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1 Mexico – Business and Taxation Guide

Business and Taxation Guide to

Mexico


Preface This guide was prepared in 2012 by Julio Freyssinier and Miguel Vazquez from Mazars Outsourcing, S. de R.L. de C.V.

Mazars Outsourcing, S. de R.L. de C.V. Paseo de la Reforma 295 Piso 8 06500 Mexico City MEXICO

© Praxity 2011 This guide is intended as a general guide and should not be acted upon without further advice.


Contents Page

1. General information 5

1.1 Opportunities and possible obstacles for foreign investors 1.2 Area and population 1.3 Government and law 1.4 Currency 1.5 Economy 1.6 Direct foreign investments

2. Regulation of foreign investment 9 3. Government incentives 10 3.1 Tax incentives

4. Business organisations available to foreigners 11 4.1 Limited Liability Company (Sociedad Anónima) 4.2 Private Limited Company (Sociedad de Responsabilidad Limitada) 4.3 Partnerships 4.4 Limited Partnership (Sociedad en comandita simple) 4.5 Cooperative Company 4.6 Branch of a foreign entity

4.7 Joint Venture (Asociaciones en Participación)

5. Setting up and running business organisations 13 5.1 Mandatory requirements 5.2 Visual diagram for setting up a legal entity in Mexico

6. Corporate taxes and social charges 16 6.1 Income tax 6.2 Net operating losses 6.3 Capital gains 6.4 Maquiladora regime 6.4.1 Safe harbour 6.5 Transfer pricing 6.6 Single-rate corporate tax (IETU) 6.7 Social charges 6.8 Employee profit sharing

7. Personal taxation 20 8. Double taxation agreements 21 9. Sales and use taxes 22 10. Portfolio investments for foreigners 23 11. Trusts 24 11.1 Investment fideicomiso 11.2 Management fideicomiso 11.3 Guarantee fideicomiso 11.4 Entrepreneurial fideicomiso 11.5 Using fideicomisos to acquire real estate


11.6 Other fideicomiso 11.7 Tax reporting requirements for fideicomisos

12. Practical information 26 12.1 Transportation 12.2 Language 12.3 Time relative to Greenwich Mean Time (GMT) 12.4 Business hours 12.5 Public holidays


1. General information 1.1 Opportunities and possible obstacles for foreign investors

Mexico has a privileged geographical position for international trade, an attractive market of

over 100 million consumers, and a good investment climate for foreign investment.

As a consequence of this international exposure, Mexico has signed 12 free trade agreements

with 44 countries and over 40 tax treaties with its major trade and investment partners. These

agreements have eased the way for multinational companies to conduct business in Mexico.

Today, the United Sates, Spain, the Netherlands, Canada, Germany, France and the UK are

among the main source of foreign direct investment into Mexico.

Within the emerging economies of Latin America, Mexico occupies a prominent place with

diverse economic sectors and has highly developed industries, such as mining,

manufacturing, petroleum, electronics, textiles and tourism.

Mexico is a strong exporter and manufacturer of passenger and cargo

vehicles, machinery parts, machinery for information processing and aluminium. It also has a

strong reputation in scientific research and development, medicine and engineering. The

electronics industry has also grown significantly in the last decade.

The recent economic crisis, originating in late 2008, has seriously impacted the Mexican

economy. This is predominantly due to the commercial dependence and high correlation on

economic performance with the United States, since the U.S. receives 85% of Mexican

exports and is the source of more than 50% of Mexico’s Foreign Direct Investment (FDI).

See section1.5 for more details.

1.2 Area and population Mexico borders the Caribbean Sea and the Gulf of Mexico at the east, the Pacific Ocean to the west, the United States to the north and at the south, Belize and Guatemala. The total area of the country is 1,964,375 square kilometres, with 1,943,945 square kilometres of land and 20,430 square kilometres of water. Mexico has 9,330 kilometres of coastline and 12 nautical miles of territorial sea and 200 nautical miles of exclusive economic zone. The climate from north to south varies from tropical to desert and the terrain is very diverse, with high points, rugged mountains, coastal plains, desert, forests and some jungles.

The latest census (2010) revealed that Mexico has an approximate population of 113,724,226. By age, the population is structured as:


28.2% (0-14 years) 65.2% (15-64 years) 6.6% (65 years and over).

The gender split of the Mexican population is 49% men, 51% women. The latest census shows that 78% of Mexico’s population reside in urban areas, the remainder in rural locations. With regard to population, Mexico’s major cities are:

Mexico City (19,319 million) Guadalajara (4,388 million) Monterrey (3,838 million) Puebla (2,278 million) Tijuana (1,629 million).

The ethnicity mix is equally diverse, with a reported 60% Mestizo (Amerindian-Spanish), 30% Amerindian (Asian), 9% white and 1% other.

1.3 Government and law

The United Mexican States are a federation of 31 free and sovereign states. The Executive is the President, and is the head of state and government, as well as the commander-in-chief of the Mexican military forces. The President also appoints the Cabinet and other officers. The President is responsible for executing and enforcing the law, and has the authority to veto bills.

The bicameral Congress of the Union, comprising a Senate and a Chamber of Deputies, makes federal law, declares war, imposes taxes, approves the national budget and international treaties, and sanctions diplomatic appointments

The United Mexican States constitution establishes three levels of government:

1. Federal Union 2. State governments 3. Municipal governments.

Each of the 31 states has their own constitution, congress, and judiciary. The states’ citizens elect, by direct voting, a governor for a six-year term, and representatives to their respective unicameral state congresses for three-year terms

The states are divided into municipalities. These municipalities are governed by a mayor or municipal president (Presidente municipal), elected by residents.

All constituent states of the federation must have a republican form of government comprising three branches:

1. The executive branch, represented by a governor and an appointed cabinet


2. The legislative branch, constituted by a unicameral congress and 3. The judiciary branch, which includes the state Supreme Court of Justice.

Each state also has its own civil and judicial codes.

1.4 Currency

The monetary unit used in Mexico is the Peso. The international abbreviation is $ MXN. The peso is subdivided into 100 centavos, represented by ‘¢’.

1.5 Economy In 2009, Mexico suffered its worst economic crisis in 70 years, with a decrease of 6.5% on the GDP, resulting in the bankruptcy of 500,000 small and medium enterprises and the dismissal of a million and a half workers. However, the GDP for 2010 showed a 5% growth as a result of the performance in Mexican exports. An increase of 34% was recorded, compared to the same period of 2009. The International Monetary Fund (IMF) anticipates strong growth, suggesting a 4.5% increase in GDP in 2011 and 4.1% in 2012, with an upturn in domestic demand ahead of the presidential elections in July 2012. The Organisation for Economic Co-operation and Development also suggests that given the slowdown in inflation, monetary policy can support the recovery by holding down the key interest rate for the short term.

As a liberal and open economy, Mexico has currently signed 12 Free Trade Agreements with 44 countries:

Mexico’s Free Trade Agreements

United States and Canada

Colombia and Venezuela

Costa Rica

Bolivia

Nicaragua

Chile

European Union

Israel

Guatemala, Salvador and Honduras

Iceland, Norway, Liechtenstein and

Switzerland

Uruguay

Japan In the near future, Mexico is anticipating signing free trade agreements with countries like South Korea, Singapore, Peru and Australia.

http://en.wikipedia.org/wiki/Cent_sign


1.6 Direct foreign investments Mexico is the second most popular destination for Foreign Direct Investment (FDI) in Latin America, after Brazil. The FDI to Mexico comes mainly from the U.S., Spain and Canada. The resources of the FDI are typically oriented towards the industrial and services sectors of the Mexican economy.

Country Millions USD

United States $35,708

Spain $14,337

Canada $6,261

United Kingdom $2,746

Germany $1,562

Japan $971

France $786

Brazil $608

Sweden $478

Chile $183

China $57

FDI 2007-2010


2. Regulation of foreign investment The Mexican government adopts a proactive attitude towards foreign investment and, in general, provides a regulatory framework to attract direct foreign investment. In general, Mexican entities can be totally owned by foreign equity or stockholders. However, there are certain industries that are protected by the Mexican government (from between 0% to 49% of foreign participation), including:

Oil, electric and nuclear power Telecommunications Ground transportation of passengers Public radio and TV Air transportation Insurance Newspapers Agriculture Maritime cargo transportation.

Investments in mobile telecommunication, insurance brokerage, and legal services should be approved by Mexico’s Ministry of Economy where foreign ownership accounts for over 49%.


3. Government incentives Several states in Mexico offer incentives for foreign investors who want to establish businesses within the state, such as exemptions from certain local taxes and discounts on official registration fees. In addition, states may grant incentives, reducing taxes for land acquisition and property taxes for investment in targeted industries.

3.1 Tax incentives The Income Tax Law offers benefits such as immediate deductions for investment, the hiring of people with disabilities, and investment in real estate developments, amongst others. Taxpayers may elect to accelerate depreciation rates on new fixed assets acquired. The maximum percentages that can be deducted in the year the asset is purchased or used ranges from 63% to 96%. The balance would then be depreciated at the normal rate according to the type of asset. Agricultural activities have a reduced income tax rate, which is almost 50% of the current income tax rate. The Mexican government has enacted a decree whereby taxpayers can increase the deduction taken from hiring employees for their first formal job.


4. Business organisations available to

foreigners

The most common way for domestic and foreign investors to operate in Mexico is through a Limited Liability Stock Corporation (Sociedad Anónima - S.A.). An S.A. may adopt the form of a fixed capital company or a variable capital company (S.A. de C.V.). The main difference between a fixed capital company and a variable capital company is that the latter may increase or decrease its capital with fewer legal formalities. The following are the most common structures to perform business activities in Mexico:

4.1 Limited Liability Stock Corporation (Sociedad Anónima) This entity provides limited liability to its shareholders (at least two). A manager or Board of Directors may run the company for legal purposes. The shareholders are the ultimate decision-making authority of the company. These entities are limited liability stock corporations, where liability is limited up to the amount of its capital. A minimum of two shareholders is required for incorporation. Shareholders can be either foreigners (individuals or companies) or Mexican – or a combination of both. A Sociedad Anonima de Capital Variable (S.A. de C.V.) can increase or decrease its capital contributions through a mere shareholders meeting. These entities can go public.

4.2 Limited Liability Company (Sociedad de Responsabilidad Limitada - S.R.L.) As a limited liability company, the partners’ liability is limited to the amount of their contribution. 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 a partnership for U.S. tax purposes. The company must have a minimum of 2 partners and a maximum of 50. No minimum equity contribution is required.

4.3 Partnerships There are two types of civil associations:

1. The ’Asociación Civil” (A.C.) in which the partners decide to carry out a common purpose without a dominant economic objective.


2. The ‘Sociedad Civil’ (S.C.), whereby partners join their resources and efforts to achieve a common purpose, which might have an economic objective, for example professional services.

4.4 Limited Partnership (Sociedad en comandita simple) This is the equivalent of a limited liability partnership (L.L.C.). A limited partnership is a partnership in which one or more partners are liable for the company’s obligations, and one or more general partners have limited liability, up to their contributions.

4.5 Cooperative Company This is a type of company integrated by individuals who join their interests and efforts with the purpose of satisfying their individual and collective needs through the realisation of economic activities. In general, a minimum of 5 partners should integrate a cooperative company, having each partner one vote regardless of its capital contributions. There are no minimum capital requirements.

4.6 Branch of a foreign entity Foreign companies are legally recognised by Mexican law, but retain their liability characteristics from abroad. To start operating as a branch, approval from the Foreign Investments Commission, Ministry of Foreign Relations, and registration at the Public Registry of Commerce is required. From a tax perspective, branches are treated as a permanent establishment (PE). The branches obligations are the same as the parent company, and include bookkeeping, tax returns, and employee obligations. So, from that perspective, there are few administrative advantages when considering opening a branch in Mexico.

4.7 Joint Venture (Asociaciones en Participación) Joint Venture agreements (Asociaciones en Participación) are legally recognised only as contracts (in the same way as trusts), but are treated like an entity for tax purposes. Normally one or more partners provide goods, services or resources to an operating partner and profits are then shared accordingly. Joint Ventures must obtain tax identification, file tax returns and maintain individual accounting records. Taxpayers should be cautious, as it can be possible to unintentionally set up a regular contract that falls within JV tax rules.


5. Setting up and running business organisations

Foreign investors must comply with the same tax, legal, labour, environmental and other regulations set for companies or individuals conducting business in Mexico. One minor difference is that companies with foreign ownership must file an informative return detailing the amount of foreign investment at the end of each fiscal year, or earlier if the foreign investment is modified. For incorporation, all types of entities, except branches, require at least two shareholders. All company incorporations must be done using a Mexican public notary. The basic document is an incorporation act (deed) that is usually drafted by a public notary. Within the incorporation act, the shareholders must either appoint a sole administrator or a Board of Directors. This decision does not make any difference to the tax status. Foreign administrators or directors acting in Mexico need an immigration permit. Without this, any shareholder meeting can be challenged Within the deed, the shareholders can assign power of attorney to an official within the company. At least one person must be appointed a legal representative for tax purposes. Also, a statutory examiner (comisario) must be appointed. Usually, the statutory examiner would be the independent auditor. In the incorporation act, shareholders must define their initial capital contribution. Nowadays, entities are not required to have a minimum initial capital. Newly incorporated entities must designate a tax domicile within Mexico. This must be a physical location that will be validated by a tax agent. Legal books that must be maintained and held include a shareholders meetings book (normal and extraordinary) and stockholders/shareholders registry book. 5.1 Mandatory requirements The main obligations for an incorporated company or branch establishing itself in Mexico include:

Bookkeeping and accounting records in Spanish and in Mexican currency Providing and requesting customers and suppliers with compliant digital invoices Annually submitting the following tax returns for information purposes:

Income tax withholdings due to professional services and land leasing Income tax withholdings due from payments to foreign entities Entities that were granted donations Income tax withholdings due from payroll Financing activities with foreign entities


Main clients and suppliers disclosure Related party transactions Paid dividends Trust related transactions Payments to foreign entities

Monthly (advance) payments of single-rate corporate tax, income taxes, VAT and any withholding tax and must be complied on each 17th business day after the closing of every month

Filing annual tax return for federal taxes An independent tax audit if:

The entity determines a taxable income in the previous year over $2,600,000 USD, or

The entity had assets over $ 5,000,000 USD, or The entity had employed 300 or more persons during the last year.

If the entity has employees: Monthly payments of Social Security and ‘Housing Funds’ taxes. Calculate and pay Profit Sharing to Employees (10% of net income).

5.2 Visual diagram for setting up a legal entity


Procedures to setup a company applicable to foreign and Mexican investment

Notary Public

Request company’s incorporation permit.

(Foreign Relationships Ministry)

The notary proceeds to elaborate the

incorporation act.

Register with Tax Administration (SAT)

Registration with the Social Security

Registration in the SIEM (Business Chambers or the

corresponding sector, optional)

Registration in the Foreign Investment National Register

Approval from health authority (if applicable)

Registration with Customs Office (only if the company

imports goods)

Naming of commissions and writing of ledgers.

Issue of Tax ID and CIEC and FIEL electronic

passwords

Registry into the Public Commerce Registry of the

entity’s address.

Zone Development certificate (if applicable)

Operational business permits (if applicable)

Informing of the declarations opening or

function license (if applicable)

Questionnaire of the civil protection auto

diagnostic (if applicable)

Register for payroll tax ID

Training job commission

Security and hygiene at work

Registration and approval of the

Certificate in the STPS or federal job

branches.

If required, elaborate the

civil Protection Program.

FEDERAL PROCEDURES LOCAL PROCEDURES

Note: This is an indicative guide and the number of procedures could increase depending on the activity of the company.


6. Corporate taxes and social charges

Taxes are levied on taxpayers at federal, state and municipal level. The most relevant federal taxes that companies and individuals incur are Income Tax, Single-rate Corporate Tax, Value Added Tax, Excise Tax and Cash Deposits Tax. The general statute of limitation is five years after the filing of the tax return.

6.1 Income tax Mexico has a corporate tax rate of 30% on taxable profit. This rate will be decreased in 2013 to 29% and from 2014 onwards to 28%. Reduced rates (30% for 2013 and 27.59% for 2013) apply for specific industries, including agriculture, cattle farming and fishing. Items considered as income include:

Revenues Inflationary adjustments Exchange rate earnings Interest earned.

Items considered for tax deductions include:

Cost of goods sold Business expenses Depreciation Interest paid Inflationary adjustment.

An annual income tax return must be filed by 31 March after the end of the fiscal year. The fiscal year in Mexico runs from 1 January to 31 December. This is mandatory and cannot be changed.

6.2 Net operating losses A net operating loss (NOL) can be carried forward for 10 years. For mergers, only losses of the merging company remain. If two companies within the same industry (activity) merge, the balance of carried forward losses can also be merged.

6.3 Capital gains Proceeds from the sale of stocks, real estate, trust certificates and similar investments are taxed at the same corporate rate of 30% on the net gain. For foreign residents, Mexican legislation requires that an independent auditor file the tax report in order to carry out a tax


payment on the net gain of the transaction and in order to avoid the withholding tax on the gross proceeds.

6.4 Maquiladora Regime Maquiladoras is a specific tax regime authorised to Mexican companies (through the IMMEX Decree), which entitles companies to receive certain beneficial customs and tax treatment. Maquiladoras normally import inventories and PP&E, property of a foreign resident, on a temporary basis (for example, without actually owning such goods). Maquiladoras have safe harbour rules that protect the foreign resident from having a Permanent Establishment (PE) in Mexico. Maquiladoras are exempt from paying custom duties and VAT upon importation of temporary products. In addition, they may opt to pay income tax in one of two ways:

1. Safe harbour, or 2. Applying transfer pricing.

In either case, the effective income tax rates applicable to Maquiladoras are lower than the general Mexican corporate tax rates.

6.4.1 Safe harbour Maquiladoras opting for safe harbour are required to pay income tax on the greater of either:

1. The total value of assets used in the maquila activity (including foreign owned assets) multiplied by 6.9%, or

2. Total costs and expenses multiplied by 6.5%. What’s more, a Presidential decree published in October 2003 allows taxpayers operating as Maquiladoras under a Maquiladora entity to reduce their income tax by an amount that is equal to the difference between:

The tax base determined under safe harbour rules (assets or total costs and expenses) multiplied by 6.5% or 6.9%, and

The same taxable base, applying a 3% factor. A Maquiladora must comply with rigorous custom activity controls. Maquiladora programmes are approved for specific products and specified periods of time. If taxpayers fail to comply with such controls, the tax authorities may either impose fines on the company or terminate the company’s Maquiladora programme. This can cause major operational interruptions, such as ceasing of import and export activities until regularisation.

6.5 Transfer Pricing


Since 1997, multinational companies doing business in Mexico have had to observe transfer pricing regulations. Local legislation is based on the OECD guides. In addition, local groups must also comply with arm’s length standard, which means Mexican intragroup transactions must possess transfer pricing documentation. The tax authorities are especially sensitive to companies with:

Recurring losses in controlled transactions Unsubstantiated corporate restructuring (such as companies without assets or newly

created distributors) Sale of intangible property Payment of (management) services to foreign related parties without proper

evidence that a service was provided. Independent auditors are required to disclose lack to compliance with the Transfer Pricing rules.

6.6 Single-rate corporate tax (IETU) As of 1 January 2008, this tax replaced the asset tax, providing an alternative control measure for income tax. The key aspects of the ’lETU’ include:

The tax is determined on a cash basis - income is included as it is received and deductions are recognised as they are paid.

The general tax calculation is determined by subtracting from the income the authorised deductions. The tax is calculated by applying a 17.5% rate.

The ‘IETU’ is an alternative minimum tax to income tax, payable when it exceeds the income tax for the same year.

The tax is payable by resident individuals and entities and by non-residents with a PE in Mexico. Tax is paid on their worldwide income.

The tax does not apply to not-for-profit entities, as defined in the Income Tax Law. Scientific, political and cultural associations and societies are granted certain exceptions. The list also includes chambers of commerce, and authorised recipients of deductible donations, among others.

‘IETU’ is imposed on income proceeds from the sale of goods, performance of services and the temporary use or enjoyment of property (leasing). ‘IETU’ is determined on a cash flow basis. Enhanced payment is triggered upon collection of income and deductions are allowed upon payment to suppliers.

‘lETU’ cannot deduct tax free-benefits paid to employees, interests and royalties paid to related parties. This constitutes one of the main differences, besides cash flow, with the Income Tax base. Stocks are not taxed by ‘IETU’.

6.7 Social Charges


All employers must register their employees at the Social Security Institute and pay the monthly contributions applicable to each individual employee. Part of these social security payments are levied on the employers, and part on the employee. In total, employee social charges can range from between 25% and 35% of an employees’ nominal salary. Mandatory benefits include Social Security (Health Care) Retirement Savings, Housing Fund (Infonavit). Additionally, payments for vacation premiums, year-end bonuses and the employee profit sharing (see item 6.8 below) should be paid to employees, as a minimum legal requirement (Mexican Labor Law). Severance payments occur if a contract is terminated for reasons attributable to an employer. It is calculated as three months’ salary plus 20 days’ salary for each year of service. The Social Security Institute requires a mandatory independent audit from a Certified Public Accountant for companies that have over 300 employees. Below this threshold, employers can opt to perform this audit in order to ensure full compliance with social security regulations.

6.8 Employee profit sharing According to Federal Labor Law in Mexico, an employer must distribute 10% of its annual tax profit among employees. The latest payment can be made five months after the end of the fiscal year, so by 30 May each year.


7. Personal taxation

Individuals are taxed on income derived from:

The rendering of personal services (subordinate and independent) Leasing of land and real estate property Sale of property (including stocks or real estate) Acquisition of property (heritage and legacies) Entrepreneurial activities Dividends (and similar profits), interest, and prizes.

The Income Tax Law allows the deduction of certain expenses carried out, which depends on the kind of income earned by the individual. It also allows individuals to carry out some deductions, namely ‘personal deductions’ that include among others medical bills, funeral expenses, and donations. The income tax rate for individuals ranges from 2% to the maximum rate of 30%. The rates are progressive and ascendant in relation to the individuals’ annual income. See the taxable income bracket below, which currently apply:

Income Lower Limit

Income Upper Limit

Fixed Tax % over lower limit

$ 0 $ 5,953 $ - 1.92%

$ 5,953 $ 50,525 $ 114 6.40%

$ 50,525 $ 88,793 $ 2,967 10.88%

$ 88,793 $ 103,218 $ 7,131 16.00%

$ 103,218 $ 123,580 $ 9,439 17.92%

$ 123,580 $ 249,243 $ 13,087 21.36%

$ 249,243 $ 392,842 $ 39,929 23.52%

$ 392,842 and above $ 73,703 30.00%

Individuals must file an annual tax return by April in the year that immediately follows the year the income was obtained. Individuals are also required to pay ‘IETU’ (see section 6.6) on income obtained from rendering professional services, or the leasing and sale of property. ‘lETU’ is charged at a flat tax rate of 17.5%. Tax residence is determined by the actual domicile of the individual. If a foreign resident moves his or her domicile to Mexico (even on a non-permanent basis) must register as a Mexican taxpayer.


8. Double taxation agreements

Mexico has a vast number of double taxation treaties in place and the government continues to negotiate with new jurisdictions. Court resolutions have ruled that treaty benefits are above federal regulation, in spite of the tax burden locally established. However, to benefit from an international tax treaty, Mexican taxpayers must be able to produce proper documentation, such as invoices, contracts and records. In addition, a foreign company must supply a certification of tax residence in order to apply the preferential rates established by the treaties. Currently, Mexico has over 40 double taxation treaties signed, including:

Americas Bahamas, Barbados, Brazil, Canada, Chile, Ecuador, Panama, Uruguay, and the USA.

Europe

Austria, Belgium, Czech Republic, Denmark, Finland, France, Germany, Greece, Iceland, Ireland, Italy, Luxemburg, Netherlands, Norway, Poland, Portugal, Romania, Russia, Spain, Slovenia, Sweden, Switzerland and the UK.

Asia, Africa and Middle East Australia, South Korea, China, India, Indonesia, Israel, Japan, Singapore, and South Africa.

Countries pending treaty approval: Colombia, Costa Rica, Kuwait, Peru, and Venezuela. Countries with treaties currently under negotiation: Saudi Arabia, Aruba, Gibraltar, Hong Kong, Latonia, Lebanon, Liechtenstein, Malaysia, Malta, Monaco, Morocco, Nicaragua, Pakistan, Qatar, St. Lucia, Thailand, Turkey, Turks and Caicos Ukraine and Vanuatu.


9. Sales and use taxes

Under Mexico’s Value Added Tax (VAT) Law, the sale of goods and services, and the importation of goods are two separate VAT events. VAT is a Federal tax. No other sales or use tax is imposed by state or local government. As a general rule, provision of services or a sale with the delivery of products within Mexico, is subject to VAT. In such cases, the seller of the goods must collect the tax and remit it to the Mexican tax authorities. If a Mexican business is the importer, an input VAT credit can be claimed to offset the VAT charged to its customer. The VAT rate is 16% countrywide, with the exception of the border zone (11%). Since VAT is triggered through a cash transaction, payment is required upon actual collection from the customer. VAT on imports is levied on the importer of the goods and is paid through import duties. Since all companies are subject to VAT for either imported goods, or goods sourced locally, VAT rules on importation do not constitute by themselves as competitive issues regarding pricing. That is, VAT by itself does not make imported goods less competitive in terms of costs in comparison to local sourced goods.

Specific products are not subject to VAT (exempt). These typically relate to the food industry, land and buildings for residential use, books and newspapers, and interests paid to financial institutions. VAT is not charged on the exportation of goods and services. It is important to mention that VAT Law establishes for some products a 0% VAT rate. When the VAT paid to suppliers and service providers is higher than the VAT charged to clients, the credit balance can be requested as a refund from the tax authority. Alternatively, this balance can be used to offset other federal taxes.


10. Portfolio investments for foreigners

According to current Mexican law and regulations, a non-resident individual cannot be subject to Mexican tax for income realised through the sale of shares registered on the Mexican Stock Exchange, or any other securities exchanges or markets approved by the Mexican Ministry of Finance. Sales or other dispositions of shares carried out in other circumstances (private companies) are subject to Mexican tax. This is either through a withholding on the gross proceeds at a 25% rate, or 30% tax rate on the net gain. There are exceptions to the extent that a foreign resident is eligible for benefits when using a double taxation treaty. In accordance with the OECD Model Tax Convention, gains realised by foreign resident which is eligible to receive benefits utilising a tax treaty when selling or disposing of shares, will not be subject to Mexican income tax, providing:

The gains are not attributable to a permanent establishment or a fixed base in Mexico

The alienated shares derive more than 50% of their value directly or indirectly from immovable property.

It is important to mention that Mexico has in force some Tax Treaties in which the gain derived from the alienation of shares is not taxable for income tax purposes if the foreign resident owns less than 25% of the issued shares. Dividends are taxed at corporate level and not at individual level. This means all dividend distributions are not subject to Mexican withholding tax. The corresponding withholding tax derived from the interest payment will depend of the beneficial owner of such interest, the tax rate can vary from 4.9% to 40%. Bonds and paper issued by the federal government may be free of any withholding.


11. Trusts

The ‘fideicomiso’ (using its Spanish acronym) are similar to Trust agreements, and in Mexico are flexible agreements governed by the General Financial and Credit Operations Law. A fideicomiso is created when a ‘fideicomitente’ (settlor) dedicates a property to a particular lawful purpose, which may be either for private or public benefit. The settlor designates a fiduciary institution, which must be authorised to act as a fiduciary (normally a commercial bank). The most common fideicomisos found in Mexico include:

11.1 Investment fideicomiso Under this type of fideicomiso, the settlor transfers assets or rights to the fiduciary for investment and for the management of the funds/assets. Generally, with fideicomisos, the fideicomitente is also the beneficiary. Investments are made through the acquisition of assets, which generate a return on capital. These include fixed or variable income instruments, treasury bonds and obligations of common or preferential shares on companies.

11.2 Management fideicomiso The fiduciary manages the assets (usually real estate assets) transferred by the settlor, in accordance with the provisions of the agreement. Usually it is the ‘fideicomisario’ (trustee) who is the beneficiary of these fideicomiso. The purpose of this fideicomiso is to transfer all of the daily and active work of the real estate property to the fiduciary, such as rentals, payment of expenses, taxes and generally maintain it favourably for the trustee.

11.3 Guarantee fideicomiso The trustee transfers the legal title of certain assets or rights to the fiduciary, with the purpose of guaranteeing the fulfillment of an obligation towards a creditor (who is appointed as beneficiary) and its priority over the corresponding payment.

11.4 Entrepreneurial fideicomiso A fideicomiso created to perform business or commercial activities on behalf of the trustees. In these fideicomiso, trustees grant goods or funds to perform commercial activities under the name of the trust. The benefits of the entrepreneur can be either returned to the trustees or forwarded to the beneficiaries.

11.5 Using fideicomiso to acquire real estate The Mexican Laws prohibits foreigners from acquiring property within 100km of the border (north or south) or within 50 km of any shore. Using a trust, foreigners are allowed to purchase the right to use the property, even though they cannot gain the title to that land.


11.6 Other fideicomiso FIBRAs are fideicomisos modelled on investment vehicles used in other countries, such as the Real Estate Investment Trusts (REITS) that are used in the U.S. These types of instruments have enabled taxpayers to participate in real estate projects with a beneficial tax regime. FICASs are fideicomisos based funds offering specific tax benefits to attract venture capital investments in Mexico. FICASs have to invest at least 80% of their assets in Mexican non-listed companies, either by acquiring capital or debt.

11.7 Tax reporting requirements for fideicomisos Entrepreneurial fideicomisos are treated as regular taxpayers and consequently, the regular tax regime applies. In general, fideicomisos are transparent entities and tax regulations apply to trustees. However, the fideicomiso must comply on behalf of the trustees for any tax requirements. In practice, this means fideicomiso are required to comply with all applicable requirements of its trustees and beneficiaries, including accounting records, tax return filing, tax audits, etc.


12. Practical information 12.1 Transportation Mexico has international airports in all of the major cities and local airports that maintain connections throughout the country. The busiest airports are Mexico’s City Benito Juarez, Monterrey International Airport and Guadalajara’s Miguel Hidalgo International Airport. Most of the principal international airlines fly to and from Mexico City. Mexico also has 360,000 km of roads, and every small city can be reached by car or bus. However, most commercial, industrial and business locations are usually better served by the airlines.

12.2 Language The official language is Spanish, spoken by 97% of the population. However, in major cities and in business environments, English is widely spoken and understood. Some remote zones do have predominance of indigenous languages, like Mayan or Nahuatl.

12.3 Time relative to Greenwich Mean Time (GMT) Mexico has two time zones - the central time zone is six hours behind GMT and the Pacific Time zone is eight hours behind the GMT. Mexico City is within the central time zone. The entire country observes daylight saving time.

12.4 Business hours Regular business in Mexico is conducted between 9.00am and 7.00pm. Lunch is usually taken around 2.00pm, and long business lunches are common. Most business offices are closed on Saturday and Sunday.

12.5 Public holidays The national statutory holidays observed by businesses and government offices are:

New Years Day (Año Nuevo) – 1 January Constitution Day (Día de la Constitución) - 5 February (or closest Monday) Benito Juárez’s birthday (Natalicio de Benito Juárez) - 21 March (or closest Monday) Holy week (Thursday and Friday) - usually the last week of March or first week of

April Labour Day (Día del Trabajo) - 1 May


Independence Day (Día de la Independencia) - 16 September Revolution Day (Día de la Revolución) - 20 November (or nearest Monday) Christmas Day (Navidad) - 25 December

In addition, election days designated by federal and local electoral laws are statutory holidays.

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