mexico business opportunities legal framework

Transcripción

MEXICO
BUSINESS OPPORTUNITIES
AND
LEGAL FRAMEWORK
GOODRICH, RIQUELME
Y
ASOCIADOS
© All rights reserved
Goodrich, Riquelme y Asociados
MEXICO
AND
LEGAL FRAMEWORK
Editor and Contributors:
Bill F. Kryzda
Partner
Editor and Supervisor
Raúl Moreyra Suárez
Partner
Jaime Delgado Reyes
Partner
Julio Flores Luna
Partner
Jorge León Orantes
Partner
Robert R. May
International Legal Consultant
GOODRICH, RIQUELME
Y
ASOCIADOS
ACKNOWLEDGMENTS
Mention should be made of the following partners and attorneys of the firm who
participated in reviewing various Sections of this document: David H. Brill, Alvaro González
Ocampo and Agustín Urdapilleta Rivas (general review and comments); Salvador Rangel
Solórzano, Francisco Velázquez Osuna, Ricardo Lan Arredondo, Virginia García García, Rosario
Huet Covarrubias, Mario Tremblay, Hilda Farah Duayhe, Richard Seid, Laura Bueno Avilés,
Eugenia González Rivas, Jorge Sánchez Dávila and Ma. Teresa Gómez Neri. We would also like to
thank Jorge Flores Meza, Luis R. García Martínez and Mauricio Castroparedes Merino for their
comments.
Special gratitude is extended to Mary J. Ramírez who worked tirelessly at the computer
processing the various drafts of the Sections, as she did in the first edition. Without her hard work
and dedication, the completion of the second edition would surely not have been possible.
All Rights Reserved
©1995 by Goodrich, Riquelme y Asociados
México, D.F.
No part of the material protected by this copyright
notice may be reproduced or utilized in any form
or by any means, electronic or mechanical,
including photocopying, recording, or by any
information storage and retrieval system,
without written permission
from the copyright owner.
Printed in Mexico
1st Edition 6,000 copies
July, 1995
Reprinted 1998, 1999
2nd Edition 6,000 copies
January, 2000
This guide offers a general panorama of the current legal framework in Mexico and does
not intend to be specific legal advice. Goodrich, Riquelme y Asociados, as well as the
Editor, Contributors and participants, accept no legal responsibility for any errors,
irrespective of their cause, that may be contained in this guide, or for any loss however
caused, sustained by any person that relies on the information contained herein.
____________________
__________________
GOODRICH, RIQUELME Y ASOCIADOS
MÉXICO CITY
Paseo de la Reforma 265
Col. Cuauhtémoc
06500 México, D.F.
MEXICO
Telephone: (52-55) 55-33-00-40
Fax: (52-55) 55-25-12-27
E-mail: [email protected]
P.O. Box 93-Bis
06000 México, D.F.
MEXICO
PARIS
24, Av. de l'Opéra
Paris 75001
FRANCE
Telephone: (33-01) 42-60-27-00
Fax: (33-01) 42-60-27-13
E-mail: [email protected]
Associated with
BOMCHIL, CASTRO, GOODRICH, CLARO, AROSEMENA Y ASOCIADOS
ARGENTINA, BOLIVIA, BRAZIL, CHILE, COLOMBIA, COSTA RICA, DOMINICAN REPUBLIC,
ECUADOR, EL SALVADOR, GUATEMALA, HONDURAS, NICARAGUA, PANAMA,
PARAGUAY, PERU, PUERTO RICO, URUGUAY, VENEZUELA
____________________
__________________
NOTE
This guide has been written for those business people who believe that, above all,
there are profitable opportunities for their companies in Mexico. Business people familiar with
doing business outside of their home country know that preparation and planning for entry into
international markets is essential. This guide will alert those who approach the Mexican market,
and their legal counsel, to the existing legal and regulatory framework. Although the guide is
accurate at the time of its completion, January 31, 2000, it is important to bear in mind that
reforms to the legal and regulatory systems as well as new criteria and interpretations are ongoing and, thus, users of this guide are urged to ensure that regulations are current and, therefore
at the time of decision making, to obtain competent legal advice.
Reproduction authorized
by the National Institute of
Fine Arts and Literature
____________________
__________________
THE FIRM
Goodrich, Riquelme y Asociados, founded in 1934, based in Mexico City, is one of
the country's largest law firms, serving an international clientele, as well as leading Mexican
companies in every facet of the manufacturing, trade and service industries. We are a fullservice law firm, not only providing our clients with complete legal services, but also
consulting with them to achieve their business objectives.
As Mexico began industrializing after World War II, the firm grew substantially by
handling the rising tide of direct foreign investment and assisting companies to form joint
ventures in Mexico before and after the 1973 law governing and restricting direct foreign
control of businesses. Mexico is now simultaneously liberalizing restrictions on foreign
investment and privatizing industry. We represent clients in many varied fields, taking
advantage of both of these trends to make new or expand existing investments in Mexico.
Today the firm has a professional and administrative staff over 200. As creative
problem-solvers, we help our clients address their changing needs so they can prosper in the
Mexican business environment, which itself is continually and dynamically changing. Our
main office is next to the Stock Exchange, close to the Independence Monument as well as
the British, Japanese and American Embassies, in the heart of Mexico City, the center of the
political, financial, commercial and industrial life of Mexico.
The firm has earned the high regard of officials at all levels in the Mexican
government, as well as the Mexican Bar. In fact, our partners are routinely asked by
government officials to comment on proposed legislation.
Since the firm has a strong international orientation, a number of attorneys have lived,
trained and are qualified to practice, and indeed have practiced law, in other countries. Thus,
as interpreters and arbiters, we are able to assist foreign business people to better understand
"doing business in Mexico", as well as help Mexican business people and government
officials comprehend and evaluate the foreigners' objectives.
The firm has a branch office in Tijuana, Baja California, a city of commercial
importance on the Mexico-United States border, an office in Paris and correspondent offices
in other major cities throughout Mexico.
As a leading member of Bomchil Castro Goodrich Claro Arosemena & Asociados, an
association of independent Latin American law firms, we are able to give our clients
immediate access to top quality legal services in over 150 countries throughout the Americas,
Europe, the Mediterranean, Asia and the Pacific Rim.
Each client's legal affairs are personally handled by a partner, referred to as an
account-attorney, heading a dedicated team of professionals assisted by specialists in different
practice areas. Goodrich, Riquelme y Asociados, in fact, was among the first Mexican law
firms to stress a client-oriented, pragmatic service approach. The account-attorney works
closely with other partners and lawyers within our firm having specialized expertise, as well
as accountants, bankers, economists, other business advisors and correspondent attorneys in
cities where we do not have offices, to ensure the prompt completion of work and avoid
duplication of effort. This partner, account attorney, keeps clients informed, and advises them
on legal and business developments and legislation that may impact their businesses.
____________________
__________________
(i)
We speak our clients' language, both literally and figuratively. Not only are virtually
all of our attorneys multilingual, but as lawyers who have long served the business
community, we understand and speak the language of business.
Our practice covers international commercial and civil law, including the following
areas: Corporate, Foreign Investment, Transfer of Technology, In-Bond "Maquiladora"
Regulations, Joint Ventures, Mergers and Acquisitions, Privatization, Competition Law,
Trade Law, Real Estate, Tourism Investment and Development, Environmental, Construction,
Government Procurement, Tax, Labor, Mining, Petrochemical, Gas, Petroleum and
Electricity Projects, Banking and Finance, Insurance, Arbitration, Immigration, Customs,
Admiralty, Aviation, Transportation, Telecommunications, Food Processing and Agricultural
Corporate Investment, Patents and Trademarks, Copyright, Intellectual Property, Licensing,
Franchising, Wills, Trusts and Estate Planning and representation in all courts and
administrative agencies. Legal collaborators in principal cities of Mexico.
We take pride in the role our firm has played in Mexico's past and look forward to
being part of the country's dynamic future.
PASEO DE LA REFORMA 265
After 35 years, in March, 1998, Goodrich, Riquelme
y Asociados moved.
Our present location, Paseo de la Reforma 265,
is one of the most modern office buildings in the
city, right next door to the Mexico City Stock
Exchange (the Bolsa).
While our old building was one block west of the
American Embassy, our new offices are a block
to the east.
Within blocks of our new location are all other
major embassies and several of the finest 5-star
hotels in the city.
We still have a fine view of the famous Angel,
Mexico's Independence Monument pictured on
the front page of this guide.
────────────────
────────────────
(ii)
PASEO DE LA REFORMA
____________________
__________________
(i)
MEXICO
Business Opportunities
and
Legal Framework
TABLE OF CONTENTS
MACRO-ECONOMIC FRAMEWORK
MEXICO IN THE NEW MILLENNIUM
(by Roberto Salinas León) ............................................................................................................................I
I.
THE COUNTRY AT A GLANCE .................................................................................................. 1
A.
INTRODUCTION............................................................................................................... 1
B.
GEOGRAPHY .................................................................................................................... 2
C.
POPULATION.................................................................................................................... 2
D.
LANGUAGE....................................................................................................................... 3
E.
TIME ZONES ..................................................................................................................... 3
F.
CULTURE........................................................................................................................... 3
G.
SOCIO-POLITICAL CONCERNS..................................................................................... 5
1.
Money Laundering .............................................................................................................. 5
2.
Narcotics and Corruption .................................................................................................... 5
a)
Narcotics................................................................................................................. 5
b)
Corruption............................................................................................................... 6
3.
Human Rights...................................................................................................................... 6
II.
INVESTMENT - GENERAL CONSIDERATIONS ....................................................................... 8
A.
POLITICAL SYSTEM........................................................................................................ 8
B.
LEGAL SYSTEM ............................................................................................................. 10
C.
ECONOMIC SYSTEM ..................................................................................................... 10
D.
JUDICIAL SYSTEM ........................................................................................................ 11
1.
Federal judicial system ......................................................................................... 11
a)
The Supreme Court of Justice.................................................................. 11
b)
Collegiate Circuit Courts ......................................................................... 12
c)
Unitary Circuit Courts ............................................................................. 12
d)
District Courts.......................................................................................... 12
e)
Federal Jury of Citizens ........................................................................... 12
f)
Federal Judicial Board ............................................................................. 12
2.
Local courts .......................................................................................................... 12
3.
Other courts and tribunals..................................................................................... 13
III.
DIRECT SALES ............................................................................................................................ 14
A.
NOMS (OFFICIAL MEXICAN STANDARDS) ............................................................. 14
B.
HEALTH ........................................................................................................................... 14
C.
LABELING ....................................................................................................................... 15
D.
GENERAL IMPORT SYSTEM........................................................................................ 15
1.
Shipping documentation and insurance ............................................................... 16
2.
Broker requirement............................................................................................... 16
E.
TAXATION OF DIRECT SALES.................................................................................... 17
1.
Tax, exchange incentives, free trade zones .......................................................... 17
2.
Income tax ............................................................................................................ 17
____________________
__________________
(iii)
F.
G.
H.
I.
J.
3.
Value-added tax.................................................................................................... 17
TEMPORARY IMPORTS ................................................................................................ 17
TRANSFER PRICING...................................................................................................... 18
THE VIENNA CONVENTION........................................................................................ 18
TRADE DISPUTES UNDER MEXICAN LAW.............................................................. 19
1.
Unfair practices of international trade .................................................................. 19
2.
Safeguards ............................................................................................................ 20
3.
General Procedures............................................................................................... 20
a)
Specific procedure for unfair practices of international trade ................. 20
b)
Specific procedure for safeguards............................................................ 21
TRADE DISPUTES UNDER NAFTA ............................................................................. 21
IV.
SECURING TRANSACTIONS..................................................................................................... 22
A.
MORTGAGES/LIENS...................................................................................................... 22
1.
Real estate mortgages ........................................................................................... 22
2.
Maritime mortgages.............................................................................................. 22
3.
Mortgages/Liens on aircraft.................................................................................. 23
4.
Complete production facilities (Industrial) mortgages ......................................... 23
5.
Chattel mortgages ................................................................................................. 23
B.
PLEDGES ......................................................................................................................... 23
1.
Commercial pledges ............................................................................................. 24
a)
Warehousing ............................................................................................ 24
b)
Confidential warehouse receipts.............................................................. 25
c)
Equipment-operating and financing credits............................................. 25
2.
Civil pledges.........................................................................................................26
C.
GUARANTY..................................................................................................................... 26
1.
Bond (Fianza) ....................................................................................................... 26
2.
Unconditional guarantee endorsement (Aval) ...................................................... 27
3.
Joint and several liability...................................................................................... 27
D.
CONDITIONAL SALES - RESERVATION OF TITLE ................................................. 27
E.
TRUSTS ............................................................................................................................ 27
F.
LETTERS OF CREDIT .................................................................................................... 28
G.
LEASES ............................................................................................................................ 28
1.
Lease with purchase option .................................................................................. 28
2.
Financial lease ...................................................................................................... 29
V.
GOVERNMENT SALES AND CONTRACTING........................................................................ 30
A.
RELEVANT LAW SOURCES ......................................................................................... 30
B.
GRANTING OF CONTRACTS ....................................................................................... 30
C.
FOREIGN PARTICIPATION........................................................................................... 31
D.
CHALLENGING PROCEDURES.................................................................................... 31
VI.
REPRESENTATIVES, DISTRIBUTORS, FRANCHISEES ........................................................ 33
A.
REPRESENTATIVES ...................................................................................................... 33
B.
DISTRIBUTORS .............................................................................................................. 33
C.
FRANCHISEES ................................................................................................................ 33
D.
CONSIDERATIONS ........................................................................................................ 34
VII.
INTELLECTUAL PROPERTY. LICENSING.............................................................................. 35
A.
PATENTS ........................................................................................................................ 35
B.
UTILITY MODELS.......................................................................................................... 36
C.
INDUSTRIAL DESIGNS ................................................................................................. 36
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(iv)
D.
E.
F.
G.
H.
I.
J.
K.
L.
M.
N.
O.
P.
Q.
VIII.
INDUSTRIAL SECRETS ................................................................................................ 36
INTEGRATED CIRCUITS .............................................................................................. 37
TRADEMARKS AND SERVICE MARKS ..................................................................... 37
COLLECTIVE TRADEMARKS ...................................................................................... 38
COMMERCIAL SLOGANS ............................................................................................ 39
TRADE NAMES............................................................................................................... 39
APPELLATIONS OF ORIGIN ........................................................................................ 39
ROYALTY PAYMENTS ................................................................................................. 39
TRADEMARK LICENSE AGREEMENTS..................................................................... 39
COMPARATIVE ADVERTISING .................................................................................. 39
PARALLEL IMPORTS .................................................................................................... 40
COPYRIGHTS INCLUDING SOFTWARE .................................................................... 40
FRANCHISES................................................................................................................... 42
MEXICAN LAW FOR THE PROTECTION OF NEW VARIETIES OF PLANTS ....... 42
INVESTMENT FRAMEWORK ................................................................................................... 44
A.
NEW FOREIGN INVESTMENT LAW ........................................................................... 44
1.
Activities reserved for the State............................................................................ 44
2.
Activities reserved for Mexican investors ............................................................ 45
3.
Activities subject to specific participation percentage ......................................... 45
4.
Majority interest upon approval ........................................................................... 46
5.
Acquisition of existing Mexican companies......................................................... 47
6.
Real estate............................................................................................................. 47
7.
Neutral investment................................................................................................ 47
B.
PRIVATIZATION ............................................................................................................ 48
C.
MONETARY AND FINANCIAL SYSTEM.................................................................... 49
1.
Normative Framework.......................................................................................... 49
2. Currency ....................................................................................................................... 49
3.
Investment Units (UDIs) ...................................................................................... 49
4.
The Central Bank and foreign exchange .............................................................. 49
5.
Affiliates of foreign financial entities................................................................... 50
6.
Credit institutions ................................................................................................. 51
a)
Development banks ................................................................................. 51
b)
Commercial banks ................................................................................... 51
7.
Special purpose financial entities (non-bank banks) ............................................ 52
8.
Auxiliary credit organizations and activities ........................................................ 52
9.
Institute for the Protection of Bank Savings (IPAB) ............................................ 53
10. Insurance and bonding sector....................................................................................... 54
a)
Insurance companies................................................................................ 54
b)
Reinsurance intermediaries...................................................................... 55
c)
Foreign reinsurers .................................................................................... 55
d)
Insurance agents....................................................................................... 55
e)
Bonding companies ................................................................................. 56
11.
Stock exchange operations sector......................................................................... 56
a)
The Mexican stock exchange................................................................... 56
b)
Brokerage houses and stock specialists ................................................... 57
c)
Security portfolio management companies.............................................. 57
d)
Institutions for the deposit of securities................................................... 57
12.
Investment companies .......................................................................................... 57
13.
Financial groups ................................................................................................... 58
14.
Credit information companies .............................................................................. 59
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(v)
D.
EXCHANGE CONTROLS ............................................................................................... 59
1.
Repatriation and exchange controls...................................................................... 59
2.
Capitalization and payment of dividends ............................................................. 59
IX.
NAFTA .......................................................................................................................................... 60
A.
INTRODUCTION............................................................................................................. 60
B.
NAFTA KEY FEATURES ............................................................................................... 60
C.
NAFTA PRINCIPLES REGARDING INVESTMENT ................................................... 61
D.
TARIFF REDUCTION ..................................................................................................... 62
E.
PROFESSIONAL SERVICES.......................................................................................... 62
F.
LAND TRANSPORTATION OF CARGO AND PASSENGERS................................... 62
G.
AUTOMOBILE SECTOR ................................................................................................ 62
H.
IMMIGRATION ............................................................................................................... 63
I.
GOVERNMENT PROCUREMENT ................................................................................ 63
J.
FINANCIAL SERVICES.................................................................................................. 64
K.
TRADE DISPUTES AND REMEDIAL MEASURES UNDER NAFTA........................ 65
1.
Unfair trade practices............................................................................................ 65
2.
Safeguards ............................................................................................................ 66
L.
NAFTA SUPPLEMENTAL AGREEMENTS.................................................................. 67
1.
NAFTA Labor Supplemental Agreement............................................................. 67
2.
NAFTA Environment Supplemental Agreement ................................................. 68
X.
EXPORTS FROM MEXICO ......................................................................................................... 71
A.
FOREIGN TRADE COMPANIES (ECEX) ..................................................................... 71
B.
HIGH-EXPORT COMPANIES (ALTEX) ....................................................................... 71
C.
IMPORT TAXES DRAWBACK PROGRAM ................................................................. 71
D.
MAQUILADORA PROGRAM (IN-BOND PROGRAM) ............................................... 71
1.
Domestic sales ...................................................................................................... 72
2.
Tax advantage of maquiladoras ............................................................................ 73
E.
TEMPORARY IMPORT PROGRAM FOR EXPORT (PITEX) ..................................... 73
F.
SECTOR PROMOTION PROGRAMS ........................................................................... 73
G.
THE MAQUILA AND PITEX PROGRAMS FROM THE YEAR 2001......................... 74
XI.
INVESTMENT OPPORTUNITIES............................................................................................... 76
A.
ENERGY........................................................................................................................... 76
1.
Petrochemicals and natural gas............................................................................. 76
2.
The electric power sector...................................................................................... 78
3.
Water resources ................................................................................................... 79
B.
TRANSPORTATION ....................................................................................................... 80
1.
Maritime activities................................................................................................ 80
a)
Foreign participation................................................................................ 80
b)
Navigation regime ................................................................................... 81
2.
Trucking ............................................................................................................... 82
a)
The Transportation Law .......................................................................... 83
b)
Participation in the Mexican market under NAFTA................................ 83
3.
Passenger transportation ....................................................................................... 83
4.
Aviation ................................................................................................................ 84
C.
INFRASTRUCTURE........................................................................................................ 84
1.
Railroads............................................................................................................... 84
a)
Content of new regulations...................................................................... 84
b)
Concessions ............................................................................................. 85
c)
Permits ..................................................................................................... 85
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(vi)
2.
3.
D.
E.
F.
G.
H.
I.
J.
K.
XII.
Airports................................................................................................................. 86
Ports...................................................................................................................... 86
a)
History of investment restrictions............................................................ 86
b)
The new Law of Ports.............................................................................. 87
i)
Scope of the new Law................................................................. 87
ii)
Foreign investment...................................................................... 87
iii)
Limitations of rights granted....................................................... 88
4.
Tourism................................................................................................................. 88
a)
Tourism Law............................................................................................ 88
b)
Casino gaming ......................................................................................... 89
c)
Time-share ............................................................................................... 89
5.
Construction ......................................................................................................... 90
a)
Private construction ................................................................................. 90
b)
Social interest housing............................................................................. 90
c)
Public works ............................................................................................ 91
d)
Industrial facilities ................................................................................... 92
NATURAL RESOURCES................................................................................................ 92
1.
Mining ................................................................................................................. 92
2.
Fisheries................................................................................................................ 93
3.
Agriculture and Agribusiness ............................................................................... 94
4.
Forestry................................................................................................................. 95
TELECOMMUNICATIONS ............................................................................................ 96
AUTOMOTIVE INDUSTRY ........................................................................................... 98
1.
History of investment restrictions......................................................................... 98
2.
Automotive industry Decree of 1989 ................................................................... 99
3.
Relevant NAFTA provisions ................................................................................ 99
ENVIRONMENTAL EQUIPMENT AND SERVICES ................................................. 100
MEDICAL SERVICES ................................................................................................... 101
1.
Private Hospitals and Clinics.............................................................................. 101
2.
Health Maintenance Organizations (HMO)........................................................ 101
3.
Mexican Social Security..................................................................................... 101
ELECTRONIC COMMERCE ....................................................................................... 101
1.
General 101
2.
Developing a legal framework............................................................................ 102
3.
Jurisdiction ......................................................................................................... 103
4.
Intellectual property............................................................................................ 103
5.
The Mexican Government and the Internet ........................................................ 104
INSURANCE ............................................................................................................... 104
OUTSOURCING ............................................................................................................ 104
DIRECT INVESTMENT ............................................................................................................. 105
A.
COMMON FORMS ........................................................................................................ 105
1.
Purchase of stock or assets. ................................................................................ 105
2.
Registration of a branch...................................................................................... 106
a)
General status of branches ..................................................................... 106
b)
Approval requirements .......................................................................... 106
c)
Taxes .................................................................................................... .107
3.
Registration of a representative office................................................................ 107
4.
Creation of a subsidiary ..................................................................................... 108
5.
Joint venture companies ..................................................................................... 108
a)
"Joint venture company."....................................................................... 108
b)
"Joint venture agreement" (Asociación en Participación) ..................... 108
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(vii)
B.
GENERAL COMMENTS............................................................................................... 109
XIII.
SUBSIDIARIES AND COMPANIES ......................................................................................... 110
A.
TYPES OF MERCANTILE COMPANIES .................................................................... 110
1.
"Sociedad en nombre colectivo."........................................................................ 110
2.
"Sociedad en comandita simple" and "sociedad en comandita por acciones...... 110
3.
"Sociedad de responsabilidad limitada ............................................................... 110
4.
"Sociedad anónima." .......................................................................................... 111
a)
General comments ................................................................................ 111
b)
Capitalization requirements ................................................................... 111
c)
Incorporation and registration requirements.......................................... 112
B.
COOPERATIVE COMPANIES ..................................................................................... 113
C.
ASSOCIATIONS ............................................................................................................ 113
XIV.
SENSITIVE AREAS.................................................................................................................... 114
A.
ZONING.......................................................................................................................... 114
B.
ENVIRONMENTAL REGULATION............................................................................ 114
1.
Environmental impact......................................................................................... 117
2.
Air emissions ...................................................................................................... 119
a)
Fixed sources ......................................................................................... 119
b)
Mobile sources....................................................................................... 119
3.
Water pollution ................................................................................................... 119
4.
Hazardous materials and toxic waste.................................................................. 120
5.
Other pollutants .................................................................................................. 120
6.
Inspection and sanctions..................................................................................... 121
C.
COMPETITION LAW.................................................................................................... 121
1.
Monopolistic practices........................................................................................ 121
2.
Mergers and acquisitions (Concentrations) ........................................................ 122
D.
CONSUMER PROTECTION ........................................................................................ 124
1.
Product liability .................................................................................................. 125
2.
Price Controls ..................................................................................................... 126
XV.
THE TAX SYSTEM .................................................................................................................... 127
A.
B.
ADMINISTRATION. ..................................................................................................... 127
C.
INCOME TAX 127
1.
Residency ........................................................................................................... 127
2.
Mexican residents ............................................................................................... 128
3.
Foreign residents ................................................................................................ 128
4.
Resident Mexican Companies ............................................................................ 128
a)
Object of taxation ................................................................................. 128
b)
Inflationary gains .................................................................................. 128
c)
Taxable base .......................................................................................... 128
d)
Fiscal year.............................................................................................. 129
e)
Rate of tax.............................................................................................. 129
f)
Authorized deductions ........................................................................... 129
g)
Requirements for deductibility .............................................................. 129
h)
Deductibility of interest ......................................................................... 130
i)
Deductibility of investments.................................................................. 130
j)
Non-deductible items............................................................................. 131
k)
Fiscal losses ........................................................................................... 131
l)
Dividends............................................................................................... 131
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(viii)
D.
E.
F.
XVI.
m)
Payment of tax ...................................................................................... 132
n)
Information on loans from foreign residents ......................................... 132
o)
Liquidation, merger and split-off .......................................................... 132
p)
Investments in low-tax jurisdictions ...................................................... 132
q)
Tax Consolidation System..................................................................... 134
r)
Transfer Pricing ..................................................................................... 134
5.
Taxation of individuals resident in Mexico ........................................................ 136
6.
Taxation of foreign companies and individuals ................................................. 136
a)
Salaries and fees .................................................................................... 137
b)
Leasing of real estate, property and time-sharing services .................... 137
c)
Sale of real estate ................................................................................... 137
d)
Sale of shares ......................................................................................... 137
e)
Dividends............................................................................................... 138
f)
Interest .................................................................................................. 138
g)
Financial leases...................................................................................... 139
h)
Royalty payments .................................................................................. 139
i)
Construction services............................................................................. 139
j)
Payment of commissions ....................................................................... 139
PERMANENT ESTABLISHMENT AND FIXED BASE ............................................. 140
1.
Definition of permanent establishment............................................................... 140
2.
Agency relationship............................................................................................ 140
3.
Definition of fixed base ...................................................................................... 141
4.
Tax rules ............................................................................................................. 141
a)
General requirements............................................................................. 141
b)
Remittances to head office..................................................................... 141
c)
Computation of taxable income............................................................. 141
OTHER TAXES ON CAPITAL AND TRANSACTIONS ............................................ 142
1.
Asset Tax ............................................................................................................ 142
2.
Value-Added Tax ............................................................................................... 142
a)
Transfers. ............................................................................................... 143
b)
Temporary use ....................................................................................... 143
c)
Imports................................................................................................... 143
d)
Services.................................................................................................. 143
e)
Exports................................................................................................... 144
f)
Computation of tax and miscellaneous .................................................. 144
MEXICO'S TAX TREATIES ......................................................................................... 145
LABOR ........................................................................................................................................ 146
A.
UNIONS.......................................................................................................................... 146
B.
FOREIGN EMPLOYEES ............................................................................................... 147
C.
GENERAL LABOR REGULATIONS ........................................................................... 147
1.
Individual employment contracts ....................................................................... 147
2.
Wages ................................................................................................................. 147
3.
Working hours .................................................................................................... 147
4.
Rate of overtime ................................................................................................. 148
5.
Rest days............................................................................................................. 148
6.
Safety and health care......................................................................................... 148
7.
Job-related risks.................................................................................................. 148
8.
Termination of employment contracts................................................................ 148
9.
Benefits ............................................................................................................. 150
a)
Paid vacations ........................................................................................ 150
b)
Christmas bonus..................................................................................... 150
____________________
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(ix)
10.
c)
Housing fund ......................................................................................... 150
d)
Profit sharing ......................................................................................... 150
Social Security.................................................................................................... 151
XVII. IMMIGRATION .......................................................................................................................... 153
A.
NON-IMMIGRANT........................................................................................................ 153
B.
IMMIGRANT ................................................................................................................. 155
C.
PERMANENT RESIDENT ............................................................................................ 156
D.
E.
TEMPORARY ENTRY OF VISITORS AND MEMBERS OF A BOARD
THROUGH THE "FMVC" ............................................................................................. 156
F.
NATURALIZATION...................................................................................................... 158
G.
TEMPORARY ENTRY OF BUSINESS PERSONS UNDER NAFTA......................... 159
XVIII. REAL ESTATE............................................................................................................................ 161
A.
ACQUISITION OF REAL ESTATE BY FOREIGNERS.............................................. 161
B.
AGRICULTURAL, LIVESTOCK AND TIMBERLAND ............................................. 161
C.
FORMALITIES CONCERNING THE TRANSFER OF PROPERTY .......................... 162
1.
Verification requirements ................................................................................... 162
2.
Legal formalities................................................................................................. 163
3.
Immigration status of the foreigner .................................................................... 163
D.
TAXES .................................................................................................................................. 163
1.
Income tax .......................................................................................................... 163
2.
Real Estate Acquisition Tax ............................................................................... 164
3.
Value-Added Tax .............................................................................................. 164
XIX. DISPUTE RESOLUTION ........................................................................................................... 165
A.
COURT PROCEEDINGS ............................................................................................... 165
1.
Choice of jurisdiction ......................................................................................... 165
2.
Choice of law...................................................................................................... 166
B.
ARBITRATION .............................................................................................................. 166
C.
EXECUTION OF FOREIGN JUDGMENTS AND ARBITRAL AWARDS ................ 167
1.
Exclusion Jurisdiction ........................................................................................ 167
2.
General Jurisdiction............................................................................................ 167
D.
FOREIGN EXTRATERRITORIAL MEASURES ......................................................... 168
XX.
MERGER, TRANSFORMATION AND DISSOLUTION OF BUSINESS ENTITIES ............. 169
A.
DISSOLUTION AND LIQUIDATION.......................................................................... 169
1.
Legal causes for dissolution ............................................................................... 169
2.
Liquidation ......................................................................................................... 169
3.
Tax consequences ............................................................................................... 170
4.
Labor consequences............................................................................................ 170
B.
MERGER AND TRANSFORMATION ......................................................................... 171
1.
2.
3.
Industrial property .............................................................................................. 172
C.
SPLIT-OFF ..................................................................................................................... 172
1.
2.
3.
Industrial property .............................................................................................. 173
────────────────
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(x)
D.
SUSPENSION OF PAYMENTS AND BANKRUPTCY............................................... 173
1.
Suspension of payments ..................................................................................... 174
2.
Declaration of bankruptcy .................................................................................. 174
3.
Bankruptcy procedure ........................................................................................ 175
4.
Criminal liability in bankruptcy ......................................................................... 176
5.
Termination of bankruptcy procedure ................................................................ 177
6.
Comments........................................................................................................... 177
XXI. INTERNATIONAL RELATIONSHIPS...................................................................................... 178
A.
DIPLOMATIC AND CONSULAR MATTERS............................................................. 178
1.
Diplomatic matters ............................................................................................. 178
2.
Consular matters ................................................................................................. 179
B.
INTERNATIONAL AGREEMENTS............................................................................. 180
1.
GATT and the World Trade Organization.......................................................... 180
2.
NAFTA and other Free Trade Agreements ........................................................ 181
3.
Asia-Pacific Economic Cooperation Mechanism ............................................... 181
4.
Organization for Economic Cooperation and Development............................... 181
5.
ALADI (Asociación Latinoamericana de Integración) Association for the
Integration of Latin America .............................................................................. 182
6.
MERCOSUR (Mercado Común del Sur) Common Market of the Southern
Hemisphere ....................................................................................................... 182
7.
European Union.................................................................................................. 182
8.
International Agreements for Investment. .......................................................... 185
9.
Free Trade Agreement of the Americas.............................................................. 185
10.
Other international conventions ......................................................................... 185
XXII. WILLS, TRUSTS AND ESTATE PLANNING .......................................................................... 186
A.
JURISDICTION .............................................................................................................. 186
B.
THE MEXICAN CIVIL CODE ...................................................................................... 186
C.
U.S. ESTATE TAXES .................................................................................................... 186
D.
WILLS AND TRUSTS ................................................................................................... 186
CONCLUSION ........................................................................................................................................ 187
APPENDIX
Statistics ........................................................................................................................................................i
GDP Growth 1997 – 1998................................................................................................................ii
Gross Domestic Product - Latin America and the Caribbean ..........................................................ii
Mexico's Balance of Trade by Region 1997 - 1998 ......................................................................iii
Total Imports in Billions of Dollars ...............................................................................................iv
Total Exports in Billions of Dollars ...............................................................................................iv
Mexico's Exports Share in United States' Imports .......................................................................... v
Percentage of Imports Attributable to Export Industries ................................................................. v
Main Products Traded by Mexico – Imports ..................................................................................vi
Main Products Traded by Mexico – Exports ................................................................................vii
Composition of Total Exports. .....................................................................................................viii
Share of Manufacturing Exports in Total Exports .......................................................................viii
Growth of Maquiladora Employment .............................................................................................ix
Growth of Maquiladora Plants ....................................................................................................... ix
____________________
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(xi)
MACRO-ECONOMIC FRAMEWORK
MEXICO IN THE NEW MILLENNIUM
Problems and Prospects for Stability and Sustained Growth
* Dr. Roberto Salinas-León
THE MAKINGS OF A MODERN MEXICO
Mexico has experienced significant strides in economic and political reform in the past
15 years. The process of reform can be characterized as a four-dimensional program of fiscal and
monetary discipline, aggressive deregulation, a broad-based program of privatization and
multilateral liberalization of trade and capital investment. This fits the fashionable description of
reform in accordance with what John Williamson calls “the Washington consensus.” The Zedillo
administration has demonstrated an open commitment to reform and continuity, with an agenda
that targets transformation of the pension system, labor market flexibility, greater deregulation
and a “second wave” of privatization.
The dramatic crisis engendered by the peso devaluation in December of 1994
undermined the nation’s image as an attractive market regime and sparked acute criticism of the
entire program of reform through guilt by association. Unfortunately, the association between
market reform and currency devaluation generated a widespread counterattack by forces opposed
to the transformation process. Hence, enemies of reform, both inside and outside the body
politic, have wielded the prevalence of anti-market sentiments to defend state ownership.
Moreover, the exaggerated emphasis on macroeconomic adjustment has failed to heed the
principles of an institutional approach, namely, an emphasis on property rights, competitive
markets, a stable monetary system, and strong judicial institutions. So, despite the official
commitment to market-based transformation, and the recent certification from a higher
investment grade, a great deal remains to be done to fulfill all the institutional requirements of a
free and prosperous economy.
The anti-liberalization fallout of the currency collapse has led to reform fatigue. Indeed,
suspicions of crony capitalism and corruption associated with the sale of state-owned enterprises
has inhibited future progress in the second wave of privatization. In mid-1996, the legislature
overturned the decree to sell off the majority ownership of secondary petrochemicals. In the
period 1998-2000, congressional gridlock and thirst for political blood has prevented passage of
major reforms, including liberalization of the electricity sector, new and improved financial laws
designed to remove protectionist moral hazards, exchange-rate autonomy, and other structural
changes. These failures constitute a major blow to reform. To be sure, implementation of a
Chile-style social security privatization and individualized pension reform constitutes a
fundamental step in the right direction, but more remains to be done in order to re-energize the
momentum that underpins successful privatization. This is especially important in view of the
extraordinary decision to open the electricity sector to national and international private capital a decision which spills over into the next administration.
Although economic recovery has been strong (3.7% average growth for 1995-2000, even
despite the massive fall of -6.2% in 1995), the current state of affairs constitutes a litmus test of
the strategic benefits of liberalization in forcing public policy to undertake issue-specific
(I)
measures such as greater deregulation and privatization as mechanisms designed to restore
confidence and increase economic well-being. To recap, the policies of the period of
macroeconomic adjustment were distorted during the Salinas administration-- for example,
entities were privatized but not deregulated, free trade on the outside (NAFTA, liberalization of
tariffs) was not complemented with free trade on the inside (red-tape, corruption and regulatory
burdens), fiscal and monetary discipline were relaxed in 1994, and the like. However, the good
news is that the basic principles of progress are being acknowledged, albeit in a partial manner,
after two decades of fruitless debates about whether state intervention is needed to attain a more
"equitable" distribution of national income.
CONTAGION AND GLOBAL VOLATILITY
In 1998-1999, after successful coping with the "contagion" fallout of the Asian crisis,
Mexico was severely tested with a new round of contagion generated by the devaluation and
debt default in Russia and the 1999 devaluation of the Brazilian real. These episodes occasioned
two contrary movements. First, a massive flight to quality in the investment world. Mexico was
forced to auction 28-day Cetes at 47%, in a desperate effort to curtail irrational panic, which the
other side of the coin of the "irrational exuberance" of 1997. Today, however, those interest rates
have fallen to slightly above 12% levels, as a result of a successful separation from the emerging
market blues that afflict global capital flows. The shift from a maximum bullish regime of stable
money to a less favorable financial environment bottomed out once Brazil devalued its
currency, the real. Yet, since then, world markets have began to discriminate between the "fast
track" and "slow-track" performers in Latin America, a phenomenon known as de-coupling.
Mexico is categorized among the former group due to strong economic fundamentals, especially
its commitment to fiscal discipline.
It has become commonplace to characterize the Mexican 1994 crisis as "the first financial
crisis of the 21st century". The episodes in Asia, Russia and Brazil confirm the view that new
policy arrangements are required in emerging markets in order to respond adequately to the
increasing competition for global capital flows and the sudden shifts in perception associated
with investment expectations:
1.
One maxim says that "sound policies are essential". This suggests an obvious truism, but
technological advances in the world of finance have made the movement of global capital
flows highly sensitive to the policies pursued in different countries. A sound policy is
rewarded with instantaneous capital inflows; and bad policy can be severely punished
with capital outflow shocks. This occurred in Mexico 1994 and Brazil 1999, as the
government sought to compensate a fall in reserves required to sustain the exchange-rate
regime with an untenable monetary policy: an increase in domestic credit. This gamble
maintained interest rates artificially low; and when the modification of the exchange-rate
bands occurred, panic ensued and capital flows fled en masse towards dollar assets.
2.
Emerging markets should treat capital inflows as transitory, not permanent; and they
should treat capital outflows as permanent, not merely transitory. This conservative riskmanagement strategy failed in the months preceding the peso crash of 1994, and again in
the Asian crisis, as authorities bet on a return of foreign investment that never
materialized. If such a strategy is followed, capital outflows that turn out to stay for good
would then be regarded as a windfall gain, but not as a basis for pursuing policy. It is an
extremely relevant notion, again, in view of the capital inflow episode Mexico will
experience following the investment grade.
(II)
3. A final lesson is that high rates of internal savings constitute a key ingredient for durable
growth-- notwithstanding the turbulence in Asian economies. But such rates of savings
must be based on long-term policy initiatives, such as reducing the rate of inflation so
that savers get positive real returns; reform of the pension system; fiscal discipline; and a
more efficient and accessible financial system.
This set of lessons suggests the unfeasibility of the popular claim to implement controls
on short-term capital. The consistent practice of sound macroeconomic policy constitutes a better
anchor for foreign capital flows than manufactured schemes attempting to control short-term
investments. As Alan Greenspan says a policy of capital controls, or taxes of private investment
inflows, represent self-defeating options that fail to acknowledge the technological contribution
of the spread of knowledge through information systems. The challenge is not to avoid the new
paradigm of global finance, but to enhance transparent policies in order to minimize systemic
risk.
MONETARY AND EXCHANGE-RATE POLICY
The Governor of the Bank of Mexico, Guillermo Ortiz, claims that the role of the central
bank is to create sustainable growth by lowering inflation rates consistently. An initiative has
been introduced to strengthen central bank autonomy, including control of exchange rate policy
and responsibility for bank supervision. Despite rumor of dollarization, Ortiz has denied changes
in monetary policy and exchange rate policy. This means people need to learn to live with
occasional downward stair steps in the peso's value. The floating rate system has worked better
than expected. Mexico has made a shift from the pre-1995 exchange rate anchor to a "monetary
policy anchor". The "corto" mechanism has been applied seven times, causing a drain in
liquidity and a hike in interest rates, thereby stabilizing the ratio of internal credit to foreign
exchange, as a response to undesirable drifts in the exchange rate and increased inflation
expectations. The central bank uses the following method: if the peso weakens beyond a level
consistent with falling inflation, they drain liquidity. This is supposed to offset inflation
pressures derived from a currency depreciation.
However, the role of the central bank continues to be controversial, in light of concerns
of whether monetary autonomy is merely a de jure artifact rather than a de facto condition of an
independent monetary policy. The past history of monetary mismanagement and acute price
instability suggested the need to enhance the quality of monetary policy, compatible with the
mandate for stability, regardless of whether the means to attain this end conflict with the political
process. In effect, hard questions remain
1.
2.
3.
4.
Will Ortiz maintain the target of 0% to 3% inflation of the central bank by 2003, or will
he show willingness to relax monetary policy at the tough ends of the business cycle, in
the interest of short-term growth?
Will Ortiz seek full price stability, consistent with his new responsibilities, or will he
give way to the "soft" projections formulated by the new gradualist commitment to
single-digit inflation until 2003?
Will Ortiz condemn all fiscal deficits, regardless of size, as a threat to price stability? Or
will he assume a pragmatic stance, defending certain levels as "reasonable"?
Will Ortiz heed the noisy demands of exporters, who continue to press for a system of
controlled devaluations in order to stimulate competitiveness, or will he honor the
objective of the central bank, which is to protect the stability of the purchasing power of
(III)
the currency?
These questions reflect legitimate concerns. Mexico has a poor track record in price
stability in the past two decades, which explains the need for an independent monetary policy,
capable at any moment of "just saying no". Monetary policy suffers a credibility gap. The
popular consensus is that, price stabilization notwithstanding, the monetary institution in charge
of procuring the purchasing power of the currency not genuinely independent. Indeed, all formal
explanations for monetary phenomena, whether valid or not, are typically construed as attempts
to save face or conceal an ulterior motive. This is not an assessment, but a sociological fact on
the status of the monetary institutions. As David Hale says, the shadow of the peso collapse
entails that investors will unavoidably focus attention of the "quality of the monetary
institutions".
THE DOLLARIZATION DEBATE
"It is questionable whether a sovereign nation, otherwise inclined to economic policies that are
'off the wagon', can force itself into 'sobriety' by dollarization ..."
Alan Greenspan, November 1998
One "d-word" (devaluation) has been replaced by another "d-word" (dollarization). The
exchange-rate collapse in Brazil and fears of further contagion has sparked debates about the
pros and cons of radical monetary reform, namely, establishment of a currency board,
negotiation of monetary union in the hemisphere, or outright unilateral dollarization. The
enthusiasm with the new "d-word" stems from concerns on how to eliminate exchange-rate risk
and thereby enhance the “quality” of a monetary system ravaged by two decades of debt,
devaluation and several unfulfilled promises. The economist Sebastian Edwards, who is
sympathetic to the need for radical monetary reform, warns that dollarization “is not a cure for
the common cold” of contagion. Yet, from a theoretical basis, the benefits of dollarization are
extremely attractive:

Low inflation rates. Inflation is both a monetary and exchange rate phenomenon in
Mexico. Maxi-devaluations tend to be followed by price instability, through imported
goods and expectations. Dollarization would end the inflation-devaluation trap and allow
the price level to converge to international dollar levels.

Low interest rates. The fall in inflation would permit a stabilization of interest rates and
thereby the growth of private credit allocation. The spread with US rates would no longer
be a function of exchange-rate risk, but of other forms of risk.


Improved country risk. The near convergence of interest rates would improve the
country rating, and stimulate greater capital flow of foreign direct investment.
Transparency. Dollarization would rule out currency confiscation, capital controls, or
the abuse of devaluation as a tool of discretionary public policy. The transparency in the
new monetary system would give impetus to fiscal and structural reform, since a policy
mistake (eg., large fiscal deficits) could no longer be “hidden” with monetary instruments
(eg., artificially expanding the money supply to finance public largess). Thus,
dollarization would attract scrutiny and provide an incentive to move faster in improving
fiscal and structural policies.
The objections to dollarization or currency board reform embody three dimensions. The
first is political, namely, the loss of national sovereignty vis-à-vis the decision to forego an
(IV)
independent monetary policy and surrender such policy to the US Federal Reserve. A second
objection is that dollarization requires relinquishing the flexibility of exchange-rate policy and
the “discretionary” use of exchange rates to counteract external shocks. This objection is
popular, but begs the question, since the issue is whether discretion is (or has been) a necessary
tool for stability. The third set of objections are pragmatic, that is, the financial or technical
obstacles that prevent dollarization from taking place:
(V)

Seigniorage. Seigniorage, the earnings a central bank derives from issuing currency,
would be foregone under a dollarized economy.

Lender of Last Resort. The central bank’s role as lender of last resort would be lost
under dollarization, which would make the banking system vulnerable in case a run
occurred, or worse, systemic crisis. An alternative lender of last resort facility would
have to be developed in order to remove this critical vulnerability.

Labor Markets. An external shock would entail burdening the real economy with the
full adjustment, instead of using the exchange rate as shock absorber. A flexible labor
market is essential to mitigate the pain occasioned by such shocks.
The logic of dollarization claims in light of the collapse of market confidence in
devaluation-prone countries (witness Mexico 1995 or Brazil 1999), dollarization would, ipso
facto, remove fears of a future devaluation. Thus, inflation and interest rates would fall to levels
similar to the US. A lot of money and economic pain would be spared.
In effect, construction of a credible and functioning independent monetary policy
requires a long well-established track record of stability. Dollarization is a short-cut that avoids
this endeavour. The issue between maintaining a domestic currency and radical monetary reform
centres on the benefit of the doubt: in view of past performance does the central bank deserve
this benefit? To be sure, currency reform is not a panacea. The principal objection is, indeed, that
the benefits of dollarization can be achieved without a need to undertake such a radical monetary
reform. This is an open question. In addition there are strong “how-to” practical considerations.
Mexico is rife with banking fragility and low levels of capitalization, whereas dollarization
demands a much healthier financial system. Be that as it may, by 2005, the predominance of the
external sector in the economy entails that 4 out of every 5 transactions will be dollar
denominated - thereby forcing a natural, not ideological, need for monetary convergence.
NAFTA: NEW RULES OF THE GAME
A salient irony about the politics of NAFTA is that it has gained far broader support in
the Latin-American region (a region with long statist and protectionist traditions) than in the US,
the alleged paradigm of free-trade. So construed, issues like the ban on tomatoes, the problems
with transportation, the tuna embargo and forms of hidden protectionism are far more relevant to
the dispute over NAFTA than, for instance, the concerns prevalent in the environmental and
cultural debates. Mexico’s role in continental trade liberalization is critical: it acts as a
commercial and cultural bridge between the North American region and the underdeveloped
Latin-American region.
The NAFTA treaty establishes a framework that enables 84% of Mexico's non-oil exports
to enter the US duty- and quota-free (this is equivalent to 7,300 goods). Conversely, 40% of US
and Canadian export goods can enter the Mexican market under the same zero-restriction
conditions. The majority of the latter percentage is composed of intermediary durables not made
or sold in the Mexican domestic market and capital-intensive goods such as machinery, hightech equipment, systems, and the like. Thus, in both instances, the treat is beneficial to the trade
and investment prospects of the Mexican economy. This trade privilege paid off significantly.
Mexico’s exports to the U.S. have boomed, and are likely to surpass the $150 billion mark in
2000. The top exports include automobiles, electronic goods, machinery parts, plastics,
computers and glass. Imports from the U.S. have also seen a significant boost, of which an
estimated 88% represent new capital-intensive and intermediary goods.
(VI)
In commercial matters, this means that the increase of two-way trade between Mexico
and the U.S. will top a massive $500 billion US by the middle of the next millennium. In the
medium-term, Mexico is commercially bound to become the US's most important trading
partner. Yet, despite these gains, the key point about NAFTA to Mexico is not unrestricted
market access, but that the treaty encourages a permanent adjustment. There are four
fundamental benefits derived from the NAFTA framework.

The first centers on the need for order. Mexico and the US enjoy a flourishing trade
relationship. The NAFTA framework represents an attempt to consolidate legal order to
this growing relationship. For example, the need for dispute settlement mechanisms is
evident in view of the problem of “unilateralism”; namely, the problem that U.S.
antidumping and countervailing duties charges, or failure to meet environmental
standards, are decided in U.S. courts. The cross-selection dispute solving mechanism
embodied in NAFTA avoids this problem by seeking neutrality in deciding trade disputes
among the three countries.

The second benefit centers on diversification. In effect, open trade liberalization has
transformed the structure of Mexico’s external sector. The latter has diversified its
exports. Manufactured goods represent over 60% of the country’s external output. In
contrast, prior to trade liberalization, oil exports dominated the external sector by some
85%. Today oil sales abroad constitute less than 6%. Thus, NAFTA constitutes an
opportunity to diversify underdeveloped trade structures as well as to attain higher levels
of domestic activity via duty-free market access.

The idea of competitiveness supplies the third fundamental claim behind NAFTA. The
treaty lays the foundations of business competitiveness by providing broad-based rules to
allow for long-term planning, open access to updated technology, incentives to
specialize, and free entry to the largest market in the world. NAFTA represents an
opportunity to develop economies of scale and specialization.

A fourth argument for NAFTA is that this accord seeks to meet the capital needs of
economies like Mexico. Of the total stock of world private capital, only 20% is destined
to less developed world. For Mexico, it is imperative to continue attracting a large flow
of new capital investments. In effect, regional agreements like NAFTA embody an
unnoticed strategic benefit in forcing countries to follow salutary domestic policy. In
other words, the strategic value of NAFTA lies in its potential for literally forcing
government to follow trade-consistent policies. This means that a policy that inhibits
“what must be done” will disappear, or adapt to change. Not surprisingly, Mexico has
averaged a $10 billion annual inflow of direct foreign investment since 1994, which is
second only to China among emerging markets.
THE EXPORT SECTOR: A GENERAL OVERVIEW
Mexico’s economy faces important challenges in the new millennium, both internally and
externally. The uncertainty governing the immediate performance of the economy in the face of
external shocks, together with global financial volatility and the shortage of credit, will tend to
have a negative effect in the “real economy,” namely, private investment and consumer
spending. Mexico’s growth rate will still average between 4 and 4.5% percent growth. However,
export growth is considered a “safety valve” separating markets like Mexico from markets such
as Indonesia, Russia, even Brazil. This proved to be the case in a recession-laden year, such as
(VII)
1999.
Mexico’s strong trade and investment links to the US economy make export performance
an unavoidable function of domestic economic performance in the US. The external sector is tied
to the US geographically and institutionally (through NAFTA). Consequently, for the years
ahead, there are four factors that will influence the behavior of Mexico’s external sector:




The performance of the US economy
The availability of capital to finance expansion
Exchange-rate variations
Institutional problems related to NAFTA (eg., trucking and “snapbacks”)
Despite recent warnings of a slowdown, the US will continue to outperform expectations
of a negative turn, notwithstanding the slower nominal world growth. The monthly survey
conducted by the Banco de México systematically reflects perpetual worries over the cost of
financing, the supply shocks associated with volatile commodity prices and the volatility
surrounding global financial markets.
Nevertheless, despite the sharp “up-down” movements in oil prices, total exports have
continued to grow. This reflects a phenomenon known as the “de-petrollarization” of the export
sector. Oil sales represent less than 6% of total trade with the rest of the world, whereas in the
mid-1980s this figure was closer to a massive 85%. A similar figure can be observed in the
rubric of total investment. A potential slowdown of the US economy would limit growth
potential in manufacturing, leading the sector to post modest growth rates in comparison to its
previous performance (but not unusual given a volatile world market). Future projections are
based on the premise that everything else will remain equal. Yet, the four aforementioned factors
are critical:
The US economy
The evolution of Mexico’s economy and external sector are heavily dependent on
domestic performance in the US. The conventional slowdown expected in the US merely reflects
a soft-landing, which will not signify an abrupt downward change in Mexico’s merchandise
trade performance. The crucial factor in the new millennium will be the reaction of US
consumers to the changes in commodity prices, the financial markets, unemployment and
interest rates. If the spending trends slow down, exports will fall and growth in Mexico will
diminish. This is unlikely to happen in an abrupt fashion.
Exchange-rate variations
Mexico’s exports are highly sensitive to changes in nominal exchange-rate variations.
The depreciation in 1998 “helped” exports remain competitive (albeit artificially), but a capital
inflows generated new pressures towards currency appreciation in 1999. More is expected in the
coming years. The critical factor in this rubric is the vulnerability to external shocks inherent in a
floating rate.
Cost of Capital
The high interest rate environment signifies a limited universe of opportunity for
expansion and capital financing. The high inflation rate and the anti-growth fiscal package
constrain the requirements for re-capitalizing the banking sector, which remains swamped
with a high bad debt portfolio and restructuring problems. If bank capitalization can take
(VIII)
place in future years, exports will benefit from domestic availability of capital. Otherwise,
the current prohibitive levels limit the expansion potential of small and medium size
concerns.
Institutional Problems with NAFTA
Despite the welcome performance of NAFTA, failure to solve the problem of trucking
and access to the US transportation market will eventually lead to retaliatory measures on the
part of Mexico’s government, thereby limiting the full potential of exports and total trade. A
solution is expected, but new problems in overcoming protectionist obstacles represent an
important institutional challenge.
PROBLEMS AND PROSPECTS FOR MEXICO’S ECONOMY
Mexico’s economy has registered a substantial improvement since the peso devaluation:
inflation has fallen and growth has resumed pace - surviving the worst consequences of the 1998
oil shock and financial crisis. In addition, interest-rates have fallen and the stock market remains
highly active. The numbers reflect more that a statistical improvement. A variable like the
interest rate, or the exchange rate, reflects a barometer of expectations. The issue is to identify
the factors could undermine recovery. An assessment of Mexico's conditions for private
investment must address two items: the short-term stability of the investment regime and the
long-term prospects for sustained and stable economic growth.
The first issue centers on the initiatives to maintain stability and social order amid a
vulnerable international situation wherein the confluence of factors has short-circuited the
investment euphoria generated by the original prospects of open trade in North America and
structural reform. The second issue centers on the long-term opportunities that accrue from the
shift to a pro-trade, market-oriented economy with vast resources for growth.
Indeed, the central challenges for Mexico can be encapsulated in three words:
investment, stability, growth. While performance has improved, problems remain. The efforts in
trade and investment liberalization were implemented to help fulfill the capital needs of the
economy, by creating a reliable investment regime. The 1994 devaluation interrupted this crucial
process. The challenge for policy makers is not to avoid dependence on foreign capital, but to
forge, on a systematic basis, a reliable haven for productive investment.

The global objectives of current economic policy are threefold: a growth rate superior to
5% per annum, the annual generation of 1,000,000 jobs per year and the reactivation of real
purchasing power. There is no magic in this figure: such is the average growth rate needed to
service the high demands of a rapidly expanding labor market. The following items are key
ingredients of this policy:
The emphasis placed on internal savings reflects the belief that purchasing power
stability and the prevention of a new financial crisis requires using domestic savings as a
basis to reach a total net investment to 25% of GDP. In addition, this is consistent with
the 3% ceiling for current account deficits. Thus, the gap between savings and investment
that generates current deficits via external capital is seen as a complement of growth, but
not as the basis for policy. A crucial issue is whether the economy can afford to treat
foreign capital as expendable, or merely secondary, in light of the need to service the
growth requirements of a severely undercapitalized economy.
(IX)



The reform to privatize social security and encourage competition in management of
individual retirement accounts (Afores) constitutes the basis of the effort to increase
domestic savings. In effect, the reform of the pension system is designed to act as the
core of the plan to bolster private domestic savings to 22%. It is a landmark reform,
modifications and all. The results will not manifest themselves in the short-term, but the
reform is fundamental for future generations. Under the system of competition, the
accounts would be individual and the funds will be the property of each one of affiliated
workers. Consequently, each worker will be able to identify the recourses destined to
retirement as exclusive private savings. An incentive is thereby built to protect the
individual patrimony.
The banking sector is still immersed in resolving problems with debt restructuring and a
high burden of bad debts. This prevents banks from fulfilling their role as efficient
financial intermediaries between savings and investment. If the banks are unable to
perform this role in the longer-term, credit will not be available in the level required to
finance high rates of private sector-led economic growth. This is the motive for the new
legislation to allow 100% of foreign ownership in the banking system and for the
approval of the Fobaproa fund - which is the equivalent of the RTC. The request for a
conversion of current debt to formal debt has a clear financial logic: if the debt is
registered as public internal debt, interest payment obligations can be reduced. Also, if
bad debt portfolios were not formalized into public debt the bank system would risk
another run and the economy could face another financial collapse. The cost is high: it
elevates public-debt burden to 45% of GDP from 27%. This conversion will take place
on an annual basis and requires congressional approval.
Electricity privatization is stalled. In the border city of Matamoros, electricity is
supplied via the government-run Federal Electricity Commission (CFE). Predictably, the
quality of service is poor. Power variations and shortages are commonplace, forcing both
residential users and industrial consumers to purchase an vast array of power regulators
designed to moderate sudden surges or decreases that might ruin machinery, televisions,
computers or air conditioning. In addition, the government heavily subsidizes electricity
costs, regardless of income level. Across the border in Brownsville, Texas residents
enjoy a choice between two electric companies, a local co-operative or the subsidiary of a
larger company. Electricity rates are not subsidized and although bills tend to be higher
than in Matamoros, power surges and shortages are rare and competition keeps market
prices at reasonable levels. This tale of two cities reflects the need for a major overhaul
of Mexico’s electricity sector. The lack of efficient power constitutes a huge cost,
inhibiting the competitiveness of small and medium size concerns that merely strive to
make ends meet. This is the logic behind the Zedillo administration's initiative to reform
articles 27 and 28 of the Constitution: allow private domestic and foreign companies to
engage in the generation of electric power and development of a distribution market. The
subsidized tariffs would be gradually phased out, consistent with reduction of prices that
comes with competition. The initiative has been sabotaged by congressional gridlock,
with little chance of approval in the forthcoming electoral year. But this is a matter of
simple arithmetic. In the next six years the rate of population growth in Mexico will
increase demand for electric power by an 13 gigawatts, which is 37% higher than current
generation capacity. However, to meet this demand, the CFE and CLE would require new
capital investment equivalent to $25 billion dollars. The average annual cash flow of
these two enterprises in the last two years is a staggering 86.7% below the level needed
to generate that much capital. A massive round of public debt would be needed. Without
(X)
the aid of private investment, Mexico will need to continue subsidizing a wasteful
electricity sector that has little chance of meeting future increases in demand. Indeed, the
more vested interests keep the initiative in the congressional cooler, the more government
will continue to waste valuable taxpayer cash to finance inefficiency.
The economic projections for the medium term convey a message in support of economic
growth, based less in export performance and more on recovery of domestic consumption and
capital formation. Thus, the logic is that the projected increases in consumption and income will
signify a comparative increase in real wages, employment and opportunities in the credit market.
However, despite the government’s commitment to relative stability and high growth, the
middle-term scenario embodies a fundamental inconsistency in the combination of fore-casts for
inflation rates, economic growth and the exchange rate. The triple projection of a positive high
growth rate, a declining inflation rate and an annual rate of exchange that adjusts to inflation
differentials between Mexico and the US, constitutes an unsustainable combination. There are
three possible scenarios under the official projections:
Scenario #1: If inflation falls, this will be based on discipline in monetary and fiscal
policy; and if growth ensues, it will be based on a reactivation of private consumption and
capital formation. If this scenario materializes, it will generate lower country risk, more foreign
investment and greater levels of confidence in the economy-factors which would, together with
anti-inflation policy, create a strong background for peso stability (even real peso appreciation).
Scenario #2: If a peso depreciation occurs, and the parity is maintained at a sufficiently
“competitive” level (congruent with differences in Mexico’s and the US's consumer price
indices), then a combination of growth and depreciation is impossible unless government relaxes
its anti-inflation goal. Depreciation in the parity induces high interest rates, as the central bank
must contract liquidity to neutralize the inflationary impact of devaluation. So, if there is growth
and more depreciation, this would engender an increase in prices.
Scenario #3: In the third scenario, assume a “controlled” depreciation of the currency;
and assume that inflation falls. This can occur only if monetary policy is sufficiently strict to
overkill inflation pressures derived from a cheaper currency. However, in order to do this, the
central bank would need to maintain monetary base expansion well below the ceiling targets,
thereby engendering high interest rates and choking domestic growth. So growth would fail to
reach the levels sought for by the government.
One way out of this trilemma is to forge ahead with structural reform-particularly in the
rubrics of privatization, electricity reform, labor market reform and deregulation. The
government has several pending privatization efforts, including airports, petrochemical concerns
and private participation in energy generation. A new push on behalf of greater market reform
would facilitate the transference of assets to private management and thereby consolidate the
effort to sustain rates of growth of 5% and above.
This will remain the fundamental economic task of the new administration, of governing
Mexico in the new millennium.
* Executive Director of Policy Analysis
TV Azteca
(XI)
President, Mexico Business Forum.
Formerly Executive Director, Centro de Investigaciones Sobre la Libre Empresa (CISLE).
Institutions like Centro de Investigaciones Sobre la Libre Empresa usually restrict their range of
activities to either academic goals or public policy goals. At CISLE, we do both. Academically,
our aim is to foster a proper understanding of the market system. This is a long-term task. At the
level of public policy, our aim is to propose solutions and creative strategies to transform the
current system of mixed economy into a system approximating a market regime as far as
possible. This is a short-term task, which concentrates on issues like privatization, deregulation,
tax reform, legal reform, free trade, and the like.
(XII)
MEXICO
AND
LEGAL FRAMEWORK
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I. THE COUNTRY AT A GLANCE
I.
THE COUNTRY AT A GLANCE
A.
INTRODUCTION
In the twenty-first century, the balance of power will change. A dynamic economic global
interdependence is now replacing the once dominant nation-state relationship as the most influential
force in today's world. With the end of the Cold War, "might" is now principally measured by
strength of participation in international markets, not in the historical terms of military power.
Economic strength depends on the ability of a country's companies to use all available resources,
wherever located, to their maximum advantage. To ensure the necessary cooperation and to
maximize competitiveness, international trade relationships are being formed.
Mexican leaders have long recognized this need to optimize conditions under which
business and industry could flourish. The country joined the GATT (now the World Trade
Organization) in 1986, the Asia-Pacific Economic Cooperation Mechanism (APEC) in 1993, the
Organization for Economic Cooperation and Development (OECD) in 1994 and, of course, the
North American Free Trade Agreement (NAFTA) which took effect with the United States and
Canada on January 1, 1994. When the complete terms of NAFTA become fully effective on January
1, 2009, all barriers to commerce will have been removed from what is now one of the largest free
trade areas in the world, a US$6.5 trillion market of more than 360 million potential consumers
which, even now, is creating lucrative opportunities for Canadian, Mexican and U.S. companies.
Mexico also has entered into numerous other bilateral trade and tax treaties. In addition,
Mexico has concluded negotiations for a free trade agreement with the European Union. The final
EU treaty is expected to be signed and become effective in 2000. (See sections XV.F. and XXI.)
In spite of 1995's recessionary pressures, Mexico's business-friendly economic policy never
wavered and macroeconomic statistics have now recovered. Judicial reform has progressed on
schedule and political reform, which has been a firm commitment of President Ernesto Zedillo, was
realized to a great degree by the July, 1997 federal election which saw great changes in the Mexican
political landscape. The ruling PRI lost its majority in the lower house of Congress for the first time
since the party was created in 1929, and the left-center leader, Cuauhtémoc Cárdenas of the PRD,
won the race for mayor of Mexico City. Subsequent elections at state and municipal levels have
shown that Mexico has become a more mature democracy with three major parties (including the
right-center PAN) hotly contesting almost every electoral contest. After scandals involving Mexico's
former first family, the Zedillo administration pledged a fight on governmental corruption.
The reform process of the commercial, political, judicial, legal and regulatory systems is not
complete, but the government is committed to carrying out needed reforms. Most importantly, it
now seems impossible that Mexico's open economic policy will be reversed; unquestionably,
Mexico will not return to a closed economy.
Now that Mexico's economy is back on course — and democratization is becoming a reality
— it is relevant to review the many conditions that make the country a good business and
investment opportunity:
• A relatively young workforce of 36.5 million that has proven capable of delivering
quality, hard work and loyalty at lower labor costs than those common in more advanced
industrialized economies;
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• Access to the United States, the world's largest consumer market - with a vastly
improved infrastructure leading to the 3,107-kilometer (almost 2,000-mile) border.
• Up-to-date electronic communications, expanded airline connections and a modernized
highway system;
• A strategic geographical location for other key markets with coastlines facing Europe
and Asia, and easy entry to the rest of Latin America;
•
Existing trade and tax treaties;
•
Plentiful natural resources;
•
A currently stable domestic market with great potential;
• A liberalized commercial policy climate which has become increasingly supportive of
private business activity and investment; and
A firm commitment to, and realization of, extensive privatization, political reform and increasing
public accountability and transparency.
B.
GEOGRAPHY
Mexico is approximately 30 percent as large as the United States, which makes it the third
largest country in Latin America, after Brazil and Argentina, and the thirteenth largest in the world.
It is bounded on the north by the United States, and on the south by Belize and Guatemala. Water
flanks both the east and west sides of Mexico, with the Pacific Ocean on its west coast and the Gulf
of Mexico and Caribbean on its east coast.
Mostly mountainous and with large extensions of desert, only 12 percent of its land is arable
(as against 30 percent in the U.S.). Future irrigation projects, however, could raise the percentage of
cultivatable land considerably.
While Mexico has no large navigable rivers, it has excellent port facilities along its long
Pacific, Caribbean and Gulf of Mexico coastlines.
C.
POPULATION
Mexico's population is approaching 100 million, with an annual growth rate, including the
migratory factor, of 1.7 percent (down from 3.5 percent 25 years ago).
Mexico, the second most populous country in Latin America, has roughly one-half the
population of Brazil, and well over twice that of Argentina.
Eighty percent of Mexico's population is under 40 years of age and 48 percent is under 20.
The average age is 26.
Because of population growth and its relative youth - and because more than a million
workers were laid off during the 1995 recession - it is foreseen that more than a million new
jobs
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must be created each year. Mexico requires and welcomes substantial private investment to
meet these employment needs.
Mexico City, among the largest cities in the world with a metropolitan area population of
approximately 20 million, is the country's political, commercial, industrial and cultural center. With
22.5 percent of Mexico's people and 40 percent of its motor vehicles, the future expansion of
Mexico City needs to be regulated. Accordingly, the government has put into effect incentive
programs to decentralize industry. As a consequence, nearby cities such as Toluca, Puebla and
Queretaro, have realized considerable industrial and population gains in the last decade.
Guadalajara, northwest of Mexico City, is the second largest metropolitan area with 6.3
million inhabitants, and the industrial city of Monterrey, just south of Laredo, Texas, is third with
about five million.
The recent growth in the number of maquiladoras (in-bond assembly plants) has created new
population centers in Tijuana (south of San Diego), Ciudad Juárez (south of El Paso) and Nuevo
Laredo, Laredo, Texas' sister city.
D.
LANGUAGE
Spanish is the national language of Mexico. Mostly in the South, however, about eight
million indigenous Mexicans speak close to 60 different native dialects.
English is now spoken more than ever in business circles. There are many good bilingual
(English-Spanish) schools, including international American Schools, in the principal cities, and
most top Mexican universities now require a high degree of English proficiency by students entering
their third year. Also, an important segment of the younger generation has been educated abroad,
mainly in the United States, and is conversant in English and, sometimes, in other languages, too.
Many Mexicans educated abroad occupy high positions in business and government.
E.
TIME ZONES
In 1996, Mexico instituted Daylight Savings Time nationwide, setting its clocks forward and
back on the same dates as in the United States. Previously, only the Baja California peninsula made
the change.
When the country is on Standard Time, most of it is on Greenwich Mean Time minus six
hours (U.S. Central Standard Time). The far northwest of Mexico is on U.S. Mountain Time (minus
seven from GMT) and the Baja California peninsula is on U.S. Pacific Time (minus eight from
GMT).
F.
CULTURE
Understanding the unique Mexican culture is a key to business success.
Mexico is a multi-generational, family-oriented society. From birthdays and weddings to
Mother's Day, Mexicans put family ahead of everything else in their lives. When meeting for the
first time, the best ice breaker is to ask about the family. When speaking on the phone to a Mexican
friend or business associate, the safest opening topic of conversation is always family. Learning the
names
of
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wives and children — and asking about their welfare —is a wise and empathetic course toward
friendship.
Mexicans are sensitive, friendly and emotional. When men who know each other meet, they
hug ─ with three pats on the back being the norm. Politeness is key, and in public Mexicans rarely
raise their voices. In that regard, Mexicans are quite different from Spaniards and Argentineans, for
instance.
Although the traditional ideal of women staying at home is still prevalent, in upper middle
class families feminism is making inroads and many women are now in business, politics and the
professions.
Mexico is deeply Roman Catholic. Unlike in France, where about 7 percent of the
population goes to church, in Mexico the corresponding figure is close to 90 percent. No one ever
questions the validity of the apparition of the Virgin of Guadalupe. That said, however, Mexico has
had a long tradition of official secularism; there is no state religion and there is almost complete
religious tolerance and respect.
Mexican cuisine (not to be confused with Tex-Mex) is one of the world's great schools of
cooking. Throughout the country, the main meal is in the early afternoon, usually starting between
two and three o'clock. Business breakfasts, however, are now almost as common as working
lunches.
National pride is encouraged as a matter of public policy.
An "American" should be tactful about most Mexicans' feelings that those who live in the
United States do not have a monopoly on Americanism since everyone from Alaska to the tip of
Chile lives in "the Americas". Remember also that Mexicans are North Americans.
With some validity, Mexican history emphasizes that the United States practically stole
more than one-half of all Mexican territory in the 1846-47 Mexican-American War. However,
notwithstanding some current differences between Mexican and U.S. foreign policies, mainly in the
areas of drug enforcement, immigration, the death penalty and Cuba, individual Americans and U.S.
companies are welcomed with open arms. Almost without exception, Mexicans are sincerely
friendly.
Mexican heroes are those who fought for independence from Spain (1810 - 1821), six cadets
who died defending Mexico City's Chapultepec Castle from invading U.S. troops in 1847, those
instrumental in expelling the French who occupied Mexico in the 1860's, and those who helped
reform the country during and after the Mexican Revolution (a civil war) between 1910 and 1920.
To most Mexicans, the only post-Revolutionary hero is Lázaro Cárdenas, president from 1934 to
1940, who nationalized the country's petroleum industry. Many, however, have disagreed with
Cárdenas' socialist policies which, in almost all cases have now been reversed, except land reform,
which has been liberalized to allow more commercial opportunities. For business leaders, Miguel
Alemán, president from 1946 to 1952, is widely admired for bringing modern industry, including
many multinational firms, to the country.
All Mexican cultural idiosyncrasies have implications in planning, decision-making,
communication styles, business etiquette, negotiating and contracting.
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G.
SOCIO-POLITICAL CONCERNS
1.
Money Laundering
In recent years, as the fight against illegal drug trafficking increases, the Mexican
government has also intensified its campaign of deterring, detecting and prosecuting money
laundering. This struggle has been intensified since a US "sting" operation in the spring of 1998
caught several Mexican banks and mid-level bankers involved in laundering for drug traffickers.
Mexico was embarrassed by the revelations but is responding positively to the enforcement
challenges.
Banks, brokerage houses and foreign exchange currency houses will need to provide the
Ministry with reports about the operations and services they perform for their clients. In the case of
credit institutions, the law involves amounts higher than US$10,000 or the equivalent. Also, the new
resolutions will specify: criteria for proper identification of clients, taking into account the economic
or professional activity involved; disclosure of the amounts, frequency, types and natures of the
financial operations and the monetary instruments with which they are carried out; disclosure of the
relationship between the operations and the stated activities of the clients; and disclosure of the
places where the clients do business as they relate to the practices that prevail in those locations.
Additionally, current resolutions will define the training of financial institution personnel
and specify security measures to be followed by the institutions.
The officers and employees of the institutions, external auditors, inspectors, and members of
the institutions' Board of Directors are obligated to ensure compliance with the law.
Reporting to Ministry personnel, as mandated, will not infringe on privileges of
confidentiality which are normally in force for certain financial institutions. In all other cases,
confidentiality will be ensured.
Violations of the resolutions will be punished by fines which will range from ten percent to
100 percent of the value of the operation involved.
.2.
Narcotics and Corruption
.a)
Narcotics
President Zedillo emphasized in his State of the Union speeches that the fight against
narcotic producing, transporting, trafficking and selling would be intensified. He has stressed that
the Army's already substantial role will be heightened. Zedillo continuously accented the danger of
illegal drugs to the health of Mexican youth and promised that the gravity of the present situation
would be forcefully addressed.
When President Clinton visited Mexico in May, 1997, he admitted that the United States had
a responsibility to curb consumption.
Both countries are cooperating with each other more than ever, not only with joint military
and police efforts, but also with the modernization of extradition laws. It is recognized that only by
working together will the equally stiff legal sanctions of each nation be enforced.
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Mexico's penal code provides for 10 to 15 years in prison for the commercialization of
illegal narcotics, and five to 15 years for possession. Many foreigners are currently serving time in
Mexican prisons for such offenses.
.b)
Corruption
Corruption by Mexican officials has received much worldwide publicity. It has been equally
reported in Mexico, and eliminating it is one of the executive branch's top priorities.
For the first time in recent history, top officials are now being prosecuted and convicted for
using their high offices for personal gain.
The case of Raul Salinas, former president Carlos Salinas' brother, is a prime example. He
has been accused, among other crimes, of "illicit enrichment". The prosecutors have found that his
evident wealth is ostensibly and notoriously greater than his legal income would indicate. He can be
sentenced to from two to 14 years in prison. This is a landmark case and could prove to be both a
precedent and a deterrent.
Many observers feel that the current process of democratization will have a healthy effect in
the struggle against corruption. By public pressure for accountability and transparency in opening up
the system and by holding officials financially and politically accountable, it is expected that there
will be fewer opportunities for illegal enrichment. All admit that there is a great challenge in this
area, but everyone agrees, too, that the government and society are on the right track. Mexico's
participation in globalization will be beneficial in sharing and learning methods of control from
other nations ─ both developed and developing ─ affected by this phenomenon.
.3.
Human Rights
Protecting human rights is a priority of the Mexican government and it is making significant
strides toward the enforcement of the rule of law in the area.
In Mexico, human rights are guaranteed under both international law and custom. As a
signatory of the Universal Declaration of Human Rights, adopted by the United Nations General
Assembly in 1948, and the American Convention on Human Rights (effective 1978), Mexico agreed
to implement the fundamental entitlements of its citizens and foreigners within its territory to
protection against personal abuse and violations by the state and its agents. Mexico has a major
interest in the enforcement of the rule of law.
Internally, human rights abuses are usually brought to the courts' or other authorities'
attention by the Federal Commission on Human Rights (created in 1990) or the comparable
commissions of each state and the Federal District which have been formed in accordance with the
Mexican Constitution (Article 102, part B).
These commissions have the obligation to monitor and defend human rights, receive
complaints, investigate, and make recommendations to the institutions authorized to take appropriate
action.
As public awareness has been heightened, people have turned to these commissions in
increasing numbers. During a recent reporting period, May 1996 to May 1997, complaints to the
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national commission rose to 8,509, more than 32 percent higher than the average for the
Commission's first seven years. From January to December 1998, the commission received 6,523
complaints. In total, from its inception in June of 1990 through December of 1998, the national
commission received 66,085 complaints of human rights violations.
The local Commission of Mexico City (the Federal District) is very active as well, handling
6,665 complaints during the October 1998 through September 1999 reporting period.
One of the most important objectives of all the Commissions is to create social awareness
for the protection of human rights. In this regard, during the May, 1996 - May, 1997 period, the
Federal Commission conducted 720 events involving 37,338 participants - almost evenly divided
between educators and students, public officials, vulnerable groups and civil organizations.
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II. INVESTMENT - GENERAL CONSIDERATIONS
II.
INVESTMENT - GENERAL CONSIDERATIONS
A.
POLITICAL SYSTEM
As of this printing, the lower house of Congress is controlled by a coalition of parties
following a loss in the 1997 elections of the traditional majority held by the Partido Revolucionario
Institucional (PRI). The PRI, however, retains the executive branch and holds a majority in the
Senate. Even its hold on the upper house, however, has shrunk to below the two-thirds needed to
amend the Constitution. Such constitutional changes, considered drastic in the United States, have
been common in Mexican legislation.
In addition to Mexico City's mayor from the left-center PRD, that party also gained an
absolute majority in the city's legislative Assembly - and the right-center party (PAN) gained two
state governorships formerly held by the PRI. In 1998, each of the three major parties showed
competitiveness, with elections being won more on the strength of candidates' personalities than
party affiliation. Also in 1998, the PRI won back a governorship it had previously lost.
In the two elections for governor in July, 1999, the PRI retained its hold on the State of
Mexico - the most populous Mexican state which surrounds Mexico City on three sides - but lost the
small state of Nayarit, where the PRI had been considered invincible, to a coalition of opposition
parties.
This landmark process of democratization has been welcomed as a sign of political maturity
by both President Ernesto Zedillo and the business community. After the 1997 vote, although the
left-center made widespread gains, there were immediate gains in the Bolsa (Mexico City Stock
Exchange) index. Investors - and the World Bank - had seen clean and fair elections as a key to
economic stability, and the new electoral reforms of Zedillo were highly successful. The presidential
election in 2000 promises to see a high degree of competition and the consolidation of Mexico's
democratization process.
Mexico is a constitutional democracy under a federal system of government.
The political system features six-year presidential and senatorial terms, three years for
members of the lower house of Congress and no reelection for any official.
The current Constitution dates from 1917 and patterns the Mexican political structure after
that of the United States: a popularly elected president, a lower house of Congress with 500
members, a Senate with 128, and a separate judiciary. There are 31 states, each with its own
constitution, governor, legislature and courts. Even the capital is a Federal District, as is the District
of Columbia (although there is presently a strong movement to make Mexico City the 32nd state).
A multi-party political system did not progress in Mexico until recently. After the 1910
Revolution, there was political chaos until all the important factions of society were absorbed into a
single ruling party in 1929. That party, now the PRI, consolidated the country by making space for
diverse political positions with a workable in-party consensus, and led Mexico to unparalleled years
of growth without any opposition until the student unrest in 1968. The PRI's domination was so
absolute that even as late as 1976, José López Portillo ran unopposed for the presidency. In those
years Mexican prosperity advanced rapidly in spite of the lack of political plurality.
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Starting with the administration of Miguel de la Madrid (1982-1988) and especially during
the administration of Carlos Salinas de Gortari (1988-1994), the groundwork was laid for future
political pluralism and the present economic growth which, briefly interrupted by the 1995
recession, is now continuing.
The 1980's saw the rapid advancement of opposition political parties which are
proportionally represented in both houses of Congress, and have now won the executive leadership
of several states and Mexico City. All parties now receive fair and ample coverage in the media.
By the 1980's, Mexico's closed economy was admittedly obsolete - as was wasteful
government ownership of much of Mexico's production and service industries. Opening the
economy, renouncing import substitution, entering into free trade agreements and privatizing the
vast majority of government-run enterprises have been priorities in recent years. Now, through tight
austerity measures, the government has a balanced budget and macroeconomic indicators are
showing strong growth.
At this time, all political parties are committed to retaining privatization. In addition, the
three major parties' platforms are dedicated - in varying degrees - to improving individual guarantees
and property rights, and strengthening the rule of law, achieving exchange rate stability and
reducing inflation, implementing a more equitable tax system, increasing the transparency behind
public expenditure, producing economic growth and development that will benefit the entire
population, and enlarging domestic savings.
In early 1996, the World Bank conceded that permanent economic stability in Mexico could
not be possible without political reform.
Accordingly, President Zedillo made political reform the goal of his administration, and the
subsequent elections have borne the fruits of his efforts.
With the greater participation of the opposition parties, various civic organizations and the
population in general, 1997 saw important political reforms realized. The Federal Electoral Institute,
which manages national elections is now impartial and nonpartisan. More equitable campaign
funding rules have been enacted and, for the first time, opposition party campaign ads are shown on
television.
It is expected that further reforms will be forthcoming: an end to the monopoly of the PRI on
using the colors of the Mexican flag, a further separation of the PRI from the government, greater
intraparty democracy in the selection of candidates, accountability for all public spending and
guarantees of fairness by the media are all expected to be on the Congressional agenda.
At least until the fall of 2000, the PRI will retain a plurality in the Cámara de Diputados
(lower house). For its legislative initiatives to pass, however, it has to ally itself with either of the
other two major parties. Fortunately for investors, the right-center PAN has espoused pro-business
policies for an even longer period than has the PRI. Even the left-center PRD, which finished a
strong third in the 1997 congressional elections, now agrees that a market-driven economy is best
for Mexico. The only main differences between the political parties on economic policy concern the
degrees of government control each believes to be needed.
The presidential elections in July 2000 are expected to be relatively free of many of the
irregularities of the past. They will be properly monitored and expected to be a test of the growing
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multi-party political atmosphere.
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B.
LEGAL SYSTEM
Mexico's legal system is based on the civil law system, originating in Roman Law, as further
developed and evolved in continental Europe, and more recently influenced by Anglo Saxon law.
The civil law system is based on "written law," that is, the codes or statutes that present the general
principles governing broad areas of law. The judiciary in civil law countries such as Mexico,
therefore, does not play the central role in interpreting and "making" the law as it does in common
law jurisdictions.
All laws regulating commerce, investment and trade in Mexico are federal in nature and
apply throughout the country to entities operating therein. The statutes or codes most relevant to
firms doing business in Mexico are the Companies Law, the Civil Code, the Banking Law, the
Competition Law and its regulations, the Foreign Investment Law, the Labor Law, the Negotiable
Instruments Law, the Commercial Code, and tax laws, mainly the Income Tax Law and the Value
Added Tax Law.
C.
ECONOMIC SYSTEM
The Mexican Constitution governs many aspects of the country's regulatory system for
economic development and foreign investment. Constitutional authority for the enactment and
implementation of economic policy is shared between the Congress and the President. Article 73 of
the Constitution authorizes the Congress to enact laws to promote and regulate investments in
Mexico, both by Mexicans and foreigners. Under Article 89, the President must ensure that the laws
passed by Congress are faithfully executed.
The State is in charge of guiding national development and has the authority to plan and
coordinate national economic activity. The Constitution provides that the public, private and social
sectors will participate in the national economic development.
The Federal Congress is authorized to enact legislation relating to the national plan for
economic and social development. The President enforces laws and establishes the procedures for
participation and consultation in national planning.
In past decades, the Mexican government pursued an inward-looking, statist model of
development characterized by pervasive import restrictions, strict regulation of foreign investment
and a national economy dominated by government-owned-or-operated enterprises with highly
regulated private Mexican investments. By the mid-1980's, however, Mexico decided to change its
economic model through a transformation of the existing and regulatory framework. The first
indication of such changes was the liberal interpretation of the 1973 foreign investment law which
as its title indicated was a "Law to Promote Mexican Investment and Regulate Foreign Investment."
With a series of specific resolutions in the mid 1980's, a more liberal interpretation of the 1973 Law
was given. Such liberalizing criteria were followed by the 1989 Regulations to the 1973 Law,
extending liberalization, including neutral investment, and providing for specific requirements to
permit the increase of foreign participation over 49 percent, without prior authorization, in most
economic activities.
Finally, the December 1993 Foreign Investment Law was enacted to further liberalize and
permit direct foreign investment in most economic activities. With that law, the foreign investment
policy changed from restricting foreign investments except when permission was granted to a more
progressive policy of permitting all types of foreign investment unless specifically prohibited.
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The Mexican government has established new economic policy initiatives that have resulted
in the elimination of trade barriers, reduction of tariff levels, massive privatization of governmentowned entities, new rules governing foreign investment, membership in 1986 in GATT, succeeded
by the World Trade Organization as of January 1, 1995, the ratification and implementation of
NAFTA, membership in the OECD and execution of various free-trade treaties, including with the
EU.
D.
JUDICIAL SYSTEM
Mexico's court system is divided into federal and local courts, which apply their own laws
related to civil and criminal matters and in commercial matters the applicable federal laws.
1.
Federal judicial system.
The federal judicial system consists of the Supreme Court of Justice, the Electoral Court, the
Collegiate and Unitary Circuit Courts, District Courts, Federal Jury of Citizens and a Federal
Judicial Board.
a)
The Supreme Court of Justice.
The Supreme Court is composed of eleven justices, one of whom serves as its president, and
is divided into two chambers. The Supreme Court may, on certain matters, act in a plenary session.
The Supreme Court of Justice reviews the following matters:
i)
Constitutional controversies arising, among others, between the Federal government
and other states or the Federal District, the Federal government and the
municipalities, Executive and Legislative branches, states, and states and the Federal
District.
If a decision by the Supreme Court in these matters is approved by a majority of
eight votes, the decision is "stare decisis."
Other decisions may be rendered by the vote of the majority of the members of the
Court. Decisions so rendered will produce effects only for the parties to the
controversy and will not be considered "stare decisis."
ii)
Claims asserting unconstitutionality raising contradictions between a law, regulation
or other disposition of general application and the Constitution.
These claims may be filed within 30 days of publication of the relevant rules upon
resolution of 33 percent of the Chamber of Representatives or Senate, depending on
the issue, or upon the request of the Attorney General or other authorities as
provided by law.
The Supreme Court of Justice may declare a law, regulation or disposition invalid
only by decision of at least eight members. Upon the issuance of a decision declaring
an act unconstitutional, such act is considered to be overturned. The application of
an invalid law or disposition by any authority is illegal.
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iii)
Revision of Judgments of District Courts and Unitary Circuit Courts, in certain
cases, and revision of certain judgments issued by the Collegiate Circuit Courts in direct "amparo"
(constitutional trial) suits. The direct "amparo" suits may be filed against final judgments and
decisions rendered by judicial, administrative or labor courts.
b)
Collegiate Circuit Courts.
Each one of these courts is composed of three magistrates who hear and resolve direct
"amparo" proceedings against final decisions because of violations during the procedure or caused
by the decision.
Also, they resolve appeals for review against decisions of District Courts and Unitary Circuit
Courts in "amparo" suits.
c)
Unitary Circuit Courts.
They are courts of appeal in matters pertaining to the federal jurisdiction. A magistrate
sitting alone hears appeals of decisions issued by District judges, as well as some specific cases of
"amparo" proceedings.
d)
District Courts.
They are composed of a single judge and have dual jurisdiction:
i)
to hear "amparo" suits brought against acts of authorities which infringe individual
guarantees (constitutional rights) and which are not final decisions, and
ii)
to intervene in suits concerning the application of federal laws.
e)
Federal Jury of Citizens.
The Federal Jury of Citizens may decide situations of fact submitted by the District Courts,
and is also competent to decide on crimes committed by the press against the public order, or the
external or internal security of the country. However, the jury system is not generally provided for in
civil or criminal trials.
f)
Federal Judicial Board.
The Federal Judicial Board is in charge of the management and surveillance of the judicial
branch, except of the Supreme Court. It is also in charge of appointing and removing magistrates
and judges.
2.
Local courts.
The court structure of the Federal District in Mexico City, which is taken as a model by the
other states, and consists of:
a)
The Supreme Court of Justice of the Federal District, which hears appeals for local,
criminal, civil or commercial matters, arising usually from the enforcement of local
or federal laws when applicable;
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b)
The Court of First Instance, which decides cases governed by local laws. There are
specialized First Instance Courts for civil, commercial, family, criminal, leasing and
bankruptcy cases; and
c)
Courts of Justice of the Peace with jurisdiction over cases in which minor amounts
are involved.
3.
Other courts and tribunals.
Mexico's court system also includes specialized Federal and local courts ruling on labor, tax,
administrative matters, as well as local electoral disputes.
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III. DIRECT SALES
III.
DIRECT SALES
Sellers of products imported into Mexico must comply with all commercialization
requirements, such as, the Consumer Protection Law (see Section XIV.D.), official technical
standards, and health and labeling regulations. Sellers also should be aware of, among others,
applicable tax regulations (see discussion of permanent establishment in Section XV.D.), regulations
concerning government procurement (see Section V.), possible labor law consequences, (see Section
XVI.) requirements to protect intellectual and industrial property (see Section VII.), other options
for doing business in Mexico (see Sections VI., XII. and XIII.) and should be aware of dispute
resolution mechanisms (see Section XIX.).
A.
NOMS (OFFICIAL MEXICAN STANDARDS)
Certain products, processes, services, emblems, and methods, imported, sold, used or
rendered in Mexico must comply with technical standards issued by the Ministry of Commerce
describing their characteristics or specifications. These standards are known by the Spanish acronym
NOMS.
In the absence of a standard for a certain imported product or service, such product or
service must include a label indicating that it complies with the corresponding specifications of the
country of origin, international specifications or the manufacturer's specifications.
The meeting of the standards contained in the NOMS must be verified and certified by the
corresponding authorities or by an authorized certifying entity. A product subject to compliance
with standards must carry a statement affirming such compliance.
B.
HEALTH
Mexico has many legal provisions prescribing sanitary measures designed to promote and
preserve the health of the community. Only those that may be more likely to be of interest to
businessmen or their counsel planning to enter the Mexican market are referred to herein.
Sanitary control includes the verification and application of safety measures or sanctions to
manufacturers and sellers of certain products. The Health Law regulates sanitary control of national
and imported products, such as food, alcoholic or non-alcoholic beverages, perfumes, cosmetics,
tobacco, pesticides, fertilizers and hazardous or toxic substances used in the manufacture of those
products, as well as certain health products such as medical, odontological and surgical equipment,
prosthesis, and hygiene and healing products. What constitutes each of the products covered by the
law is defined therein.
The manufacturing process and specifications that must be complied with by some of the
products are described in technical standards. Medications and their preparation are regulated by the
Mexican Pharmacopoeia Book.
Facilities dedicated to the manufacture and distribution of health products, pesticides,
fertilizers, sources of radiation and toxic or hazardous substances, among others, require a health
authorization. Labeling requirements of those products also must be complied with.
First-time imports of food, alcoholic and non-alcoholic beverages, perfumes, beauty
products and tobacco as well as materials used in the manufacture of those products, are subject to
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III. DIRECT SALES
sampling and analysis by certified laboratories in order to determine compliance with official
standards. Certain products contained in a listing published in the Official Daily Gazette may require
import permits depending on the risks they may represent to human health.
In the event that no such permit is needed, these products may be imported under the health
certificate of the country of origin or from authorized Mexican or foreign laboratories.
The import and export of drugs and psychotropics is subject to authorization from health
authorities, which may be granted to pharmacies or authorized manufacturers of medicines. Import
permits for health products and medicines are needed for those products established by the health
authorities and published in the Official Daily Gazette. Importation of fertilizers, pesticides and
toxic substances is also subject to authorization.
C.
LABELING
The Ministry of Commerce has issued several regulations requiring precise information on
the packaging or labels of products to be sold. The information required varies depending on the
product, but in most cases it refers to its content and net weight, safety measures and instructions of
use from the manufacturer.
Imported products must include a counter-label in Spanish containing specific commercial
information, data concerning the manufacturer and the importer.
Products imported into Mexico from a NAFTA Party must comply with the rules regarding
listing the country of origin, to determine when these products must be considered as NAFTA
products.
D.
GENERAL IMPORT SYSTEM
Mexico has substantially simplified its import classification system by converting to the
"Harmonized System for Merchandise Classification and Codification," making its import
classification system compatible with that of most industrialized countries. The Harmonized System
has taken on added importance with the passage of NAFTA because the rules of origin, which
determine whether goods are eligible for preferential tariff treatment under NAFTA, are keyed to
changes in tariff classifications for goods incorporating non-NAFTA components.
Moreover, Mexico has adopted GATT-approved valuation rules that enable the foreign
supplier to determine the "normal price levels" for goods shipped to its Mexican importer.
Before Mexico joined the GATT (now WTO), most imports were subject to prior import
permit requirements. GATT (WTO) accession has dramatically reduced the number of products
requiring an import permit. Since GATT (WTO) and even prior to NAFTA, tariffs were reduced
from highs of 100 percent to a maximum of 20 percent with many products free of tariff.
Nevertheless, when the imported products exceed the quotas established in NAFTA, the executive
branch of the Mexican government is authorized under the Mexican Budget Law for the year 2000
to impose a minimum of 30 percent on the value of the product as a customs tariff on imports. The
average weighted tariff is approximately 11 percent. In the few cases where permits are required, the
Ministry of Commerce reviews the applications, and relies on Mexican industry associations for
advice regarding the local availability of the product and may reject applications if the product is
already available.
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III. DIRECT SALES
Under NAFTA and other trade agreements, certain products enjoy favorable tariff treatment.
(See Section IX.)
Prohibitions and restrictions on imports, such as quotas and licensing requirements, are
prohibited with few exceptions and reservations, such as firearms, certain pharmaceuticals,
endangered species, used computers, used printers and peripherals. Certain Mexican import
restrictions, such as those on automobiles, will be phased out by January 1, 2004. Importers must be
registered with the Importers Registry operated by the Ministry of Finance, and some importers also
must register in a Sectorial Importers Registry, as in the case of diapers, beer, toys, wine, cigarettes,
textiles, footwear, steel, etc.
.1.
Shipping documentation and insurance.
Apart from the import permit, an import declaration is always required and must be
completed by a customs broker or forwarding agent. Other shipping documentation includes the
commercial invoice, packing list and bill of lading, and may also include a certificate of origin of the
goods if the goods are imported from a country with which Mexico has a trade agreement. Due to
Mexico's attempts to eliminate corruption, customs officials now emphasize the accuracy and
completeness of all shipping documentation.
If goods are shipped by land, a bill of lading must be included. The bill of lading is the
contract between the shipper and the carrier. If the carrier is to be liable for the value of the goods,
the shipper must pay an additional charge equivalent to the insurance premium. The full value of the
goods must be expressly declared in the bill of lading. If no declaration is made, the carrier's
responsibility will be generally limited to an amount equivalent to fifteen times the daily minimum
wage per ton.
If goods are shipped by sea, a bill of lading must be issued by the ocean carrier to the
shipper. This bill of lading is a title representing the goods and is a receipt for the goods on board
the vessel. The ocean carrier or operator issuing the bill of lading will be responsible for the
merchandise from the moment received until delivered to the consignee. The ocean carrier or
operator may limit its responsibility in the event of loss or damage to the goods up to an amount
determined by the applicable legal provisions.
If the goods are shipped by air, an airbill must be issued by the carrier to the shipper upon
receipt of the goods. The carrier will be responsible for the goods from the moment received until
delivery to the consignee. In the event of loss or damage to the cargo, when the value of the
shipment is not declared, the carrier will be responsible for up to an amount equivalent to ten times
the minimum general daily wage in Mexico City per gross kilogram. The carrier will be liable for
the total value of the goods even in the event of force majeure, when the shipper declares the total
value and pays an additional charge to the carrier equivalent to the cost of the insurance premium.
.2.
Broker requirement.
Mexico requires the use of a customs broker to withdraw merchandise from the
customshouse when the total value of the shipment is more than US$1,000.00.
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III. DIRECT SALES
.E.
TAXATION OF DIRECT SALES
.1.
Tax, exchange incentives, free trade zones.
Until December 31, 1991, geographic areas had been established in Mexico as free trade
zones to which merchandise and equipment could be shipped free of customs duties. Since January
1, 1994, customs duties are being phased out, and therefore free trade zones will no longer be
necessary in a general free trade system. Special transition provisions are in force according to
which the importation of certain goods to the following places is partially or completely free of
customs duties: the state of Baja California, the cities of Agua Prieta, Cananea and Salina Cruz, a
number of ports in southern Mexico in the state of Quintana Roo, an area in the state of Sonora and
the southern border area with Guatemala.
Mexico offers no special tax concessions to encourage foreign entities to establish
operations in Mexico, and there are no special exchange rates in effect for trade.
There are no exchange controls on funds moving in or out of the country. Foreign currency
accounts, however, are not allowed except in special cases.
.2.
Income tax.
In most cases, direct sales originating outside Mexico are not taxable in Mexico, especially
when orders are accepted outside Mexico, merchandise is delivered and accepted FOB outside
Mexico. The activities of an individual or legal entity acting in the name or on behalf of a foreign
seller, however, may result in the non-resident incurring tax obligations in a taxable transaction as a
"permanent establishment". (See section XV.D.)
Foreign residents who have merchandise in Mexico on a consignment basis for sale are
considered to have a "permanent establishment" for tax purposes.
Goods can be delivered to one of many bonded warehouses found in most Mexican cities
under the tax deposit regime. Under this regime, import duties, taxes and compensatory duties are
calculated but not paid until the purchaser actually withdraws the goods from the warehouse. Having
goods in such a bonded warehouse is not considered as having a "permanent establishment."
Delivery from a warehouse within Mexico will mean that the seller may be deemed to have
a permanent establishment, and in such case would be subject to Mexican income tax on profit
earned on the sale. However, tax treaties may allow delivery to be made locally without triggering
the concept of a permanent establishment (example U.S.-Mexico Tax Treaty).
.3.
Value-added tax.
VAT is imposed on most imported goods at the rate of 15 percent payable by the purchaser.
.F.
TEMPORARY IMPORTS
A buyer may wish to temporarily import components, raw materials and equipment.
Companies with a maquila program are allowed to import into Mexico the materials, components,
and equipment needed to manufacture their products without paying import duties (see Sections
X.D.
and
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III. DIRECT SALES
X.G.). Other programs facilitating temporary duty imports are described in Section X. Mexican
companies without a maquila or other special program that only temporarily import such goods on a
case by case basis may receive authorization for the importation of such products, in most cases, for
up to two years, or longer as per specific authorization.
With regard to temporary imports not subject to these special programs, the importer must
deposit the amount of the import duty and the amount of the value-added tax in a special bank
account, referred to as "cuenta aduanera." When the goods are exported within the term provided by
law for the particular goods, the importer will recover the deposit, plus the interest earned.
In addition, NAFTA mandates that each Party allow duty-free entry of certain goods
imported on a temporary basis, including professional equipment, press equipment, equipment for
sound or television broadcasting, cinematic equipment, sporting equipment, goods intended for
display or demonstration, commercial samples and advertising films.
.G.
TRANSFER PRICING
Effective as of January 1, 1993, Mexico introduced a new system for the valuation of goods
for customs purposes (consistent with the WTO Code), to simplify the determination of the basis for
imposition of import duties. This system must be used by importers of goods in order to establish
the taxable basis upon which the import duty (ad valorem) will be applied.
The Ministry of Finance is authorized to determine, presumptively, the price at which
taxpayers acquire or sell goods, as well as the amount of the consideration in case of other types of
operations, as mentioned in several cases in the Income Tax Law. For example, when the price of
the corresponding operation is lower than market value, or the acquisition cost is higher than said
price, or when the sale of goods in import and export operations is at cost or less than cost, or
whenever a payment abroad is made.
By determining the price the Ministry of Finance may modify tax profit or loss in operations
entered into by and between related individuals, companies, residents in Mexico or abroad, and
permanent establishments, as long as the requirements specified in the law are not complied with.
(Articles 64-A and 65 of the Income Tax Law.)
In order for maquiladoras not to be considered as a permanent establishment of a nonresident corporation, an option for a safe harbor rule was established as of January 1, 2000.
Maquiladoras will have the option to pay the income tax in the amount resulting from considering a
profit equivalent to 6.9 percent of the value of the assets or a 6.5 percent of the total costs and
expenses, as specifically defined in the Miscellaneous Resolutions of the tax law, whichever is
higher.
.H.
THE VIENNA CONVENTION
The International Sale of Goods Convention (Vienna Convention) has been in force in
Mexico since January 1, 1989. Its objective is to establish a standard system for international
commercial agreements, which is applied in lieu of national commercial legislation, therefore
facilitating commercial operations relating to goods in a world moving towards globalization of
commerce.
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III. DIRECT SALES
Rather than attempt to harmonize national laws with regard to international trade, the
Convention enables countries to adopt uniform substantive rules on international transactions
without abandoning their domestic commercial laws. The Convention contains provisions
concerning contract formation, delivery, documentation, payment, breach, remedies, risk and
damages, among others.
Because Mexico is a signatory, this Convention applies to any international commercial
agreements for goods unless the parties expressly waive application of such Convention or any part
thereof. If the Convention is applicable, Mexican commercial legislation applies only in a
supplementary manner.
The Convention itself establishes the application of Mexican legislation in the following
cases:
1.
2.
3.
4.
5.
validity of contracts,
acquisition of title to merchandise,
extra-contractual liability arising from the nature of merchandise,
type of interest paid over due amounts, and
any other matter not covered in the Convention.
The Convention excludes the following types of purchase and sale operations:
1.
2.
3.
4.
5.
6.
7.
goods for personal consumption,
bids or judicial sales,
money and securities,
ships and aircraft,
electricity,
requirement contracts, and
services.
Although there is no formal international convention, Incoterms (International Commerce
Terms) are often used in commercial transactions by business people and their use is becoming a
customary international convention.
.I.
TRADE DISPUTES UNDER MEXICAN LAW
The adherence of Mexico to GATT in 1986 was followed by the adoption of several Codes
of Conduct, such as the Dumping Code, which came into effect in 1988. This Code served as a
framework for the Regulatory Law of Article 131 of the Constitution Regarding Foreign Trade,
substituted on July 27, 1994, by the Foreign Trade Law, which is supplemented by the Regulation to
the Foreign Trade Law effective as of January 1, 1994. Mexico is a member of the World Trade
Organization (WTO) which came into effect on January 1, 1995, and adopted the Agreement on the
Application of Article VI of the General Agreement on Tariffs and Trade of 1994.
Since the late 1980's, Mexico has become much more aggressive in enforcing its
international trade laws, initiating numerous antidumping and subsidies procedures against countries
such as the United States, China, Brazil, Argentina and Korea. The Mexican antidumping system is
the fifth most frequently used in the world.
.1.
Unfair practices of international trade.
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III. DIRECT SALES
The Mexican legal definition of unfair practices of international trade includes
discriminatory pricing and foreign government subsidies that cause or threaten injury to national
production.
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III. DIRECT SALES
To offset the effects of the importation of goods under unfair practices of international trade,
the law establishes the imposition of antidumping or countervailing duties that may only be imposed
if there is a price discrimination practice or a subsidy, injury or threat of injury, and a cause-effect
relationship between them.
Discriminatory pricing is defined as introducing goods into the country at a price below their
"normal" value. Subsidies are defined as a benefit granted by a government, or its entities, directly
or indirectly to manufacturers or exporters for specific goods to strengthen their international
competitive position, unless they involve internationally accepted practices.
If goods are imported from a country with a centrally-planned economy, their "normal
value" will be taken from an identical or similar product manufactured or sold in a substitute marketeconomy country.
.2.
Safeguards.
Safeguards are temporary measures taken to regulate or restrict imports of goods to prevent
or remedy a serious injury to national production of similar or like products, and to facilitate market
adjustment of national manufacturers. Safeguards may consist of specific or ad-valorem import
duties, permits or quotas.
.3.
General Procedures.
The procedures regarding unfair practices of international trade and safeguards are different.
They take place, however, before the same Bureau of Unfair International Trade Practices, which is
the authority for the filing of all complaints that may trigger an investigation.
In both cases the complaint may be filed by any national manufacturer, individually or as
part of an association of manufacturers, representing at least 25 percent of the national production of
a similar or like product to those imported and accompanied by documents supporting the
allegations. An investigation may also be initiated by the Bureau when it has gathered sufficient
evidence to presume the existence of unfair practices of international trade or safeguards and of an
injury or threat of injury.
.a)
Specific procedure for unfair practices of international trade.
The Bureau will publish the initiation of the investigation and directly notify all interested
parties accused by the manufacturer, who may respond within the term granted.
A provisional resolution containing its preliminary findings must be published 130 days
after the publication of the initiation of the investigation. The Bureau may impose a preliminary
antidumping or countervailing duty, continue the investigation without such duty or terminate the
investigation.
The Bureau will publish the final resolution containing its findings 260 days after
publication of the initiation of the investigation. A final antidumping or countervailing duty may be
imposed, the provisional compensatory duty revoked or the investigation concluded without the
imposition of compensatory duties.
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III. DIRECT SALES
Thereafter, any interested party may: i) request the review of the final resolution at the first
anniversary of the final resolution; ii) initiate an administrative repeal action, iii) bring an injunction
lawsuit (amparo proceeding), iv) initiate an annulment lawsuit, or v) request the initiation of an
alternative dispute settlement procedure under NAFTA Chapter XIX, or WTO.
.b)
Specific procedure for safeguards.
Once a petition is filed, the Bureau will proceed to analyze the information in order to
determine the possible existence of an injury or a threat thereof.
Safeguards must be instituted 260 days after publication of the initiation of the
corresponding investigation. The measures adopted may continue for up to four years provided the
national manufacturer fulfills the adjustment programs adopted.
Provisional safeguard measures may be taken 20 days after the date of initiation if, from the
circumstances, a delay in the imposition of the safeguard measures would cause an injury that would
be difficult to repair and there is sufficient evidence of the threat of serious harm resulting from the
imports. These measures may not last more than six months.
.J.
TRADE DISPUTES UNDER NAFTA
The Trade Law allows interested parties to initiate an administrative action to repeal any
measures taken or to request the application of an alternative dispute settlement procedure contained
in any treaty to which Mexico is a signatory. If an alternative mechanism is invoked, remedies under
Mexican law generally are not applicable. In some cases, however, the "amparo" proceeding may
apply as a last resort.
The remedies established under Mexican law (nullity suit before the Superior Chamber of
the Tax Court of the Federation) for the review of the conformity of the final determination to the
law, may be replaced under NAFTA Chapter XIX with a binational panel. The panel may confirm
the Bureau's final resolution or make recommendations for modification.
Panelists must apply the same standard of review and general legal principles that the
Federal Tax Court would apply.
(For more detailed information regarding trade disputes under NAFTA, see Section IX.K.)
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IV. SECURING TRANSACTIONS
.IV.
SECURING TRANSACTIONS
Many types of security measures are available in Mexico to foreign or local lenders, which
grant either rights in-rem or rights in-personam, among the prominent of which are:
.A.
MORTGAGES/LIENS
The most widely used security device in Mexico is the mortgage. Mortgages may be
established on real estate, vessels, aircraft or complete production (industrial) facilities.
.1.
Real estate mortgages.
This is a guaranty in-rem constituted on specifically determined property and gives the
creditor, in the event of default, the right to be paid out of the proceeds of a foreclosure proceeding.
Mortgages are regulated by the Civil Code of the situs of the mortgaged property and may
be created by agreement between the parties, by voluntary unilateral acts, or pursuant to a legal
disposition.
The mortgage lien extends to the natural accessions of the mortgaged property, any
improvements and fixtures made by the owner, the movable objects permanently attached to the
property which cannot be separated therefrom without damage to said property, new buildings
constructed by the owner of the mortgaged land and additions to the mortgaged buildings.
For a mortgage to be effective against third parties, it must be registered in the Public
Registry of Property of the situs of the property. The mortgage lien takes priority over all other liens
except liens for unpaid taxes and past due wages, and previously registered liens.
In an event of default under a mortgage, the mortgagee may foreclose and enforce, through a
judicial proceeding, the sale of the mortgaged property. The mortgagee may bid in the
corresponding public auction. Once the sale takes place, the mortgagee may have access to the
proceeds. If the proceeds are insufficient to cover the amounts owed a deficiency judgment will be
rendered.
.2.
Maritime mortgages.
The Law of Navigation provides that mortgages may be placed on any vessel whether
constructed or in the process of construction and must be recorded in the National Maritime Public
Registry to be effective against third parties.
The mortgage established over a vessel will have preference over any other lien on the
vessel after the following priorities: a) wages and amounts owed to the crew; b) credits derived from
indemnities by death or injuries at sea, or on land in direct relationship with the exploitation of the
vessel; c) credits for the compensation for the salvage of a vessel; d) credits to the vessel derived
from the use of port infrastructure, maritime signaling, navigation fees and piloting; e) credits
derived for the indemnities for extra-contractual claims for loss, or material damages caused by the
exploitation of the vessel, different from the loss or damage to the cargo, the containers or
belongings of any passengers transported on board the vessel.
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.3.
Mortgages/Liens on aircraft.
Mortgages may be established over aircraft, real estate and chattels of an air transport
company. Mortgages on aircraft that are used in public air transportation service are subject to
previous authorization from the Ministry of Communications.
The equipment of aircraft, such as engines, spare parts and instruments, may be given in
pledge. Constructive delivery is recognized.
Mortgages and pledges must be recorded in the Mexican Aeronautical Registry.
Mortgages on aircraft have preference except for tax salvage and maintenance credits.
.4.
Complete production facilities (Industrial) mortgages.
Industrial mortgages are created in favor of banks over the complete industrial, agricultural,
ranching or service units of the mortgagor and include all assets, movable and immovable, used for
exploitation of said unit. This mortgage includes any concession or permission granted as well as
moneys and credits in favor of the mortgagor.
The mortgagor retains possession of the mortgaged assets and continues to use and exploit
the industrial unit. The mortgagee must consent to a sale of any of the mortgaged assets, or to any
merger, except when made or replaced within the scope of its normal operations, unless otherwise
agreed.
The mortgage must be recorded in the Public Registry of Property to produce effects against
third parties.
Some attorneys sustain the opinion that this type of mortgage may be executed between
private parties and is not limited to banks.
.5.
Chattel mortgages.
Chattel mortgages are not commonly used as a security measure; more often a pledge is used
for chattels.
.B.
PLEDGES
There are two kinds of pledges under Mexican legislation: the commercial pledge and civil
pledge.
The Law of Credit Instruments defines and regulates commercial pledges. A commercial
pledge exists when the subject matter of the pledge is commercial as defined in Article 75 of the
Commerce Code, or if a party to the pledge is a businessman or engages in commerce, or is a
company, as per Articles 3 and 4 of the Commerce Code. All other pledges are considered civil and
therefore regulated by the Civil Code.
Although commercial and civil pledges are similar in many aspects, they have different
means of creation and perfection.
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25
.1.
Commercial pledges.
A commercial pledge is constituted by any of the following: a) the delivery to the creditor of
the goods or negotiable instruments; b) endorsement of the negotiable instruments in favor of the
creditor, in the case of nominative instruments, and by such endorsement and the corresponding
notation in the registry if the instruments are subject to registration; c) delivery of the instrument or
the document representing the credit to the creditor, in the case of non-negotiable instruments, and
by recording the lien in the applicable registry or by notification to the debtor; d) the deposit of the
goods or bearer instruments at disposal of the creditor with a third party designated by the parties; e)
the deposit of the goods at disposal of the creditor in places to which the creditor has keys, even
though such places are owned by or located within the establishment of the debtor; f) the delivery or
endorsement of the instrument representing the goods that are object of the contract, or by the issue
or endorsement of a pledge bond relative thereto; g) the registration of the contract for the
equipment or operating credit (see paragraph c) below) in the manner set forth in the Law; and h)
compliance with the requisites set forth in the Law of Credit Institutions with respect to account
receivables (book credits).
Pledges of fungible goods continue to be effective even when the original goods are
substituted by goods of the same type.
Although constructive delivery of pledged goods is not recognized for commercial pledges,
there are a number of cases in which the pledged goods may be placed with a third party or under
the joint control of the debtor and the creditor. These pledges produce effects against third parties
upon registration of the corresponding pledge in the Public Registry of Commerce of the situs in
which the pledged goods or instruments are to be kept.
The creditor may petition the court to authorize the sale of the pledged collateral upon
maturity of the principal obligation, if the value of the collateral given in pledge drops below an
amount that is not sufficient to cover the original obligation plus 20 percent and if the debtor does
not provide for sufficient funds to liquidate the debt represented by the credit instruments.
The creditor may not become owner of the property given in pledge without the express
written consent of the debtor given after the creation of the pledge.
.a)
Warehousing.
Goods may be granted in pledge through a deposit of those goods in an authorized general
deposit warehouse. After deposit is made, a deposit certificate is issued by such warehouse
certifying ownership, along with a pledge bond, evidencing the creation of a pledge on the goods
placed in the warehouse.
Warehoused goods may only be released by the warehouse to the holder of both the deposit
certificate and the pledge bond.
A person holding a deposit certificate retains dominion over the goods deposited in the
warehouse; however, such goods may not be removed without payment of all amounts due to the
warehouse and depositing the amount covered by the respective pledge. The holder of the
warehouse receipt will have rights in the pledged goods superior to those of judgment creditors, and
without a court order to the contrary, superior rights in the proceeds of such goods whether in the
form of sale proceeds or insurance proceeds as a result of damage or destruction.
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A person holding a pledge bond, may request the warehouse to sell the goods deposited in
order to collect its credit after maturity.
.b)
Confidential warehouse receipts.
This type of security, although not established by the law, provides in practice a simplified
method for security arrangements. The confidential warehouse receipt is a personal note from a
warehouse that, when issued with a pledge bond, is accepted by many banks as collateral for
commercial financing purposes. This receipt allows for the financing of goods kept in warehouses,
without the need of a federal warehouse license and avoiding stringent requirements of the law
governing warehousing in which the risks seem to be outweighed by the practical advantages.
.c)
Equipment-operating and financing credits.
Since a commercial pledge requires that the pledgor gives up possession of the assets given
in pledge, alternative methods that allow the debtor to retain possession of the collateral are the
equipment-operating credit agreement (crédito refaccionario) and the financing credit agreement
(crédito de habilitación o avío).
The assets underlying these credit agreements are also subject to the summary foreclosure
proceedings provided in the Commerce Code. Both liens continue attached to the equipment or raw
materials for which the credits were granted and/or to the finished products produced therefrom.
These credits may only be used for the precise acquisitions stipulated in the financing
agreement. The creditor should verify the proper use of the credit or risk loss of the lien. Improper
use of the credits by the debtor constitutes default and the creditor may rescind the agreement or
demand immediate payment and can claim damages in either case.
Both credits are generally granted by the opening of a credit line against which the debtor
may draw. The agreements must be in writing and recorded in the Public Registry of Property when
the security is on real property and in the Public Registry of Commerce when the security is on
personal property. The agreement must establish the duration and the purpose of the loan, the use of
the funds and a precise description of the collateral. The primary obligation of the borrower in both
cases might be evidenced by one or more promissory notes.
The financing credit has priority status over equipment-operating credit and both over a
mortgage registered second in time.
i)
Equipment-operating credits.
The proceeds of this credit (crédito refaccionario) may be used for the acquisition of tools,
instruments, farming equipment, fertilizer, cattle or breeding stock, the development of farms and
raising of crops, whether seasonal or permanent, the preparation or developing of land or farming,
the purchase or installation of machinery and equipment and the construction necessary for the
business of the debtor. The proceeds of the loan may also be used to pay for operating expenses,
acquisition cost of real and personal property and taxes incurred therewith, provided that such debts
were incurred in the year preceding the date of the credit agreement.
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These operating credits are secured simultaneously or separately with real property,
improvements, fixtures, machinery and equipment and, in general, all that is acquired or improved
by the use of the proceeds of the credit.
ii)
Financing credits.
This type of security agreement (crédito de habilitación o avío) is used for the financing of
the direct and immediate production costs of a business. Financing credits are granted for the
acquisition of raw materials or for the payment of wages, salaries and other direct expenses required
for the operation of the business. The financing credits are secured by raw materials acquired with
the proceeds of the credit, as well as the products resulting therefrom.
.2.
Civil pledges.
The Civil Code defines a civil pledge as a property right over chattel for the purpose of
guaranteeing the performance of an obligation and its priority in payments. Nearly every chattel may
be given in pledge and must be evidenced in a written agreement and is perfected by actual or
constructive delivery. In the latter case, the pledge must be recorded in the Public Registry of
Property.
In the event of default by the debtor, the creditor may demand and the judge shall order the
sale of the pledged collateral at a public auction. If the collateral cannot be sold at a public auction it
may be transferred to the creditor for two-thirds of the legally required minimum bid. The debtor
may agree after default that the creditor may retain the collateral in satisfaction of all or a portion of
the debt or that the pledged item may be sold extrajudicially.
Only tax debts and claims for unpaid wages have a preference to the proceeds of the
creditor's collateral. Priorities among competing mortgages and pledges of constructively-delivered
property are determined by the recording date, and by the transaction date for pledges actually
delivered.
.C.
GUARANTY
The guaranty is the simplest form of security in Mexican Law and takes two forms: the bond
("fianza") or the unconditional guarantee ("aval").
.1.
Bond (Fianza).
A bond is an agreement accessory to a principal contract between the creditor and the debtor
whereby the guarantor assumes the debtor's obligation in the event of default. A bond may not exist
without the existence of a valid obligation.
Bonds may be granted by an individual, a legal entity or a bonding company. However, a
company may not guarantee obligations of third parties unless provision is made in its corporate
object clause.
A guarantor under a bond may not be called upon to meet his obligations until the creditor
has first exhausted his rights of action against the debtor and his assets; however, this benefit may be
expressly waived.
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.2.
Unconditional guarantee endorsement (Aval).
This endorsement guarantees payment of specific obligations evidenced by a negotiable
instrument and is regulated by the Law of Credit Instruments. The obligation appears on the face of
the instrument it guarantees. The unconditional guarantee is deemed to guarantee the entire amount
of the instrument interest included unless otherwise established therein.
The grantor of the unconditional guarantee endorsement (aval) is jointly and severally liable
for the debt, even if the principal debt is cancelled, totally or partially, due to a defect and the
creditor may not institute an action against the debtor nor exhaust remedies against him.
The holder of a negotiable instrument is entitled to a summary "executory commercial
action" against the issuer or the guarantor, attaching assets simultaneously with initiation of the
action of collection. For this unconditional guarantee to be effective, the use of the words "por aval"
above the signature is sufficient.
.3.
Joint and several liability.
It is a usual and legal practice in agreements that a third party voluntarily and expressly
becomes jointly and severally responsible with the debtor for the payment of a debt.
.D.
CONDITIONAL SALES - RESERVATION OF TITLE
Seller may reserve title to the goods sold until complete payment by purchaser of the
purchase price.
If the goods sold consist of real estate or movable goods which can be identified, the clause
containing the reservation of title shall be recorded in the Public Registry of Property in order to
produce effects before third parties.
If movable goods cannot be identified, the parties may also include in their agreement a
clause that the sale will be rescinded in the event of lack of payment of the purchase price, however
this clause will not produce effects before a third party who purchased the goods in good faith.
When the seller rescinds and repossesses the goods upon judicial order, payments received
must be returned to buyer less depreciation and fair rental.
If recorded in the Public Registry of Property and in the event of bankruptcy of purchaser,
the seller may request the judge to separate the goods sold, which have not been paid for, from the
assets of the bankruptcy proceeding.
.E.
TRUSTS
Although the trust is widely used for many different purposes and a wide variety of
transactions, such as to manage assets, to transfer properties, to invest shares and other securities
and to creates a business concern, it may be used as a vehicle to guarantee debts when the security
involves a substantial amount of property.
A trust is created through an agreement between the grantor or grantors and the trustee
which may only be a Mexican banking institution. A beneficiary or beneficiaries are also named
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which are the persons entitled to the benefits of the trust agreement. Grantors may also be the
beneficiaries.
The trustee will perform its duties through its agents which may accomplish the purposes of
the trust through a technical committee which may be designated by the grantors. The trustee will be
personally liable for the failure to perform its fiduciary duties.
Property and rights of all types may be placed in trust. Trusts affecting real property must be
recorded at the Public Registry of Property of the situs in which the real property is located. Trusts
involving movable property will be effective against third parties once the following requirements
have been fulfilled:
1. if on non-negotiable credit instruments, or personal rights, from the date the obligor is
notified of the trust; 2. if on nominative instruments, from the date of endorsement of the instrument
to the trustee and the recording of such endorsement in the registry of the issuer if applicable; and 3.
if on tangible property or bearer instruments, from the moment of possession by the trustee.
Trust are extinguished: 1. by the fulfillment of its purposes; 2. by the impossibility to fulfill
its purposes; 3. through the exercise by the grantors of the right to revoke, if applicable; 4. the
agreement between the grantors and the beneficiaries; and 5. the removal or resignation of the
trustee without designation of its substitute.
Foreclosure may be achieved extrajudicially in a guaranty trust by incorporating a
conventional procedure in the trust agreement or with the intervention of a court following the
procedure applicable to conventional pledges for the sale of assets.
Conditional Deposit (escrow). It is an agreement whereby something is deposited with a
trustee to be delivered to a third party subject to its complying with a certain obligations within a
certain period.
.F.
LETTERS OF CREDIT
Letters of credit are instruments used, among other things, to secure payment in the sale of
goods. Letters of credit allow the seller of merchandise to be paid by a bank or its agent upon
instructions from the purchaser or presentation of certain documents such as invoices or bills of
lading by the seller. The bank or its agent will pay the seller with funds from a line of credit
extended to the purchaser.
.G.
LEASES
Lease agreements may be structured in certain cases to be, in effect, security arrangements.
.1.
Lease with purchase option.
These are governed by the general lease rules contained in the civil codes for each State or
the Federal District. A lease agreement may grant the lessee an option to purchase the leased
merchandise either during the lease term or the expiration thereof. The purchase price and payment
conditions may be determined in the lease agreement.
The local civil codes usually require registration at the Property Public Registry of leases for
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real estate beyond a certain duration (i.e. 6 years) to be effective against third parties.
.2.
Financial lease.
Financial lease agreements are regulated by the General Law of Auxiliary Credit
Organizations and Activities and may be granted only by financial leasing companies (see Section
VIII.C.8.) which acquire the title of the merchandise and lease same to individuals or legal entities
for a compulsory period of time. The lessee pays a determined amount which includes the price of
the goods, the financial and other costs. On termination of the lease, the lessee may: a) purchase the
merchandise at a value lower than the original purchase price paid by the lessor or market value; b)
extend the agreement paying a lower rent in accordance with the terms established in the agreement;
c) participate in the proceeds from the sale of the leased merchandise to a third party as may be
agreed.
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V. GOVERNMENT SALES AND CONTRACTING
V.
GOVERNMENT SALES AND CONTRACTING
A.
RELEVANT LAW SOURCES
Two new laws regarding government acquisitions and public works were published in the
Official Daily Gazette on January 4, 2000, both effective as of March 4, 2000. The Law of Public
Acquisitions, Leases and Services and the Law of Public Works and Related Services, regulate acts
related to planning, programming, budgeting, cost, execution, conservation, maintenance and control
of acquisitions and public works by governmental entities, companies in which the government
holds a majority ownership interest, and government-owned entities. The Law of Public
Acquisitions, Leases and Services governs the purchase or lease of personal property and the
rendering of services of any nature. The Law of Public Works and Related Services regulates public
works projects. Other laws and regulations in specified activities sometimes detail, among other
things, the content, form and obligations of the particular contract.
The laws specify the internal procedure that must be followed in the planning and
programming of the corresponding purchase or work, contracting procedures, information and
verification requirements, violations and penalties and dispute resolution procedures. The new laws
eliminated the requirement to put up a bond in order to participate in the bidding process.
Government entities and dependencies may make acquisitions, enter into lease agreements,
contract for services and carry out public works by virtue of: 1. public bidding, 2.limited invitation,
or 3.direct awarding of such contracts.
B.
GRANTING OF CONTRACTSError!Marcador no definido.
As a general rule contracts are awarded after a public bidding process. The invitation to bid
is published simultaneously in the Official Daily Gazette, a newspaper of national circulation and
the gazette of the federal entity which will purchase or use the property, provide the service or carry
out the project. The bid contains the specifics of the purchase or project and the related
requirements. If the bid is for a public works project, a model of the contract is also included. Any
party that satisfies the bid requirements may submit a proposal.
The bid must include both a technical proposal, and an economic proposal, including
guarantees depending on the nature of the project. Bids are first evaluated to ensure that all
requirements are met, and any bid not satisfying the legal, technical and economic requirements,
including effective guarantees, outlined in the invitation to bid, is disqualified.
If more than one bid satisfies the above-mentioned requirements, the bid proposing the
lowest price is selected. Contracts must be signed within 20 calendar days of the notice of the
awarding of the contract in the case of acquisitions, leases or services, and within 30 calendar days
in the case of public works, or the contract will be awarded to the next lowest bidder. Moreover, the
supplier or contractor awarded the contract shall grant a performance bond to assure compliance
with the contract.
The laws also permit government dependencies and entities, at their discretion, to conduct
restricted bidding, in which case invitations must be extended to at least three prospective suppliers
or contractors. Other Articles of the Law spell out the requirements for the utilization of restricted
bidding. For example, restricted bidding is permitted when the contract can only be executed with a
determined individual because such individual is the holder of patent or trademark rights, or other
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exclusive rights.
If the entity or dependency concludes that restricted bidding is not suitable, it may opt to
award the contract directly.
.C.
FOREIGN PARTICIPATION
The laws also distinguish between national and international bidding. In the case of
acquisitions, leases and service contracts, the bidding process is considered to be national if only
Mexican nationals may participate and the goods to be acquired are produced in Mexico and contain
at least 50 percent national content. On the other hand, the bidding process for acquisitions, leases
and service contracts is considered to be international if both Mexican and foreign nationals may
participate, and the products to be acquired may be Mexican or foreign. In the case of public works,
the bidding process is considered to be national if only Mexican participation is permitted and
international if both Mexican and foreign nationals may participate.
Both laws provide that an international bidding process may be carried out only in the
following cases:
1.
when required by treaty;
2.
when the relevant entity or dependency determines, after a market investigation, that
the quantity or quality of national suppliers is not adequate or that national
contractors do not have the capacity to perform the work contemplated;
3.
when national bidding fails to award a contract because no bids were tendered or the
bids did not meet minimum requirements; or
4.
when required as a condition for the granting of foreign credits to the federal
government or its guarantor.
However, the laws expressly give government entities and dependencies the right to deny
the participation of suppliers or contractors in any international tender if they are nationals of
nations with which Mexico has no international treaty, or of nations in which reciprocal treatment is
not provided to either Mexican suppliers or contractors, or Mexican products and services. Thus,
nations that have executed trade agreements with Mexico may hold a distinct advantage in obtaining
government procurement contracts. (See Section IX.I. for NAFTA considerations).
.D.
CHALLENGING PROCEDURES
Any interested party may present a claim before the Comptroller’s Department for acts
contrary to the Law committed by a public entity in the process of acquiring a public contract or
granting a bid. Most often, claims are presented against the decision regarding the winner of a bid.
At its discretion, the Comptroller’s Department may begin an investigation even if there have been
no claims regarding a particular bid or contract. In either case, the investigation can last up to 45
days, during which the process of acquisition or bid may be suspended. As a result of the
investigation, the Department may declare:
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a)
that the whole procedure or bid is null and void;
b)
that only acts carried out after the infringement are null and void (notably, this
would include the decision regarding the winner of a bid); or
c)
that the acquisition or bid process is legal, and there are no grounds for a claim.
Within ten calendar days, any interested party may file a claim against the decision. The
claim is filed before the Department itself, presenting any relevant evidence. At the time of filing
this claim, it is possible to request that the procedure of acquisition be suspended, provided that the
claimant presents a bond to cover any damages which may arise from such suspension. Any party
affected by the suspension may present a counter-guarantee, in an amount equivalent to the bond of
the claimant, in order to lift the suspension. The final decision of the Department must be issued
within twenty working days.
It must be noted that severe penalties may be imposed to government officials and private
parties who participate in acts contrary to the Law of Public Acquisitions or the Law of Public
Works.
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VI. REPRESENTATIVES, DISTRIBUTORS, FRANCHISEES
VI.
REPRESENTATIVES, DISTRIBUTORS, FRANCHISEES
.A.
REPRESENTATIVES
A foreign vendor can sell goods or services in Mexico directly through its own employees.
In other cases, a vendor may decide for various reasons to use other methods to dispose of his
merchandise, either through representatives or intermediaries, who may be commission agents,
distributors or franchisees.
When dealing through a commission agent, the vendor should be careful to have the agent
considered an independent contractor, and not an employee.
The employee could claim a labor relationship exists under Mexican law for services while
in Mexico, independently of the nationality or residence of the employer, and thereby be entitled to
the benefits of an employee provided thereunder. Further, it is important to keep in mind that the
Labor Law states that any person conducting sales, subject to direct supervision, is considered an
employee of the person for whom he conducts the sale.
Mexican laws do not regulate the amount to be paid as commission. For tax purposes the
agent's commission will be considered as his normal income. The sale by the foreign vendor could
be subject to Mexican taxes. (See Section XV.C.6. and D.2.)
.B.
DISTRIBUTORS
Distributors are independent vendors who purchase on their own and resell products, also for
their own account.
Distributors, unlike commission agents, derive their income from the difference in the
wholesale price at which they purchase, and the retail price at which they sell. Income of
commission agents is the commission received, which usually is fixed as a percentage of sales. The
risks of loss are suffered by the distributor upon accepting the purchase of products. Commission
agents do not suffer risks of loss of products, acting only as intermediaries.
.C.
FRANCHISEES
Mexican law broadly defines franchises as when along with the license to use a trademark,
technical knowledge is transferred, or technical assistance is granted, to produce, sell goods or
render services in a uniform manner and with the same commercial, administrative and operative
methods established by the owner of the trademark, with the purpose of maintaining the quality,
prestige and image of the products or services therein distinguished.
Since a franchise agreement implies the licensing of a trademark, it has to be recorded before
the Mexican Institute of Industrial Property to gain protection of the trademarks against third parties.
The franchisee will then be authorized to exercise all legal actions necessary to impede the illegal
use of the trademark, as if he were its owner, unless otherwise agreed.
The parties to a franchise agreement enjoy full contractual freedom. Their respective
obligations include, among others, the granting of a trademark license and technical assistance,
protection
of
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VI. REPRESENTATIVES, DISTRIBUTORS, FRANCHISEES
confidential information, compliance with quality and operational standards, payment of royalties,
and access to the franchisor's system of operations.
Franchise agreements are not subject to governmental approval. In accordance with the
Intellectual Property Law, franchisors must deliver to potential franchisees before execution of the
franchise agreement, the technical, economic and financial information regarding the franchise and
its system.
.D.
CONSIDERATIONS
Representatives, distributors and franchisees are subject to the Competition Law. It is
important to avoid agreements to unfairly eliminate competitors from the market.
The agreements governing the above relationships may be terminated by either party, in
accordance with their terms. Mexican law does not contain specific provisions for the payment of
damages or remuneration upon termination of the agreement except as may be provided in the
agreement.
The vendor may prefer other ways to either enter the Mexican market or expand market
penetration by creating a subsidiary or opening a branch in Mexico, instead of, or in addition to
having a representative, distributor or franchisee. Rules are different in each case and offer the
foreigner different advantages. (See Sections XII., XIII. and XV.)
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VII. INTELLECTUAL PROPERTY. LICENSING
.VII. INTELLECTUAL PROPERTY. LICENSING
The Industrial Property Law as amended on August 2, 1994, was the last of a series of
amended laws which ameliorated obstacles to foreign investment in earlier versions.
The Industrial Property Law created the Mexican Institute of Industrial Property, an
independent entity dedicated to the enforcement of intellectual property rights. The content of the
Law may be summarized as follows:
.A.
PATENTS
A patent is a right granted to an individual or to an assignee to exclusively exploit an
invention for a twenty-year, non-renewable period beginning from the date of filing the related
application.
To be patentable, an invention, must meet the following requirements:
1.
it must be novel, not be comprised in the state of the art, which is defined as the
technical information generally available to the public through a written or oral
description, through working or through any publication in Mexico or abroad; there
is no loss of novelty if an invention is exhibited is a nationally or internationally
recognized industrial or trade show;
2.
it must be the result of an inventive activity not readily deduced from the state of the
art or which may be evident or obvious to an expert;
3.
it must be capable of industrial application, that is, must be useful to manufacture a
product or to use a process in any type of economic activity; and
4.
it must be a human creation which allows the transformation of matter or energy in a
manner which may be used to satisfy a concrete need.
The following inventions are not patentable:
1.
biological processes for production or reproduction of plants or animals,
2.
biological or genetic material as found in nature,
3.
animal breeds,
4.
the human body and the parts or organs thereof, and
5.
vegetal varieties. (These are protected by the Vegetal Variety Law discussed below.)
Patent Law incorporates the first-to-file principle. Mexico is a party of, among others, the
Paris Convention, the Patent Cooperation Treaty, UPOV and others, thus the date of filing a patent
application in another member country is treated as the date of filing in Mexico.
There is no express obligation to work an invention, but the Law does provide that anyone
may apply to the Institute of Industrial Property for a compulsory license if the patent is not worked
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within the longer of three years following issuance of the patent application or four years following
the filing of the application, provided the applicant or patentee has no valid reason for the failure to
work the invention.
.B.
UTILITY MODELS
Utility models are objects, utensils, apparatus or tools that, as a result of a modification to
their arrangement, configuration, structure or form, perform a different function with respect to the
parts forming them or represent advantages with respect to the usefulness of said parts.
Utility models may be registered with the Institute of Industrial Property if they are
absolutely new and capable of industrial application. Protection is granted for a non-renewable term
of 10 years from the date of filing.
.C.
INDUSTRIAL DESIGNS
Industrial designs include industrial drawings and industrial models. Industrial drawings are
any combination of figures, lines or colors incorporated to an industrial product as an ornament
giving it a peculiar aspect of its own. Industrial models are tridimensional models that serve as
molds to manufacture industrial patterns giving a special appearance, provided they do not imply
technical effects.
Industrial designs may be registered with the Institute if they are new and are used as a type
or mold to make industrial products and are granted protection for a non-renewable term of 15 years.
.D.
INDUSTRIAL SECRETS
Industrial secrets are defined as any information capable of industrial application maintained
in confidence which may be useful to obtain or to maintain a competitive advantage in the
performance of economic activities, the confidentiality of which the owner has taken measures to
preserve by labeling information as "confidential," "secret," or in another similar manner. An
industrial secret must necessarily relate to the nature, characteristics or purposes of products, to
production methods or processes, or to the means or forms of distribution or marketing of products,
or the rendering of services.
Information in the public domain, information which may be obvious to an expert, or
information which must be disclosed by law or by court order, is not considered an industrial secret.
Any confidential information shall not be deemed to be in the public domain if such
information is disclosed to any authority for the purpose of obtaining any permits, registries,
authorizations or similars.
The protected information may be set forth in documents, electronic or magnetic media,
optical discs, microfilms, films or other similar instruments.
Industrial secrets may be transferred or licensed to third parties. Individuals with access to
industrial secrets may not reveal them without justified cause or consent from the owner or licensee.
Individuals or entities hiring employees, or contracting services from competitors, with the purpose
of obtaining industrial secrets may be liable for damages.
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.E.
INTEGRATED CIRCUITS
Integrated Circuits are protected as follows:
1.
Integrated circuits are products in final or intermediate form having at least an active
element and one or more interconnections to form an integral part of the body or of the surface or a
piece of semiconductor material destined to have an electronic function.
2.
Topography or layout is the tridimensional disposition, having at least one active
element with one or all of the interconnections of an integrated circuit for use in it.
3.
Original topography or layout is the topography or layout of an integrated circuit that
is the result of the creative effort of the inventor and which is not obvious or common among
creators or among manufacturers of integrated circuits at the time of invention.
Protection is afforded to the topography and/or layout of integrated circuits which are
original and have not been commercially worked anywhere in the world.
There is a two-year grace period from the date of first use. Any original combination of a
previously-known layout may be protected. The term of protection is 10 years from the date of
filing.
The owner of a Certificate of the Topography of an Integrated Circuit has the right to stop
others from reproducing the circuit in whole or in part, and to stop the importation, sale, or
distribution without authorization.
There is no infringement if the protected topography or layout of an integrated circuit is used
for:
a)
evaluation, analysis, or academic purposes, not for profit;
b)
creating a different original topography or layout;
c)
a third party who, independently and prior to the publication of the registration in the
Industrial Property Gazette, created an identical topography.
If a third party in good faith is importing, reproducing, distributing, or selling integrated
circuits incorporating protected topography or layouts, there will be no infringement until after the
infringer is notified in writing by the owner of the certificate. The infringer may finish his supplies
in stock provided that a reasonable royalty is paid to the owner of the certificate.
A protected topography of integrated circuits must bear the legend "(M)" or "(T)" plus the
name of the owner.
.F.
TRADEMARKS AND SERVICE MARKS
A trademark is defined as a visible sign or symbol that distinguishes products or services
from others of the same species or class in the marketplace.
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Trademarks may be:
1. any name or visible design which is sufficiently distinctive or any other means which may
identify certain products or services and distinguish them from other products of the same class;
2. tridimensional forms;
3. trade name and corporate names;
4. personal names unless there is a homonym previously registered.
Some marks are not registerable, such as:
1. words or designs that are not sufficiently distinctive;
2. the proper, technical or commonly-used names of products or services as well as words
which are the usual or generic designation of the products to be covered;
3. descriptive names or designs;
4. geographic names or any name designating the place of manufacture of products or
rendering of services; names of places known for the manufacturing of certain products;
5. names, figures or designs that are well known in Mexico;
6. any name, form or design confusingly similar or identical to a previously registered name,
trade or service mark or design to cover the same products or services; and
7. the translation to other languages of unregisterable marks.
Trademarks and service marks must be registered in order to obtain exclusive right of use.
As a general rule, registration is granted to the first applicant; however, the first user in
Mexico or abroad has a preferential right to register. Trademarks may be registered for up to 10
renewable years from the date of filing of the registration application with the Institute. Use of a
trademark may not be discontinued for more than three consecutive years without justification,
otherwise the registration could expire.
Trade or service marks cover only specific goods or services within a single class of
products. There are no multiple class registrations.
.G.
COLLECTIVE TRADEMARKS
Collective trademarks may be registered by legally incorporated associations of producers,
manufacturers, business-people or service providers in order to distinguish their products or services
from those of non-members.
A collective trademark may not be transferred to third parties, and its use is reserved for the
members of the association.
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.H.
COMMERCIAL SLOGANS
Commercial slogans are phrases or legends that have the purpose of announcing businesses,
commercial, industrial or service establishments to the public, to easily distinguish them from others
of their kind. Commercial slogans must be registered in order to obtain exclusive right of use.
.I.
TRADE NAMES
Commercial names of companies and trade names of commercial, service or industrial
establishments are protected without need for registration. The protection is granted in the
geographic zone of the effective clientele of the company, or establishment, using the trade name
and may be extended throughout the country if there is massive and constant diffusion of the name
on a national level.
A user may apply for publication of the trade name in the Gazette of the Institute to establish
a presumption of good faith in the use of the name.
Trade names are protected for a specific class of goods or services. The publication is valid
for 10 years and may be renewed.
.J.
APPELLATIONS OF ORIGIN
Appellations of origin are names of geographic regions used to designate a product that
originates from said region, and whose qualities or characteristics stem exclusively from the region.
Mexico is a party to the Lisbon Convention.
.K.
ROYALTY PAYMENTS
Mexican law does not provide any specific rules governing minimum or maximum royalties.
Tax authorities, however, have the right to adjust the taxable profit of the payer if such royalties are
excessive and do not reflect "market value."
.L.
TRADEMARK LICENSE AGREEMENTS
Trademark license agreements must be notarized, have an apostille placed or be legalized by
a Mexican consul, and translated into Spanish for registration purposes. The agreement may provide
for payment of royalties in foreign currency.
Generally, licensing practices may have significant antitrust implications, i.e., including
efforts by the seller or licensor to restrict by territory purchases and sales of the licensee. (See
section XIV.C.)
.M.
COMPARATIVE ADVERTISING
Comparative advertising is permitted in Mexico if the comparison of products or services
covered by a trademark is done for information purposes. The Institute may impose fines, close the
business, or place under arrest for up to 36 hours individuals who use comparative advertising and
publicity that is misleading, false, or exaggerated, with the purpose of discrediting or trying to
discredit products, services or a competitor.
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In addition the Consumer Protection Agency may also impose sanctions if the comparison of
products is false, misleading or exaggerated, even if it does not have as a purpose to discredit or to
try to discredit products, services or a competitor. The sanction in this case could be a fine up to
2,000 times the minimum daily wage in Federal District.
.N.
PARALLEL IMPORTS
Any person may legally import into Mexico products covered by a registered trademark, for
their use, distribution or commercialization.
The legal licensee of a trademark registered in Mexico which covers products being
imported does not have any action against the lawful importer.
.O.
COPYRIGHTS INCLUDING SOFTWARE
Copyright is protected for original intellectual creations without need for registration. There
are two types of rights granted to authors:
1.
patrimonial rights to use or reproduce the work of the author for profit. This right is
effective during the author's lifetime and 75 years after his death. The protection of
posthumous works lasts 75 years counted from the day of first publication; and
2.
moral rights, which include recognition of authorship and opposition to any
deformation, mutilation or modification made of the copyrighted work without
authorization or opposition to any action which may decrease the value or prestige of
the work or the reputation of the author. This right is perpetual, non-transferable,
non-waivable and does not expire when an action to enforce it is not exercised.
The protection of the author's right is granted on the following types of works: literary,
scientific, technical, legal, pedagogic, didactic, musical, pictorial, design, engraving, lithographic,
sculptural, plastic, architectural, photographic, cinematic, audiovisual, radio and television, titles of
periodicals, computer programs and on any other work which could be considered comprised within
the generic types of artistic or intellectual works mentioned above.
The Copyright Law was amended in 1996 to include computer software within the protected
items against unauthorized commercial exploitation or reproduction in the same terms as the rest of
the items mentioned in the paragraph above.
The author or his assignee has the right to the exclusive use of any protected work. Only the
right to use or reproduce a protected work may be assigned. The author's moral rights are not
assignable.
The author has the non-assignable right to be designated as such and to oppose any
deformation, mutilation or change of his work. These rights pass to the author's heirs.
Copyright is protected even if it is not registered or published.
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Copyright infringement is defined as any of the following actions carried out without the
consent of the author or his assignees:
1.
To use a protected work.
2.
To use the picture of a person.
3.
To manufacture, reproduce, store, distribute , market copies of phonograms,
videograms, or books protected by copyright.
4.
To sell, offer for sale, store or circulate protected works that have been modified,
adapted or deformed.
5.
To import, sell, lease, or carry on any action to deactivate electronic protection
systems of software.
6.
To rebroadcast, fix, reproduce or publish radio broadcasts.
7.
To use, reproduce or exploit a registered work, pseudonym or character.
Copyright infringement is punishable by fine, but if the infringement is done on a
commercial scale, there may be criminal penalties as well.
The Mexican Industrial Property Institute (IMPI) is in charge of prosecuting copyright as
well as other intellectual property infringements.
Preliminary measures, such as the seizure of infringing material, orders to cease and desist,
and orders to suspend an infringement may be issued by the IMPI.
A suit or action can be filed while a registration application is pending.
The usual defenses against copyright infringement are:
a)
That the use of the copyright is not for profit;
b)
That the reproduction of the copyrighted work is different;
c)
That there is a dispute as to who is the real author;
d)
That the copyright is not original and that it is in the public domain.
A civil action for damages also may be filed.
The author or his assignee may put a lien on the entrance fee or income derived from the
performance of a copyrighted work.
The author or his assignee also may repossess electromechanical equipment, sound systems,
projection systems or force commercial operations into receivership.
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The judge in a civil action or in a criminal action may order the seizure of all instruments
used to make unlawful copies, as well as the copies of reproductions of copyrighted works.
The judge or the public prosecutor may order the sale of all reproductions and the proceeds
thereof shall be paid to the author.
If the counterfeit products may not be sold to the public because the author objects, such
products shall be destroyed.
The criminal action has no effect on the civil action and vice versa.
Mexico is a party to the Universal Copyright Convention, the Interamerican Copyright
Convention and the Berne Convention.
.P.
FRANCHISES
(See Section VI.C.)
.Q.
MEXICAN LAW FOR THE PROTECTION OF NEW VARIETIES OF PLANTS
New varieties of plants are protected under a separate law, the Vegetal Variety Law,
published in the Official Daily Gazette on October 25, 1996. Mexico is also a member of UPOV:
To be protected, plants must be:
1.
New
2.
Different
3.
Stable
4.
Homogeneous
The term of protection is granted for:
-
25 years for perennial, forestry, fruit, ornamental plants and grafts.
-
20 years for other species.
The owner has the right to the exclusive use of:
1.
the breeding material for commercial production;
2.
marketing, and
3.
sale.
This law will be administered by the Secretary of Agriculture.
Plant varieties will be identified by a specific name proposed by the breeder.
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The breeders rights are:
1.
To be acknowledged as breeder of the plant variety.
2.
To prevent the use of a plant variety without authorization.
3.
To license others to use the plant variety.
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VIII. INVESTMENT FRAMEWORK
Over the last several years, Mexico has removed significant foreign investment barriers as
part of an ambitious economic development plan that aims to achieve, and sustain, industrial
development and expansion. The government has recognized that substantial private capital is
needed to create additional employment and to increase industrial output, which also results in
attracting an influx of modern technology, management techniques and financing.
Consistent with NAFTA, Mexico has enacted a new Foreign Investment Law (FIL),
effective as of December 28, 1993, as amended on December 24, 1997, which abolished restrictions
on foreign investment in most areas. FIL repealed several statutes that strictly regulated the
participation of foreign investors in certain activities. The Foreign Investment Commission is the
exclusive authority for the application of FIL.
On September 8, 1998, new Regulations were published for the FIL and the Foreign
Investment Registry to further relax requirements and filings.
.A.
NEW FOREIGN INVESTMENT LAW
FIL establishes, as a general rule, that foreign investors may hold 100 percent of the capital
stock of any Mexican corporation or partnership, except in those few areas expressly subject to
limitations under the FIL. The repealed law stated as a general rule that foreign investment was
limited to 49 percent unless expressly authorized to exceed this percentage. FIL grants all investors
from NAFTA and non-NAFTA countries the same investment treatment in Mexico. In certain
activities limited by FIL, investors from NAFTA countries enjoy greater access, as provided in
NAFTA. There has been dynamic liberalization of previous restrictions in FIL by modification of
various specific laws, applicable generally, as well as to specific provisions in NAFTA applicable to
NAFTA Parties. To attract further flows of capital, changes have been accelerating to allow even
greater foreign capital participation, for example, in railroad services, ports, airports,
telecommunications, and certain financial services.
The following are the major categories of limitations on foreign investment contained in
FIL. Where applicable, NAFTA provisions relevant to each sector are noted as well.
.1.
Activities reserved for the State
The constitutionally-defined "strategic activities" continuing to be reserved exclusively for
the State are the following, as per Article 5 of FIL:
a)
b)
c)
d)
e)
f)
g)
h)
oil production and oil refining;
basic petrochemical production;
sale of electricity to the public (see Section XI.A.2.);
nuclear power;
telegraph and radiotelegraph services;
local postal service;
bill issuance and coin minting; and
control, supervision and surveillance of ports, airports and heliports.
Consistent with FIL, Mexico has reserved these activities from NAFTA application.
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.2.
Activities reserved for Mexican investors
Article 6 of FIL reserves the following activities of the Mexican economy for national
investors:
a)
domestic land transportation of passengers, tourists and cargo not including
passenger, or package delivery services;
b)
retail gasoline sale, and distribution of liquefied petroleum gas.
c)
radio broadcasting and television services (except cable television, where foreign
participation may reach up to 49 percent);
d)
credit unions;
e)
development banks;
f)
professional and technical services expressly defined by the applicable legal
provisions;
g)
As of December 18, 1995, Transitory Article Sixth included activities of
international land transportation of passengers, tourists and cargo between points in
Mexican territory, and services of administration of central stations for passenger
and auxiliary automotive service vehicles.
Foreign investment may participate up to 49 percent in the capital stock of Mexican
companies operating in these areas. Beginning January 1, 2001 foreign investment may reach up to
51 percent in the capital stock of Mexican companies; and beginning January 1, 2004, up to 100
percent.
.3.
Activities subject to specific participation percentage.
Article 7 of FIL establishes the following three categories where foreign investment is
authorized up to 10 percent, 25 percent, and 49 percent:
a)
10 percent in cooperative production companies;
b)
25 percent in domestic and specialized air transportation and air shuttle services;
c)
49 percent, which is the most extensive category, includes the following activities:
i)
insurance and bonding institutions, currency exchange houses, general
deposit warehouses, financial leasing and factoring companies, special
purpose financial companies (non-bank banks), companies mentioned in
Article 12-Bis of the Securities Market Law which handle security portfolios
in the name of third parties, investment companies' fixed capital and
companies operating investment companies;
ii)
manufacture and commercialization of explosives, firearms, cartridges,
munitions and fireworks, excluding their acquisition and use for industrial or
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extractive activities, or the production of explosive mixtures for use in these
activities;
.4.
iii)
printing and publication of newspapers for circulation exclusively in Mexico;
iv)
ownership of series "T" shares of companies that own agricultural, cattleraising or timber land;
v)
cable television, basic telephone services;
vi)
fishing in fresh water, along the coast and in the exclusive economic zone,
except aquaculture;
vii)
integral port administration, piloting port services for interior navigation
operations, shipping companies commercially using vessels for interior and
coastal navigation, except for tourist cruise ships and for use of dredges and
naval devices for port construction, conservation and operation;
viii)
supply of fuel and lubricants for ships, aircraft and railway equipment; and
ix)
Transitory Article Seventh of FIL establishes that as of January 1, 1999, 100
percent foreign investment is allowed in the manufacture and assembly of
auto parts for the automotive industry without the requirement of prior
authorization.
Majority interest upon approval
Finally FIL in Article 8 establishes categories of activities in which foreign investors may
hold greater than a 49 percent interest subject to approval of the Foreign Investment Commission.
These activities include the following:
a)
port services such as piloting, dock services, mooring and lighterage;
b)
naval companies using vessels exclusively for high-seas traffic;
c)
administration of air terminals;
d)
private educational services;
e)
legal services;
f)
credit information companies;
g)
institutions for categorization of securities;
h)
insurance agencies;
i)
cellular telephone services;
j)
construction of pipelines for transportation of petroleum and derivatives thereof. As
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of May 11, 1995, 100 percent participation is permitted by special law without
specific authorization;
k)
oil and gas well drilling;
l)
erection, construction and installation of public works. Beginning January 1, 1999,
foreign investment may participate up to 100 percent in these activities without prior
authorization. (Transitory Article Ninth of FIL.)
.5.
Acquisition of existing Mexican companies
Foreign investors may acquire up to 100 percent of the shares of any company unless one of
the limitations previously mentioned applies to such company, requiring only registration with the
Foreign Investment Commission. However, a resolution from the Foreign Investment Commission
is required when foreign investors wish to acquire more than 49 percent of the capital stock of
existing Mexican companies when the total value of the assets of the Mexican company is greater
than $712 million pesos (approximately US$75 million).
NAFTA provides phasing for NAFTA parties. (See Section IX.C.)
.6.
Real estate.
The Mexican Constitution establishes a "restricted zone" (100 kilometers wide from the
borders and 50 kilometers wide from the coastal shores) in which direct foreign ownership is
prohibited.
FIL for the first time authorizes foreign participation in a Mexican company owning real
estate within the restricted zone for non-residential purposes and requires only a notification to the
Ministry of Foreign Affairs; if for residential purposes, title of the real estate must be held through a
trust by a trustee which must be a Mexican bank. Approval of the Ministry of Foreign Affairs is
required.
Long term leases of real estate are no longer prohibited.
.7.
Neutral investment.
Neutral investment is a carryover from the 1989 Regulations to the 1973 Foreign Investment
Law. FIL regulates said mechanism to allow foreigners to hold greater percentages of the capital of
Mexican companies in restricted areas.
Neutral investment may be done either through Mexican companies or in authorized trusts.
a)
The Ministry of Commerce may authorize companies to issue special series of shares
with limited or no voting rights.
b)
Banks acting as trustees may be authorized by the Ministry of Commerce to issue
instruments of neutral investment granting holders economic and limited voting
rights, with the restriction that no voting rights may be granted for ordinary
shareholders or partners meetings.
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c)
The Foreign Investment Commission may authorize neutral investment in the capital
stock of Mexican companies by international development financial companies.
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The Ministry of Commerce has a 35 working days to issue or deny the above-mentioned
authorizations. Otherwise, authorization will be granted automatically.
.B.
PRIVATIZATION
In 1982, during the term of former President Miguel de la Madrid, the Mexican government
started a privatization process of government-owned enterprises, but it was not until 1988 in the
administration of President Carlos Salinas that this process was intensified. The Zedillo
administration continued the process and further broke down other taboo areas.
To date, more than 1,150 government-owned enterprises - of what once were approximately
1,400 - have been privatized, contributing more than US$24 billion to the federal treasury.
Many government-owned enterprises have been privatized, including hotels, airlines, all of
the banks, the telephone company (TELMEX), mining (Minera Cananea), TV channels (TV
Azteca), theaters, sugar mills, fishing companies, automobile assembly, steel companies, and other
companies covering a wide range of activities.
The privatization process is part of the policy to liberalize the economy, simultaneously
allowing foreign participation in most economic activities. For example, the banking system, which
until 1982 was owned by Mexican investors, was expropriated by the government and in 1990, once
again, privatized to Mexicans and now recently expanding to allow foreign participation and even
control.
Another example is TELMEX, which was privatized in 1990 with foreign participation in
special series of shares, bringing in over US$7 billion. Foreign participation was permitted in the
telecommunications industry in 1997 when Mexico opened long-distance telephone markets.
Depending on the specific characteristics of the government-owned company in process of
being privatized, special rules in the bidding process are applied. Each privatization requires the
approval of the Intersecretarial Committee on Privatization, created on April 7, 1995, consisting of
the Ministers of Finance, Commerce, General Comptroller and Labor, with the participation of the
president of the Competition Commission.
The Zedillo administration is expected to privatize, among others, Almacenes Nacionales de
Depósito, S.A. (warehousing company), El Nacional, S.A. de C.V. (newspaper), Ocean Garden, Inc.
(seafood distributor) and PIPSA (paper company).
Additional areas for privatization are ports, petrochemical plants, highways, airports,
telecommunication services, railroads, among others.
Outsourcing part or all of the activities of the entity without changing its ownership is
another form of privatization (sometimes referred to as "indirect privatization"), without the
necessity of direct ownership of the outsourcing company.
Privatization in this form opens a whole new vast area of business opportunities to national
and foreign enterprises. Such contracting may be for operations to be performed separately from the
facilities of the government-owned entity or actually within the facility, i.e., maintenance contracts,
statistical processing, management of production, and operating computer systems.
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.C.
MONETARY AND FINANCIAL SYSTEM
.1.
Normative Framework.
Money, foreign exchange and financial services are regulated by a series of laws, regulations
and circular letters from the Ministry of Finance, the Bank of Mexico, National Banking and
Securities Commission (NBSC) and the National Insurance and Bonding Commission (NIBC).
.2.
Currency.
The unit of currency is the peso. The only legal currency circulating are paper bills issued by
the central bank, and coins of various values and characteristics. Foreign money is not legal
currency in Mexico. Obligations denominated in foreign currency for payment in Mexico may be
paid by delivery of the equivalent amount in pesos at the exchange rate in effect on the date of
payment, as established in the Monetary Law. The Official Daily Gazette publishes the U.S. dollar
exchange rate determined by the central bank for payment of obligations. The parties may agree to
make payment in foreign currency outside of Mexico, in which case the Monetary Law would not be
applicable. The exchange rates for other foreign currencies is calculated according to the exchange
rates of those currencies with the U.S. dollar in international markets. The rates of exchange of most
foreign currencies are available at banks in Mexico.
Mexican monetary law provisions may not be waived and any contractual stipulation to the
contrary is null.
.3.
Investment Units (UDIs).
To offset inflationary pressures, the Mexican government has created the Unit of Investment
(UDI) which is a unit of account that may be used to express the value of investments, credits or
commercial transactions. The value of the UDI is calculated daily by the Bank of Mexico based on
the National Consumer Price Index. (The value of one UDI was equal to $1.00 peso on April 4,
1995, the date of enactment of the corresponding decree. The value of that same UDI was 2.70448
pesos on January 31, 2000, reflecting the inflation index to that date.)
UDIs may be used to denominate the value of obligations in credit instruments, except
checks. They are voluntary and when due, payment must be made in pesos by multiplying the peso
value of the UDIs on the payment date by the number of UDIs owed.
Relatively few private investments or commercial transactions are denominated in UDIs,
principally because of the relative stability of the exchange rate of the peso and attractive interest
rates in pesos.
.4.
The Central Bank and foreign exchange.
The Bank of Mexico operates as the country's central bank. The purpose of the Bank of
Mexico is to provide legal currency for the economy, and its goals include achieving stability in the
purchasing power of the peso, as well as promoting the healthy development of the financial system
and providing an effective payment system.
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53
The Bank of Mexico maintains foreign reserves for the purpose of supporting the purchasing
power of the peso. The Bank supports the peso's purchasing power by compensating for disparities
in the inflow and outflow of foreign currencies in the country.
The Bank of Mexico is well respected both inside Mexico and in international financial
circles.
Mexico has complete freedom regarding monetary exchange. This free peso exchange policy
has been a constant in the financial history of Mexico, except for a short period between September
2, 1982 and December 10, 1982, when strict exchange controls were enforced. After December 10,
1982, the few remaining controls were liberalized considerably, and were finally removed
completely on November 11, 1991.
Mexico uses a floating exchange rate system. Foreign currency may be sold or purchased in
authorized currency exchange houses and in commercial banks. Furthermore, peso futures markets
operate in Chicago, U.S.A., and in Mexico City. Although there is no exchange control, bank
accounts may not be denominated in foreign currency, with few exceptions for maquiladoras and
individuals. There are some discussions to allow dollar bank accounts more generally; this being
related to monetary policy.
.5.
Affiliates of foreign financial entities
Affiliates are defined in the law as a Mexican corporation, authorized to operate as a type of
financial institution, whose capital stock is owned by a "foreign financial institution." A "foreign
financial institution" is one legally established as such in a foreign country. In addition, the "foreign
financial institution" must be from a country with which Mexico has entered into a treaty that
provides for the establishment of foreign affiliates in Mexican territory. Similarly, an affiliate
holding company, is defined as a Mexican corporation, organized and authorized to operate as a
holding company of a financial institution or institutions in which a "foreign financial institution"
holds at least 51 percent of the capital stock. As such, under the financial laws, and as these terms
are used herein, an affiliate, a foreign financial entity or institution and an affiliate holding company
are terms that apply to vehicles related to foreign investment by an entity in a NAFTA country,
which to date is the only treaty in force that permits affiliates of foreign financial entities to operate
in Mexico. (See section 13 below regarding foreign investment in regular (not affiliate) holding
companies of financial groups.)
Since 1994, by virtue of amendments to the respective laws governing various financial
institutions, foreign financial entities may establish affiliates with the prior approval of the Ministry
of Finance. NAFTA contemplates the establishment of foreign financial affiliates including market
participation limits, individual and aggregate. (See Section IX.J.)
In order to have an affiliate, foreign financial institutions must perform in their countries of
origin the same activities authorized for the affiliate in Mexico. Mexican legislation regulates
affiliate operations.
The capital stock of foreign financial affiliates engaged in activities of credit institutions,
holding companies of financial groups, bonding companies, auxiliary institutions, exchange houses,
special purpose financial companies and brokerage houses, can be represented only by "F" and "B"
shares. "F" shares must represent at least 51 percent of the capital stock and may be held only by an
affiliate holding company or foreign financial institution. "B" shares are free of ownership
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54
restrictions, and are regulated by the provisions for "B" series contained in the corresponding laws.
In the case of affiliates of foreign insurance companies, the capital stock shall be represented
by "E" and "M" shares. "E" shares must represent at least 51 percent of the capital stock and may be
held only by an affiliate holding company or a foreign financial institution. "M" shares are free of
ownership restrictions, subject to certain restrictions according to the Law of Insurance Institutions
and of Mutual Insurance Companies regarding holdings permitted to a single stockholder.
In the case of affiliate investment companies or companies operating investment companies,
up to 99 percent of the fixed capital stock may be held by an affiliate holding company or a foreign
financial institution.
Please note that an affiliate foreign financial institution is a Mexican entity and is not
considered as foreigner or foreign entity.
.6.
Credit institutions.
Banking institutions fall into two categories in Mexico, development banks and commercial
banks.
The Mexican legal denomination in Spanish for commercial banks is "Instituciones de
Banca Múltiple" (the literal translation of which is "multiple bank institutions"). This denomination
expresses the change in the range of services of commercial banks which are now permitted by law
to perform all kinds of banking services and are not restricted to just certain types of services, as was
the case in the past, i.e. deposit banks, mortgage banks, medium and long term financing banks,
savings banks, trustee banks, etc. Article 46 of the Law of Credit Institutions contains the detailed
list of such services which development banks can also perform.
The essential difference between development banks and commercial banks is that
development banks are governmental entities and commercial banks are privately owned. The
different services they offer result more from the practice than from legal provisions.
.a)
Development banks.
Development banks are established by their respective organic laws for special objectives,
such as promotion of foreign trade, financing public utilities, housing, industrial and agricultural
development, among other areas. Some examples of development banks include Nacional
Financiera, S.N.C., which operates as the principal government bank for promotion of industry in
Mexico, Banco Nacional de Comercio Exterior, S.N.C., which promotes exports and pre-exportation
activities, and Banco Nacional de Obras y Servicios Públicos, S.N.C., which promotes housing,
public works and public utilities projects.
Foreigners may not participate in the equity of development banks.
.b)
Commercial banks.
To operate as commercial banks, authorization from the Ministry of Finance and opinions
from the Bank of Mexico and the NBSC are required. The authorizations are not transferable.
The ordinary capital stock of commercial banks must be represented by series "O" shares.
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56
The law allows commercial banks to issue special series "L" shares representing contribution
of "additional" capital. "L" shares have limited voting rights, and a preferred and cumulative
dividend, which can be greater but not less than the dividend on common stock. These shares may
be issued for up to an amount equal to 40 percent of the ordinary capital stock. "O" shares must be
held by Mexicans, including affiliates of foreign financial entities, provided there are no restrictions
governing their particular area of activity. Foreign government entities cannot hold stock of
commercial banks.
No person or entity may hold more than 5 percent of the capital stock but may hold up to 20
percent with prior authorization from the Ministry of Finance. Exceptions to such limitations on
holdings of ordinary capital stock are listed in Article 17 of the Law of Credit Institutions, which
include the federal government, certain institutional investors, holding companies of financial
groups, shareholders of banks participating in a merger program approved by the Ministry of
Finance, and other banks and foreign financial institutions and their Mexican affiliates when
participating in programs approved by the Ministry of Finance.
Except for the period between 1982 to 1992, historically, most Mexican commercial banks
have been privately owned. Today, three large national banks (Banamex, Bancomer and Bital),
operating through more than 4,000 branches throughout the country, dominate this sector of the
economy.
.7.
Special purpose financial entities (non-bank banks)
The Law of Credit Institutions expressly prohibits any entity other than credit institutions
from rendering banking services, with few exceptions. One such exception includes the "non-bank
banks," which may obtain resources from the placement of securities registered in the National
Registry of Securities and Intermediaries and grant credits for determined activities or sectors.
Foreigners may participate only up to 49 percent of the capital stock of such entities, except
affiliates of foreign financial institutions, provided there are no restrictions governing their particular
area of activity.
.8.
Auxiliary credit organizations and activities
The General Law of Auxiliary Credit Organizations and Activities considers the following
as auxiliary credit organizations: general deposit warehouses, financial leasing companies, savings
and lending companies, credit unions, and financial factoring companies, as well as others
considered as such by any other law. The law also considers the purchase and sale of currencies as
an auxiliary credit activity. As such, this law regulates the operation of currency exchange houses.
The above institutions are subject to authorization of the Ministry of Finance, with the
exception of credit unions, which are subject to authorization of NBSC. All except the savings and
lending companies must be incorporated as corporations and have capital requirements established
by the Ministry of Finance.
Auxiliary credit institutions and exchange houses, except savings and lending companies
whose capital is represented by social parts rather than shares, may issue preferential, limited vote or
no-par-value shares.
Foreign government entities and bonding and mutual insurance companies may not
participate in the capital stock of auxiliary credit institutions or exchange houses. Other auxiliary
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57
credit institutions and exchange houses may hold capital stock in auxiliary credit institutions and
exchange houses when participating in merger programs approved by the Ministry of Finance.
No person or entity may hold more than 10 percent of the paid-in capital stock of these
organizations, except for the federal government, credit institutions, insurance companies, stock
brokerage houses and financial group holding companies, shareholders of auxiliary credit
organizations and exchange houses, or those institutions participating in a merger program approved
by the Ministry of Finance. The Finance Ministry or the NBSC may in special cases authorize the
purchase of more than the 10 percent limit to persons or entities with no connection to other
shareholders of the respective company, provided such approval does not create an undue
concentration of share ownership.
As per the FIL, foreigners may participate with up to 49 percent in the paid-in capital stock
of general deposit warehouses, leasing and factoring companies and currency exchange houses.
.9.
Institute for the Protection of Bank Savings (IPAB)
The Law for the Protection of Bank Savings went into effect on January 20, 1999, for the
purpose of establishing a guaranty system for people who have bank deposits or who have given
loans or credits to financial institutions, and of regulating the supports given to financial institutions
for the protection of depositors.
The system established by the law is administered by a decentralized agency of the
government called the Institute for the Protection of Bank Savings, known by its Spanish acronym
IPAB. The IPAB has its own budget and its own legal capacity, and operates under a Board of
Directors, formed by the Bank of Mexico, the Ministry of the Treasury and the NBSC, and a
General Secretary.
IPAB is the entity that replaced the Banking Fund for Savings Protection, known in Mexico
as FOBAPROA dating from July 18, 1990, as published in the Official Daily Gazette. The
FOBAPROA was a trust set up by the federal government, managed by the central bank in a
fiduciary capacity, which during its term had similar objectives to those of IPAB.
IPAB is expected to accelerate the recovery of the financial sector and lay the groundwork
for more solid and well-supervised financial institutions through the promotion of market discipline
and the efficiency and capitalization of the banking system.
The law establishes that whenever a financial institution is liquidated, enters into suspension
of payments under bankruptcy law or enters into bankruptcy, IPAB will assume and pay the
guaranteed liquid obligations due according to procedures specified in the law. It also manages the
deposit insurance sale of assets through its banking support system.
The amount paid is calculated in UDIs (see 3 above) based on the principal and ancillary
amounts outstanding on the date on which IPAB publishes the resolution regarding the liquidation,
suspension of payments or bankruptcy of the financial institution. The value of the UDI is also listed
in the same publication. Term obligations covered by the guaranty are considered due as of the date
of publication, with interest accumulated to that date.
The total coverage provided by IPAB will be phased out gradually, leading to a maximum
coverage of the IPAB guarantee, which will be limited to the equivalent of four hundred thousand
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58
UDIs, approximately US$110,000.00 at January 31, 2000 UDI value, per person or entity by 2005,
whatever the number or types of obligations owed by the financial institution.
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59
IPAB does not guarantee the following:
a)
operations for the benefit of domestic or foreign financial institutions;
b)
operations for the benefit of any company that forms part of a financial group to
which the financial institution in liquidation or bankruptcy belongs;
c)
debt denominated in negotiable instruments or bearer instruments;
d)
obligations or deposits for the benefit of shareholders, advisors, high officers,
attorneys-in-fact holding powers of administration and general managers of the
financial institution being liquidated or in bankruptcy;
e)
any operations not conforming to the applicable legal or administrative requirements,
as well as to sound banking practices; any banking operations in which bad faith
exists on the part of the obligation creditor; and any operations related to illegal
transactions or acts.
Financial institutions are required to pay ordinary and extraordinary fees established by the
IPAB Board to fund the objectives of the law. In any year, such fees may not exceed eight-one
thousandths of the total of the financial institution's operating liabilities.
.10.
Insurance and bonding sector
.a)
Insurance companies.
Insurance companies are regulated by the Law of Insurance Institutions and of Mutual
Insurance Companies and the circular letters issued by the NIBC.
The following institutions may not participate in the capital stock of Mexican-controlled
insurance companies: credit institutions, mutual insurance companies that belong to a financial
group, brokerage houses, auxiliary credit organizations, and companies operating investment
companies.
A mutual insurance company is one in which the policyholders are the owners of the
company. It is a rarely-used vehicle in Mexico.
Only insurance companies authorized by the Ministry of Finance may engage in any of the
following insurance or reinsurance activities: i) life, ii) health; and iii) damage in any of the
following areas, among others: civil liability and professional risks, maritime and transport, fire,
agriculture and animals, automobiles, credit, earthquake and other catastrophes.
Insurance companies must have a minimum paid-in capital stock expressed in UDIs for each
of the above-mentioned operations determined by the Ministry of Finance during the first quarter of
each year. If the insurance company has variable capital, shares representing the minimum capital
required by the Ministry of Finance may not be voluntarily withdrawn whether or not any of such
shares represent the variable portion of the capital.
No person or legal entity may hold more than 20 percent of the capital stock of an insurance
company, except the federal government, companies subject to NIBC oversight, investors or other
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60
insurance companies participating in merger programs approved by the Ministry of Finance, banks
acting as trustees and holding companies of financial groups. Foreign financial institutions may
acquire Mexican insurance companies under programs approved by the Ministry of Finance. The
Mexican company must then become an affiliate of the foreign financial institution.
Foreign insurance companies may only enter into insurance contracts in Mexico, with prior
authorization from the Ministry of Finance, when: (i) the risks covered are in countries where such
companies are authorized to act as such, and (ii) no Mexican insurance company is able or deems it
beneficial to enter into the relevant insurance contract. For this purpose, Mexican insurance
companies may act as commission agents of the foreign insurance companies.
.b)
Reinsurance intermediaries.
Insurance companies engaged in reinsurance operations may use the services of
intermediaries residing in Mexico or abroad. Reinsurance intermediaries residing in Mexico must be
authorized by the NIBC. Reinsurance intermediaries residing abroad must be registered with the
NIBC.
.c)
Foreign reinsurers.
To participate in reinsurance operations, foreign reinsurers must be registered in the General
Registry of Foreign Reinsurers of the Ministry of Finance.
Foreign reinsures may open representative offices in Mexico with prior authorization from
the Ministry of Finance, which may only accept or assign reinsurance liabilities in the name of their
main offices.
.d)
Insurance agents.
Insurance agents may be individuals or legal entities regulated by the Regulations for
Insurance and Bonding Agents, and, in the case of legal entities, also by the Law of Insurance
Institutions and Mutual Insurance Companies. This law defines insurance agents as all persons or
legal entities intervening in the contracting of insurance through the exchange of offers and
acceptances, as well as advising regarding execution, preservation or modification of insurance
policies or coverage, for which authorization from the NIBC is needed.
Individuals acting as insurance agents may be Mexican or foreign. Legal entities must be
incorporated as corporations and may be 100 percent foreign owned, subject to authorization from
the Foreign Investment Commission. The following entities may not participate in the capital stock
of insurance agencies: credit institutions, insurance institutions, mutual insurance companies,
bonding companies, brokerage houses, auxiliary credit organizations, investment companies,
corporations operating investment companies, exchange houses and financial commission agencies,
foreign governments, holding companies of financial groups, and reinsurers of insurance and bonds.
Under the December 31, 1999 Decree, individuals or entities not authorized as insurance
agents may intervene in the contracting of most adhesion contracts, with the prior registration with
the NIBC of their respective service agreements with the insurance companies.
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61
.e)
Bonding companies.
Bonding companies are regulated by the Federal Law of Bonding Institutions. Incorporation
is subject to authorization from the Ministry of Finance. The capital stock of bonding companies
may be controlled by foreign financial institutions or affiliate holding companies, which may own
up to 99 percent of the capital stock (affiliates), or controlled by Mexicans who must own at least 51
percent of the capital stock thereof, as per the FIL.
In cases in which the bonding company is not a foreign affiliate, no person or entity may
acquire more than 10 percent of the paid-in capital stock of a bonding company except as otherwise
authorized by the Ministry of Finance. No person may own more than 20 percent of the paid-in
capital stock of bonding companies, except: the federal government, entities subject to surveillance
by the NBSC, individuals and other bonding companies purchasing shares in accordance with
merger programs approved by the Ministry of Finance, credit institutions acting as trustees,
shareholders of merging bonding companies (subject to restrictions), holding companies of financial
groups, and other authorized persons fostering technical development and commercialization of
bonds.
The following institutions may not participate in the capital stock of bonding companies:
credit institutions, mutual insurance companies, brokerage houses, auxiliary credit organizations,
and companies operating investment companies.
Bonds may be acquired from foreign bonding institutions, with prior authorization from the
Ministry of Finance, in those cases in which no Mexican bonding company can or deems it
beneficial to grant a requested bond. Mexican bonding companies may acquire "back-up" bonds
from foreign bonding institutions, which are duly registered in the registry created by the Ministry
of Finance for that purpose.
.11.
Stock exchange operations sector
.a)
The Mexican stock exchange.
Stock exchanges are principally regulated by the Securities Exchange Law and the circular
letters issued by the NBSC. Although the Law contemplates the possibility of a stock exchange in
any city, currently, the only authorized stock exchange is the Mexican Stock Exchange located in
Mexico City. The Mexican Stock Exchange is operated by a corporation whose shareholders must
be brokerage houses or stock specialists. The Mexican Stock Exchange had an auction hall divided
in two trading floors, one for capital markets, including an intermediate market, for trading shares, a
derivatives market for trading of futures, warrants and options, and the other floor for the money
market for trading of debt instruments, but since 1999 the trading is performed electronically from
the brokers' offices while the derivatives market is operated on a trading floor.
As of July 7, 1993, the Intermediate Market initiated operations for the sale and purchase of
shares issued by mid-size companies not complying with the requirements established by the
Mexican Stock Exchange.
In December 1998 the Derivatives Market initiated operations. Mexican companies have
been authorized by Mexican authorities to place securities in foreign markets. Foreign securities
have not yet been authorized to register in the Mexican market.
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62
.b)
Brokerage houses and stock specialists.
Brokerage houses and stock specialists are considered in the Securities Exchange Law as
intermediaries in the stock market and may perform intermediation activities, such as: a) brokerage,
commission and other activities with the purpose of creating a supply and demand; b) operations for
their own account of public offerings of securities issued or secured by third parties; and c)
administration and handling of third-party portfolios. Brokerage houses and stock specialists must
be registered in the Intermediaries Section of the National Registry of Securities and Intermediaries.
The Law refers to the limitations on holdings of shares and types of shares to be issued,
which are essentially the same as those discussed in paragraph b) of Section 6 above, i.e. "O" shares
and "L" shares.
Brokerage houses, stock specialists, foreign governmental agencies, credit institutions,
insurance or bonding companies, auxiliary credit institutions, currency exchange houses, investment
societies or companies and any other person or entity that could have a conflict of interest may not
participate in the capital stock of brokerage houses or stock specialists.
.c)
Security portfolio management companies.
Security portfolio management companies are regulated by Article 12-Bis of the Securities
Exchange Law and may handle security portfolios in the name of third parties without registering in
the National Registry of Intermediaries, as long as they comply with the following requirements: a)
they must be Mexican corporations or associations in which foreign participation in the capital stock
and in the board of directors is limited to a minority proportion; b) its administrative partners or
members of the board of directors and officers may not have relationships with brokerage houses,
stock specialists, companies operating investment companies, credit institutions, securities
qualifying institutions or issuers of securities traded in the securities market; c) all operations must
be documented in the name of the respective client and must be carried out through brokerage
houses, stock specialists, companies operating investment companies or credit institutions; and d)
these companies may not receive funds or securities in trust or for the development of their
activities.
Foreigners may have a minority participation in the administration and capital stock of these
companies, but may not have decision-making powers in their administration.
.d)
Institutions for the deposit of securities.
Institutions for the deposit of securities operate through a concession granted by the Ministry
of Finance to hold for safekeeping, administering, compensating, liquidating and transferring
securities. Only one concession is granted per city. The shareholders may be only the Bank of
Mexico, brokerage houses, stock specialists, stock exchanges, credit institutions, insurance and
bonding companies.
.12.
Investment companies.
Investment companies are entities incorporated for the purpose of purchasing securities and
documents selected in accordance with risk diversification criteria, using funds obtained from the
public placement of shares representing their capital stock.
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63
Incorporation of investment companies is subject to authorization by the NBSC, and may be
divided into: a) common investment companies, which operate exclusively with fixed and variable
interest rate instruments, b) debt instrument investment companies, which operate exclusively with
fixed interest rate instruments, and c) capital investment companies, which operate with securities
and instruments issued by companies requiring long-term funding.
Management of investment companies, as well as the purchase and distribution of
investment company shares, may be performed by companies operating investment companies,
brokerage houses and credit institutions.
Foreign participation on the fixed capital stock is limited to 49 percent by the FIL. This
limitation does not apply to affiliates of foreign financial entities.
Individual participation in the capital stock is limited to 10 percent, except for a) founding
members and those purchasing shares during a six-month term from the date of incorporation, who
must resell their shares in accordance with the investment plans approved by NBSC; b) brokerage
houses, credit institutions, companies operating investment companies and shareholders of capital
investment companies; and c) any other person authorized by NBSC.
.13.
Financial groups.
Financial groups are governed by the Law of Financial Groups, and are formed in one of
three ways:
1.
With a holding company along with any of the following financial entities: general
deposit warehouse, leasing company, financial factoring company, currency
exchange house, bonding company, insurance company, non-bank bank, brokerage
house, commercial bank, company operating investment companies and pension
fund administration companies.
2.
Without a holding company, but including at least two of the following: a
commercial bank, a brokerage house or an insurance company.
3.
Without a holding company, but including at least three of the financial entities
mentioned in 1 above, not including companies operating investment companies or
retirement fund administration companies.
The Ministry of Finance may authorize the participation of other institutions.
To establish and operate a financial group, authorization from the Ministry of Finance is
required. Each of the financial institutions that forms part of the financial group must also receive
authorization from various authorities, such as the Ministry of Finance, Bank of Mexico, NBSC or
NIBC.
The holding company must own at least 51 percent of the paid-in capital stock with the
voting rights of each of the financial institutions forming the group, and its corporate purpose must
be the acquisition and administration of the shares issued by the financial institutions. The holding
company may never engage in the activities of each of the financial institutions. Since liberalization
of the Foreign Investment Law, foreign investors no longer have to form an affiliate holding
company.
Stock
of
a
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64
regular holding company (as distinguished from a foreign affiliate holding company) may be
subscribed freely, which means there are no restrictions on foreign ownership.
.14.
Credit information companies.
Credit information companies are regulated by Article 33 of the Law of Financial Groups
and by the General Rules Applicable to Credit Information Companies effective as of February 16,
1995, as modified on December 30, 1997 and September 22, 1998. The purpose of these companies
is to render information services on credit and analogous operations performed by financial entities.
Their operation is subject to authorization from the Ministry of Finance with the opinion of the Bank
of Mexico and NBSC. As per the FIL, foreign participation in the paid-in capital stock may exceed
49 percent with prior approval from the Foreign Investment Commission.
.D.
EXCHANGE CONTROLS
.1.
Repatriation and exchange controls.
Repatriation is not restricted in Mexico nor was it ever controlled except for a relatively
short period, and does not require any special tax or exchange rate. No requirements exist for
registering direct foreign investment made in foreign currency or to pay dividends or to repatriate
capital investments or loans and interest.
.2.
Capitalization and payment of dividendss.
Apart from the general capitalization requirements discussed in Section XIII.A.3 and
A.4.b), no capitalization requirements apply before a dividend may be repatriated.
Dividends to foreign shareholders are not generally taxed when distributed, if they are paid
from a net taxed profit account. (See Section XV.C.4.l.)
There are no imposed limitations on capital remittances when operations are terminated.
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IX. NAFTA
IX.
NAFTA
.A.
INTRODUCTION
The North American Free Trade Agreement went into effect on January 1, 1994, committing
the United States, Canada and Mexico to a process of phasing out trade barriers completely by
January 1, 2009. In 1994, with a combined market of some 360 million consumers and an annual
economic output of $6 trillion, NAFTA was by far the largest free trade area in the world. The
subsequent lowering of trade tariffs in the European Union now makes NAFTA one of the two
largest free trade areas.
NAFTA represents a free trade region that combines the world's largest economy with a
mid-size developed economy and a developing economy. The 2,000-mile border between the United
States and Mexico separates peoples of vastly disparate histories, languages, cultures and economic
development. To the north of the border are the modern, developed economies of the United States
and Canada, with all the competitive advantages of modern technology and scientific advancements.
To the south lie the developing economies of Latin America, which historically have relied
primarily on exploitation of natural resources or agriculture for foreign trade revenue rather than on
technological advancements and industrial capacity. It should not be surprising that there sometimes
has been both economic and cultural friction between neighboring Mexico and the United States.
More surprising should be the increasing level of cooperation between the two nations despite their
differences. Each country has long recognized the importance of the other to its own national
interest.
The United States and Mexico are linked by more than geography and history. Today,
Mexico is the second largest trading partner to the United States after Canada. For Mexico, the
United States is its primary international trading partner.
The level of cooperation necessary to implement NAFTA has significantly broadened
economic and commercial cooperation among the three NAFTA parties. Total trade with the United
States increased more than 122 percent in the first five years of NAFTA, and total trade with Canada
increased more than 38 percent in the same period. The massive credit support given Mexico by its
NAFTA partners in 1995 after a severe devaluation of the peso was justified, in part, because of the
close commercial ties among the three countries as a result of NAFTA. Similarly, Mexico has
adopted standards, including environmental standards, that it probably would not have adopted
without the NAFTA ties. Foreign investment in Mexico has increased considerably since NAFTA
was implemented, and now the presence of U.S. and Canadian companies in Mexico, as well as
those from other countries, is becoming widespread.
The increased trade and investment also is encouraging changes in laws and regulations in
various areas in order to facilitate continued growth, economic security and stability.
B.
NAFTA KEY FEATURES
The following are among NAFTA's key features:
a) Eliminates tariffs and non-tariff barriers to trade in, and the facilitation of cross-border
movement of, goods and services among the three Parties. (NAFTA Treaty Chapters III and XII.)
b) Creates strong "North-American-made" rules of origin to ensure that non-NAFTA
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IX. NAFTA
countries do not also gain duty-free access to the free trade area. (NAFTA Chapter IV.)
c) Opens Mexico's services market, including its financial services sectors, to U.S. and
Canadian firms, as well as other foreign-owned firms that meet a North American residency test.
(NAFTA Chapters XII, XIII and XIV and Annex VII sections A, B and C, Mexico.)
d) Loosens Mexico's restrictions on foreign investment, including "performance
requirements" that regulate the operations of foreign firms in Mexico. (NAFTA Chapter XI and
Annex I, Mexico.)
e) Strengthens North American protection of patented, trademarked and copyrighted goods.
(NAFTA Chapter XVII.)
f) Establishes an expert-based panel system to resolve trade conflicts among the NAFTA
parties. (NAFTA Chapters XIX and XX.)
.C.
NAFTA PRINCIPLES REGARDING INVESTMENT
For Mexico, NAFTA is a treaty with the United States and Canada and provides certain
protections to investors. Each Party must treat other NAFTA investors and their investments no less
favorably than it treats its own investors and their investments (national treatment) or investors and
investments of third parties (most favored nation treatment) under similar circumstances. A Party is
obliged to grant the more advantageous of either national or most favored nation treatment. (Articles
1102 and 1103.)
These obligations apply to the "establishment, acquisition, expansion, management, conduct,
operation, and sale or other disposition of investments." These basic obligations ensure that, subject
to agreed exceptions in the NAFTA Annexes, a Party may not subject enterprises to different, or
more onerous operating conditions, simply because of foreign ownership. In addition to these
general provisions, the Chapter expressly prohibits certain commonly-encountered forms of
discrimination such as requirements that a minimum level of equity be held by local nationals, or
that certain senior management positions be reserved to local nationals. Finally, the foregoing
comparative standards and explicit prohibitions are supplemented by the incorporation of customary
international law principles obligating the host government to accord "fair and equitable treatment"
and "full protection and security" to investments in its territory.
In a broad reservation clause contained in the trade agreement, Mexico maintains the right to
review the acquisition of more than 49 percent foreign ownership in Mexican enterprises, but only if the
gross assets of the entity exceed a threshold level (beginning at US$25 million with the implementation
of NAFTA in 1994, stepping up to US$150 million after the ninth year of the Treaty). The current
threshold of US$75 million became effective in January 2000 with a resolution modifying Article 9 of
the Foreign Investment Law, published in the Official Daily Gazette on January 12, 2000. (See Section
VIII.A.5.)
Regarding performance requirements, the parties obligate themselves not to condition the
establishment, operation or expansion of an investment on the fulfillment of certain requirements of
behavior or performance, such as commitments concerning export programs, degrees of national
integration, foreign currency balance and transfer of technology. (Article 1106.)
Currency convertibility at market rates is guaranteed. NAFTA prohibits expropriation, except for
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IX. NAFTA
public purposes, on a non-discriminating basis, in accordance with due process of law and with
compensation paid without delay and at a pre-expropriation fair market value with applicable interest.
(Articles 1109 and 1110.) On payment, compensation shall be freely transferable outside the country.
.D.
TARIFF REDUCTION
Under NAFTA, U.S. and Canadian firms shall enjoy tariff-free treatment on all NAFTAmade goods that enter Mexico on a phase-in schedule. Fifty percent of all tariffs on U.S. and
Canadian exports to Mexico were eliminated as of January 1, 1994, the day NAFTA entered into
force. By January 1999, Mexico discontinued tariffs on 65 percent of all U.S. and Canadian goods
entering the country, and by January 2009, all tariffs on NAFTA imports shall disappear.
Depending on the import-sensitivity of each of the approximately 9,000 goods covered by
NAFTA, specific categories were placed in one of four tariff transition lists:
A List:
B List:
C List:
D List:
.E.
Cuts tariffs to zero immediately,
Phases out tariffs in equal cuts over five years,
Phases out tariffs in equal cuts over ten years,
Phases out tariffs in equal cuts over fifteen years.
PROFESSIONAL SERVICES
Under NAFTA, in 1996, Mexico eliminated citizenship and permanent residency
requirements in the area of professional services. NAFTA, however, does not require Mexico to
recognize foreign professional degrees, but it is committed to provide a procedure under which
foreigners may obtain a revalidation.
Accordingly, Mexico amended its Regulatory Law of Article 5 of the Constitution relevant
to the exercise of professions in effect as of January 1, 1994. The modifications eliminate the
requirement that only Mexican nationals may exercise a profession in Mexico and grants the same
right to foreigners, subject to what has been agreed to in international treaties to which Mexico is
party, or in the absence of such treaties, subject to reciprocity and to compliance of other
requirements established by Mexican laws. Also, the amendments to the law provide that
professional degrees or titles issued abroad may be registered at the Ministry of Education if the
studies covered by such degree are equal or similar to those of institutions forming part of the
National Education System.
.F.
LAND TRANSPORTATION OF CARGO AND PASSENGERS
Mexican companies already established, or to be established in Mexico, engaged in the
operation of bus or truck terminals, and bus or truck depots, may have foreign participation up to 49
percent from January 1, 1997, 51 percent from January 1, 2001, and up to 100 percent after January
1, 2004. (NAFTA Chapter XI.)
With respect to urban, suburban and interurban passenger transportation services by bus,
school bus, taxi, and other public transportation services, as well as cargo and tourism transportation
services, foreign investment is not permitted. Therefore, these activities are reserved to Mexican
individuals and companies with an exclusion of foreigners clause in their bylaws.
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IX. NAFTA
.G.
AUTOMOBILE SECTOR
In accordance with NAFTA provisions, 100 percent foreign investment is permitted in the
entire automobile sector, including the auto parts industry, which was restricted until January 1,
1999. The applicable terms, conditions and limits are essentially the same as those provided for any
non-NAFTA Party investor, under the Automotive Decree and its Rules of Application. (See
Investment Opportunities, Section XI.F.2.)
.H.
IMMIGRATION
NAFTA provides that each of the Parties will authorize the temporary entry of
businesspersons, without requiring an employment permit. Therefore citizens from each of the
Parties may cross borders under four different categories:
a) Business visitor,
b) Traders - investors,
c) Intra-company transferees, and
d) Professionals.
Each one of these categories contemplates specific activities to be performed by persons
going into another country. For example, business visitors are persons wishing to carry out activities
related to research and design, cultivation, manufacturing and production, marketing, sales,
distribution, after-sales services and general services.
To facilitate the temporary entry of persons on a reciprocal basis, NAFTA creates the
"FMN," a special immigration form issued by the consular offices of Mexico in Canada and the
U.S., airlines, travel agency and immigration staff at the ports and the points of entry to the country,
to nationals of another Party crossing the border to develop a non-remunerated activity in Mexico
for a maximum period of 30 days. If the visitor wishes to extend his stay in Mexico, he must obtain
from the Ministry of the Interior the normal business visa (FM-3), which is granted for a duration of
one year, renewable four times, enabling multiple entries and exits. (See Section XVII.)
.I.
GOVERNMENT PROCUREMENT
Chapter X of NAFTA, called "Purchases by the Public Sector," is applicable to contracts
executed by governmental entities of Mexico, United States and Canada, which are specifically
listed in the Annex to Chapter X. Chapter X deals with goods, services and construction services,
enabling investors from a Party to participate in public bids if the value of such contract is beyond
certain fixed U.S. currency thresholds.
The thresholds are: for entities of the Federal government (such as Ministries), US$50,000
for contracts concerning the acquisition and lease of goods and for the rendering of services, and
US$6.5 million for construction contracts; for governmental entities (such as PEMEX and the
Federal Electricity Commission), US$250,000 for contracts concerning the acquisition and lease of
goods and for the rendering of services, and US$8 million for construction contracts.
For more information on government sales and contracting in Mexico, see Section V.
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IX. NAFTA
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70
IX. NAFTA
.J.
FINANCIAL SERVICES
Chapter XIV of NAFTA sets out the rules governing the treatment each NAFTA Party must
accord to those financial institutions in its territory owned by investors from other NAFTA Parties.
Annex VII sections A, B and C contain the reservations adopted by each Party.
Section A of Annex VII contains existing federal measures that are reserved. Mexico has
reserved the right to apply its current investment restrictions as mentioned in Section VIII.C. Section
B contains a list of financial services sectors in which the Parties have reserved the right to maintain
existing inconsistent federal measures or adopt new ones. Section C contains specific additional
commitments that individual NAFTA Parties have undertaken.
Under Sections B and C, Mexico has committed to liberalize its investment requirements for
foreign investors investing through foreign financial affiliates (see Section VIII.C.5.) In accordance
with such commitment, and after the expiration on January 1, 2000 of the transition period, to full
liberalization of investment established in this sector, foreign credit institutions, stock brokers,
insurance companies and financial leasing companies are subject to limits on the aggregate
percentage of capital in the Mexican market they are permitted to hold. Foreign credit institutions,
stock brokers and insurance affiliates are also subject to individual capital limits.
However, if the sum of the authorized capitals of foreign financial affiliates exceeds 25
percent of the percentage of capital in the Mexican market, Mexico has a right to freeze for one time
within the following four years after the transition period above referred to has expired, the
percentage representing the aggregate capital of the foreign financial affiliates at their level
(percentage) in that moment. The freeze may not last more than three years.
Mexico may require that a foreign financial affiliate (other than a foreign insurance affiliate)
be wholly-owned by an investor of another Party. Mexico may also restrict any foreign financial
affiliate from establishing agencies, branches or other direct or indirect subsidiaries in the territory
of any other country.
After January 1, 2000, acquisition of a commercial bank established in Mexico, or of the
assets or liabilities thereof, by an investor of the United Sates or Canada will only be authorized by
Mexico, subject to reasonable prudential considerations on a case-by-case basis, if the sum of the
capital of the acquired commercial bank and the capital of any foreign commercial bank affiliate
already controlled by the acquiror would not exceed four percent of the aggregate capital of all
commercial banks in Mexico.
Mexico may adopt measures that (a) limit eligibility to establish a foreign financial affiliate
in Mexico to an investor of another Party that is, directly or through any of its affiliates, engaged in
the same general type of financial services in the territory of the other Party; and (b) limit such
investor (together with its affiliates) to no more than one institution of the same type in Mexico. In
determining what types of operations an investor of another Party is engaged for purposes of the
preceding sentence, all types of insurance shall be considered to be only one type of financial
service; but both life and non-life insurance operations may be conducted either by a single or
separate foreign financial affiliates.
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IX. NAFTA
.K.
TRADE DISPUTES AND REMEDIAL MEASURES UNDER NAFTA.
.1.
Unfair trade practices.
As provided by NAFTA Chapter XIX, each party shall replace judicial review of final
antidumping and countervailing duty determinations with binational panel review. The party
involved may request that a panel review, based on the administrative record, a final antidumping or
countervailing duty determination of a competent investigating authority of an importing party to
determine whether such determination was in accordance with the antidumping or countervailing
duty law of the importing party. For this purpose, the antidumping or countervailing duty law
consists of the relevant statutes, legislative history, regulations, administrative practice and judicial
precedents to the extent that a court of the importing party would rely on such materials in reviewing
a final determination of the competent investigating authority.
The panel shall apply the standard of review provided by NAFTA and the general legal
principles that a court of the importing party otherwise would apply to a review of a determination
of the competent investigating authority.
A request for a panel shall be made in writing to the other involved party within 30 days
following the date of publication of the final determination in question in the official journal of the
importing party. In the case of final determinations that are not published in said journal, the
importing party shall immediately notify the other involved party of such final determination where
it involves goods from said party, and the latter party may request a panel within 30 days of receipt
of such notice. When the competent investigating authority of the importing party has imposed
provisional measures in an investigation, the other involved party may provide notice of its intention
to request a panel under the relevant provisions of NAFTA, and the parties shall begin to establish a
panel at that time. Failure to request a panel within the time specified shall preclude review by a
panel.
An involved party on its own initiative may request review of a final determination by a
panel and shall, on request of a person who would otherwise be entitled under the law of the
importing party to commence domestic procedures for judicial review of that final determination,
request such review.
Where both involved parties request a panel to review a final determination, a single panel
shall review that determination.
The competent investigating authority that issued the final determination in question has the
right to appear and be represented by counsel before the panel. Each party shall provide that other
persons who, pursuant to the law of the importing party, otherwise would have had the right to
appear and be represented in a domestic judicial review proceeding concerning the determination of
the competent investigating authority, shall have the right to appear and be represented by counsel
before the panel.
The panel may uphold a final determination, or remand it for action not inconsistent with the
panel's decision. Where the panel remands a final determination, the panel shall establish as brief a
time as is reasonable for compliance with the remand, taking into account the complexity of the
factual and legal issues involved and the nature of the panel's decision. In no event shall the time
permitted with a remand exceed an amount of time equal to the maximum amount of time (counted
from the date of the filing of a petition, complaint or application) permitted by statute for the
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IX. NAFTA
competent investigating authority in question to make a final determination in an investigation. If
review of the action taken by the competent investigating authority on remand is needed , such
review shall be before the same panel, which shall normally issue a final decision within 90 days of
the date on which such remand action is submitted to it.
The decision of a panel shall be binding on the involved parties with respect to the particular
matter between the parties that is before the panel. However, it is important to point out that NAFTA
shall not affect:
a)
the judicial review procedures of any party, or
b)
cases appealed under those procedures,
with respect to determinations other than final determinations.
A final determination shall not be reviewed under any judicial review procedures of the
importing party if an involved party requests a panel with respect to that determination within the
time limits above mentioned. No party may provide in its domestic legislation for an appeal from a
panel decision to its domestic courts.
The foregoing procedure shall not apply where:
a)
neither involved party seeks panel review of a final determination;
b)
a revised final determination is issued as a direct result of judicial review of the
original final determination by a court of the importing party in cases where neither
involved party sought panel review of that original final determination; or
c)
a final determination is issued as a direct result of judicial review that was
commenced in a court of the imposing party before the date of entry into force of
NAFTA.
Regarding the establishment of the referred binational panels under this section, the parties
on the day of entry into force of NAFTA, shall have established and thereafter maintain a roster of
individuals to serve as panelists in disputes under this NAFTA Chapter, from which a majority shall
be lawyers in good standing. Said roster shall include judges or former judges to the fullest extent
practicable, and shall include at least 75 candidates, from which each party has the right to select at
least 25 candidates.
.2.
Safeguards.
Under Chapter VIII of NAFTA, NAFTA Parties establish the principles by which they may
impose temporary protections for a specific industry that has been seriously injured by imports from
the other Parties. This Chapter includes two procedures, one for bilateral emergency actions against
the imports of another Party, and the other for multilateral emergency action under GATT.
Regarding bilateral actions, NAFTA Article 801 establishes that if goods originating in the
territory of a NAFTA Party, as a result of the reduction or elimination of a duty provided for in
NAFTA during the transition period (ten years commencing January 1, 1994), are being imported
into the territory of another NAFTA Party in such increased quantities, in absolute terms, and under
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IX. NAFTA
such conditions that the imports constitute a substantial cause of serious injury, or threat thereof, to a
domestic industry producing a like or directly competitive good, the NAFTA Party into whose
territory the goods are being imported may remedy the injury as follows:
a)
temporarily suspend further reductions under NAFTA of the duty rate on the goods;
b)
increase the duty rate on the good to a level not to exceed the lesser of:
i)
the most-favored-nation (MFN) duty rate in effect at the time the action is
taken, or
ii)
the MFN duty rate in effect prior to January 1, 1994.
The following conditions shall apply to an emergency action proceeding described above:
a)
a NAFTA Party taking emergency action shall notify the other Party and request
consultations thereon;
b)
any safeguard measure shall be imposed no later than one year after initiating the
proceeding; and
c)
as a general rule, the duration of such emergency action shall not exceed three years,
or extend beyond the transition period.
The NAFTA Party taking the emergency action shall provide the other Party, against whose
good the action is taken, mutually agreed compensation in the form of concessions having
substantially equivalent trade effects, or equivalent to the value of the duties expected to result from
the action. If the NAFTA Parties concerned are unable to agree on compensation, the NAFTA Party
against whose goods the action is taken may take tariff action having trade effects substantially
equivalent to the action.
These emergency actions do not apply to textile and apparel goods, which have special
treatment under NAFTA.
Under NAFTA, irrespective of the safeguard provisions contained therein, each NAFTA
Party retains its rights and obligations under Article XIX of GATT, or any safeguard agreement
pursuant thereto, with few exceptions.
.L.
NAFTA SUPPLEMENTAL AGREEMENTS
On September 14, 1993, the United States, Canada and Mexico executed labor and
environment supplemental agreements.
.1.
NAFTA Labor Supplemental Agreement.
Its purpose is to promote the economic development of each NAFTA Party based on high
standards of training and productivity in North America.
Its objectives will be achieved through:
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IX. NAFTA
-
investment in the permanent development of human resources.
-
promotion of employment stability.
-
strengthening of the cooperation of workers and employers in order to promote a
dialogue among work organizations as well as to promote creativity and productivity
in the work force.
-
promotion of higher living standards and consultations among workers'
organizations, companies and governments of each Party.
Each Party to this Agreement guarantees that its laws and regulations contain high labor
standards consistent with work forces of high quality and productivity.
The Parties agree to monitor the compliance and enforcement of their respective labor laws
and to guarantee, in their respective countries, a free access to administrative and judicial courts, as
provided by their own laws related to the application and enforcement of labor laws.
Furthermore, each Party guarantees that labor procedures be just, transparent and equitable.
The North American Agreement on Labor Cooperation entered into force along with the
implementation of NAFTA in January of 1994. The objectives of the NAALC are to foment labor
cooperation and sharing of information among the three NAFTA countries, as well as to develop
procedures to enable individuals to dispute irregularities in the application of each country's labor
laws.
Also the Commission is in charge of establishing cooperation measures consisting of
technical assistance programs such as seminars, conferences, preparation of joint investigations and
training courses.
In case of controversy, the Parties will first seek solution through consultation; also they
may submit such controversy to the Council of the Commission. If the controversy is not solved,
further procedures are established.
The Party refusing to comply with the resulting recommendations or with the plan of action
agreed to may be subject to monetary fines, which may not be higher than 0.007 percent of the total
trade volume of the goods between the countries.
Each of the signatory countries to NAFTA has established a National Administrative Office
in charge of receiving and processing complaints from individuals regarding failures to comply with
labor laws of the other NAFTA countries. In the six years of NAFTA, only some 20 complaints
have been filed, none of which has reached the final phase of the procedures under the Agreement.
This final phase, which theoretically could include the imposition of commercial sanctions, is
limited by the requirement to have an employer within the country, against whom the complaint is
filed. Complaints most frequently include allegations of unsafe working conditions, minimum wage
disputes, child labor and the right to unionize. Any complaint must be founded on an issue related to
commerce, and must be an issue contemplated in the laws of the three NAFTA countries.
For a general overview of Mexican labor laws, see Section XVI.
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IX. NAFTA
.2.
NAFTA Environment Supplemental Agreement.
The purpose of this Agreement is to protect and improve the environment by supporting the
environmental objectives referred to in NAFTA. Each of the parties to the Agreement commits to
provide high levels of environmental protection, enforce environmental regulations and follow all
procedures according to their respective laws.
This Agreement created the Commission for Environmental Cooperation, the purpose of
which is to formulate recommendations on environmental issues, promote the drafting of laws and
cooperate in the fulfillment of the environmental objectives.
The Parties further agree to furnish any other Party any environmental information
requested. The Agreement also includes a procedure for the consultation and resolution of
environmental controversies based on a consistent pattern of non-enforcement by a Party of its
environmental legislation regarding manufacture of goods or services traded, or manufacturing by
one Party in the territory of the other.
Dispute resolution procedures are complex and provide for a series of steps, such as
consultation, mediation, consulting with advisors and experts and creation of a panel, all of which
ultimately lead to the formulation of action plans to remedy the alleged enforcement deficiencies.
The sanction for non-compliance with the action plan is that NAFTA benefits to the accused Party
may be suspended, and said Party may be forced to make monetary contributions in an amount not
to exceed US$20 million.
The NAFTA Parties created two other institutions that should help to alleviate the
environmental problems Mexico faces: the Border Environmental Commission and the North
American Development Bank (NAD Bank). The Border Environmental Commission assists states,
local communities and non-governmental organizations in finding solutions to environmental
problems in the northern border region, and may arrange financing for environmental projects in and
outside the region upon request from the United States or Mexico. The NAD Bank is a source of
funding for the projects of the Commission.
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76
IX. NAFTA
THE NAFTA STRUCTURE
NAFTA is divided into 22 chapters. Below is the structure of the contents of the Agreement.
PART ONE:
GENERAL
Chapter 1:
Objectives
Chapter 2:
General Definitions
PART TWO:
TRADE IN GOODS
Chapter 3:
National Treatment and Market Access
Chapter 4:
Rules of Origin
Chapter 5:
Customs Procedures
Chapter 6:
Energy
Chapter 7:
Agriculture:
Subchapter A: Market Access
Subchapter B: Sanitary and Phytosanitary Measures
Chapter 8:
Emergency Action
PART THREE:
Chapter 9:
PART FOUR:
Chapter 10:
PART FIVE:
TECHNICAL BARRIERS TO TRADE
Standards-Related Measures
GOVERNMENT PROCUREMENT
Government Procurement
INVESTMENT, SERVICES AND RELATED MATTERS
Chapter 11:
Investments
Chapter 12:
Cross-Border Trade in Services
Chapter 13:
Telecommunications
Chapter 14:
Financial Services
Chapter 15:
Competition Policy, Monopolies and State Enterprises
Chapter 16:
Temporary Entry for Business Persons
PART SIX:
Chapter 17:
PART SEVEN:
INTELLECTUAL PROPERTY
Intellectual Property
ADMINISTRATIVE AND INSTITUTIONAL PROVISIONS
Chapter 18:
Publication, Notification and Administration of Laws
Chapter 19:
Review and Dispute Settlement in Antidumping and Countervailing Duty
Matters
Chapter 20:
Institutional Arrangements and Dispute Settlement Procedures
PART EIGHT:
OTHER PROVISIONS
Chapter 21:
Exceptions
Chapter 22:
Final Provisions
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77
X. EXPORTS FROM MEXICO
.X.
EXPORTS FROM MEXICO
One of the priority objectives of Mexican foreign trade policy is to promote exports,
especially non-petroleum exports. This has been made possible through the adoption of several
programs which grant additional advantages to exporting industries.
Applications to participate in these programs are issued by the Ministry of Commerce and
Foreign Development within a term of 20 working days for PITEX, 10 working days for ALTEX,
10 working days for maquiladoras, and 15 working days for ECEX.
.A.
FOREIGN TRADE COMPANIES (ECEX)
This program may be adopted by entities whose corporate purpose is the promotion and
commercialization of exports, and it is divided in two categories, companies called export
consortiums, export consolidators, and export promoters. To be eligible for the first category, it is
necessary to have a fixed capital of $2,000,000.00 pesos, and to export goods manufactured by at
least five different companies, and to comply with the second category, a fixed capital of
$200,000.00 pesos is needed and to export goods manufactured by at least three different
companies.
Foreign trade companies have ready access to ALTEX registration (See B. below) and
PITEX programs. (See E.)
.B.
HIGH-EXPORT COMPANIES (ALTEX)
To be eligible for this program, applicants must demonstrate direct exports of at least
US$2,000,000 or 40 percent of the company's total annual sales, or indirect exports of at least 50
percent of their total annual sales.
ALTEX companies are granted benefits such as special treatment before administrative
authorities, such customs advantages as simplified procedures and lower tariffs, and access to the
value-added tax automatic refund system.
.C.
IMPORT TAXES DRAWBACK PROGRAM
This program may be entered into persons or entities performing direct or indirect exports.
Companies within this program are eligible for a refund of import taxes paid for imported parts
incorporated into the exported goods and for those returned in the same condition as imported.
Indirect exports are those in which the original importer resells the imported product to
another party who will, in turn, re-export the imported product. The import taxes are refundable
upon presentation of a certificate of export issued by the exporting party, which may be presented by
the importer or by the exporter to obtain the refund.
.D.
MAQUILADORA PROGRAM (IN-BOND PROGRAM)
Mexico's maquiladora program has been quite successful. Maquiladora plants are assembly
plants - often referred to as in-bond plants - in which raw materials or component parts are
temporarily imported for assembly in Mexico and the assembled product is exported. The United
States cooperates by taxing only the value added to the product by the assembly process when
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78
finished products are imported into the United States. In 1975 there were 454 maquiladora plants
employing 67,214 people, by 1983 there were 600 plants employing 150,867 people, by 1990 there
were 1,703 maquiladora plants employing 446,436 people, and by 1999 there were some 3,244
plants employing more than 1.1 million people.
On June 2, 1998, the new Mexican Maquiladora Decree was published. The new Decree
replaces the Decree published on December 22, 1989, establishing several noteworthy changes,
while maintaining the essence of the tremendously successful Mexican maquiladora program which
first began in 1965. On November 13, 1999 the first amendment to the 1998 Maquila Decree was
published.
Consistent with the previous version, the new Decree is designed to achieve five primary
goals: 1) create sources of employment; 2) strengthen Mexico's trade balance and foreign reserve
levels; 3) increase the international competitiveness of Mexican industry; 4) improve the quality and
training of Mexican labor, and 5) promote the transfer of technology to the country.
Under the Maquiladora Decree, maquiladoras are industrial enterprises dedicated to the
assembly, transformation or manufacture of foreign materials temporarily imported free of general
import tax and value-added tax, and subsequently exported after having undergone assembly or
processing. The Decree establishes four categories of authorized duty-free imports:
I)
Raw materials, component parts, associated products and packing materials. These
goods may not remain in Mexico for more than 18 months.
II)
Containers and trailers. Cargo containers and truck trailers may not remain in
Mexico for more than two years.
III)
Tools, equipment and accessories for research, industrial production and safety
products necessary for hygiene and sanitation, pollution control equipment, work
manuals, industrial plans and telecommunications and computing equipment.
IV)
Machinery, devices, instruments and spare parts for the production process,
laboratory and testing equipment, and information and products necessary to ensure
quality control, train personnel and manage the business.
The goods described in III and IV may remain in Mexican Territory for five years or longer
in accordance with the depreciation schedule provided by the Income Tax Law.
.1.
Domestic sales.
Consistent with NAFTA, the maquiladora Decree authorizes maquiladoras to sell a specified
percentage of production in the domestic market. In 1994, 55 percent of the total volume of exports
for the previous year could be sold domestically. These percentages increased 5 percent annually
until the year 2000, when the percentage became 85 percent. Beginning in the year 2001, the
Mexican government must remove all restrictions on maquiladora sales in the domestic market.
There seems to be a contradiction, however, because the new maquila Decree establishes that as of
November 1, 2000, in order for the Ministry of Commerce to authorize companies to be included in
the maquiladora program, they will have to export more than 30 percent of their total production.
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79
Under the new Decree, an annual report of their foreign operations must be filed by the
maquiladoras with the Ministry of Commerce. This report must be filed by April 30 of each year.
Domestic sales have important tax consequences. When a maquiladora sells products in
Mexico, these products are subject to the general import duty and counter-vailing duties, if any, and
value-added tax on the foreign parts and components originally imported duty free.
Under NAFTA, these performance-based duty waiver programs are prohibited, and all such
existing programs will be modified by the year 2001 in accordance with NAFTA. (See G.
hereinafter.)
.2.
Tax advantage of maquiladoras.
The maquiladora program allows materials to be imported duty free and processed in
Mexico as explained above and applies the zero percent value-added tax rate for any invoicing to an
individual or company with residence outside of Mexico. The maquiladora entity in Mexico is
subject to an income tax on its profits as normally determined. (See Section XV.4.)
In practice, many maquiladoras reported minimum profits, but tax legislation now has been
enacted to regulate transfer pricing between affiliates. (See Section III.G.)
.E.
TEMPORARY IMPORT PROGRAM FOR EXPORT (PITEX)
This program may be entered into by individuals or entities directly or indirectly exporting
goods. In order to be eligible, annual exports must exceed US$500,000 or its equivalent in other
currencies or represent at least 10 percent of total annual sales of products inscribed in the Pitex
program. Application may be made for the total operations of either an individual or a business
enterprise, or for an industrial plant or specific export project.
Exporters who adopt this program may be authorized to temporarily import duty free: 1) raw
materials, parts and components destined to be incorporated into export goods; 2) containers and
packaging and bottling materials, trailer containers; and 3) fuel, lubricants, spare parts and
consumable goods used in the manufacturing process.
If exports represent at least 30 percent of total sales of the respective product or products,
exporters additionally may temporarily import duty free: 4) machinery, equipment, instruments,
molds and durable tools to be used in the production process or equipment for the handling of
materials related to the exported goods; and 5) equipment for investigation, communication,
industrial safety, quality control, environmental control, and other equipment related to the
manufacturing process of that product or products.
.F.
SECTOR PROMOTION PROGRAMS
The Mexican government is aware that, for certain companies, components from outside
North America are very important. Indeed, certain companies need competitive customs tariffs for
merchandise from countries outside of NAFTA. As a consequence, the Mexican government will
put into force "sector programs," which set up supply conditions for components to the export
industry and help to achieve national integration of the export industry.
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In November 1998, two decrees relating to the "sector programs" for the electrical and
electronics industries were published. In 2000 several "sector programs" will be implemented
according to the needs of the Mexican export industry. Thus, the export industry will keep
international competitive standards. "Sector programs" will permit companies currently importing
components from NON-NAFTA countries to continue this practice by applying reduced custom
tariffs or, as in the electronics industry, establishing a zero percent tariff.
The "sector programs" and the changes mentioned below to the "maquila" and "PITEX"
programs will become effective November 1, 2000.
G.
THE MAQUILA AND PITEX PROGRAMS FROM THE YEAR 2001
The NAFTA has set up two implementation periods for the maquila and PITEX programs.
We have already discussed the 1994-2000 implementation period; the second period will begin on
November 1, 2000 and will be developed as follows:
I.
Goods (raw materials, parts, components, associated products, packaging materials,
fuels and lubricants) temporarily imported under the maquila and PITEX programs will still be
exempt from general import duties and value-added taxes, provided:
1.
The origin of the goods is a NAFTA country and form part of export products whose
final destination is one of the NAFTA countries.
2.
The origin of the goods is a NAFTA country and form part of export products whose
final destination is a country outside of NAFTA.
3.
The origin of the goods is a country outside of the NAFTA and form part of products
whose final destination is a country outside of NAFTA.
From November 1, 2000, a new formula will apply to PITEX and maquiladora program
components and materials whose origin is a country outside of NAFTA, and which form part of
products to be exported to NAFTA countries. For the goods mentioned in (I) above in which the
origin is a NON-NAFTA country but which form part of goods exported to NAFTA countries,
customs tariffs will apply according to the following formula:
1.
It is necessary to work out customs tariff payments related
temporarily to Mexico and integrated into the goods to
temporarily-imported goods are considered as if they had
imported, taking into consideration the customs tariff and
applicable on the date of export.
to goods imported
be exported. The
been permanently
the exchange rate
2.
It is necessary to determine the customs tariff paid for the merchandise in the
NAFTA country of final destination (Canada or the United States).
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81
3.
The customs tariffs payable in Mexico will be the amount resulting from subtracting
the customs tariffs payable in the NAFTA country of final destination from the
Mexican tariffs applicable to the final importation of the goods into Mexico.
Examples:
Customs tariff in Mexico for
component "X" imported from
France.
Customs Tariff paid in USA
for final product "Y"
assembled in Mexico.
Amount paid in Mexico for
component "X" imported From
France.
11
2
9
5
6
0
The general import tax which was calculated as described hereinabove, must be paid within
60 days from the date of export of the finished product, taking into account tariff and exchange rates
applicable on the date of export.
In order to work out the general import duty, exporters are allowed to use a preferential tariff
as described in the "sector programs."
This formula cannot be applied to the temporary imports listed in Appendix 6, Annex 300-B
of NAFTA, related to textile goods and clothing.
II. The companies will pay the general import duty, as if the goods were definitely imported,
without taking into account their origin. This rule will apply to the following goods:
1.
Tools, equipment and accessories for research, industrial security, and the products
used for hygiene, control and prevention for environmental pollution of the
productive plant, as well as work manuals and industrial plans and
telecommunication and computing equipment;
2.
Machinery, devices, instruments and spare parts necessary for the production
process, laboratory equipment, measuring and testing devices for their products and
those devices that may be required to control quality, train their employees and
develop company administrative programs, the latter applicable to the installation of
new industrial plants.
According to the Value-Added Tax Law, final imports are subject to VAT and temporary
imports are VAT exempt. The decrees relating to the maquiladora industry and PITEX are not clear
regarding VAT. In fact, they do not indicate if temporary imports considered to be final imports will
be subject to this tax. Consequently, the Mexican government and tax authorities will have to
determine the tax rules governing VAT in this connection. However, in our opinion, under current
tax laws final imports are subject to VAT.
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XI. INVESTMENT OPPORTUNITIES
.XI.
INVESTMENT OPPORTUNITIES
To enable Mexican economic growth, substantial private investment is needed in the
expansion and modernization of infrastructure, education, transportation and communications,
among others.
As previously mentioned, Mexico's government has entered into a process of economic
modernization by adopting unprecedented actions to reduce governmental intervention in the
economy and open the country to international competition.
These objectives have been pursued through an intensive deregulation program directed
towards promoting legal and administrative procedures favorable to private investment, national or
foreign.
New dispositions have been issued in the following areas:
.A.
ENERGY
.1.
Petrochemicals and natural gas.
One of the most sensitive issues to Mexican nationals is the privatization of the oil industry
which is operated by Petróleos Mexicanos (PEMEX). The petroleum sector, developed and operated
primarily by British and American companies, was expropriated in 1938.
On December 31, 1995, the Energy Regulatory Commission Law was enacted and provides
for the creation of the Energy Regulatory Commission (CRE) which has acquired the authority to
act on behalf of the Ministry of Energy with regard to electric power and natural gas services.
The Law Regulating Article 27 of the Mexican Constitution referring to petroleum, reserves
to the Mexican State the following strategic activities, including investment and rendering of
services, together defined as the "oil industry":
a)
exploration, exploitation, refining, transportation, storage, distribution and first-hand
sales of oil and products derived from its refinement;
b)
exploration, exploitation, elaboration and first-hand sales of natural gas, as well as
transportation and storage indispensable for its exploitation; and
c)
elaboration, transportation, storage, distribution, and first-hand sales of oil
derivatives and gas that are suitable to be used as basic industrial raw materials and
considered basic petrochemicals. The list of basic petrochemicals are the following:
ethane, propane, butane, penthanes, hexane, raw materials for carbon black, naphthas
and methane when derived from hydrocarbons obtained in deposits within Mexican
territory and used as raw materials in petrochemical industrial processes.
As a result of amendments to the above-mentioned law, on May 11, 1995, the transportation,
storage and distribution of natural gas was no longer included in the definition of the oil industry
and therefore can be carried out by the private sector, including foreign participation, subject to prior
authorization of the CRE. Foreign investors are entitled to construct, operate and own pipelines,
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83
installations and equipment for such purpose. Authorizations can be assigned upon prior approval
from the CRE. Therefore, the limits contained within NAFTA Chapter VI (Annex 602.3) are no
longer applicable. This evidences the desire of Mexico to open its economy to private and foreign
investment, even in previously sensitive areas.
On December 8, 1995, the Natural Gas Regulations were published in the Official Daily
Gazette. The primary objective of the regulations is to regulate first-hand sales, as well as activities
that do not form part of the petroleum industry regarding natural gas. Additionally, they establish the
terms and conditions of the permits granted for transportation, storage and distribution of natural
gas. However, these companies must contain in their bylaws as a main corporate purpose the
provision of distribution and transportation of natural gas and other related services. Their bylaws
must also include an obligation to have a fixed minimum capital stock, without any right of
withdrawal, which must be equal to 10 percent of the proposed investment. These permits will be in
force for a 30-year term which will be renewable.
Since 1997, several permits for distribution of natural gas in different geographic zones have
been granted through public bids. Distribution permits for a particular geographic zone are granted
through a public bid process, and confer an exclusivity period of 12 years for the construction of the
distribution system and the receipt, transmission and wholesale delivery of gas within the zone.
The distribution permits do not confer exclusivity in the retail commercialization of gas in
the geographic zone covered by the permit. Permits for transportation and storage of natural gas may
be filed directly with the CRE. Moreover, users in a geographic zone may enter into gas supply
agreements with other parties who are allowed to commercialize (but not to distribute) natural gas
within the same zone, in which case the distributor must allow nondiscriminatory open access to its
distribution system upon payment of the relevant rate.
As per the Foreign Investment Law, the drilling of oil and natural gas wells is still subject to
the 49 percent limitation on foreign ownership, unless authorization is obtained to exceed such limit.
Regarding the petrochemical industry, private participation was first permitted in 1971 with
the publication of the first resolution that classified petrochemical production into basic/primary and
secondary activities, with the former being restricted to PEMEX and the latter permitting private
participation, requiring Mexican control and a permit from the Petrochemical Commission. The list
classified 20 products as primary and 64 as secondary. It was revised in 1989, reducing the list of
primary and secondary petrochemicals, and finally in 1992, currently classifying only eight products
as primary and 12 as secondary, further opening the door for private participation in the
petrochemical industry.
The list of secondary petrochemical products includes production of the following:
acetylene, ammonia, benzene, butadiene, butylene, ethylene, methanol, n-paraffins, orto-xylene,
para-xylene, propylene, and toluene.
The Foreign Investment Law gives foreigners the right to own up to 100 percent of a
company engaged in secondary petrochemical activities.
For some time the Mexican government has been planning to privatize its 61 secondary
petrochemical plants located in nine petrochemical facilities, including the Morelos, Cangrejera and
Pajaritos facilities. However, the privatization process has been delayed due to political opposition
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84
that forced the Mexican government to offer just 49 percent to the private sector instead of the 100
percent participation as mandated by law. Currently, Mexican and foreign investors are negotiating
with
the
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85
Mexican government to overcome obstacles so private investment (including foreign) may
participate up to 100 percent in the Mexican petrochemical sector. The Intersecretarial Committee
on Privatization will be in charge of the process.
In sum, the Mexican government is moving quickly both directly and indirectly, to privatize
the oil industry sector.
.2.
The electric power sector.
Articles 27 and 28 of the Mexican Constitution contain provisions reserving to the Mexican
State the supply of electricity as a "public service," which is considered a strategic activity. Until
recently, the Mexican government controlled all facets of the electric power industry.
This sector is regulated by the Law for the Public Service of Electric Power which was
amended on December 23, 1992, redefining "public service" to open areas for private investment up
to 100 percent. The law excludes the following activities from the definition of "public service":
a)
self generation; when companies acquire, establish or operate an electricity
generating facility to satisfy their own needs. Any excess production must be sold to
the Federal Electricity Commission (CFE);
b)
co-generation; electricity generated associated with industrial processes using heat,
steam or other energy sources. Owners of the industrial facility need not be the
owners of the co-generating facility. Once again, any excess production must be sold
to the CFE;
c)
independent power production is an enterprise that generates over 30 megawatts for
sale to the CFE;
d)
export of electric power, derived from co-generation, independent production or
small production (note that the CFE must be part of the contract negotiations);
e)
importation of electric power, by individuals or companies, exclusively to supply
their own needs;
f)
production of electric power for emergency use arising from the interruption of the
public service of electric power as required by the CFE; and
g)
small production; generation of electricity of less than 30 megawatts.
All of the above activities require a permit issued by the CRE based on prior opinion of
CFE. The permits run for an indefinite period, except those for independent production, which run
for 30 years, with a possibility of multiple extensions.
Permit-holders must adopt the proper methods to comply with "Official Mexican Standards"
(see Section III.A.) related to public works, installations, industry services and delivery of electric
power to the public service network and will be subject to transmission and operation regulations of
the National Electric System. Permit-holders may assign to third parties their rights derived from
permits, upon prior approval of the Ministry of Energy.
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With respect to rates, the Ministry of Finance, with the participation of the Ministry of
Commerce and the CRE, sets the rates for the sale of electric power, determines any adjustments,
amendments or restructuring, within the guidelines dictated by the public interest and the
requirements of public service of electric power.
The Regulation to the Law for the Public Service of Electric Power was published on May
31, 1993, in the Official Daily Gazette and establishes a procedure whereby the Ministry of Energy
must act upon the application for a permit within 70 working days; lack of a decision within such
period shall be considered as approval.
CRE may request that the CFE carry out the public bidding process for the acquisition of
electric power for public service. The CFE executes contracts with i) the holders of permits for
production, after a public bidding process for electric power is held, and ii) with holders of permits
with excess production of 20 megawatts or less pursuant to regulations.
At the end of 1996, the CFE announced that it would not participate in the construction of
electricity generating plants, thus opening the door for foreign and national investment in this area.
Some electric plants of the CFE have already been privatized, such as Samalayuca II and Mérida III.
Despite recent delays, the federal government still expects that private investors will construct at
least eight electricity generating plants within the next several years and estimates that private
investment will be the mechanism for future expansion of electricity generating capacity for
Mexico's growing population.
A new institutional framework for the Mexican electricity industry and market was recently
proposed to encourage competition in the electricity generation sector. The proposal includes the
transformation of Mexico's current state-owned entities into several electricity generation and
distribution companies, as well as the existence of a transmission company entrusted with the
transmission of electricity nationwide. This will open the Mexican electric industry to domestic and
foreign investment by the creation of a wholesale electric market by which generators will be able to
sell electricity under competitive conditions.
The proposal involves amending the Constitution as well as passing a new law in connection
with the electricity industry. Several sectors of Mexican society have manifested their opposition to
this proposal. Nevertheless, it is expected that the proposal will be discussed by the Mexican
Congress in the short-to-medium term.
Chapter VI of NAFTA, in particular Annex 602.3, Section 5, provides that Parties thereto
may produce electricity for their own use, establish or operate co-generation facilities and acquire,
establish or operate plants dedicated to independent power production as described above.
Currently, as amended, the applicable Mexican law referred to above goes somewhat beyond the
original liberalization of NAFTA.
.3.
Water resources.
Pursuant to the National Water Law and its regulations, private parties are entitled to obtain
a concession for the utilization of national water. The National Water Commission (CNA) is
empowered under the Law to grant concessions for a period no less than five years and no more than
50 years. Concessions may be renewed for the same period that the concession was granted. The
renewal must be filed with the CNA within the last five years of the concession.
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National Water is defined by article 27 of the Mexican Constitution as all lakes, springs,
surface and underground rivers including direct or indirect waterways.
The main obligations of the concessionaire are the following:
a)
Execute the construction works related to the utilization of the water in order to
prevent negative effects to third parties and to the water development.
b)
Pay the fees related to the utilization of water.
c)
Comply with the water security regulations and the environmental law.
d)
Give access to the CNA authorities to inspect the construction works related to the
utilization of water including drilling and lighting of underground water.
e)
Comply with other obligations established in the law and its regulations.
Concession titles related to the utilization of national waters can be totally or partially
transferred in accordance with the following requirements:
a)
If the title of the concession is transferred without any amendments, the transmission
will take place with a simple notification to the Public Registry of Water.
b)
Approval from the CNA is required if the title of concession is intended to be
transferred with amendments.
The CNA has under its control a Public Registry of Water in which all concession titles,
agreements related to the transfer of titles and amendments to the authorizations contained in the
titles must be recorded. Third parties are entitled to obtain a certificate issued by the Public Registry
of Water containing the status of a concession title, the owner of the concession along with other
registrations related thereto.
Also, water may be supplied from the municipal authorities, which is regulated under the
corresponding municipal laws including domestic, commercial and industrial uses.
.B.
TRANSPORTATION
.1.
Maritime activities.
.a)
Foreign participation.
The new Mexican Navigation Law published in the Official Daily Gazette on January 14,
1994, considerably opened navigation operations to foreign companies. The Ministry of
Communications is empowered to regulate maritime activities.
Mexican shipping companies may be 100 percent foreign owned. The Mexican Navigation
Law provides that foreigners may flag, record and register tourist or sport vessels for private use
under Mexican nationality.
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Mexican shipping companies may register in the National Maritime Public Registry and flag
as Mexican, vessels owned by them or in their legal possession under any bare boat charter
agreement with option to purchase.
However, masters, pilots, engine room and deck hands and all personnel on board on any
Mexican flag vessel must be Mexican by birth. Fishing vessel personnel who carry out the following
duties may be Mexican or foreign: instruction, training and supervision of activities related to the
capture, handling or processing of game fish, and tourist cruise ship personnel who carry out the
duties of attending to tourists.
The general shipping agent is the person or company acting on behalf of shipping companies
or operators as agent or business representative to represent his principal in the bills of lading, and to
perform other business his principal may request.
To act as shipping agent, one must be a Mexican citizen or a Mexican company with
domicile in Mexico and duly registered as a shipping agent in the National Maritime Public
Registry. A shipping agent company may be 100 percent foreign owned.
.b)
Navigation regime.
Navigation in Mexican territorial waters and use of Mexican ports is open to any foreign
vessel. It must be noted that "maritime artifacts," defined as floating or fixed constructions made for
navigation or accessory to maritime activities, are also regulated by the Navigation Law. Fixed and
floating platforms are among such "artifacts."
Under Mexican law, it is not possible to detain a vessel or artifact (regardless of its being
foreign or Mexican) located within Mexican territory unless an order has been issued by a court of
law. Such detention can only occur as a result of a final decision of the court, or as a result of a court
order as a "precaution" during the trial.
The Navigation Law provides for maritime liens, which grant creditors preference over a
vessel, artifact or merchandise. Liens are granted to creditors in the following order:
i)
salaries and other amounts payable to the crew of the ship in connection with their
work as crew, including any expense for their return to their country of origin and
social security fees payable in their name;
ii)
amounts due as indemnification for death or injury which may occur on land or
water, which are directly connected with the use of the ship;
iii)
credits for rescue of the ship;
iv)
credits due for use of port infrastructure, maritime signals, means of navigation or
pilot’s services;
v)
credits due for indemnization for liabilities arising from loss or damage caused by
explosion of the ship, different from loss or damage to the freight on board the ship
and passengers’ belongings;
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Liens over merchandise transported by sea are granted in the following cases:
i)
Charges for transportation, loading, unloading and storage.
ii)
Salvage of merchandise in case of wreck.
In order to benefit from maritime liens, a suit must be filed in federal court.
International maritime transportation and towing is open to foreign shipping companies and
vessels of all countries with which there is reciprocity.
Operation on inland waterways is reserved to Mexican shipping companies with Mexican
vessels. However, Mexican shipping companies may obtain a temporary permit from the Ministry of
Communications to operate or manage foreign vessels on inland waterways, or in case no Mexican
shipping companies are interested, foreign shipping companies may obtain such a permit.
Either Mexican or foreign shipping companies may navigate in coastal waters provided a
permit from the Mexican Ministry of Transportation is obtained. The permit is subject to reciprocity
and equal conditions with the country in which the vessel is registered and with the country where
the shipping company has its corporate domicile.
Also, the operation and management in Mexican territorial inland and coastal waters of
tourist cruise ships as well as dredges and naval equipment for port construction, conservation and
operation may be carried out by foreign or Mexican shipping companies with foreign or Mexican
vessels or naval equipment.
.2.
Trucking.
Mexico has been significantly deregulated since 1989. Prior to the recent deregulation,
motor carrier transport was permitted only under concessions and permits that gave carriers
exclusive routes and fixed tariffs.
Deregulation ushered in an era of greater facility in the administrative process of granting
operating authorizations via non-exclusive permits. The establishment of rates is now entirely
governed by supply and demand of the marketplace.
The motor carrier industry is primarily composed of small and medium-sized companies,
which are being forced to overcome problems associated with costly financing and outdated
operating procedures.
The new era of deregulation has brought greater competition, which is expected to result in
modernization in all aspects of motor carrier transportation.
The Federal Transportation Law of December 22, 1993, governs the granting of operating
permits and the rights and responsibilities arising therefrom.
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.a)
The Transportation Law.
Motor carrier transportation regulated under the Law is defined as the carriage of
merchandise for third parties on roads of federal jurisdiction.
The Ministry of Communications issues permits to operate as a motor carrier and to haul
large loads. Said permits are granted for an indefinite period of time to Mexican individuals and
entities. The Ministry of Communications must resolve an application for an operating permit within
45 calendar days from the date it is deemed filed and complete.
Vehicles employed to render motor carrier transportation services may be leased or owned,
but in any event must be duly inspected and licensed. The carrier must comply with weight and load
rules.
Motor carrier transportation is currently among the six economic activities exclusively
reserved under FIL to Mexican investors and Mexican entities containing a foreigner-exclusion
clause. The reservations made by Mexico to NAFTA include this limitation: neither foreign persons
or entities, nor Mexican companies in which foreign capital participates, may provide domestic
motor carrier services between two points within Mexico.
b)
Participation in the Mexican market under NAFTA.
NAFTA provides for a gradual opening of the Mexican border to U.S. and Canadian motor
carriers transporting cargo to and from Mexico. According to NAFTA, U.S. carriers are allowed to
provide cross-border truck services to and from the Mexican territory as well as gradual investment
in Mexican companies engaged in the transportation of international cargo between points in
Mexico (See Section IX.F. regarding the NAFTA applicable legal framework.)
To date, however, U.S. carriers have not been allowed to provide and cargo cross-border
services beyond the border zone (twenty kilometers south of the border), mainly due to lobbying
from unions in the United States and lack of reciprocity. Canadian carriers are allowed to provide
cross-border services, as set forth in NAFTA. It is interesting to note that a Canadian subsidiary of a
U.S. company would be able to benefit from NAFTA in this regard.
Even before NAFTA was signed, Mexican trucks had been allowed into the "commercial
border zone" in the United States and delivered freight there. Likewise, U.S. trucks have customarily
been allowed to enter the Mexican border zone and deliver cargo. In order to avoid tensions with
unions on either side of the border, it is advisable that the driver be changed upon crossing.
.3.
Passenger transportation.
As in the case of trucking, NAFTA provides that U.S. bus operators may provide crossborder services in Mexico, U.S. entities may participate in Mexican companies providing
international transportation in Mexican territory. As in the case of trucking, both the United States
and Mexico have denied permits to bus companies to provide cross border services as mandated by
NAFTA. Important joint ventures between leading Mexican and U.S. bus transportation companies
have taken place so passengers at both sides of the border may enjoy efficient cross-border services.
(See Section IX.F. regarding the NAFTA legal framework applicable to passenger services between
Mexico and the United States.)
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.4.
Aviation.
A new Aviation Law in force since May 13, 1995, regulates air transportation services and
simplifies administrative procedures.
The Ministry of Communications is the authority in charge of issuing concessions to
Mexican companies to provide regular domestic air transportation. Concessions are granted for a
period of 30 years and may be renewed. Air transportation service is considered to be regular when
subject to schedules, itineraries and flight frequencies.
Other air transportation services are only permitted subject to permits issued by the Ministry
of Communications in accordance with international treaties: to Mexican companies, for domestic
irregular air transportation; to foreign companies, for regular international air transportation; to
Mexican or foreign companies for international irregular air transportation; and to individuals and
companies, Mexican or foreign, for private commercial air transportation.
FIL limits foreign investment in companies rendering domestic air transportation services to
25 percent. (See Section VIII.A.3.)
All aircraft shall comply with the regulations in force regarding insurance policies,
airworthiness certificates and navigation licenses.
Foreign aircraft rendering private, not commercial, air transportation services, may fly over
Mexican territory, land in and take off from Mexico upon prior approval from the Ministry of
Communications.
Also, the owners or the crew of foreign aircraft rendering private, not commercial, air
transportation services must demonstrate upon request from the Ministry of Communications, that
the crew and the aircraft comply with technical requirements on airworthiness and that licenses are
issued by the country of registration.
.C.
INFRASTRUCTURE
.1.
Railroads.
.a)
Content of new regulations.
On March 2, 1995, Article 28 of the Mexican Constitution was amended to change railroad
services from a strategic activity reserved to the State to a priority area, paving the way for increased
private participation in the railroad sector.
Prior to the modifications mentioned above, Article 5 of FIL provided that the railroad sector
was reserved to the State, but after two amendments to the FIL, Article 8 provides that up to 49
percent foreign investment would be permitted in service areas related to the railroad sector, such as
construction and operation of railroads and transportation railroad public services.
With the amendments to the FIL published in the Official Gazette on December 24, 1996,
and the Regulations of the Railroad Service published in the Official Gazette on September 30,
1996, the FIL and the specific Regulations became consistent with existing laws to govern this
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privatized area.
.b)
Concessions.
The Law provides that foreign investment may participate in up to 49 percent of the capital
of Mexican companies engaged in such activities, with the possibility of 100 percent foreign
participation subject to approval from the Foreign Investment Commission. The Ministry of
Communications may grant concessions for the following activities:
i)
construction, management and operation of railways that are considered common
thoroughfares;
ii)
the providing of public rail service, which encompasses both passenger and freight
traffic;
The concessions are granted for a maximum of 50 years, and may be renewed several times,
but the total time period may not exceed an additional 50 years.
Those companies receiving concessions will have the right to subcontract with third parties
for the construction, maintenance and conservation of railways covered under such concession.
However, in the eyes of the Mexican government, the company receiving the concession will be
held solely liable for any breach of obligations contained in the concession.
In addition, concession holders will have the right, upon approval of the Ministry of
Communications, to encumber the rights derived from the concession, but, without exception, the
concession holder will not be able to encumber railways, rights of way, communication centers or
switching equipment. Concession holders will also have the right to assign part or all of the rights
granted under the concession provided that the assignee agrees to carry out the pending obligations
and to assume the conditions imposed by the Ministry of Communications.
Moreover, upon termination of the concession, the related common thoroughfare, and all
property transferred thereunder, will once again become part of the federal public domain. During
the term of the concession, holders will be allowed to replace assets if by virtue of the use or nature
of the asset such should be replaced.
.c)
Permits.
The Ministry of Communications may grant permits to provide auxiliary services. The law
defines auxiliary services as passenger or freight terminals, the transshipment or transfer of liquids,
repair shops for railroad equipment and the supply centers for the operation of the equipment. The
law also provides that permits must be granted to construct access ways, crossing or signal gates in
the right of way of the respective railway, as well as to place any type of promotional billboard or
advertisement along the right of way. In addition, the concessionaire must also request and receive a
permit to construct and operate bridges.
Foreign investment is allowed to participate in up to 100 percent of the capital stock of a
Mexican company rendering services subject to the abovementioned permits.
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.2.
Airports
The Airport Law was published on December 22, 1995, and contains the terms and
conditions by which permits and concessions related to administration, operation, exploitation and
construction of air terminals are granted by the Ministry of Communications.
Air terminals are classified by the law for either public or private service. Public service
terminals are subdivided in airports to provide i) general and supplementary services to the public
and ii) general service terminals which provide more comprehensive services other than airports,
such as aircraft maintenance, passenger facilities, irregular cargo and mail air transportation (such as
private package services), as well as private commercial and private noncommercial transportation.
A concession for the administration, operation, exploitation and construction of airports can
be obtained by a Mexican company through a public call for bids. Concessions will be granted for a
maximum period of 50 years, and may be renewed several times, but the total time may not exceed
an additional 50 years.
Also, the Airport Law provides that a concession may be granted to a private party without
carrying out a public bid if:
a)
A permit holder of a general service air terminal, in operation for the last five years
or more, intends to provide public airport service, and if the proposed change from
general to public service complies with programs and policies for the development
of national airports.
b)
An airport concessionaire who requires a supplementary airport in order to satisfy
increased demand. Increased demand and the need to acquire the supplementary
airport must be proven. Operating both airports must be more cost-efficient than
other options.
Permits for the administration, operation, exploitation and construction of air terminals to
provide general services can be requested by a Mexican company through direct application to the
Ministry of Communications. Permits may be granted for a 30-year term, which may be renewable.
The Foreign Investment Commission may authorize foreign investment in the capital stock
of Mexican companies in activities related to the administration of air terminals. (See Section
VIII.A.4.)
If an individual or company is a stockholder or partner of a company that holds a permit or
concession related to air terminals and has more than 35 percent ownership, the Ministry of
Communications must be notified about said holding.
.3.
Ports.
.a)
History of investment restrictions.
The Mexican Constitution provides the basis for the State operation and control of ports.
Article 27 provides, inter alia, that the Nation shall be the owner of all territorial waters.
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Prior to recent amendments described below, the General Communications Law classified
coastal and international waters as general communication routes and means, thus subjecting them to
the terms of the Law. The General Communications Law provides that activities in areas considered
to be international communication routes shall be controlled by the federal government, including
auxiliary services, works and construction projects.
The Transportation Law enacted on December 22, 1993, amended the General
Communications Law to exclude territorial waters from the list of activities considered to be general
communication routes and means and there is now a move to privatize certain port activities.
Restrictions on investment in port activities, however, are still contained in other legislation.
The Foreign Investment Law, enacted five days after the Transportation Law, provides in Article 5
that the control, supervision and surveillance of ports shall be reserved to the State, but further
provides in Article 7 that up to 49 percent foreign investment is permitted in integral port
administration and port services related to internal navigation. The FIL also provides that upon
favorable resolution of the Foreign Investment Commission, foreign participation may reach 100
percent in companies providing port services such as piloting, dock services, mooring and
lighterage.
.b)
The new Law of Ports.
.i)
Scope of the new Law.
The Law of Ports was enacted on July 19, 1993, and has as its purpose the regulation of
ports, terminals, marinas and port facilities, their construction, use, beneficial utilization,
exploitation, operation and manner of administration. The Law also regulates the providing of
auxiliary port services.
The Ministry of Communications is empowered under the Law to grant concessions or
permits for the exploitation, use and beneficial utilization of property within the federal public
domain, defined as the lands and water which are part of the harbor enclosure and the works and
facilities acquired or constructed by the Federal government when located within harbor enclosures.
Concessions are granted for integral port administration and the construction, operation and
exploitation of terminals, marinas and port facilities. Permits are granted for the rendering of port
services which are defined as those services rendered at ports, terminals, marinas and port facilities
to serve vessels, as well as those rendered in the transfer of people and goods between ships, to land,
or to other means of transportation. In addition, a permit is also required to build piers, wharves,
launching docks and other similar facilities on the general waterways outside of ports, terminals and
marinas.
Under the Law of Ports, concessions for integral port administration may be granted to
Mexican companies when the planning, programming, development and other actions relating to the
property and services of a port are entrusted wholly to a corporation, for the use, beneficial
utilization and exploitation of the respective property and services. Equity initially will be
underwritten by the government and through an international public bidding process, its divestiture
will follow.
.ii)
Foreign investment.
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The Law of Ports also provides that concessions and permits shall only be granted to
Mexican nationals and Mexican corporations and that foreign investment in port activities shall be
governed by FIL. As mentioned in subsection a) above, FIL provides that up to 49 percent foreign
investment is permitted in integral port administration and piloting services related to internal
navigation. It also provides that upon favorable resolution of the Foreign Investment Commission,
foreign participation may exceed such 49 percent, companies providing port services such as
piloting, dock services, mooring and lighterage are limited to 49 percent also. Foreign participation
may obtain more than 49 percent ownership in Mexican companies that carry out the activities
covered by the concessions and permits mentioned above, unless limited by FIL as hereinabove
mentioned. Integral port administration require a concession, while all other services and activities
including piloting require only a permit. Several bids have already been published and concessions
and permits granted, among others, Manzanillo, Altamira, Tampico and Veracruz.
.iii)
Limitations of rights granted.
The Ministry of Communications, upon request, may grant authorization for the assignment
in full of all the obligations and rights resulting from the concessions, provided the concession has
been in effect for a term not less than five years, the assignor has complied with all its obligations,
and the assignee meets the same requirements existing at the time the concession was granted.
Concession holders shall have the right to create liens and encumbrances on the rights
conferred under the concession and the property related thereto, including buildings thereon and
appurtenant facilities, as long as the liens and encumbrances are not executed with foreign
governments or states. Buildings and port facilities built on public property by concession holders
shall be considered the property of the concessionaire during the effective term of the concession. At
the termination of the latter or of any extension thereof, only those works and facilities affixed
permanently to such public property shall become property of the Nation, at no cost and free and
clear of any lien.
.4.
Tourism.
Tourism has long been an important aspect of the Mexican economy, and currently ranks as
the country's second largest foreign-exchange earner. Mexico offers vacationers a wide range of
attractions, including beautiful beaches; fascinating archeological sites; quaint colonial cities;
fishing, diving and other water sports; beautiful jungle, mountain and desert landscapes; diverse
wildlife; rich cultural heritage; and many opportunities for nature and ecotourism. It is no wonder
that by the end of 1999, Mexico had become the world's seventh most popular tourist destination,
and easily the first in Latin America.
The Mexican government is vigorously promoting tourism development. Between 1998 and
1999 there were more than 165 tourism development projects under way in Mexico, with
investments totally more than six billion U.S. dollars. Tourism and related industries accounted for
more than 5 percent of foreign direct investment in 1998. A large portion of foreign investment in
the tourism business currently comes from Spanish investors, followed by U.S. investors. Beach
areas are the most popular for foreign investment projects, particularly on the Yucatán Península in
what is called the Maya Riviera along the Caribbean coast. Other areas of the country, however, are
also attracting substantial foreign investments in tourism development.
.a)
Tourism Law.
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A new federal Tourism Law was enacted on January 30, 1993, to promote and facilitate
investment in the tourism sector. The purpose of the law is to define a legal framework for providers
of tourism services, which will create employment, encourage an increasing inflow of foreign
currency,
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improve the quality of tourism services and introduce modern technologies in management,
communication and commercialization of services.
The Law provides for the coordination of activities of the federal government, state
governments and municipalities to avoid duplication of procedures.
The new law repealed existing regulations and focuses mainly on guaranteeing the physical
security of tourists, respecting terms of reservations and of contracts executed between the provider
of tourism services and the client.
Prices and tariffs are no longer fixed by the state. Rating of tourism services will no longer
be done by the Ministry of Tourism, but by public and private consultation committees. Promotion
of low-budget tourism accessible to persons with lower income is also envisaged through the
construction of vacation resorts.
Foreign investment may participate without limits or restrictions in the following tourism
services: hotels, motels, parks for camping and recreational vehicles, travel agencies, tour operators,
tourist guides, restaurants, cafeterias, bars, tourism exchange service companies, scuba organizers,
car rental, ports and marinas.
.b)
Casino gaming.
Periodically, the issue is raised in Mexico of permitting casino gaming. So far, each attempt
to pass legislation to allow casinos has been defeated, but a new bill permitting restricted gaming is
again being debated in Congress. There are estimates that just one casino permitted to operate in
Mexico could generate more than 35 million dollars annually in salaries, which makes the idea very
attractive to many people.
Opponents to casino gaming cite corruption and the lack of enforcement in so many other
areas of government regulation, making the analogy that any attempt to regulate casinos also would
fail.
The current bill before Congress would permit no more than one casino in any single tourist
center. Some areas considered likely for casino development would include Mexico City,
Guadalajara, Acapulco, Cancún and the Cabos region of Southern Baja California.
With or without gaming, however, large entertainment complexes combining hotels, movie
theaters, restaurants and other attractions are becoming popular in Mexico. Development of this type
of aggregate entertainment centers is expected to continue vigorously.
.c)
Time-share.
Time-share projects are another area open for foreign investment. A compulsory technical
standard enacted on January 29, 1999, contains new rules for suppliers and users of time-share
facilities. Persons dedicated to the commercialization of time-share projects and/or the rendering of
this type of service must notify the Ministry of Tourism before initiating the sale of time-shares.
The service provider must be domiciled in Mexico or must have a representative, subsidiary
or branch office. The contracts for the sale of time-shares must be recorded at the Consumer
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Protection Agency. Hotel service providers must have civil liability insurance for the protection of
tourists and guests. The insured amount depends on the number of rooms in the hotel. Likewise,
intermediary providers who try to make regular affiliation or membership collections, should prove
that they have sufficient guarantees to secure their obligations.
It is possible to commercialize foreign time-share projects, as long as there is compliance
with the legal requirements.
.5.
Construction.
As in other countries, the construction industry in Mexico is particularly vulnerable to
economic cycles. Construction is one of the areas of the economy most affected by recessions, but it
also expands more than most industries in cycles of general economic growth. In Mexico, much of
the construction industry is dependent on government expenditures.
Construction activity was up in 1999 compared to the previous year. Between January and
August 1999, construction companies operated at 76.1 percent of their capacity, compared with 71.9
percent over the same period in 1988, according to the National Construction Industry Survey.
General construction, including housing, office buildings and hospitals, represented one-third of all
construction activity. Infrastructure construction, such as in public utilities improvement and
irrigation projects, suffered during the period because it depends on government funding.
.a)
Private construction.
According to statistics from Banco de México, the Mexican central bank, the current
housing deficit in Mexico is estimated at seven million units. It is estimated that some 800,000
additional units will be needed per year to keep the deficit from growing further.
Fundamental weaknesses in the financial sector and inadequate finance and foreclosure laws
have curtailed commercial credit for the purchase or construction of real estate projects. Reforms are
being discussed that may alleviate the credit situation. Several construction firms have developed
self-financing plans to enable customers to purchase residential or commercial real estate, but the
plans are awkward and expensive for customers.
.b)
Social interest housing.
Mexico's government is looking for the consolidation of urban development in cities that,
from a national perspective, present alternative investment and residential options for the population.
This is to be accomplished by promoting decentralization and the development of medium-size
cities, with the goal of a more balanced demographic distribution. The focus of the government will
be on promoting and coordinating the efforts of private, public and social sectors for the
construction of houses for urban and rural families. Administrative procedures will be simplified to
better meet housing demands. Innovative building methods and materials will be promoted and used
in order to provide better results in terms of quality and price.
Government-backed credits are available for the purchase of low-income housing. Both
Mexican and foreign construction firms may apply to government agencies for approval of their
housing construction projects for the credit. The credit does not finance the construction, but rather
covers the resale of individual low-income residential units to the public, helping the developers sell
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the completed project more quickly.
.c)
Public works.
The Mexican government is focusing on promoting extensive participation of foreign and
domestic private investment in infrastructure because of the limited resources of the public sector.
The National Development Plan 1995-2000 foresaw private sector participation in the construction
of highways, railroads, telecommunications, ports, airports, electric power plants and transportation
and distribution of gas, among other areas.
To increase the country's industrial development over the coming years, emphasis on
investment in the public works projects is essential. Improvement of the country's infrastructure is
necessary to strengthen development of the most underdeveloped areas.
Public works construction is an important area in the construction industry. According to
government figures, 34 percent of the US$ 22.4 billion federal procurement budget in 1996 went to
construction.
The Mexican constitution requires that public works projects be awarded through a public
bid process. The law regulating the bid process is the Law of Acquisitions and Public Works. The
process begins with a call for bids, which is published in the Official Gazette, a government
publication for official notices. In addition, the calls for bids for different projects can be obtained
on the internet through the Compranet system at http://www.compranet.gob.mx.
Calls for bids will contain (i) the name of the entity to which tenders must be submitted; (ii)
the address, date and schedules for obtaining tender documentation and its cost and terms of
payment; (iii) the address, date and time for reception and opening of tenders; (iv) a description of
the public works project or products or services; (v) the starting and completion dates for the
delivery of goods or services; (vi) a statement as to whether the tender is national or international,
under terms of treaty, etc.; and (vii) the language or languages in which the bids may be submitted.
The process for open tendering may be national or international. It is national when only
Mexicans or Mexican companies, including 100 percent foreign-owned Mexican companies, may
participate. International tenders permit foreign or Mexican participation, and occurs under one of
the following circumstances: (i) when mandated by a free trade agreement, (ii) when financing is
provided by international financial organizations, (iii) when national bids cannot fulfill the technical
requirements, or (iv) when necessary because of price considerations.
Bids are submitted in two sealed envelopes, delivered simultaneously. One envelope must
contain the technical specifications of the bid, and the other the price bid. The opening of bids
occurs in two stages. First the technical portions of the bids are opened. The bids that do not
conform to all technical conditions set in the call for bids are rejected. The bids that pass the
technical stage are then reviewed in a second stage for price.
A system of preferences exist in awarding contracts if two bids are similar. Under equal
circumstances, if two bids are technically similar the lower price will win. Free trade agreements to
which Mexico is a party call for national treatment of bidders from member countries. If two similar
bids come from a Mexican company and a foreign company from a treaty partner country, and if the
project or service is not covered or is specifically excluded under the terms of the treaty, preference
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will go to the Mexican company. If similar bids come from two foreign companies, one of which is
from
a
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country with which Mexico has a trade treaty and the other from a country with no trade treaty with
Mexico, the foreign company from the treaty partner country will get preference in bid awards.
Plans are in the works to develop a completely electronic bidding process for public works
and all government procurement in which bids can be submitted and contracts awarded
electronically by computer.
.d)
Industrial facilities.
There are investment opportunities in both building industrial development parks and in
locating plants within them.
As of early 1998 there were 254 industrial developments throughout Mexico. The vast
majority, 203, are industrial parks. Led by Baja California, which, with 40, has almost twice as
many of these industrial developments as any other state, 56.3 percent are located in the six Mexican
states which share a border with the United States. Two other states, Mexico (which surrounds more
than half of Mexico City), and Querétaro, also have attracted industrial developments, 15 and 11,
respectively.
Industrial parks usually have optimal conditions of location, infrastructure and services and,
therefore, are considered the best option for establishing an industrial plant. Industrial parks are
usually oriented toward small and medium-size industry and offer favorable atmospheres for
industrial activity.
Selecting a location for a manufacturing industry with export capabilities is a major decision
requiring an analysis of many factors, some of the main ones being human resources, physical
infrastructure, access to markets, living standards, economic conditions, technological development,
suppliers and services, market conditions and government incentives to invest.
.D.
NATURAL RESOURCES
.1.
Mining.
The Mexican Mining Law regulating Article 27 of the Mexican Constitution in the mining
sector, establishes the requirements that must be complied with in order to obtain a concession for
exploration and/or exploitation of minerals and substances listed in this Law.
The Law establishes that concessions to perform the above-mentioned activities may be
granted by the Ministry of Commerce to Mexican individuals, Mexican companies and agrarian
communities. Although traditionally exploitation of natural resources has been a cornerstone of
statist and nationalistic policy, foreign investment may now participate up to 100 percent in the
capital stock of mining companies.
The concessions for exploration and/or exploitation are given on "free land" to the first
applicant if the conditions and requirements of the Mining Law are fulfilled. The applicants offering
the technical or economic conditions for the public interest shall have preference over other
applicants.
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The Law defines "free land" as all Mexican territory, except for: a) islands, keys, reefs and
seabeds; b) national mining reserves; c) lands covered by a prior concession, d) lands covered by a
concession in process; e) concessions granted through a public bid and later canceled; f) concessions
substituting for other concessions previously granted in a public bid and later canceled; and g) land
in which no concession for exploration was granted because bidders did not comply with the public
bid requirements.
The mining concessions grant the holder of the concession rights to explore and exploit all
minerals and substances covered by the concession and to sell such minerals.
Exploration concessions are granted for a period of six years, and are non-renewable. They
can, however, be replaced by a new concession. Exploitation concessions are granted for a period of
50 years, which shall be renewable. The term of each concession commences upon registration of
the concession in the Public Registry of Mines.
Among the most important obligations that the holder of this type of concession must
comply with are the following:
a)
to execute the works of exploration and/or exploitation;
b)
to pay the fees imposed by the Mining Law;
c)
to advise if radioactive minerals are discovered;
d)
to provide statistical, technical and financial information of the company to the
Ministry of Energy; and
e)
to permit inspection visits by the Ministry of Energy to the mining site.
Mining activities performed on lands assigned to PEMEX require prior authorization of the
Ministry of Commerce and a favorable resolution by the Ministry of Energy, which shall establish
the technical conditions to be followed.
Mining concessions can be totally or partially transferred to third parties. Said transfers have
to be registered at the Public Mining Registry in order to have legal effect against third parties.
.2.
Fisheries.
Modernization is also under way in the fishing sector. A legal framework has been in effect
since June, 1992, to contribute to the construction, improvement and equipment of ships and tools
for fishing, to build infrastructure in order to promote the use, transformation, distribution and
commercialization of aquatic natural resources, to promote the development of fisheries as well as
research and study. Foreigners may request permits to conduct scientific expeditions and
explorations.
A permit is needed to fish for commercial, research or sporting purposes, including fishing
activities necessary to support application for a commercial fishing concession, and for foreign
vessels fishing in waters within the exclusive economic zone. A concession is required to capture,
extract or cultivate aquatic natural resources.
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Concessions or permits may be granted to interested persons, Mexican individuals or
companies. As per FIL foreign investment may participate up to 49 percent in Mexican companies
engaged in fishing activities. Concessions or permits to operate manufacturing-ships and floating
plants may be granted to Mexican individuals or companies.
Another major area for development is aquaculture, consisting of cultivation of water
species by using methods and techniques for their controlled development in all types of biologic
and water environments and in any type of installation. The Federal government is promoting the
development of this activity by rendering advice on the construction of necessary infrastructure and
for the acquisition and operation of plants for industrial conservation and transformation. There is no
need for a permit or concession, except if these activities are done in federal waters. An
authorization is needed only to collect seeds and other natural products from the environment to be
used in this activity.
Foreigners may invest in Mexican companies engaged in aquaculture up to 100 percent.
.3.
Agriculture and Agribusiness.
The Amendments to Article 27 of the Mexican Constitution and the enactment of the
Agrarian Law of 1992 constitute a new legal framework for the ownership of agricultural land in
Mexico. The new rules repeal legislation regulating private investment in agricultural, livestock and
forestry activities.
One of the causes of the Mexican Revolution of 1910 was the unequal distribution of land
among peasants. Consequently, the Constitution of 1917 empowered the executive branch to
distribute land to any newly formed "commune" for which purpose the executive could order the
expropriation of land from private owners whose land exceeded the constitutionally-defined
"individual landholding," and through land grants, constituting "ejido communes."
An extension of "ejido" land may be worked collectively by a group of "ejidatarios," or each
peasant may work his designated parcel.
To protect lands of the "ejido" and to ensure that large landholdings were not formed, the
existing legal framework did not permit the sale, lease or mortgage of tracks of "ejido" land; the
peasants or ejidatarios could not execute contracts with other "ejidatarios," private farmers or
companies; and "ejido" land could not be used as collateral for loans. Also, stock companies could
not own or manage agricultural land for these purposes.
These restrictions resulted in factors which restrained the "ejidatarios" from progressing
efficiently. Furthermore, they did not guarantee certainty for producers to invest and for financial
institutions to provide credit, resulting in limited opportunities, low levels of investment and
productivity and the utilization of old technology.
The 1992 Amendments to Article 27 of the Constitution provide the framework for security
in land ownership for the "ejidos" and private landowners which encourages investment and
productivity.
Also the new Agrarian Law eliminates the previous governmental excessive intervention in
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the process of decision-making of the farmers, and recognizes the peasants' liberty to produce and
organize themselves in the manner they consider most advantageous. This enables the peasants to
buy, sell or rent land, to hire labor or to associate with other producers and with third parties. Also,
the new framework provides that peasants may enter into any type of association or contract
including joint-venture schemes, with domestic or foreign private investors, through contracts of a
maximum duration of 30 years, renewable.
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Moreover, upon a resolution of an "ejido" meeting, the "ejido" may give the use of their land
as guaranty to Credit Institutions or third parties with commercial or association relationship. Said
guaranty must be executed before a Notary Public and registered at the National Agrarian Registry.
Notwithstanding the above, after an "ejido" privatization procedure, the individuals may sell their
land.
One of the major reforms provides that any Mexican company may own land for agrarian,
livestock or forestry purposes with a maximum extension of land equivalent to 25 times the limits of
the individual landholdings. (See Section XVIII.B.)
Companies investing in land for agrarian, livestock or forestry purposes must issue a special
series of shares or partnership interests, identified with letter "T" which represent the capital
invested in the acquisition of land or the value of the land contributed. Foreign individuals or
companies may not acquire more than 49 percent of series "T" shares or partnership interests.
In addition to series "T" shares, or partnership interests, such companies may issue an
unlimited number of common shares or partnership interests through capital contributions which
may include 100 percent foreign participation.
The agrarian sector with the reformed legal structure represents an opportunity for foreign
investors who would like to enter into joint-ventures with farmers, either private or communal
("ejido") and with domestic companies. Projects to raise animals, or for the production of cereals,
fruits, vegetables and other agricultural products have been successful, with growing export
opportunities.
The modernization of the agricultural sector is under way. Mexico is looking towards the
creation and solidification of the conditions necessary for an efficient allocation of resources and for
increased investments.
.4.
Forestry.
On December 22, 1992, a new Forestry Law was enacted to regulate the conservation,
protection, restoration, use, management, harvest and production of forest resources.
An authorization is required from the Ministry of Environmental and National Resources to
carry out lumbering activities in forest areas or areas suitable for forestation. The application must
contain a program describing the management of the lumber resources, such as the general purposes
and the duration of the program, the location of the land in which the activity will take place and
reforestation commitments.
A simple notification to the Ministry of Environmental and National Resources is sufficient
for non-lumbering activities. Such activities must comply with technical standards, however, if the
activities are for commercial purposes.
Commercial production involving a surface area smaller than or equal to 20 hectares
requires a simple notification to the authorities containing a commitment to comply with the
environmental requirements established in the Environmental Law, the location in which such
activity will take place and other minor details. For activities within surface areas smaller than or
equal to 250 hectares, an application must be filed with the authorities. The application must contain
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additional information with respect to environmental program. For production within a surface area
of more than 250 hectares, the application must contain, among other requirements, the potential
physical and biological impact on the forest ecosystem, socioeconomic description of the area in
which the activity will take place and other environmental information.
.E.
TELECOMMUNICATIONS
The Mexican legislature enacted the first Federal Communications Law effective on June 8,
1995. The stated purpose of the Law is to promote efficient development of telecommunications and
to foster healthy competition to provide better prices, diversity in quality of service for users without
conceding the regulatory role of the state and its dominion over the electromagnetic spectrum.
The Federal Telecommunications Commission (COFETEL) was created in August, 1996,
and is entrusted with tasks such as the promotion of competition, management of spectrum, as well
as supervision of proper interconnection. The Ministry of Communications and Transportation
requires a favorable opinion from COFETEL in order to grant concessions.
Concessions will be required:
1.
To use, develop or exploit radio frequencies in Mexican territory;
2.
To install, operate or exploit public telecommunication networks;
3.
To occupy geostationary orbital positions and satellite slots assigned to Mexico and
to exploit the respective radio frequencies, and
4.
To exploit the right to send or receive signals through radio frequencies associated
with foreign satellite systems that cover and have capacity to render services in
Mexico.
(Points 1, 3 and 4 hereinafter will be collectively referred to as "concessions of use of radio
frequencies").
The grant of concessions will be done through a public call for bids in all cases except that
of the public telecommunication network, which can be requested through direct application to the
Secretary of Communication and Transportation (SCT).
The concessions of radio frequencies will be granted for a specific use and modality
covering a limited geographic area. Interested parties may solicit a particular use and geographic
area in addition to those offered from time to time by SCT.
There will be a five-year period from the date a concession is granted to place a satellite in
orbit. The satellite control center must be located in Mexico. A preference that the center be
operated by Mexican nationals is expressed in the Law.
The concessions for commercial use of radio frequencies will have a 20-year term,
renewable for an indefinite number of additional terms. Concessions for public telecommunication
networks will be granted for a 30-year renewable term.
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Successful bidders will be required to pay for concessions for the use of radio frequencies.
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Concessions and permits may be assigned to third parties with prior approval from the
Ministry of Telecommunications. A period of three years must transpire for assignments to take
legal effects.
The concessions referred to above shall be granted to Mexican individuals or corporations.
Foreign investment is permitted up to 49 percent of the capital stock of such corporations, except for
cellular telephone services where foreign participation of more than 49 percent of the capital stock is
permitted, upon prior authorization from the Foreign Investment Commission.
A permit is required:
1.
To operate as a "reseller" of telecommunication services, without being a public
telecommunication network, and
2.
To install, operate or exploit land transmission stations.
A "reseller" of telecommunication services is defined as an entity providing
telecommunication services to third parties through the use of capacity of a concessionaire of a
public network without itself owning or possessing transmission infrastructure.
A concessionaire of a public telecommunication network cannot directly or indirectly own
an entity authorized as a reseller without prior authorization from SCT.
The parameters to establish and operate as a reseller will be described in the regulations.
A permit is not required for installation, operation or exploitation of downlink satellite earth
stations, or for rendering value-added services, in which case only registration with the Ministry of
Communications is required.
Private networks for intra-company communications do not require any authorization except
when using a frequency band that is not considered as free use or official spectrum.
Telecommunication tariffs can be fixed freely by the corporations holding concessions or
permits with the only requirement being registration of the tariff with the Ministry of
Communications.
The concessionaires of telecommunication public networks must adopt adequate network
designs to allow interconnection by third parties to permit the development of new
telecommunication services on a non-discriminatory basis.
Concessions do not grant holders exclusive access to rights of way such as electric and
telecommunication power, cable ducts and other public networks.
Interconnection agreements with other countries can only be established through prior
authorization from the Ministry of Communications.
As per the Resolution for Long Distance Interconnection of Networks published in the
Official Daily Gazette on July 1, 1994, concessions for public networks of basic long distance
telephone services were granted beginning August 10, 1996. Operations for interconnection to the
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TELMEX public network to render national or international long distance telephone services were
granted beginning January 1, 1997.
Rules pertaining to public telephony, local service and satellite communications have been
issued. Since 1996, Mexico started to auction several spectrum frequencies, including paging
services, trunking, pcs, wireless local loop and one-way restricted pay TV or mmbs. Two-way
wireless restricted TV (Lmbs) is expected to be auctioned in 1999. Mexico has also signed two
important satellite agreements with the U.S. to provide fixed and mobile satellite services.
Chapter XIII of NAFTA refers to telecommunications and ensures that Parties have access
to and use of any public telecommunication transportation network or service (including private
leased circuits) offered in its territory or across its borders for the conduct of their business on
reasonable and non-discriminatory terms and conditions.
Each NAFTA Party shall ensure that any licensing, permit, registration or notification
procedure that it adopts or maintains relating to the provision of enhanced or value-added services is
transparent and non-discriminatory, and that applications filed thereunder are processed
expeditiously. Also, any measure taken related to standards for the attachment of terminal or other
equipment to the public telecommunications transportation networks may be established only to the
extent necessary to prevent technical damage to the networks or interference.
When a monopoly exists in a NAFTA Party, such Party shall ensure that the monopoly does
not use its position to engage in anticompetitive conduct in the market.
.F.
AUTOMOTIVE INDUSTRY
.1.
History of investment restrictions.
The basis of the restrictions on foreign investment stem from numerous laws and regulations
that have been passed this century in Mexico with the objective of promoting the development of the
domestic automotive industry.
On August 25, 1962, the Mexican government enacted a Decree that prohibited the
importation of motors for automobiles and trucks and mechanical parts destined for use therein as of
September 1, 1965. This Decree provided, inter alia, that motors and transmissions to be installed in
vehicles in Mexico be produced with at least 60 percent of the content coming from parts produced
within Mexico. In addition, the Mexican government prohibited the importation of vehicles in the
same year.
Another Decree was passed in 1972 to limit foreign participation in the automotive parts
industry. The Decree established that foreigners could not hold greater than 40 percent of the capital
stock of companies dedicated to the production of auto parts. The Law to Promote Mexican
Investment and Regulate Foreign Investment, published on March 9, 1973, further reinforced the
prohibition, providing that foreign participation could not exceed 40 percent for companies
producing automotive parts. Further decrees and regulations were passed during the 1970's and early
1980's, which slightly modified the existing regime, while at the same time reinforcing the emphasis
on Mexican majority capital in the automotive industry.
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.2.
Automotive industry Decree of 1989.
In line with other market opening policies, the Mexican government passed the Decree for
the Development and Modernization of the Automotive Industry and the Rules of Application of the
same. This Decree took effect on June 15, 1990, and was amended in 1995 and 1998 to reflect the
provisions of the Foreign Investment Law and Mexico's commitments under NAFTA. Pursuant to
the Decree, the Mexican automotive industry is comprised of final assembly plants and auto parts
manufacturers. Currently, the Decree defines final assembly plants as companies that manufacture
vehicles or carry out the final assembly thereof, subject to compliance with certain national valueadded content requirements, which are gradually reduced down to 29 percent in the year 2003. Auto
parts manufacturers are defined as companies with sales to final assembly plants of components and
parts for use as original equipment in excess of 60 percent of their total sales, which must include at
least 20 percent of national value-added content. As of January 1, 1999, final assembly plants and
auto parts manufacturers may be 100 percent foreign owned. Both must be registered with the
Ministry of Commerce.
Auto parts manufacturers in which sales to final assembly plants are lower than 60 percent
of their total sales, are not and have never been limited in the amount of foreign ownership, and have
no requirement for national content.
The Decree discusses the concept of national supplier, defined as companies that
manufacture specific parts for the automotive industry satisfying a 20 percent national value-added
content requirement. Final assembly plants or majority shareholders thereof may not be majority
shareholders of national suppliers. Prior registration with the Ministry of Commerce is also required.
Companies operating as maquiladoras may be classified as national suppliers. (See Section X.D.)
Prior to January 1, 1999, and pursuant to confirmation by the Foreign Investment
Commission, foreign investment could reach 100 percent in final assembly plants or in companies
classified as national suppliers, while a 49 percent limit existed in companies manufacturing auto
parts, which could increase as high as 100 percent foreign investment indirectly through trusts. As of
January 1, 1999, the election to be classified as national supplier depends solely on the percentage of
sales of parts and components to the final assembly plants.
The Decree also permitted a special regime for the importation of new vehicles. Basically,
final assembly plants must keep a positive balance in their foreign exchange account, which may
then be utilized, within limits, to import new vehicles for sale in the domestic market, or the positive
balance may be sold or assigned to another similar enterprise for its own use.
.3.
Relevant NAFTA provisions.
NAFTA provides that Mexico may adopt or maintain measures limiting the importation of
used vehicles. Mexico is committed to allowing the import of vehicles that are at least ten years old
on January 1, 2009. For each two-year period thereafter, Mexico will increasingly open its used car
market by providing for the increased import of vehicles via lowering of the minimum age
requirement for importation, i.e. on January 1, 2011, Mexico must allow the import of vehicles that
are at least eight years old, January 1, 2013, six years old, etc. Thus, Mexico is not committed to
allowing the unrestricted importation of used vehicles until the year 2019.
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.G.
ENVIRONMENTAL EQUIPMENT AND SERVICES
With a relatively new environmental legal framework, Mexico intends to rapidly implement
various regulations for the dynamic commercial and industrial sectors. The laws, regulations and
technical standards are in most cases comparable with those of the developed countries, and further
changes are foreseen.
The government has created the Ministry of Environment, the National Institute of Ecology
and the Environmental Protection Agency, in charge of formulating environmental policy and
enforcing the law.
The government is increasing enforcement of environmental laws by assigning more
qualified inspectors and broadening the environmental audit program. Under this scenario,
environmental compliance has become an important issue for industries searching for improved and
expanded environmental services and equipment.
Some of the government's priorities for investment in environmental equipment and services
are hazardous and non-hazardous waste collection and disposal, and water treatment and supply
activities in which foreign investment is permitted.
Another important area for development of environmental services are the needs of large
government-owned companies, such as PEMEX, the Mexican National Railway and power
generating plants, where opportunities will be increased with the current privatization process.
Environmental infrastructure to handle hazardous waste is urgently needed because only
one-third of the hazardous waste generated annually is disposed of in authorized facilities, with the
rest being illegally dumped. The Law requiring adequate disposal and treatment of hazardous waste
creates opportunities for companies investing in commercial recycling plants, confinement facilities,
waste stabilization and treatment facilities and incinerators.
According to U.S. experts, Mexico is failing to treat 85 percent of its industrial wastewater
discharge and more than 80 percent of municipal waste water. The Mexican market for water
pollution equipment, services and wastewater treatment plants is expected to grow substantially.
Wastewater treatment and recycling is foreseen as one of the growth areas in the
environmental sector. Major producers of wastewater are, among others, automotive parts
manufacturers, food and beverage processors and the mining industry, which are already under
pressure to comply with the new regulations.
Increasingly stronger regulation and enforcement require companies to update their pollution
control procedures, in turn increasing the demand for products and services, such as equipment
designed to reduce human error with the accompanying technical support, equipment designed to
reduce the production of sludge, advanced monitors and instruments to measure pollution output,
service programs developed to provide companies with waste management plans and engineering
services to assist in the construction of waste treatment plants.
Important opportunities also for environmental services are the performance of
environmental impact studies, equipment for air pollution control, disposal of state and municipal
solid waste, and finally in alternative energy sources such as geothermic, solar and wind power.
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.H.
MEDICAL SERVICES
.1.
Private Hospitals and Clinics.
At present, Mexico City has two hospitals of first world caliber, the American British
Cowdray and the Angeles. Both are operating at or near capacity. This might indicate that there are
now opportunities for foreign investment in the full service hospital and medical center field.
There are also several good private clinics in the metropolitan area but knowledgeable
sources believe that others, especially in the respiratory disease field, are needed.
In the rest of the country, hospital services vary greatly. Guadalajara, Monterrey and
Cuernavaca have fairly good facilities, but many other cities need good medium-sized hospitals and
clinics.
.2.
Health Maintenance Organizations (HMO).
U.S. style HMOs are just starting in Mexico. Coordination with both government and private
insurance plans is necessary for entry into this potentially sizable investment area.
.3.
Mexican Social Security.
Unlike in the United States, Mexican Social Security is not limited to the elderly; health care
is available to all employees and their families. Although Social Security has always been
government run, it has many private suppliers. In addition, with the current trend toward
privatizations, it will be interesting to observe whether or not the government carries this trend into
what is now public health care.
.I.
ELECTRONIC COMMERCE
.1.
General.
One of the most dynamic areas in business today involves the use of computers and the
internet for conducting commercial transactions. The growth in electronic commerce, or ecommerce, has been astounding over the past few years. Technological advances, development of
more user-friendly applications and the ever-increasing popularity of this means of communication
make the idea of an almost-paperless future more plausible all the time. Opportunities for using
electronic means to facilitate communication and business transactions in Mexico are immense.
For the purposes of this book, we use "electronic commerce" as a general term
encompassing all commercial transactions and communications executed through computers, by the
internet or otherwise, including digital transfer, data messages, electronic data interchange (EDI),
electronic mail, and similar technologies.
In Mexico, as in the rest of the world, the number of computers connected to the internet and
the number of internet service providers have grown very fast, although the percentage of the
population that uses the internet is still much less than in more developed countries. At the
beginning of the year 2000, fewer than 3 percent of Mexicans have computers, and only
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approximately 10 percent have telephone service. By the beginning of 2000, the number of Mexican
internet users was estimated at about 1.5 million, and that number is expected to more than double
by the end of 2001. Demand in Mexico for internet services is expected to continue to grow at a
rapid rate for the for foreseeable future. Opportunities abound in the areas of telecommunications,
internet access and related areas, as well as in the use of electronic commerce as a marketing and
sales tool for other types of businesses.
Multinational companies, as well as many of Mexico's largest companies, are energetically
positioning themselves in the Mexican e-commerce market. In general, however, most Mexican
companies have been slow to appreciate the importance of electronic commerce and somewhat
reticent to embrace new business strategies necessary for success in an electronic era.
The direct sale of products from the web creates a problem in Mexico of how to deliver the
goods purchased. Local, national and international delivery services exist in Mexico, and the large
international package delivery companies operate throughout the country. Delivery of products by
mail, however, which is used as a less expensive means of delivery by mail-order companies in
other parts of the world, is less common in Mexico, although there are initiatives by the postal
service to remedy any shortcomings. Household bills, for example, must be paid directly at banks
rather than simply dropping a check in the mail.
Electronic commerce and advances in computer technology promise to change the way
business is done throughout the world. As a natural consequence, legal concepts worldwide also
must adapt to the needs of societies in the midst of an electronic revolution.
.2.
Developing a legal framework.
Because the technology driving electronic commerce can be as effective internationally as
locally, there is pressure on all countries to develop legislation that is compatible with that of other
countries. With that in mind, the United Nations Commission on International Trade Law
(UNCITRAL) has developed a Model Law on Electronic Commerce, which frequently has become
the basis for local legislation.
According to the UNCITRAL Guide to Enactment of the UNCITRAL Model Law on
Electronic Commerce, "[t]he Model Law is based on the recognition that legal requirements
prescribing the use of traditional paper-based documentation constitute the main obstacle to the
development of modern means of communication."
The standard legal requirement for the use of paper documents with authenticated (notarized
or witnessed) signatures is an issue all jurisdictions must deal with. As of this writing, legislators
and legal analysts in Mexico are debating how to accommodate the rapidly-changing technology of
electronic commerce. A draft of a bill incorporating the precepts of the UNCITRAL Model Law into
Mexican commercial law currently is being debated in Congress.
Verifying the authenticity of an electronic document or message represents both legal and
practical problems. The authenticity of electronic signatures, which are digital identification codes
attached to electronic documents, must become as reliable as written, witnessed signatures on paper
documents.
The issue of certification of electronic signatures, which should be an essential element of
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any electronic commerce legislation, is being analyzed and debated in various legal circles in
Mexico. One organization, the National Association of Mexican Notaries, known by its Spanish
acronym ANNM, is developing legal procedures for the certification of electronic signatures and
documents. It should be noted that in Mexico, as in many civil law countries, a notary is a speciallytrained lawyer authorized to act in a semi-official capacity to certify records and documents, among
other acts. Documents certified by a notary carry the legal presumption of validity, unless the
validity can be disproved by showing fraud, etc.
The focus of the Digital Certification Network being developed by the ANNM is to certify
(i) the identification of the sender, signor or originator of an electronic document, (ii) the legal
inability of the sender to repudiate the act of having sent the electronic data, (iii) the authenticity of
the data or document, and (iv) the confidentiality of the transmission through cryptography.
.3.
Jurisdiction.
Jurisdictional concerns regarding electronic commerce involve other issues that all countries
face. Internet addresses are not dependent on physical location and are not easily subjected to
geographically-based jurisdictional claims. This situation will become even more obvious as
technology advances, which will create the need for new, more flexible approaches to issues of legal
jurisdiction.
Related to jurisdiction is the issue of regulation of securities on the internet. Does offering a
security on a website in one county constitute activity in another country when the potential
purchasers have to go to the website to see the offer? Does a single website transaction with a buyer
in a particular country cause a substantial direct effect on that country? How can the authorities of
any country monitor the number of its citizens who may be exposed, perhaps by pure happenstance,
to securities offerings on the net?
Similarly, how can internet transactions be taxed? Where is the point of sale of an internet
transaction for value-added tax purposes? How can the tax collector monitor these transactions?
Will offering products or services over the internet be considered as having a presence in a country,
which would lead to taxation of profits worldwide? Many such issues are beginning to be discussed
in Mexico, but as yet remain unresolved.
Privacy is another issue that takes on added dimensions with regard to electronic commerce.
Article 16 of the Mexican Constitution protects private communications, which would include
electronic mail. In addition, the Mexican Postal Law would apply to electronic mail.
.4.
Intellectual property.
The use of trademarks on websites creates other issues that the Mexican Patent and
Trademark Office (known by its Spanish acronym, IMPI) is grappling with. Under Mexican law,
trademark protection can be cancelled if the trademark is not used. Because webpages are not
currently contemplated in law or regulations, the IMPI is using internal criteria on a case-by-case
basis to determine whether website use of a trademark constitutes sufficient use of the mark under
the law.
Similarly, the IMPI is using internal criteria also to determine trademark infringement in
cases of unauthorized use of a trademark on a webpage.
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Copyright protection for electronic documents is covered by the Mexican Copyright Law.
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In addition, the internet is creating new opportunities for the unauthorized use or pirating of
software, music and other products dependent intellectual property rights. Addressing this issue will
require both technological and legal advances.
.5.
The Mexican Government and the Internet.
The value of the internet for streamlining processes for the transmission of information has
not been lost on the Mexican government. Most government agencies, as well as the different
branches of government, now have websites offering volumes of information on Mexican laws,
politics, culture and business. Information on government procurement and public works projects in
Mexico currently can be found on the internet, including specifics regarding calls for bids. Plans for
the acceptance of bids electronically are being made in the Mexican government, with the
expectation that the entire bid process will be conducted electronically in the near future.
.J.
INSURANCE
Under the terms of NAFTA, barriers to ownership of Mexican insurance companies by
NAFTA investors have been lifted. Now U.S. and Canadian investors may own 100 percent of a
Mexican insurance company. (See Section VIII.C.10.) Some of the world's largest insurance
companies are entering the Mexican market, both by forming their own Mexican insurance company
as well as through significant acquisitions and joint ventures with Mexican insurers. Setting up a
subsidiary of a foreign insurance company, however, is still subject to foreign ownership
restrictions, unless Treaty's provisions provide otherwise.
With an estimated 1.7 percent life insurance penetration rate-one of the lowest in the worldlife insurance represents a large untapped market in Mexico. Overall, the Mexican insurance market
has been estimated to grow at 10 percent to 12 percent per year over the next 10 years.
.K.
OUTSOURCING
Outsourcing has become a dynamic business opportunity around the world. The concept is
growing in Mexico for various types of services. (See Section VIII.B.)
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XII. DIRECT INVESTMENT
.XII. DIRECT INVESTMENT
.A.
COMMON FORMS
Mexican and foreign investors, both private and public, may invest in Mexico through
different vehicles.
It is important to analyze tax advantages, relationships with the parent company, need of
technical assistance and technology, availability of deductions, type and size of market, competitors,
suppliers, importance of imports and exports, projected business and financial plan including growth
expectations, as well as limitation of liability and other similar factors, before choosing an
appropriate vehicle or structure.
.1.
Purchase of stock or assets.
a) Investors may purchase stock or assets of an existing company, which will enable them to
enter into the Mexican market immediately, taking advantage of the existing operation and its
infrastructure.
The first consideration of a foreign investor desiring to purchase shares should be possible
restrictions on the purchase of assets or stock in a given activity as provided by FIL or bilateral or
multilateral agreements on trade and investment, i.e., NAFTA. (See Section VIII.A. and for NAFTA
Parties see Section IX.) The Competition Law may also impact the proposed purchase of shares or
assets over a given threshold level. (See Section XIV.C.)
Other corporate concerns should also be addressed. For example, the investor should analyze
possible methods of financing the transaction. (See Section IV.) There also may be restrictive rights
of first refusal or other limits on transfer in the charter or by virtue of a shareholders agreement, or
the shares may be encumbered or pledged.
Apart from these and other concerns, a standard due diligence investigation should be
conducted on, among other things, possible labor and tax liabilities; outstanding loans, liens or
encumbrances on the company and/or its assets; rights of employees, i.e., seniority and fringe
benefits; zoning or environmental problems; consumer protection considerations; standards (NOMS)
and labeling concerns; export or import programs and related permits; intellectual property rights;
immigration considerations; and contracts or leases.
The decision of whether to purchase shares or assets should also be analyzed from a tax
perspective. For example, if a newly- formed company acquires only assets, not an ongoing
business, instead of purchasing shares, a four-year exemption from the asset tax would apply.
The acquisition of an ongoing business (assets and employees) entails the concept of
"employer substitution" for labor purposes. The purchaser of the business becomes liable with the
former employer for all labor compensations and obligations for a period of six months counted as
of the date of notification of the substitution to the employees or to the union. After the six-month
period only the new employer will be liable. (See Section XVI.)
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b) Taxes imposed on transfer of assets or stock.
A corporation that realizes profits derived from the sale of assets or shares (often referred to
as "capital gains," although such income classification does not exist in Mexican law) is subject to
tax on the profit obtained. The tax depends on the legal status of the seller. A Mexican corporation
that realizes gains as a result of sale of assets or shares will include the proceeds of the sale with
income derived from other sources and will pay tax at the rate of 35 percent on the total income less
allowable deductions. (See Section XV.C.4.)
In case of sale of shares, whether seller is a Mexican individual or a foreign resident,
company or individual, such sale is subject to payment of income tax at the rate of 20 percent of the
total price, without any deduction. In some cases such tax must be withheld by the purchaser who is
jointly liable for such withholding. The seller may, however, elect to pay an alternate tax (40 percent
on the taxable profit) if certain requisites are fulfilled. (See Section XV.C.6.) Several tax treaties
between Mexico and other countries contain different provisions on those transfers.
In case of a sale of assets, special attention should be given to the price at which each of the
assets is sold to avoid tax problems resulting from application of transfer pricing rules, and prices
should reflect market values. It should also be noted that goodwill is not deductible for income tax
purposes.
The sale of shares through the Mexican stock market is a non-taxable operation.
.2.
Registration of a branch.
The investors may decide to open a branch of the parent company to simplify
communication and accounting and consolidate advantages between the branch and the parent
company (See Section XII.A.2.)
.a)
General status of branches.
Mexican law has always authorized the establishment of branches of foreign companies,
although in practice the procedure was difficult. With the enactment of the 1973 Foreign Investment
Law which, as a general rule required 51 percent Mexican capital, it was practically impossible to
obtain the required permit. Since liberalization towards foreign investment, presently the
establishment of such branches is possible.
There are no income tax advantages to operate through a branch rather than through a
subsidiary. On the contrary, from a liability point of view, a foreign corporation acting in Mexico
through a branch is not a separate legal entity therefore the foreign company may be liable for the
branches obligations. A parent company is a separate legal entity, unlike a branch, and therefore, it
has no liability for acts of its subsidiary.
.b)
Approval requirements.
As of the amendments to the FIL of December 24, 1996, a foreign company must obtain
approval from the Ministry of Commerce to assure that the following requirements are being
complied with:
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i)
Said entities must prove their legal incorporation in their country.
ii)
The charter and bylaws of said foreign entities must not be against Mexican public
policy.
iii)
The entity must have a legal representative located in Mexico to act on behalf of the
foreign company.
The Ministry of Commerce has 15 working days to issue a ruling regarding the abovementioned authorization. Lack of decision shall be considered as an approval. Upon obtaining
authorization, a branch must register at the Registry of Foreign Investment.
Thereafter, the foreign company must file at the Public Registry of Commerce the charter
and by-laws, a document detailing the location and its specific business activities, and the
authorization from the Ministry of Commerce.
If a foreign company performs commercial activities in Mexico without having obtained
prior approval, the Ministry of Commerce may impose a fine from 500 to 1,000 times the minimum
salary.
Branches cannot operate in activities requiring Mexican participation, as required in certain
activities under FIL. (See Section VIII.A.)
.c)
Taxes.
Branches of foreign corporations have the same tax obligations as Mexican companies.
Branches are considered "permanent establishments" for tax purposes and are not subject to any
additional taxes to those paid by Mexican corporations.
However, there is an important disadvantage with respect to deductions. As a general rule
the branch may deduct those expenses which correspond to its activities in Mexico, but not
remittances made by the branch to the parent company, or another establishment of the parent
company abroad. These remittances are not deductible even if they are made as royalties, fees or
similar payments, or as commissions for specific services or for services rendered, or for interest
payments for money sent to the branch. On the other hand, the permanent establishment in Mexico
is allowed to deduct an allocation of expenses incurred by the parent company or any other of its
establishments abroad when such expenses relate to the Mexican branch.
.3.
Registration of a representative office.
Frequently foreign investors act as intermediaries or engage in promotion or similar
activities in Mexico, from which they will not obtain income. Therefore, they may decide not to
register a branch but only a representative office without income.
At present FIL provides that foreign companies with no income wishing to establish in
Mexico must obtain prior authorization from the Ministry of Commerce and must register at the
Registry of Foreign Investment.
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Whether a representative office without income in fact performs commercial activities, i.e.,
intermediation, and therefore should request authorization from the Ministry of Commerce to open a
branch and register subsequently in the Public Registry of Commerce, is still subject to differences
of opinion.
.4.
Creation of a subsidiary.
For a variety of commercial and legal reasons and advantages, foreign investors may prefer
to incorporate a new company in Mexico, enabling them to limit their liability, as the activities of
the subsidiary are legally independent from those of the parent company. (See Section XIII.)
.5.
Joint venture companiesError!Marcador no definido. and agreements.
Foreign investors may enter into a business together with other persons or companies which
often, in a generic way, is called a joint venture, which may either provide for a joint venture
company or a joint venture agreement.
.a)
"Joint venture company."
Various persons may decide to incorporate a joint venture company to take advantage of the
partners' knowledge of the Mexican business and industrial sectors, and to join efforts by bringing
capital, technical assistance and technology together. The new entity or entities, formed or
restructured company or companies, will be used precisely for the purpose determined, for example,
to commercialize products, render services, or build infrastructure.
Each one of the shareholders, or partners, of the new or restructured entities may contribute
capital, goods, services, and technology, thus enabling them by their efforts and knowledge to
comply with the corporate purposes. The new or restructured entity or entities will be a Mexican
company, operating in accordance with the type of company chosen, will pay taxes and comply with
its obligations as a normal company. The types of entities they may form are analyzed in Section
XIII.
.b)
"Joint venture agreement" (Asociación en Participación).
If the parties to a project decide not to engage in the cost of creating a new company, but
prefer to execute an agreement of "asociación en participación" by which they agree to join efforts
for a specific purpose, when the identity of only one of the partners holds himself out before third
parties (active partner), and the other is what often is referred to as a silent partner, contributing to
the execution of the agreement with capital, services or otherwise. The parties will agree on how to
distribute profits or share the losses derived from the operation.
Responsibility before third parties will be that of the active partner; but he will share
responsibility with the silent partner if the agreement so provides. Therefore, there will not be any
relationship between the silent partner and third parties.
Upon completion of the work or the desired objective the agreement will terminate. Such an
agreement does not create a new entity, and each of the parties is liable to the other, without liability
limits, as per undertakings in the contract.
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The active partner is responsible for compliance with the joint venture's tax obligations,
including registration with the Taxpayers' Registry and making required tax payments. For tax
purposes, a joint venture is treated as a separate taxable entity from the joint venture partners. In the
accounting for the joint venture, the active partner must keep the joint venture income separate from
any other income or business activities he may have, and must file separate tax returns for the
venture. Profits distributed to partners are treated as dividends, and deductions are not passed
through to the partners.
.B.
GENERAL COMMENTS
The Companies Law requires that any company be legally incorporated and registered in the
Public Registry of Commerce. The representatives of a non-registered company who enter into
operations with third parties will be liable for the execution of the obligations assumed, jointly and
severally, without limitation.
A non-incorporated or non-registered company can obtain government contracts, sometimes
with the commitment to incorporate thereafter. From a practical viewpoint, however, a nonincorporated company will be unable to, among other things, hire local workers, open a bank
account, import equipment, obtain work permits or import or export materials. Moreover, it will not
have a tax number which will make conducting business transactions virtually impossible.
There are no financing restrictions on foreign-owned Mexican companies, i.e., required
debt/equity ratio. Foreign companies may freely grant financing to companies or individuals resident
in Mexico. Also, intercompany agreements, such as licenses, rental agreements and technical
assistance agreements, are permitted.
Incorporation and registration costs vary depending on the complexity of the proposed
structure and the type of investment method chosen. The time to incorporate may run from one to
four weeks depending on availability of necessary documentation and the domicile of the company.
Business entities must comply, among others, with water, environmental, tax, federal
housing, labor, health, consumer protection and social security regulations, among others.
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XIII. SUBSIDIARIES AND COMPANIES
.XIII. SUBSIDIARIES AND COMPANIES
Business entities are governed by two laws, the federal Companies Law and the local Civil
Code of the respective states. As discussed in Section VIII.A., certain sectors are subject to foreign
participation limitations. Another type of company with a different purpose, the cooperative
company, is subject to specific regulation as discussed in Subsection B. below.
.A.
TYPES OF MERCANTILE COMPANIES
Stock corporations are generally the vehicles for foreign and national investments in
Mexico, the most common of which is the Sociedad Anónima (S.A.). The S.A. may have fixed or
variable capital, in which case the acronym "S.A." becomes "S.A. de C.V."
Any legal entity may adopt the variable capital form, and may increase and decrease its
capital after incorporation pursuant to the conditions provided for in the charter and the law.
In most companies the minimum capital is fixed by law, and generally, the variable capital is
unlimited. Companies may increase the capital to be subscribed by the shareholders or partners,
which shall be paid in the time periods provided for in the charter or in the law. In the event shares
are issued, but are not subscribed, they will be held by the company to be delivered after the
subscription is paid.
The types of business entities provided for in the Companies Law are the following:
.1.
"Sociedad en nombre colectivo."
"Sociedad en nombre colectivo" is similar to a partnership, in which the partners are
ultimately and unlimitedly liable for the company's obligations, jointly and severally.
.2.
"Sociedad en comandita simple" and "sociedad en comandita por acciones. "
"Sociedad en comandita simple" and "sociedad en comandita por acciones," are similar to
limited liability partnerships (L.L.C.). These types of companies have one or more general partners
who will be ultimately unlimitedly liable for the company's obligations, jointly and severally, with
one or more partners having limited liability, who are only liable for the payment of their
contributions. In the "sociedad en comandita por acciones" the capital will be divided into shares
which represent the rights and obligations of each one of the partners. Such shares cannot be
assigned without the agreement of all of the partners with unlimited liability and with the agreement
of two-thirds of the other partners.
.3.
"Sociedad de responsabilidad limitada. "
"Sociedad de responsabilidad limitada" (S.R.L.) is similar to a limited liability company,
although not currently commonly used, this company may be incorporated with a minimum capital
of $3,000 pesos (whereas an S.A. requires $50,000 pesos) and the partners' liability is limited to the
amount of their contribution. This type of company is oriented toward the personal capacities of its
partners. Therefore, to assign or transfer partnership interests as well as to admit new partners, the
consent of partners representing the majority of the capital is necessary, except when the charter
provides for a higher percentage. If the assignment or transfer of partners' interests is to a third party,
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the other partners have a right of first refusal to acquire the partnership interest.
Since the S.R.L. appears to be similar to limited liability partnerships in the United States
(L.L.C.); some observers comment that they may be considered partnerships for U.S. tax purposes.
.4.
"Sociedad anónima."
.a)
General comments.
As per recent modifications to the law, the minimum number of shareholders required is
two, with no maximum limit.
The S.A. provides limited liability to its shareholders. A sole administrator or board of
directors may manage the corporation. The shareholders are the ultimate decision-making body of
the corporation. Shareholders may call ordinary or extraordinary meetings, in certain cases under the
law or as provided in the charter. The statutory quorum for shareholder meetings is one-half of the
outstanding shares for ordinary meetings and three-fourths of the outstanding shares for
extraordinary meetings.
In an ordinary meeting, if a quorum is not present, a second meeting may be called. The
shareholders present at this second meeting are considered to constitute a quorum. Resolutions in an
ordinary meeting require a majority vote of the shares represented.
In an extraordinary meeting, if three-fourths of the outstanding shares are represented,
resolutions require the vote of one-half of the outstanding stock. Even if the extraordinary meeting is
in response to a second call, resolutions are only carried upon the vote of one-half of the outstanding
stock.
Such voting requirements and quorum may be increased by charter, often referred to as
"veto" power.
Foreigners, residents or non-residents, may be members of the board of directors. Meetings
of the board of directors need not take place in Mexico, however, shareholders meetings must be
held at the corporate domicile.
Resolutions adopted by directors or shareholders outside of a meeting, by unanimous vote of
all of the directors or the shareholders of the company, by telephone or in any other manner, shall be
valid as long as the resolutions so adopted are confirmed in writing and the charter so provides.
The shareholders must appoint at least one examiner whose responsibility is to oversee the
administration of the company on behalf of the shareholders. The examiner may be any person
except the directors of the company, their relatives or employees.
Five percent of annual after-tax profits must be allocated to a legal reserve account until it
reaches 20 percent of the capital stock of the company.
.b)
Capitalization requirements.
The minimum capitalization for the S.A. is $50,000 pesos (approximately US$5,000 at $10
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pesos per dollar). The initial capital must be at least 20 percent subscribed and paid-in, the
remainder to be paid as provided by the shareholders or decided by the board of directors.
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Increases of capital must be approved at extraordinary meetings and may not take place until
all outstanding capital is paid-in. The subscription and payment of later increases may be either
agreed to by the shareholders or left to the decision of the board, if so provided in the charter. A
capital increase or decrease of an S.A. de C.V. does not require an amendment of its charter, as does
an S.A.
The shareholders have a preferential right, in proportion to the number of their shares, to
subscribe shares of any increase in capital.
In the case of transfers of shares, the charter may provide for shareholders' rights of first
refusal including the terms and conditions of its exercise, or may provide for board approval in case
of transfers, which can only be denied if the board designates a purchaser of the shares at market
value.
All shares must be registered since bearer shares are no longer permitted.
Shareholders are liable for unpaid shares and may receive dividends only in proportion to
the amounts paid.
Should the payment for unpaid subscriptions lapse without payment, the company may
request the payment of the value of the shares through a judicial process or may proceed to their
sale. After one month from the date fixed for the payment, if the judicial process has not been
initiated, or it has not been possible to sell the shares at a price covering their value, the company
may proceed to reduce the capital accordingly.
Shares paid for in kind are considered fully paid-in. However, such shares must be held in
the treasury of the company for two years to determine the exact value of such contribution. If the
value at which it was contributed is lower than 25 percent of the value of the shares received at the
time of such contribution, the shareholder must pay the difference.
.c)
Incorporation and registration requirements.
To incorporate a company the shareholders have to agree on a proposed charter and by-laws
and must request prior authorization from the Ministry of Foreign Affairs for the use of the proposed
corporate name. These documents must be protocolized by a Public Notary. Foreign shareholders
shall grant a power of attorney to a resident in Mexico to represent them before the Public Notary
for such purpose.
The public instrument issued by the Notary shall be registered at the Public Registry of
Commerce of the domicile of the company. Other corporate documents, such as minutes of
shareholder meetings, amendments to the charter and by-laws and general powers of attorney must
also be recorded.
A newly-formed company shall register at the Taxpayers' Registry, as well as with other
relevant federal or local agencies, depending on the nature of the business.
The incorporation and registration procedure herein mentioned for a "Sociedad Anónima"
applies to all types of commercial companies.
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Under Mexican law, attorneys-in-fact acting for a company must be granted specific powers
of attorney. Since there is no concept of "apparent or implied powers," such powers should be
granted in the charter, or by specific resolution of the shareholders, the board, or by substitution and
delegation from an attorney-in-fact.
The Civil Code provides for powers of attorney for lawsuits and collections, acts of
administration and acts of dominion. Each power may be general or special, limited or unlimited,
with respect to amounts or authority or term. To issue credit instruments, the Law on Credit
Instruments requires that the attorney-in-fact be vested with a specific power for such purpose.
Any person acting on behalf of the company without such powers does not bind the
company and becomes personally liable to the company and to third parties.
Directors, acting individually, may also have powers if granted by charter or specific
resolution of shareholders. Directors resident abroad may act as such and exercise powers abroad. If
they act as directors or exercise the power in Mexico, they must have proper immigration status.
(See Section XVII.)
.B.
COOPERATIVE COMPANIES
"Sociedad cooperativa" is a cooperative company. Although this type of company is
mentioned as another type of business entity by the Companies Law, it is regulated in a separate law
called the Cooperative Companies Law. The cooperative company is a type of entity formed by
individuals who join their interests and efforts with the purpose of satisfying their individual and
collective needs through the realization of economic activities of production, distribution and
consumption of goods and services. These types of companies are used, for example, for fisheries
and agribusiness.
.C.
ASSOCIATIONS
The Civil Codes of the states of Mexico generally follow the Civil Code of the Federal
District, which provides for two types of civil associations: the "asociación civil" (A.C.) in which
the partners decide to carry out a common purpose not prohibited by law and without a
preponderantly economic objective; and the "sociedad civil" (S.C.) by which the partners join their
resources and efforts to achieve a common purpose, which might have an economic objective but
which should not have profit as its primary motive.
Associations are incorporated following a procedure similar to that of commercial
companies. (See Subsection XIII.A.4.c.)
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XIV. SENSITIVE AREAS
The following is a selection of possible problem areas often not given the attention merited
when planning an investment in Mexico and which could suddenly become critical in the course of
operations.
.A.
ZONING
Most municipalities within Mexico have areas designated for residential, commercial, office
and industrial purposes, and each state has the authority to enact administrative general rules for the
use of land and for the operation of establishments. In most states the rules require an operations
license, a land use permit and a construction permit issued from the corresponding municipality. In
some cases depending on the type of establishment, an opening notice must be given. It is important
to note that the opening of establishments and the use of the land (zoning) have different
requirements, and should be addressed separately.
For example, in the Federal District, hotels, restaurants and sports clubs require an
operations license, whereas only a notice of opening is required for the operation of an office or a
commercial establishment.
Several official documents are required to obtain an operations license, such as a zoning
permit, license for the use and occupancy of the premises, construction permits and authorization
from the health authorities. When dealing with industrial facilities, in order to obtain the operations
license, it is necessary to comply with federal environmental requirements as well.
In the case of an opening notice, it is necessary to file some of the above mentioned
documents.
The municipality can impose fines, close temporarily or even close permanently those
establishments operating without the required licenses or for failing to file the opening notice.
.B.
ENVIRONMENTAL REGULATION
Environmental regulation is a relatively new and significant area of concern for businesses
with operations in Mexico.
The Ministry for Urban Development and Ecology was created in 1982 to regulate urban
development, housing, land use and ecology. It was replaced in May 1992 by the Ministry of Social
Development.
On December 28, 1994, the Organic Law for the Federal Public Administration was
amended creating a new Ministry of the Environment, Natural Resources and Fisheries. There are
also environmental related decentralized entities, such as the National Institute of Ecology and the
Environmental Protection Agency. The Institute is basically in charge of formulating regulations and
legislation, while the Agency is in charge of enforcement of environmental land regulations and
technical standards. Another important agency is the National Water Commission, which is in
charge of issuing permits relating to the use and exploitation of federal waters, and the discharge of
waste into federal waters in accordance with applicable technical standards (NOMS).
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In 1988, Mexico enacted its first comprehensive environmental law known as the General
Law of Ecological Equilibrium and Environmental Protection, (the "Law") with the purpose of
defining environmental policy and regulation; preserving and restoring the environment;
establishing environmental protection areas for flora and aquatic and wild fauna; promoting rational
use of natural resources; preventing and controlling water, soil and air pollution and regulating the
competence of federal, state and municipal authorities regarding the environment.
The Law is divided into six titles addressing (i) general dispositions, (ii) protected natural
areas, (iii) rational use of natural elements, (iv) protection of the environment, (iv) social
participation and (v) safety and control measures and sanctions.
The Law is supplemented by the regulations on: environmental impact, toxic waste,
prevention and control of the atmospheric pollution, vehicles circulating in Mexico City and the
metropolitan area, and generation of noise. In addition to the Law and Regulations, most Mexican
states have adopted their own environmental laws.
An amendment to the Law was published in the Mexican Official Gazette on December 13,
1996, which expanded its purpose to include concepts such as the preservation of the biodiversity
and the setting up of specific environmental policies, as well as the introduction of the concept of
sustainable preservation of natural resources to replace the concept of rational development.
Another important aspect of the above-mentioned amendment is a better definition of the
jurisdiction of federal, state and municipal authorities in environmental-related matters. Currently,
the determination of jurisdiction is based on grounds such as territory in which the activities will
take place, the type of activity and the sources of pollution. Following are some of the main areas
that according to Article 5 of the Law, as amended, fall within federal jurisdiction:
•
Formulation and management of national environmental policy;
•
Matters that affect ecological equilibrium within national territory or in zones subject
to Mexican sovereignty and jurisdiction, originating from territory or areas subject to
the sovereignty and jurisdiction of other countries, or from zones outside of the
jurisdiction of any country;
•
Matters originating from within national territory or areas subject to Mexican
sovereignty and jurisdiction that affect the ecological equilibrium in territory or areas
subject to the sovereignty and jurisdiction of other countries or areas outside of the
jurisdiction of any country;
•
Issuing of official regulations and oversight to ensure compliance with
environmental laws;
•
Regulation and control of activities considered to be high risk, and of the generation,
handling and disposal of hazardous waste;
•
Prevention and control of environmental emergencies according to civil protection
policies and programs;
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•
Establishment, regulation, administration and oversight of federally-protected natural
reserves;
•
Evaluation of environmental impact of the works and activities described in the Law,
as well as the issuance of necessary permits and authorizations;
•
Regulation of sustainable development, protection and preservation of forest areas,
land, water, biodiversity, flora, fauna and other natural resources under federal
jurisdiction;
•
Regulation of atmospheric pollution from any source, as well as the prevention and
control of atmospheric pollution in federal zones;
•
In coordination with state and local authorities, the fostering of the use of
technologies, equipment and processes that reduce emissions and discharges of
pollutants from any source, as well as the establishment of regulations for the
sustainable development of energy resources;
•
Regulation of activities related to exploration and exploitation of minerals,
substances and other underground resources under federal jurisdiction, with regard to
their environmental and ecological effects;
•
Prevention of ambient pollution caused by noise, vibration, thermal energy, light,
electromagnetic radiation and odors;
•
Promotion of participation by the society in environmental matters; and
•
Implementation of the National System of Environmental and Natural Resources
Information for public use.
Following are some of the principal environmental issues under the jurisdiction of the states:
•
The formulation and management of state environmental policy;
•
Application of the environmental policy measures provided by local laws, as well as
ecological preservation and restoration and environmental protection regarding areas
of state jurisdiction;
•
Prevention and control of atmospheric pollution from fixed industrial or transient
sources, in areas specified by the Law as not falling within federal jurisdiction;
•
Regulation of activities not considered to high-risk activities, as defined in the Law;
•
Regulation of systems for collection, transport, storage, handling, treatment and
disposal of non-hazardous solid and industrial waste;
•
Prevention of ambient pollution caused by noise, vibration, thermal energy, light,
electromagnetic radiation and odors from fixed industrial or transient sources, in
areas specified by the Law as not falling within federal jurisdiction;
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•
Regulation of sustainable development, prevention and control of pollution of waters
under state jurisdiction, as well as in cases in which the oversight of federal waters
has been assigned to the states.
The environmental legislation also includes technical standards to determine parameters for
maintaining the health of the population and the preservation and restoration of the ecological
equilibrium and the protection of the environment.
There are other relevant laws that contain dispositions on specific subjects related to the
environment, such as the Mexico City Environmental Law that was published in 1996 and
implementing regulation sin 1997, the Health Law, which regulates the negative effects of the
environment as an influence on human health, the Communications Law, which provides that the
establishment and exploitation of general means and routes of communication must be done in a
manner not affecting the ecosystems and the ecological equilibrium, and the Law of Population
Centers, which provides that population centers must be established taking into account the
prevention, control and monitoring of ecological risks and emergencies and the preservation and
improvement of the environment, among others. Other important laws are the Forestry Law and the
Fisheries Law, which, among others, contain important environmental related provisions.
.1.
Environmental impact.
Anyone wishing to carry out any of the following activities will need the prior authorization
from the Ministry of the Environment:
a)
water works, general means and routes of communication, oil and gas and other
pipelines;
b)
petroleum, petrochemicals, chemicals, iron and steel works, paper, sugar, cement
and electricity;
c)
Exploration and exploitation of minerals and substances reserved to the nation under
the Mining Law, and under regulations to Article 27 of the Constitution regarding
nuclear materials;
d)
Installations for treatment, storage or disposal of hazardous waste, as well as
radioactive waste;
e)
Forestry in tropical jungle areas and slow regeneration species;
f)
Forest plantations;
g)
Changes in zoning of forest areas, as well as jungle and desert areas;
h)
Industrial parks in which high-risk activities are to be carried out;
i)
Real estate development that affects coastal ecosystems;
j)
Works and activities in and around wetlands, mangrove swamps, lakes, rivers and
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estuaries, or in federal zones;
k)
Works in federally-protected nature areas;
l)
Fishing, aquaculture or agriculture activities that may put a species at risk or harm
the ecosystem;
m)
Federal works or activities that may cause ecological imbalances, harm to public
health, harm to ecosystems or pass the limits or conditions established by law related
to the environment.
To obtain the authorization necessary to engage in these activities, interested parties must
present an environmental impact report to the Ministry, containing among other things:
i)
a description of the possible ecological effects of the activity or project;
i)
preventive, mitigating and other necessary measures to avoid or minimize the impact
on the environment;
When high-risk activities are involved, as defined in the Law, the environmental impact
report must include a risk study.
Once the environmental impact report is filed, the Ministry begins the evaluation process to
determine if the application conforms to the requirements of the Law and its regulations, as well as
applicable official standards. The Ministry has 10 days to analyze to the application. The authority
may authorize, modify or reject the performance of the activity within 60 days from the receipt of
the environmental impact report.
The activities listed in a) through l) above require the prevention report rather than an
environmental impact report in the following cases:


If there are Official Mexican standards or other dispositions of law regulating
emissions, discharges, use of natural resources and, in general, all environmental
effects that may be caused by the activity;

The activities are expressly provided for in a partial urban development plan or an
ecological regulation that has been evaluated by the Ministry;
The activities will be realized in an industrial park authorized by the Ministry for the
activity involved.
In these cases, once the Ministry has analyzed the prevention report, it will determine the
need for an environmental impact report.
Local authorities will be competent in those activities not reserved to the Ministry of
Environment.
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.2.
Air emissions.
Emissions to the atmosphere are released either by fixed or mobile sources.
.a)
Fixed sources.
All facilities releasing pollutants to the atmosphere located in a fixed place in which
industrial, commercial and service activities are performed, are considered as fixed sources and their
emissions must not exceed the maximum levels established in the corresponding standards.
Fixed sources must comply with several requirements, such as maintaining systems and
equipment to control atmospheric emissions, keeping an inventory of emissions and installing
measuring equipment.
As described before, atmospheric pollution from any source falls under federal jurisdiction,
as do the prevention and control of atmospheric pollution in federal zones or in cases of fixed
sources or mobile sources of atmospheric pollution under federal jurisdiction. Among the fixed
sources under federal jurisdiction are chemical, petroleum, petrochemical, paint, dyes, automotive,
paper, metallurgy, glass, electric energy generation, asbestos, cement and treatment of hazardous
waste.
These fixed sources require an operations license from the Ministry of Environment.
Once the operations license has been obtained, the holder must submit to the Ministry of the
Environment, every February, an inventory with information regarding the company and its
operations.
When applicable, the facility must comply with local or municipal requirements.
.b)
Mobile sources.
The Law includes mobile sources that must comply with the limits established in the
corresponding standards.
Automobile manufacturers must use methods, processes, parts and equipment that ensure
that the maximum levels of atmospheric pollution specified in the official Mexican standards are not
exceeded. All vehicles with motors after 1990 must have catalytic converters.
Vehicles rendering federal public transportation services must comply with emission control
standards. Passenger vehicles in Mexico City and the metropolitan area must comply with a
verification program carried out twice a year and are barred from circulating once a week depending
on their license plate number.
.3.
Water pollution.
The discharge of residual waters into any body of water or on ground is subject to
authorization by the National Water Commission. If discharges are made into the sewer system,
authorization must be obtained from the municipal authorities, unless toxic wastes are discharged, in
which case, the Ministry of Environment would have jurisdiction. Industries with water discharges
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also must comply with the corresponding technical standards.
.4.
Hazardous materials and toxic waste.
Hazardous materials and toxic waste are considered as such depending on their toxicity,
reactivity, flammability and corrosiveness, or if included on the list of the corresponding technical
standards.
Toxic waste, as determined by applicable official technical standards, generated from a
transformation or production process, must be disposed of pursuant to applicable regulations. If
toxic waste results from processing imported materials under temporary import permits and finished
products are exported, such toxic waste must be returned to the country of origin.
Individuals or companies intending to construct or perform public or private activities that
may generate toxic waste, or in which the handling of toxic waste is involved, must obtain
authorization from the Ministry of the Environment, and comply with the following:
a)
register in the Registry for toxic waste generating companies, controlled by the
Ministry of Environment;
b)
keep a monthly record of all toxic waste generated;
c)
handle and dispose of toxic waste in accordance with the corresponding standards;
and
d)
prepare a semi-annual report containing all movements of toxic waste.
Transport, storage and final disposal of toxic waste or rendering of related services are
subject to authorization from the Ministry of Environment in addition to compliance with any other
health or hygiene regulations.
The generator of toxic waste may contract handling services with any company authorized to
render such services, and which must comply with the respective standards.
Vehicles used for transport of hazardous materials and toxic waste must comply with the
requirements established by the Ministry of Communications contained in the Regulations for the
Land Transport of Toxic Materials and Waste.
All importers and exporters of hazardous materials must file a declaration to obtain the
necessary authorization (Ecological Guide) from the Ministry of the Environment, and must
guarantee compliance with the relevant regulations and indemnification of the damages that may be
caused, either in Mexico or abroad, by posting a bond.
.5.
Other pollutants.
The emission of noise, vibrations, thermic and luminous energy, odors and visual pollution
is subject to compliance with the corresponding standards. The Ministry of Health may conduct onsight inspections to determine whether any of these emissions are hazardous to human health.
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.6.
Inspection and sanctions.
The competent authorities, who must have a written order issued by the Verification Unit of
the Environmental Protection Agency, may perform inspection visits to verify compliance with the
Law, regulations and technical standards. Once the inspection has taken place, the inspector must
issue an inspection report which is the basis for the application of sanctions, if any.
In case of non-compliance, sanctions range from partial or total seizure of pollutant
substances, temporary or definitive closing, fines, administrative arrest, cancellation of
authorizations or imprisonment for up to six years.
Mexico, however, lacks adequate environmental enforcement personnel to enforce the Law
throughout the country. To foster compliance, Mexico has instituted a system of voluntary selfinspections supported by random government audits.
.C.
COMPETITION LAW
The Federal Economic Competition Law (the "Law"), effective as of June 22, 1993, and its
implementing regulations issued on March 4, 1998, comprise the new antitrust act to promote
economic efficiency and protect the process of free competition and market participation. The Law
also establishes a Competition Commission as an autonomous agency separate from the Commerce
and Industrial Development Secretariat. The Commission is responsible for enforcing the Law,
conducting investigations, issuing administrative rulings and prohibiting anticompetitive market
practices.
The Competition Law is divided into two principal areas: monopolistic market practices and
concentrations, and applies to all individuals and companies, Mexican or foreign, regardless of the
economic activities carried out by them in Mexico. Federal, state and municipal agencies,
professional associations and other economic groups are also included. There are some exceptions,
such as owners of patents and trademarks, which are enumerated in article 28 of the Mexican
Constitution.
.1.
Monopolistic practices.
The Law distinguishes between absolute and relative monopolistic practices. Absolute
monopolistic practices are considered anticompetitive per se while the legality of relative
monopolistic practices is not always clear. The subjective "rule of reason" evaluation must be
applied to the net effect on competition and the competitive process before the practice can be
considered illegal.
The Law covers so-called "absolute" monopolistic practices, which commonly are horizontal
practices that take place among competitors. Absolute monopolistic agreements are illegal per se
and, therefore, are not enforceable. The Law establishes several presumptions of absolute
monopolistic agreements between or among competitors, including, (i) price fixing or manipulation;
(ii) placing restrictions or limitations on production, processing, distribution or commercialization;
(iii) dividing or segmenting the market; and (iv) coordinating bids or abstaining from bidding in
calls for bids, auctions or public sales.
The Law also sanctions "relative" monopolistic practices, which consist of vertical
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agreements among non-competing businesses with substantial market power for the purpose of
unfairly driving competitors from the market. Presumptions of relative monopolistic practices
include, (i) the fixing, imposition or establishment of exclusive distribution of goods or services or
the division or allocation of customers or supplies; (ii) limitations imposed on the manufacture or
distribution of goods; (iii) the imposition of obligatory price or other conditions on distributors or
suppliers; (iv) linkage of the transaction to the sale or distribution of an additional good or service
usually distinct from the transaction product or service; (v) sale or transaction subject to obligation
not to use, acquire, sell or provide goods or services of a third party; (vi) unilateral refusal to sell or
supply to certain agents goods that are normally offered to third parties; (vii) agreements to exert
pressure on a certain customer or supplier as retaliation or to dissuade him from certain conduct, or
to force him to act in a certain manner; (viii) or any act, such as predatory pricing, giving of
discounts in return for exclusivity, causing increases in costs, inhibiting production or reducing
demand, that might impair free competition.
A "relative monopolistic practice" will be sanctioned if it is proven that the responsible party
has substantial power in the relevant market and the practice relates to goods or services
corresponding to such relevant market.
The "relevant market" will be determined by grouping goods or services that can substitute
for each other in terms of use and price. For this purpose, the Commission takes into consideration
products characteristics, acquisition costs, opening of the economy to foreign markets and
restrictions of access to alternate suppliers or to other markets, their geographic location and the ease
of access to the product and its substitutes.
In determining "substantial power," other additional criteria are used, such as whether or not
there is the capacity to fix prices unilaterally, or produce or considerably restrict the supply of goods
or services in question, without competitors being able to fairly oppose the actions; the existence of
natural or artificial entry barriers; the possibility that competitors may access other sources; and the
recent behavior of the accused, since this might be a good indicator of his capacity to act
unilaterally.
Sanctions for engaging in an absolute monopolistic practice may be up to the equivalent of
375,000 times the minimum daily wage in Mexico City, currently $37,90 pesos or a total of
US$1,496,000.00, and for engaging in a relative monopolistic practice up to the equivalent of
225,000 times the minimum wage in Mexico City, US$897,631.00 (both at an exchange rate of 9.5
pesos per dollar).
.2.
Mergers and acquisitions (Concentrations).
The Law governs all acts that have effects in Mexico. The analysis of mergers assesses the
impact in Mexico of the intended transaction. In some cases, however, the determination of the
relevant market may include elements of overseas territories. The Law applies to all economic
entities whose actions have a bearing on markets in Mexico.
The Law defines a concentration as the acquisition of control, or any other act whereby
companies, associations, partnerships, shares, equity, trusts or assets generally are consolidated.
If the Commission determines that a proposed merger lessens, impairs or hampers
competition in a relevant product area or geographic market, it has broad authority to dissolve a
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completed merger, order a purchaser to dispose of all or some of the purchased assets or shares, or
block the parties from proceeding with all or part of a proposed merger. In making such a
determination, the Commission considers a number of factors, including the degree of concentration
in the market, barriers to entry of competing firms, the availability of substitute products, whether
the transaction would give the resulting entity the power to set prices or restrict output unilaterally,
and any other factor relevant to competition.
The Law also contains a pre-merger notification requirement which is triggered if one of
three thresholds is met:
a)
If the value of a single transaction or a series of transactions amounts to over 12
million times the minimum general daily wage prevailing in the Federal District,
which on January 31, 2000, was approximately US$47 million; or
b)
If a single transaction or a series of transactions create an accumulation of 35 percent
or more of the assets or shares of an economic agent, whose assets or sales amount
more than 12 million times the minimum general daily wage prevailing in the
Federal District; which on January 31, 2000, was approximately US$47 million; or
c)
If two or more economic agents participate in the transaction, and their assets or
annual volume of sales, jointly or separately, total more than 48 million times the
minimum general daily wage prevailing in the Federal District, which on January 31,
2000 was approximately US$190 million; and such transaction creates an additional
accumulation of assets or capital stock in excess of 4.8 million times the minimum
general daily wage in the Federal District, which on January 31, 2000, was
approximately US$116 million.
Prior to closing, mergers exceeding the established thresholds must file a notification to the
Commission. The Commission has ruled that the buyer is primarily required to file this notification,
although the seller or transferor may comply with this obligation. In the case of mergers for
consolidation purposes, all parties are obliged to notify the Commission. The initial notification
must include, among other things, the corporate name; the corporations' legal representatives; the
by-laws and articles of incorporation; financial statements; the shareholding structure; a description
of the transaction; a description of the principal goods or services produced or provided; data related
to the market share; and addresses of the plants or facilities involved.
The Commission may request additional information within 20 days after receipt of the
initial notification, to which the interested parties must respond within 15 days. The Commission has
45 calendar days to respond from the date of notification or from the date of receipt of the additional
information. In exceptionally complex cases the President of the Commission may extend the period
for the Commission’s response up to an additional 60 days. If it fails to render a decision within the
statutory time period, it is deemed to have consented to the transaction.
If the merger is determined to be anticompetitive and the parties close the merger before it is
approved, the Commission can order divestiture, with the associated costs and uncertainty born by
the parties involved.
If the concentration is significant, the Commission studies whether the party or parties, by
virtue of the proposed transaction, acquire "substantial power" in their relevant market, or whether
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the parties already have "substantial power." The Commission takes into consideration the existence
and power of present and potential competitors, and the recent conduct of the parties participating in
the merger, among other elements legally required.
Concentrations may not be challenged once a transaction has been approved, except on the
grounds that the parties provided false information to the Commission, or after one year in cases of
concentrations that did not require notifications.
No other agency from the Executive Branch of the government participates in the
Commission's decision-making process. Parties may appeal to the Commission for reversal of
rulings unfavorable to them. If the appeal is rejected and the decision involves fines, the parties may
later file an administrative adversary proceeding in Federal Tax Court. If the decision affects their
constitutional rights, they may file suit in District Court.
.D.
CONSUMER PROTECTION
The Consumer Protection Law is very strict and protective of consumers in their commercial
relationships with suppliers. A supplier is defined by the law as any person who temporarily or
permanently offers, distributes, sells, leases or grants the use or benefit of goods, products or
services. According to this definition, the supplier may be the manufacturer of products, a
distributor, or even a sales person.
Suppliers of goods and services must respect their prices, guarantees, terms and conditions
of the corresponding operations. They must also respect prices and tariffs agreed to with the
Ministry of Commerce (See No. 2. below), and must not use misleading or erroneous publicity.
Consumers may present a claim either to the manufacturer or the seller of a product if, for
example, the product does not correspond to the terms offered; its net content or amount delivered is
less than what is indicated on the package or container; or if once repaired, the product is not
adequate for its normal use or destiny, within the period of the guarantee.
In such case consumers are entitled to receive a substitute product, a discount or refund of
the amount paid, at their option, to be paid by the supplier or distributor. In turn, the seller or
distributor, sanctioned, may obtain reimbursement from the person who sold the product or from the
manufacturer, who must pay the cost of repair or of substitution, except if the cause of the claim is
attributable to the consumer or the supplier.
When a supplier hampers or damages the rights of a consumer under the Law, the latter may
bring an administrative action before the Consumer Protection Agency acting as conciliator and
arbiter, or may initiate an action directly in Mexican courts; in the former case, the time bar for
bringing to court a civil action will be suspended. The consumer may file an administrative
complaint within six months following the supplier's noncompliance. If the Consumer Protection
Agency can not lead the parties to an agreement, arbitration by the Agency may be requested either
in amicable composition or in lawful judgement. The Agency can also order sanctions, close the
supplier's establishment and impose fines up to the equivalent of 2,500 times the minimum daily
wage in effect in the Federal District (currently at $37.90, therefore the fine might amount to
$94,750 pesos or approximately US$9,973 at $9.50/US dollar). In case of reoccurrence the fine can
amount to twice this amount, and arrest may be ordered.
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Suppliers who render maintenance or repair services must indemnify the consumer if the
product is lost or damaged in such a way that it is no longer useful for its intended purpose due to
deficiency in the service.
If a product or service may be considered dangerous for the consumer or the environment, or
when its danger can be predetermined, the supplier must include instructions describing
characteristics, potential effects and recommended use of the product or service. The supplier will be
liable for damages arising from failure to comply with this disposition.
A supplier who uses warning labels restricting or limiting the use of the product or the
service must clearly state the limitations or restrictions truthfully and without ambiguities. Advisory
labels regarding "warranties" may only be used if they describe their coverage and the procedure to
be effective.
Guarantees must be in writing, must specify their duration, conditions and mechanisms to
make them effective and must be delivered to the consumer upon receipt of the goods or service.
Guarantees may not be inferior to those required by law, and may not include conditions or
limitations reducing the legal rights of the consumer. The consumer may demand compliance by the
manufacturer or by the importer of the goods or the service provider, as well as by the distributor,
unless one of them or a third party has assumed this obligation in writing.
Suppliers are responsible for the substitution of spare parts and for repairs during the term of
the guarantee. The Ministry of Commerce may require certain products be covered with a guarantee
of longer duration with respect to the supply of spare parts, taking into account the life of the
product.
The Consumer Protection Law contains a specific chapter regulating adhesion contracts
(drafted by one party which may not be negotiated by the other party). Said agreements must be in
Spanish. The Ministry of Commerce may determine, through compulsory official standards, that
certain agreements of this type must be registered with the Agency when they contain
disproportionate or abusive obligations for consumers. Failure to register a contract when a standard
requires its registration will entail an economic fine to the responsible party.
Finally, it should be mentioned that the Agency is in charge of vigilance and oversight of the
compliance with the law. Consequently, it is authorized to inspect or visit suppliers' facilities, either
on its own or pursuant to a consumer's request.
.1.
Product liability.
Mexican law does not contain specific provisions governing product liability.
Notwithstanding the protection granted under the Consumer Protection Law (See paragraph D
immediately above), the local Civil Codes provide general rules applicable to damages, either to
persons or their property, which encompass those caused by products. For example, the Civil Code
of the Federal District states: a) that those persons who, acting illegally or against good customs,
cause damage, must indemnify unless it is proven that the damage was caused as a consequence of
fault or negligence of the injured party; and b) that if a person uses apparatus, instruments,
mechanisms or dangerous substances (explosive or flammable, for example) he has to repair the
damage caused unless it is proven that the damage was caused as a consequence of fault or
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negligence of the injured party.
The damage must be repaired either by reestablishing the prior situation or by indemnifying.
Note that Mexican law does not include some of the damage concepts developed in Anglo-Saxon
common law, and therefore damage awards are generally low by comparison.
.2.
Price Controls.
Consistent with Mexico's deregulation policy, only a limited number of products and
services are subject to price controls. Products of general consumption indispensable for nutrition,
like bread, corn, tortillas, sugar and milk, which were formerly subject to price controls, have been
recently deregulated.
Some public services and goods provided by the Mexican government, either directly or
through concessions, are still subject to official tariffs and prices. Electricity, gas, water, oil and
gasoline are subject to price controls. Public transportation services, such as buses, the metro,
collective transportation and taxi cabs, are also controlled by the government.
The Ministry of Commerce may enter into agreements with private entities, such as
Chambers of Industry and Commerce and companies to limit increases in prices for the benefit of
consumers. These agreements only bind the parties and are not mandatory for those companies or
members of the chamber who are not signatories to the agreements.
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XV. THE TAX SYSTEM
XV.
THE TAX SYSTEM
.A.
GENERAL COMMENTS
The Mexican Constitution contains provisions that govern the separation of powers to tax
among the Federal government, the states and municipalities, specifically enumerating the taxing
powers of the Federation and in general terms those of the states and municipalities.
In line with such separation, the Federal government establishes the income and value-added
tax as well as all taxes related to international commerce. Moreover, the Constitution reserves to the
states the right to tax real property for the benefit of municipalities. As such, the principal state taxes
are the Real Estate Acquisition Tax and the Real Estate Property Tax and in most of the states there
is a payroll tax.
Any tax, either federal, state or municipal, must respect constitutional principles related to
proportionality and equity. In addition, tax laws must establish with clarity the elements of the tax,
such as the subject, object, taxable base, and the respective rate or tariff.
.B.
ADMINISTRATION
As of July 1, 1997, a new decentralized agency (Servicio de Administración Tributaria SAT) took over the responsibilities of assessing and collecting federal taxes and customs duties,
while the respective Departments of Finance of each state or municipality administer state and local
taxes.
The Federal government, the states and Mexico City have entered into agreements providing
for tax coordination and administrative cooperation, and, as a result, the states are now legally
empowered to collect and audit the correct payment of federal taxes.
.C.
INCOME TAX
.1.
Residency.
The federal income tax, regulated by the Income Tax Law (the "Law"), is the most important
tax in Mexico as it still produces the highest portion of the total tax collected. The Law establishes
two criteria crucial to the imposition of the tax: residency and source of income. The Law integrates
these two criteria into three separate chapters fundamental to the taxation of individuals and
corporations:
a)
Mexican residents are taxed on all income, from whatever source.
b)
Foreign residents, with a permanent establishment or fixed base in Mexico, are taxed
on the income attributable to such permanent establishment or fixed base. (See
discussion of permanent establishment and fixed base in Subsection D. of this
Section, hereinafter.)
c)
Foreign residents with no permanent establishment or fixed base are taxed on
income attributable to Mexican sources; and foreign residents, although having a
permanent establishment or fixed base and taxed as per paragraph b) above, are also
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XV. THE TAX SYSTEM
taxed on income attributable to Mexican sources not attributable to such permanent
establishment or fixed base. (See discussion of Mexican source income in Subsection
C.6. hereinafter.)
For tax purposes the Law defines "resident" as follows:
a)
Individuals are considered to be residents of Mexico when establishing their
dwelling place therein, except if they are in another country for more than 183 days
during the calendar year, consecutive or non-consecutive, and demonstrate acquiring
residence for tax purposes in that country.
b)
Companies are considered to be residents of Mexico when the place of incorporation
of the company is in Mexico or when they have in Mexico their main management
or business decisions center.
.2.
Mexican residents.
The Law establishes specific provisions to tax companies resident in Mexico, including rules
for taxation of permanent establishments; and also specific provisions to tax individuals and fixed
bases.
.3.
Foreign residents.
The Tax Law contains a specific section addressing the tax treatment of both foreign
individuals and companies and establishes specific instances in which income shall be considered to
be from a Mexican source, providing the applicable withholding rate depending on the type of
income.
.4.
Resident Mexican Companies.
.a)
Object of taxation.
Mexican resident companies are subject to tax on all income received in cash, in kind, in
services, in credit or in any other form obtained during the fiscal year. Mexican resident companies
are subject also to tax on income originating from permanent establishments abroad. Moreover,
inflationary gain is also considered income.
.b)
Inflationary gains.
The tax laws of countries with high inflation rates commonly contain provisions requiring
that inflationary gain to be included within the concept of taxable income. Mexico's tax laws have
required that inflationary gain be included in taxable income since 1987.
The Tax Law defines inflationary gain as income received by virtue of a real "decrease" in
indebtedness. In the calculation of inflationary gains, which must be done on a monthly basis, the
taxpayer must employ the National Consumer Price Index. This index measures price increases, i.e.,
inflation, on a monthly basis and is published once a month in the Official Daily Gazette.
.c)
Taxable base.
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XV. THE TAX SYSTEM
The amount subject to tax, the "taxable result," is determined by subtracting the legallyauthorized deductions and losses carried over from prior fiscal years, from income for the given
fiscal year. Authorized deductions and loss carry over, respectively, are more fully discussed in
paragraphs f) and l) below.
.d)
Fiscal year.
The federal income tax must be calculated and paid each fiscal year. However, taxpayers
must still make provisional monthly or quarterly payments. The fiscal year of companies must
coincide with the calendar year. When a company begins operations after January 1st, the fiscal year
is considered to be irregular, as the period will not include an entire year, and such period is
considered to begin running on the date in which operations are commenced and ends December
31st of the same year.
.e)
Rate of tax.
The Law provides for a flat tax rate of 35 percent on all taxable income of Mexican
corporations.
A 30 percent tax rate will be applied if profits are reinvested and the tax difference will be
deferred until the date on which the profits are distributed.
The Law provides that certain Mexican companies will pay a reduced rate of tax if engaged
in activities in specific sectors. There is a 50 percent reduction of the tax if the taxpayer exclusively
engages in farming, ranching, fishing or forestry activities; the tax will be reduced by 25 percent if
these taxpayers also commercialize their products, or carry out such commercial or industrial
activities from which they obtain as a maximum 50 percent of their gross income. There is also a 50
percent tax reduction if the company carries out editing activities.
.f)
Authorized deductions.
In general, the Law allows the deduction of all expenses and investments that are
indispensable for the development of the business activity of the taxpayer for a given fiscal period.
Deductions include the purchase of inventory.
.g)
Requirements for deductibility.
The Law is very formal and thus all requirements established for deductions must be
precisely observed. If the rules provided are not observed, the deduction will not be permitted for
the related expense.
Some of the more prominent legal requirements for deductibility are the following:
i)
the taxpayer must possess documentation satisfying the respective tax requirements
and such documentation must be included as part of the accounting records of the
corporation;
ii)
the taxpayer must withhold the proper amount of tax if withholding is required; and
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iii)
the payment of the deductible expenses must be made with a nominative check or a
bank transfer.
.h)
Deductibility of interest.
The Law contains specific provisions related to the calculation of deductions for interest
payments and the accumulation of interest profits to be taxed.
The concept of exchange gain or loss is included within the definition of interest.
The calculations of deductions or accumulation of interest are made monthly. In light of
these provisions, there is no relevance given to the date on which interest payments are due and/or
payable.
The mechanism for the calculation of interest consists of three fundamental elements:
i)
interest receivable: considered to be ordinary income of the taxpayer;
ii)
interest payable: considered to be the interest owed by the taxpayer; and
iii)
the inflationary component: serves to measure the effect of the inflation rate to
eliminate from both interest receivable and payable the distortions caused by
inflation in order to calculate the "real" interest which may be either deducted by the
debtor or accumulated by the creditor.
In general terms, in order to calculate the inflationary component, the total of all credits and
debts of the taxpayer during the month in question must be considered, averages obtained, and then
multiplied by a monthly adjustment factor, based on the National Consumer Price Index. After the
appropriate calculations have been made the taxpayer shall accrue any inflationary gains or deduct
any inflationary loss.
.i)
Deductibility of investments.
The concept of investments includes fixed assets, deferred payments and charges and
payments realized during the start-up period. These investments may be deducted by applying in
each fiscal year the maximum percentage authorized by law, which varies depending on the type of
investment.
For example, the maximum percentage authorized for automobiles is 25 percent per year, for
furniture and office equipment the maximum is 10 percent, for pollution control equipment the
maximum is 100 percent, for buildings the maximum is 5 percent and for computer equipment the
maximum is 30 percent.
The respective annual depreciation percentage must be applied to the "original investment
amount" determined by adding costs, such as importation, transportation, and insurance costs,
including commission fees, to the original cost of the asset as well as taxes, except the value-added
tax. The taxpayer may decide to begin taking deductions in the year the asset is placed into use or in
the following year.
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To reflect the effect of inflation on investments, the Law permits the taxpayer to adjust the
amount of the annual deduction utilizing the inflationary index. The annual adjustment to the
deduction is considered to be the inflation that has existed from the month in which the asset was
purchased until the last month of the first half of the fiscal period in which the asset has been
utilized.
.j)
Non-deductible items.
Certain other items are not permitted as a deduction. Payments to employee profit sharing
are not deductible, although a part of it may be deductible if certain specific requirements are met.
Expenses related to non-deductible investments, entertainment expenses, fines,
indemnification for injuries, gifts that are not made to governmental or charitable organizations and
premiums that the taxpayer pays in excess of the nominal value for the redemption of stock are not
deductible. Goodwill may not be deducted or amortized.
The income tax, the asset tax and taxes paid on behalf of third parties are not deductible.
Payment of value-added tax and the payment of the special tax on production and services paid by
or charged to the taxpayer, are not deductible. These taxes are deductible, however, if the taxpayer is
not entitled to a tax credit or refund and the expense incurred to carry out the transaction is
deductible.
.k)
Fiscal losses.
A fiscal loss results when the allowable deductions for a given fiscal period exceed gross
income. This fiscal loss may be used to offset income in the next ten fiscal periods.
The taxpayer may adjust losses pending amortization to reflect the effects of inflation based
on the inflationary index for the period covering the first month of the second half of the fiscal
period during which the fiscal loss occurred until the last month of the same period. The fiscal loss
may also be adjusted from the month of the last adjustment, until the last month of the first half of
the fiscal period in which it will be offset based on the inflation during the given year.
.l)
Dividends.
The Law establishes that companies distributing dividends or profits must calculate and pay
a tax of 35 percent on the result derived from multiplying said dividends by a factor of 1.5385. The
corporate tax on dividends is the responsibility of the distributing company, but foreign resident
companies and individuals as well as individuals resident in Mexico are subject to a withholding tax
on dividends paid by corporations resident in Mexico. The tax rate is 5 percent on the result derived
from multiplying the dividend by the factor of 1.5385.
However, not all dividend payments trigger a corporate tax. Any distribution made from the
net tax profit account is exempt from the above-stated tax liability unless such distribution is made
from the net tax reinvested profit account, in which case the deferred corporate tax must be paid
applying the 5 percent on the distributed profit. (See paragraph e) above.)
The Law provides that these accounts may be adjusted annually to reflect the rate of
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inflation based on the National Consumer Price Index. The net profit account is increased by the net
taxable profit of each period plus the dividends received from other Mexican resident companies and
decreased by the amount of dividend distributions. The net tax reinvested account is increased by
reinvested profits and decreased by the payment of same as a dividend.
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m)
Payment of tax.
There is no obligation to make provisional payments in the initial year of operations. In the
beginning of the second fiscal year taxpayers must make provisional payments either monthly or
quarterly. Taxpayers who in the prior year have accrued income of less than approximately
$11,945,348.00 pesos at January 1st, 2000, (approximately equivalent to US$1,257,405.00 at
$9.5/dollar) are required to make quarterly provisional payments while those who obtain an accrued
income in the prior year greater than said amount are required to make monthly provisional
payments. The above amount is adjusted quarterly as per the National Consumer Price Index.
Annual tax returns must be paid during the three-month period immediately following the
end of the tax year. Taxpayers must also annually file in February an informational return detailing
activities carried out with the 50 largest clients and suppliers, and for transactions with clients and
suppliers that exceed $50,000.00 pesos (equivalent to US$5,102.00 at $9.5/dollar).
In February of each year taxpayers must file information on investments made in tax-haven
countries. If this information is not filed by May of each year at the latest, the omission is
considered a criminal offense and the penalty ranges from three months to three years imprisonment.
The list of countries considered as tax havens is published in the Law.
.n)
Information on loans from foreign residents.
Taxpayers who receive loans granted from foreign residents or guaranteed by foreign
residents, must file in February of each year to the tax authority, information setting forth the
balance that will be outstanding as of December 31st of the prior year. The information must also
include the type of financing, the identity of the actual beneficiary of the interest and the currency in
which the loan payments are denominated, the applicable interest rate, and the due dates for
payments of principal and interest.
.o)
Liquidation, merger and split-off.
For tax consequences of liquidation, see Section XX.A.3; for tax consequences of merger,
see Section XX.B.1; for tax consequences of split-off, see Section XX.C.1.
.p)
Investments in low-tax jurisdictions.
The list of low-tax jurisdictions under the Law includes more than 90 low-tax offshore
jurisdictions.
Investments by Mexican taxpayers in these jurisdictions are those made directly or indirectly
in branches, legal entities, real estate, shares, bank or investment accounts, and any form of
participation in trusts, partnerships, investment funds, as well as any similar legal structure created
or constituted pursuant to foreign law located in said jurisdictions, including those made through
third parties.
An investment is deemed to be located in a tax-haven when any of the following
assumptions occur in such jurisdiction:
i)
There is a physical presence of the investment;
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ii)
There are accounts or investments in banking institutions;
iii)
There is a domicile or post office box;
iv)
There is an actual or main address;
v)
It is the place where the company was organized; and
vi)
If a legal entity is created or constituted pursuant to foreign law of such countries
and related to the investment in accordance with the laws of said jurisdiction.
Amounts received from an investment located in a tax haven are deemed to be income,
profits or dividends, unless proved otherwise.
Taxpayers shall keep an account of the income, dividends and profits originating from
investments in a low-tax jurisdiction.
Income derived from tax havens shall be deemed to be received at the time it is accrued. The
income may not be commingled with other income; the profit will be taxed separately and such tax
is paid annually. The applicable rate is 35 percent.
Companies who have a direct investment in a low-tax jurisdiction in which they do not have
actual or administrative control may pay the tax when they receive the income, dividends or profits
and not when they are generated. Except when proved otherwise, it is assumed that taxpayers have
such control.
Companies whose accounting records for investments are available to the tax authorities and
who file their tax return in February of each year may take the deductions to which their investments
are entitled. They also may subtract losses from the preceding five fiscal years from the profits, but
only starting with losses generated after January 1, 1997.
The following will not be deemed as investments in tax havens:
1.
Those considered as entrepreneurial activities, provided that at least 50 percent of the
total assets of the investments consist of fixed assets, land and inventories and that
income from the lease of assets, dividends, interest, royalties or profits from the
disposition of real and personal property does not exceed 20 percent of the total
income obtained.
2.
Indirect investments made in a tax haven through any legal structure created or
constituted pursuant to foreign law in any country whose laws require that income be
reported on an accrual basis and the taxpayer demonstrates that he has filed such
report.
3.
Those who have a per diem indirect participation that prevents the taxpayer, whether
directly or through a third party, from having the control or administration of the
investment to the extent that he can not decide on the timing of the distribution of
yields, profits or dividends. It is assumed, except when proved otherwise, that the
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taxpayer has the administration or control of the investment.
4.
Companies incorporated pursuant to Mexican law, even when they are located in a
tax haven.
.q)
Tax Consolidation System.
Mexican law allows payment of taxes under a consolidated regime. Controlling companies
are those that have a direct or indirect participation of more than 50 percent in the capital of other
companies. Indirect holding shall be understood to be that held by the controlling company through
another company or companies that in turn are controlled by the same holding company.
In order to limit the effects of consolidation in cases of controlling companies engaged in
activities other than those related to the holding of shares, two categories of holding companies
exist: "pure" and "impure." "Pure" controlling companies are those in which at least 80 percent of
their income is derived from operations carried out with their controlled companies, and also from
the sale of shares, interest and profits from derivative financial transactions of capital obtained from
persons unrelated to the consolidated group. The dividends received by the controlling companies
are considered income.
The provisions for computing the consolidated tax return establish that the participation to
be consolidated shall be the direct or indirect participation that the controlling company has in the
shares of the controlled companies at the close of the fiscal year, multiplied by a factor of 0.60.
Thus, the participation to be consolidated by both "pure" and "impure" holding companies in their
holdings in the controlled companies shall be 60 percent.
Besides, in connection with their own results, the "pure" holding company will consolidate
100 percent and the "impure" 60 percent.
.r)
Transfer Pricing.
Tax authorities have the power to impose transfer pricing rules on parties the Law defines as
"related." Parties are considered to be related in the following two general cases: if one party
participates, either directly or indirectly, in the management or administration of another party or if
the former holds capital stock in or controls in any way the latter, and if one party or a group of
parties participates, either directly or indirectly, in the management, administration or capital of the
other parties.
There is a rebuttable presumption that operations carried out between Mexican residents and
companies or other entities that are residents of or located in low-tax jurisdictions are operations
carried out between related parties and that the agreed upon consideration is an amount not in line
with the consideration that would have been agreed upon by independent parties.
Companies must make information available to the tax authorities when requested regarding
the transactions carried out in the previous year with related parties resident abroad, and they have to
file in February of each year a report on the transactions carried out in the previous year with related
parties resident abroad. Companies carrying out operations with related parties must determine their
accrued income and authorized deductions utilizing amounts that would have been agreed upon by
independent parties for similar transactions.
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The Law establishes that operations or parties are comparable if no circumstances exist that
would significantly affect the price, amount of consideration or profit margin referred to in the
methods established in the Law. If the application of these provisions suggests that a difference
exists between the actual amount in question and the amount the Law determines as the equivalent
of that which would have been agreed upon in an arm's-length transaction, operations or parties may
be considered comparable if the difference is eliminated after a reasonable adjustment of the related
amounts.
The following transaction-specific categories and their respective elements are taken into
account to calculate the difference referred to in the prior paragraph.

Financing.- Principal amount, term, guaranties, solvency of debtor and interest rate.

Services.- Nature of the service and the experience and "know how" required to
perform the service.

Use, enjoyment or sale of tangible property.- Physical characteristics, quality and
availability of property.

Use or transfer of intangible property.- Length and type of protection granted and
classification of property, i.e. patents, trademarks, commercial names or transfer of
technology.
The following elements will also be taken into consideration in all cases:

Operations or activities, assets utilized and risks assumed by each party.

Contractual terms.

Economic conditions.

Business strategies, including those related to market penetration and preservation
and those related to increasing market share.
Transfer prices may be determined using any one of the following six methods:

Comparable uncontrolled price method.

Resale price method.

Cost-plus method.

Profit split method.

Residual profit-slip method.

Transactional profit-margin method.
For effects of the transfer pricing provisions, revenue, costs, gross income, net sales,
expenses, operating income, assets and liabilities shall be determined based on generally accepted
accounting principles.
Moreover, after the application of the above-mentioned methods, a range of compensation
levels or profit margins may be established when two or more comparable operations exist. The
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ranges shall be adjusted by applying statistical methodology. If the compensation level or profit
margin falls within said ranges, the operation in question shall be considered to be between two
independent parties. If the compensation level or profit margin falls outside the correct range, the
median of the range shall be considered to be the compensation that would have been agreed upon
by independent parties.
The Ministry of the Treasury and Public Finance shall resolve consultations as requested to
determine the acceptable level of compensation of operations between related parties. (Advanced
Price Agreements.) These resolutions may also result from an agreement with authorities of another
country that has entered into a tax treaty with Mexico.
Resolution of consultations requested by taxpayers under the Law may be applicable for the
fiscal year in which the consultation is requested, for one year before and for up to three years
following the year of application, but if they result from a treaty as mentioned above, they may be
extended for a longer period.
If competent authorities of another country with which Mexico has entered into a tax treaty
adjust the compensation of a resident of that country and if Mexican authorities accept such
adjustment, related parties that are resident in Mexico may file an amended income tax return to
reflect such adjustment.
Tax authorities may consider interest payments to be a dividend if they are paid from one
related party to another and if they represent payments for interest that exceeds the market rate.
Interest payments related to back to back loans among related parties also may be considered
dividends.
.5.
Taxation of individuals resident in Mexico.
Individuals resident in Mexico must pay a tax based on the income obtained during the given
calendar year regardless of the location of the source from which the taxpayer obtained the income.
The Income Tax Law contains ten chapters that provide rules for authorized deductions in a
given income category, as well as rules requiring provisional payments in some instances. The
principal chapters cover salaries, fees, leases, transfer of property, entrepreneurial activities, interest
and dividends. Individual taxpayers that receive income from fees, leases, transfers of property or
entrepreneurial activities must make provisional payments.
The individual taxpayer's annual return must be filed between the months of February and
April of the year following the year in which the income was obtained. The individual tax rate for
individuals resident in Mexico is progressive and runs anywhere from 3 percent to 40 percent.
.6.
Taxation of foreign companies and individuals.
Non-resident companies or individuals, without a permanent establishment or fixed base in
Mexico, are liable for tax on any income that falls within the definition of Mexican-source income.
The term is defined broadly and the specific activities included within the definition will be
discussed below.
The tax liability of the foreign resident is generally satisfied through a withholding by the
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Mexican party making the payment to the foreign resident who will be liable for the tax if not
withheld.
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The withholding must be made on the date of payment or on the date the debt becomes
payable on demand, even if payment to the foreign resident is not made. The withholding and
payment of the tax is considered to be a conclusive payment.
.a)
Salaries and fees.
When a service is provided in Mexico, the source of income is considered to be Mexico. In
the case of salaries, the first $115,661.00 pesos (approximately US$12,174.00 at $9.5/dollar) of
salary earned in a given calendar year shall be exempt from tax. A withholding tax of 15 percent is
made on the earnings from $115,661.00 pesos to $931,710.00 (approximately US$98,074.00) to the
1st of January, 2000, and a 30 percent withholding is made on earnings above this amount. The
above-mentioned amounts are adjusted quarterly as per the National Consumer Price Index.
The tax rate for payment of fees for independent services is 21 percent.
.b)
Leasing of real estate, property and time-sharing services.
The source of income is considered to be Mexico when the real estate or chattel is located
within Mexico or when capital goods are used therein. The income derived from the use of these
assets is subject to a 21 percent withholding tax and no deductions are permitted. The maker of the
payments is responsible for withholding the tax.
The withholding rate for income obtained from time-sharing services is 21 percent and 40
percent if the recipient is resident of a tax haven country.
In some cases the foreign resident of a country with a tax treaty with Mexico has the option
to pay a 40 percent rate on the net income.
.c)
Sale of real estate.
The proceeds from the sale of real estate in Mexico is considered to be Mexican-source
income. There are two methods by which to pay the tax on the transaction. The first is through a
withholding by the purchaser of an amount equal to 20 percent of the amount obtained without
deductions. In the second scenario, the foreign seller must appoint a representative resident in
Mexico, who shall notify the person authenticating the public instrument (notary, judge, broker) of
any deductions to which the taxpayer is entitled. The person authenticating the public instrument
will file the tax return within 15 days following the date of signature of the instrument and in such
case a 40 percent tax rate will be applicable to the profit.
.d)
Sale of shares.
The proceeds from the sale of shares are considered to be Mexican-source income when the
company issuing the shares is resident in Mexico or when more than 50 percent of the accounting
value of the shares transferred represents real estate located in Mexico.
The proceeds from the sale will be taxed at 20 percent unless the foreign resident appoints a
representative in Mexico as mentioned above. In this case, the tax is 40 percent of the net profit on
the transaction. Residents in tax haven countries or countries with a territorial system of taxation do
not have this latter option.
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Residents of a country that has signed a tax treaty with Mexico could have a better treatment
under the terms of the treaty.
.e)
Dividends.
The distribution of a dividend of a company resident in Mexico is considered to be Mexicansource income. The tax rate is 5 percent on the amount resulting from multiplying the dividend by a
factor of 1.5385.
Residents of a country that has signed a tax treaty with Mexico usually benefit from a
reduced withholding rate.
.f)
Interest.
When capital is invested or placed in Mexico, or when interest is paid by a Mexican resident
or a non-resident with a permanent establishment or fixed base in Mexico, the interest income
derived therefrom is considered to be Mexican-source income. Depending on the liability underlying
the credit and the specific characteristics of both the creditor and debtor, one of four withholding
rates will be applied to such interest income:
i)
A 15 percent withholding tax is applied to interest payments made to, among others,
foreign banks upon compliance with disclosure requirements imposed by tax
authorities.
ii)
A 21 percent withholding tax is applied to interest payments made by Mexican credit
institutions to creditors different from those contemplated in (i) above, or when the
credit is used to pay foreign suppliers for the sale of equipment or machinery and in
general for credits used to purchase inventory or for marketing, provided that the tax
authorities are provided the required financial information.
iii)
A 15 percent withholding tax is applied to interest payments made to reinsurance
companies.
iv)
A 4.9 percent withholding is applied to interest payments made to foreign financial
entities in the capital of which the Mexican government has an interest.
v)
A 40 percent withholding rate is applied to interests deriving from credits used for
other purposes.
Reduced tax rates could be applicable to residents of countries that have a tax treaty with
Mexico.
Interest paid in the cases mentioned in i) and ii) above up to June 30, 2000 will be subject to
a 4.9 percent and 10 percent withholding, respectively.
In addition, interest payments for credits granted to the Mexican government, or credits
granted for terms greater than three years guaranteed by financial institutions located abroad
dedicated to the promotion of exports when such institutions are registered with the Ministry of
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Finance, or credits issued by foreign financial institutions in favor of institutions authorized to
receive deductible donations, are exempt from income tax. Income from interest, capital gains and
proceeds from rents of real estate are exempt when received by foreign pensions and retirement
funds from investments in Mexico, complying with some requirements.
.g)
Financial leases.
When the property leased under a financial lease is located in Mexico, the proceeds are
considered to be Mexican source income. The withholding rate is 15 percent of the amount
considered to be interest payments.
.h)
Royalty payments.
The definition of royalty includes payments for the use or exploitation of intangible goods as
well as the payments for information relative to industrial, commercial or scientific know-how, and
in general, for payments made for technical assistance or transfers of technology. The source of
income is considered to be in Mexico when the property or rights for which royalty payments are
made are utilized in Mexico, or when the payments are made by a resident in Mexico or by a nonresident with a permanent establishment or fixed base in Mexico.
Two withholding rates exist and are applied depending on the concept for which the
payment is made. When the payment derives from the right to use patents, invention certificates,
trademarks, trade names, commercial names or advertising, the applicable withholding rate is 40
percent. When the royalty payments are made for the use of commercial or scientific information,
technical assistance or the transfer of technology and, in general, for the use and exploitation of
works protected by copyright or other intangible goods, the applicable withholding rate is 15
percent.
Payment of royalties to residents in tax haven countries are taxed at a rate of 40 percent in
all cases.
Residents of a country that has signed a tax treaty with Mexico usually benefit from a
reduced withholding rate.
.i)
Construction services.
When the services of construction, maintenance, installation, inspection or related
supervisory services are provided inside Mexico, the source of income is considered to be Mexico.
The withholding rate will be 30 percent on the total revenues obtained without the benefit of
deductions. There is an option, however, if a representative is appointed in Mexico to pay 40 percent
on the net profit derived from the transaction instead of 30 percent on the total revenues. The tax is
payable in the month following that of conclusion of the work.
If the services last more than 183 days in a twelve month period, a permanent establishment
will be deemed to exist.
.j)
Payment of commissions.
Payment of commissions to foreign residents is exempt but if paid to residents in tax haven
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countries, a 40 percent withholding tax applies.
.D.
PERMANENT ESTABLISHMENT AND FIXED BASE.
Non-residents with a permanent establishment or fixed base in Mexico are taxed on income
attributable to such permanent establishment or fixed base. Non-residents without a permanent
establishment or fixed base in Mexico are taxed on Mexican-source income only.
.1.
Definition of permanent establishment.
For income tax purposes the term "permanent establishment" means any place in which
business activities are wholly or partially carried on. The term incorporates branches, agencies,
offices, factories, workshops, installations, mines, quarries and any other place of exploration for or
extraction of natural resources. The federal tax law stipulates that the following activities do not
constitute a permanent establishment:
a)
the use of maintenance or facilities solely for the purpose of storage or display of
goods or merchandise belonging to the non-resident;
b)
the maintenance of a stock of goods or merchandise belonging to the non-resident
solely for the purpose of storage or display, or for processing by another person;
c)
the maintenance of a place of business solely for the purpose of acquiring goods or
merchandise, or for collecting information for a non-resident;
d)
the use of a place of business by a non-resident solely for the purpose of carrying on
any activity of a preparatory or auxiliary character, such as advertising, supply of
information, scientific research, preparation for loan placements and similar
activities; and
e)
the deposit of goods or merchandise of a non-resident in a bonded warehouse, or the
delivery of such goods or merchandise for import into Mexico.
.2.
Agency relationship.
The activities of an individual or legal entity acting on behalf of a non-resident in Mexico
may be considered a permanent establishment or fixed base with respect to all the activities
performed on behalf of the non-resident. In the following situations an agency relationship will lead
to tax liability as a permanent establishment or fixed base:
a)
if the agent has and exercises authority to conclude contracts in the name of the nonresident to carry out business activities in Mexico or to render independent personal
services;
b)
if the agent has a stock of goods or merchandise out of which he makes deliveries on
behalf of the non-resident;
c)
if the agent incurs risk on behalf of the non-resident;
d)
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resident;
e)
if the agent engages in activities that economically correspond to the non-resident
and not as a person acting independently; and
f)
if the agent receives a fixed remuneration which is not dependent on the results of
his activities.
g)
if the agent conducts activities for the non-resident by setting prices or amounts of
compensation other than those that would have been used by unrelated parties in
comparable transactions.
.3.
Definition of fixed base
A fixed base in Mexico through which a non-resident individual, association or company
renders independent personal services is treated as a permanent establishment. Fixed base is defined
as any place in which independent personal services are rendered or where an independent
profession is exercised.
.4.
Tax rules.
.a)
General requirements.
Permanent establishments and fixed bases must keep records separate from their head office,
and their net profits must be determined on the basis of the accounting records of such offices.
Business companies not resident in Mexico that have one or more permanent establishments
in Mexico must, in calculating taxable profits, compute all receipts attributable to those
establishments and claim deductions attributable thereto, including those incurred abroad.
Likewise, non-resident entities with one or more fixed bases in Mexico may take the
deductions corresponding to the activities of such bases, whether incurred in Mexico or abroad, even
if they are allocated on a proportional basis between the Mexican base and the head office or
establishments located abroad provided certain requirements are fulfilled.
.b)
Remittances to head office.
Remittances by a permanent establishment located in Mexico to the head office or other
establishments located abroad are not allowed as deductions even if they represent royalties, fees or
similar payment for patents or rights, commissions or interest.
.c)
Computation of taxable income.
The cost of goods purchased by permanent establishments in Mexico is deductible under the
general rules previously discussed for resident entities. The cost of goods received from the head
office or from another foreign establishment of the taxpayer may not be greater than the value
declared for customs purposes.
The profits of permanent establishments of foreign entities are subject to corporate income
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tax in a similar manner as local corporations. Permanent establishments of foreign entities must keep
a special account known as a capital remittances account. Distributable profits of each tax period
and remittances received from the head office or other establishment abroad are added to this
account. Conversely, cash payments and other remittances made to the head office or other
establishments reduce this account.
All profits remitted to the head office or other establishments located abroad, including those
arising from termination of activities, are exempt from income tax when remitted out of the capital
remittances account. They are, however, subject to a withholding tax of 5 percent on the amount
resulting from multiplying the profit by a factor of 1.5385.
Interest paid by a resident company or permanent establishment of non-residents located in
Mexico, to a resident or non-resident company, may be treated as a dividend in certain instances.
.E.
OTHER TAXES ON CAPITAL AND TRANSACTIONS
.1.
Asset Tax.
A tax on assets must be paid in addition to income tax. Corporate and individual income tax
actually paid on business income during the same period may be credited against this tax.
This tax must be paid by resident legal entities, resident individuals engaging in business
activity, non-residents with a permanent establishment with respect to assets attributable to the
establishment, non-residents maintaining stock that has been transformed or will be transformed by
a taxpayer, and entities and individuals granting the use or temporary enjoyment of assets used in
activities by the aforementioned taxpayers but only with respect to such assets. (See maquiladoras,
Section X.D.)
The taxable base is the annual average of assets less the annual average of eligible liabilities
with resident enterprises. A set of rules exists to determine net worth for the purposes of this tax.
The tax is not levied during the year in which activities are started (independent of the year
in which the company was incorporated), and the following three years of operations, or during
liquidation. Since the fiscal year must coincide with the calendar year, the first year may be a partial
year. This exemption does not apply to companies that have as main purpose the leasing of assets
and to those that have simply changed their corporate structure, for example, a company that is the
result of a merger. (See Sections XII. and XX.B.) The tax is levied at a rate of 1.8 percent.
Taxpayers are required to make advance payments on the same dates on which advance payments of
income tax are due.
.2.
Value-Added Tax.
Mexico has a value-added tax (VAT) which is levied on the transfer of goods, rendering of
independent services, granting of temporary right to use goods, and import of goods and services.
Exports and some other specified items are subject to the zero-rate, such as basic foodstuffs (meat,
milk, corn, wheat), medicine and agricultural services related to the production of basic foodstuffs.
The general VAT rate is 15 percent, except in the border area where the general rate is 10 percent.
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XV. THE TAX SYSTEM
.a)
Transfers.
A wide variety of transfers in Mexico are defined as transfers of goods and thus are subject
to VAT. Any transfer of property leads to VAT liability, including sales where the seller holds title
from the outset, as in installment contracts.
A transfer is considered to be carried out in Mexico under the following circumstances:
i)
if the transferor physically delivers the goods in Mexico;
ii)
if the goods are located in Mexico when shipped to the buyer.
iii)
if the property in question should be registered in Mexico, regardless of the physical
location of the property, provided the transferor is a resident of Mexico or a
permanent establishment or fixed base of a non-resident; and
iv)
with respect to intangible property, if both the transferor and the recipient are
residents of Mexico.
Several transfers are exempt from the VAT. Transfers of land and houses or any property
destined for residential use (condominiums) for dwelling are exempt, as are gifts in certain
instances. Transfers in trust with the right of reversion also are exempt from the VAT. Perhaps most
importantly, transactions involving foreign currency, stocks and bonds may also be exempt.
.b)
Temporary use.
The temporary use of goods also is included and generally incorporates the leasing of
machinery or other intangible property for consideration.
.c)
Imports.
A wide variety of imports is subject to VAT. Any use of intangible property granted or
transferred to a Mexican resident by a non-resident also is subject to VAT, as well as services
rendered by non-residents that benefit companies or enterprises inside Mexico.
Services provided with respect to international transportation, imports in several instances,
temporary imports, goods in transit or transshipment are not subject to VAT. Imported goods and
services are exempt if such are exempt from VAT inside Mexico or subject to the zero rate.
.d)
Services.
Numerous services are covered under the Law. Any act carried out to discharge an
obligation is taxed regardless of the underlying obligation. Specific services are also covered, such
as transportation of goods and individuals, insurance and reinsurance, guarantees, mediation,
agency, representation, brokerage, technical assistance and transfer of technology.
A service is considered to be provided in Mexico if a resident of Mexico wholly or partially
provides the service.
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XV. THE TAX SYSTEM
A special case exists for international transportation. If the trip begins in Mexico, the service
is considered to be provided in Mexico regardless of the nationality of the operator. For air
transportation, including transportation to border areas, only 25 percent of the service is considered
provided in Mexico.
Numerous services are exempt, such as services provided by employees, interest in certain
instances, i.e. interest on the financing of transactions not subject to VAT or those subject to the
zero rate and interest received for financing secured by mortgage.
.e)
Exports.
Most exports are subject to the zero rate. Any enterprise resident in Mexico qualifies for the
exemption. The definition of export is complex and includes the following transactions:
i)
any export of a good which is considered as definitive under the customs law;
ii)
any transfer of intangible property from a resident to a non-resident;
iii)
any granting by residents of Mexico to non-residents of the right to use intangible
property abroad;
iv)
the providing of technical assistance, technical services, or intellectual interchange to
non residents by residents of Mexico;
v)
the transportation of goods exported abroad by residents of Mexico;
vi)
the providing of maquila services for export;
vii)
the providing of services to non-residents related to publicity, commissions and
brokerage, insurance, reinsurance, guarantees and other financial transfers by a
resident of Mexico; and
viii)
transfer of goods between enterprises under a PITEX program or exclusively
engaged in the export of goods as well as to in-bond assembly enterprises in
compliance with rules established by the Ministry of Finance.
ix)
the providing of independent personal services to non-residents.
.f)
Computation of tax and miscellaneous.
The computation of VAT is based on the value of the goods or services. Provisional
payments must be made on the same dates as provisional payments for income tax purposes. The
amount of the provisional payment will be the difference between the tax which corresponds to the
total of activities carried on in the period for which payment is made and the amounts for which
accreditation is due.
Creditable tax is understood to be an amount equivalent to VAT which has been transferred
to the taxpayer, plus the VAT that he has paid for the importation of goods or services in the
corresponding period. If the creditable tax is greater than the VAT due for the period, resulting from
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XV. THE TAX SYSTEM
the taxpayer's income from transfers, services or use, the difference will be considered a tax credit.
The taxpayer may apply this credit to VAT due in subsequent provisional payments or may apply
for a refund.
The only instance in which a creditable tax may be transferred is through merger.
Taxpayers who have the legal obligation to pay the VAT to the tax authorities are required
to specifically and separately shift VAT to persons in receipt of the goods, enjoying the use of or
right to use the goods, or receiving services subject to VAT, indicating such tax on the invoice.
Nevertheless, VAT must be included in the quoted price of goods and services purchased by the
final consumer.
When tangible goods are imported they are subject to customs duties and VAT. Both must
be paid before customs clearance is granted. If a sale is made on credit to consumers with terms
exceeding twelve months, and more than half the price is paid after six months, regulations allow for
the deferment of VAT payments.
.F.
MEXICO'S TAX TREATIES
Mexico has treaties in effect to avoid double taxation and prevent tax evasion with Belgium,
Canada, Chile, Denmark, Finland, France, Germany, Great Britain, Ireland, Italy, Japan, Korea,
Norway, Singapore, Spain, Sweden, Switzerland, the Netherlands and the United States.
Tax treaties, among other things, reduce withholding taxes on dividends, interest, royalties
and capital gains.
The Mexican government has also concluded tax treaty negotiations with Ecuador, India,
Israel, Poland and Venezuela.
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XVI. LABOR
.XVI. LABOR
The labor force in Mexico is generally young (one half of the population is under 20) and
readily available for unskilled and semi-skilled work throughout the country. Skilled and managerial
level employees, many of whom are bilingual, are also available in the large metropolitan centers.
The Federal Labor Law of 1970 governs all aspects of the employer-employee relationship,
including collective bargaining, the right to strike, minimum wage rates, work hours, compensation,
and occupational health and safety. The Law establishes employee rights that go well beyond the
guarantees provided in many industrialized countries. For example, employees are entitled to
mandatory profit sharing, may only be dismissed for a limited number of justifiable causes and
enjoy the right to severance pay and seniority pay upon unjustified dismissal.
As of January 2000, business organizations and labor unions were negotiating legislative
proposals to raise worker productivity without curtailing traditional principals of worker protection.
State labor boards may enforce the Federal Labor Law within their jurisdiction, except for
specific cases in which the federal government maintains exclusive enforcement jurisdiction.
Any person rendering services to another individual or entity is considered an employee if
that person works under the supervision of, or is subordinate to, the contracting individual or entity.
Care must be exercised in drafting service agreements in which the intent is not to form an
employment relationship.
In the acquisition of an on-going business, the purchaser becomes a substitute employer for
the seller, and acquires all the seller's labor obligations. The purchaser and seller remain jointly
liable for labor obligations for six months after acknowledgment by employees of the notice of the
transfer.
.A.
UNIONS
The Law provides that groups of 20 or more employees, irrespective of whether or not they
are employees of the same company, may form a labor union. If a company has fewer than 20
employees, its employees may affiliate with another union and request the company enter into
collective bargaining. More than half the nonagricultural labor force is unionized. Labor unions are
particularly strong in the oil, petrochemical, mining, education, banking, transportation,
entertainment, textile, restaurant, electric energy, soft drink, automobile and communications
industries. The largest and most influential labor union in Mexico is the Confederation of Mexican
Workers (CTM).
The main unions frequently support the ruling party, the PRI. Many of their members form
part of the government as municipal authorities, state governors, representatives and senators.
Strikes are recognized and protected by law as a tool available to workers for obtaining
improved benefits and working conditions. Although legally the labor authorities may only resolve
the legality of a strike once started, as a matter of practice, they may intervene in labor disputes in
order to avoid work stoppages.
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XVI. LABOR
.B.
FOREIGN EMPLOYEES
Pursuant to the law at least 90 percent of a company's employees must be Mexican nationals,
except for directors, administrators and other managerial-level employees. In practice, this rule is
not significant since foreign nationals require proper immigration documentation in order to be
employed, and such immigration authorizations are normally restricted to upper level positions. (See
section XVII.)
Foreign personnel are subject to the same legal requirements as Mexican employees and are
treated equally, both in benefits and sanctions.
.C.
GENERAL LABOR REGULATIONS
.1.
Individual employment contracts.
It is mandatory for employers to execute individual employment agreements in writing. The
law protects employees' job stability; hence their contracts are usually entered into for an indefinite
term.
Nevertheless, hiring for a definite term for a specific project is permitted provided that the
nature of the job is truly temporary.
.2.
Wages.
The government is not empowered to mandate salary increases, with the exception of the
minimum wage. The National Minimum Wage Commission periodically sets the minimum wage
rate by geographical area. At present, the daily minimum wage in Mexico City is $37.90 pesos,
equivalent to approximately US$4.00. The Commission also sets specific ranges of minimum wage
rates for a number of occupations.
.3.
Working hours.
Under the Federal Labor Law, the maximum work week is determined depending on the
work shift.
There are three types of work shifts:
a)
Day shift.- From 06:00 A.M. to 08:00 P.M., with a maximum of forty-eight hours
per week.
b)
Night shift.- From 08:00 P.M. to 06:00 A.M., with a maximum of forty-two hours
per week.
c)
Composite shift.- Includes hours of the day and night shifts. The night shift hours
may not exceed 3 hours. If there are more night hours, it then becomes a night
shift. The maximum number of hours permitted per week is forty-five.
Workers are entitled to at least one thirty-minute break. Overtime is permitted by the law.
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XVI. LABOR
.4.
Rate of overtime.
Workers are entitled to double pay for the first nine hours of overtime worked in a given
week; overtime exceeding this limit must be paid at three times the rate paid during normal work
hours.
If workers render their services on their day of rest, they are entitled to double pay plus their
salary corresponding to that rest day.
If workers render their normal services on Sunday they are entitled to a 25 percent premium
for that day's work.
.5.
Rest days.
Workers shall enjoy one fully paid day of rest for each six days of work. Saturday working
hours may be spread on the other weekly working days.
Compulsory holidays are observed on January 1st, February 5, March 21, May 1st,
September 16, November 20, December 1st every six years, December 25 and the day fixed by the
Elections Law to exercise the right to vote.
.6.
Safety and health care.
The law places special importance on safety and health care in the workplace. A number of
administrative regulations exists in this regard which employers must comply with and which are
amended from time to time.
.7.
Job-related risks.
All job-related risks, defined as those risks to which an employee is exposed as a result of,
or while performing, his particular occupation or job, are the responsibility of the employer. In
localities where the Social Security System operates, employees must be insured against these types
of risks (See subsection 10 below). In localities where the Social Security System does not yet
operate (which are increasingly fewer), employers are required to pay directly to employees and
their beneficiaries the indemnities provided in the law.
.8.
Termination of employment contracts.
An employer may justifiably dismiss an employee without liability only if the employee
commits any of the acts listed in the law, such as dishonesty, mistreatment of employer,
insubordination, disobedience, disclosure of trade secrets or having more than three unjustified
absences within a 30-day period.
The employer dismissing an employee with cause is bound by law to deliver him a notice in
writing stating both the grounds for dismissal and the date of termination.
Should the employee refuse to receive the written notice of dismissal, the employer must,
within five days of such refusal, notify the Labor Board and request the Board to serve notice of the
dismissal to the employee at his registered home address.
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XVI. LABOR
In cases of unjustified dismissal employees are entitled to demand either reinstatement or
payment of an indemnity equal to three months' salary plus 20 days' salary per year of service,
seniority premium, back pay and the outstanding balance of any earned and unpaid benefits.
Moreover if the employer fails to prove in court that there was sufficient cause for dismissal and that
employer complied with the notice requirements for dismissal, the employer will be required by law
to pay to the employee back wages from the time of dismissal to the date of the judgment, including
any salary increase that the employee might have been entitled to (for example, under a labor
contract, etc.).
In the case of employees with less than one year's seniority; confidential employees, house
servants, temporary employees as defined in the law and employees having direct and permanent
contact with the employer, the law grants the employer the privilege of refusing to reinstate the
employee and paying him instead an indemnity equal to twenty days' salary per year of services, in
addition to the three months' salary severance indemnity. This option, however, is available only
with the approval of the Labor Board.
Although the indemnity of twenty days' salary per year of service technically applies only in
the foregoing cases, in general practice such payment is incorporated into the proposed severance
package to make it attractive to the employee and thus prevent his suing for reinstatement. However,
if the employee rejects said payment and demands to be reinstated, and does not fall under any of
the five above-mentioned employee categories, he is entitled to be reinstated regardless of the
amount of money offered to him by the employer.
Under the law the basis for calculation of the indemnity payments is the "integrated salary,"
so called because it results from adding the base salary to the proportional part of other benefits,
such as bonuses, commissions, Christmas bonus and vacation premium.
In addition to the indemnity payments employees must also be paid any earned and unpaid
benefits they may be entitled to, such as salaries, vacation days, vacation premium and Christmas
bonus. Among the benefits requiring indemnity payment also is a seniority premium consisting of
twelve days' salary per year of service calculated on a basis limited to twice the general minimum
salary in force in the location of the employment.
An employee may claim termination of his employment contract if the employer commits
any of the acts listed in the law, such as insults, salary reductions or unilateral modification of
existing conditions of employment. If the employee proves in court that the employer committed
any of these acts, the employee will be entitled to payment of three months' salary plus 20 days'
salary per year of service, seniority premium, back pay and the outstanding balance of any earned
and unpaid benefits.
Employees may voluntarily resign their job at any time without any liability on their part and
without any obligation to advise employer in advance.
An employee voluntarily terminating his employment is entitled only to payment of the
outstanding balance of any earned and unpaid benefits. Exclusively in the case of employment for
more than 15 years, the employee will be entitled to the payment of a seniority premium, which, as
previously discussed, is equal to 12 days' salary per year of service calculated on a salary basis
limited to twice the amount of the current minimum salary.
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XVI. LABOR
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XVI. LABOR
.9.
Benefits.
Fringe benefits are high relative to total payroll costs. Employee benefits are compulsory
under the Labor Law. The most significant fringe benefits are the following:
.a)
Paid vacations.
After one year of employment, an employee is entitled to a paid vacation of six working
days, increasing by two days for each of the next three years of service. Thereafter, the vacation
period increases by two days for every additional five years of service.
Years of Service
1
2
3
4
5 to 9
etc.
No. of vacation days
6
8
10
12
14
Workers are entitled to a vacation premium in addition to their vacation days' salaries in an
amount equal to 25 percent of their daily wages.
.b)
Christmas bonus.
Employees are entitled to an annual bonus of not less than 15 days' salary payable on or
before December 20.
.c)
Housing fund.
Employers must contribute 5 percent of payroll to the National Workers' Housing Fund
Institute. At this time, the base salary for contributions has a cap of 17 times the minimum daily
wage in Mexico City. This cap will rise annually until it reaches 25 times the minimum daily wage
in 2007. The housing contribution and the social security payments into pension and retirement
funds are part of the Retirement Savings Plan. (See section 10 below). Employees may use the funds
to purchase, repair, or remodel their homes based on a preference policy followed by the Institute.
The net fund balance, if any, will be paid to the employee in the case of total disability, retirement or
death.
.d)
Profit sharing.
Profit sharing is compulsory for all businesses, regardless of size or organizational structure
(i.e. whether organized as a partnership, corporation or sole proprietorship). Employees are entitled
to receive an amount equal to the percentage determined by the National Commission on ProfitSharing. This percentage currently amounts to 10 percent of the taxable income as calculated for
income tax purposes under the terms of the Income Tax Law.
In businesses whose income is derived exclusively from personal services, the amount of
profit share is capped at one month's salary.
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XVI. LABOR
The mandatory profit sharing does not apply in the following cases:
i)
newly established entities, during the first year of operation;
ii)
newly established entities engaged in manufacturing a new product, during the first
two years in operation;
iii)
entities engaged in mining, during the exploration period;
iv)
public and private welfare institutions; and
v)
businesses whose capital and/or gross income do not meet certain minimums
established by the Ministry of Labor.
Distribution of profit-sharing must be made no later than May 30 of the following year.
The officer with the highest level of authority is not entitled to participate in the compulsory
profit-sharing program for workers. Employees holding confidential positions will have a share in
the company's profits; however, if their salary is higher than that of the highest paid unionized
worker (or in the absence of a union, the non-confidential worker), such salary plus 20 percent will
be considered as the maximum salary for profit sharing. The distribution is made on the basis of
salary earned and days worked during the fiscal year.
Temporary workers are entitled to their share of the profits, provided they have worked at
least 60 days during the year.
.10.
Social Security.
All employers must register themselves and their employees with the government Social
Security agency known as IMSS (its acronym in Spanish). Social Security dues are paid by both the
employer and the employee (via withholding) every month, taking as a basis the daily salary
received by the employees. This contribution basis generally is capped at 25 times the minimum
wage. Social Security benefits cover job-related risks; general illnesses and maternity; disability and
life; retirement, old age and unemployment at an advanced age; children's nurseries and social
benefits.
IMSS maintains medical clinics and hospital facilities throughout Mexico and provides
services free of charge to eligible employees and their families. IMSS subsidizes 100 percent of an
employee's salary in the event of temporary disability due to job-related accident or illness, and 60
percent of the salary in case of general accidents or illnesses. Employees may receive a pension in
the event of permanent disability, and heirs may also receive a pension in the event of the death of
the employee.
An employee may obtain pension benefits upon retirement at age 60. There is no legal
mandatory retirement age.
The new law that took effect on July 1, 1997 introduced important modifications to the
Social Security system, the most relevant of which involves replacement of the administrative
system for employee retirement funds that had been controlled by the IMSS since its
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commencement in 1943. As of July 1997 such funds are administered by private, specialized
financial entities known as AFORES, their acronym in Spanish.
To this effect a complex network of organizations, rules and related procedures has been
created to extend the Retirement Savings System known in the country as SAR. The main emphasis
of this system is in the individualization of retirement accounts for workers. The funds in the
individual accounts are invested by specialized subsidiary companies of the AFORES.
Because Social Security contributions are of a tax nature, the law uses concepts from the
Federal Tax Code to regulate sanctions.
Employer penalties for noncompliance with contribution payment requirements, along with
updating and delayed payment surcharges, include fines from 70 percent to 100 percent of the
omitted payments.
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XVII. IMMIGRATION
.XVII. IMMIGRATION
The General Law of Population (the Law) establishes both the rights and obligations of
foreigners and the various degrees of immigration status permitting foreigners to enter Mexico for
the purposes described therein, such as to carry out business and remunerative activities. Such
status, rights and obligations are specified in individual authorizations granted by the Ministry of the
Interior.
The Law establishes the following three general groupings: non-immigrant, immigrant, and
permanent resident.
.A.
NON-IMMIGRANT
Foreigners may enter the country temporarily within the following categories:
1.
Tourists: foreigners entering the country for entertainment, health, artistic, cultural or
sporting activities, without receiving remuneration, who will be granted a permit for
a non-renewable period of up to six months.
2.
Travelers in transit: foreigners entering the country in transit to another country who
will be granted a permit for a non-renewable period of up to thirty days.
3.
Visitors: this is the most common category for foreigners entering the country for
business meetings, market studies, to carry out any technical or management
activities for Mexican companies, or to attend corporate shareholders or board of
directors meetings, among others. Such visitors will be granted a permit for up to
one year, renewable four times, for a total potential time period of five years. The
permit shall specify the place and activities to be carried out by the foreigner. When
a remunerated activity is performed for a Mexican entity, the Mexican entity will be
jointly responsible for any sanctions imposed for violations of the terms of the
permit.
This category includes investors and businessmen, scientists or technicians,
professional, confidential employees and retirees as defined in the Regulations to the
Law. Certain requirements have to be complied with. For example, businessmen are
required to deliver documentation evidencing the activities to be performed and their
economic solvency. In other cases, they must substantiate their technical or
professional capabilities.
4.
Religious Ministers or Members of Religious Associations: to perform the religious
duties inherent to any religion and to carry out social services. They must register
with the Ministry of the Interior and prove their qualifications as minister or member
of the religious association under the terms of the Religious Associations Law.
5.
Political asylum: at the discretion of the Ministry of the Interior this authorization is
granted to foreigners to protect their lives or liberty from political persecution. Such
grantees will be allowed to remain in the country for the duration of the threat of
persecution.
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XVII. IMMIGRATION
6.
Refugees: A refugee is a foreigner who is granted entry into the country to protect
his life, security or liberty when they have been threatened by general violence,
foreign aggression, internal conflicts or a massive violation of human rights.
Refugees will be allowed to remain in the country while such conditions continue to
exist.
7.
Students: foreigners entering the country to study in official or private educational
institutions. To obtain authorization, students must prove economic solvency and
adequate accreditation. They will be granted a permit for up to one year renewable
for as long as they remain students in Mexico.
8.
Distinguished visitors: prominent individuals at the discretion of the Ministry, who
will be granted entry for up to six months.
9.
Local visitors: foreigners visiting maritime ports and border cities will be granted
permits for a period not to exceed three days.
10.
Provisional visitors: foreigners landing in international airports without the required
immigration documentation who may be allowed up to thirty days to obtain such
proper documentation; such foreigners must make a deposit or obtain a bond to
guarantee their return to their country of origin.
11.
Correspondents: foreigners engaged in the activity of journalism, either to report a
special event or to temporarily carry out journalistic activities. They will be granted
up to a one-year stay, with extensions as long are they continue performing their
journalistic activities.
In 1990, the Interior Ministry, in collaboration with the Ministry of Foreign Relations, issued
Joint Instructions authorizing the Mexican Foreign Service (embassies and consulates) to issue nonimmigrant immigration permits without prior authorization from the Interior Ministry for citizens of
most countries in the following cases: tourists, travelers in transit, visitors (including
businesspeople, technicians, retirees and members of boards of directors).
Foreigners entering the country with immigrant or non-immigrant status, in the latter case as
religious ministers or members of religious associations, refugees, students, political asylum
grantees, scientific visitors, technicians and confidential employees, are required to register at the
Domestic Foreigners Registry within 30 days of the date of entry. Also, notice of any change in their
immigration status or characteristics (such as a change of address) shall be given to the Registry
within 30 days of such change. Fines are levied for late notifications.
All visitors entering Mexico as non-immigrants under the following visa categories: tourist,
business visitor (FMN), board members and traveler in transit will be subject to a $170.00 pesos
immigration documentation fees (about US$17.00.)
If the visitors enter Mexico under the above mentioned categories, they will be issued the
application form (FMT, FM6, FMN or FMVC) through the Mexican Consulates, airlines, travel
agency and immigration personnel at the ports of entry, according to the activities they will be
conducting while visiting Mexico.
The payment of the immigration documentation fees may be made at any bank branch with
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XVII. IMMIGRATION
form SHCP-5. Sometimes the airlines will absorb the cost of the visa fee and will issue the visa
application at the time the airline ticket is purchased.
.B.
IMMIGRANT
Immigrants are foreigners authorized to enter the country with the purpose of establishing
permanent residency. Immigrants will be allowed to remain in the country upon satisfying various
requisites and will be granted an immigrant ("inmigrante") permit for up to one year annually
renewable for up to five years, provided they comply with the proper requisites established by the
Ministry of the Interior. Upon completion of the five-year period, the foreigner will be granted
permanent resident ("inmigrado") status. Immigrants staying out of the country more than 18 months
in a continuous or non-continuous manner during the five year annually renewable period will not
be granted the permanent resident status until a new five-year period has elapsed thereafter. When
such absences total more than 2 years, foreigners will lose their immigrant status.
Immigrant categories include the following:
1.
Retirees: foreigners over 50 years of age engaging in non-remunerative activities but
receiving from abroad funds such as interest or any other fixed income coming from
abroad, provided they can prove the receipt of a monthly income equivalent to 400
times the daily minimum wage in force in the Federal District (approximately
US$1,600.00) and an additional monthly income of 200 times the daily minimum
wage (approximately US$800.00) per family dependent who accompanies them.
There are restrictions regarding residence in certain cities of Mexico in which there
are already a high number of foreign residents.
2.
Investors: foreigners entering the country to invest their capital in industry,
commerce or services. The minimum investment shall be the equivalent of 40,000
times the daily minimum wage in force for the Federal District (approximately
US$160,000.00).
3.
Professionals: foreigners entering the country to exercise a profession. Educational
requirements must have been fulfilled and must be revalidated by the Mexican
authorities to exercise the corresponding profession.
4.
Scientists: foreigners who enter Mexico to perform scientific, training or educational
activities. The Ministry of the Interior may require that foreigners entering Mexico
under this category be invited by an institution active in the area of specialization of
the foreigner, and that the foreigner work in the institution to instruct Mexicans
through conferences, courses, lectures or other methods.
5.
Confidential employees: foreigners entering the country to perform activities as sole
administrators or any other managerial positions at the discretion of the Ministry of
the Interior, in a business established in Mexico.
6.
Technicians: foreigners entering Mexico to render technical assistance and services
for resident companies. The Ministry of the Interior may require that foreigners
entering Mexico under this category be invited to conduct instructive conferences,
courses or lectures, just as in the case of scientists described in section 4 above.
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XVII. IMMIGRATION
7.
Relatives: dependent spouses or blood relatives provided they are minors, full-time
students in Mexico, or handicapped children, of an immigrant or permanent resident.
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XVII. IMMIGRATION
Family members of permanent residents may obtain authorization from the Interior
Ministry to engage in other activities.
Children and siblings of immigrants, permanent residents or Mexican citizens may
only be admitted into Mexico under this category if they are minors, unless they are
students or can demonstrate an incapacity to work.
If the marriage ends or the foreigner does not comply with the obligations imposed
by civil law, such as alimony, the foreigner may lose this immigration status unless
the foreigner already has permanent resident status. Immigration authorities, at their
discretion, may confirm the foreigner's current residency status or authorize a change
of immigration classification.
8.
Artists and sportsmen: at the Ministry's discretion.
9.
Assimilated: foreigners assimilated to the Mexican milieu, having a Mexican spouse
or child, and not included in any of the above categories.
.C.
PERMANENT RESIDENT
Immigrants residing in the country for five years may acquire permanent resident status
("inmigrado") if they have complied with the respective legal immigration provisions. Permanent
resident status must be requested within six months following expiration of the fourth renewal of
their immigrant status.
Under the permanent residency classification (inmigrado), the foreigner's periods of
permitted absences from Mexico become more liberal, and the foreigner may leave and enter the
country freely. If, however, the permanent resident foreigner remains outside Mexico for more than
three consecutive years or for more than five years in a 10-year period, the foreigner will lose
permanent residency status. The 10-year periods are computed from the date the foreigner becomes
a permanent resident.
D.
GENERAL COMMENTS
Foreigners entering the country as non-immigrants may import a vehicle during the term of
their status complying with certain requisites, such as periodic renewals and posting bonds.
Immigrants may not import a vehicle, except for immigrants in the retiree ("rentista") classification.
Non-immigrants and immigrants may import household belongings with certain restrictions. Among
the various requirements that may apply to obtain immigrant status are possession of a valid
passport, demonstration of economic solvency, and presentation of a certificate from the police
authorities in the last place of residency indicating there have been no criminal violations, payment
of fees and a personal appearance before the granting authority.
The Labor Law may be applicable to foreigners entering under the various categories
referred to above (generally see Section XVI., and for Tax Law applicability, see Section XV.C.5
and 6.)
E.
TEMPORARY ENTRY OF VISITORS AND MEMBERS OF A BOARD THROUGH THE "FMVC"
The FMVC immigration form went into effect on August 15, 1995, in order to facilitate
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XVII. IMMIGRATION
foreigners entering Mexico as Visitors or as Members of a Board covered by categories listed
below, and has been replaced by a combined form that also includes tourists and travelers in transit.
The combined form is available at the consular offices of Mexico, airlines, travel agencies
and immigration staff at the ports and the points of entry to the country and are valid for a maximum
period of time of thirty (30) days, in any of the following modalities:
1.
Business Visitor: foreigner who intends to realize any business activity related with
trading or signing of commercial agreements, or the search for alternatives to invest
in the country.
2.
Members of Board: foreigners entering the country to attend meetings or board of
directors meetings of enterprises which is legally established in Mexico.
3.
Technicians: foreigners entering the country to render specialized services,
previously stipulated, on the transfer of technology, patents and trademarks, transfer
of machinery and equipment, technical qualifying of staff agreements; or any other
similar activity related to the production process of any enterprise which is legally
established in the country.
4.
Transfer of Staff: those parties who are employed by an enterprise and who
discharge management or executive duties or who which assist with specialized
knowledge in said enterprise or in one of its subsidiaries or affiliates which are
legally established in Mexico.
Citizens from the following countries are eligible applicants under the above categories:
Argentina
Australia
Austria
Belgium
Bermuda
Brazil
Czech Republic
Chile
Denmark
Finland
France
Germany
Greece
Holland
Hungary
Iceland
Ireland
Israel
Italy
Japan
Liechtenstein
Luxembourg
Monaco
New Zealand
Norway
Poland
Portugal
San Marino
Singapore
Slovak Republic
Slovenia
South Africa
South Korea
Spain
Sweden
Switzerland
United Kingdom
Uruguay
In the cases of Brazil and South Africa no consular visas suppression agreements exist with
Mexico. Therefore, it would be necessary for applicants from those countries have a Mexican
Consular visa stamped in their passports in order to request the FMVC immigration form.
The combined form must be completed by the interested party, who must be prepared to
demonstrate the following at the Mexican point of entry or at a Mexican consular office abroad:
a)
Proof of citizenship.
b)
Mexican immigration policy grants this status to residents of the United States and
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XVII. IMMIGRATION
Canada; U.S. and Canadian citizens are covered under NAFTA categories. (See G.
below.)
c)
Letter issued by the interested enterprise, association, Mexican or foreign chamber,
binational, foreign or Mexican councils that are accredited in the country, which
should describe the applicant's proposed activities and qualifications, express the
necessity of the applicant's presence in Mexico to carry out the activity, and evidence
economic payment sufficient to cover his stay in the country.
d)
In the event of "transfer of staff," the foreigner must present a letter in Spanish issued
by the enterprise, its subsidiary or affiliate stating that the applicant is an employee,
and that the corresponding payment of salary for the activities and services of the
foreigner will be paid by the enterprise.
A foreigner entering the country as "technician," "business visitor," or "transfer of staff,"
who desires to extend his stay in the country for a term exceeding thirty (30) days; must appear at
the nearest office of the National Immigration Institute to apply for an FM3 as a Non-immigrant
visitor with authorization to perform said activities in the country, for a period not to exceed a year.
.F.
NATURALIZATION
The granting of nationality status to foreigners is exercised in a very selective manner. The
requirements include five years residency with immigrant status, which could be reduced to two
years under certain circumstances. The granting of nationality is exercised in a discretional manner
and often depends on economic, business and social considerations.
Persons with relationships defined in the law to Mexican nationals could be granted
nationality without fulfilling certain requisites such as residency. Along with Mexico's entrance into
various multilateral and regional organizations, considerations are being made regarding
liberalization of policies toward naturalization.
The new Nationality Law became effective on March 20, 1998, and waives the traditional
one nationality principle. It now grants permanent nationality to Mexicans by birth.
Such nationality is granted to Mexican-born individuals under the norm of jus soli (place of
birth regardless of the parents' citizenship) or jus sanguine (if one of the parents is Mexican-born or
naturalized). In both cases, this right may only be transferred to the first generation.
Dual citizenship, accepted as a corollary of permanent citizenship pursuant to the above
reform principal, only benefits Mexican-born citizens. Subsequently, several ancillary laws were
modified in order to avoid dual-citizenship conflicts. For instance, public posts and functions may be
held only by Mexican-born citizens who have not acquired any other nationality, for which reason
such citizens shall comply with the provisions of Constitutional Article 32 by stating the waivers
specified in Articles 15, 16 and 17 of the Nationality Law.
When the Naturalization Law went into effect (as reported in the Official Daily Gazette of
March 20, 1998) the Legal Department of the Foreign Relations Ministry prepared new forms
according to the various assumptions foreseen by said Nationality Law, specifying the requirements
to be fulfilled in each of the cases stated hereunder:
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XVII. IMMIGRATION
1.
Application for Mexican nationality by birth. Form DNN2.
2.
Application for Mexican naturalization through standard procedure. Form DNN3.
Minimum residence: 5 years.
3.
Application for Mexican naturalization by Privilege. Form DNN4. Minimum residence:
2 years; for
a)
Children of a Mexican-born national.
b)
Parent(s) of Mexican-born children.
c)
Native of a Latin American country or Spain or Portugal.
d)
Having rendered distinguished services or made significant cultural, scientific,
technical, artistic, sports, or corporate contributions to Mexico.
4.
Application for Mexican naturalization by marriage. Form DNN5. Minimum residence:
2 years and having lived by mutual consent with the Mexican spouse.
5.
Application for Mexican naturalization through parental rights and duties. Minimum
residence: 1 year for adopted and minor children up to second-degree lineage, subjected
to the Mexican adoptive parents' rights and duties. Should parents not take this step, the
adopted children may take it during the year following their majority (18 years).
Mexican-born individuals, who waived their Mexican nationality and wish to recover it, shall
submit a written request therefor to the Foreign Relations Ministry or to the respective Mexican
embassies or consulates within five years after this Law goes into effect. To this end, they must submit
full evidence of their identity and fill in form DNN2.
In cases of naturalization, the applicant must prove by examination his knowledge of Spanish,
Mexican history and his integration into the Mexican culture.
G.
TEMPORARY ENTRY OF BUSINESS PERSONS UNDER NAFTA
Chapter XVI of NAFTA states the general principles under which a NAFTA Party may
authorize temporary entrance of businesspersons of another NAFTA Party, without the need for an
employment permit.
The term businessperson under NAFTA includes the following categories: business visitor,
traders-investors, intra-company transferees, and professionals.
1.
Business visitors: performing activities related to, among others, research and design;
agriculture; manufacturing and production; marketing; sales; distribution; after-sales
services and general services. (See NAFTA Chapter XVI for detailed description).
2.
Traders-investors:
a)
Traders: of goods or services principally among NAFTA Parties.
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XVII. IMMIGRATION
b)
Investors: establishing, developing, administering or providing advice or key
technical services to the operation of an investment.
3.
Intra-company transferee: businesspersons employed by an enterprise to render services
to that enterprise, or a subsidiary or affiliate thereof, to fulfill management or executive
functions, or functions involving specialized knowledge.
4.
Professionals: businesspersons seeking to perform a business activity professionally in
one of several permitted areas. The exercise of a profession is permitted only after
compliance with the educational revalidation requirements established in Article Five of
the Mexican Constitution and other related regulations, including NAFTA measures.
Businesspersons entering as professionals are expressly prohibited from performing any
activity that involves a professional practice, without previously obtaining a professional
license from the Ministry of Education.
All the above authorizations shall be temporary, and thus visitors shall be classified as nonimmigrants. NAFTA creates the "FMN", a special immigration document, currently included in a
combined immigration form covering tourists, travelers in transit and non-immigrant businesspersons, as
well as the FMVC category mentioned in E. above, issued by the consular offices or at the airlines, to
businesspersons crossing the border to develop a non-Mexican remunerative activity for a maximum of
30 days. Upon expiration, a businessperson shall apply for an FM3 as a non-immigrant businessperson
performing non-profitable activities.
The provisions of NAFTA Chapter XX shall govern dispute resolution when authorization for
temporary entry is denied as a pattern of practice and all other administrative remedies have been
exhausted.
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XVIII. REAL ESTATE
XVIII. REAL ESTATE
Article 27 of the Mexican Constitution discusses the ownership of lands and waters. The
Article grants to the Mexican Nation ownership of the land and water within the national territory,
and provides that the Nation shall have the power to transfer ownership rights to such properties to
private individuals, thereby creating private property.
Section I of Article 27 grants the right to acquire the dominion of land and water only to
Mexican individuals and companies, and grants to the State the discretionary power to grant the
same right to foreigners, subject to the condition that the foreigners agree with the Ministry of
Foreign Affairs to consider themselves Mexican nationals with respect to the property acquired and
not to invoke the protection of their home governments with respect to the same. If said covenant is
breached, all rights to such property shall revert to the Nation. (Often referred to as the "Calvo
Clause".)
Moreover, said Section prohibits foreigners from acquiring direct ownership over land and
water in the "prohibited or restricted zone." (See Section VIII.A.6.)
A.
ACQUISITION OF REAL ESTATE BY FOREIGNERS
As a general rule, a foreign individual or company may directly own land in Mexico.
However, as stated, foreigners (including individuals or companies) may not acquire direct
ownership over land and water located within the restricted zone. Although foreigners may not
acquire direct ownership in the prohibited zone they can acquire other rights over real estate in the
following cases:
1.
A Mexican company with foreign investment up to 100 percent may directly acquire
property within this zone to perform non-residential activities, i.e., industrial,
commercial or tourism activities. The acquisition must be registered with the
Ministry of Foreign Affairs.
2.
If the real estate is for residential purposes, foreign individuals or companies and
Mexican companies with 100 percent foreign capital stock may acquire the rights of
use and benefit from the real estate through a trust executed with a Mexican bank.
The duration of the trust may be 50 years, and the term may be extended upon
request of any person having an interest in the property.
3.
Foreign individual or companies may lease real estate and other properties in Mexico
without limitation.
.B.
AGRICULTURAL, LIVESTOCK AND TIMBERLAND
Foreign and Mexican individuals may acquire land for agrarian, livestock and forestry
purposes subject to the restrictions and requirements mentioned above and the following size
limitations:
1.
Individual agricultural property generally cannot exceed 100 hectares of irrigated
land.
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XVIII. REAL ESTATE
Land used for the production of cotton cannot exceed 150 hectares of irrigated land,
and land used for the production of a very few specialized crops, like coffee,
bananas, cacao and fruit trees may not exceed 300 hectares of irrigated land.
2.
Individual property used to raise livestock cannot exceed an amount of land
necessary to raise a maximum of 500 large farm animals or its equivalent in small
farm animals.
3.
Individual forest property can be any type of timberland, as long as it does not
exceed 800 hectares.
As a general rule a foreign company cannot directly own land in Mexico for agricultural,
livestock or forestry purposes. However, Mexican companies may own agricultural, livestock or
timberland, in tracts not greater than 25 times the factor of individual landholdings regarding each of
the three types of uses mentioned above.
A Mexican company owning land must have a sufficient number of individual shareholders
or partners to justify its total landholdings. For example, if the company owns 2,500 hectares of
irrigated land, and the individual irrigated landholding is limited in size to 100 hectares, the
company must have at least 25 individuals as shareholders or partners.
In addition, the capital stock of the company must include a special series of shares or
partnership interests identified with the letter "T." Series "T" shares or partnership interests are
equivalent in par value to the value of the capital contributed in agriculture, livestock or timberland,
or those funds destined for the acquisition of such land, depending on the value of the land at the
moment of the contribution or acquisition. Foreigners, either companies or individuals, can acquire
no more than 49 percent of series "T" shares or partnership interests; the remaining 51 percent must
be held by Mexicans. In addition, a corporation may issue an unlimited number of ordinary shares
through capital contributions, which may be subscribed 100 percent by foreigners. Series "T" shares
carry the same rights as ordinary corporation stock shares. (See Section XIII.)
Further, no individual, either directly or through a company, may hold more series "T"
shares or partnership interests than those equal to one individual landholding.
Another option to acquire land in Mexico is through a Mexican trust.
C.
FORMALITIES CONCERNING THE TRANSFER OF PROPERTY
There are several verification requirements to be carried out before the sale of the property.
Mexican law also requires that several formalities be satisfied to transfer real property.
.1.
Verification requirements.
Prior to any sale, all individuals or companies, either Mexican or foreign, desiring to
purchase real property should verify the absence of any liens. If the property is mortgaged, the lien
will follow the property and therefore the new owner may have the risk of forfeiting such property
in case of the seller's default on payment obligations.
Also, the prospective buyer should verify that the seller has paid the Real Estate Property
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XVIII. REAL ESTATE
Tax and water contribution fees for the previous five years.
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XVIII. REAL ESTATE
.2.
Legal formalities.
Except for very low cost acquisition, sales of real estate must be executed before a Public
Notary, in a public instrument recorded in the public registry of property in order to produce effects
before third parties.
.3.
Immigration status of the foreigner.
All individual foreigners, with the exception of travelers in transit, independent of their
immigration status, may acquire real estate in Mexico, directly or acting through an attorney-in-fact,
without the need of a permit from the Ministry of the Interior (which was required in the past).
Moreover, they can carry out any other act of dominion over real estate, without need of a permit
from immigration authorities.
.D.
TAXES
Both the seller and purchaser are liable for taxes upon the purchase and sale of real estate
located in Mexico.
.1.
Income tax.
a)
If a foreign individual or company is the seller, the sale of real estate located in
Mexico will be subject to a 20 percent tax on the gross amount of the operation, as a
final payment.
b)
However, foreigners who conclude the sale through a public deed may choose to pay
40 percent tax on the net profit obtained. Net profit is calculated on an adjusted
original cost basis, which includes permitted inflation accounting. The Public Notary
is responsible for calculating the income tax and including it in the public
instrument. The Public Notary must also collect the amount of the tax from the party
and pay the tax to the Ministry of Finance within 15 days following the execution
date of the public instrument.
c)
The Tax Code considers that a transfer of property has occurred when a trust is
created, if the grantor designates or agrees to designate a beneficiary different from
such grantor and does not reserve the right to reacquire the property placed in trust,
or when the beneficiary loses the right to reacquire the property from the trustee, if
such right was reserved.
In addition, when the beneficiary assigns rights granted or gives instructions to the
trustee to transfer the property to a third party, a transfer of property is considered to
take place upon the issuance of said instructions or upon the assignment of rights.
The foreigner will be subject to the payment of income tax in the terms mentioned
above.
d)
If a foreigner is the purchaser, the tax authority may make an appraisal, and, if the
value of the appraisal is greater than the purchase price by more than 10 percent, the
purchaser will be required to pay a 20 percent tax on the difference between the two
amounts. The taxpayer shall pay this tax within 15 days following the notification.
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XVIII. REAL ESTATE
e)
Income generated by foreign lessors of real estate in Mexico is subject to a 21
percent income tax on gross receipts. The lessee shall withhold the tax and pay it to
the tax authorities.
.2.
Real Estate Acquisition Tax.
Individuals or companies purchasing real estate, consisting of land or land and its structures
located in Mexico, as well as the accessions related to them, are subject to the payment of a Real
Estate Acquisition Tax calculated at a variable rate that goes from 2 percent to 3.7 percent and must
be applied to the value of the property, when located in the Federal District, or the applicable rate in
other states.
Purchasers of real property, irrespective of the nature of their operations, must pay this tax.
That is, the tax must be paid whether the acquisition is carried out through, for example, a purchase
and sale agreement, donation, trust, merger of companies, split-off, or payment in kind.
.3.
Value-Added Tax.
VAT shall be paid by the purchaser of structures or constructions at the rate of 15 percent
calculated on the amount of the operation, which usually includes taxes, other fees, interest or any
other expenses.
No VAT is triggered on the sale of land used for any purpose and on constructions used for
residential purposes. In the event that only part of the construction is used for residential purposes,
VAT will not be paid on the residential part.
The Mexican notary issuing the transfer document will require a qualified appraisal for tax
purposes. Usually, he will obtain certificates of no encumbrance at the Public Property Registry and
certificates by tax authorities that real estate taxes are duly paid. The final deed should be registered
at the Public Property Registry for the transfer to be valid against third parties.
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XIX. DISPUTE RESOLUTION
Any controversy, irrespective of its nature, may be brought before Mexican courts. The
parties may also agree to submit their differences to arbitration.
Conciliation is generally required by Mexican law; accordingly, judicial clerks named
"conciliators" suggest to the parties at a special hearing alternative solutions in order to lead them to
an agreement. In certain special procedures conciliation has special priority, such as divorce by
mutual consent where the judge will schedule two hearings to try to reconcile the parties, procedures
before the Consumer Protection Agency and labor matters between workers and employers.
Mexico does not have rules for enforcement of mediation clauses or resolutions issued by
mediators. If the parties agree on a settlement, within the mediation procedure, they can execute a
settlement agreement which will be enforced before Mexican courts.
Pursuant to mercantile rules, when an act has a commercial nature for one of the parties to an
operation, and for the other is of a civil nature, the controversy will be settled in accordance with
mercantile laws.
As noted in Section II.D. there are special courts for certain matters, such as family
controversies, lease contracts and bankruptcies.
.A.
COURT PROCEEDINGS
.1.
Choice of jurisdiction.
The parties to a contract may waive the forum designated by law and choose the courts of
the domicile of any party, or the courts of the place of performance of some of the obligations or
even those of the location of the goods involved in the controversy.
Jurisdiction shall be established in the place of the domicile of the debtor in bankruptcy
proceedings, and, in cases of voluntary jurisdiction, in the place of the debtor.
If the parties to a contract do not expressly choose a forum, as described immediately above,
the Commercial Code provides, irrespective of the basis of the cause of action, that jurisdiction shall
be established pursuant to the following forum selection rules, in order of preference:
a)
the place designated by the debtor to be judicially required for payment;
b)
the place designated in the contract for the performance of obligations.
If the parties have not made the designations in a) or b):
c)
the place of the domicile of the debtor, and, if the debtor has various domiciles, that
which the creditor so chooses;
d)
if there is no fixed domicile, the place in which the contract was executed when the
action is in personam, and, when the action is in rem, the place of the location of the
property; and
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e)
if the subject matter of the in-rem action is located in different domiciles, the
competent court will be that of the place in which the plaintiff initiated the action.
.2.
Choice of law.
Mexican law is very liberal with respect to the choice of the law governing a contract,
enabling the parties to a contract to choose in most instances the substantive law applicable
governing the interpretation and performance of their rights and obligations.
Even though Mexican law does not require that the choice of law have any relationship
whatsoever with the parties or the controversy, it is implied by logical interpretation.
Mexican law will generally be applied to all persons located in the Mexican Republic and to
the acts and matters occurring within its territory or jurisdiction, except in the following instances:
a)
Mexico recognizes legal relationships validly created in the other states of the
Republic or in a foreign country in accordance with their own law;
b)
the status and capacity of individuals is governed by the law of their domicile;
c)
the regime of property rights over real estate and movable property is governed by
the law of the place of their location, including leasing agreements or any other
contract concerning the temporary use of goods;
d)
the form of legal acts is that of the law of the place of execution; and
e)
legal effects of acts and contracts will be governed by the law of the situs of their
performance, except if the parties validly designate the application of another law.
The law of the location of real property and the status and capacity of individuals may not be
waived.
.B.
ARBITRATION
As another step towards modernization, Mexico amended in 1993 the Commerce Code and
the Federal and Local Civil Procedures Codes to establish new arbitration rules similar to the
UNCITRAL rules.
Disputes of a civil nature may be settled by arbitration, pursuant to Mexican law, except
disputes related to alimony, divorces, actions regarding nullity of marriage, actions regarding the
civil status of individuals and others expressly provided by law.
Commercial disputes also may be settled by arbitration pursuant to the rules of the
Commerce Code. Under Mexican law, the parties may decide freely which claims shall be submitted
to arbitration, the arbitration rules to be applied in the proceedings (ICC, Mexico City Chamber of
Commerce, Rules of the AAA), applicable substantive law, language, the place of arbitration,
designation of arbitrators, and provide that the arbitral awards shall be final. Arbitration agreements
must be in writing. They can be executed at any time, even during court proceedings.
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In past years, arbitration was not permitted in contracts with the government. All disputes
had to be submitted to Mexican courts. However, in recent years, arbitration is becoming
increasingly acceptable in most contracts with governmental agencies, including the acceptance of
arbitration by international arbitration organizations and in some cases even the application of
foreign law.
Mexico is a signatory to and has ratified the 1958 New York Convention on the Recognition
and Enforcement of Foreign Arbitral Awards. Also Mexico has signed and ratified the 1975 InterAmerican Convention on International Commercial Arbitration, known as the Panama Convention.
.C.
EXECUTION OF FOREIGN JUDGMENTS AND ARBITRAL AWARDS
It is necessary to determine if the judgment or arbitral award is issued in a country that is a
party to an existing convention with Mexico regarding this matter. If there is no convention, the
execution of the foreign judgment or arbitral award will be governed by the Federal or Local Civil
Procedures Codes.
.1.
Exclusion Jurisdiction.
The following matters are the exclusive jurisdiction of Mexican courts and therefore no
judgments or awards of any other authority will be executed in Mexico:
a)
lands and waters located in Mexican territory, including subsoil, air space, seas;
b)
resources of the exclusive economic zone or related to sovereignty rights of said
zone, according to Mexican law;
c)
acts of authority related to the internal regime of Mexico or to Mexican
governmental entities or its states; and
d)
the internal regime of Mexican embassies and consulates located abroad.
.2.
General Jurisdiction.
Foreign judgments and arbitration awards will be executed in Mexico and their effects will
be governed by the Federal or Local Civil Procedures Codes.
Execution must be requested in the courts of the domicile of the defendant, or the place of
location of its assets in Mexico.
The court will analyze compliance with the following requirements:
a)
formalities regarding letters rogatory,
b)
that the judgment or arbitration award was not issued in a dispute over an in-rem
action,
c)
jurisdiction and competence of the court or arbitrator issuing the resolution,
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d)
notice to the defendant and right to a defense,
e)
"Res judicata" (definitive judgment) in the country where the resolution is issued,
f)
there may not be a pending lawsuit in any Mexican court for the same matter,
g)
that the obligation to be enforced is not contrary to the public order of Mexico.
The execution of the foreign judgment or arbitration award can be denied if in the country of
origin, equivalent judgments and arbitration awards may not be executed.
If a judgment or arbitration award cannot be executed completely, the courts may declare a
partial execution if the interested party requests it.
The judgment approving the recognition or execution of a foreign judgment or foreign
arbitration award may be appealed.
.D.
FOREIGN EXTRATERRITORIAL MEASURES
On March 12, 1996, The U.S. government enacted the Cuban Liberty and Democratic
Solidarity (LIBERTAD) Act, commonly known as Helms Burton Act (The Act). The Act contains
controversial provisions, due to their enforceability outside U.S. Territory, in countries where
companies have a exchange of goods and services with the Cuban government.
The government of Mexico published the "Antidote Law" named the Law for the Protection
of Trading and Investment against foreign legislation which violates International Law (published in
the Official Gazette of October 23, 1996).
The above-mentioned law contains provisions similar to those included in foreign laws such
as the FEMA (Foreign Extraterritorial Measures Act) of Canada and the PTIA (Protection Trading
Interests Act) of Great Britain.
In Mexico's Antidote Law, protection is given to entities or individuals who are liable in the
U.S. according to the Helms Burton Act.
Any sentence or award issued by a foreign court, authority or arbitral panel, containing
resolutions with extraterritorial effects and/or against international principles, shall not be executed
within the Mexican Territory.
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XX. MERGER, TRANSFORMATION AND DISSOLUTION OF BUSINESS ENTITIES
XX.
MERGER,
ENTITIES
TRANSFORMATION
AND
DISSOLUTION
OF
BUSINESS
The Companies Law provides for several cases of dissolution of business entities, including
dissolution and liquidation, merger, transformation and split-off.
Another form of extinction of a business entity is a consequence of bankruptcy proceeding.
.A.
DISSOLUTION AND LIQUIDATION
.1.
Legal causes for dissolution.
The Companies Law contains five causes for dissolution of business entities:
a)
expiration of the term provided for in the company's charter;
b)
impossibility to realize the principal purpose of the company as per corporate
charter, or completion of said purpose;
c)
the agreement of all of the partners or shareholders adopted in accordance with the
company's charter and the law;
d)
reduction of the number of partners or shareholders to less than the minimum
provided for by law or ownership of all partnership interests or shares by one person;
and
e)
loss of two-thirds of the capital stock.
Once the company has evidence of the existence of the causes of dissolution, the
administrators should call for a general shareholders or partners meeting in order that this situation
be noted and the proper measures taken. Although the law seems to call for an automatic dissolution,
in practice there is no such automatic procedure. The partners or shareholders shall adopt a
resolution at a meeting which will be recorded in the Public Registry of Commerce. The legal
personality of the company continues until final liquidation. The auditors of the company will
usually put a note on the balance sheet of the company reporting the cause of dissolution.
If the registration is not made, even though the cause for dissolution exists, any interested
party may appear before the judicial authority in a summary proceeding in order that said authority
orders the registration of the cause for dissolution.
The directors or administrators of the company should not engage in new operations after
the expiration of the term of the company, after the resolution of dissolution, or after having
evidence of the existence of a cause of dissolution. If they breach these prohibitions, they may be
jointly liable for the operations they perform.
.2.
Liquidation.
After the dissolution of the company has been agreed to by the partners or shareholders, the
company shall be liquidated. The liquidation shall be in charge of one or more liquidators who will
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be the legal representatives of the company and will be liable for the acts performed that exceed
their authority. The partners or shareholders, by unanimous vote, should appoint the liquidators
when approving the dissolution. The administrators of the company shall continue to discharge their
duties until the designation of the liquidators is recorded in the Public Registry of Commerce.
Among the duties of the liquidators are the following: to conclude the operations of the
company pending at the time of the dissolution, to collect all amounts due to the company and to
pay its liabilities, and to sell the goods of the company.
The liquidators shall prepare a final balance sheet in which they determine the amount
corresponding to each partner or shareholder of the remaining capital account. The final balance
sheet of liquidation shall be published three times once every ten days in the Official Daily Gazette
of the company's domicile. The shareholders may present their claims to the liquidators within the
following 15 days counted from the date of the publication. After this term is over, the liquidators
will call a general shareholders meeting for final approval of the balance sheet. Once the balance
sheet is approved the liquidators will pay each partner or shareholder the corresponding amounts
against cancellation of their share certificates and will proceed with the cancellation of the
registration of the company at the Public Registry of Commerce once the liquidation is concluded.
Liquidation in kind is possible and may include assets such as patents and trademarks to
which the shareholders may have attached a value.
.3.
Tax consequences.
Within the month following the date of termination of the liquidation, the liquidator shall file
the final tax return of the fiscal year of liquidation. If the total liquidation of the assets cannot be
terminated within the six months following the date in which the company started its liquidation
process, the liquidator shall file tax returns every six months until total liquidation of the assets.
The liquidator must request the cancellation of the registration of the company at the
Taxpayer's Registry. The amounts received by the shareholders as reimbursement of capital will be
tax free, as long as they are paid out of the net taxed profit account.
Liquidators are jointly liable for tax amounts which should have been paid on behalf of the
company during the liquidation process, except if the company filed all notices and information in
accordance with and as provided by law.
.4.
Labor consequences.
The liquidator shall have to pay the workers compensation calculated in the same terms as
for termination of the labor relationship. (See Sections XV. and XVI.)
Provisions of the Labor Law contemplate the right of employers to demand the termination
of the collective labor contract and of work relationships by bringing an action before the competent
board of conciliation and arbitration when there are justified causes, including any clear evidence of
unprofitability in the operation.
The purpose of formally notifying the labor board is to establish a basis for negotiation with
the union or the workers, to pay a reduced compensation to the workers. If the union or workers
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object to said negotiation, they have the right to request payment of the total indemnity calculated on
the basis of their "integrated" salary.
.B.
MERGER AND TRANSFORMATION
The merger of companies should be approved by an extraordinary shareholders meeting of
each company and the resolution of merger should be recorded in the Public Registry of Commerce
and published in the Official Daily Gazette of the domicile of each merging company. Each
company shall publish its last balance sheet and those companies which are merged into the
surviving company should also publish the manner in which their liabilities will be satisfied.
The merger will produce effects three months after the registration of the merger resolution
in the Public Registry of Commerce giving creditors of the merged companies the opportunity to
oppose such merger, in which case, the merger may be suspended upon court resolution recognizing
the opposition.
Upon expiration of the three-month period the merger becomes effective; the surviving
company or the newly-created company shall acquire all rights and obligations of the merged
companies.
However, the merger may produce effects upon the registration at the Public Registry of
Commerce if: 1. the surviving company agrees to pay all liabilities of the merged companies, or 2.
the amounts owed are deposited in a bank, or 3. the creditors have granted their consent to the
merger.
A business entity may change its legal form to another type of company by following the
same procedure as herein mentioned, i.e., a S.R.L. or S.C. to S.A. (See Section XIII.)
.1.
Tax consequences.
The merger of companies shall produce the following tax effects:
a)
The surviving company shall present a notice of merger to the tax authorities within
the month following the date of the merger.
b)
It is necessary to present notices of cancellation of the registration at the Taxpayers'
Registry for each merged company, attaching copy of the minutes of the
shareholders meeting containing the resolution of merger. The merger of companies
entails the obligation to audit the financial statements of the surviving company and
of the merged company by an independent public accountant.
c)
The surviving company shall present the last annual tax return of the merged
company.
d)
The Income Tax Law does not consider for income tax purposes that a merger
produces transfer of property among the surviving company and the merged
companies if the surviving company complies with the obligation mentioned in the
previous paragraphs.
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e)
If real estate is transferred as a consequence of the merger, the surviving or newlycreated company shall pay the Real Estate Acquisition Tax at the rate prevailing in
each state, which currently throughout Mexico is between 2 percent and 4 percent on
the value of the property.
f)
No VAT shall be paid in connection with property transferred as a result of a merger
of companies. The balance of the Net Taxed Profit Account and of the Net Taxed
Reinvested Profit Account of the merged company may be transferred to the
surviving or newly-created company. Fiscal losses pending amortization in the
merged company are not transferable to the surviving company.
.2.
Labor consequences.
A merger entails the transmission of an economic entity, therefore, for labor purposes, a
substitution of employer takes place. (See Sections XII.1.a. and XVI.)
.3.
Industrial property.
The Industrial Property Law considers that a transmission of the rights on registered patents
and trademarks takes place as a result of the merger of companies, unless the parties agree otherwise
or the existing licenses prohibit such transfer. It is necessary to register the resolutions of merger at
the Mexican Institute of Industrial Property for legal recognition of the new authorized user or
owner of patents or trademarks.
.C.
SPLIT-OFF
A split-off takes place: 1. when a company, without continuing in existence, transfers all or
part of its assets, liabilities and capital stock to one or more new companies; or, 2. when the
company transfers part of its assets, liabilities and capital stock to one or more new companies and
continues in existence.
A split-off can only be agreed by resolution of the partners' or shareholders' meeting adopted
by the majority required for the modification of its charter.
Each one of the shareholders or partners of the original companies must have the same
proportion in the capital of the new companies as they had in the original company.
The resolution approving the split-off must contain a description of the terms and
mechanisms for the transfer of the assets, liabilities and capital which correspond to each new
company. The original company must present audited financial statements. Also, the obligations to
be assumed by each new company must be determined.
If any of the new companies breaches any of the obligations assumed by virtue of the splitoff to creditors who did not approve said split-off, the original and other new companies shall be
jointly liable for a three-year period counted as of the publications mentioned hereinafter. If the
original company continues in existence it will be liable for all obligations until the statute of
limitations periods expire for each obligation, usually between five and 10 years.
The resolutions approving the split-off must be registered with a Public Notary and recorded
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in the Public Registry of Commerce.
Also, an extract of said resolution must be published in the Official Daily Gazette and in one
newspaper of wide circulation at the domicile of the original company together with a summary of
the information regarding transmission of assets, liability and capital stock. After a period of 45 days
counted as of the registration in the Public Registry of Commerce and after the publication, without
any opposition from creditors or from shareholders, the split-off will produce full effects. For the
creation of new companies it will be necessary to register their charter with a Public Notary and to
register it in the Public Registry of Commerce.
If the split-off entails the extinction of the original company, its registration will be
cancelled from the Public Registry of Commerce, once the split-off becomes effective.
.1.
Tax consequences.
The Tax Code considers that there is no transfer of property in a split-off as long as the
shareholders of at least 51 percent of the shares with a voting right of the original and new
companies did not change in the year prior to and the year following the notice of the split-off
presented to the tax authorities.
Tax losses pending amortization may be divided between the original and the new
companies in proportion to the division of capital. The balance of the capital account and the net
taxed profit account may be transferred proportionally by the split-off as well as the right to credit
VAT.
The exemption to newly formed companies of the 1.8 percent Asset Tax is not applicable in
this case. (For explanation of Asset Tax see Section XV.E.1.)
A local Real Estate Acquisition Tax between 2 percent and 4 percent must be paid in
connection with a transfer of real estate property as a consequence of split-off.
.2.
Labor consequences.
Work relationships will be affected as the employer will change. The employee rights and
obligations cannot be modified as a consequence of the split-off. Such rights and obligations
continue against the original company and/or the new companies, the latter as substitute employer.
(See Section XVI.)
.3.
Industrial property.
Any industrial property rights or related licenses should be modified to reflect the change in
ownership or right to use.
.D.
SUSPENSION OF PAYMENTS AND BANKRUPTCY
Mexico's Federal Bankruptcy and Suspension of Payments Law was enacted in 1943.
Suspension of payments requires a court judgment. When debtors envision inability to meet
payment obligations or already have ceased payment, they can request of their creditors an extension
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of time to pay debts and enable the debtor to normalize the business. It is an opportunity granted to
debtors in difficulties, while permitting continuation of the business operations.
Bankruptcies in Mexico must also be declared by a court judgment. The debtor must be
engaged in commerce and have ceased meeting payment of his debts.
.1.
Suspension of payments.
Before the declaration of bankruptcy a debtor has the right to request the suspension of
payments.
If the judge grants the suspension, the claims filed requesting the declaration of bankruptcy
will be suspended.
After the debtor's request for suspension of payments is accepted, a creditors' hearing will
take place at which time creditors' rights will be recognized and classified in order of preference.
During the procedure of suspension of payments the statute of limitations and judicial terms
will be suspended against the debtor. However, it is possible to proceed judicially with those actions
necessary to prevent deterioration to the debtor's assets or to preserve the rights of the parties.
Judicial proceedings regarding claims for labor debts, alimony and credits with in-rem guaranties
will not be suspended. During the procedure the business continues to be operated and managed by a
debtor under the surveillance of a receiver.
The debtor can enter into an agreement with its creditors if there is approval by a sufficient
number of creditors to represent a majority interest in the total debt, in accordance with the
percentages and requirements of the law. Nevertheless, if said agreement is rejected by the creditors,
or not approved by the majority required, the judge will declare the bankruptcy.
Furthermore, at any time of the procedure, the judge may declare bankruptcy if the debtor
breaches its commitments or decreases its assets or patrimony. Also, the judge may terminate the
suspension of payments if the debtor is incapable of continuing to comply with the agreed
obligations. The procedure may also terminate with the approval of an agreement with the creditors.
The major advantage of a suspension of payments proceeding for the debtor is that while
coming to an agreement with his creditors, he will not loose the right to administer his assets, and
the continuation of his business will be allowed. Nevertheless, any act different from those
considered as ordinary administration acts will be deemed invalid with respect to the creditors.
.2.
Declaration of bankruptcy.
Bankruptcy is presumed to exist in the following cases:
a)
general failure to pay outstanding liabilities;
b)
the non-existence or insufficiency of assets to seize in order to carry out an
attachment proceeding against the debtor;
c)
the conveyance of the assets of the debtor in favor of its creditors;
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d)
if debtor acts in deceptive, fictitious or fraudulent manner or abandons the business;
e)
failure to complete all requirements after requesting a suspension of payments or
failure to reach an agreement with the creditors;
f)
the concealment or absence of the debtor if no person legally in charge of the
business is empowered to honor obligations, or the closing of the place of business
in the same circumstances; and
g)
breach of obligations agreed to in the agreement of suspension of payments.
The presumptions may be rebutted if the debtor demonstrates ability to pay outstanding due
accounts with its liquid assets.
The declaration of bankruptcy may be requested by the debtor, creditors or the attorney
general. Until all creditors are recognized by the court in the proceeding, neither the debtor nor the
creditor who has requested the bankruptcy declaration may withdraw the suit even when all
creditors are in agreement.
.3.
Bankruptcy procedure.
The procedure starts before a bankruptcy judge who will declare bankruptcy, immediately
appoint a receiver, order seizure of all assets and records and appoint up to five auditors for
surveillance of the creditors' interests. The creditors' committee also has the right to select and
remove auditors. From this point forward all creditors must conduct business with the receiver. The
receiver is required to draft a list of fixed assets.
The debtor will receive personal notification of the judgment. The judgment will be
published three times in the Official Daily Gazette of the debtor's domicile, thus notifying the
creditors who will be called to a meeting for the recognition, rectification and prioritization of
credits. The meeting will take place within 45 days. Any judge may extend the time period in which
a foreign creditor may file a claim. Such foreigner must provide a mailing address in Mexico to
receive correspondence related to the bankruptcy. Otherwise, convocation for such meeting will be
made via the Official Daily Gazette as provided for the notification of the judgement.
The bankruptcy judgment deprives the debtor of the right to administer and dispose of assets
and prevents the debtor from leaving the situs of the procedure without judicial authorization.
The judge and the receiver may authorize the continuation of business operations if closing
down the operation could adversely prejudice the rights of the creditors.
From the moment of declaration of the bankruptcy, all pending obligations of the debtor
shall be considered due and payable. Bilateral executory contracts may be honored by the receiver
with prior authorization from the judge. Those who have contracted with the debtor may request that
the receiver indicate either compliance or rescission of the contract. There are detailed rules
concerning disposition of executory contracts, such as leases, service contracts, labor agreements,
and purchase of goods not yet delivered.
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All merchandise, credit instruments or any other types of goods which exist as part of the
bankruptcy proceeding and which may be identified, whose property has not been transferred to the
debtor under a definitive and irrevocable legal title, may be separated by the legal holders of title
through the exercise of the corresponding action before the bankruptcy judge. If there is no
opposition to the request for separation the judge may declare the requested exclusion.
Once the creditors have been notified, they must request recognition in writing from the
judge to exercise their rights against the mass of assets. The receiver analyzes each credit and issues
a report. The bankruptcy law requires creditors' meetings in certain matters and sets out how votes
shall be counted.
Secured creditors must attend the secured creditors' hearing to preserve their rights.
Thereafter, the judge issues a report with a list of all secured claims classified by type and priority,
declaring those claims that have been accepted, rejected or set aside. Priority of creditors is as
follows:
a)
general labor liabilities;
b)
privileged creditors such as creditors for the expenses of the funeral of the debtor,
expenses of the sickness which caused the death of the debtor, and alimony
payments;
c)
creditors with mortgage guarantee who receive payment from the proceeds of the
sale of the mortgaged goods, excluding payment to any other creditors;
d)
tax;
e)
creditors with a special privilege (pledge);
f)
common creditors for mercantile operations;
g)
common creditors for civil obligations;
Creditors not presenting their claims lose their privilege and are classified as common
creditors.
.4.
Criminal liability in bankruptcy.
Bankruptcy is classified as follows:
a)
Fortuitous: Fortuitous bankruptcy occurs when in the ordinary course of business,
and under a good administration, casual misfortune brings a considerable reduction
of the assets. There is no sanction.
b)
Negligent or careless: Negligent bankruptcy occurs when the business is
mismanaged. The merchant or administrators may be imprisoned for up to four
years.
c)
Fraudulent: Fraudulent bankruptcy occurs when the administrators perform acts such
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as: i) increasing the liabilities or decreasing the assets of the business, ii) favoring
special creditors, and iii) failure to maintain accounting records in accordance with
the law. The sanction may be imprisonment for up to five years and the payment of
up to 10 percent of the liabilities.
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.5.
Termination of bankruptcy procedure.
Bankruptcy may be terminated in the following cases:
a)
Payment of all of the liabilities and pending obligations. Payments can be made fully
or on a discounted basis. Because it is not normally possible to sell all the goods in
bankruptcy at the same time, the law contains a system of periods of four months to
pay the creditors. The designated creditors or their representatives will appear in
court to collect the amounts determined in the distribution. This procedure will be
repeated as long as there are assets that can be sold or creditors who have not been
paid. Once all of the assets are sold the judge will call a general meeting of
recognized creditors in order for the receiver to render definitive accounts.
In case of a debt payable in foreign currency or outside of Mexico, the judge will
declare its payment in pesos in an amount equivalent to the foreign currency, at the
exchange rate published for such purpose on the date of the declaration of
bankruptcy.
b)
If the assets are insufficient to cover expenses of the bankruptcy or part thereof.
c)
If no more than one creditor appears to present credits.
d)
By unanimous consent of creditors whose credits were recognized.
e)
By agreement between the creditors and the debtor at any time during the
bankruptcy procedure, after the recognition of the credits and before the final
distribution.
.6.
Comments.
Because of deficiencies in the Bankruptcy Law, "informal reorganizations" are common
whereby the groups of creditors meet together and reach an "extrajudicial solution" either for
payment or even continuation of all or part of the business.
Due to the prevailing economic difficulties in Mexico, the problems of suspension of
payments, bankruptcy and reorganization have been prominent. Both creditors and debtors are
seeking more expeditious solutions to their liquidity and insolvency problems. Various proposals for
modifications to the Bankruptcy Law are being discussed.
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XXI. INTERNATIONAL RELATIONSHIPS
Mexico has consolidated its position as a developing country with international relationships
worldwide.
The foreign policy of the Mexican government is considered a means to protect and promote
national interests in a globalized world.
International agreements between Mexico and other countries assure cooperation in areas
such as agriculture, commerce, admiralty, aerospace, arbitrage, immigration, environment, pollution,
intellectual property rights, free trade, tax cooperation and culture, among others.
Mexico is part of the Vienna Convention of 1969 (published in the Official Gazette of
February 14, 1975) related to treaty rights between nations and/or international organizations.
In order to comply with the aforesaid Convention, the Mexican government enacted the Law
on Treaties (published in the Official Gazette of January 2, 1992), which contains new laws
regarding dispute resolution, such as the recognition and execution of foreign arbitral awards and
judicial decrees.
With the enactment of the Law on Treaties, the Mexican government, represented by the
Ministry of Foreign Affairs, has corroborated its intention to promote better relations with countries
and international organizations.
.A.
DIPLOMATIC AND CONSULAR MATTERS
History and tradition have demonstrated that diplomatic and consular authorities from
Mexico have worked tirelessly all over the world to promote Mexico's national interests.
To learn the principles and practices of diplomacy, Mexicans having international
backgrounds are trained at the Matías Romero Institute of the Ministry of Foreign Affairs for one
year. At the end of the term they are examined to determine whether or not they qualify for the
diplomatic corps.
Once they are accepted as members of the Foreign Service they carry out consular or other
diplomatic duties.
.1.
Diplomatic matters.
Mexico executes its foreign policies mainly through diplomacy. The principal purposes of its
diplomacy are:
a)
To represent the country in other nations;
b)
To negotiate international agreements or other related documents;
c)
To inform nationals and foreigners of certain issues related to the Mexican political
structure, economy and culture;
d)
To promote, the country in areas such as culture, tourism and commerce;
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e)
To protect Mexicans and national interests abroad; and
f)
To issue passports and notarial certifications of documents.
Embassies and consulates are the official buildings where diplomatic functions are carried
out. Mexico has 70 embassies distributed as follows:
i)
Embassies.
North America.- United States of America and Canada.
Central America and Caribbean.- Guatemala, Belize, Honduras, El Salvador, Panama,
Nicaragua, Costa Rica, Cuba, Dominican Republic, Jamaica, Haiti and Trinidad y Tobago.
South America.- Argentina, Bolivia, Brazil, Chile, Ecuador, Colombia, Venezuela, Peru,
Uruguay, Paraguay
Europe.- Great Britain, Spain, France, Italy, Germany, Austria, Denmark, Norway, Czech
Republic, Netherlands, Sweden, Switzerland, Republic of Ireland, Finland, Poland, Belgium,
Portugal, Russia, Hungary, Yugoslavia, Turkey, Greece, the Vatican and Romania
Africa.- Algeria, Morocco, Namibia, South Africa, Egypt and Kenya
Asia.- Japan, China, South Korea, Philippines, Thailand, India, Indonesia, Iran, Saudi
Arabia, Israel, Lebanon, Malaysia, Singapore.
Oceania.- Australia and New Zealand.
An Ambassador heads an embassy in which duties are carried out in five sections: Political
Section, Economic Section, Consular Section, Cultural Section and Administrative Section.
ii)
Permanent Representatives.
The permanent representatives execute diplomatic duties within International Organizations
such as the United Nations and the Organization of American States.
.2.
Consular matters.
Consular duties can be carried out by the General Consulates, Career Consulates, Consular
Agencies, Consular Sections and Honorary Consulates. Depending on the issues, authorities granted
to those offices may vary.
Mexico signed the Vienna Convention on Consular Relations of 1963 (published in the
Official Gazette of September 9, 1968)
According to said Convention, and pursuant to the "Organic Law for the Mexican Foreign
Service," Mexican consuls have the following duties:
a)
To protect the interests of Mexico and civil rights of the Mexicans abroad;
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b)
To promote commercial and tourist exchanges;
c)
To execute the duties of Notary and Civil Registry Judges;
d)
To execute judicial and administrative proceedings;
e)
To act as a special delegate of the Mexican President pursuant to law;
f)
To issue passports, visas, immigration permits and to legalize documents; and
g)
To record the Mexicans living within its constituency.
.B.
INTERNATIONAL AGREEMENTS.
In a more interrelated and competitive world, Mexico has adopted several measures to
assure its participation. It has signed several bilateral and multilateral commercial agreements, the
most important of which are described below.
.1.
GATT and the World Trade Organization.
Mexico signed the GATT in 1986 with the goal of participating in the consolidation of a
system allowing for a more equitable distribution of international commercial benefits and the
furthering of multilateral policies.
Upon signing the GATT, Mexico committed itself to reducing tariffs, eliminating import
permits and reducing non-tariff barriers. Mexico also has signed various GATT supplementary
agreements such as the Agreement on Customs Valuation Procedures, Agreement on Subsidies and
Countervailing Measures, Agreement on Antidumping (for implementation of Article VI of GATT),
Agreement on Technical Barriers to Trade, Agreement on Import Licensing Procedures and the
Agreement on Trade Related Aspects of Intellectual Property Rights (TRIPs Agreement).
In 1994, pursuant to the Uruguay Round, 124 governments and the European Union signed
the Marrakesh Declaration establishing the World Trade Organization (WTO), the successor of the
GATT, which was implemented in January 1995. Mexico was a party to these agreements and is
thus considered to be one of the founding members of the WTO. The WTO is an organization
responsible for the functioning of the world international trade system providing a forum for trade
negotiations and the resolution of disputes among its members.
The latest round of WTO trade negotiations, dubbed by some the Millennium Round,
promises to be contentious. Initial attempts in the U.S. city of Seattle in late 1999 to negotiate new
trade standards were met with massive public demonstrations. Negotiators from 135 WTO member
nations were unable to come to any agreement. Many difficult issues face negotiators, including
calls to renegotiate dumping agreements concluded in the Uruguay Round; linking minimum labor
standards to trade; state subsidies of agriculture; further reductions of barriers to textile trade;
intellectual property piracy of software, music recordings, etc.; determining government regulation
and taxation of electronic commerce; as well as issues driven by public opinion, such as job loss
from lowering protectionist barriers, environmental issues and monopolistic practices.
Most sensitive trade issues involve aspects that can be double-edged swords. In some cases,
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such as health and safety standards, strict regulations can be used as an artificial means to restrict
access of a competing product, but they also can legitimately improve living standards and prevent
disease. A country with stringent regulations regarding pesticides may be the same country that
permits hormonal supplements in animal feed. On one hand the country feels it has a legitimate right
to restrict the importation of prohibited pesticides, but also finds that its own meat and poultry
exports are restricted by other countries with more rigorous standards in the area of animal feed. The
challenge for trade negotiators is to permit fair trade without lowering all standards to the lowest
common denominator.
.2.
NAFTA and other Free Trade Agreements.
Mexico has signed the NAFTA with the United States and Canada which took effect on
January 1, 1994 (NAFTA is discussed in Section IX.). Mexico has also signed bilateral free trade
agreements with Latin American countries such as Colombia, Venezuela, Chile, Costa Rica and
Bolivia. Negotiations are also in progress for bilateral trade agreements with several other countries,
such as Uruguay and Israel, as well as the European Union.
.3.
Asia-Pacific Economic Cooperation Mechanism.
The Asia Pacific Economic Cooperation (APEC) was established in 1989 in response to the
growing interdependence among Asia-Pacific economies. Begun as an informal dialogue group,
APEC has since become the primary regional vehicle for promoting open trade and practical
economic cooperation. Its goal is to advance Asia-Pacific economic dynamism and sense of
community. Despite the financial instability recorded in 1997-98, this economic area remains one of
the fastest growing regions in the world. It is a major contributor to global prosperity and stability.
Today, APEC includes all the major economies of the region and a large number of the fastest
growing economies in the world.
APEC has 21 members which are as follows by date of joining: Australia, New Zealand,
United States, Canada, Japan, Republic of Korea, Thailand, Malaysia, Indonesia, Republic of the
Philippines, Singapore, Brunei Darussalam, People's Republic of China, Chinese Taipei, Hong Kong
China, Mexico, Papua New Guinea, Chile, Peru, Russia and Vietnam.
The economies of APEC's 21 members had a combined gross domestic product of over
US$16 trillion in 1998 and comprised 42 percent global trade.
Mexico became a member of the Asia-Pacific Economic Cooperation Mechanism (APEC) in
November of 1993 and now has the opportunity to conduct trade in one of the most promising areas
of the world.
As a member, Mexico has promoted commercial missions from most of the countries in the
Pacific Basin. Also, there have been several meetings with government representatives of the Asian
Pacific Basin countries in order to negotiate the necessary steps to improve market access for
Mexican products.
.4.
Organization for Economic Cooperation and Development.
The Organization for Economic Cooperation and Development (OECD) was established in
1961, and currently brings together 29 countries sharing the principles of the market economy,
pluralist democracy and respect for human rights. The OECD comprises the following countries:
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Australia, Austria, Belgium, Canada, Czech Republic, Denmark, Finland, France, Germany, Greece,
Hungary, Iceland, Ireland, Italy, Japan, Korea, Luxembourg, Mexico, The Netherlands, New
Zealand, Norway, Poland, Portugal, Spain, Sweden, Switzerland, Turkey, United Kingdom and the
United States. Mexico became the 25th member of the Organization in 1994. Mexico was the first
new member of the OECD in 22 years.
Inviting Mexico to join this organization was an acknowledgement of the far-reaching
reforms the country has implemented in recent years and that its economic legislation and policies
were consistent with those of other OECD member countries, such as liberalization of trade and
investment, major reform of the financial system, deregulation of the economy and a commitment to
the privatization process.
OECD membership gives Mexico access to more effective channels of communication,
along with a means to cooperate with the world's major economies. Membership also guarantees the
continuity and consolidation of Mexico's economic, political and social policies, as well as
encouragement for capital inflow with all the benefits this implies, including, for example, more and
better-paid jobs, training and state-of-the-art technology.
Some of the implications related to investment in Mexico as a member of the OECD are
non-discriminatory treatment to investors, further liberalization of investment regulations and
increased accountability of the legal system.
5.
ALADI (Asociación Latinoamericana de Integración) Association for the Integration
of Latin America.
This agreement, known as the Montevideo Agreement of 1980 (Published in the Official
Gazette on March 31, 1981), was signed in Montevideo, Uruguay on August 12, 1980 by the
following countries: Argentina, Bolivia, Brazil, Colombia, Chile, Ecuador, Mexico, Paraguay, Peru,
Uruguay and Venezuela. The main purpose of the Agreement is to promote and regularize reciprocal
trade and commerce, as well as to develop a new model of economic and social policies among
Latin American countries.
6.
MERCOSUR (Mercado Común del Sur) Common Market of the Southern
Hemisphere.
On March 26, 1991, representatives of Argentina, Brazil, Paraguay and Uruguay signed the
Treaty of Asunción, committing their countries to work toward the harmonization of trade laws
among the members. As such, Mercosur, which went into effect as a common market on December
31, 1994, goes much further than a simple free trade organization. Subsequently, Chile entered
Mercosur as an associate member.
Although Mexico is not a member of Mercosur, it does have strong commercial ties with the
Mercosur member states, and has signed a number of bilateral trade agreements of limited scope
with its members.
.7.
European Union
The ultimate goal of the European Union is "an ever closer union among the peoples of
Europe in which decisions are taken as closely as possible to the citizen"; the objective is to promote
economic and social progress which is balanced and sustainable, assert the European identity on the
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international scene and introduce a European citizenship for the nationals of the Member States.
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The European Union has 15 members, which are the following: Austria, Belgium, Denmark,
Finland, Germany, Greece, Ireland, Italy, Luxembourg, The Netherlands, Portugal, Spain, Sweden
and the United Kingdom. The European Union represents a market of 375 million consumers, whose
consumption exceeds US$800,000 million annually.
The European Union (EU) is Mexico's second largest commercial partner in the areas of
foreign investment and international trade of goods and services, and is the world's largest market.
Mexico and the EU have further developed the ties created by the Agreement of Cooperation
between the Community and Mexico, signed in Luxembourg on April 26, 1991.
In order to strengthen international relationships with the Europeans, in 1997 the
government of Mexico proposed a series of agreements regarding joint cooperation in economics
and politics, as well as competition issues. The negotiations to sign a free trade agreement between
the EU and Mexico began in July 1998 and ended in November of 1999. The final agreement is
expected to be signed in the early part of 2000 and is scheduled to become operational in July of
2000.
The Treaty's general aims comprise progressive, preferential and reciprocal trade
liberalization, liberalization of current payments, capital movement and invisible transactions and
investment promotion, in accordance with WTO's rules.
This Treaty which is based on democratic principles and the respect for human rights
institutionalizes a regular political dialogue and extends the bilateral co-operation. It definitively
marks a new phase in the EU's relations with Mexico.
Specific issues contemplated in the Treaty include government procurement, intellectual
property, financial services, cooperation in several sectors such as industrial, customs, agriculture,
mining, energy, transport, tourism, education and fishing, among others.
As of the year 2003, 100 percent of industrialized Mexican products will have access to the
common market duty free. Canned tuna will have a tariff with preferential access. More than 91
percent of Mexican exports will obtain a rule of origin from the EU, among the most important are
textiles, transport and autoparts sector, household electrical appliances, electronics, shoes, chemicals
and plastics.
Several technical standards were agreed to in order to protect human, animal and plant
health, consumers and the environment, as well as to guarantee the truthfulness of the information
provided for a product regarding the latter's ingredients, net weight and volume. Requirements for
the manufacture of machinery and equipment were also established. Regarding sanitary and
phytosanitary standards the Treaty reserves the right of Mexico to adopt the aforesaid standards to
protect human, animal and plant life and health against risks emerging from sicknesses, plagues,
pollutants, if these are scientifically supported.
Countermeasures may be adopted for a maximum period of three years in order to provide
temporary relief to a sector that could be at serious risk or threatened due to substantial increase of
the imports between Mexico and the EU.
In connection with payments related to direct investment, the current liberalization granted
____________________
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207
by domestic laws of the parties would be consolidated. For Mexico, the foregoing will not imply an
additional liberalization of direct foreign investment in any sector.
Mexican service providers will have access to the European service market with the
certainty that no restrictions limiting the number of operations or service providers in that territory;
will be granted "national treatment," which will guarantee the same conditions as those granted to
service providers established in the EU; and will receive most favored nation treatment in reference
to other countries.
Regarding government procurement, a committee will be established to analyze the relevant
government markets, rules for procurement, bidding terms, criteria to classify providers, a
mechanism to challenge bids, and the commitment to make opportunities available through the
internet.
Economic competition is promoted and monopolistic practices will be investigated and
punished. Other measures may be adopted in conformity with domestic law against non-competitive
commercial practices. A work committee will be established in order to analyze competition issues
related to competition policies and laws.
Obligations concerning intellectual property will be established in accordance with the laws
of each party to the Treaty regarding the acquisition, conservation and enforcement of intellectual
property rights. A special committee will be created and will be ruled by international treaties and
conventions in force.
A mechanism for commercial consulting and dispute resolution is established, through
which the dispute resolution mechanism provided for the WTO can be appealed.
The commercial liberalization will allow Mexico to increase foreign investments. It will
likewise create improved access to the European market for Mexican companies which wish to
invest or export.
In terms of coverage, this Treaty and the negotiations conducted by Mexico and the EU's
Commission will provide EU operators with more rapid preferential treatment than Mexico has ever
before granted to any of its preferential partners. It will place them in a much better position to
compete on the Mexican market, which is strategically important and has significant growth
potential. All industrial goods will be free of tariffs by 2007.In trade volume, 52 percent of EU
exports will enter the Mexican market duty free by 2003 and for the remaining 48 percent a
maximum duty of 5 percent will be applied by 2003. While preserving EU sensitivities for
agriculture and fishery products, the package negotiated for these products will grant quick and full
market access for the EU's most important export products. For services, EU operators will be
granted better access than that currently enjoyed by Mexico's other preferential partners, including
the United States and Canada. This package will be completed by a commitment to liberalize
investment and related payments. Substantial access to the Mexican procurement market, similar to
NAFTA, will also be obtained. Finally, the package will include substantive disciplines for
competition matters, the protection of intellectual property and an effective dispute settlement
mechanism.
Substantially all trade in goods will be covered by the Treaty with coverage amounting to 95
percent of total current trade, and elimination of substantially all discrimination in trade in services.
The Treaty is compatible with the relevant WTO provisions and, in particular, Article XXIV of
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208
GATT and Article V of GATS.
Regarding other economic issues pertaining to the EU, a European monetary union was
formed as of January 1, 1999. This union will have a new currency named "the Euro" and will have
broad effects and legal consequences in issues related to contracts, securities, export credits,
SWAPS (debt to equity), mortgages, letters of credit, taxes and accounting.
In Mexico, many European transactions will be reviewed in order to react appropriately to
the new Euro ramifications.
.8.
International Agreements for Investment.
In order to increase foreign investment in Mexico, the Federal government has negotiated
international agreements for Trade and Investment with countries such as Spain, Switzerland,
France, Germany, Italy, Argentina and Brazil, among others.
In said agreements protections are being given to the investors of both parties. Each party
must treat the other party's investors and their investments no less favorably than it treats its own
investors and their investments (national treatment) or investors and investments of third parties
(most favored nation treatment) under similar circumstances. Each party is obliged to grant the more
advantageous of either national or most favored nation treatment. Said principles are supplemented
by the incorporation of customary international law principles obligating the host government to
accord "fair and equitable treatment" and "full protection and security" to investments within its
territory.
In addition, the agreements prohibit certain commonly encountered forms of discrimination,
such as requirements that a minimum level of equity be held by local nationals or that certain senior
management positions be reserved to local nationals.
.9.
Free Trade Agreement of the Americas.
In Miami in 1994, at what was called the Summit of the Americas, the 34 nations of the
region agreed to work toward the implementation of a free trade area reaching from Alaska to Tierra
del Fuego by 2005. The enthusiasm the meeting generated was nearly derailed by the economic
crisis and peso devaluation in Mexico in 1994 and by the devaluation of the Brazilian currency in
1999. Tensions that developed among Mercosur partners after the Brazil devaluation further
dampened hemispheric free trade passions.
Supporters of a Free Trade Agreement for the Americas or FTAA, face an enormous
challenge in attempting to link the vastly disparate economies of the hemisphere in a single free
trade agreement. If such an ambitious dream is to succeed, it will have to move progressively in
slow stages, probably beginning by incorporating other countries into the existing regional trade
associations, such as Nafta and Mercosur, as well as by widening the network of bilateral trade
agreements between individual nations.
.10.
Other international conventions.
Among the international conventions to which Mexico is a party, the following are the most
relevant: a) Sea Law Convention, Official Daily Gazette (ODG) June 1, 1983; b) Basel Convention
on Transborder Movements of Hazardous Wastes, ODG Feb. 22, 1991; c) International
____________________
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209
Telecommunications Union Convention, ODG April 26, 1991; d) International Sales Convention on
Prescription, ODG Feb. 22, 1991; e) Tax Treaties to Avoid Double Taxation (See Section XV.F.); f)
Treaties to Exchange Tax Information with the United States and Canada (See Section XV.F.); g)
Paris Convention, Universal Copyright Convention, Interamerican Copyright Convention and Berne
Convention. (See Section VII.)
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210
XXII. WILLS, TRUSTS AND ESTATE PLANNING
.XXII. WILLS, TRUSTS AND ESTATE PLANNING
.A.
JURISDICTION
If a person dies intestate (without a valid will), the law of his domicile at date of death will
determine how and to whom his estate will be distributed.
For instance, if a New York businessman is doing business in Mexico, is renting a house in
Mexico City but maintains a permanent residence in New York, it would probably be determined,
even if he died in Mexico, that his domicile was still in New York. If he has a valid will - which can
be drafted and executed in Mexico City - in which he states his domicile to be in New York, there
would be no question of jurisdiction and, furthermore, he can divest his property as he wishes
(within limits).
On the other hand, if he had sold his New York residence, he might have no domicile other
than his rented house in Mexico City. In that case, if he dies without a valid will, the Mexican Civil
Code would determine the division of his possessions.
.B.
THE MEXICAN CIVIL CODE
The most important difference between Mexican intestacy law and that of most U.S. states
concern the treatment of spouses. The Mexican Civil Code follows the old Roman Law and treats a
wife as if she were a child.
If a man with a wife and five children dies without a valid will, under Mexican law his wife
would inherit only one-sixth of his estate. Therefore, a valid U.S. or Mexican will would be
advisable. The laws of the place of execution govern the validity of a will, regardless of the domicile
of the testator.
.C.
U.S. ESTATE TAXES
An American citizen is liable for estate taxes on property he holds worldwide. If he has an
estate worth more than the Unified Credit exemption, $675,000 as of 1999, estate tax planning is
essential to avoid paying unnecessary taxes. A husband and wife with combined assets of up to
twice the exemption can eliminate all estate taxes with the proper division of asset ownership and by
taking advantage of the Unified Credit and Marital Deduction. The estates of non-U.S. citizens not
residents, will be liable to U.S. estate taxes if the U.S. assets total more than $60,000. The goal of
estate tax planning is to eliminate, minimize and/or delay estate tax payments.
.D.
WILLS AND TRUSTS
A foreigner doing business in Mexico might consider having one will for his Mexican
property and a will which can be probated in his country of origin for property or expected
inheritances there. Whether to have a will or a will substitute, such as a revocable trust, should be
discussed with an attorney.
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211
CONCLUSION
Mexico has experienced dynamic and unprecedented changes in the last 17 years. The
current administration of Ernesto Zedillo is expected to carry forward the changes initiated during
the previous two administrations of Miguel de la Madrid and Carlos Salinas de Gortari that have
radically reorganized the State itself and its relations with labor, capital, the Church, the farmers, its
neighbors to the north, and the rest of the world. The process of legal reform also has been initiated
and the Mexican government realizes the importance of improving its responsibility to the public
and its respect of and protection of rights granted under the legal system, the rule of law, right of
private property and human rights, not only in order to further attract foreign investment, but to
improve the well being of the public.
As the century ended and a the new millennium begins, Mexico, Canada and the United
States, under NAFTA (see Section IX.), as well as the rest of the nations of the Americas, will be
engaged in the rational reorganization of hemispheric relationships whose political components were
put together by European conquest and historical accidents. Mexico is proceeding with trade
negotiations with various countries, has finalized treaties with some, and has continuing interest in
the FTAA. (See Section XXI.B.9.) Its recent negotiations with the European Union are being
finalized and expected to be operational by July, 2000. (See Section XXI.B.7.)
The movement towards integration is not a recent phenomenon. The nations of Western
Europe have been struggling to implement the commitments entered into since signing of the Treaty
of Rome in 1957. The nations of the Western Hemisphere are not laden with the historical and
cultural inhibitions and differences that have complicated the economic, social and political union of
Europe. On the other hand Mexico, Central and South America share a common historical Iberian
heritage thrust upon them together with a common religion, and thus perhaps in the Americas
economic and political union will more rapidly evolve with the commensurate benefits in living
standards. NAFTA, though not as far reaching as the Economic Union process, could be a model for
the eventual extension of free-trade relationships with Central and South America initiated in Miami
in 1994, paving the way for economic integration of the developed and underdeveloped nations of
the Hemisphere, with 800 million consumers from Alaska to Argentina. Such integration, by 2005
as a goal, will require a good faith effort on the part of each nation and a willingness to learn and
adapt to new and ever changing conditions. (See Section XXI.B.9.)
Mexico is a nation very distinct from its largest trading partner, the United States of
America. In fact, Mexico is still, in many respects, underdeveloped and the pains of the political and
social upheaval of the Mexican Revolution, initiated in 1910, which in its early years resulted in
millions dead and a wrecked economy, were and are long in healing.
The three administrations mentioned above have promoted economic change leading to the
creation of what has been called the "New" Mexico. However, before this change of policy, Mexico
suffered through 12 turbulent years: beginning in 1970, the sharp turn to the left, with excessive
nationalism, increased land reform, statism, and the Foreign Investment and Technology Laws,
created havoc for both Mexican nationals and foreign investors; and the Devaluation of '76, the brief
oil boom, massive foreign borrowing, and the bust of '82 further exacerbated already looming
____________________
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212
problems.
We suggest that the changes initiated during the last 17 years, with the last eleven years
perhaps the most dramatic, far surpass any in Mexico since the changes brought about as a result of
the bloody Mexican Revolution. Mexico has experienced slow, steadily increasing economic
growth, without the heavy hand of the military, but also without democracy, U.S. style, although
substantial changes in the electoral system have been made with the last 1994 presidential and
congressional election being a demonstration of progress. We are witnessing in some parts of the
world, economic chaos where democratic reform is perhaps too precipitous. How to manage orderly
change in both, at the same time, is a challenge, still awaiting clear answers.
The profound changes of the last 17 years are continuing, with the process becoming more
dynamic as time progresses. For example, the Mexican government has already privatized sectors
until recently considered taboo, such as the banking system and telephone services; and has also
approved constitutional reforms allowing private investment in gas, railroads, telecommunications
and agribusiness; while at the same time eliminating most trade barriers as per international trade
agreements. The reform process is characterized by Dr. Roberto Salinas León as a four dimensional
program of fiscal and monetary discipline, aggressive deregulation, broad based program of
privatization and multi-lateral liberalization of trade and capital investment. (See his section,
"Mexico in the New Millennium" and Sections VIII., IX., and X.) Mexico has also reestablished
relations with the Vatican and has modified the relationship between the Church and State.
Furthermore, Mexico has also made great strides in addressing other pressing issues by
passing legislation on the protection of the environment and competition (see Section XIV.), human
rights and other socio-political concerns (see Section I.G.); establishing an autonomous Bank of
Mexico independent of the executive branch, and improving the credibility of the election process.
Mexico has also witnessed the breakdown of the ruling PRI party's monopoly on power as
evidenced by opposition party victories in gubernatorial and senate elections and the appointment of
an Attorney General from the opposition. Such changes are consistent with the declared policy of
modernization of Mexico to become an active partner in the globalized economic world in which
Mexican major companies are already buying into large foreign companies.
Currently, Mexico is expecting an increase in rating by moody's investors' services of its
foreign debt to be elevated to investment grade, from BA1 to BAA3, thus making Mexico more
accessible to foreign capital and financial investment in its competition among emerging countries
for the capital required for continued growth both by the public and private sector. This new status
supports and recognizes the government's efforts to assure internationally and nationally that its
current policies have matured sufficiently to provide stability and resist volatility during the mid2000 election period. Economic targets have been attained in most cases and surpassed in others.
Like in emerging economies, dangers to continued growth and stability exist. (See initial section
"Mexico in the New Millennium.")
Will the reforms endure??? Many by their nature are irreversible. Mexico cannot go back to
an entirely closed economy and an old style "ejido" agricultural system. New governments may chip
away, somewhat, but the bedrock of change will be hard to destroy. The Mexican statists and radical
nationalists, the left in general, are not dead, and the government has kept them at bay, but their
constituency are workers and the poor. The approval of NAFTA was important to keep the economy
moving and to maintain forward momentum. Similar benefits are expected from the Mexico____________________
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213
European Union trade treaty. Unique opportunities exist for Mexican, European and NAFTA
investors and traders to take advantage of this combined large market likely to grow with the
realization of the FTAA.
Mexico has abandoned statism, adopted a neo-liberal economic system, and has, despite its
stormy past, agreed to lay the foundations for what could be a hemisphere-wide community together
with the United States and Canada as a basis. By participating in the world community through the
WTO, OECD, APEC and other international organizations, the world has recognized Mexico's
commitment to free market reform and integration into the global economic system, evidenced by
the IMF and World Bank financial assistance, along with the United States, at the moment of
economic crisis in 1995. Mexico's experience has awakened the G-7 countries and the IMF, among
others, to reflect on mechanisms to forewarn or prevent sudden similar occurrences in an ever
growing, interdependent global economy.
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214
Appendix
Statistics
On the following pages are brief statistical data that may be of interest and for general
orientation. For additional current and detailed statistical information, the following sources may be
consulted, most of which have websites:
Banco de Mexico
United Nations
Mexican embassies and consular offices abroad
Instituto Nacional de Estadística, Geografía e Informática
Chambers of Commerce
Foreign embassies in Mexico
Trade and Commerce departments and ministries of other countries
Bancomext
Bancomext, the Mexican Bank for Foreign Trade, is a government development bank
responsible for the promotion of foreign trade, investment and joint-venture opportunities between
Mexican and foreign companies. Bancomext also functions as a credit institution providing trade
financing products and services to Mexican companies in order to develop foreign trade projects and
enhance the presence of domestic products in international markets.
Bancomext has foreign offices in the following countries:
Argentina
Bolivia
Brazil
Canada, in the cities of
Montreal
Toronto and
Vancouver
Chile
Colombia
Costa Rica
Cuba
Ecuador
France
Germany
Guatemala
Holland
Hong Kong
Italy
Japan
Korea
Malaysia
Peru
San Salvador
Singapore
Spain
Taiwan
United Kingdom
Venezuela
United States, in the cities of
Atlanta
Chicago
Dallas
Detroit
Los Angeles
Miami
New York
San Antonio, and
Seattle
GDP Growth 1997-1998
Annual percentage change
Source: Banco de México The Mexican Economy 1999
Worldwide GDP
Developed Economies
Asian Economies
Recently Industrialized1
Delveloping Countries
Asia
ASEAN—42
Middle East
Latin America
Countries in Transition
Selected Countries:
Germany
Argentina
Brazil
Canada
Colombia
Korea
Chile
China
Spain
United States
Philippines
France
Hong Kong
Indonesia
Israel
Japan
Malaysia
Mexico
United Kingdom
Singapore
Thailand
Taiwan
Venezuela
1
2
Korea, Hong Kong, Singapore and Taiwan.
Indonesia, Malaysia, Philippines and Thailand.
1997
4.2
3.2
1998
2.5
2.2
6.0
5.7
6.6
3.7
4.3
5.2
1.9
-1.5
3.3
3.8
-9.4
2.9
2.3
-0.2
2.2
8.6
3.2
3.8
3.1
5.5
7.1
8.8
3.5
3.9
5.2
2.3
5.3
4.6
3.3
1.4
7.7
6.8
3.5
8.0
-0.4
6.8
5.9
2.8
4.2
0.2
3.0
0.2
-5.5
3.5
7.8
3.8
3.9
-0.5
3.2
-5.1
-13.6
2.0
-2.8
-6.8
4.8
2.1
1.5
-7.0
4.8
-0.7
Gross Domestic Product
Latin America and the Caribbean
(Annual growth rates on the basis of dollars at constant 1995 prices)
Source: United Nations Economic Commission for Latin America and the Caribbean
1991 1992 1993 1994
Latin
America
Caribbean4
1996
1997
19983
19911998
3.8
3.2
3.8
5.7
1.0
3.6
5.4
2.3
3.6
Subtotal (19 countries)
Argentina
Bolivia
Brazil
Chile
Colombia
Costa Rica
Ecuador
El Salvador
Guatemala
Haiti
Honduras
Mexico
Nicaragua
Panama
Paraguay
Peru
Dominican Republic
Uruguay
Venezuela
3.8
10.0
5.4
1.0
7.3
1.6
2.2
5.0
2.8
3.7
0.1
2.7
4.2
-0.3
9.0
2.5
2.5
0.8
2.9
10.5
3.2
8.9
1.7
-0.3
11.0
3.9
7.1
3.0
7.3
4.9
-13.8
5.8
3.7
0.8
8.2
1.7
-0.9
6.4
7.4
7.0
3.9
5.8
4.2
4.5
6.6
4.5
5.8
2.2
6.4
4.0
-2.2
7.1
1.7
-0.4
5.3
4.0
5.7
2.0
3.1
-0.4
5.8
8.3
4.8
6.2
5.1
6.3
4.3
4.4
6.0
4.1
-8.3
-1.9
4.6
4.0
3.1
3.0
13.6
4.3
5.5
-3.7
1.0
-3.1
4.7
4.2
9.1
5.4
2.2
3.0
6.2
5.0
5.0
3.7
-6.2
4.5
1.9
4.5
8.6
4.5
-2.0
5.9
3.6
4.4
4.5
2.9
6.9
2.1
-0.5
2.3
1.8
3.0
2.8
3.8
5.2
5.0
2.7
1.1
2.3
6.8
5.0
-0.4
5.4
8.0
4.1
3.8
7.0
1.5
3.5
3.9
4.2
4.3
1.5
5.0
6.8
5.5
4.8
2.4
8.6
7.1
5.0
6.6
2.4
4.9
4.6
0.2
3.1
0.7
5.5
1.0
3.2
5.0
3.2
3.9
4.9
4.2
4.0
-0.6
0.1
6.0
4.6
-0.2
3.6
5.8
4.2
2.8
7.0
3.2
3.7
3.1
4.7
4.3
-1.7
3.7
3.0
2.9
4.9
2.3
5.0
4.7
3.9
3.1
Subtotal—Caribbean5
Antigua and Barbuda
Barbados
Belize
Dominica
Grenada
Guyana
Jamaica
Saint Kitts and Nevis
Saint Vincent and the
Grenadines
Saint Lucia
Surinam
Trinidad and Tobago
1.8
4.1
-3.5
3.4
2.6
3.7
10.2
0.3
3.4
1.6
0.9
1.0
-5.4
8.9
3.0
1.0
11.2
2.5
3.6
6.7
0.5
3.5
1.0
4.0
2.2
-1.1
3.1
1.8
6.7
2.4
3.3
4.8
3.6
1.6
2.1
3.4
17.7
1.9
3.3
-2.6
2.5
-4.3
2.5
3.5
2.3
3.0
2.4
1.7
3.1
7.8
3.2
5.5
5.1
1.0
2.9
3.2
9.2
-0.5
5.5
1.7
2.0
4.6
3.0
4.0
2.7
4.7
6.1
-2.3
6.3
3.2
2.0
2.8
4.4
1.6
3.5
5.0
-1.3
-0.7
4.0
5.5
2.0
2.7
1.3
3.5
2.7
2.9
7.2
0.6
4.5
3.2
-2.0
4.4
3.5
7.3
-1.9
-1.1
0.4
-8.5
-1.2
1.9
-4.0
4.2
0.7
-1.7
4.1
0.5
20.7
4.0
0.9
3.6
4.2
2.9
0.0
3.6
1.6
1.3
2.6
3
&
1995
Preliminary estimate
Excluding Cuba
5
Based on figures at factor cost
4
Mexico´s Balance of Trade by Region 1997-1998
(Millions of Dollars)
-767
Other
-511
-10,902
Asia
-9,106
-8,284
Europe
-6,270
1998
2,976
Rest of America
1997
4,022
-771
Canada
189
9,835
United States
-15,000
12,300
-10,000
-5,000
0
5,000
10,000
15,000
T o ta l Im p o rts in B illio n s o f D o lla rs
S o u rc e : B a n c o d e M é x ic o T h e M e x ic a n E c o n o m y 1 9 9 9
140
1 2 5 .4
120
1 0 9 .8
100
8 9 .5
7 9 .3
80
7 2 .5
6 5 .4
6 2 .1
60
50
4 1 .6
40
3 4 .8
2 8 .1
20
1 8 .8
0
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
T o ta l E x p o rts in B illio n s o f D o lla rs
S o u rc e : B a n c o d e M é x ic o T h e M e x ic a n E c o n o m y 1 9 9 9
140
1 1 7 .5
120
1 1 0 .4
96
100
7 9 .5
80
6 0 .9
60
5 1 .9
4 0 .7
4 2 .7
1990
1991
4 6 .2
3 5 .2
40
2 7 .6
3 0 .7
20
0
1987
1988
1989
1992
1993
1994
1995
1996
1997
1998
Mexico´s Exports Share in United States´ Imports
12
10.4%
9.9%
10
9.1%
8.3%
7.4%
8
6.8%
6.6%
6.3%
6
4
2
0
1991
1992
1993
1994
1995
1996
1997
1998
Percentage of Imports
Attributable to Export Industries
70
60.5%
59.8%
58.6%
58.6%
1995
1996
1997
1998
60
50
42.3%
40.5%
40
30
20
10
0
1993
1994
Main Products Traded by Mexico
Imports
Total (billion dollars)
1985
1990
14.5
31.3
1998
(preliminary)
82.7
of Total
Percentage
Automobile replacements
2.0
2.0
8.6
Computers
2.2
2.8
6.5
Automobile motors
1.0
0.6
2.7
Spare parts for electric
installations
Automobiles
2.1
2.1
2.6
0.3
0.9
2.6
Seeds, cotton and soybean
2.0
0.9
1.8
Measurement instruments
1.6
0.9
1.5
Radios and TVs
0.9
1.8
1.5
Radio & telegraphic devices
1.4
1.9
1.5
non-specified industrial
machinery
Metal-working machinery
0.8
0.9
1.5
1.4
1.1
1.4
Synthetic resin articles
0.6
0.7
1.3
Steel tubes & plates
1.6
1.7
1.3
Fuel oil & gasoline
1.1
2.3
1.2
Cereals
2.0
1.5
1.2
Electric bulbs
0.6
0.5
1.1
Meat, fresh & frozen
0.7
1.0
1.1
Resins
0.7
0.8
1.1
Mixtures for industrial use
1.6
1.3
1.1
Pumps
1.7
0.9
1.0
Prepared paper and cardboard
0.6
0.9
0.9
Trucks
0.4
0.1
0.9
Textile machinery
0.9
1.2
0.8
Generators, transformers
& electric motors
Rubber industry machinery
1.0
0.5
0.8
0.7
0.6
0.8
Bearings, Rollers
0.9
0.9
0.7
Tires
0.2
0.5
0.7
Elevator machinery
0.7
0.7
0.7
Other
69.7
68.9
51.4
Main Products Traded by Mexico
Exports
Total (billion dollars)
1985
1990
21.7
26.6
1998
(preliminary)
64.6
of Total
Percentage
Automobiles
0.5
9.3
17.2
Crude oil
61.4
33.2
9.9
Trucks
0.1
0.1
5.6
Automobile motors and
spare parts for motors
Spare parts for machinery
5.0
6.0
4.0
0.3
1.1
3.8
Computers
0.3
1.3
3.5
Textile articles
0.2
0.6
3.1
Tomatoes & vegetables
1.7
3.2
2.7
Insulated cables for electricity
0.1
0.6
2.3
Spare parts for automobiles
1.1
1.6
2.3
Iron (bars and pigs)
0.2
1.2
1.9
Iron & Steel manufactures
0.8
1.8
1.9
Other electric equipment
0.1
1.0
1.6
Beer & tequila
0.5
0.9
1.4
Coffee
2.3
1.2
1.0
Plastic materials & synthetic resins
0.3
0.9
1.0
Glass & glassware
0.7
1.0
0.9
Fresh fruit
0.2
0.6
0.9
Copper & silver (in bars)
1.2
1.8
0.8
Textile man-made fibers
0.4
0.6
0.8
Other pharmaceutical products
0.1
0.1
0.7
Frozen shrimp
1.5
0.8
0.6
Spare parts for electric installations
0.1
0.2
0.6
Manufactured products
made of synthetic resins
Refrigeration equipment
0.1
0.3
0.6
0.0
0.2
0.6
Wood furniture
0.1
0.2
0.6
Other
20.4
30.3
29.6
Composition of Total Exports
Oil
6.1%
Agriculture and Livestock
3.2%
Extractive
0.4%
Manufacturing
90.3%
Share of Manufacturing Exports in Total Exports
Source: Banco de MéxicoThe Mexican Economy 1999
100
90.3
90
85.8
82.8
83.7
83.7
1994
1995
1996
80.3
80
76.7
74
70.5
70.9
70
68.4
59.1
60
61.1
50
40
36.1
37.6
31.7
30.8
28.2
30
24.3
20
10
0
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1997
1998
Growth of Maquiladora Employment
Source: Instituto Nacional de Estadística, Geografía e Informática
1,200,000
1,000,000
800,000
600,000
400,000
200,000
0
Employment
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
446,436
467,352
505,698
542,074
583,044
648,263
753,708
898,786
1,008,031
1,112,496
Growth of Maquiladora Plants
Source: Instituto Nacional de Estadística, Geografía e Informática
3,500
3,000
2,500
2,000
1,500
1,000
500
0
Number of Plants
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
1,703
1,914
2,075
2,114
2,085
2,130
2,411
2,717
2,983
3,244
This Second Edition of 6,000 copies was printed in March, 2000.
Impresos & Grabados
GENESIS
s.a. de c.v.
Cerrada de Bajío No. 15-1
Col. Roma Sur
06760 México, D.F.

mexico business opportunities legal framework

Transcripción

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