolution), the importers have the option of taking the risk of not paying the anti-dumping duty when importing the incumbent products subject to investigation, this if they and theexporters feel like the preliminary duty will be either reduced or eliminated at the end of the investigation.In this case, however, the importers do have the obligation to secure payment by the granting ofguaranties or liens. If the preliminary duties are eliminated at the end of the investigation, then theguaranty or lien will be cancelled. If the preliminary duty is converted into a final anti-dumping duty, thenthe Customs Administration will collect the duties (plus surcharges) or foreclose on the guaranty or lien.7. AppealsAfter the completion of an anti-dumping duty, the party affected by the decision of the UPCI has the rightto appeal. The first instance of appeal, which is mandatory, shall be before the UPCI. The affected partycannot skip this instance of appeal, as this is a mandate of the FTL. Usually this results in the UPCIconfirming its decision (there is only one documented case where the UPCI went back and revoked itsdecision). 9606.2011
  • The second instance of appeal would be before the Federal Tribunal of Tax and Administrative Justiceand the third would be the amparo lawsuit. The amparo is the constitutional lawsuit, where one partyclaims that its constitutional rights were violated by the rulings of the UPCI or the Tribunal.However, when the anti-dumping investigation involves a product being imported to Mexico where theorigin is a country with whom Mexico has a trade treaty (like the NAFTA, with the United States ofAmerica and Canada), then there is an alternative to the appeal process. Instead of going through theinternal justice system, the affected parties have the right to request the initiation of a multi-national Panelreview.In the case of the NAFTA, the Panel review is established in Chapter XIX thereof. If this alternative appealoption is selected by the incumbent party, then such party is prevented from pursuing an appeal beforethe internal justice system. The Panel is comprised by five members, three from one country and two fromthe other one (disregarding the country where the decision was entered; instead, each country takes itsturn to have three members in the Panel, then the other and so on). The Panelʼs decision is not subject tofurther review.8. Review of Anti-Dumping DutiesThe UPCI may review, on an annual basis, whether or not to continue with the same rate of anti-dumpingduty. In other words, after an annual review the UPCI may determine to (i) eliminate an existing anti-dumping duty; (ii) continue with the same rate; or (iii) increase or decrease the existing rate. The annualreview may be initiated as the result of a petition filed by an interested party (an exporter, importer or theMexican industry) or ex officio, in the latter case if the UPCI becomes aware of circumstances that call forthe initiation of an annual review, even if no petition was filed by an interested party.Once an anti-dumping duty has been in place for five years, the UPCI will publish a notice in the FederalOfficial Daily calling to any interested party to come forward and declare if the anti-dumping duty shouldremain in force. If no interested party approaches the UPCI to declare that the anti-dumping duty shouldremain, then the UPCI shall move to declare the cancellation of the anti-dumping duty. Obviously, thenotice is directed basically to the Mexican industry. If the Mexican industry makes the declaration that theanti-dumping duty should remain in force, the UPCI will initiate a procedure known as the “sunset review”,to examine whether or not the circumstances that support the anti-dumping duty still linger.The annual review and the sunset review follow the same procedural rules as a normal anti-dumpinginvestigation. 9706.2011
  • XV. Maquiladora (In-bond assembly plants) and Export ProgramsA. Overview of Export ProgramsSince the early 80ʼs, Mexico has focused on a free market economy, and the globalization of markets hasbeen the best way to reach it. Within this opening mechanism of the national market, export developmentprograms have played a very important role.In such programs, the Mexican government provides administrative and economical support, and offersexemptions of taxes and customs duties for the exportation of merchandises and services, althoughwithout subsiding the exportation directly in order to avoid causing international unfair competition.Most of the programs for export promotion that formerly existed, were merged into the IMMEX program(also known as Maquila). The operation and benefits of the Maquila program is described below.B. Maquiladoras1. Overview (a) The maquila industry is one of the main sources of foreign currency in the country. In the cities where such industry prevails, it represents the base of infrastructure. Besides, it is a very important source of national retailers for inputs and services. Maquila industry and its exportation programs are ruled in the Executive Decree for the Promotion of the Manufacturing, Maquila and Export Service Industry that was published in the Federal Official Daily of November 13, 2006, (hereinafter the “Maquila Decree”). The latest relevant amendments to the Maquila Decree were published in the Federal Official Daily of December 24, 2010. Although the Maquila and Pitex programs were different when created, with time they converged as to their benefits. As a consequence, the Maquila Decree abrogated the Executive Decree that Establishes Temporary Import Programs to Manufacture Export Goods, known as the “Pitex Program”. With the entry into effect of the Maquila Decree, the Pitex programs are considered as Maquila, also known as “IMMEX” programs. Likewise, as a result of the latest amendments to the Maquila Decree, the ALTEX and ECEX Decrees that granted several benefits for major exporters and importers were merged into one unique Decree, the Maquila Decree, in order to facilitate the administration and overseeing of a sole benefits scheme. There are several tax and custom benefits for maquila industry, specially regarding the temporary importation of merchandises that are meant to be transformed, manufactured or repaired, as well as for the render of services related to those activities. (b) Legal entities resident in national territory may request the Ministry of Economy an authorization for using a maquila exportation program, from the moment they are established. In such 9806.2011
  • request, the company must chose one of the following maquila modalities according to its own business needs. (i) Company holding, when a single program integrates the manufacturing operations of a 1 certified company named holding and of one or more subsidiary companies; (ii) Industrial, when an industrial manufacturing or transformation industrial process of certain merchandise destined to exportation is performed; (iii) Services, when certain services are rendered to export merchandise or certain export services are rendered, only for the development of the activities determined by the Ministry of Economy and by the Ministry of Finance and Public Credit (Secretaría de Hacienda y Crédito Público), for example repair, inspection, testing, warehousing, distribution, design of products, and recycling of wastes, among others; Activities such as labeling and packing of merchandise, among others, formerly considered as services activities will nor be treated as industrial manufacturing or transformation industrial process activities for tax purposes, specifically those related to permanent establishment of the foreign resident. (iv) Shelter, when one or several foreign companies facilitate the technology and the productive material, without directly operating the Maquila Program; and (v) Intervention, when a certified company that does not have the facilities to perform productive processes, carries out the manufacturing operations through third parties registered in its program. There is also an additional operation called “sub-maquila”, which is understood as complementary industrial process that is directly related to the operation of a maquila program, although it is performed by a third person (different to the holder of the maquila program) that needs to be registered in the relevant maquila program. The maquila companies are also authorized to transfer imported merchandise on a temporary basis to other companies with a maquila program for the carrying out of an export sub-manufacturing process. (c) Maquila companies must deliver an annual report to the Ministry of Economy and the Tax Administration Service (Servicio de Administración Tributaria “SAT”) regarding the foreign trade transactions that were carried out, under their authorized program. Failure to submit such reports within the relevant terms shall cause the authority to suspend temporary imports until such omission is cured. If on the last business day of the month of August the company has st not yet filed the report, the Maquila Program shall be finally cancelled as from September 1 of the respective year. (d) The programs will be in force as long as the permit-holder complies with all the corresponding legal requirements. Therefore, only the Ministry of the Economy is allowed to cancel a program (even if the tax authorities requested it), in the event there is a breach of the authorized programs, tax or customs provisions.2. Special Customs Treatment1 Authorization granted by the Customs Administration to major importers. 9906.2011
  • Maquila companies may import those goods that are necessary for the manufacturing process ofmerchandises (inputs and assets), under a temporary basis, with the possibility to be exempted ofimportation taxes or with reduced importation taxes, or to defer payment thereof, as long as they honorthe legal terms for the temporary importation.By the end of the legal term of temporary importation, merchandises shall: (i) be returned to the foreigncountry, (ii) be returned as parts of a final product that results from the maquila process, or (iii) beimported into Mexico under a definitive basis.The terms for the legal stay in Mexico of merchandises imported under a temporarily basis are thefollowing: • Up to eighteen months, for fuels, lubricants, and other materials to be consumed in the process of production of merchandise for export, raw materials, parts or components the entirely of which is intended to become part of merchandise for export, package and packaging; labels and brochures. • Up to two years, for containers and house trailers. • For as long as the maquila program is in force, regarding machinery, tools, instruments and general equipment. • Up to twelve months, for merchandise listed in Exhibits II and III of the Maquila Decree. Such exhibits include products such as powder milk, corn, milk products and several textile products, among others. • Up to six months, for merchandise listed in Exhibit III of the Maquila Decree, when imported by a maquila company authorized under the service modality. • Up to nine months, for merchandise listed in Exhibit I TER of the Maquila Decree. Such exhibit mainly includes several steel industry inputs and raw materials. This type of goods may only be imported under a service modality Maquila Program by certified companies. • Up to six months, for merchandise listed in Exhibit I BIS of the Maquila Decree. Such exhibit includes sugar and sugar related products. This type of goods may not be imported under a service modality Maquila Program.The legal stay terms referred to above for merchandise listed in Exhibits I BIS, I TER, II and IIIof the Maquila Decree are not applicable for certified companies, which are allowed to importsuch merchandise for the general term of eighteen months.Merchandise listed in Exhibit 1 of the Maquila Decree (e.g. Non-denaturalized ethylic alcohol with avolumetric alcoholic grade over 80% vol., ethylic alcohol and denaturalized eau-de-vie of any graduation,ethylic alcohol, alcoholic beverages of more than 14 degrees without exceeding 23 centesimal degreesGay-Lussac at a 15ºC temperature, in clay, china or glass services, and pawnbroker articles) may not beimported under a maquila program.The importation of merchandises is taxed, among others, with the general importation tax. Until the end ofyear 2000, the merchandises temporarily imported that were dedicated to a manufacture process, wereautomatically exempted from the general importation tax. However, the legal provisions from several tradeagreements that are currently in force in Mexico obligated to eliminate such exemption. However, in 10006.2011
  • certain cases and depending of the particular type of good, its importation may be exempted for thepayment of importation duties or even some other taxes may be credited. It is, therefore, necessary topay the general importation tax for machinery and equipment.In this regard, the Maquila Decree further clarifies that in imports performed under a maquila program nopayment of foreign trade taxes shall be made for the following cases: (a) In the temporary imports of fuels, lubricants, and other materials to be consumed in the process of production of merchandise for export, raw materials, parts or components the entirely of which is intended to become part of merchandise for export, package and packaging; labels and brochures, when considered originating goods under the terms of a Free Trade Agreement of which Mexico is a party; (b) In the temporary import of trailer containers and boxes; (c) In the temporary import of fabric entirely formed and cut in the United States of America to be incorporated into textile and dress goods in Mexico and to be exported to the United States of America, as well as in the temporary import of raw materials for the manufacturing of such textile and dress goods, to be exported to the United States of America; (d) In the temporary import of goods that are considered as originating from countries non- members of the North America Free Trade Agreement, which are incorporated into the goods listed in Appendix 6.B of such Treaty and to be exported to the United States of America or Canada; (e) In the temporary import of fabric imported to the United States of America, cut in such country or in Mexico, to be incorporated into clothes in Mexico or similar manufacturing operations of textile and dress goods established by the United States of America or Canada, to be exported to the United States of America or Canada, as well as in the temporary import of supplies for the manufacturing of such textile and dress goods, to be exported to the United States of America or Canada; (f) In the temporary import of merchandise to be exported or returned in the same condition as it was imported; (g) In the temporary import of merchandise that is considered originating from the United States of America or Canada, which are only submitted to repair or alteration processes and are subsequently exported or returned to any of such countries, or the spare parts that are imported on a temporary basis to carry out such processes; and (h) In the temporary import of sugar used to manufacture merchandise classified in the tariff schedule of the General Import and Export Tax Law under number HTS 22.05 and items 1704.10, 2202.10 and 2208.70, which are subsequently exported to Switzerland or Liechtenstein.Nevertheless, in order to diminish the effect of such duty, the Mexican government issued SectorialPrograms (Programas Sectoriales “PROSEC”), which allow either the exemption of taxes, or theobligation to pay it at an average rate of 5%. For such purposes, it is necessary to request anauthorization before the corresponding authorities, and to import merchandises that are exclusivelydedicated to the manufacture of final products authorized. 10106.2011
  • 3. Process to Establish a MaquiladoraThe Maquila Industry Decree contemplates several documental requirements that must be complied andsubmitted in order to obtain the authorization of a maquila program. Also, there are other ongoingrequirements, the most important of which is that the maquila company must perform on an annual basiscertain sales abroad for more than $500,000.00 US Dollars, or its equivalent in Mexican currency, or else,invoice exports at least for 10% of its total invoicing.In order to secure a Maquila Program an Advanced Electronic Signature certificate and an active RFCmust be obtained, and the tax and other domiciles where operations are performed under the MaquilaProgram must be also registered and be active before the RFC.Regarding application requirements for authorization of a maquila program, as of the latest amendments,it is now necessary to include in the application general information of the shareholders or partners of thecompany and/or legal representative, as well as to inform the Ministry of Economy of any changes ofshareholders, partners and/or legal representatives.Likewise, the companies that request authorization of a maquila program service modality, will now, inaddition to proving legal possession of the facility or premise, have to detail the investment program whichshould contain information regarding the premises where the manufacturing process will take place,including the description of the investments in real estate, movable property, machinery and equipment,location blueprints, photographs and blueprints of the installations in the premises, as well as the numberof personnel hired directly or indirectly, estimated or total value of import operations, and volume orestimated value of production or of the service.For purposes of granting the authorization the Ministry of Economy will now carry out two inspection orverification visits to the companyʼs premises. If the company holds only the premises, the program will beauthorized for a pre-operation period of 3 months and the company will only be able to import machineryand equipment. Once said term elapses, or else, if requested by the holder of the authorization, a secondinspection visit to verify that the machinery and equipment imported has been installed will be carried out.After the second inspection visit has been performed, the company will be authorized to import rawmaterials and inputs.The machinery and equipment imported must be owned by the foreign resident and may not be owned bythe company that carries out the maquila operation or by another related party resident in Mexico. A thirdparty with whom the foreign resident has a commercial relationship for manufacture may own themachinery and equipment.Additionally, the foreign resident with whom the company that carries out the maquila operation hassigned the maquila agreement should own at least 30% of the machinery and equipment used by thecompany to carry out the maquila operation. Said restriction was not a requirement pursuant to the formerDecree.Upon notifying the authorization of a Maquila Program, the Ministry of Economy shall electronicallytransfer the data that will allow an identification of the company to the Customs Bureau for its automaticregistration before the General Importersʼ Register.The entities to whom a maquila program is authorized shall have, among others, the following obligations:(i) the imported merchandise must be kept at the domicile registered in the maquila program, and (ii) anautomatic inventory control shall be kept with minimum information provided for in Annex 24 of theGeneral Customs Rules. It is important to mention that failure to keep an inventory control or to updatethe same is a cause for cancellation of the program. 10206.2011
  • 4. Maquiladora Sales to the Domestic MarketYears ago, the maquila companies were bound to export a certain percentage of their annual production.Said minimum percentage no longer exists, and maquila companies may dedicate their entire productionto national market. To do so, these companies have to change their merchandiseʼs custom regime from atemporary to a definitive basis, by paying the corresponding taxes.5. Transfer or Sale of MerchandisePerhaps one of the greatest advantages of maquila is the possibility to avoid the importation tax,regarding the sale or the simple physical transference of imported merchandises. Additionally, theseoperations may have a special treatment for value added tax.In this sense, any good imported under a temporary basis may be transferred to a third party with amaquila program, either to finish the transformation, manufacture or repair process, or to return suchmerchandises, as long as they have an exportation manifest under the name of the person who makesthe transfer and an importation manifest under the name of the person who receives them.In accordance with the General Customs Rules issued by the Tax Ministry, the transfer of merchandise ismore strictly regulated as a result of the latest amendments to the Maquila Decree. Additionaldocumentation is required to evidence that the transfer was in fact carried out and the legal stay term hasbeen limited to fewer months.With the aforementioned process, in most of the cases there is no obligation to pay the generalimportation tax, since the goods will be considered as indirectly exported at the time that they aretransferred to an entity with an export program through virtual means.In this regard, maquila program allows the sale and the transfer of merchandise to third parties allowingchains of production, whether among related parties or not. It is important to mention that for suchpurposes, there is no need for the maquila company to own the goods that will be imported, therefore anon resident may remain the owner of the goods at all times.6. Value Added Tax (Impuesto al Valor Agregado)Taxation of the maquila operations is as follows: (a) Importations. The general rate for the importation of merchandises is 16%. Nevertheless, if temporary importations are covered by a maquila program, the importation will be exempt, as long as the merchandise does not exceed the authorized term of permanence in the country. If the importation regime of the merchandises is changed from a temporary basis to a definitive, the tax rate of 16% shall be paid at the moment the change is done. (b) Services. Rendering maquila services is subject to the value added tax. Those services rendered by a Mexican resident as maquila and sub-maquila operations on behalf of non-residents (to be benefited exclusively in another country) are considered as exported services, and therefore the applicable rate for value added tax is 0%. In order to consider that the benefits are taken advantage in a foreign country, the merchandise subject of the services must be physically exported. 10306.2011
  • (c) Sale of temporarily imported merchandises. One of the main advantages of the maquila regime is the possibility to be exempted from value added tax, or to apply a 0% rate with a different tax effect to the exempted rate. In this regard, although the exempted rate and the 0% tax rate are different and have distinct effects for crediting purposes, both have the same effect on cash flow. The tax will be exempted on sales of merchandises that were imported under a temporary basis between foreign residents, from foreign residents to a maquila company and in the event of sales between maquila companies. The 0% rate of the value added tax (that allows crediting other VAT paid, or reimbursement thereof is applicable to the transfer of goods in the following events: • Sales among foreign residents of goods imported under a temporary basis by a maquila company if the physical delivery is made in Mexico to another maquila, automotive industry, or auto-transportation manufacturing company for its importation to a tax warehouse. • Sales by foreign residents of imported goods under a temporary basis to a maquila, automotive industry, or auto-transportation manufacturing company for its importation to a tax warehouse. • Sales by maquila companies to foreign residents regarding goods imported under a temporary basis with physical delivery in Mexico to another maquila, automotive industry, or auto-transportation manufacturing company for its importation to a tax warehouse. (d) Sale of national or permanently imported goods.- In the event Mexican residents who do not have a program for exportation development sell goods to a maquila company for its manufacturing process, they will be deemed as suppliers of the maquila industry, therefore the goods they sell may be considered as indirectly exported.In this case, the Mexican resident who sells the goods, is considered as a supplier of the maquilaindustry, and may credit the value added tax, therefore the tax effect of the transaction is null.This option may be used also in the event of a national supplier selling merchandise to a foreign residentunder instructions to deliver physically the goods to a maquila company within Mexico.7. Transfer pricing in the Maquiladora Industry(a) General OverviewThe general principle is that market value is used in commercial relationships between parties that are notsubordinated to each other. However, it is recognized that if the parties are deemed related and bound toeach other, they can enter into transactions based on additional elements.Therefore, tax authorities may determine the taxable income and authorized deductions of taxpayers bydetermining the price or the amount of consideration of transactions executed among related parties,taking in consideration for such purpose those used by the independent parties in similar transactions.Since January 1, 2000, the Income Tax Law (Ley del Impuesto Sobre la Renta) considered that the legaland economical relationships held by foreign entities and maquila corporations may be deemed asconstituting a permanent establishment in Mexico. 10406.2011
  • (b) Permanent EstablishmentThe creation of a permanent establishment implies the obligation of a maquila company to pay an incometax in Mexico derived from its own activities, and of the foreign resident to pay such tax in Mexico over theincome attributable to its permanent establishment. However, the permanent establishment will not bedeemed if the maquila complies with the applicable transfer pricing rules.It is important to mention that article 33 of the Decree was amended, effective as of January 1st, 20011,to define what is understood by the term “maquila operation” for purposes of the Income Tax Law inconnection with the ownership of fix assets and inputs used in carrying out the maquila operation. Saidamendment has important implications with respect to permanent establishment in the country andcompliance with transfer pricing.Notwithstanding the foregoing, the above is not applicable to companies whose programs wereauthorized before December 31st, 2009, and who have complied with their income tax obligationspursuant to article 216-Bis of the Income Tax Law, that is, related to transfer pricing. Therefore, possibleimplications for maquila operations shall be analyzed on a case-by-case basis.(c) Alternatives for the compliance with transfer pricingThe Income Tax Law establishes three options that are only applicable to a maquila company to complywith transfer pricing rules. These alternatives are: (i) having documentation that evidences thecompliance therewith, (ii) obtaining a particular resolution related to the price methodology used intransactions with related parties or the advance price agreement (“APA”), or (iii) declaring a minimumtaxable profit (mechanism know as “safe harbor”). Such options shall be elected pursuant to relevantsituation of the business maintained by each company.The aforementioned options consist on the following: (i). Evidencing Documentation. Maintain such documents that evidence that the transactions are being executed at market prices (armʼs length basis), evidencing that the income and deduction amounts executed with related parties result from adding the following amounts: (i) apply the methods provided under law in order to determine that the transactions are executed at market prices, and pursuant to the provisions of the “Transfer Pricing Guidelines for Multinational Corporations and Tax Administrations”, approved by the Organization for Economic Cooperation and Economic Development (OECD), without considering the assets which are not property of the taxpayer and (ii) an amount equivalent to 1% of the net value in books of the foreign resident regarding the machinery and equipment which use is lent to a maquila corporation in conditions different to the lease and with considerations adjusted to market prices. Likewise, compliance can be met if the corporation has documentation that evidences that the transactions are executed at market prices, applying for such purposes the “transactional margins operationʼs profit” method, considering the profitability of the machinery and equipment used in the maquila operations which are owned by the foreign resident. (ii) Advanced Price Agreement (“APA”). The maquiladora might request tax authorities a specific ruling regarding the methodology used for prices in transactions executed among related parties, confirming that the corporation complies with transfer pricing. 10506.2011
  • The main advantage of such resolutions consists in that they can be effective in the fiscal year in which are requested, the preceding, and the following three fiscal years. Their effectiveness could be even longer if they are derived from an amicable proceeding pursuant to the provisions a treaty to avoid double taxation. (iii) Safe Harbor. The maquiladora shall obtain a minimum tax profitability representing at least the higher amount resulting from the following: • 6.9% over the total amount of the assets used in the operations of a maquila company during the fiscal year, including those which are property of Mexican residents for tax purposes, foreign residents or any of their related parties, even if they have been granted in temporary use or enjoyment. • 6.5% over the total amount of the operation costs and expenses incurred by the maquila company, determined pursuant to generally accepted accounting principles, and also including the cost and expenses incurred by foreign residents, except those pointed out by the Income Tax Law.In order to apply the safe harbor option, maquiladoras shall file before tax authorities a notice stating thatthe taxable profit of the fiscal year represented at least an amount in excess of that mentioned.(d) Other tax benefitsThrough an Executive Order granting several tax incentives, partial exemption of income tax tomaquiladoras may be available by calculating the total amount of the assets used in its operations(excluding the value of inventories). 10606.2011
  • XVI. SecuritiesA. GeneralAs a consequence of recurring financial crisis, supplier credit in Mexico is still the primary source offinancing for small and medium size businesses; however, an increasing number of companies havestarted to access capital and debt markets. Regulatory agencies are imposing higher corporategovernance standards and facilitating easier ways for both domestic and foreign companies to access themarket.Securities, issuers and stock exchanges in Mexico fall under federal jurisdiction; moreover, they areregulated, registered and authorized by the Ministry of Finance and Public Credit, the Bank of Mexico,and the CNBV. The newly enacted Stock Market Law of 2006 and certain Rulings (Circulares) issued bythe CNBV contain the main provisions applicable to securities and issuers.B. Mexican Stock ExchangeStock exchanges in Mexico are incorporated as private corporations with previous approval of the SHCP.Currently, one stock exchange operates for the trading of securities—the Mexican Stock Exchange (BolsaMexicana de Valores “BMV”)—and one operates for the trading of futures and options—the MexicanDerivatives Exchange (Mercado Mexicano de Derivados “Mexder”). The BMV is a public company inMexico and controls the Mexder.The BMV encompasses a number of different Indexes, mainly:1. The National Securities Index (Indice Nacional de Valores), where domestic and foreigncompanies may be listed, subject to certain requirements;2. The International Quotation System (Sistema Internacional de Cotizaciones), where foreignsecurities already traded in an international recognized stock market may be listed; and3. The Intermediate Index (Indice de Mediana Cotización), where securities issued by domestic orforeign midsize companies may be traded.Securities listed with the BMV are traded electronically through a system known as BMV-SentraCapitales. Issuers must file all relevant information with the BMV through an electronic system known asEmisnet.C. Securities/Public OffersMexican laws classify securities, regardless of their nature (i.e. equity or debt), as those titles offered in amassive way to the general public, granting their holders ownership, credit or a stake of the issuer.Securities offerings are considered public when the offer is conducted through mass means ofcommunication or to an unidentified general public. The Stock Market Law provides certain safe-harborsas to when an offering is not considered public (e.g., sale to institutional investors). As later described, ifan issuer intends to make a public offer, it must secure approval of the CNBV and record its securities. 10706.2011
  • Equity maybe issued either as stock or as convertible debentures. Stock issued as equity may varydepending on whether any corporate rights (voting rights) are included therein, and whether such stock isquoted directly or through the use of depositary instruments (normally called Ordinary ParticipationCertificates, Certificados de Participación Ordinarios - “CPOʼs”) and commonly used in regulatedindustries where foreign investment is limited). Debt may be represented in bills, bonds, notes, securitiescertificates, federal governmental development paper, or Federal Treasury certificates.Recently, regulations were issued to permit the offering of a new instrument called CKDdesigned for private equity funds to raise capital or to securitize “whole business”.D. Approval and Registration of a Public OfferBefore offering securities to the general public in Mexico, issuers must obtain approval from the MSE andthe CNBV, and record the securities with the National Securities Registry (“Registro Nacional de Valores”)of the CNBV. Finally, before trading, securitiesʼ certificates (i.e. shares, notes, bonds) must be physicallydeposited with a depositary institution known as S.D. INDEVAL, S.A. de C.V. (“Indeval”). The recordingand approval process for foreign issuers is almost identical to that for Mexican issuers.Additionally, issuers must enter into underwriting agreements with a broker-dealer (“financial sponsor”).The latter will be responsible for reviewing and analyzing the issuerʼs business and activities informationfiled with the CNBV, as well as in some issuances depending on the security, for coordinating andensuring that the issuance is rated by one of the authorized rating agencies (Moodyʼs, Standard & Poorʼs,etc.).Issuers must apply simultaneously to register securities before the CNBV and to list them with the BMV.After filing, the issuer shall receive a written notice from the BMV containing general comments on theinformation that accompanied the application. Later, and once all observations have been addressed, ageneral favorable opinion issued by the BMV will be given to the issuer. The issuer must then file thatopinion before the CNBV; the CNBV will likewise make comments, and after the issuer addresses thosecomments, grant its authorization. This authorization shall then be filed before the BMV in order to get thesecurities registered and listed. Finally, a prospectus for the placement of securities—containing,generally, financial, administrative, economic, accounting, and legal information about the issuer and thesecurities to be offered—will be issued to potential purchasers.The documents commonly required for the application include current by-laws of the issuer, powers ofattorney of the legal representative, a draft of a shareholdersʼ meeting resolving on the amendment of by-laws to adopt special provisions applicable to issuers, a draft of the certificate to be registered, certifiedfinancial statements for the last three fiscal years, certifications from an outside auditor and legal counsel,favorable opinions from the relevant stock market, a report on the issuerʼs compliance with the Code ofBest Corporate Practices, a draft of the underwriting agreement and a draft of the public offer notice andof the prospectus. Furthermore, if the offering comprises debt, the issuer must identify amortization terms(early and natural expiration), interest rates and terms of payment, place of payment of interest andprincipal, and premiums, if any.In our experience, the process can take up to six months, depending on the complexity of the securitiesand the thoroughness with which the relevant requirements are satisfied. Part of the process usuallyinvolves informal meetings between the issuer, the underwriter and the CNBV, with the purpose ofanswering inquires, submitting additional documents, covering all relevant aspects of the process andensuring an efficient review upon filing for authorization. 10806.2011
  • It is a typical requirement that CNBV authorizes the issuance and record the securities in the NSR, inorder for the issuer to begin the steps leading to a formal public offer in Mexico.As a general rule, no filings before the SHCP or the Central Bank (Banco de Mexico) are necessary.Nevertheless, depending on the kind of securities and the significance of the intended quotation, theCNBV may request the opinion of such entities once an application has been filed. Banco Mexico has thepower to issue regulations and impose sanctions against financial and securities intermediaries in order toprotect monetary policies, the proper development of the financial system, and the public interest.To summarize, the filing process includes the following steps: • Filing of applications with the BMV and the CNBV; • Securing rating from rating agency in some cases; • Registration of the securities before the National Securities Registry and public offering authorization issued by the CNBV; • Obtaining a favorable opinion from the BMV; • Registration of the securities with the BMV; and • Depositing of the securities certificates with Indeval.E. Listing with the International Quotation System of the BMVSecurities issued abroad may be listed. This System is a mechanism provided by the LMV for quotingsecurities that have not been publicly offered in Mexico and that have not been registered before theCNBV, but which are listed in foreign stock markets recognized by the CNBV or securities issued byprivate foreign entities recognized by CNBV.The acquisition of securities through this System is only available to institutional and qualified investors,as well as to foreign individuals and corporations.Physical holding of the stock certificates shall not necessarily be held in Mexico, as Indeval may enter intoagreements with foreign securities depository firms or banks, with respect to the custody of securitiescertificates. Securities are listed as common stock, not as depositary receipts.The following is a brief summary of the requirements for listing securities on the International QuotationSystem: • An underwriting agreement between the issuer and a Financial Sponsor. • A Financial Sponsor, which files application to list recognized foreign securities with the BMV, along with general and financial information of the issuer, information about the securities to be listed, as well as information regarding the operation of the foreign stock market in which the securities are listed. • The BMV prepares a technical report in order to determine if listing the securities is viable. • The result of BMVʼs report is sent to the CNBV, Indeval and the Financial Sponsor. • Once the authorization for listing has been granted by the BMV, the Financial Sponsor has 20 business days to request the listing of the securities in the Electronic Negotiation System of the BMV. Pursuant to the Financial Sponsorʼs request, such term may be extended, one time, for an additional 20 business days. 10906.2011
  • • Two business days prior to listing of the securities, the BMV publicizes the names of the Financial Sponsor and the issuer, as well as the main characteristics of the securities to be listed. • Having satisfied the requirements, the securities are then listed.Financial Sponsors must furnish to the BMV financial, economic, accounting, legal and managementinformation of the issuer, as well as relevant information that may have an impact on the valuation of theissuer and pricing of the securities. Such information must be reported at the same time and at the sameintervals with which it is reported in the foreign stock market where the issuer is listed. The BMV makessuch information, along with the characteristics of the securities listed available to all investors.F. Ongoing Reporting Obligations and other Relevant InformationIssuers of registered securities must make quarterly and annual reports to the CNBV and the BMV. Suchreports include financial, economic, accounting, management and legal information (such as shareholdersresolutions, restructurings and other important planned events). The applicable reporting obligations mayvary depending on the type of issuer and security involved.Further obligations are imposed on holders of securities who reach certain ownership thresholds. Holdersacquiring 10% or more of an issuerʼs equity must notify the CNBV and the BMV of the purchase in orderfor such entities to disclose the transaction. Any acquisition in excess of 30% of an issuerʼs equityautomatically obligates the potential purchaser to issue a tender offer to purchase for the remainingoutstanding stock.The issuer must disclose immediately to the public all relevant information that may impact the valuationand pricing of its securities. However, specific exceptions allow issuers to maintain appropriate levels ofaccuracy and objectivity in their disclosure of events. Insiders are subject to blackout periods andinformation disclosures.All relevant information must be immediately disclosed to the BMV through an electronic system know asEmisnet.G. Minority RightsAs part of the public offer approval and recording process, issuers commonly must amend their by-laws inorder to provide for minority rights, as required by the LMV. Such rights lower the percentagesestablished in the General Law of Commercial Companies for minority shareholders to be entitled to thefollowing:Minorities representing at least 10% of the capital stock may: ! Appoint at least one member of the Board or its corresponding alternate. This right is granted regardless of the stock having limited or full voting rights; ! Request the Board of Directors or the Statutory Auditor to call a General Shareholdersʼ Meeting; ! Delay voting on any matter on which they consider themselves not to be fully informed. Such right may be exercised only a single consecutive time for the same matter. 11006.2011
  • Minorities representing at least 20% of the capital stock are entitled to file for judicial opposition to theresolutions adopted by a Shareholdersʼ Meeting as long as: ! Their claim is filed within fifteen days following the Meeting; ! If the claimants appeared before the Meeting, they voted against adopting the opposed resolutions; and ! Their claim accurately reflects and explains a violation to the by-laws or legal precept.H. Underwriting AgreementsIssuers and Financial Sponsors commonly execute underwriting agreements for the placement ofsecurities, through either: ! Firm commitment, under which an underwriter purchases up front the securities offered and sells them in the open market; or ! Best effort commitment, under which an underwriter is not obliged to purchase any specific amount of securities, but has an option to purchase up to a specific number of securities, to the extent the underwriter is able to place such securities through its best efforts.Generally, these agreements include general boiler-plate clauses. Force majeure, success fees andover-allotment options are permitted under Mexican law. Fees and green shoes are freely negotiated ona case-by-case basis. 11106.2011
  • XVII. BankingA. GeneralMexicoʼs banking and financial system has evolved due to a number of changes in Mexicoʼs financialsituation that have taken place during the last sixty years.Since the first Credit Institutions Law (Ley de Instituciónes de Crédito - “LIC”) was issued in 1941, anumber of different legal regimes have governed banks and financial institutions. Economiccircumstances and the countryʼs needs have also changed during that time, causing adjustments to theapplicable laws and regulations.During the 1940ʼs and until 1976, the banking system consisted of a number of banks that providedlimited specialized services. Amendments to the LIC in the 1970ʼs introduced the concepts of FinancialGroups and Multiple Banking Institutions, allowing individual banks to provide a variety of banking andfinancial services to their clients.In 1982, the Mexican government expropriated all banks, although ownership of banks was re-privatizedin 1990. Since 1993 with NAFTA becoming effective, foreign investors have been permitted to take anincreased role in the Mexican banking and financial system. As a matter of fact, currently, foreign financialentities, principally those from the United States and Spain, control almost all commercial banks inMexico.The Mexican banking system is regulated by authorities and agencies that protect the interests of thegeneral public, banking and non-banking financial agents.B. Authorities1. Bank of MexicoThe Bank of Mexico (Banco de Mexico - “Banxico”) is the Central Bank of the Mexican government,granted autonomy through the 1994 amendments to the Constitution and governed by the Bank of MexicoLaw (Ley del Banco de Mexico). The primary activities of Banxico consist of: directing monetary policyand controlling inflation; financing the federal government; minting coins and issuing bills; and regulatingintermediation and financial services. Banxico accomplishes these tasks in part by establishing requiredcharacteristics for financial transactions (e.g. mandatory rates, terms and interest).Banxico issues general provisions or Regulations (Circulares), which are applicable to financialinstitutions, issuers of securities, intermediaries and the general public. Banxico has authority to sanctionthose entities or individuals that do not comply with such Regulations.Banxicoʼs central administration consists of a Government Board composed of a Governor (appointed bythe Federal Executive Branch) and four Sub-Governors.2. Ministry of Finance and Public CreditThe SHCP is a Ministry of the Federal Public Administration which in addition to its “natural function” oftaxing authority, evaluates, surveys, promotes and organizes financial services rendered by banking and 11206.2011
  • non-banking agents. Through its separate agencies, including the CNBV and the Insurance and BondsNational Commission (Comisión Nacional de Seguros y Fianzas “CNSF”), the SHCP evaluates andsurveys banks, bonding and insurance companies, brokerage houses and all other entities within thefinancial system.The SHCP has the authority to issue rules to develop provisions of the CIL, which is the main body of lawgoverning Credit Institutions and their transactions.3. National Banking and Securities CommissionThe Comisión Nacional Bancaria y de Valores or CNBV is a decentralized agency of the SHCP, and ischarged with inspecting and surveying all financial activities, transactions and entities; it also acts as anenforcement body for those entities under its surveillance. All financial activities are mainly coordinatedand regulated by the CNBV; as such it can be considered the most important government agency for suchmatters.Authorizations to undertake banking and other regulated financial activities in Mexico will commonly haveto be filed with, among others, SHCP, Banxico, and the CNBV.Additionally, the CNBV issues Rules or Circulares that financial entities, securities issuers andintermediaries are required to follow.C. Protection of the Interests of the Public1. National Commission for the Protection and Defense of Users of FinancialServicesThis Commission (Comisión Nacional para la Protección y Defensa de los Usuarios de los ServiciosFinancieros “CONDUSEF”) is a decentralized agency of the federal government governed by the Law forthe Protection and Defense of Financial Services Users.The main function of CONDUSEF is to regulate conciliation and arbitration proceedings that may beinitiated by users adversely affected by financial services provided by credit institutions and, in general, byentities forming part of the financial sector in Mexico. Likewise, the CONDUSEF promotes financialculture; it provides counsel and other legal services for users of financial services that cannot afford alawyer to enforce their corresponding claims; also, it maintains the Registry of Financial ServicesProviders.2. Institute for the Protection of Bank SavingsThe Institute for the Protection of Bank Savings (Instituto para la Protección al Ahorro Bancario “IPAB”) isa decentralized agency of the federal government governed by the Protection of Bank Savings Law (Leyde Protección al Ahorro Bancario).IPAB develops bank savings protection programs for Mexican banks, provides financial support tobanking institutions when required, insures saversʼ deposits up to a certain amount, and acts as liquidatorin event of a bankʼs bankruptcy. The coverage granted to each affected depositor in the event of a bankʼsbankruptcy is limited. 11306.2011
  • 3. Credit Information EntitiesCredit Information Entities (Sociedades de Información Crediticia) are private companies, consideredauxiliary credit organizations, governed by the Law for Regulation of Credit Information Companies (Leypara Regular las Sociedades de Información Crediticia). These companies render services related tocompilation, management and delivery of information regarding individual and corporate credit recordsand regarding the credit operations executed by such individuals with financial and other commercialentities. Although Credit Information Companies are not credit institutions, they are regulated byprovisions similar to those which govern credit institutions and other financial agents.D. Financial AgentsThe primary agents are private banks, most of which are now controlled by non-Mexican financialinstitutions.1. Commercial BanksCommercial banks – known as multiple banking institutions (instituciones de banca múltiple) aregoverned under the Credit Institutions Law, and licensed to operate by the Ministry of Finance and PublicCredit - SHCP upon favorable opinions from Banxico and the CNBV.Commercial banks are authorized to render banking and credit services on a nationwide (federal) basisunder Mexican law. Banking and credit services comprise the ability to: (i) receive deposits; (ii) receiveloans and credits; (iii) grant loans and credits; (iv) issue credit cards; (v) issue securities; and (vi) act astrustees.The most common transactions involve credit, lines of credit, unsecured loans, working capital and fixedasset loans, as well as mortgage loans and financial leases.Acquisition of more than 5% (five percent) of the capital stock of a commercial bank requires authorizationof the SHCP and the CNBV. Transfer or acquisition of 2% (two percent) or more of the capital stockrequires notice to the agency.2. Affiliates of Foreign Financial EntitiesAffiliates of foreign financial entities or (instituciones de banca múltiple filiales) are similar to commercialbanks, except that they are owned or controlled by a foreign financial entity incorporated in a country withwhich Mexico has entered an international treaty that provides for the existence of such a financial entity.Most of the foreign commercial banks currently operating in Mexico are recognized thereunder.3. Development BanksDevelopment Banks are decentralized agencies of the federal government known as national creditcompanies (Sociedades Nacionales de Crédito), that may perform credit operations in the same way ascommercial banks. However, their purpose is to render services for the development of specific segmentsof the national economy—promoting, for instance, foreign commerce or the development of public works.4. Non-Banking Financial Agents 11406.2011
  • Special Purpose Financial Entities (Sociedades Financieras de Objeto Limitado, “Sofoles”) or “non-bankbanks” are companies that, although not considered credit institutions, are authorized to perform certainbanking services, securing funds from- and allocating them among- the general public with a specificniche or industry sector. These entities are an exception to the rule that enables only credit institutions torender banking services. The incorporation and operation of Sofoles must be authorized by the SHCP.The difference between commercial banks and Sofoles is that the latter may only secure funds throughthe issuance of debt and the reception of credits, and may only allocate such funds for specific types oftransactions and investments (for example, mortgage loans). It should be noted that the use of Sofoleshas diminished importantly, as the creation and regulation of Multiple Purpose Financial Entities(sociedades financieras de objeto multiple) as explained below, has given greater flexibility for theprovision of financial services in Mexico.Multiple Purpose Financial Entities (sociedades financieras de objeto multiple or Sofomes), are financialentities that like the Sofoles are not authorized to secure funds through reception of deposits from thegeneral public, are authorized to grant credits through the granting of credit and other activities such asthe execution of leasing agreements and issuance of securities. Also, their scope is not limited, as in thecase of Sofoles. Precisely because of the lack of limitation on the sector or industry to which Sofomesmay grant credit, their use has become more popular, and a number of Sofoles are even beingtransformed into Sofomex.These entities may be regulated or non-regulated, and in the case of the latter, they are not subject toregulation of the government financial authorities, although their activities may be supervised byCONDUSEF. An advantage of Sofomes over Sofoles is that the former may act as trustees (along withbanks, and other certain financial institutions) in trusts set to guaranty obligations – such as loantransactions. Likewise, they can enter into factoring and financial leasing transactions, representing aclear advantage vis-á-vis other specialized financial entities.Other non-banking financial agents within the Mexican financial system are leasing companies, factoringcompanies, pension fund management companies, public bond warehouses and currency exchangehouses.Lately, it has become interesting the participation of Popular Financial Institutions (SociedadesFinancieras Populares - Sofipos) in the financial services market. Alike banks, Sofipos are permitted totake sight and time deposits, and operate very much like a small, regional bank. Sofipos aredivided/assigned four different levels depending on their amount of capitalization and value assets, andeach level permits them to engage in a variety of services and more complex transactions.Sofipos are subject to the supervision of the CNBV and are subject to the auxiliary supervision ofFederations, which assist CNBV and serves as an initial filter of the activities carried by Sofipos. 11506.2011
  • XVIII. Secured TransactionsA. Principles Applicable to Security InterestsMexican law provides different alternatives for granting security interests. The decision to use of one ormore of the schemes should be taken on a case-by-case basis, depending on amounts, assets andstructure, among others. These guarantees are regulated under different legal bodies, among others, theFederal Civil Code and those Civil Codes for each State, the Commercial Code and the General Law forNegotiable Instruments and Credit Transactions (Ley General de Títulos y Operaciones de Crédito -“Negotiable Instruments Law”).B. Personal PropertyPersonal property (i.e., those movable assets or intangibles not considered as real property), may besubject to the following most common guarantees.1. Personal Guarantee (Fianza)Guarantor (or guarantors if more than one) responds for debtorʼs obligations in case of breach or default.Personal guarantees can have different characteristics or derive from different sources, such as a jointobligation, with no cost, with cost, judicial, by law, or private. Other limitations or agreements can beincluded. Termination can occur, among others, by release, termination of the obligation or term.Guarantor can be also backed by other personal guarantee.It is common to find that personal guarantees are granted through surety or performance bonds issued bybonding institutions that are licensed and regulated by the federal government for such purposes. Suchinstitutions grant the respective policy to debtor giving creditor certain comfort of the solvency.2. PledgeDebtor or a third party creates a guarantee to secure the performance of an obligation and its prioritypayment right delivering movable assets subject of transfer.A pledge is subject to the Civil Code when it is created on an object that is not a commercial asset or notinvolved in acts of commerce. In such case, the pledge shall be agreed in writing and requires thedelivery of the asset. In order to be effective against third parties, the pledge must be recorded before thePublic Registry of Property. If the guarantee involves acts of commerce or is created on commercialassets, the pledge will be then subject to the Negotiable Instruments Law.In general, the Negotiable Instruments Law provides that commercial pledges are created and perfected,among other, by delivery of the collateral to the creditor (including bearer negotiable instruments);endorsement of negotiable instruments and entries in the records of the issuer; delivery to the creditor ofthe document where the credit is evidenced; deposit of the collateral with a third party; delivery orendorsing the documents representing the goods subject matter of the pledge; issuance or endorsementof a pledge bond; and record of chattel mortgage agreements in the Public Registry of PropertyThe Pledge may or may not involve transfer of possession. In the first case, the possession of thepledged asset is transferred to creditor; who will keep and conserve the asset. If parties agree to grant apledge without transfer of possession, guarantor will then keep such asset, but will be effective before 11606.2011
  • third parties once recorded before the RPC. Nonetheless, recording pledges that involve transfer ofpossession is as well required for it to be effective, among others, vis-à-vis the taxing authorities.In case of breach or default of the guaranteed obligations, creditor under the pledge will be entitled toforeclose the guarantee requesting from the judge the sale of the pledged asset at public auction. If theasset cannot be sold, it can be adjudicated to creditor in accordance to the law. The pledge can be sold inan extrajudicial manner if the parties agreed to do so.Likewise, security interest created on movable assets should be recorded in the special section of theRPC recently created therefor. This registration is to be made electronically through the internet.3. Trust AgreementsAssets can be transferred into trust for guarantee or security purposes. The settlor contributes assets orcontractual rights to the trustee in order to guarantee in favor of the beneficiary. Trustees may be banksor other financial services entities licensed for such purpose.In case of breach or default of the guaranteed obligations, trust agreements may show a great advantagesince they are permitted to provide for ad hoc rules for foreclosure, granting the beneficiary the right toorder the trustee to foreclose on the collateral without the need of filing a request before Courts.These trust agreements should as well be recorded in the Public Registry of the Property (where realestate is involved) and in the RPC for them to be effective vis-á-vis third parties. It should be noted that incertain States of Mexico, registration is required for the agreement to even become effective as betweenthe parties.4. Chattel MortgageThese contracts (créditos de habilitación o avío and refaccionario) allow the grantor of the credit toreceive a specific security on assets purchased with the proceeds of the loan. The main differencebetween the two kinds of chattel mortgage will be the type of assets that will be acquired by the debtorusing the respective loan. In one case they deal primarily with the acquisition of liquid assets, while in thesecond case with fixed assets.Among others requirements, the contract must express the purpose of the credit operation, the use of theloan proceeds and the manner in which the beneficiary will dispose of the credit. It should describe thesecured goods, should be ratified before a Notary Public and in order to be effective against third partiesmust be recorded before the RPC.C. Mortgage of Real PropertyDebtor or a third party creates a security interest through real assets. Usually a mortgage is executedover real estate or fixed assets or movable goods deemed as real property (e.g., ships). Under themortgage, guarantor maintains the possession of the asset. Mortgage agreements shall be executedbefore a Notary Public and in order to be effective before third parties, shall be recorded before the PublicRegistry of Property. In cases of special types of assets, such as ships or aircraft, the relevant agreementwill be subject to registration at the proper registry.The mortgage extends to the assetʼs natural accessories, improvements, movable objects permanentlyattached to the asset and that cannot be separated without decreasing the value thereof, the buildingsconstructed over the mortgaged land. Mexican law permits the “industrial mortgage” in which an industrial 11706.2011
  • plant, including real estate, construction and specifically designated equipment, as well as that equipmentwhich is permanently incorporated into the structure would be covered as part of the collateral. Whetheror not an industrial mortgage can be created only in favor of banks (since it is governed under CreditInstitutions Law) and not in favor of other third parties is still under debate.Although, according to Mexican law, if a debtor fails to pay the debt due to its insolvency, all creditors mayfile a claim so as to force the debtor to carry out the payment of its obligations, debts secured by amortgage, can be handled through separate legal procedures since the credit is secured by a specificasset independently of the solvency or insolvency of the debtor. Although, this will apply only to theamount that the assetʼs value covers. In case of breach of default by debtor under the guaranteedobligations, creditor can foreclose the mortgage through a special mortgage proceeding or through anordinary process if so elected by creditor.Real property can be subject to a trust agreement executed for guarantee purposes as well. 11806.2011
  • XIX. Government ProcurementA. General ScopeAccording to the Mexican Constitution, the government must seek the best price, financing, quality andopportunity conditions on subjects such as acquisitions, leasing and transfer of any kinds of goods, orprovision of services, as well as constructionʼs contracting.There are several legal procedures enabling the Mexican State to keep and guaranty the properfunctioning of institutions and satisfy the citizenʼs demands and public services. Competitive bidding isthe most common procedure, while restricted invitation and direct award are exceptions.Legislation regarding contracting with the State for any acquisition of goods or services is the Leasing,Acquisitions and Public Sector Services Law (Ley de Adquisiciones, Arrendamientos, y Servicios delSector Público “LAPSS”), while public works are subject to the Government Construction and RelatedServices Law (Ley de Obras Públicas). Both laws have their respective Regulations.B. Contracting Procedures1. Competitive BiddingThis is the most common procedure. It consists of a regime directed to the selection of the private partyamong a group of bidders responding to a public invitation, who could grant the best terms for the State inorder to obtain all the benefits that allow justice and equity under the principles of concurrence, equality,competence and transparency.(a) National and International BidsBoth public works and acquisition legislation provide that competitive bidding will be national when onlyMexican citizens are allowed to participate; the goods to be acquired are produced in Mexico and have50% of national content at least. International competitive bids, on the other hand, allow either Mexicanor foreign citizen to participate and the goods to be acquired could be either Mexican or foreign sourced.International competitive biddings can only take place when: • Its obligatory according to international agreements. • When thereʼs no offer from national suppliers of goods and services in the required quantity and quality according to a stateʼs market survey or when itʼs convenient in terms of price. • When there is no response to a national competitive bidding or none of them fulfill the requirements. • For external-credit financed contracting given to the federal government or his third-party guarantee.In this kind of bids, the Ministry of Economy will publish in the Federal Official Daily (Diario Oficial de laFederación) the cases in which participants must declare that the prices theyʼre proposing are not quoted 11906.2011
  • under conditions of international trade disloyal practices on their modality of prices or subsidiesdiscrimination.On the other hand, the Mexican State could deny foreigners participation in international bids when thereis no agreement celebrated with their country of origin and that country doesnʼt have an equal treatmentto Mexican bidders or goods and services providers.(b) Bidding proceduresCompetitive bidding procedure starts with an invitation that is simultaneously published in the FederalOfficial Daily, a national circulation newspaper and a local newspaper from the relevant state where thegoods will be used, the service provided or the construction executed.Bidʼs rules prepared by the Mexican State agencies will be open to anyone interested. These will containall the requirements and conditions, necessary for the appropriate goods and serviceʼs provision orconstruction executing. In this way, any interested party who satisfies the requirements will have theright to make its proposal before the inviting authority.On competitive bids, submittal of proposals is made through a written document that contains thetechnical and economic proposals, the last one must include a seriousness of offer guarantee orperformance bond. All this delivered in a sealed closed envelope.In this sense, anyone participating at the bids or executing a government procurement agreements, mustprovide three guarantees (normally by way of a surety bond) in order to guaranty: • Seriousness of the bid proposal or offer, to ensure that the agreement will be executed if the bid results the winner. • The correct application of the advance payments received. • Proper performance of the contract.Once the participantʼs propositions are evaluated by the agency, the contract must be awarded to thebidder that fulfills the conditions established at the bidʼs rules, the legal, technical and economicrequirements and that guarantees his obligationʼs proper performance. If there are two or morepropositions that totally fulfill the authorityʼs requirements, the agreement will be made with the lowestprice offer, or the bidder who received more percentage points, depending on the awarding criteria.Recent amendments to the LAPSS allow for subsequent discounts once the sealed envelopes areopened, in order to allow a last round of proposals thus allowing the state to secure even better economicconditions.2. Restricted Invitation and Direct AwardAs an exemption to the general rule of the competitive bidding, the Mexican government agency canagree to contract for acquisitions, leases, services and government construction through a restrictedinvitation process (made to at least three parties) or through direct award when, among others: • The agreement can only be executed with certain person in cases like works of art, intellectual property, patents, etc. 12006.2011
  • • When the economy, social order, public services, health, security or environment of certain region or zone in the country could be altered or may in danger. • When two competitive bids are deemed deserted or the proposals received were insolvent. • When justified reasons exist for the acquisition or lease of certain goods under trademark.C. Execution of a Procurement ContractOnce the contracting procedure has concluded, the winners or those who have been directly award, havethe obligation to formalize the contract within twenty days following the resolutionʼs notification (foracquisitions or services provision), and within the following thirty days (for construction contracts).According to procurement laws, rights and obligations emerging from contracts may not be assigned infull or in part in favor of third parties, except for the account receivable rights, and in this event only withthe authorityʼs previous authorization.If the contractor to whom the agreement is awarded is not able to execute the work and subcontractssomeone else with the authorityʼs previous authorization, the contractor will nonetheless remain solelyresponsible.In the case of government construction works, three types of agreements are recognized depending onthe contracting price formula: (i) On the basis of unit prices, in which case the total amount of the payment or compensation that shall be paid to the contractor will be made on the basis of work concepts and prices. (ii) On lump-sum price, in which case a total fixed price shall be paid to the contractor for the totally finished work executed. (iii) Mixed, when part of the work is on unit prices and other part on lump-sum basis.D. SanctionsBidders breaching any legal provision related to any contracting procedure may be fined by the PublicFunction Ministry (Secretaría de la Función Pública – “SFP”), and may be temporarily banned fromparticipating in any government contracting procedure in anyone of the following cases: • When bidders, without justification, do not execute an agreement already awarded by the authority. • When the contractʼs obligations are not performed for reasons attributable to the bidders that cause serious damages and lost profits, as well as when the private party supplies goods and services of different specifications than those agreed. • When bidders give false information or act with fraud or bad faith in any contracting procedure. 12106.2011
  • E. Challenges and RemediesInterested parties may challenge governmental actions before the SFP that are contrary to applicable lawor bid rules, such as, for example, defects on the evaluation and award of a contract.F. Conciliation ProcessContractors or suppliers have the right to request a conciliation procedure before the SFP in case ofbreach of the contractʼs terms and conditions by the relevant authority.Once the complaint is received, a conciliation hearing will take place. The SFP will determine thecontroversial points and will invite the parties to settle, considering the facts declared by the interestedand the authority. If the parties reach settlement, its terms will be binding and its performance can berequired by judicial means. If not, the rights of the parties remain open to be pursued in court.G. Dispute ResolutionAs of 2009, procurement laws allow the inclusion of arbitration clauses in long-term service and publicworks contracts. Arbitration will not proceed regarding administrative rescission or early termination ofthe contract.H. PemexIn light of the enactment of the Pemex Law and its corresponding Administrative Procurement Provisions,as of 2010 Pemexʼs procurement regime for acquisitions, leasing, works and services for substantiveactivities of productive nature is not subject to general procurement laws, and therefore the generalprocedure described in this chapter.The main objective of this special regime was for substantive activities of productive nature, as well aspetrochemicals other than basics to be ruled by provisions out of the scope of the LAPSS Law, and thePublic Works and Related Services Law; the foregoing with the purpose that public procurement for suchactivities (limited to those specific areas) be more efficient and consistent with their economic andoperative nature, thus granting Pemex and its Subsidiary Entities more flexibility for procurementprocedures as well as contracting and performance thereunder.For more information in connection with the new Pemex procurement regime, please refer to the Energysection. 12206.2011
  • XX. Intellectual PropertyA. GeneralIntellectual Property encompasses all distinctive signs, such as trademarks, slogans, trade names, aswell as inventions such as patents, utility models and industrial designs, and copyright and related rights.The protection of intellectual property rights in Mexico has increased as a result of the execution ofdifferent international treaties and of the countryʼs participation in international organizations such as theAgreement on Trade-Related Aspects of Intellectual Property Rights including Trade in Counterfeit Goods(Acuerdo Sobre los Aspectos de los Derechos de Propiedad Intelectual Relacionados con el Comercio“TRIPS”) and World Intellectual Property Organization (Organización Mundial de la Propiedad Intelectual“WIPO”). Moreover, the protection of intellectual property rights was one of the main subjects discussedduring NAFTAʼs (North America Free Trade Agreement) negotiations; that agreement includes a specificchapter (XVII) describing the minimum intellectual property protection that each country must provide.This section will provide a brief summary of the scope of protection granted in Mexico regarding each ofthe rights noted above as Intellectual Property rights, including some practical matters to be consideredwhen enforcing such rights.B. CopyrightThe Federal Copyright Law (Ley Federal del Derecho de Autor - “LFDA”) is the statute that sets forth therules for protection of copyright, related rights and reserve of rights.As provided by the Berne Convention, of which Mexico and most countries are a party, the protection of acopyrighted work is not dependent upon registration or any formal requirements but rather from itscreation; however, any agreement or document related to copyrightsʼ transfer or license must beregistered before the Registry of the National Copyrights Institute (Instituto Nacional del Derecho de Autor- “Indautor”) in order to be enforceable vis-à-vis third parties.All works are entitled to two separate copyright protection: (i) economic rights and (ii) moral rights.Economic rights, also known as exploitation rights, include the right to use and exploit the work in anyform or by any means. The right to collect money derived from the use of any work may be transferred atany time provided such transfer agreement is executed through compensation on onerous manner anddoes not exceed the maximum 15-year term provided by law. The law states that the assignment couldbe for a longer time depending on the investment, although the latter is not defined. As an exception,some specific works, such as software, may be assigned or licensed for a longer term.The “moral rights” attached to a work refer to the personal rights which may not be waived or transferred,that are granted to its original author. These rights include the right to claim authorship (and be namedevery time the work is displayed) and the right to object to modifications or other derogatory action thatwould be prejudicial to the authorʼs honor or reputation.By defining the author of a copyrighted work as “the individual who creates a work,” the LFDA restrictsoriginal ownership of any work to an individual. Accordingly, no entity or corporation may hold moralrights, and the name of an individual must be noted as the original creator every time a work is displayedor exploited. The protection provided by the LFDA is granted for a 100 year term counted as from the 12306.2011
  • original creatorʼs (authorʼs) death; when different authors have contributed to the creation of the work, the100 year term begins on the date of death of the last living contributor.Mexican copyright law also protects performerʼs rights and other related rights or neighboring rights(derechos conexos) granted on behalf of performers, producers, editors and radio stations; suchprotection is valid for a 75 year period beginning on the date of performance or creation of the producedwork.The reserve of rights is the exclusive right granted on behalf of its holder, to use and exploit: (i) the nameof a periodical publication; (ii) periodical broadcasts; (iii) characters; and (iv) advertisement promotions.C. TrademarksThe Industrial Property Law (Ley de la Propiedad Industrial “LPI”) and its regulations and the MexicanInstitute of Industrial Property (Instituto Mexicano de la Propiedad Industrial – “IMPI”) are, respectively,the statutes and the authority granting and protecting trademark rights in Mexico. A trademark is any“visible sign distinguishing products and services from others of the same kind in the market”; such visiblesigns must be registered in Mexico in order to achieve trademark and exclusivity rights within Mexico.Mexican trademark registrations are federal in nature; therefore, the rights granted extend to the wholeterritory.Since trademarks are granted to distinguish a specific type of product or service only from other productsor services in the same market, such products and services are catalogued in different classes. Suchclasses are modeled in Mexico after those defined in the Nice Convention, which is followed in most ofthe countries where trademarks are protected in accordance with the standards of the Paris Convention.A trademark will be granted only when IMPI has verified that the registration requirements of the LPI havebeen fulfilled. One of the key requirements is that the trademark must not be likely to confuse theconsumer about the services or products protected and its origin.The LPI provides that the priority date of any trademark filed in another country that is part of the ParisConvention will also be considered the Mexican priority date if the foreign trademark is filed in Mexicowithin six months of the filing date in its country of origin.The LPI does not require “intent to use” or “prior use” of a trademark for registration purposes. However,if three consecutive years elapse without a registered trademark being used, and unless IMPI judges thata justified cause for such delay exists, a third party may contest the registration and have it cancelled.The registration of a trademark grants its holder the right of exclusive use thereof. In order to maintainsuch exclusivity, the holder or the registered licensee(s) must use the trademark within the Mexicanterritory as registered or amended, provided that its distinctive character remains unchanged.A trademark registration is valid for a ten-year renewable term, beginning on the date when theregistration application was filed.Trademarks in Mexico are also protected as from its date of first use in commerce in Mexico, providedsuch use is claimed in the application. If contested, the holder would need to evidence the date of firstuse. There is no opposition process against a pending application whilst its registration period. Thus, theregistration process is only between the applicant and IMPI. If a third party believes that his/her rights arejeopardized with the trademark, then it will be necessary to challenge the registration once it has beengranted. 12406.2011
  • D. Trade Names and SlogansTrade names and slogans are other kind of distinctive signs protected by the LPI. Although a companyʼsname or trade name are protected without registration with the IMPI, holders should publish a notice inthe Industrial Property Daily in order to evidence the use of such name and create a bona fidepresumption of use. The trade name protection extends throughout the geographical zone where thecompanyʼs effective customers are located.A slogan is a certain phrase or phrases that publicly advertises any product, service, or industrial orcommercial establishment in order to distinguish it from others of its kind. The exclusive right to use acertain slogan may be obtained through registration before the IMPI, which will use the product andservice classifications and other registration rules contained in the Nice Convention, the LPI and itsregulations.A slogan registration is valid for a renewable ten-year term counted as from the date the correspondingapplication was filed.E. PatentsAccording to the LPI, an invention must fulfill all of the following requirements in order to be subject topatent protection: (i) the invention must be new; (ii) the invention must be created as the result of aninventive activity; and (iii) the invention must be subject to industrial application.Mexican patents are granted by the IMPI, who will perform the formal and novelty examinations. Whenapproved, a patent is granted for a twenty-year term counted as from the date the application was filed.Patents are not subject to renewal nor can be extended.The exclusivity right granted by a patent covers all Mexican territory. Only those patents granted by IMPIwill be enforceable in Mexico; however, the LPI provides a priority right to such applications previouslyfiled in a country that is party of the Paris Convention that are filed in Mexico within twelve monthsfollowing their original application.Mexico is a member of the Patent Cooperation Treaty; thus, applications can be filed in Mexico up to 32months following the international application without negatively affecting the novelty requirement. Anapplication in these cases will be governed by the Treatyʼs provisions rather than by the LPI provisions inMexico.F. Trade SecretsA trade secret is any information fulfilling the following requirements: • The information must be subject to industrial or commercial use or application by a certain entity or individual; • It must be kept confidential and contained in documents or another similar electronic or magnetic device (verbally transmitted information is not protected); • It must constitute a competitive or economic advantage over competitors; • The titleholder must have taken sufficient measures to protect the informationʼs confidentiality; and 12506.2011
  • • The information must refer to the nature or characteristics of the titleholderʼs production or distribution methods or other similar commercial or economic information.Even though trade secrets do not require registration (for confidentiality reasons) they are protected bythe LPI, and their violation constitutes a crime.G. Franchising and Transfer of TechnologyThe LPI recognizes the existence of franchises as the transfer of technical knowledge along with atrademark license. The franchisee can be required to produce and distribute the products or services in auniform manner and according to the franchisorʼs operation methods, maintaining the quality, image andprestige of the associated trademark. There is no additional formality required for the franchising of atrademark except for the franchisorʼs obligation to provide, prior to the execution of the agreement,sufficient information as to the financial terms of the agreement.H. EnforcementIntellectual property rights may be protected by means of administrative, civil and criminal procedures,including border measures.Copyright and related disputes may be resolved through an amicable proceeding held before the NationalCopyrights Institute, whose officers will appear as mediators and help parties reach a settlement. Thisprocedure is not mandatory and, even when the parties have submitted to it, parties are entitled to bringfurther claims before administrative, civil or criminal authorities.Industrial property and copyright related provisions include extensive lists of the conduct and actions,such as unauthorized use of any of the rights protected, that may be considered tortuous or intentionalinfringement, depending on the nature of the conduct.Administrative procedures must be raised before IMPI, which can order and carry out protective measuresin cases of infringement, and may even confiscate infringing products or impose economic sanctionsagainst infringing parties.Criminal actions will be prosecuted in accordance with corresponding criminal procedures. It is importantto point out that most intellectual property crimes are considered major felonies; accordingly, theprosecuted individual shall not be entitled to bail during trial.Although customs is duly empowered to carry out border measures, there is a good coordination betweenCustoms, the Attorneyʼs General Office and IMPI to enforce border measures, a program that has beenvery successful in Mexico during the last years. 12606.2011
  • XXI. ImmigrationA. IntroductionOn January 29, 2010 was published in the Federations Official Journal (Diario Oficial de la Federación“DOF”) the new Criteria and Procedures Manual of the National Immigration Institute which came intoforce on April 30. This manual brought many changes to all processes and systems of the NationalImmigration Institute (“Insituto Nacional de Migración” INM, the agency that applies immigration laws andregulations), and it allows a more flexible and efficient service for users, and its main objective is toimprove the quality of immigration procedures for foreigners visitors. With the new manual, foreigners canapply some procedures to enter Mexico, whether for work, study or to be integrated with their families, ina more easy and simple way, since it has reduced the paperwork and requirements. Some criteria havebeen established and consistent so that users receive homogenized attention in all the Institute Offices.B. Immigration Status1. Tourist“Tourist” status is a category of Non-Immigrant that enters Mexico for recreational, cultural or sportingactivities that will not be remunerated. The Tourist may stay in Mexico up to 180 days. There are threegroups of nationalities: (i) those who only require a valid passport to enter Mexico as a Tourist, (ii) thosewho require a valid passport and also a visa issued by a Mexican Consulate and posted in the Touristʼspassport and (iii) those who, in addition to the valid passport and visa, require the authorization of theNational Immigration Institute, prior to their trip to Mexico. However, under new Criteria and ProceduresManual of the National Immigration Institute enacted in 2010, those who have tourist visa issued by theUnited States of America may enter Mexico, and remain legally for six months without the need for aprevious visa.2. Working Visas for Non-Immigrant and for ImmigrantThere are two initial immigration status for foreigners who wish to work in Mexico: Non Immigrant Visitor(FM3) and Immigrant (FM2). 1. Non-Immigrant Visitor (No Inmigrante Visitante): foreigners who enter the country on a temporary basis to work for a company based in Mexico. 1. 2. Immigrant (Inmigrante): foreigners who come to Mexico with the purpose of staying on a more permanent basis and that ultimately may receive the permanent residence status (“Inmigrado). The INM has established as “official criteria” that foreign citizens wishing to permanently reside in the country must stay under a Non-Immigrant Visitor status (FM3) for a period of at least 2 to 3 years before applying for Immigrant status (FM2). However, under some circumstances, a foreign national may apply directly for an FM2 visa: (i) if the foreign national is married to a Mexican national; (ii) if the foreign national has children that are Mexican nationals by birth; or (iii) if the foreign national has a kin relationship y blood or though their Mexican national spouses (e.g. that of mothers-in-law and sons-in-law).Non-Immigrants Visitors and Immigrants, upon their entry, are allowed to stay in Mexico for an initial one-year period. Thereafter, they may extend their stay in Mexico for up to four consecutive one-yearrenewals, which results in a total stay of five years. Certain requirements must be met when filling each 12706.2011
  • renewal, doing so within established deadlines and verifying that the conditions under which the foreignnational entered the country prevail.Once Non-Immigrants Visitors complete the five-year term, they must either: (i) leave the country; (ii)apply for new FM3 status: or (iii) change their immigration status to that of Immigrant. On the other hand,at the end of five years of residence, an Immigrant may: (i) apply for permanent residence (“Inmigrado”status), provided certain conditions are met; or (ii) if the conditions to apply for permanent residence arenot met or the application is denied by the INM, then the Immigrant may apply for a new FM2 status.The family dependants of FM3 Non-Immigrant Visitors and FM2 Immigrants may receive the authorizationto join Visitor or Immigrant to Mexico bearing the same visa. The family dependants may not engage in aremunerated activity unless previously authorized by the INM.3. Permanent Resident (Inmigrado)As mentioned above, once an Immigrant has spent five years in Mexico with the FM2, the Immigrant (andhis family) may apply for permanent residence (“Inmigrado” status). The granting of the Inmigrado statusis discretionary and not automatic. Statutorily speaking there are only two requirements: (i) the five yearperiod holding the FM2, and (ii) Not exceed a period of 18 months, whether or not successive, out ofMexico during the five year period holding the FM2. In some cases, the INM may allow that foreignersremain a longer period, subject to a fine.The INM will also look at other issues while examining the application to become an Inmigrado, such asthe nationality, the behavior of the applicant and the type of activities carried out during the five-yearperiod holding the FM2.Once the Inmigrado status is granted, the beneficiary will have the right to engage in any lawful activitywithout the previous authorization of the INM (a notice to the Registry shall suffice).The Inmigrado status allows the beneficiary to leave and come back to Mexico with no further formalities.However, the Inmigrado status may be cancelled if the beneficiary stays out of Mexico during a period ofthree consecutive years or an intermittent period of five years during a ten-year span.C. Working Visa Options1. Business VisitorsUnder the Regulations to the General Population Law and considering some administrative arrangementsaround Business Visitors, International Commitments on Mexican bilateral and multilateral Treaties, theimmigration authorities will document like a Non-immigrant Business Visitor all the persons located on thefollowing assumptions: • Business Visitors. Persons that plan to perform a business activity related to research, design, farming, manufacture, production, marketing, sales, distribution, post-sale services and other general services. • Merchants and Investors. Persons who intend to exchange goods or services, or establish, develop, manage or render advisory or technical services to oversee an investment that the person or his employer has made or is planning to make. 12806.2011
  • • Transfer of Personnel. Persons employed by a company in the U.S. or Canada who carry out general managerial or executive functions or who have special knowledge for a company or its subsidiaries or affiliates that are established within Mexico. • Professionals. Persons who intend to carry out a profession among the sixty professional activities listed under NAFTA. Some activities are subject to limitations on the number of entrants and authorizations to be annually evaluated, based upon mutual consultation among the three NAFTA member countries. Mexico requires that these individuals obtain an official certification of their profession from the Ministry of Public Education. • Business Visitor. Persons whose visit to Mexico has the purpose of negotiating or executing commercial contracts, verify the fulfillment of such contracts, analyze investment alternatives or make a direct investment in Mexico. • Board Members. Persons that visit Mexico to attend Board of Directors meetings of companies established in Mexico. • Technicians. Persons whose visit to Mexico has the purpose of providing specialized services previously agreed or contemplated in a transfer of technology agreement, in a purchase agreement for machinery or equipment, in a technical training agreement or any other similar type of arrangement with a company organized in Mexico. • Transfer of Personnel. Persons that are employees of a company established abroad and who are assigned to a Mexican affiliate to carry out management or advisory functions, the assignment resulting from the specialized knowledge of the Business Visitor in the activities of the Mexican affiliate.In case the activity to be performed by the Business Visitor will be paid or it will be longer than 180 days,then will be documented like an Investors Business Person or in the form corresponding to activity thatthe foreigner intends to develop.ABTC SchemeThe scheme of the Travel Card for Business Visitor of the Asia-Pacific Economic Cooperation Forum theABTC (Business Travel Card) allows its holder to enter and handle business in the participatingeconomies without the need to apply for another immigration process. The ABTC scheme applies tocitizens from participating economies seeking to enter to conduct business in any of the countries.D. General Procedures for Securing Immigrant or Non-Immigrant Visas1. Entrance ProcedureA Mexican Consulate overseas issues a visa based on the authorization previously issued by the INM.Specific documents, indicating the actual work activities to be performed in Mexico, must be submittedwith the entrance application. Once the INM issues the authorization for a visa, a fax copy and mail orderwill be sent to all Mexican Consulates in the world so that the foreigner may secure the new visa. MostConsulates take an average of two working days to issue the immigration documents.The foreigner holding an immigration approval are documented for entry Mexico with the FMM, this wayonly proves their legal immigration stay for 30 days from its entry and within that term it must be 12906.2011
  • exchanged by the Non-Immigrant (FM3) or Immigrant (FM2) form, and it can be filed in any INM RegionalDelegation in Mexico.2. Change of Immigration Status or CharacteristicA foreigner who has entered Mexico with a specific immigration status must follow a particular procedureupon seeking to secure a visa to perform different activities or to reside permanently in Mexico. The mostcommon changes are: from FMM to Non-Immigrant or to Immigrant.E. Documentation RequirementsIn general, all of the noted immigration clearance procedures require filing certain documentation with theINM. The most commonly required documents include a Valid Passport and a sponsorship letter (forsome business visas) issued by a Mexican company.F. Extension of Stay in MexicoWork visas for non-immigrant and immigrants are issued for one-year periods, but can be extended byyearly renewals. After five years, the latter can apply to become permanent residents.G. Right to Import Personal PropertyAll Immigrants and some Non-Immigrants are entitled to import into the country, duty-free, all itemsconstituting their household goods. An authorized Customʼs Broker (Agente Aduanal) must handle theclearing process for the goods upon their entry into Mexico. In cases of imports by Immigrants the entry ispermanent, while in the case of Non-Immigrants they must return at the end of the stay. 13006.2011
  • XXII. Environmental LawsA. OverviewEnvironmental compliance is Mexico is a recent development. Mexicoʼs core statute, the General Law ofEcological Balance and Environmental Protection (Ley General del Equilibrio Ecológico y la Protección alAmbiente; the “Environment Law”) was passed by the Federal Congress and promulgated in 1988. TheEnvironment Law was the answer of the Mexican government to claims from other countries that arguedthat Mexico was a country where environmental protection was virtually non-existent. Fouradministrations later enforcement of environmental laws in Mexico is still growing, just as Mexicancompanies and industries are going through the adjustment of complying with environmental protectionrules and obligations.The Environment Law provides for separation of jurisdiction on environmental matters. As we will discusswith further detail, there are aspects of environmental protection that are reserved for federal statutes andagencies and others that are reserved to state (or even municipal) jurisdiction. Therefore, both at thefederal and state level Congresses passed legislation to create new environmental enforcementagencies. Likewise, state Congresses enacted state laws that were crafted to mirror the principlesadopted by the Environment Law. We will further explain how the division of jurisdiction is determined.After the promulgation of the Environment Law the federal government published a series of Regulations(Reglamentos) that complemented the essential rules established by the Environment Law in differentareas of environmental compliance. Therefore, separate sets of Regulations were adopted to cover areaslike environmental impact, hazardous waste and air emissions at the federal jurisdiction level.In addition to the legal framework comprised by the Environment Law and its Regulations, Mexicoadopted official norms (Normas Oficiales Mexicanas; “NOMʼs”) to establish the technical standards thatare used as thresholds in order to determine whether or not environmental protection and compliance areobserved.There are also other more recent statutes like the National Waters Law and the General Law for thePrevention and Comprehensive Management of Waste (Ley General para la Prevención y GestiónIntegral de los Residuos; the “Waste Law”) and their respective Regulations. These focus morespecifically in aspects related to waste handling to prevent water and soil contamination.Environmental statutes in Mexico are focused on, among others: (i) preventing air, soil and watercontamination; (ii) setting the requirements that industries must meet on environmental impact; (iii)allowing industries to submit voluntarily to auditing procedures in order to confirm their level ofcompliance; (iv) establishing the conditions for the use of water and the discharge of wastewater; and (v)establishing the sanctions that shall be imposed in case of lack of compliance.Mexicoʼs enforcement system is not yet as sophisticated as other more developed countries, but the legalprinciples are already established therein. Therefore, it is just a matter of development of theenvironmental protection culture amongst Mexican industries as well as entities and individuals. This taskshould be strengthened by more devoted efforts from the government (federal, state and even municipal)to foster investment in environmental protection. 13106.2011
  • B. AuthoritiesThe adoption of environmental statutes resulted in the creation of new enforcement agencies. The federalCongress passed amendments to the Organic Law of the Federal Public Administration (Ley Orgánica dela Administración Pública Federal) to create a new Ministry that would be in charge of environmentalprotection. The new Department of Urban Development and Ecology (Secretaría de Desarrollo Urbano yEcología; “SEDUE”) was the first Ministry of the Federal Government entrusted with full authority toenforce the new Environment Law. Eventually SEDUE became the Department of Social Development(Secretaría de Desarrollo Social; “SEDESOL”), which for a few years remained as the federal agency incharge of conducting environmental policy. In 1994 new amendments to the Organic Law of the FederalPublic Administration took away from SEDESOL the jurisdiction on federal environmental matters andplaced it in the newly created Ministry of the Environment, Natural Resources and Fisheries (Secretaríade Medio Ambiente, Recursos Naturales y Pesca; “SEMARNAP”), which just a few years later, due tofurther amendments to the Organic Law of the Federal Public Administration the jurisdiction on fisheriesfrom SEMARNAP was taken away and adopted its current name, Ministry of the Environment and NaturalResources (Secretaría de Medio Ambiente y Recursos Naturales; “SEMARNAT”).In the beginning both policy-making and enforcement were placed in SEDUEʼs jurisdiction. However, in1992 changes to the laws and regulations governing SEDUE (then already SEDESOL) divided thejurisdiction on environmental matters in two: (i) policy-making was left with SEDESOL (now withSEMARNAT); and (ii) enforcement authority was placed in the jurisdiction of a new agency known as theFederal Prosecutor for Environmental Protection (Procuraduría Federal de Protección al Ambiente,“PROFEPA”). Legally speaking, PROFEPA is part of SEMARNAT as an agency within SEMARNATʼsauthority. However, PROFEPA keeps technical and operational autonomy.At the state level within Mexico events unraveled in the same way as in the federal level. The newlyadopted state environmental statutes and regulations called for the creation of state environmentalagencies in Mexicoʼs states and the Federal District (Mexico City). Most of state environmental agencies(usually named Secretaría del Medio Ambiente; Department of the Environment) keep both policy-makingand enforcement authority under their jurisdiction, with certain exceptions, such as the case of the statesof Jalisco and Guanajuato, which have separated agencies similar to the structure at the federal level.In certain cases, the Municipalities (counties) maintain environmental agencies that are in charge of localcompliance matters, such as solid waste management and wastewater discharges (when wastewater isdischarged to the municipal sewer system).C. Areas of Exclusive Federal JurisdictionAs mentioned above, jurisdiction is divided between federal, state and municipal agencies. There areareas that are left to federal jurisdiction exclusively. These areas are mainly: (i) environmental impact ofcertain industries; (ii) air emissions of certain industries; (iii) generation, handling, transportation andconfinement of hazardous waste; (iv) soil contamination and remediation related to hazardous waste andsubstances; and (v) water rights and wastewater discharges, when the water sources are of federaljurisdiction and when the wastewater is discharged to sources or bodies of federal jurisdiction,respectively. The distribution of jurisdiction is determined by Environment Law and is operativelyregulated by different statutes.D. Environmental Impact 13206.2011
  • When a private party or a governmental agency plans to conduct the construction of a project or performcertain activities that may alter the conditions of the environment, then such private party or governmentalagency must file an environmental impact statement before the competent environmental agency for it todetermine the feasibility of undertaking such activities considering their impact on the environment.The Environment Law is clear as to which are the areas or industries where the jurisdiction onenvironmental impact is federal. In connection with the above, it establishes that an environmental impactstatement authorization from SEMARNAT is necessary when the construction project or industrial activitythat may cause an alteration to the environment is related to one of the following works or activities: ! Construction of federal highways and roads; oil, gas and coal ducts or poliducts; hydraulic works; ! Oil, petrochemical, chemical, metal, paper, sugar, cement and electrical industries; ! Exploration, exploitation and benefit of mineral resources and substances reserved to the federal government in terms of the Mining Law (Ley Minera) and the Law Regulating Article 27 of the Constitution on Nuclear Matters (Ley Reglamentaria del Artículo 27 Constitucional en Materia Nuclear); ! Facilities for the treatment, confinement and destruction of hazardous waste and radioactive waste; ! Rain forest and wildlife preservation projects; ! Change of forestry land use on forest, rain forest and desert areas; ! Industrial parks where the undertaking of high risk activities are foreseen; ! Real estate or housing developments affecting coastal ecosystems; ! Wetlands, mangroves, lagoons, rivers, lakes or water bodies connected with the sea, as well as their coasts or federal zones; ! Federal natural protected areas; ! Fishery, aquatic or agricultural-cattling that may endanger the preservation of one or more species or that may damage the ecosystems; and ! Works or activities of federal jurisdiction that may cause severe or permanent alteration to the environment or damages that may affect public health the ecosystems or that may surpass the limits and conditions set forth in applicable environmental laws.The Regulations of the Environment Law on Environmental Impact (Reglamento de la Ley General delEquilibrio Ecológico y la Protección al Ambiente en Materia de Evaluación del Impacto Ambiental) containa detailed list of each of the works and activities related to each of the ones described above that are alsosubject to the submission of an environmental impact statement for SEMARNATʼs approval. Any otherconstruction, project or industrial activity not contained in the list above and the aforementionedRegulations will be subject, for purposes of environmental impact, to the jurisdiction of the state agency.The evaluation of environmental impact is the procedure whereby SEMARNAT or the competent stateagency examines the environmental impact statement submitted by the relevant interested party and 13306.2011
  • authorizes, authorizes conditionally or rejects the construction project or industrial activity that is thesubject matter of evaluation. During the evaluation process, SEMARNAT or the state agency have theauthority to request additional information to resolve accordingly.The usual outcome of the environmental impact evaluation is the issuance of an environmental impactauthorization of the relevant project or activity, which is normally subject to the compliance of certainconditions imposed by SEMARNAT or the state agency. The conditions are established to make sure thatthe interested partyʼs project or activity will not adversely affect or alter the environment or, when thealteration is to some extent significant, to establish the obligation to conduct remediation or reclamationactivities once the project is ended in order to balance the conditions of the environment.After the end of the project subject matter of the environmental impact statement or the remediation orreclamation activities ordered by SEMARNAT or the state agency, the applicant is normally required to fileevidence of compliance with the conditions established in the environmental impact authorization. Usuallywith this filing, when submitted to SEMARNAT because of the federal nature of the project, PROFEPAalso has to be informed/copied. In general terms, SEMARNAT and PROFEPA study the compliancereport and, if complete, they generally issue a “release letter” in favor of the interested party.E. Air Pollution; the Sole Environmental License LAUThis is another area of environmental concern that has multiple jurisdictions, federal, state and municipal,and the Environment Law is also the source of distribution of authority. The Environmental Lawestablishes that industries of federal jurisdiction that represent fixed sources of air emissions shall securea “license” from SEMARNAT to operate.The Regulations of the Environment Law on Prevention and Control of Contamination to the Atmosphere(Reglamento de la Ley General del Equilibrio Ecológico y la Protección al Ambiente en Materia dePrevención y Control de la Contaminación de la Atmósfera) list in article 17-Bis the industries that fallwithin federal jurisdiction. The industry classification includes all the following types of industrial activitiesof federal jurisdiction: ! Oil and petrochemicals; ! Manufacturing of chemical products in general; ! Manufacturing of paint and ink; ! Metal; ! Automobile; ! Paper and cellullose; ! Cement and lime based products; ! Asbestos; ! Glass; ! Electric generation; and ! Treatment of hazardous waste.Each of these classifications includes more detailed types of industrial activities, as set forth in theaforementioned Regulations. For any industry or activity not listed therein, the jurisdiction falls in the stateagency.With respect to the “license” that either SEMARNAT or the state agency must grant to operate fixedsources of air pollutants, originally this license was known as the “Functioning License”. With thepublication in April, 1997 by SEMARNAP of the Decree establishing mechanisms to secure the SoleEnvironmental License (Licencia Ambiental Única; “LAU”), SEMARNAT implemented a process wherebyone sole license (the LAU) would encompass the authorization/registration for the interested party in 13406.2011
  • different areas such as environmental impact, fixed sources of air emissions and generation/treatment ofhazardous waste.The LAU encompasses, in just one process, the comprehensive evaluation of the environmentalprocedures that any industry must undertake before SEMARNAT. The LAU issued by SEMARNAT is forthose industries and activities of federal jurisdiction (with respect to environmental impact and fixedsources of air emissions) and for any industry that generates hazardous waste (since generation ofhazardous waste is a matter of federal jurisdiction). However, if the relevant industryʼs sole area offederal jurisdiction is the generation of hazardous waste, then such industry may only apply for theregistration as a generator of hazardous waste, and will not require to secure a federal LAU.The LAU may be issued to new industries, to industries that secured originally a Functioning License (thisis called “Re-Licensing”) or to industries that have operated historically without a Functioning License or aLAU (this is called “Regularization”). The LAU is issued per industrial facility, not per interested party orapplicant. In other words, if the interested party operates two or more industrial facilities of federaljurisdiction! in different locations, it would have to obtain as many LAUs as industrial facilities of federaljurisdiction such party!operates.With respect to the air emissions information, the relevant items included in a LAU are: ! Name of the Licensee; ! Location of the industrial facility that is subject to the license; ! Description of the manufactured product, manufacturing equipment and manufacturing process; ! Schedule of production activities (production shifts when the manufacturing equipment is in use); ! Levels of production; and ! Type and levels of air emissions.The LAU must be revised in case the industrial activities within the relevant facility change or such facilitychanges of address. Likewise, the LAU must be revised in case of change of corporate name, productionincrease, manufacturing process, or expansion of the facility. Annual updates to the LAU are madethrough the filing of an annual report of air emissions known as Annual Operating Card (Cédula deOperación Anual; “COA”).There are states that have incorporated the use of their own kind of LAU (these include the FederalDistrict, where Mexico City is located, among others). Other states have maintained the name of the“Functioning License”. In the Federal District the LAU encompasses the regulation of air emissions ofstate jurisdiction, the generation of solid waste (non-hazardous) and wastewater discharges to the sewersystem, among others.F. Hazardous WasteRegulation of hazardous waste is one of the main areas of environmental concern that are of federaljurisdiction. However, the Waste Law grants jurisdiction to the State agencies to verify micro-generators ofhazardous waste (in general terms, micro generators are considered those industries that generatehazardous waste in low quantities).The basic criteria to determine what is considered or constitutes “hazardous waste” is two-fold. First,there are materials that are considered hazardous per se. These materials are listed in a NOM. If notlisted as hazardous material, such material may still be considered as “hazardous” if it surpasses any ofthe thresholds of corrosiveness, reactivity, explosiveness, toxicity, flammability and biological 13506.2011
  • infectiousness set forth in the relevant NOM (what is called the “CRETIB” test). The generation, handlingand management of non-hazardous waste is monitored and enforced by state or municipal agencies.There are two kinds of non-hazardous waste: special management waste and solid waste.Originally the generation, handling, transportation, confinement and elimination of hazardous waste wasset forth by the Environment Law and the Regulations of the Environment Law on Hazardous Waste(Reglamento de la Ley General del Equilibrio Ecológico y la Protección al Ambiente en Materia deResiduos Peligrosos). However, the federal government and Congress agreed that this area was apriority and should have its own set of statutes. Therefore, Congress passed the act and the federalgovernment published the Waste Law. The Waste Law was enacted in October, 2003, but did notbecome effective until January 1, 2004. SEMARNAT took three years (until November, 2006) to publishthe Regulations of the Waste Law.The purposes of the Waste Law and its Regulations are, among others, to: (a) establish the conditionsand obligations that generators of hazardous waste must meet and comply with respect to temporarystorage and ultimate confinement of hazardous waste; (b) list the requirements that must be met bycompanies that are engaged in the transportation, confinement and elimination of hazardous waste anddescription of the process to obtain the license to operate such activities; and (c) for the first time sincethe inception of the environmental legal framework in Mexico, provide the rules to determine the liabilityon soil contamination and the assignment of the obligation to remediate such contamination (this is thesubject of discussion of the next section).The main obligations that a generator of hazardous waste must comply with are to: 1. File an application to secure a LAU, which application must describe the types of hazardous waste generated or to apply for the registration as a generator of hazardous waste, in case no other environmental procedures of federal jurisdiction are required; 2. Depending on the quantities of hazardous waste generated, maintain a warehouse for their temporary storage (which must not exceed 6 months), which must comply with the specifications established in the Waste Law, its Regulations and the applicable NOMʼs (among the most important conditions are the fixing of trenches to prevent spills to other areas and the correct signaling); 3. Place hazardous waste in drums or other appropriate means of containment; 4. Deliver the drums or other containment means containing hazardous waste to a SEMARNAT-licensed freight contractor, who shall deliver it to a SEMARNAT-licensed confinement site; and 5. Fill-in the forms that evidence proper delivery of hazardous waste and file the reports on hazardous waste management with SEMARNAT each year (as part of the COA).When the conditions of the generation of hazardous waste change from what was originally filed withSEMARNAT, the generator must request a revision of the LAU or the registration as a generator ofhazardous waste, as applicable.G. Soil Contamination and RemediationSoil contamination and site remediation are two areas covered by the Waste Law and its Regulations. 13606.2011
  • Liability on soil contamination was sort of a “grey area”, as there was no specific method in theEnvironment Law and its Regulations on Hazardous Waste for the assignment of liability on soilcontamination. The manner in which procedures related to soil contamination usually used to work werebased on the criteria or premise of PROFEPA holding as liable the possessor of the contaminatedproperty or site, regardless of the party that caused contamination. The Waste Law has incorporateddefinitive criteria on how to assign liability related to soil contamination.Under article 68 of the Waste Law, the party who causes contamination of a site is liable for itsremediation. Notwithstanding, the Waste Law still contains, to a certain extent, the criteria that PROPEPAimplemented prior to the enactment of the Waste Law. Therefore, article 70 of the Waste Law establishesthat owners or possessors of private real estate properties affected with contaminated soil are jointly andseverally liable for its remediation, regardless of the actions they may have against the contaminatingparty. If the owner or possessor, who did not contaminate, were to carry out the remedial actions, thensuch owner or possessor would have the right to obtain redress from the actual contaminating party. Thedifference from the past “non-written rule” is that there is now a joint and several concept of liabilitywhereas in the past PROFEPA would just fine whoever was in possession of the contaminated siteregardless of the party who actually contaminated.Before remediation actions are implemented, the party intending to start a remediation project at acontaminated site must prepare a remediation plan and submit it for authorization before SEMARNAT.The remediation plan should include interim and final target dates with a thorough description of thestatus of the contamination, the technology and methods that shall be implemented in order to reachminimum levels of soil contamination and the final conditions that the site will have at the termination ofthe remedial actions. The remediation plan should be prepared and implemented by a SEMARNAT-licensed environmental consultant. Once the plan is filed for SEMARNATʼs review, and if complete,SEMARNAT will issue an authorization of the plan and grant a term for its completion (such term shall betaken from the suggested schedule included in the plan). Once the plan is completed, the interested partymust file a notice of termination of the plan with a final report on the actions taken, the results of the planand the current status of the site. The report must be filed with PROFEPA (not SEMARNAT), as it will bePROFEPAʼs inspectors who will visit the site to verify the accuracy of the final report. If PROFEPA verifiesthat the conditions of the site are as described in the final report and that every condition established bySEMARNAT in the remediation authorization were met, then PROFEPA will report back to SEMARNATand consequently the interested party will receive a “release letter” whereby the site is declared incompliance with applicable NOMʼs.Finally, one big step taken towards achieving remediation compliance was the inclusion of article 71 ofthe Waste Law, which sets forth the obligation of the seller of a contaminated site to disclose thecontamination conditions of the relevant site to the prospective buyer. Moreover, article 71 establishes therequirement of securing the authorization from SEMARNAT for the transfer of the contaminated sitesubject to its remediation. Therefore, once submitting the application for such authorization the interestedparties must also submit the remediation plan and go through the process described in the foregoingparagraph. The remediation does not need to be completed to perfect the transfer of property of thecontaminated site, however what is required is to submit the application and eventually secure theauthorization. However, the party who would be responsible for the remediation (be it the seller or thebuyer) must complete the relevant remediation works, otherwise such party would be subject to sanctions.H. WaterThe National Waters Law (Ley de Aguas Nacionales; “LAN”) establishes that the water sources of federaljurisdiction are those listed in the fifth paragraph of article 27 of the Mexican Constitution, upon which theMexican nation holds property. These sources are basically marine waters within Mexican jurisdiction, 13706.2011
  • rivers, lakes, creeks, lagoons and underground water (with certain exceptions where the source may beconsidered private property).Under this law, private parties may receive concession rights to use and exploit water from sources offederal jurisdiction. The granting of water rights is within the jurisdiction of the National WatersCommission (Comisión Nacional del Agua; “CNA”). The CNA is past of SEMARNAT as an agency withinSEMARNATʼs authority. However, the CAN keeps its independence of action.In order to obtain the rights to use and exploit water from federal sources the interested party must firstfile an application before the CNA. The application must contain the following information: ! Name and address of the interested party; ! Hydrological basin, aquifer (if applicable), hydrological region, municipality and location of the water source; ! Location of the requested extraction point; ! Volume of water required by the interested party; ! Initial use of the water (industrial, agricultural, domestic, fish harvesting, etc.); ! Wastewater discharge point, including quality and quantity conditions; ! Project of works to be performed or the characteristics of the existing works for the extraction and benefit of water, as well as the works required for wastewater discharges, including treatment of wastewater and the process and measures for water reuse (if applicable) and restoration of the water resource; in addition, the economical and environmental cost of the projected works (the last one according to the provisions of the Environment Law) must also be filed; and ! Term of the concession requested (in a range between five and thirty years).The requesting party must comply with certain requirements and also with the filing of other technical andlegal documents required by the LAN as part of the relevant application. Such requirements anddocuments are: 1. Documents evidencing the property or possession of the real estate in which the extraction of water will be performed, as well as the documents evidencing the property or possession of the surface where the water will be used (in case it is different to the real estate in which the extraction of water will be performed); 2. Document evidencing the creation of the required easements; 3. Environmental impact statement, when required in accordance to the Environment Law; 4. Project of the works to be performed or the characteristics of the existing works for the extraction, benefit and discharge of the requested water; 5. Technical report with the corresponding maps, containing the description and characteristics of the works to be performed, for the exploitation, use and benefit of the requested water, as well as the disposal and treatment of the resulting wastewater and other measures to prevent contamination of the receiving bodies, with the purpose to comply with the LAN; 6. Technical documents supporting the application regarding required consumption volume, the initial use of the water and the conditions of quantity and quality of the corresponding wastewater discharges; and 7. Map containing the location of the property, including reference points that allow its location and the location of the site in which the extraction of national water will be performed; including discharge points.Once a concession to use and exploit water from sources of federal jurisdiction is granted by the CNA, theholder of such concession will have, among other obligations, to pay federal duties on a quarterly and 13806.2011
  • annual basis, taking into consideration the fees set forth in the Federal Duties Law (Ley Federal deDerechos; “FDL”).Industries that generate wastewater must secure also a permit to discharge effluents. The permit isgranted by the CNA when the wastewater is discharged to a source of federal jurisdiction, which includesusing treated wastewater for irrigation purposes (due to the risk of permeating to underground waterdeposits, which are considered sources of federal jurisdiction).When the wastewater is discharged to the municipal sewer system, then the discharge permit is grantedby the local water authority.Each discharge permit will include the minimum conditions and contaminant levels that the wastewatermust meet before being discharged. Usually these conditions and levels are incorporated from thethresholds established in the respective NOMʼs (there is a NOM establishing the thresholds fordischarges to federal sources and another NOM that sets forth the thresholds for waste water that isdischarged to the sewer system). When the discharges of wastewater cannot meet the conditions andminimum levels set forth in the respective NOM (even after cleansing treatment), then the relevantgenerator could request the competent authority the approval of particular discharge conditions. Suchconditions would be based on the standards established in the NOMʼs, allowing the relevant generator notto meet a certain standard up to the fixed level that is closer to the NOM threshold that the generatorcould meet. The allowance of a particular discharge condition could be granted temporarily with propertechnical support, where the competent authority would establish a term to the relevant generator to meetthe standards established in the NOMʼs.When wastewater discharges do not meet the applicable thresholds or maximum permissible levels, theholder of the discharge permit will have, among other obligations, to pay federal duties taking intoconsideration the fees set forth in the FDL.Finally, hydraulic works within water sources of federal jurisdiction require prior authorization from theCNA, and, also, occupation of adjacent lands to such water sources (federal zones) require priorobtainment of a concession from the CNA.I. Environmental Audits and Voluntary ComplianceNew Regulations of the Environment Law on Voluntary Compliance and Environmental Audit(Reglamento de la Ley General de Equilibrio Ecológico y la Protección al Ambiente en Materia deAutorregulación y Auditorías Ambientales) were enacted and published in the Official Gazette of theFederation on April 29, 2010, which replaced the past Regulations of the Environment Law on VoluntaryCompliance and Environmental Audit published on 2000.Environmental audit is a policy instrument whereby PROFEPA fosters the voluntary correction/complianceof industries. Through the environmental audits industries implement a testing and analysis method oftheir operations focusing on the causes of pollution to the environment and the risk/adverse effects thatmay result from such operations. The environmental audit also serves the purpose of reviewing the levelof compliance of environmental obligations set forth in the different federal, state and municipal statutes,as well as the applicable NOMʼs. Finally, the environmental audit is also useful to determine theobservance of international standards and good engineering and environmental practices.Industries that successfully conclude the environmental audit and prove an optimum level of compliancereceive a “certificate” from PROFEPA. There are different types of “certificates” depending on the activitycarried out. The types of “certificates” are: (i) Certificate of Clean Industry (applicable to industrial worksand activities); (ii) Certificate of Touristic Environmental Quality (applicable to activities and services of the 13906.2011
  • touristic branch); and (iii) Certificate of Environmental Quality (applicable to such activities notcomprehended in the aforementioned certificates).The phases of an environmental audit are in general terms the following: 1. Planning: In this phase the audited industry must select an environmental auditor licensed by PROFEPA. The environmental auditor, once selected and appointed, will prepare an “Audit Plan”. The Audit Plan is the document that contains the auditing method to be developed. Once the Audit Plan is completed and approved by the audited industry, it must file the Audit Plan as well as an incorporation notice before PROFEPA for registration. 2. Execution: During this phase the environmental auditor will verify, quantify and evaluate the activities and processes of the audited industry and that may have an impact on the concepts of environmental concern: environmental impact and risk; air pollution; soil contamination; hazardous waste generation; water use and waste water discharge, noise, etc. The environmental auditor will also review and analyze the energy installations of the audited industry to determine the risk exposure. Finally, the environmental auditor will evaluate the internal organization of the audited industry to assess whether or not such organization has the necessary staff devoted to environmental compliance. Once the environmental audit is completed, the environmental auditor must deliver to the audited industry an “action plan” containing the measures, steps, works and actions that the audited industry must undertake to meet the compliance standards necessary to obtain the relevant certificate. 3. Post-Audit: PROFEPA and the audited industry will subscribe an agreement whereby both parties establish the measures and actions to be taken by the audited as contained in the action plan proposed by the environmental auditor. The agreement will also include the calendar and schedule that the audited industry must observe and the expected date of completion. After completion of the measures and actions by the audited industry the environmental auditor must prepare a final report on the completion, which must be filed with PROFEPA together with the notice of completion.If PROFEPA does not make any observation to the notice of completion and the final report prepared bythe environmental auditor in a term of 30 business days after the date of filing thereof, then PROFEPA willgrant the relevant certificate.J. SanctionsSanctions vary depending on the governing statute, the level of non-compliance and the repetition ofinfractions. At the federal level, the Environment Law, the Waste Law and the LAN establish their own setof sanctions. In addition to sanctions, PROFEPA or the state environmental agencies will imposemeasures aimed to correct any infraction to the environmental statutes.The state environmental statutes tend to follow the principles set forth in the Environment Law for theestablishment of sanctions and the criteria used for the imposition thereof.The Environmental Law sets forth the following sanctions: ! Fine equivalent to 20 to 50,000 times the applicable daily minimum wage in the Federal District; 14006.2011
  • ! Temporary, partial or total closure of the relevant facility when: (a) the infractor fails to comply with the terms and conditions established by SEMARNAT or PROFEPA when imposing corrective or urgent measures; (b) in the event of repeated offenses causing material negative effects to the environment: or (c) there is a repeated disobedience (in three or more occasions) to the compliance of a corrective measure imposed by SEMARNAT or PROFEPA; ! Administrative arrest up to 36 hours; ! The seizure of instruments, specimens, products or by-products related to the infractions in connection with forestry resources, flora or fauna, among others; and/or ! The suspension or cancellation of the corresponding concessions, licenses, permits or authorizations.After an order to correct an infraction is issued by PROFEPA the infractor must implement the steps tocorrect it within the term established for such purposes by such authority or it may impose daily fines inaddition to the original fines imposed until the corrective measures are implemented. Likewise, a fine maybe doubled in case of repetition of the original infraction.The criteria principles that PROFEPA uses upon determining a sanction are: ! The seriousness of the infraction, considering the damages that may be caused against public health; the generation of ecological unbalance; the adverse effects on natural resources and biodiversity; the level of non-compliance with the standards and limits established in the NOMʼs; ! The economic conditions of the infractor; ! The repetition of the infraction, if it is the case; ! The intention or negligence of the infractor or the omission that leads to the infraction; and ! The benefit directly obtained by the infractor as a result of the infractions committed.The Waste Law establishes the same sanctions set forth in the Environment Law, with the addition ofremediation of a contaminated site. The Waste Law also incorporates the principles of daily fines in caseof non-compliance of corrective measures and the doubling of fines in case of repetition of the originalinfraction.With respect to infractions in terms of the LAN, the most common ones are the exploitation of watervolume in less or higher quantities than the volume granted by the CNA, to provide to third parties the useof water granted in concession without prior authorization of the CNA, the exploitation of water volumewithout a valid concession and the discharge of wastewater without permit or without meeting thestandards of the NOMʼs.In case of exploitation of a volume in less quantity than the volume granted by the CNA for twoconsecutive years, the CNA may cancel the volume that was not exploited (unless the water rights holdercan raise one of the exception scenarios established in the LAN). In case of exploitation of volumesabove the quantity granted by the CNA it would result in a fine between 5,001 and 20,000 times theminimum daily wage in the Federal District and, in case of repetition, the cancellation of the concession.The discharge of wastewater without permit or without meeting the standards of the NOMʼs or thosecontained in the corresponding permit issued by the CNA would result in the same penalty. 14106.2011
  • There are other infractions set forth in the LAN that, depending on the type of infraction, could be subjectto fines that range between 1,000 and 20,000 times the minimum daily wage in the Federal District. TheCNA may also sanction with the cancellation of the concession for water exploitation or the permit todischarge wastewater.The state environmental statutes tend to follow the same example of the federal laws in connection withthe sanctions and the criteria to determine them. 14206.2011
  • XXIII. TelecommunicationsA. GeneralThe Federal Telecommunications Law (Ley Federal de Telecomunicaciones – “FTL”) was enacted in1995, and sought to increase and diversify the services available to the general public by regulating threeprimary areas: (i) radio-frequency spectrum; (ii) public telecommunications networks and (iii) via satellitecommunication. The FTL also governs telecommunications services rendered by third parties, by usingpublic telecommunications networks. (i.e., value added telecommunications services and resellers oftelecommunications services). In 2006, the FTL was amended for the first time, in order to: (i) include astelecommunications services the broadcasting services and (ii) improve the powers and organization ofthe Federal Telecommunications Commission (Comisión Federal de Telecomunicaciones - “Cofetel”) asthe regulator in the telecom and broadcasting sectors. In parallel, the Broadcasting Law (Ley Federal deRadio y Televisión) was also amended to be consistent with the FTL and to introduce some new rulesregarding the bidding process of broadcasting licenses. However, some amendments were declaredunconstitutional in 2007.In addition, there are several administrative rules issued by the Ministry of Communications andTransportation (Secretaría de Comunicaciónes y Transportes - “SCT”) and the Cofetel dealing with theimplementation of the principles outlined in the FTL and the provision of telecommunication services.B. JurisdictionThe ability to regulate telecommunications activities is exclusively reserved to the Federation, under theMexican Federal Constitution. On the other hand, the activities referred with the construction andinstallation of telecommunication networks are governed by local regulation.C. Radio-frequency Spectrum1. Definition of Radioelectric spectrum.The radioelectric spectrum has been defined by the FTL as the space which permits the propagation ofelectromagnetic waves without artificial guidance whose frequency bands are conventionally fixed underthe 3,000 Gigaherts. Legally speaking, the radioelectric spectrum is considered to be an asset of thepublic domain, which, in light of its legal nature, may be licensed by the State in favor of privateindividuals or entities for their use and exploitation.2. Exploitation of the radio-frequency spectrum.The radio-frequency spectrum can only be exploited by the private sector upon obtaining a concessiontitle to that effect. The FTL has divided the radio frequency spectrum as follows: (a) Free spectrum. Can be used freely by any individual or entity, without further authorization from the government. (b) Official spectrum. Is reserved for the exclusive use of the federal, state or local government. Frequency bands within this category are granted through a direct award process. 14306.2011
  • (c) Experimental spectrum. Is exploited by private entities and individuals interested in determining the technical and economic feasibility of developing technologies for scientific purposes or for temporary equipment testing, by obtaining a license (concesión) from the SCT. (d) Reserved spectrum. This spectrum is composed of frequency bands which are not assigned or awarded by the SCT; and (e) Specific use spectrum. This is certainly the most important category of frequency bands of the radio-frequency spectrum, as it allows the private sector to commercialize telecommunications services. To this effect, a specific bidding procedure must be followed in order to obtain the corresponding license.D. Telecommunications Networks1. Definition of telecommunications networks. Public and private networks.Telecommunications networks are defined by the FTL as systems comprised of transmission means suchas channels or circuits using frequency bands, satellite links, wiring, electric transmission means networksor other transmission means and, if applicable, centrals, switching devices or any necessary equipment.Telecommunications networks may be private or public. The only difference between them is that privatetelecommunications networks do not commercialize the services they can provide, while publictelecommunications networks do. This seemingly small distinction means the difference between non-regulation and regulation. Through a public telecommunications network, the concessionaire will be ableto provide all technically feasible telecom services.2. Securing licenses to install, operate and exploit a telecommunications network.Contrary to the regulation of specific use spectrum, petitioners for a concession to install, operate and“exploit” a public telecommunications network do not need to undergo a bidding process. Rather theyhave to submit an application to obtain a concession title before the SCT. Moreover, petitioners have toprove to the SCT and FTL that they have the necessary technical and financial ability to properly providethe telecomm services they intend to exploit, according to their corresponding business plans. Theseconcession titles will be granted for a period of up to 30 years and may be renewed for identical periods oftime.E. Satellite Communications1. GeneralA concession from SCT is required for any of the following: • Occupy geostationary orbits and satellite orbits assigned to Mexico and exploit their associated frequency bands; and • Exploit the signal emission and reception rights associated to foreign satellite systems covering and that can render services within Mexican territory.2. Geoestationary and satellite orbits assigned to Mexico. 14406.2011
  • Concession titles to occupy geoestationary and satellite orbits assigned to Mexico and exploit itsassociated rights, will be granted under a public bid process identical to the upward bidding process. TheFederal Government will be entitled to compensation for such concession. These concession titles will begranted for a period of up to 20 years and may be renewed for identical periods of time.3. Foreign satellite systems.The SCT will grant concession titles over the signal emission and reception rights of frequency bandsassociated to foreign satellite systems that cover and may provide telecommunications systems within theMexican Republic, provided that Mexico has signed the corresponding treaties and protocols with thecountry in which the signal is originated and such treaties contemplate reciprocity for Mexican satellites.Mexico has entered into international treaties, including but not limited to NAFTA. Such treatiescontemplate reciprocity and basically provide that each country shall be entitled to grant concession titleswith respect to the frequency bands associated to foreign satellite systems, pursuant to their applicableregulations. Moreover, they are only granted with respect to those services covered in the correspondingprotocols.4. Permits.The possibility exists of securing the corresponding permit solely in regard to the installation, operationand exploitation of earth stations that transmit signals (not those receiving signals).F. Value Added ServicesValue added services have been defined by the FTL as those services which (i) employ a publictelecommunication network; (ii) which effect the format, content, code, protocol, storage or similar aspectsof the information transmitted by any user; and (iii) market to users additional, different or restructuredinformation or which involve interaction with stored information.A particular registration issued by Cofetel must be secured in order to provide value added services, suchas the following: email, videotext, teletext, remote access to data bases, audiotext, remote processing ofdata and electronic interchange of data.G. Re-sellers (comercializadoras)These are persons that, without owning or having means of transmission, provide telecommunicationsservices through the use of capacity of other existing concessionaires.A permit is required to operate as such and the same shall be granted according to the correspondingRegulations. The company or individual shall be a Mexican national as per the terms of the ForeignInvestment Law. Unless a formal authorization from the SCT is obtained, concessionaires are notallowed to participate, directly or indirectly, in the capital stock of telecommunications commercialagencies.Previously, there were only two re-seller permits granted by the SCT: (i) public telephony services and (ii)long distance services. Nowadays, the SCT grants permits for the commercialization of alltelecommunications services, even though there are no specific regulations. 14506.2011
  • H. Dominant CarriersThe FTL provides a series of rules for dominant carriers in any particular market and reserves the right ofCofetel to issue rules to the dominant carrier should the Mexican antitrust commission determine that aparticular carrier is indeed a dominant carrier. The Federal Competition Commission has been very activein recent years to declare the dominance of certain carriers for Cofetel to issue specific rules. To date, nosuch rules have been effectively enacted against the incumbent or other dominant carriers.I. Broadcasting ServicesThe Broadcasting Law provides the terms and conditions for the bidding of new licenses and for theprovision of broadcasting services. It also regulates other programming, advertising operational issuesand content restrictions. There is no a regulatory convergence between telecommunications andbroadcasting services, so both sectors have their own regulatory framework.J. Foreign Investment Restrictions and Investment MechanismsForeign investment in the telecomm sector where the granting of a concession title is required, isgenerally restricted to Mexican individuals and Mexican entities qualified as such under the ForeignInvestment Law. Mexican entities incorporated under Mexican law will be considered as foreign entitiesfor foreign investment purposes when control of such entity lies in the hands of foreign investors. Controlcan be held either through stock ownership (i.e., more than 51% of the capital stock with full voting rights),or through the ability to run the board of directors or similar management organizations, or through othermechanisms which give majority control to foreign entities.However, there is an exception in the cellular telephone industry, where the 49% limit may be exceeded.In this case, there must be a prior authorization by the CNIE is obtained. There are no foreign investmentlimitations for value added service providers, re-sellers or comercializadoras and holders of permits forreceiving ground stations.Although foreign investment limitations have been an ever pressing obstacle in the development of thetelecomm industry in Mexico, the FIL contemplates other mechanisms that can allow higher netpercentages of participation of foreign capital through (i) neutral investment, and (ii) pyramiding. • Neutral investment. According to the FIL, there are two basic neutral investment mechanisms: (i) the issuance of Series “N” shares which will have the limited voting rights authorized for such purpose by the Commission; and (ii) neutral trusts likewise authorized by the Commission. This has allowed the entry of foreign capital into the sector without compromising the control of the company which lays at all times in the hands of Mexicans. • Pyramiding. Foreign investment limitations can also be countered through indirect investment or “pyramiding”. Before 1996, indirect foreign investment was specifically prohibited in areas subject to foreign investment limitations such as the telecomm sector. Now, foreign investors can indirectly invest in the concessionaire, through a participation in the capital stock of their Mexican partners. Again, although foreign investment at that level cannot surpass the 49% limitation set forth by the FIL, it still provides an additional mechanism to inject resources to the concessionaire (from a net standpoint) even up to 99.9%, without loosing the 49% (foreign) 51% (national) proportion required by the FIL and the LFT. 14606.2011
  • To keep control of such fundamental matters, the SCT has mandated that all concessionairesʼ by- laws incorporate an express limitation to transfer their shares “at the level of the concessionaire” without the prior approval of the SCT and COFETEL. Likewise, the concessionaire has to provide the SCT on a yearly basis, a list of the shareholders holding at least a10% interest in the concessionaire.Finally, broadcasting services are exclusively limited to Mexican individuals or Mexican entities having aclause excluding the participation of foreign nationals.K. Special TaxThe provision in Mexico of the telecommunications services through public telecommunications networksis taxed at a 3% rate. The following services are excluded: rural; telephony; public telephony;interconnection and internet. 14706.2011
  • XXIV. EnergyMexico has had a long lasting state controlled energy policy, which is embedded in constitutionalprinciples that are viewed not only as important for Mexican economic development but also as afoundation of Mexicoʼs sovereignty.A. Electric SectorThe Mexican Constitution provides that the State shall have the exclusive control of the generation,conduction, transformation, distribution, and supply of electric energy that is destined to a public service.No concessions shall be granted in this area.The state monopoly in the case of electric energy is run through the Federal Electricity Commission(Comision Federal de Electricidad or “CFE”) which CFE provides public electricity service all throughoutMéxico, a state-owned company that provided electrical power to the central part of Mexico, known asLuz y Fuerza del Centro or “LFC”, was liquidated in 209 because of union issues and major financiallosses. Areas of Private ParticipationPrivate participation in the sector is limited to those areas where the generation of electricity is notconsidered a public service, such as self-supply, co-generation, small production, independent generationfor sale to the CFE, generation for export, import of electricity for self consumption, and generation foremergency in case of power supply failure: • Self-supply. Generation of electric energy destined to the satisfaction of self consumption needs of either individuals or entities. • Co-Generation. Generation of electric energy through vapor or some other type of secondary thermal energy that is not otherwise used in a manufacturing process, or through the use of fuel generated through such manufacturing processes. Co-generation is to be used by the establishments associated with such manufacturing process as long as economic and energetic efficiencies are increased. Any excess capacity is to be delivered to the CFE. • Independent Production. Generation of energy to be sold to the CFE. • Small Production. Generation of energy to be sold to CFE or exported, which generation should not exceed 30MW. Alternatively, in the case of generation of electricity for rural areas, the energy shall be consumed by the community as long as the generation does not exceed 1MW. • Import or Export of Energy when it will be destined solely to self consumption.In order to engage in the above activities, a prior permit from the Comisión Reguladora de Energía orCRE (Energy Regulatory Commission) is required, except in the case of production which is less than .5MW.B. Hydrocarbons SectorLikewise, the Mexican Constitution provides that in the fields of petroleum and other hydrocarbons,whether solid, liquid or gaseous, as in the case of radioactive minerals, there will be no concessions or 14806.2011
  • contracts, and that those that the nation has granted shall not subsist. Further, only the nation shall takeadvantage of such products.Regulatory Law Article 27 of the Mexican Constitution provides that the petroleum industry is reserved fornational regulation exploitation. The industry is defined as encompassing the following activities: • Exploration, exploitation, refinery, transport, storage, distribution, and first hand sales or petroleum and all products deriving from its refining; • Exploration, exploitation, elaboration, and first hand sales of gas, as well as the necessary transport and storage required to interconnect its exploitation and elaboration, except in the case of firedamp gas; and • The elaboration, transport, storage, distribution and first hand sales of products deriving from petroleum or gas which may be used as industrial raw material and which are considered basic petrochemicals, such as ethanol, propane, butane, pentanes, hexane, heptane, naftas, and methane arising from hydrocarbons.The nation is engaged in the petroleum industry through Petróleos Mexicanos (“Pemex”) and subsidiaryorganisms, federal decentralized entities created for such purposes, generally known as PemexExploración y Producción (engaged in exploration and exploitation of oil and gas including transport,storage and commercialization) Pemex Refinación (engaged in industrial processes to produce oilproducts which are then used as raw materials) Pemex Gas y Petroquímica Básica (engaged inprocessing natural and artificial gas, and the corresponding storage, transport and distribution) andPemex Petroquímica (engaged in petrochemical processes which are not considered as basicpetrochemical).Mexico is currently undergoing a so called energy reform, aimed to promote investment in the industryand relieve PEMEX from absurd bureaucratic and administrative burdens that have only diminished itscapacity to operate as a healthy national oil company. This reform includes the enactment, late 2008, ofa new Pemex Law (Ley de Petroleos Mexicanos), an amendment to the Regulatory Law Article 27 of theMexican Constitution, the issuance of a law to promote renewable energies, the creation of aHydrocarbon Commission, and the mandate to issue implementing regulation within 2009, which resultedin the issuance of Regulations to the Pemex Law.The energy reform has a clear intent to increase the investment in the sector by allowing the participationof national suppliers and contractors as required by the oil industry, in a competitive, sustainable andefficient manner.In exploiting the industry, Pemex may only enter into public works and services contracts with privateindividuals or entities. However, all compensation for such works or services shall always be in cash andin no event shall compensation include a percentage in the products nor participation in the results of theexploitation. Shared production agreements or agreements that compromise production percentages,value on the sale of hydrocarbon or its derivatives, or profits of Pemex are expressly prohibited.Consequently, while international oil companies may participate in a limited manner in the Mexican oilindustry, such participation would still be limited to specific public works or services, and not in theexploitation of the hydrocarbon itself. These contractors would not receive any compensation in oil norwould they be in a position to book Mexican oil reserves in their accounting. Only in the case of cross-border fields may Pemex deviate from these principles in order to exploit such fields in the terms of theinternational treaties entered by Mexico for such purposes. 14906.2011
  • Public works contracts and service contracts entered by PEMEX and related to the oil industry are subjectto Constitutional mandate to secure the best economic conditions available. The New Pemex Law and itsRegulations mandate the Pemex Board of Directors to issue new guidelines for the contracting ofacquisitions, leases, and public works, within such constitutional mandate, but excludes the applicabilityof the Public Works and Related Services Law (Ley de Obras Públicas y Servicios Relacionados con lasMismas -LOP), and the Law on Public Sector Acquisitions, Leases and Related Services (Ley deAdquisiciones, Arrendamientos y Servicios del Sector Público - LAASP) regarding contracting of publicworks or services directly related to productive activities related the oil industry. These guidelines werepublished in March, 2010. Public works and services not related to the exploitation of the oil industry willcontinue to the subject to the LOP and LAASP.Guidelines issued by the Pemex Board of Directors for the contracting of works and services are guidedby principles of publicity, impartiality, competitiveness, efficiency, simplicity, and fairness. However,minimum national content requirements are requested. These guidelines also establish the bases todetermine when may Pemex issue limited invitations or direct awards in lieu of public bids (which includethose cases of emergency situations for remediation purposes, legal or expert services, originalreplacements). Consequently, subject to the principles set under the PL, the Pemex Board of Directorswill have the responsibility for designing all the aspects of public contracting for Pemex, regardingproductive activities of the oil industry, considering the oil industry itself and its particularities. This willallow the flexibility in the contracting and execution of agreements that simply does not exist under theLOP and LAASP, such as price adjustments based on international oil industry indexes, as new needsand scope as work progresses, technological advances, and other elements.Notably, the PL introduces two important features in the case of public bids by allowing for prequalificationmechanisms and bidding strategies that include subsequent discount offers. These two features willprovide efficiency to bidding processes and will also allow Pemex to secure the best prices available.As opposed to the LOP and LAASP, the PL does not require Pemex to award the contract to the cheapestoffer but rather to the offer that actually provides the best conditions to Pemex all things considered(technology to be used, efficiencies to be created, environmental impact, etc). Further, while Pemex isprevented from submitting to foreign jurisdictions in the case of public works or services within nationalterritory, it is validly allowed to submit to arbitration, pursuant to Mexican law and international treatiesentered by Mexico. All contracts shall be subject to and comply with the following principles: a. At all times shall the direct domain on the hydrocarbons shall be maintained by the nation; b. No rights may be granted on oil reserves and thus, contractors may not book reserves: c. Control and direction of the oil industry shall be maintained by the nation at all times; d. Compensation to be made in cash and in no event may the parties agree to payment based on a percentage of production, value of sales, or in the profits of the contracting entity; e. No preferential rights may be granted on the sale of the hydrocarbons or their derivatives, or to influence the sale to third parties; f. No shared production agreementsAlso, the Pemex Law allows for different compensation mechanisms, deviating from typical compensationallowed under the LOP and LAASP, as long as all compensation is made in cash, and has been includedin the Pemex budget. Compensation schemes may now be based on established mechanisms orpredetermined formulas used to obtain a certain price, allowing for additional remuneration based on thesuccess of specific projects. The principles guiding such compensation mechanisms are: a. Compensation shall be in cash, in reasonable terms pursuant to oil industry standards, and included in the annual Pemex budget; b. Shall be set under prefixed formulas or under fixed terms; 15006.2011
  • c. Multyannual agreements may include cost adjustment mechanisms approved by the Board; d. Shall be determined from the outset; e. shall include penalization based on breach of lack of appropriate performance; and f. Additional compensation is allowed in case of (i) economies of scale achieve during execution of the works, (ii) Pemex acquires the technology provided by supplier or contractor, and (iii) works are performed that provide additional profits to Pemex.The flexibility afforded under the Pemex Law warrants the attraction of international oil companies in theMexican hydrocarbon industry.The first bidding rounds of agreements subject to the new regime commences in 2011 for specific maturefields and is expected to cover deep water contracts in late 2012.C. Natural GasRegarding the natural gas industry, private participation is allowed through permits granted by the CRE.These permits are for either transport, storage, or distribution of natural gas. Permit holders are requiredto abide by specific servicing rules and pricing guidelines. • Transport: consists of the reception of Gas in one point of the transport system and the delivery of a similar amount of gas in a different point of the same system. • Storage: consists on the receipt of Gas in one point of the storage system and the delivery in one or several acts of a similar amount on the same point or in a contiguous point of the same system. • Distribution: consists on: (a) the commercialization and delivery of Gas by the distributor to a final user within a specific geographic zone; or (b) the reception of gas on the point or points of the distribution system and the delivery of a similar amount on a different point of such system. • Gas Transport for Self-Use: authorizes the holder to conduct, receive and deliver Gas through ducts with the unique purpose of self-consumption for the needs of the holder of the permit. If the permit is granted to a “self supply company”, it may be authorized to supply gas only to its shareholders or partners. A self supply company is created with the purpose of delivering natural gas only to its partners or shareholders. • Gas Storage for Self-Use: the only difference with the storage activity is that the storage shall have as unique purpose to satisfy exclusively the needs of the permit holder.Terms and conditions for the rendering of services related with natural gas is regulated mainly throughMexican Official Standards and also through general guidelines and methodologies issued by the CRE.Regarding the LP gas industry, private participation is also allowed through permits granted by the CRE.These permits are for either transport (whether through ducts, auto-tanks, or trailers, or for selfconsumption), storage (whether through storage plants for deposit, for supply, or for self consumption), ordistribution (whether through a plant for distribution, carburetion, or ducts).D. FiredampThe exploitation and use of firedamp is permitted under the Mining Law (Ley Minera – ML), and the theRegulations to the Mining Law referring to firedamp (also known as Mineral Carbon Gas) (the “Firedamp 15106.2011
  • Regulations”) published in the Federal Official Gazette on December 16, 2008. The purpose of theFiredamp Regulations is to regulate the matters regarding firedamp, and more specifically, the manner tosecure a permit for the recovery and use of the MC Gas.Under the current legal framework set by the ML, firedamp can only be exploited in two manners: (i) forself-consumption; or (ii) for its sale to Pemex. Furthermore, the recovery and use of the firedamp can onlybe performed prior permit issued by the Ministry of Energy. A mining concession itself does not entitle theconcessionaire to exploit firedamp, but rather allows the concessionaire to apply for the aforementionedpermit once firedamp is found.Specifically, the Firedamp Regulations regulate (i) the permits required for the recovery and use offiredamp; (ii) the authorizations to form associations for the recovery and use of firedamp; (iii) the termsand conditions under which the works and infrastructure needed for the recovery and use of firedamp shallbe executed and constructed; (iv) the transport, storage and industrial activities for the use of firedamp; (v)claims and request for the intervention of the Ministry of Energy; and (vi) verification inspections from theauthority.The Firedamp Regulations provide for either (i) the granting of a permit that allows a concessionaire torecover and use (for its self consumption or for the sale to Pemex) the firedamp; or (ii) the securing of anAuthorization that allows two or more concessionaires to associate with the purpose of recovering and usethe firedamp.The Ministry of Energy and the Ministry of Economy shall issue terms and conditions, guidelines andOfficial Mexican Standards under which the works for the MC Gas recovery and use shall be executed.These include general polices on recovery and use of firedamp, terms and conditions for the contracts tobe entered with Pemex, and technical guidelines for the work associated with the recovery and use of thefiredamp. The compliance with such terms and conditions shall be verified by the aforementionedMinistries or by third parties authorized by them.Several guidelines are still be issued regarding firedamp, such as guidelines for its recovery and use,terms and conditions of agreements to be entered with Pemex, and others.E. Renewable EnergyWhile Mexicoʼs energy policy and regulation is concentrated in the exploitation by the State of thehydrocarbons, renewable energy and environmentally friendly technology has become increasinglyimportant and consequently the industry surrounding renewable energy has increased and willsignificantly increase in the decades to come. In late 2008, the Mexican Congress issued the Law for theUse of Renewable Energy and the Financing for the Energetic Transition (Ley para el Aprovechamientode Energías REnovables y el Financiamiento de la Transición Energética - LAER).The LAER regulates the use of renewable energy and clean technologies destined to generate electricityfor purposes different than public service (i.e. cogeneration, self supply or independent production for saleto the public utilities). Renewable energy is considered to be energy originating in natural phenomena,such as wind, solar radiation, water movement, ocean energy, geothermic fields, bioenergies, and othersources as may be determined by the SE. The LAER expressly excludes radioactive minerals, hydraulicenergy with capacity of generating more than 30 megawatts, incinerated industrial residues, and wastelandfills that do not comply with environmental laws.The LAER requests the SE to issue an integral strategy and program for the fostering of renewableenergy production, with an aim to reach a minimum production goals, including specific budgetary 15206.2011
  • provisions for the fostering of renewable energy alternatives and mechanisms to connect newinfrastructure to the national grid.Further, the LAER creates a Fund for the Energetic Transition and Sustainable Use of Energy, which fundpromotes financing to renewable energy projects.F. BioenergiesThe Law on the Promotion and Development of Bioenergies (Ley de Promoción y Desarrollo de losBioenergéticos LDBE) issued as part of Mexicoʼs energy reform in late 2008 intends to promote thediversification of energetic resources and sustainable development in order to protect the Mexicanfarmland. It intends to assist in the production of bioenergies without endangering the food security andsovereignty of the country.The investment in bioenergies has been a sensitive issue that requires special regulation and theintervention of various governmental agencies (not just the SE).The LDBE considers as bioenergies those fuels secured from organic biomass stemming from thedifferent activities, including agricultural, commercial, industrial, and even domestic activities, as long assuch fuels comply with applicable specifications and provisions.In implementing a national strategy for the development of bioenergies, the LDBE creates a specialintersecretarial Commission for the Development of Energetics, formed by various agencies of the federalgovernment. Such Commission creates and implements programs for the fostering of production andcommercialization of raw materials for the production of bioenergies and infrastructure associatedtherewith.G. National Hydrocarbon CommissionThe National Hydrocarbon Commission (Comisión Nacional de Hidrocarburos “CNH”) is the a publicentity stemming from the Ministry of Energy (Secretaría de Energía – “SE”) which is technicallyindependent from such Ministry and further operates as an independent government agency.The CNH duties encompass the technical regulation and supervision of upstream activities in thehydrocarbon sector, such as exploration and extraction, as well as the initial processing and transport.Downstream activities such as refining, storage, transport, distribution, and first hand sales ofhydrocarbons and gas are not within the regulatory authority of the CNH.The ultimate objective of the CNH is to ensure the increase the long term recovery volumes of crude oiland natural gas, maximize production and find replacement oil fields. These activities shall beundertaken by the participants in the sector in an environmentally friendly manner, under appropriatesecurity conditions, with the best technology economically available and with the least loss of resources.To such end, the CNH is vested with authority to issue technical guidelines not only for the design ofexploration and extraction projects in order to ensure optimization of such projects, but also in thegeneration and gathering of information in order to maintain an appropriate statistical system regardingproduction, reserves, and prospective resources. The energy policy of the administration shall be setbased on the opinion, studies and recommendations of the CNH. 15306.2011
  • The CNH keeps an Oil Registry that maintains the resolutions issued by the CNH, all certifications andguidelines issued within its authority, decrees for the occupation of oil fields, and grants of land to Pemexfor conducting its activities, among others.H. Energy Regulatory CommissionThe CRE is a public entity stemming from the SE, which is technically independent from such Ministry andfurther operates as an independent government agency.Among others, the authority of the CRE includes not only the verification of the supply of electric energyas a public service but also the participation in the determination of electric energy tariffs, including thepurchase of energy and its generation, conduction, transformation, and delivery.The CRE also determines all methodologies for the determination of guidelines in the servicing of naturalgas storage and transport, including the ability to request and impose open seasons and open accessconditions and requirements for participants and permit holders.The CRE has a solid reputation and is continuously issuing guidelines to be followed by all those involvedin these regulated activities.I. Sustainable Use Of The EnergyMexicoʼs energy reform in late 2008 included the issuance of the Law for the Sustainable Use of Energy(Ley para el Aprovechamiento Sustentable de la Energía –LASE). The LASE is aimed to foster thesustainable use of energy through its optimal use from its generation through its consumption, and setsforth the bases guidelines under which the Executive Branch shall create national plan designed preciselyto achieve the goals of the LASE.The LASE creates the National Commission fo the Efficient Use of Energy (Comisión Nacional para elUso Eficiente de la Energía), which shall promote all actions necessary to achieve a reduction of energynecessary to satisfy energy needs, with the same or greater level of quality, and a reduction in theenvironmental impact arising from energy generation, distribution and consumption, including the use ofrenewable energy. This is known as energy efficiency.The Commission is further entrusted with the obligation to promote, secure and disseminate informationon energy efficiency at all levels and sectors (federal, state, municipal, social and private).Finally, the LASE requires manufacturers, importers, distributors and retailers of equipment that useselectric energy, to include visible and clear information on their energy consumption. The specific termsof such information shall be included in the Regulations to the LASE. 15406.2011
  • XXV. MiningA. GeneralThe Mining Law (Ley Minera “MIL”) regulates the exploration, exploitation and refining of all minerals orsubstances from veins, mantles, masses or beds that constitute deposits or substances different from thebasic components of the land. The Mining Law requires private parties to obtain a concession from thegovernment in order to engage in mining activities. Such concessions are issued to private partiesapplying with respect to areas not otherwise covered by existing concessions. Mining concessions arefreely transferable between private parties, though transfers must be recorded pursuant to the MiningLaw.The portion of the MIL that lists minerals subject to concession was amended to include not only knownminerals, precious stones, metals and similar components, but now also chemical elements extractedfrom minerals, as well as from industrial-use minerals. Clay extracted from underground sources, allmineral coal varieties, and certain products of salt mines are also subject to concessions, regulated by theMIL.The following minerals, among others, are not covered by the MIL: • Petroleum and solid, liquid or gaseous hydrocarbons (which are regulated by the Petroleum Law and Regulations); • Radioactive minerals; • Salt from certain types of formations; and • Construction materials.B. Priority of Mining ActivitiesMining activities take preference over all other uses of land, except certain agricultural uses. Thus, theholder of a mining concession can request the Ministry of Economy (Secretaría de Economía) to issue adeclaration of temporary or subservient occupation, or even expropriate land, in order to facilitate miningactivities. Whenever the rights of “ejidos” or agricultural communities are affected, the Agricultural Lawstake precedence over the MIL.In resolving petitions filed by holders of mining concessions, the ME holds hearings and considerstechnical evidence. Compensation awarded to land-owners in this process is determined by values setby the National Goods Appraisal Commission (Comisión de Avalúos de Bienes Nacionales). The MEcarries out all expropriations. When the ME rules in favor of expropriation or temporary or subservientoccupation, that ruling can be reversed for several reasons, including but not limited to initial orsubsequent failure to use the land.C. Agencies / AuthorityThe General Mining Bureau (Dirección General de Minas “DGM”) is the government agency in charge ofall mining matters, including but not limited to: (a) reviewing, processing and ruling on applications for the 15506.2011
  • issuance of mining concessions; (b) managing, coordinating and handling the operation of the MiningPublic Registry (where all acts concerning issuance and transfer of, and agreements pertaining to, miningconcessions are recorded); (c) reviewing and approving requests for extensions of mining concessions;(d) reviewing the activities of all mining concessionaires to ensure performance of their obligations; (e)coordinating the application of mining activities with government agencies at all levels of government; (f)applying sanctions to those parties violating provisions of the MIL; (g) issuing technical opinions in miningmatters; and (h) reviewing and applying all other procedures and mechanisms provided for by the MILthat are not otherwise reserved to the Mexican Geological Service (Servicio Geológico Mexicano “SGM”)The SGM is a public decentralized body, the main function of which is to generate and acquire publicinformation on geology, geophysics, geochemistry and mining in Mexico. The SGM also investigates,develops and adapts new technologies for the use of mineral resources, providing technical support andservice to small and medium-sized mining industries, the social sector, as well as for federal, state andmunicipal governments. It also provides expert consultation services to the ME in matters related to themining sector. The SGM forms part of the National Council for Protected Natural Reservoirs (ConsejoNacional de Áreas Naturales Protegidas), thus allowing decisions regarding environmental issuesconnected with mining activities to have a more solid scientific base.The following are some of the functions of the SGM: (i) procuring contracts for work to be performed inmining lots protected by mining assignments issued in its favor; (ii) signing contracts with privateindividuals or corporate entities, public or private institutions, whether national or foreign, with the purposeof lending its services to external clients; and (iii) providing technical assistance in matters of land-useplanning, by contributing to studies necessary for said purpose.D. Mining Concessions and AssignmentsMining concessions can be granted in favor of Mexican companies, citizens, ejidos, agriculturalcommunes and indigenous communities. Indigenous communities have the following rights, amongothers: (i) the right to be concessionaires; (ii) preference in the assigning of bids and in simultaneousapplications that affect their territories; and, should it be the case, (iii) the right to equate their budgetproposal to the best one presented by another competitor, with preference given to the former over thelatter.Mining assignments are those granted to government agencies to perform activities that, in the case ofprivate parties, are subject to the issuance of a mining concession.Previously, the MIL distinguished between concessions for exploration and concessions for exploitationactivities; currently, it recognizes just one type of concession that allows its holder to perform both typesof activities. Departing from past practice, the law also currently provides that a concession automaticallyencompasses all minerals or substances governed thereby.Concessions can be granted only to those legally entitled parties that file applications with the ME for"open land" that is located within Mexico. Land not considered open includes land: (a) in mineralreserves; (b) covered by existing concessions and assignments; and (c) in areas covered by pendingapplications for concessions and assignments.Generally, a Mexican company can hold a concession if it meets the following requirements: • Its purpose is the exploration or exploitation of substances or minerals governed by law; • Its domicile is in the Mexican Republic; and • It is incorporated pursuant to applicable Mexican law. 15606.2011
  • Foreign investment in Mexican mining companies is not restricted. Foreign individuals and entities mayeven obtain mining concessions, provided they obtain a permit from the SRE whereby they agree towaive the protection of their home country governments in case of any conflict with respect to theirinterests in Mexico.Concessions for exploration and exploitation of open land are granted to the first applicant in time.In the case of Mexican marine zones, submarine extensions of islands, keys and reefs, the ocean floor,the subsurface of exclusive economic zones, assignments that are cancelled, and mineral reserve zonesthat are divested, the mining concession will be granted to the person who offers the best technical andeconomic conditions in response to a request for bids issued by the ME.Mining concessions are granted for a 50-year period from the date of their registration, and can beextended for an additional 50 years upon application within the 5 years at the end of the original term.The principal rights, among others, granted through a concession are as follows: • Engage in exploration and exploitation activities; • Dispose of mineral products obtained by exploration and exploitation; • Obtain the possibility for using the earth located under the mineral lot; • Obtain the expropriation, or temporary or subservient possession, of the land necessary to conduct mining activities; • Use water near the mines for mining activities; and • Obtain preferential rights to waters in the mine for use in matters other than mining activities.The transfer of a concession or of rights arising thereunder takes effect upon its recording in the MiningPublic Registry. The transferee is subject to all obligations arising from the concession or the transferredrights. It is possible to obtain from the ME a report on the status of a concession, noting the obligationsthat have been met to date.Until title to the concession transferred is recorded, the original holder remains liable for the performanceof all obligations under the concession even though the holder may have contractually agreed to transferrights under the concession to a third party. Any transfer is void if the transferee lacks the legal capacityto hold any of the transferred rights.The principal obligations of the holder of a mining concession, among others, are to: • Engage in exploration and exploitation activities; • Pay taxes on the minerals; • Adhere to Mexican Official Norms applicable to safety and environmental protection; • Maintain the reinforcements necessary for the mines safety; • Permit inspections by the ME; and • Submit a geological-mining report to the ME.The holders of mining concessions are subject to a mining tax only at the federal level; states andmunicipalities where mining activities occur cannot impose additional taxes. Federal taxes are calculatedin accordance with the Federal Duties Law, and depend upon the size of the lands covered by theconcession. A concession holder can affect its tax obligation by increasing or reducing the boundaries ofthe concession with the express approval of the ME. 15706.2011
  • All concession holders must designate a legally authorized engineer who will be responsible for miningsafety. In the case of coal mines, this obligation applies to all operations involving over nine workers; inall other cases, it applies to operations involving over 49 workers.Concessions granted by the Ministry are void under any of the following circumstances: • The concession is used to explore for or to exploit substances not governed by the MIL; • The concessionaire lacks the legal capacity to hold a concession; or • The concession covers restricted land.A mining concession is cancelled, among others, in any of the following cases: • By expiration of its term; • By abandonment; • By the commission of any infraction described in the mining safety rules; or • By virtue of a judicial decree.In every case of an allegedly void or cancelled concession, the ME will hear the interested party and issuea final decision in accordance with its powers granted in the law.Refining operations are not subject to the approval of the ME. However, refiners must: • Notify the ME of the start of their operations; • Comply with all the Mexican Official Norms related to mining procedures and environmental protection; and • Process ore for small and medium sized mining companies and for the public sector in an amount of up to fifteen percent of the refiners installed capacity, if the installed refining capacity exceeds one hundred tons per 24 hours.Refiners are not required to process minerals for small or medium sized mining companies or for thepublic sector if: • The referred substances are incompatible with the system of refining that is in place; • The refiner has already processed its required fifteen percent; or • The lots of minerals weigh less than ten tons.The provisions of the MIL are in the nature of a public policy and are thus entitled to preference when inconflict with the interests of third parties. Nonetheless, the right to engage in mining activities may besuspended when those activities threaten to kill or injure miners or others, or to cause unjustifiabledamage to public or private property. Any conflict between the mining activities of the concessionaire andthe rights of third parties will be resolved by the ME after consultation with relevant municipal, state andfederal authorities.E. The Mining Public RegistryThe ME also directs and operates the Mining Public Registry (Registro Público de Minería). The followingacts and contracts, among others, must be recorded: (a) Titles to mining concessions, extensions of the same, and declarations of void or cancelled concessions; 15806.2011
  • (b) Titles to mineral assignments and declarations of void or cancelled titles; (c) Decrees establishing or divesting mineral reserves; (d) Rulings granting or rejecting the temporary or subservient occupation of land; and (e) Rulings issued by either courts or administrative agencies that affect mineral concessions or rights arising thereunder.In any matter relating to a concession, the parties must submit a certificate issued by the MPR relating toall of the listed matters and any others that must be recorded.Maps maintained by the ME through the Mining Cartography show the location and boundaries of areassubject to existing concessions, assignments and mineral reserves, as well as pending applications forconcessions and assignments. Such land is unavailable for new mining concessions or assignments.F. Inspection, Monitoring and SanctionsThe ME may conduct any kind of inspections necessary to confirm that the rules and provisions of theMining Law are being followed. Violations of the law can be sanctioned through either cancellation of themining concession or imposition of fines, or both.The cancellation of mining concessions will occur in the following cases, among others: • If substances other than those covered by the law are being exploited; • If the required mining activities are not performed or substantiated; • If the mining tax is not paid; • If the Serviceʼs discovery fee (if applicable) is not paid; and • In the case of assignments in petroleum-bearing areas, for not following the conditions imposed by the Mexican state oil company (Petróleos Mexicanos)Certain specified violations are punishable by a fine in the amount of ten to two thousand times thecurrent daily minimum wage in effect for the Federal District. Such violations include, among others: • Extracting minerals or substances governed by the MIL without the appropriate concession; • Preventing mining activities without a legal cause; • Avoiding or obstructing the ME inspections; • Failing to inform the ME of the identity of the mines safety manager; and • Failing to notify the ME of the commencement of refining operations. 15906.2011
  • The imposition of sanctions under the MIL does not protect the violator from civil, commercial, criminal orother sanctions under different laws. The most important criminal sanctions that could apply are thoseunder offenses considered to be against the national economy.A five-year statute of limitations applies to violations to the MIL, beyond which the ME cannot imposesanctions. Where the violation is of a continuing nature, however, the period of limitations does not beginto run until the offensive conduct ceases. Resolutions issued by the ME may be appealed pursuant toprocedures established by the Federal Law of Administrative Procedures (Ley Federal de ProcedimientoAdministrativo). 16006.2011
  • XXV. Bankruptcy A. Insolvency ProceedingsThe Mexican Bankruptcy Law (Ley de Concursos Mercantiles) of 2000 seeks to provide legal certainty bysetting forth timeframes and means of challenge in order to avoid dilatory tactics that were used underprior legislation.Commercial insolvency proceedings (concurso mercantil) have two different (and generally successive)stages, regardless of the person filing the request: (i) conciliation; and (ii) bankruptcy or liquidation(quiebra). Conciliation or reorganization is aimed to reach an agreement with recognized creditors in orderto preserve the company, while bankruptcy seeks its liquidation.The general features of commercial insolvency proceedings are briefly summarized as follows:(i) Recognized creditors are only those so acknowledged by the Bankruptcy Court;(ii) It provides for the creation of the Federal Institute of Specialists in Commercial Insolvency Proceedings as a body entrusted to the appointment of the inspector (visitador), conciliator (conciliador), and receiver (síndico) who play a key responsibility in the inspection and surveillance of the failing company. Interveners (interventores) are the monitoring professionals appointed by creditors in charge of safeguarding creditorsʼ interests and surveillance the performance of the conciliator, receiver and commercial entity.(iii) Small commercial enterprises can only be voluntary petitioners (but not involuntary subjects) of the Bankruptcy Law.(iv) Reorganization proceedings for holding companies will be joined with the controlled entities, although each shall have separate files.(v) Branches (sucursales) of foreign legal entities might be declared bankrupt; however, such declaration will only include those rights and assets (with respect to matured obligations) located in the Mexican territory and in connection with debts carried on with those branches.The Institute of Specialists in Commercial Insolvency Proceedings is an independent body that dependshierarchically from the Federal Judicial Council (Consejo de la Judicatura Federal). Its main functions are:(i) creating the rules for appointments, and appoint and revoke inspectors, conciliators and receivers,while maintaining a registry of such persons; (ii) monitoring the service provided for inspectors,conciliators and receivers; (iii) approving the formats to submit claims for acknowledgment of debts, etc.The Inspector is appointed by the Institute, and will verify the existence of causes of commercialinsolvencies.The Conciliator is also appointed by the Institute, which will be in charge of the surveillance of thecommercial entity during the conciliation proceedings, besides any other important functions, such as thereception and analysis of claims for acknowledgment of credits.The Receiver, also appointed by the Institute, represents the entity during the liquidation stage (quiebra),and will monitor the performance of the conciliator during the conciliation stage of the proceedings.In general terms, inspectors, conciliators and receivers must have relevant experience in accounting,financial or legal fields, and being independent from the judiciary and the parties. 16106.2011
  • B. Causes for Declaration in Reorganization (Concurso Mercantil)The principal cause for a declaration in reorganization is the general non-compliance of the commercialentity with its payment obligations. Generally speaking, the commercial entity, any creditor or the FederalDistrict Attorney will have locus standi to file for the reorganization of the commercial entity. Although anycreditor may file a petition for the bankruptcy of a commercial entity, the reorganization will only bedeclared if there is non-compliance with obligations towards two or more different creditors that represent35% or more of all debts of the commercial entity or the commercial entity does not have sufficient assetsto cover 80% of the payable obligations.The Bankruptcy Law provides for a non-exhaustive list of situations where the existence of general non-compliance of obligations is presumed, as follows: (i) no existence or insufficiency of assets to attach; (ii)non-compliance with payment obligations to two or more different creditors; (iii) hiding or becomingabsent without leaving some legal representative of the company; (iv) in the same circumstances asabove, the closing of the premises of the company; (v) to make fraudulent or ruinous practices to stopcomplying with its obligations; (vi) non-compliance with the terms of a previous agreement in the terms ofthe Bankruptcy Law; (vii) any other analogous case. C. Procedure for the Declaration of ReorganizationAs stated before, unless debtor requests directly the declaration of liquidation or bankruptcy (quiebra), theconciliation stage of the proceedings will have to be exhausted. These conciliation proceedings are aimedto reach a final agreement with recognized creditors in order to guarantee the survival of the commercialentity and avoid its liquidation. The conciliation stage of the insolvency proceedings seeks to provide legalcertainty to the parties and provide an expeditious venue in order to avoid dilatory tactics that werepernicious in the past.The main features of the conciliation or reorganization proceedings are summarized as follows:• No defense raised by the parties will stay the proceedings, therefore, any defense will be resolved along with the merits of the case.• The commercial entity may petition its declaration in reorganization and submit, inter alia: (i) financial statements; (ii) a statement summarizing the reasons to explain the status of non- compliance with its obligations; (iii) list of creditors (identifying names, amounts, securities, liens and encumbrances, etc.); (iv) an inventory of all real property and movable goods, negotiable instruments, rights or any other assets that can be identified, and (v) a list of the judicial proceedings in which the entity is a party.• Any creditor of the commercial entity or the District Attorney can file the complaint asking for the declaration of bankruptcy or liquidation (quiebra).• The Judge will admit the petition if there is not an evident cause for its immediate dismissal. An inspector will be appointed by the Institute, whose main task will consist on practicing a verification search to the commercial entity to ascertain whether the hypotheses for insolvency proceedings are complied and to suggest the Judge to grant provisional measures. The inspector must render a report for the Judge within the 15 calendar days following to the verification search.• The Court within the term of 5-business days thereafter will render a reasoned Judgment declaring or denying the reorganization or concurso mercantil.• The conciliation stage will last for 185 calendar days. The conciliator or recognized creditors representing two thirds of the total amount of the recognized credits may request an extension of an additional 90 calendar-day term, but the conciliation proceedings cannot exceed 360 days. 16206.2011
  • D. Judgment Declaring Reorganization (Concurso Mercantil)The key elements to be contained in are: list of creditors and amounts owed, appointment of a conciliator,order to the commercial entity to make available its books and relevant documents and the instruction toassist both the conciliator and receiver. Likewise, (i) order the insolvent entity to suspend the payment ofany obligation created prior to the declaration of reorganization, unless these are necessary for theordinary management, (ii) order to stay any pending enforcement proceedings and (iii) provide a notice tocreditors and invite them to submit their petition for acknowledgment of credits.Starting from the issuance of the judgment declaring reorganization and until the end of the conciliationstage, no enforcement proceedings can be initiated against the commercial entity, except some debtsrelated to labor matters. All actions commenced by or against the commercial entity before the declarationin concurso mercantil related to monetary rights will not be joined to the insolvency proceedings.During the conciliation stage, the insolvent entity will continue with management (although the conciliatorwill monitor the performance), unless the conciliator requests the Judge for hir/her removal. E. Existing ContractsAs regards existing contracts executed prior to the date the entity was declared in reorganization, theterms therein established will remain in effect, except as otherwise set forth in the Bankruptcy Law.However, any contractual term that may aggravate the condition of the entity given its state inreorganization will be considered as null and void. Likewise, starting from the date of judgment:(i) Capital and ancillary obligations of credits arranged in Mexican currency, without a security in rem will stop generating interests and will be converted into UDIʼs.(ii) Capital and ancillary obligations of credits arranged in foreign legal currency, without a security in rem, regardless the place where the obligation was created, will stop generating interest and will be converted into Mexican currency, and into UDIʼs.(iii) Credits with a security in rem, regardless the fact that they were originally arranged to be paid in Mexico or abroad, will be maintained in the currency or unity created and will only cause ordinary interest provided therein, up to the value of the goods secured.(iv) Agreements pending to be executed will be fulfilled by the entity, unless the conciliator opposes for safeguarding the interests of the bankrupt entityʼs assets. F. Acknowledgement of CreditsThe conciliator has the task of submitting to the Judge a provisional list of credits within 30 calendar daysfollowing the last publication of the judgment (and subsequently a definitive list), although his/her maintask is to seek a settlement agreement among the entity and its recognized creditors. This agreementmust consider the payment of credits with privileges (securities and privileges), rights in rem (i.e.mortgage, pledge, etc.) or special privileges of the parties who have not subscribed the agreement.The agreement must be subscribed by the entity in reorganization and its creditors representing morethan 50% of (i) the total common recognized creditors; (ii) the amount acknowledged to those creditorswith rights in rem or special privileges.Recognized creditors with rights in rem who have not subscribed the agreement may continue with theenforcement of their respective security interests. However, the approval of the agreement will end theconcurso mercantil proceedings. 16306.2011
  • G. Bankruptcy or Liquidation Proceedings (Quiebra)The commercial entity will be declared in liquidation (quiebra) in the following cases: (i) It was sorequested by the entity in reorganization; (ii) the term for reaching an agreement and its extensions hasexpired; (iii) the conciliator so requests it and the Judge so approves it.The relevant judgment declaring the company bankrupt shall contain inter alia the following: (i) an order tosuspend all activities by the insolvent entity; (ii) a prohibition to creditors to make payments, unless theauthorized by the receiver; and (iii) the order to record the judgment in the Public Registry of Commerce.The management of the entity will be removed, and the receiver will take over with the most ampledominion authority in that regard, since its functions include the sale of assets at public auction.There are three criminal federal offenses provided under the Bankruptcy Law that merits imprisonmentterms: (i) intentional actions aimed to aggravate the non-compliance of obligations, for example, thealteration, destruction or falsification of the accounting records of the commercial entity; (ii) failure todeliver to the Judge the information so requested; and (iii) petition for the acknowledgement of a non-existing or simulated credit.Credit institutions, auxiliary credit institutions and companies that receive concessions from thegovernment have special rules for bankruptcies.Finally, the Bankruptcy Law provides for rules of cooperation in international proceedings, tending to havetransparency and clear rules dealing with issues related to international insolvency. 16406.2011
  • Acronyms Most Commonly Used Reference Meaning Spanish MeaningAFORE Administrators of Retirement Funds Administradora de Fondos de RetiroALADI Latin-American Development and Integration AssociationALTEX High exporting companies Empresas Altamente ExportadorasAPA Advanced Price AgreementBANXICO Mexican Central Bank Banco de MéxicoBMV Mexican Stock Exchange Bolsa Mexicana de ValoresCAM Mexican Arbitration Center Centro de Arbitraje de MéxicoCANACO National Chamber of Commerce Cámara Nacional del ComercioCC Commercial Code Código de ComercioCCF Federal Civil Code Código Civil FederalCFC Federal Judiciary Council Consejo de la Judicatura FederalCFE Federal Electricity Commission Comisión Federal de ElectricidadCFF Federal Tax Code Código Fiscal de la FederaciónCNA National Water Commission Comisión Nacional del AguaCNBV National Banking and Securities Comisión Nacional Bancaria y de Valores CommissionCNIE Foreign Investment Commission Comisión Nacional de Inversiones ExtranjerasCOA Annual Emissions Report Cédula de Operación Anual.COFECO Federal Competition Commission Comisión Federal de CompetenciaCOFETEL Federal Telecommunications Commission Comisión Federal de TelecomunicacionesCONDUSEF National Commission for the Protection Comisión Nacional para la Protección y and Defense of Financial Services Users Defensa de los Usuarios de los Servicios FinancierosCPOʼs Ordinary Participation Certificates Certificados de Participación OrdinariosCUCA Adjusted Paid-in Capital Account Cuenta de Capital de Aportación Actualizado -CUFIN Net Tax Profit Account Cuenta de Utilidad Fiscal NetaECEX Foreign trade companies Empresas de Comercio ExteriorEnvironmental General Law of Ecological Balance and Ley General del Equilibrio Ecológico y laLaw Environmental Protection Protección al AmbienteFIL Foreign Investment Law Ley de Inversión ExtranjeraFTL Federal Telecommunications Law Ley Federal de TelecomunicacionesHazardous General Law for the Prevention and Ley General para la Prevención y GestiónWaste Law Integral Process of Residues Integral de los ResiduosICC MEX Mexican Chapter of the International Chamber of Commerce ArbitrationIETU Flat Rate Tax Impuesto Empresarial a Tasa ÚnicaIMPI Mexican Institute of Industrial Property Instituto Mexicano de la Propiedad IndustrialIMSS Mexican Social Security Institute Instituto Mexicano del Seguro SocialINDAUTOR Registry of the National Copyrights Instituto Nacional del Derecho de Autor InstituteINDEVAL Securities Depository S.D. INDEVAL, S.A. de C.V.INFONAVIT Institute of the National Housing Fund for Instituto del Fondo Nacional para la 16506.2011
  • Workers Vivienda del TrabajadorINM National Institute Instituto Nacional de MigraciónIPAB Institute for the Protection of Bank Savings Instituto para la Protección al Ahorro BancarioITL Income Tax Law Ley del Impuesto Sobre la RentaIVA Value Added Tax Impuesto al Valor AgregadoLA Customs Law Ley AduaneraLAN National Waters Law Ley de Aguas NacionalesLAPSS Law on Public Sector Acquisitions, Leases Ley de Adquisiciones, Arrendamientos y and Related Services Servicios del Sector PúblicoLAU Environmental License Licencia Ambiental UnicaLCE Foreign Trade Law Ley de Comercio ExteriorLFCE Federal Law of Economic Competition Ley Federal de Competencia EconómicaLFDA Federal Copyright Law Ley Federal del Derecho de AutorLFPC Federal Consumer Protection Law Ley Federal de Protección al ConsumidorLFRT Broadcasting Law Ley Federal de Radio y TelevisiónLFT Federal Labor Law Ley Federal del TrabajoLGSM General Law of Commercial Companies Ley General de Sociedades MercantilesLGTOC General Law for Negotiable Instruments Ley General de Títulos y Operaciones de and Credit Transactions CréditoLIC Credit Institutions Law Ley de Instituciones de CréditoLMV Securities Market Law Ley del Mercado de ValoresLOAPF Organic Law of the Federal Public Ley Orgánica de la Administración Pública Administration FederalLOP Public Works and Related Services Law Ley de Obras Públicas y Servicios Relacionados con las MismasLPI Industrial Property Law Ley de la Propiedad IndustrialMaquila Executive Decree for the Promotion of the Programa de Importación Temporal paraDecree Manufacturing, Maquila and Export Service Producir Artículos de Exportación IndustryMERCOSUR South American Common Market Mercado Común del SurMexder Mexican Options Exchange Mercado Mexicano de DerivadosMIL Mining Law Ley MineraNAFTA North America Free Trade Agreement Tratado de Libre Comercio de Norte AméricaNOMʼs Mexican Official Standards Normas Oficiales MexicanasOECD Organization for Economic Cooperation and DevelopmentPEMEX Petróleos MexicanosPEP Pemex Exploración y ProducciónPGPB Pemex Gas y Petroquímica BásicaPITEX Temporary basis importation program to Programa de Importación Temporal para manufacture items for exportation Producir Artículos de ExportaciónPROFEPA Federal Office of Environmental Protection Procuraduría Federal de Protección al AmbientePROSEC Sectorial Programs Programas SectorialesRFC Federal Taxpayersʼ Registry Registro Federal de ContribuyentesRNIE National Foreign Investment Registry Registro Nacional de Inversión ExtranjeraRNV National Securities Registry Registro Nacional de ValoresRPC Public Registry of Commerce Registro Público del ComercioSA Stock Corporation Sociedad AnónimaSAP Publicly traded limited liability corporation Sociedad Anónima Bursátil 16606.2011
  • SAPI Limited liability corporation that promotes Sociedad Anónima Promotora de Inversión equity investmentSCT Ministry of Communications and Secretaría de Comunicaciones y Transportation TransportesSE Ministry of Economy Secretaría de EconomíaSE Ministry of Energy Secretaría de EnergíaSEMARNAT Ministry of the Environment and Natural Secretaría del Medio Ambiente y Recursos Resources NaturalesSFP Public Function Ministry Secretaría de la Función PúblicaSIEM Mexican Business Information System Sistema de Información Empresarial MexicanoSofoles Special Purpose Financial Entities Sociedades Financieras de Objeto LimitadoSRL Limited Liability Company Sociedad de Responsabilidad LimitadaSSL Social Security Law Ley del Seguro SocialSTPS Ministry of Labor Secretaría del Trabajo y Previsión SocialTFJFA Tax and Administrative Justice Court Tribunal Federal de Justicia Fiscal y AdministrativaTRIPʼʼs Treaty on trade-related aspects of Acuerdo Sobre los Aspectos de los intellectual property rights Derechos de Propiedad Intelectual Relacionados con el ComercioUPCI Unit of International Trade Practices Unidad de Prácticas Comerciales Internacionales,,WIPO World Intellectual Property Organization Organización Mundial de la Propiedad Intelectual Editorial Note Doing Business in Mexico is a publication of Barrera, Siqueiros y Torres Landa, S.C. © Copyright. All Rights Reserved.México 2011. Title certificate in process. The reproduction in part of this publication is authorized only when said reproduction iswithout modifications, and provided the original source is credited in said reproduction. This publication is edited in English.Responsible editor: Eduardo Siqueiros T. 16706.2011