Mexico is one of the most attractive countries for foreign investment. It is the biggest trading partner of the United States, and it is ranked ninth amongst countries with direct foreign investment. Mexico’s regulatory state provides flexibility with various options for structuring investments. However, investors should not throw caution to the wind. Social and cultural issues, notably corruption and crime, require investors to take special care with their ventures.
Choice of Entity
Generally, investors choose between two main entity structures— a representative office or a locally incorporated entity. The representative office, also known as the branch office, exists solely to carry out the business of a foreign corporation. It cannot generate income and must not conduct business outside of its stated corporate purposes. Incorporating locally expands the foreign corporation’s ability to generate revenue in Mexico. Additionally, a foreign corporation enjoys limited liability as opposed to the representative office.
Mexico’s two main types of corporate structures, the SA and SRL, are corollaries to U.S. corporations and LLCs, respectively.
Acquiring a Mexican Business
Instead of starting a new business, investors may acquire an existing one. Generally speaking, there are two ways to accomplish an acquisition. First, an asset acquisition, allows the investor to purchase the company’s assets. Alternatively, a stock acquisition, allows the investor to purchase all, or a controlling interest, of the company’s equity. Each method has its advantages and disadvantages.
Equity Acquisition
An equity acquisition utilizes a stock purchase agreement for a rather expeditious process. This option provides a smooth transition of ownership and requires little to no obligatory adjustments to be made to the business. Moreover, this option typically provides for lowered transactional costs.
The drawback of choosing this option is that the company retains all known and unknown liabilities. Including liabilities which arise from taxes and employment, and potentially latent liabilities. It is possible, however, to transfer liabilities to the seller as part of the stock purchase agreement.
Asset Acquisition
Acquiring assets allows investors to dodge the above-mentioned liabilities, but the procedure is much more cumbersome. The seller must transfer each asset individually. This is time-consuming and can drive up transactional costs as each asset is transferred through its own transaction. This type of transaction is often preferred to avoid the acquisition of any known or unknown liabilities present within the corporate shell.
The acquiring entity must comply with certain regulations or seek permits when special assets are involved. In some cases, where a seller transfers personnel to the buyer, severance costs may be considerable.
Limits and Regulations
Mexico’s Foreign Investment Law (FIL) and its regulations put strict caps on foreign investment in certain business activities and industries, including a 49% limit in:
- Investments in the firearms or explosives industry
- The national newspaper industry
- Aspects of the agricultural and ranching industries
- Freshwater fishing
- Coastal fishing within certain areas
- Air transportation services
The FIL also caps foreign investment in cooperative companies for production, mandating a cap of 10%.
If the acquired company has assets valued above an established threshold, set by the National Commission of Foreign Investment around 1 billion pesos, then the foreign investors must get authorization from the Commission. Around 5% of foreign businesses require this authorization. However, if applicable, the buyer may be subject to fulfill certain conditions.
Legal Protection for Foreign Investors
At a minimum, international legal and business standards require the Mexican government to treat investors equitably. Additionally, the Mexican government provides higher standards, such as the national standard and the most-favored-nation standard. The national standard requires Mexico to treat a foreign investor without regard to their nationality, meaning the foreign investor is treated the same as a Mexican investor. The most-favored-nation standard implies that Mexico will treat the foreign investor like any other investor in a similar situation. Furthermore, Mexico’s regulatory state provides investors with protection against governmental asset seizures, such as the expropriation of land and the nationalization of assets. Foreign investors are also protected from performance requirements. This exempts investors from providing the Mexican government with a benefit in exchange for fulfilling legal requirements. Foreign investors doing business from the U.S. or Canada must familiarize themselves with the United States-Mexico-Canada Agreement (USMCA). It became law in July 2020 and controls many aspects of investing in Mexico. Within its provisions and the provisions of other trade agreements Mexico has with countries around the world (including bilateral investment treaties and free trade agreements), foreigners have access to arbitration for dispute resolution. Some believe arbitration provides a more efficient way to resolve issues than the various court systems.
Final Thoughts
Mexico provides fertile investment opportunities with quantifiable levels of safety and risk. The Mexican markets are purposefully designed to be business-friendly because its regulatory framework seeks to increase commerce and attract foreign investment.
While compliance with the regulations is not burdensome, investors should be aware of risks inherent in government corruption. Investors must take extra care to avoid criminal implication in government corruption, such as implementing safeguards against money laundering and inappropriate gift-giving.
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