doing business in mexico 2013 (b&m)

Doing Businessin MexicoLatin America2013

Doing Business in Mexico

This document has been prepared by Baker & McKenzie Abogados, S.C. or our clients and professional associates. This document only refers to Mexican law. While every effort has been made to ensure accuracy, no responsibility can be accepted for errors or omissions, however caused. The information contained in this document should not be relied on as legal advice and should not be regarded as a substitute for detailed advice in individual cases. No responsibility for any loss occasioned to any person acting or refraining from action as a result of material in this document is accepted by the authors or Baker & McKenzie Abogados, S.C. If advice concerning individual problems or other expert assistance is required, we would be pleased to oblige. Baker & McKenzie authorizes you to forward, reproduce, copy, archive and distribute this document without any changes and as long as you include the copyright notice below. The distortion, mutilation, modification or edition of this document is prohibited without the authors prior consent.

Table of Contents Overview .............................................................................................. 1

Political Structure and Legal System.................................................... 2

A. Foreign Investment Law .......................................................... 2 B. Competition Law ..................................................................... 9 C. IMMEX or Maquiladora Program ......................................... 15 D. Company Law ....................................................................... 28 E. Taxes ..................................................................................... 40 F. International Trade ................................................................ 50 G. Labor Law ............................................................................. 53 H. Environmental ....................................................................... 63 I. Intellectual Property .............................................................. 72

Contact Details: Latin American Network ......................................... 78


Baker & McKenzie 1

Overview This memorandum provides a general summary of certain aspects of Mexican law, which may be of interest to foreign companies considering doing business in Mexico. The areas of law summarized in this memorandum include:

A. Foreign Investment Law;

B. Competition Law

C. Maquiladora Operations;

D. Company Law;

E. Taxes;

F. International Trade;

G. Labor Law;

H. Environmental; and

I. Intellectual Property

Treaties, to which Mexico is a party, particularly the North American Free Trade Agreement (the NAFTA) among Canada, Mexico and the United States, may affect investors from certain countries and may modify the preceding areas of Mexican law. Although this memorandum makes numerous references to NAFTA and other treaties, it does not comprehensively address all instances in which Mexican law is modified or complemented thereby.

2 Baker & McKenzie

Political Structure and Legal System Mexico, whose official name is United Mexican States, is a federal republic comprised of 31 states and a federal district. As in the United States of America, the federal government is comprised of three branches: executive, legislative and judicial. The head of the executive branch is the President who is elected by popular vote for a six-year term. Legislative power is vested in the Chamber of Deputies and the Senate, whose members are elected for three-year and six-year terms, respectively. The judicial branch consists of a Supreme Court of Justice, Circuit Courts and District Courts.

Each of the 31 states has its own constitution, civil code and other local laws and regulations, as well as its own executive, legislative and judicial authorities. The head of the state executive branch is the governor. The legislative branch consists of the Chamber of Deputies and the local courts exercise judicial authority. Mexico has a civil law system, which is based on the Continental European legal tradition stemming from Roman law and Napoleonic principles. Under this system, basic legal principles are largely codified in civil, commercial, criminal, judicial and procedural codes. Judicial precedents are not binding except for federal courts decisions under certain circumstances.

A. Foreign Investment Law

Mexico enacted a new Foreign Investment Law (FIL) in 1993. The new FIL dramatically changed the regulatory framework for foreign investments in Mexico that was in place since 1973. Additional reforms have been made to the FIL in 1995, 1996, 1998, 1999, 2001, 2006 and 2008, respectively. The reforms embodied in the FIL largely follow those imposed by NAFTA, although NAFTA affords greater benefits in certain areas to U.S. and Canadian investors.

1. No Restrictions on Most Investments

As a general rule, the FIL allows foreign investors and Mexican companies controlled by foreign investors, without prior approval, to


Baker & McKenzie 3

(i) own up to 100% of the equity of Mexican companies, (ii) purchase fixed assets from Mexican individuals or entities, (iii) engage in new activities or produce new products, (iv) open and operate establishments, and (v) expand or relocate existing establishments. The only exceptions to that general rule are those expressly established in the FIL itself (discussed in section 1.2 below) or, in the case of the financial sector, in the legislation covering that sector. This new regulatory framework replaces the restrictions of the old foreign investment law, which generally limited foreign investment in Mexican companies to 49% or less.

2. Restricted Activities under the FIL

The FIL lists certain economic activities that are (i) reserved to the Mexican State, (ii) reserved to Mexican nationals or Mexican companies without foreign equity participation, (iii) subject to quantitative foreign investment limitations, and (iv) subject to prior approval if the foreign investor wishes to own more than 49% of a company engaged in those activities.

Activities Reserved to the Mexican State

In compliance with the Mexican Constitution and as a reflection of historical concerns regarding private investment, the FIL reserves certain strategic areas to the Mexican State. Neither Mexican nor foreign investors may engage in these areas of economic activity. These areas include (i) petroleum and other hydrocarbons; (ii) basic petrochemicals; (iii) electricity generation (as a public service), as well as its transmission and distribution; (iv) nuclear energy generation; (v) radioactive minerals; (vi) telegraphs; (vii) radio telegraphy; (viii) mail service; (ix) issuance of money; (x) control, supervision and security of ports, airports and heliports; and (xi) certain others expressly indicated under the corresponding legislation.

Activities Reserved to Mexican Investors

The activities reserved by the FIL to Mexican nationals and to Mexican companies without foreign equity participation include (i)

4 Baker & McKenzie

domestic and international1 land transportation of passengers, tourism and cargo, excluding messenger and courier services; (ii) retail trade of gasoline and liquefied petroleum (LP) gas; (iii) radio and television, excluding cable; (iv) development banks; and (v) professional and technical services reserved to Mexicans under the corresponding legislation.

Under the FIL, foreign investors may not engage in any of the foregoing activities, directly or indirectly, through any agreement or corporate structure or scheme, except through special approved neutral shares without voting rights or with limited corporate rights, or as otherwise approved by the National Commission of Foreign Investments (NCFI).

Activities with Foreign Investment Equity Limitations

The FIL establishes foreign ownership limits in certain companies, activities and types of shares, as set forth below:

up to 10%: production cooperatives;

up to 25%: domestic and specialized air transport and air-taxi transport;

up to 49%: insurance and bonding companies; foreign exchange houses; general deposit warehouses; retirement fund management; production and sale of explosives, firearms, cartridges, munitions, fireworks, excluding the purchase and use of explosives for industrial and extractive purposes, and the preparation of explosive mixtures for use in such activities; printing and

1 Under Transitory Article Sixth of the FIL, as of December 18, 1995, foreigners

may own up to 49% of the capital of Mexican entities engaged in the international land transportation of passengers, tourism and cargo within Mexico and in administrative services for bus stations and related services; they may own up to 51% of such enterprises as of January 1, 2001; and 100% as of January 1, 2004. This liberalization schedule follows NAFTAs phase out schedule for land transportation. Foreign investment in domestic land transportation will continue to be prohibited.


Baker & McKenzie 5

publication of newspapers for exclusive distribution within Mexico; Series T shares of companies owning agricultural, cattle-raising and forest lands; fresh-water and coastal fishing, and fishing in the exclusive economic zone, excluding aquaculture; comprehensive port management; piloting services to vessels engaged in interior navigation; shipping companies that operate commercial vessels for navigation in interior waterways and between domestic ports, excluding tourist ferries and the exploitation of dredges and naval devices for port construction, maintenance and operation; supply of fuel and lubricants for ships, airplanes and railroad equipment; and certain telecommunication services.

Unless a treaty otherwise provides (e.g. NAFTA in the case of financial services), a foreign investor may not own more than the permitted percentage of equity in a Mexican company engaged in any of the above activities. These limits may not be surpassed either directly or through any type of agreement or corporate structure or scheme, except through the neutral shares mentioned in 2.2 above.

Activities Where Foreign Investors Require Prior Approval to Own More than 49%

Under the FIL, prior approval is required for foreign investors to own more than 49% of a company engaged in any of the following activities:

Port services to vessels engaged in interior navigation, such as towing, and mooring;

overseas shipping;

companies authorized to operate public airdromes;

private schools, at a preschool, primary, secondary, preparatory and higher education levels;

legal services;

6 Baker & McKenzie

credit bureaus;

securities rating institutions;

insurance agents;

cellular telephone services;

construction of petroleum and petroleum derivatives pipelines;

drilling of petroleum and gas wells; and

construction, operation and exploitation of railways as well as public railroad transportation services.

Foreign investors are required to obtain prior approval to own more than 49% of a new or existing Mexican company must file an application therefore with the NCFI. The NCFI has 45 business days from the day the application is filed to issue its ruling. If the NCFI does not rule within this 45-day period, the application will be deemed approved.

3. Acquisition of Existing Mexican-Owned Companies

Under the FIL, a foreign investor may acquire more than 49% of the equity of an existing company owned by Mexican investors, without the prior approval of the NCFI, provided that the target company is not engaged in a restricted activity and the total value of the assets of such company does not exceed certain monetary thresholds established annually by the NCFI. Currently, this threshold is $3,244,014,508.30 Pesos (approximately US$250,000,000.00).

4. Branches and representative offices

Under the FIL, a foreign company must obtain approval from the Ministry of Economy (SECON) to establish and register a branch or a representative office in Mexico. SECON must rule on the branch application within 15 business days from the date the complete


Baker & McKenzie 7

application is filed. However, on August 8, 2012, SECON published in the Federal Official Gazette a General Resolution issued by the NCFI eliminating the requirement to obtain such registration for foreign companies from the USA, Canada, Chile, Costa Rica, Colombia, Nicaragua, Honduras, Uruguay, Japan and Peru, and stating that such entities only have to file a notice declaring certain information of the company, such as the corporate purpose, main activity and domicile. After the company files such notice, it will be able to be registered with the Public Registry of Property and Commerce.

5. Registration Requirements

Under the FIL, all foreign investments, whether subject to prior approval or not, must be registered with the Foreign Investment Registry within 40 business days from the date of the respective incorporation, branch registration, acquisition or execution of the relevant trust agreement. Foreign investors that do not register their investment with the Foreign Investment Registry are subject to administrative fines.

6. Repatriation and Remittance Rights

Mexican law does not impose any general restrictions or limitations on the remittance of dividends or repatriation of capital.

7. Real Estate

Mexican law establishes certain restrictions on land ownership by foreign investors in Mexico. These restrictions are discussed below.

Restricted Zone

Under the Mexican Constitution, foreign individuals and entities may not hold direct title to real estate in Mexico located within 100 kilometers from the border or 50 kilometers from the coastline (the Restricted Zone). However, such individuals and entities may hold the beneficial interest in such real estate under a Mexican trust. Real

8 Baker & McKenzie

estate trusts in Mexico have a maximum duration of 50 years and the trustee thereof must be a Mexican bank.

Under the FIL, Mexican companies with foreign equity participation may hold direct title to real estate located in the Restricted Zone if they engage in non-residential activities. If they engage in residential activities, they may hold the real estate in trust, i.e., they may not hold direct title thereto.

Non-Rural Land Outside Restricted Zone

Under Mexican law, foreign individuals and Mexican companies with foreign equity participation may hold direct title to non-rural land located outside the Restricted Zone.

Rural Land Outside the Restricted Zone

Foreign individuals may hold direct title to rural land located outside the Restricted Zone. Mexican companies with foreign equity participation may hold direct title to rural land, provided the ownership of such land is represented by special Series T shares. Foreign investors may not own more than 49% of the Series T shares issued by the respective company.

Quantitative Restriction of Land Ownership

The Mexican Constitution and regulatory agrarian legislation establish limitations on the amount of rural land a person may own and protect against expropriation for communal use. For example, generally the maximum area of irrigated land that may be protected from expropriation is 100 hectares per person. For lands subject to seasonal use and un-irrigated pastures subject to agricultural harvest, the maximum protection area is 200 hectares. Under the Constitution, a Mexican corporation may own and protect up to 25 times the land area one individual is permitted to protect.

Under certain circumstances and if certain requirements are met, a landowner may protect an area which exceeds the above limitations,


Baker & McKenzie 9

e.g., if he improves the quality of the land by installing irrigation or drainage systems.

B. Competition Law

On December 22, 1992, Mexico published in the Federal Official Gazette the Federal Law of Economic Competition (Ley Federal de Competencia Econmica), which became effective on June 22, 1993. In addition, the Regulations of the Federal Law of Economic Competition were enacted on March 4, 1998, and became effective on March 5, 1998.

Later on, on June 28, 2006 it was published in the Federal Official Gazette a decree regarding substantial amendments to the Federal Law of Economic Competition, which became effective on June 29 of the same year. In addition, on October 12, 2007 it was published in the Federal Official Gazette the new Regulations of the Federal Law of Economic Competition, which became effective on October 13, 2007.

The most recent substantial amendments to the Federal Law of Economic Competition were published in the Federal Official Gazette on May 10, 2011, becoming effective on May 11, 2011. Finally, in August 30, 2011 an amendment to Article 38 was published in order to introduce class actions (collective actions) provisions.

The Federal Law of Economic Competition and its Regulations are hereinafter jointly referred to as the Competition Law.

The Competition Law: (i) restricts monopolistic practices and regulates concentrations; (ii) creates the Federal Competition Commission (Comisin Federal de Competencia, hereinafter the Commission) with broad investigative and enforcement powers; (iii) sets forth the basic procedure for actions to be carried out by and/or before the Commission; and (iv) establishes the sanctions that may apply for breaching the Competition Law, without prejudice of the private right of action for damages and lost profits that might be applicable.

10 Baker & McKenzie

1. Monopolistic Practices

The Competition Law prohibits in broad terms those monopolies and practices which diminish, damage or impede free competition in the production, processing, distribution and marketing of goods and services. Monopolistic practices are classified in absolute and relative monopolistic practices.

Absolute monopolistic practices can be defined as any agreement between competitors which purpose is to eliminate competition between them. Competition Law typifies as absolute monopolistic practices those agreements or arrangements amongst competitors, which purpose or effect is: (i) to fix prices, or exchange information in such regard; (ii) to limit the production, purchase or distribution; (iii) to divide markets; and / or (iv) to rig public bids. The Competition Law provides that, apart from the civil and criminal sanctions that may be applicable to the parties involved, such agreements and arrangements are null and void, and therefore they will not have any legal effect.

Relative monopolistic practices can be defined as actions performed by economic agents with substantial market power to unduly displace other agents from a relevant market. The actions which may be deemed as relative monopolistic practices are those that consist in acts, contracts, agreements or procedures which purpose or effect is to eliminate third parties on a specific market, unduly prevent market access to third parties or give exclusive advantages to certain persons, in the following cases:

Between non-competitors, (a) the establishment of exclusive distribution agreements, whether based on subject matter, geographic territories or time periods, including the allocation of customers or suppliers; and (b) the imposition of obligations not to compete for certain periods;


Baker & McKenzie 11

The imposition of price or other conditions which distributors or suppliers must observe upon the re-sale of goods or provision of services;

Bundling / tied sales;

The sales or other transactions conditioned to the non-dealing with certain third parties;

The refusal to deal with certain parties;

Concerted action to pressure or retaliate against third parties (Boycott);

The systematic sales of good or services under its average (total or variable) cost;

The sale or granting of discounts conditioned to exclusivity;

Crossed subsidies;

Discrimination of prices offered to different buyers or sellers which are under the same conditions or circumstances;

Any other action to increase the costs or block the production process or reduce the sales of the competitors.

Relative monopolistic practices, unlike absolute monopolistic practices, are not per se illegal. Thus, in order for such practices to be illegal, they must be performed by an economic agent with substantial market power, being said power the capacity to fix prices or manipulate the supply of certain goods or services without any competitor that, actually or potentially, is capable of counteracting such capacity.

12 Baker & McKenzie

2. Concentrations

In general terms, a concentration is defined as any merger, acquisition of control, or any other action by means of which companies, associations, shares, equity quotas, trusts, or assets in general, are accumulated. The prohibited concentrations are defined as those between any persons or entities, whether competitors or not, having the purpose or effect of diminishing, damaging or preventing competition in identical, similar or substantially related goods or services. The Competition Law identifies certain items that the Commission must consider in determining whether a concentration violates this prohibition, such as the possible market power or price-fixing capabilities from the resulting concentration. The Commission has the power to condition its approval to a proposed concentration, on the restructuring of the transaction to avoid anti-competitive consequences. In addition, the Commission is also empowered to order the partial or full unwound of a prohibited concentration.

Proposed concentrations meeting any of the following thresholds must be notified to the Commission prior to their consummation: (i) transactions which value in the Mexican Republic exceeds 18 million times the daily minimum wage for the Federal District (DMW) 2, (approximately US$ 89 million dollars); (ii) transactions involving the accumulation of more than 35% of the assets or shares of a person or entity with assets or sales in Mexico exceeds 18 million DMW (approximately US$ 89 million dollars); (iii) transactions that (a) imply an accumulation of assets or capital stock in the Mexico exceeding 8.4 million DMW (approximately US$ 41 million dollars), and (b) involves persons or entities whose combined assets or annual sales on a world-wide basis exceed 48 million DMW (approximately US$ 239 million dollars).3

2 The current DMW is $64.76 Mexican pesos as of January 1st, 2013. 3 The exchange rate used to calculate the amounts in US dollars was of

$13.00 pesos per US dollar.


Baker & McKenzie 13

The Commission has a term of 35 business days to issue its resolution, such term is computed since the date in which the notification is filed or, if it is the case, since the date in which it is filed any additional information requested by the Commission. In case the Commission does not respond during such 35 day term, the transaction will be deemed as duly approved.

3. Federal Competition Commission

As the agency responsible for enforcing the Competition Law, the Commission has broad investigative and enforcement powers. It may institute administrative procedures on its own initiative or at the request of third parties, investigate and resolve such cases, and enforce its orders through administrative penalties. It may also bring cases of a criminal nature to the attention of the District Attorney. It must be mentioned as well, that the Commission may also issue advisory opinions in antitrust matters.

4. Dawn Raids

During the investigation of a monopolistic practice or a prohibited concentration, the Commission may conduct visits of verification without prior notice (dawn raids), at the premises of the entities under investigation, to request documents and information related to the investigation.

5. Administrative penalties

In addition to the obligation to cease the prohibited practices or divest prohibited concentrations, violators may be subject to administrative penalties in the following amounts:

Up to 10% of the annual income of the offender, for carrying out an absolute monopolistic practice;

Up to 8% of the annual income of the offender, for carrying out a prohibited relative monopolistic practice or a prohibited concentration;

14 Baker & McKenzie

Up to 5% of the annual income of the offender, for failing to file a concentration before the Commission, if necessary under the terms of the Competition Law;

Up to 200,000 DMW (approximately US$ 1 million dollars) for individuals directly participating in prohibited monopolistic practice or concentration, in their capacity as representatives of the offenders;

Up to 180,000 DMW (approximately US$ 900,000.00 dollars) for entities or individuals who induced, provoked or participated in a monopolistic practice or prohibited concentration;

Up to 8% of the annual income of the offender, for breaching a resolution issued by the Commission under an investigation procedure subject to an early closing, due to a settlement with the parties under investigation.

Up to 8% of the annual income of the offender, for failing to observe a stop order imposed by the Commission during a concentration review process.

Up to 10% of the annual income of the offender, for breaching an order issued by the Commission to discontinue those acts deemed as a monopolistic practice or a prohibited concentration.

In case the violator reoffends any of the above violations, the Commission can impose a fine of up to the double of the above listed amounts.

6. Criminal penalties

In addition to the administrative fines listed in the preceding item, as well as of the civil actions that may be exercised in its case, the individuals involved in the execution of an absolute monopolistic practice may also be subject to three to ten years of imprisonment and a fine of 1,000 to 3,000 DMW.


Baker & McKenzie 15

The Commission is the authority in charge of appearing before the General Attorney to bring the criminal action against the offenders, in the understanding that the Commission has issued a definitive resolution on the case and it has been identified the individuals that incurred in the relevant absolute monopolistic practice.

7. Action for Damages and lost profits

The Competition Law also grants private parties an express right of action to bring ordinary civil suits for damages and lost profits. In order to be able to bring such an action, the plaintiff must have previously given evidence of its alleged damages and lost profits in the administrative proceedings before the Commission. The judge is allowed to consider the Commissions opinion on the plaintiffs alleged damages and lost profits.

As of February 29, 2012 class actions (collective actions) were introduced to Mexican law by amendments to the Federal Civil Proceedings Code (enacted in August 2011). This statute allows the Federal Competition Commission and / or any representative of a group comprising at least thirty members to file a collective action for damages in circumstances where a group of end consumers have been harmed by an anti-competitive practice. As with individual actions, a prior finding of infringement by the Commission is a pre-condition to bringing a collective action for damages.

The Competition Law expressly denies any private right to bring an administrative action alleging damages and lost profits due to violations thereof.

C. IMMEX or Maquiladora Program

The Mexican maquiladora program was introduced over 30 years ago by the Mexican government to promote employment in Mexico. The maquiladora industry in Mexico is governed by the Decree for the Promotion of the Manufacturing, Maquiladora and Export Services Industry (the Maquiladora Decree or the IMMEX Decree) as amended on December 24, 2010.

16 Baker & McKenzie

1. Corporate Presence in Mexico

Under the Maquiladora Decree, a foreign investor may qualify to operate under maquiladora status only if it has a corporate presence in Mexico. A Mexican corporation that qualifies for maquiladora status may have up to 100% foreign ownership. The great majority of maquiladoras (also known as IMMEX companies) are wholly owned subsidiaries of foreign corporations.

2. Operation and Import Permits

To qualify for maquiladora status, the company must have its maquila or IMMEX program approved by the Ministry of Economy (or SECON for its acronym in Spanish). For such approval to be obtained, the company must submit detailed information about the manufacturing or service operation to be carried out, including descriptions of the following:

Product(s) to be assembled and/or manufactured in Mexico;

manufacturing or service process; and

materials, machinery, equipment, tools and auxiliary items to be temporarily imported into Mexico for the manufacturing or service process.

In addition, the company must perform annual sales abroad for a minimum value of USD$500,000 or invoice exportations for at least 10% of its total invoicing.

SECON has 15 business days from the date when the maquiladora program application is filed to issue its resolution. If SECON does not resolve within this period, the application will be deemed approved. The duration of the maquila program authorization will be indefinite, provided that all the provisions of the Maquiladora Decree and the conditions of the maquila approval are complied with.


Baker & McKenzie 17

(a) Services Maquiladora

The Maquiladora Decree provides for different types of maquiladoras, industrial, services, holding, outsourcing and shelter. The most common are the Industrial Maquiladora (which are those engaged in manufacturing activities), and Services Maquiladoras (engaged to provide services to goods subject to be exported or to provide export services). Among others, companies providing the activities of importation, warehousing, distribution, classification, inspection, testing, verification, repairing, reworking and recycling of goods subject to be exported, qualify as Services Maquiladora. Services such as product design, engineering, software related services, administrative and information technology services may also qualify under a Services Maquiladora program.

Services Maquiladoras, as any other maquiladoras, are also required to sell abroad at least USD$500,000 or to invoice abroad at least 10% of their total invoicing on a yearly basis.

3. Temporary importation

In general terms, the Maquiladora/IMMEX program allows the temporary importation of goods (including any material, parts and components, machinery and equipment) to manufacture export products or to render export services. The temporary importation of goods is Value Added Tax (VAT) exempt and in certain circumstances also duty free (as discussed further below). An additional benefit for companies operating under a IMMEX program is that they are exempted from non-tariff regulations (i.e. product labeling) on temporary importation of goods.

One of the most important obligations for Maquiladoras is that every good imported under temporary basis must be: i) exported within the prescribed legal terms; or, ii) subject to a change of customs regime from temporary to permanent importation within the legally prescribed terms. The term under which temporarily imported goods may remain under the temporary importation customs regime may

18 Baker & McKenzie

vary depending on its nature. The legally prescribed terms for temporary imports are as follows:

The temporary importation of raw materials, parts, components, auxiliary materials, packaging material, fuel and lubricants may remain in the country up to 18 months, which is extended to 36 months for companies with an IMMEX Program that are also Certified Companies, or to 60 months for Certified Companies authorized under the NEEC-SECIIT category (as described below);

Trailer containers and other containers may remain in the country up to two years; and,

Machinery and equipment may remain under the temporary importation customs regime for the duration of the IMMEX program of the importer of record.

Temporarily imported goods by a Services Maquiladora or by an Industrial Maquiladora may be transferred to other Maquiladoras.

Maquiladoras are not allowed to transfer temporarily imported goods to other companies in Mexico, except when such transfers are made to other maquiladoras, Mexican automobile manufacturers operating under the fiscal deposit regime. In all cases, these transfers need to be carried out in accordance with the applicable customs regulations.

When goods are transferred, they are considered as returned abroad for the transferor and imported under temporary basis by the transferee. In such cases, the transferred goods must be returned abroad or be subject to a change of custom regime from temporary to definitive in accordance with the prescribed temporary importation terms.

4. Import Duties.

Significant amendments to the Maquiladora Decree and the Mexican Customs Law came into effect between November, 2000 and January


Baker & McKenzie 19

1, 2001. Those amendments were passed for Mexico to comply with its obligations under NAFTA and other international trade treaties (such as the free trade agreement with the European Union).

Duties on the Importation of Machinery and Equipment

Since January 1, 2001, the importation of machinery and equipment is no longer subject to duty free treatment. According to the amendments to the Customs Law, a maquiladora will have to pay the applicable duties upon the temporary importation of machinery and equipment. Nevertheless, reduced duties may be available through Mexicos network of free trade agreements and under a special program available for manufacturers, known as Sectoral Promotion Programs (PROSEC). Machinery and equipment temporarily imported is still exempted from the payment of the value added tax, and the compliance with some non-tariff regulations and restrictions.

(b) Duties on the Importation of Raw Materials, Parts and Components pursuant to the NAFTA provisions

As a result of the implementation of the NAFTA provisions, if products produced with Non-NAFTA originating raw materials, parts and components imported under temporary basis are exported to the United States or Canada, the Non-NAFTA originating materials incorporated into products manufactured in Mexico may be subject to the payment of Mexican import duties. NAFTA originating materials are exempted from the payment of duties if imported under temporary basis. The payment of duties in Mexico can be made pursuant to the so-called lesser of rule, included under article 303 of NAFTA. This rule calculates the amount of Mexican import duties applicable on Non-NAFTA originating materials and subtracts the amount of import duties paid in the United States or Canada for the finished product imported into such countries. The result of this subtraction will be the amount of duties payable in Mexico. If the result is zero, no duties are payable in Mexico.

20 Baker & McKenzie

(c) Duties on the Importation of Raw Materials, Parts and Components pursuant to the provisions of the Free Trade Agreement with the European Union

The free trade agreement entered by Mexico with the European Union (EUFTA) has similar provisions to the NAFTA Article 303, since the EUFTA provides that as of January 1, 2003, Mexico may not grant exemptions or drawback on import duties for Non-EUFTA originating inputs incorporated into products exported to the European Union. Nevertheless, the provisions of the EUFTA differ from the provisions of NAFTA in the sense that duty relief restriction would only apply under the EUFTA when the finished products (that contain Non-EUFTA originating inputs) are imported into the European Union with preferential duty treatment. Therefore, if the finished products are imported into the European Union without claiming preferential duty treatment, the maquiladora would not be subject to the payment of import duties for the Non-EUFTA inputs incorporated in the finished products.

5. Certified Company Program.

Maquiladora and non-Maquiladora companies may secure a special registration from the Mexican Customs authorities to operate as a Certified Company, which grants access to a considerable amount of benefits that allow companies to save costs and time by being able to enjoy easier and more expedite customs clearance processes, reduction in documentation requirements as well as certain tax advantages related to the virtual exportation and importation of goods.

The specific benefits granted to each company depend on the Certified Company category under which such company is authorized. These categories have been recently established for purposes of integrating the Authorized Economic Operator (AEO) program in Mexico for easier and safer commerce. In Mexico, the AEO is reflected in the NEEC category, as a safety and security regime, which requires tax, customs and trade compliance. Being safer and compliant, NEEC


Baker & McKenzie 21

companies are granted more benefits than the other Certified Companies.

The categories and main benefits for each of them are reflected in the following table. Please note that each category has its particular benefits in addition to the benefits granted to the prior categories.

Non-IMMEX and Carriers and Courier companies

Importation without declaring serial numbers in pedimentos.

In-house brokers. Rectify pedimentos up to 3 times (vs. 2 for

non-certified) if favorable balance of duties/taxes.

60 days for complying with non-tariff regulations after a seizure of goods (PAMA).

IMMEX Extended time frame for returning temporarily imported goods to 36 months (vs. 18 months)

Importation of sensitive goods (e.g. steel) Virtual operations for transferring recreation

and sport boats. Common in-house brokers for companies of

the same corporate group. NEEC (New Regime)

Exclusive fast-lanes One vehicle with different customs transactions

(temporary, definitive, returns) Processing of virtual transactions to non-

IMMEX companies (pedimentos code V5) Automatic Reliable Importer Registration Rectification of origin information after

customs clearance and before audit by Hacienda, and for increasing quantity or volume of goods

Return of labels and manuals to USA and CA

22 Baker & McKenzie

without paying importation duties (NAFTA) Regularization of undeclared or exceeding

goods detected by the authority (10 days) for release from seizure, or during audit

PROSEC rates for changes of customs regime Process pedimentos for temporary importation

or return of exceeding or undeclared goods detected by the authority

Return undeclared goods not belonging to production processes of IMMEX, before audit

One complementary pedimento for all returns in one month (NAFTA)

NEEC IMMEX Controller companies

One pedimento may cover goods for more than one controlled company.

Controlled companies may consider as exportation of services, the manufacture, transformation or repair of goods that were temporarily imported by the Controller company.

NEEC MMEX Aeronautics

Temporarily imported fuels, consumption materials, raw materials, parts, components, packaging and labels may remain in Mexico for the validity of the IMMEX Program (vs. 18-36 months)

Discharge of import-export transactions made by tariff item and actual consumption and not by serial number, part number, brand or model.

No need to state in pedimento serial number, part number, brand or model.


Baker & McKenzie 23

NEEC IMMEX SECIIT

Discharge of import-export transactions made by tariff item and actual consumption and not by part number.

60 days upon authorization for adjusting differences between SECIIT and companys inventory control system

No requirement to maintain or provide Value Declaration or Calculation Sheet

Simplified Electronic Pedimento (also for consolidated operations)

Requirements to Secure the Registration as a Certified Company.

There are several requirements and thresholds for Maquiladoras to become Certified Companies, based on the category in which the Maquiladora wishes to apply for. These requirements and thresholds may include certain importation amounts, number of employees, and value of fixed assets.

The NEEC categories include further and stricter requirements, regarding customs compliance and extensive safety measures, as well as other specific requirements for controller and aeronautics companies. However, NEEC companies enjoy additional benefits than the ones provided to the other Certified Company categories.

6. Tax Implications.

As explained in more detail below, the tax implications for a maquiladora operation in Mexico are highly dependant on the type of structure of those operations and the type of activities carried out by the maquiladora. There are also special tax benefits applicable to maquiladora operations that meet certain requirements.

24 Baker & McKenzie

Structuring of Operations.

Export maquiladora operations can be implemented either under what is commonly known as the Buy-Sell model or under a Consignment Manufacturing model.

Under a Buy Sell model, the maquiladora company owns the machinery and equipment, raw materials used in its operations and also the finished products resulting from it. The maquiladora sells the finished products to foreign related or unrelated parties or to customers in Mexico. Maquiladora operating under this model are subject to taxation in Mexico under general rules.

A more common structure for maquiladora operations is to operate under a Consignment Manufacturing model (or toll-manufacturing), whereby a foreign company provides (on a free bailment basis) the inventory and the M&E to the maquiladora company, which processes such inventory in exchange for a manufacturing services fee. The finished products are owned by the foreign resident.

This model allows for the foreign resident to maximize the benefits arising from the sale of the finished products, while attributing a modest return to the maquiladora company calculated in accordance with transfer pricing regulations, as described in more detail below.

Tax Benefits of Operating as a Maquiladora.

Maquiladoras are subject to Mexican taxes, including income tax, single rate tax (or IETU for its acronym in Spanish), and value added tax (VAT).

The tax benefits of operating through a maquiladora company structured under the Consignment Manufacturing model are summarized as follows:

The ability to engage in consignment manufacturing (also knows as toll manufacturing) with a foreign principal, without


Baker & McKenzie 25

exposing the foreign principal to the risk of having a tax presence (a permanent establishment) in Mexico, so as to be subject to Mexican income tax and IETU.

Being subject to a combined income tax and IETU liability, in an amount that is generally equal to 17.5% of the maquiladoras income tax base. Not being able to apply this benefit will result in the maquiladora being subject to income tax at the general rate (30% for 2013) and the calculation of the IETU based on the normal IETU base, which may result in a significant tax impact.4

The application of special transfer pricing rules giving the maquiladora a choice of methods for computing the amount of the maquiladora service fee charged to the foreign principal (included in article 216-BIS of the Income Tax Law).

A zero rate of VAT on the invoices issued by the Maquiladora to its foreign related party for the manufacturing processing or service fee.

Requirements to Apply the Tax Benefits Available to Maquiladoras.

As of January 1, 2011, the requirements for a maquiladora company to apply the special tax benefits with respect to income tax and IETU mentioned above are focused on regulating the use and return abroad of raw materials, parts and components, as well as the ownership of machinery and equipment that is used in a maquiladora operation. Those requirements are described below:

That a transformation or repair process be performed through the maquiladora operation, using raw materials, parts and components provided by a foreign resident which as entered into a Maquiladora Agreement with the maquiladora company.

4 This special benefit is only applicable through December 31, 2013, but may be

extended to apply for future years.

26 Baker & McKenzie

Activities that are also considered as transformation include:

o dilution in water and other substances;

o washing or cleaning, including the removal of oxide, grease, paint or other coatings;

o the application of conservatives, including lubricants, protective encapsulation or painting for conservation, adjustment;

o sanding, filing or cutting;

o preparation in doses:

o packing and repacking;

o testing, marking, labeling or classification;

o product development or quality improvement of products, except when related to brands, commercial notices and trade names.

That temporarily imported goods used in the transformation or repair process, as well as domestic goods or goods that are imported on a definitive basis and are incorporated into the products being transformed or repaired, be exported or returned abroad, physically or by means of virtual operations.

That the maquiladora operations be carried out using machinery and equipment (M&E) that is owned by the foreign resident that has entered into a maquiladora agreement with the Maquiladora and that has not been owned by the Maquiladora company or a Mexican related party

In addition to the M&E owned by the foreign resident, it is also allowed to use (i) M&E owned by another foreign resident, under certain circumstances, (ii) M&E leased from unrelated parties, and


Baker & McKenzie 27

(iii) M&E owned by the maquiladora company, as long as the machinery and equipment in these categories must have not been owned by a Mexican related party of the maquiladora.

The machinery and equipment owned by the foreign resident must represent at least 30% of the total machinery and equipment used in the maquiladora operation.

This new requirement will not be applicable to maquiladoras that were authorized to operate under an IMMEX program as of December 31, 2009 and that have complied with the provisions set forth in article 216-BIS of the Income Tax Law

It is also important to mention that these requirements only apply to machinery and equipment used in the maquiladora operation. Other types of assets, such as buildings, land, administrative equipment, transportation equipment, tools or molds are not subject to any type of restriction with respect ownership or origin.

Maquiladora companies must comply with transfer pricing regulations and the foreign resident that has a contractual relationship with the maquiladora must be a resident of a country with which Mexico has entered into a Tax Treaty.

The transformation or repair of goods sold in Mexico and that are not documented with export pedimentos will not be considered as maquiladora operations for purposes of applying the special tax benefits.

Maquiladora companies not complying with these requirements, will still be able to apply the trade, customs and VAT benefits of operating under the IMMEX Decree.

7. Sales into Mexican Market

Maquiladoras may sell a portion of their output into the domestic Mexican market. A maquiladora company is able to sell to the domestic market up to 90% percent of the total value of its annual

28 Baker & McKenzie

sales. In any event, import duties and value added tax should be paid on all imported materials or components contained in the finished product to be sold into the Mexican market, unless the sale is made to a foreign residents with a physical delivery to another maquiladora company, in accordance with customs procedures.

There are complex rules that must be observed for purposes of complying with trade and tax requirements. In most cases the maquiladora company carries out those sales directly to customers in Mexico, but this may cause some distortion with respect to the application of the tax benefits applicable to maquiladoras (see section 6), mainly because the application of those benefits are not intended for non-maquiladora operations, such as sales of products

D. Company Law

1. Forms of Business Organizations

The Mexican General Law of Commercial Companies (GLCC) regulates various forms of business organizations. The GLCC regulates not only the requirements for their incorporation, but also sets forth their corporate governance directives. Among the relevant and most commonly used forms of business organizations regulated in the GLCC, are the following:

corporations (Sociedad Annima or S.A. or Sociedad Annima de Capital Variable or S.A. de C.V.; hereinafter collectively referred to as corporation(s));

limited liability companies (Sociedad de Responsabilidad Limitada or S. de R. L. or Sociedad de Responsabilidad Limitada de Capital Variable or S. de R. L. de C.V.); and

partnerships (Sociedades de Nombre Colectivo or Sociedad de Nombre Colectivo de Capital Variable).

Foreign investors do not commonly use partnerships, as their investment vehicles in Mexico due to the fact that such investment


Baker & McKenzie 29

vehicles do not provide limitation of liability to its partners. U.S. investors frequently incorporate a limited liability company because this form of business organization does provide limited liability to its partners and also because it provides certain benefits for U.S. tax purposes they are (considered as pass-through entities). Corporations, however, are by far the most common form of business organization used in Mexico, therefore this section four is limited to corporations and limited liability companies.

Also, the Securities Market Law (SML) contemplates the following forms of business organizations:

investment development corporations (Sociedades Annimas Promotoras de Inversin or SAPIs)

securities investment development corporations (Sociedades Annimas Promotoras de Inversin Burstil or SAPIBs; and

publicly held corporations (Sociedades Annimas Burstiles or SABs)

2. Corporations

Capital Stock

Upon incorporation, a corporation must have fully subscribed capital stock in an amount freely set by the shareholders in the corporations charter and bylaws (minimum fixed capital) and at least 20% of their capital contribution paid in cash. In case of contributions in kind, the same must be subscribed and paid in full on the incorporation date. In case of contributions some special rules apply, requiring the corporation to withhold shares paid with in kind contributions for 24 months as of the contributions date as a guarantee the value of the in kind contributions are not reduced in a percentage higher than 25%.

Shares of stock, the certificates of which are considered negotiable instruments under Mexican law, represent the capital stock of corporations. The S.A. and S.A. de C.V. differ in at least one

30 Baker & McKenzie

significant aspect. A maximum amount of capital stock for an S.A. is fixed and specified in its charter and bylaws and any subsequent increase or decrease to such fixed capital requires amending the referred incorporation documents. On the other hand, the charter and bylaws of a S.A. de C.V. sets the minimum fixed portion of its capital stock and the variable portion of such capital may remain open. In this scenario, the variable portion of its capital stock may be unlimited and may be increased or decreased without amending the incorporation documents as in the case of the S.A. For this reason, foreign investors, particularly those with wholly owned subsidiaries that want flexibility to increase or decrease the corporations capital stock without any other formalities, prefer to organize their business activities in Mexico under the form of a S.A. de C.V. rather than through a S.A.

Minimum Number of Shareholders

There must be at least two shareholders to incorporate a corporation. Unless otherwise limited by the Foreign Investment Law and its Regulations, the GLCC allows the shareholders of any given corporation to be Mexican and/or foreign.

Management Structure

The corporations management may be vested in one (Sole Administrator) or more directors (Board of Directors). Whenever two or more directors are entrusted with the management of a corporation, they must act as a Board of Directors. If the Board of Directors has three or more members, the individual shareholder or group of shareholders owning 25% or more of the corporations capital stock have the right to appoint at least one member of the Board. The corporation will be legally represented by its Sole Administrator or Board of Directors, as the case may be, and its authority will be contained in the corporations bylaws or conferred by the shareholders.

The corporations Sole Administrator or Board of Directors will be vested with the authority to appoint one or more general or special managers. By its nature, such appointment may be revoked at any


Baker & McKenzie 31

time by the corporations Sole Administrator, Board of Directors or by the shareholders. There are some statutory limitations contemplated by the GLCC in order to be appointed as Sole Administrator, Board member and/or general or special manager.

Management Surveillance

In order to obtain a better protection of the shareholders of Mexican corporations, the GLCC provides for the existence of a Statutory Auditor (Comisario) to be appointed directly by shareholders, whose main task and duty will be to survey the corporations management for the benefit of the shareholders. As in the case of managers, there are some statutory limitations contemplated by the GLCC in order to be appointed as Statutory Auditor of any given corporation, which attempt to secure their independence with respect to the corporations management.

Annual Shareholders Meetings

The shareholders of Mexican corporations must held an annual shareholders meeting to discuss and approve, as the case may be, the management report and the financial statements of the corporation. Such annual shareholders meeting must be held no later than April 30 of every year.

3. Limited Liability Companies

Capital

Upon incorporation, a limited liability company must have a fully subscribed capital with at least two equity quotas with a value of at least $1.00 Mexican Peso each (minimum fixed capital), as established by the members in the companys charter and bylaws, and at least 50% of such capital contribution must be fully paid. The capital of limited liability companies is divided in equity quotas, which by of law are not considered negotiable instruments. The assignment of equity quotas, as well as the admission of new members to participate in the limited liability companys social capital, requires a prior favorable resolution of the majority of its members, unless the

32 Baker & McKenzie

companys bylaws establish a higher percentage. As in the case of corporations, the treatment to minimum fixed and variable portion of the capital on the S. de R. L. and the S. de R. L. de C.V. differ in a similar manner as set forth in section 4.2.1 above. Based on the above considerations, most foreign investors prefer to organize their business activities in Mexico under the form of a S. de R. L. de C.V. rather than through a S. de R. L.

Number of Members

There must be at least two members to organize a limited liability company and a limit of 50 members has been set forth by the GLCC. Unless otherwise limited by the Foreign Investment Law and its Regulations, the GLCC allows the members of any given limited liability company to be Mexican and/or foreign.

Management Structure

The limited liability companys management may be vested in one (Sole Manager) or more managers (Board of Managers), which can be freely removed by the companys members at any time. Whenever two or more managers are entrusted with the management of the company, they must act as a Board of Managers. The company will be legally represented by its Sole Manager or by its Board of Managers, as the case may be, and its authority will be established in the companys by-laws or conferred by the members.

As in the case of corporations, some statutory limitations established by the GLCC will be applicable for the appointment of the companys Sole Manager or to the managers comprising the Board of Managers.

Annual Partners Meeting

The members of a limited liability company must have at least one meeting at any time of every year.


Baker & McKenzie 33

4. SAPIs

SAPIs are corporations incorporated pursuant to the GLCC that adopt the SAPIs regime as provided by the SML (a corporation subtype that may precede the SAPIBs, which may trade its stock in the stock market). The SAPIs are not required to register its securities with the National Securities Registry (Registro Nacional de Valores or NSR).

SAPIs must transform to SAPIBs in order to be susceptible of being publicly traded. The bylaws of SAPIs shall comply with the requirements set forth in the GLCC and may, inter alia:

a. Establish restrictions different to the conveyance or title or rights derived from same series or class shares representative of its corporate stock;

b. Establish shareholder exclusion clauses or for the exercise of severance, retirement or stock amortization rights; and

c. Establish the right of issuing shares: (i) with no voting rights; (ii) with restricted voting rights; (iii) granting limited non-economic corporate rights such as veto rights over some SAPI shareholders meeting resolutions or qualified vote from one or more shareholders, required to adopt certain shareholders meeting resolutions.

The management of the SAPIs shall be vested in a Board of Directors and SAPIs may adopt the surveillance regime applicable to SABs for the conformation of its Board of Directors, the creation of auxiliary committees to the Board of Directors and the appointment of an external auditor.

SAPIs may acquire their own shares, by: (a) charging them to their net worth, in which case, the SAPIs may retain the shares and no capital reduction will be needed; or (b) charging them to their paid-in capital, provided such shares are cancelled or converted into issued unsubscribed shares held by the treasury of the SAPI.

34 Baker & McKenzie

SAPIs are subject to a regulatory framework different to that applicable to corporations (sociedades annimas) in accordance with the GLCC with respect to minority rights. Among such differences are the following:

a. The right to appoint or revoke the appointment of a member of the Board of Directors and an Statutory Auditor (in its case), for shareholders holding at least 10% of the total voting shares (for ordinary commercial corporations, holding a minimum of 25% is required);

b. The right to request the call to a general meeting of shareholders (or extend the voting of its resolutions for up to 3 days) resolving on matters on which they are entitled to vote, for shareholders holding at least 10% of the paid-in capital of the corporation (for ordinary commercial corporations, holding a minimum of 33% is required);

c. The right to commence civil liability claims against the administrators and/or the Statutory Auditor (in its case) in the interest of the corporation, for shareholders holding at least 15% of the total voting shares (for ordinary commercial corporations, holding a minimum of 33% is required); and

d. The right to judicially oppose to certain resolutions of the general shareholders meeting, for shareholders holding at least 20% of the paid-in capital of the corporation (for ordinary commercial corporations, holding a minimum of 33% is required).

Shareholders of SAPIs may enter into agreements providing for (i) non competition; (ii) call and put options subject to diverse modalities; (iii) exercise of preferential share purchase or sale rights or restrictions; (iv) voting exercise covenants; and (v) covenants for purchase and sales of shares in public offerings. For SAPIs transforming to SABs, such agreements may also be validly entered into provided they are disclosed to the corporation for their disclosure to the market.


Baker & McKenzie 35

Although the SAPIs cannot be publicly traded, due to the preferential treatment of SAPIs as compared to ordinary commercial corporations, and to the institutionally perception that may be derived from the adherence to more modern transparency and corporate governance standards, SAPIs may constitute an attractive corporate subtype entity for some companies.

5. SAPIBs.

In the event a SAPI wishes to register its shares in the NSR and list them in the stock exchange, the SAPI must comply with the requirements applicable to SAPIBs. Such securities may be traded with or without a public offering and may only be acquired by institutional or qualified investors or by any other person that expressly acknowledges knowing the risks and characteristics of such securities (hereinafter collectively and indistinctly referred to as Sophisticated Investors).

SAPIBs may operate for a maximum of three years before transforming to SABs. The purpose of such term is allowing SAPIBs a transitional period during which they can adopt the corporate governance and administration measures that are required so that they comply with the entirety of the regulations and meet the entirety of the obligations applicable to SABs.

To become SAPIBs and hence being subject to registration with the NSR, any SAPIs shall:

a. Request its registration with the NSR and to that effect adopt the information disclosure requirements set forth by the National Banking and Securities Commission (the NBSC);

b. That its shareholders meeting has resolved (i) adding the expression Burstil or its abbreviation, the letter B, to the denomination of the corporation; (ii) adopting the SAB form within a term not to exceed 3 years as of the date of recording with the NSR; (iii) progressively adopting the regulatory regime applicable to SABs in accordance with the rules setout by the

36 Baker & McKenzie

stock exchange and modify the bylaws of the SAPIB to adequate the integration of the capital stock to the regime applicable to SABs, all within a term of 3 years;

c. Have at least one independent member of the Board of Directors;

d. Appoint a corporate practice compliance committee (which shall also have the duties of the auditing committee if so decided by the corporation); which committee shall be presided by an independent member of the Board of Directors; and

e. That the secretary of the board has authenticated the number of shares held by each shareholder.

Once registered with the NSR, in order to be traded in the stock exchange with or without public offering, SAPIBs shall:

1. Prepare a placement prospectus or informative document establishing (i) its differences as compared to SABs; (ii) the terms and conditions for the implementation through time of the program for the compliance of the requisites applicable to SABs; and (iii) a reference indicating that the securities may only be traded among Sophisticated Investors; and

2. Having the approval of the NBSC of its program for the compliance of all requisites applicable to SABs within a term of 3 years.

6. SABs

The SML establishes that corporations different from the SAPIBs, and whose shares are registered before the NSR, shall add to their corporate name the word Burstil or its abbreviation B. In other words, any company having such word or abbreviation in its corporate name will indicate its being a publicly held company (whether it being a SAPIB or a SAB). Formerly, publicly held corporations, were known only as issuer or securities corporations.


Baker & McKenzie 37

Among the most relevant modifications to the organizational and functional regime of the SAB, are the following:

a. Creation of consortiums.

Group of companies being a part of the same economic unit are characterized, for purposes of the SML, as a consortium, that is, a single economic management and decision unit. Consequently, the SML shall be applied to them on a consolidated basis, mainly in aspects such as (i) the disclosure of information (given that any event that affects the value of any of the subsidiaries, will affect the value of the consortium); (ii) the auditing and corporate practices roles of the Board of Directors (so that the operation policies with respect to related parties are observed among all members of the whole consortium); and (iii) consolidated accounting.

b. Duties of the Board of Directors.

The role of the Board of Directors is modified by vesting upon it the following duties (related with the strategic and surveillance of the corporation, as opposed to the regime setout by the GLCC for ordinary commercial corporations and in accordance with the operational reality of publicly held companies):

1. Establish general strategies and policies relevant to the operation of the business;

2. Approve relevant transactions or those into which the SABs enter into with related parties, taking into consideration the prior opinion of the corresponding committee; and

3. Surveillance of the management and conduction of the SAB.

c. Duties of the general manager.

38 Baker & McKenzie

The general manager (as the main officer of the SAB) shall be responsible, among other things, for:

1. The management, conduction and execution of the day to day business;

2. The existence and maintenance of the accounting, control and registry systems; and

3. The compliance of the resolutions adopted by the Board of Directors and the shareholders meetings and the disclosure of relevant information.

d. Surveillance.

The Statutory Auditor disappears and the surveillance duties of the SAB are distributed among the Board of Directors, the auditing and corporate practices committee or committees, and the independent external auditor. Hence, the surveillance duties for the management, conduction and operation of the business of the SABs and other legal entities controlled by the SABs, is vested in the Board of Directors through the committee or committees created to carry out the activities related with corporate practices and auditing, as well as through the legal entity that performs the external audit of the company, based on the competencies that respectively corresponds to each of them.

e. Integration of Board of Directors.

The Board of Directors shall be conformed by at least 5 and a maximum of 21 members out of whom at least 25% shall be independent directors not having conflict of interest with the SAB.

f. Integration of committees.

Committees shall be formed by a minimum of 3 independent counselors not having conflict of interests with the SAB, to guarantee the impartiality of their recommendations (although such


Baker & McKenzie 39

recommendations are not binding to the Board of Directors). However, if the Board of Directors does not comply with the recommendation of a committee, such fact must be disclosed to the stock market.

g. Duty of loyalty and Duty of Care

The functions and responsibilities of the directors and officers of the SAB are regulated. The governing principles of their positions are: (a) creating value for the SAB; and (b) acting in accordance with duty of loyalty and duty of care principles, subject to the business judgment rule.

1. Duty of Care.

In general terms, the duty of diligence that should govern the actions of members of the board directors of SABs consists in their obligation of conducting themselves in good faith and placing the interests of the SAB above their own. For such purpose, directors are entitled to secure the information that they deem necessary for the making of their decisions; request the appearance of relevant officers, postpone meetings of the board when justified causes exist and deliberate and vote. In certain cases, abstaining from attending the meetings of the Board of Directors or the committees, to disclose relevant information to the board or the committees or to comply with their statutory obligations are translated into breaches of the duty of care.

2. Duty of Loyalty.

In general terms, the duty of loyalty, extensive to the members and the secretary of the Board of Directors of SABs consists in their obligation of (i) maintaining confidentiality on the corporate matters with respect to which they gain knowledge in the exercise of their corporate duties; (ii) abstaining from acting in a manner inconsistent with conflict of interest rules; and (iii) informing the audit committee and the external auditor of any irregularities in the company or the

40 Baker & McKenzie

consortium of which they become knowledgeable during the exercise of their appointment.

h. Minority rights.

1. 5% of shares needed to exercise a civil action against directors and officers;

2. Relevant information and relevant events are disclosed, providing a more fair treatment to stock market participants, allowing them to attain a better knowledge of the financial standing of the SAB;

3. Hostile takeover protection clauses are allowed when: (i) they are adopted in an extraordinary shareholders meeting; (ii) no more than 5% of the shareholders present at the meeting have voted against it, (iii) they do not exclude from the benefits of such clause a shareholders group different from those who pretend to achieve the control; and (c) they do not obstruct in an absolute manner the corporate control of the SAB.

E. Taxes

1. Treaties

Mexico has executed treaties for the avoidance of double taxation with various countries, including the U.S., Canada, and most OECD countries. Those treaties establish different rules for taxation of permanent establishments and of Mexican-source income (e.g., withholding rates on dividends, royalties, and interest) derived by residents of the signatory countries. The relevant tax treaty must be reviewed to determine the applicable rates. Absent such a treaty, the rules of the Mexican Income Tax Law (ITL) will govern, as discussed below.

It should be noted that in the past couple of years, in line with the Internationally Agreed Tax Standard adopted by the Global Forum of Transparency Mexico has executed several Tax Information Exchange Agreements (TIEAs) with different countries for purposes of


Baker & McKenzie 41

promoting international co-operation in tax matters through exchange of information. Some of these TIEAs have been executed with countries like Netherlands Antilles, The Bahamas, Bermuda, Isle of Man, Cayman Islands, Cook Islands and Guernsey, despite the fact that they remain in Mexicos blacklist.

2. Corporate Income Tax

Corporations

Under the ITL, a company resident in Mexico is subject to income tax at the rate of 30% on its worldwide net income, that is, its gross income minus allowable deductions.

The recognizable income includes income in cash, in-kind, service, credit (i.e., when accrued), or any other form.

The basis of the tax is equal to the recognizable income minus allowable deductions and the previous years net operating losses.

The allowable deductions include returns, discounts, and rebates; cost of goods sold; expenses, net of discounts, bonuses, or returns; depreciation and amortization; bad debts; certain losses; accrued ordinary interest, and penalty interest with certain requirements; annual inflationary adjustment; net operating losses; and others.

Mexico is a formalistic country and, consequently, several requirements apply for the deductions to be allowed. All deductions must be strictly indispensable for the activities carried out by the taxpayer, supported by invoices that meet specific requirements, recorded in the accounting books of taxpayer, and paid with check or credit/debit/service card, or wire transfer. In addition the taxpayer must comply with withhold and reporting obligations, if applicable, and other obligations. Other deductions must meet the specific requirements established by the ITL.

Some expenses are not allowed as deductions. Such is the case, for example, of taxes, conventional penalties, and goodwill.

42 Baker & McKenzie

Dividends

Dividends distributed by Mexican companies are not subject to withholding tax. If the dividends are distributed from the companys net after-tax profit account (CUFIN), the company distributing the dividends will not be subject to tax on their payment. The net after-tax profit account is comprised of the companys net after-tax profit for each fiscal year, plus the dividends received by the company from other companies resident in Mexico, minus the dividends distributed in cash or in kind from that account.

Conversely, if a dividend is distributed from a source other than the net after-tax profit account, the company distributing the dividend will be subject to tax at a rate of 30% applied to the amount of the dividend multiplied by a factor of 1.4286.

If the dividend is received by a corporate taxpayer that is a resident of Mexico, said taxpayer does not consider such dividend as taxable income for income tax purposes, since the profits are taxed only once at the level of the distributing entity.

Withholding Taxes

Royalties, license fees or other compensation paid by a Mexican licensee to a nonresident for unpatented technology, software or technical assistance are subject to withholding tax at the rate of 25%. Royalties paid to a nonresident for patents, trademarks, for trade names, or for advertising, are subject to withholding tax at the rate of 30%. Under most tax treaties that Mexico has entered into, the rate on royalty payments (as defined in those treaties) drops to 10% of the gross amount of the royalty.

Interest payments to nonresidents are subject to withholding tax at the rates of 4.9%, 10%, 15%, 21% or 30%, depending on the type of payee or payor. Under Mexican law in general, if the payee is a foreign bank or other financial institution registered with the Ministry of Finance, the interest payments will be subject to withholding tax at the rate of 10%. According to the Mexican Revenue Law in force for


Baker & McKenzie 43

the 2013 tax year, this percentage could be reduced to 4.9% in case the beneficial owner is a financial institution resident for tax purposes of a country that has executed a Double Taxation Treaty with Mexico and that the special requirements set forth for interest in such treaty are fulfilled. If (i) the payor is a credit institution (and the payee is other than a bank or financial institution registered with the Ministry of Finance to which the 10% tax rate applies), (ii) the payee is either a foreign supplier of machinery and equipment that form part of the fixed assets of the payor, or (iii) the payee is a foreign entity that finances the purchase of such machinery and equipment or provides certain working capital financing pursuant to an agreement that sets forth these circumstances and the entity is registered with the Ministry of Finance, the interest payments will be subject to withholding at the rate of 21%. In most other cases, interest is subject to withholding tax at the rate of 30%. These rates may be lower in the case of countries with which Mexico has tax treaties. For example, under the U.S. - Mexico Tax Treaty, the rates may be 4.9%, 10% or 15%.

Payments to residents of tax heavens are generally subject to a 40% withholding tax, except for certain interest and for dividends.

Sale of Shares

Generally, the sale of shares of a Mexican company is subject to Mexican income tax, regardless of the country where the sale takes place. Foreign residents who sell shares of Mexican companies are subject to a 25% tax on the gross proceeds from the sale, or, at the option of the foreign resident if it has a local representative in Mexico, to a 30% tax on the net gain derived from the sale. This option is not available to foreign sellers domiciled in a tax haven jurisdiction. Under certain conditions, tax rulings may be available to defer payment of taxes in transfers of shares in reorganizations between members of the same group of companies.

The net gain is determined by subtracting from the gross sale proceeds the sellers tax basis in the shares sold, adjusted for inflation and other factors as determined in the ITL. Under this alternative, the party

44 Baker & McKenzie

transferring the shares or quotas is required to appoint a representative in Mexico. It is also required to file a tax return with respect to the sale or exchange shortly after the transaction and to obtain a fiscal certification (dictamen fiscal) from a Mexican Certified Public Accountant to the effect that the gain as reported on the tax return is correctly calculated. If transactions are made between related parties, the Certified Public Accountant will need to certify in the dictamen fiscal that the adjusted tax cost of the shares has been calculated correctly and that the shares have been properly valued in accordance with the arms-length principles set forth in Mexican law for purposes of determining the shareholders gain or loss on the exchange.

Thin Capitalization Rules

Thin capitalization rules apply in Mexico since 2005. In essence, the rules disallow the deduction of interest corresponding to debts with nonresident related parties, when the total amount of all debts generating interest exceeds three times the taxpayers book net worth. These rules, however, do not apply to entities that form the financial system, provided that such debts are contracted to carry out their business activities. Interest must be established at arms length. Interests might be re-characterized as dividends if they derive from back to back loans. Mexican law has a very broad concept of back-to-back loans.

Transactions and Investments Related to Tax Heavens

Beginning in 1996, Mexicos tax reforms incorporated several provisions aimed at eliminating or controlling investments in and transactions with companies incorporated in Low Tax Jurisdictions. Mexico considers a preferential tax jurisdiction to be a country where the tax actually paid is less than 75% of the tax payable in Mexico for the same income. These tax provisions may affect shareholders, trusts beneficiaries or other entities or individuals who are tax residents in Mexico or that have a permanent establishment in the countries who receive income from legal entities or from entities that are considered by the ITL as transparent entities.


Baker & McKenzie 45

Transfer Pricing

Mexican taxpayers who entered into transactions with related parties must, for tax purposes, charge or pay the prices that would be agreed to between independent parties in comparable transactions. These taxpayers are required to prepare and keep current documentation supporting the prices charged or paid.

Transfer Pricing Rules Applicable to Maquiladoras.

As mentioned in section C of this guide, Maquiladora operations generally create a permanent establishment in Mexico for the foreign principal that provides the raw materials and machinery and equipment to the Maquiladora company, which would expose such foreign resident to income tax and IETU in Mexico. An exemption from constituting a permanent establishment in Mexico for the foreign resident is available provided that the Maquiladora complies, among other requirements, with special transfer pricing requirements.

To this end, maquiladoras may comply with transfer pricing rules mainly under two alternatives (i) prepare a transfer pricing study based on a cost plus method, and adding an amount equal to 1% of all the M&E provided by the foreign related parties and used by the maquiladora, or (ii) the safe harbor method, pursuant to which the maquiladora must generate a tax profit (income minus deductions, before subtracting prior years net operating losses) equal to the greater of 6.9% of the value of the assets used in their activity or 6.5% of the amount of ordinary costs and expenses of their operation. Alternatively, maquiladoras may opt to file for and secure from the tax administration an advance pricing agreement with respect to their transfer pricing methodology.

These special transfer pricing rules are only applicable with respect to Maquiladora operations, as defined in the Maquiladora Decree, carried out by the Maquiladora. If the Maquiladora performs other activities that are not deemed as Maquiladora operations, the Maquiladora must comply with general transfer pricing rules.

46 Baker & McKenzie

3. Value Added Tax

Mexico imposes a Value Added Tax (VAT) on all purchases, rentals, and services in the country. The general rate is 16% of the value of the product, rental or service. A 11% rate applies for most transactions in the border zones. 0% rates apply in certain limited cases, mainly related to food and medicines. Note that beginning in 2002 VAT is levied on a cash basis.

The VAT normally operates by having each party in the chain of production charge the tax to its customer and pay to the tax authority the difference between the tax charged by its suppliers and the tax charged to its customers, on a monthly basis. In the case of exporters of goods, since they do not charge the tax to their customers, they may request a refund from the government of the full amount of the tax that they paid in respect of the production of the exported goods. Thus, a maquiladora that exports all of its production will be refunded any VAT paid in Mexico.

Imports are also subject to VAT at the rate of 16%. This tax is assessed on the customs value of the import plus the import duty. Because the importer is entitled to credit all VAT paid against VAT collected from its customers, the ultimate burden of the VAT effectively is passed along to the importers customers and from there to the end consumer.

4. Single Rate Tax

The single rate tax (IETU for its acronym in the Spanish language) entered into effect on January 1, 2008 and replaced the assets tax.

The IETU is an alternative minimum tax, payable only if it exceeds the income tax. The IETU is imposed on a cash basis, that is, inasmuch as the price or consideration agreed upon in a given transaction has been paid.

Mexican residents and nonresidents that have a permanent establishment in Mexico are subject to IETU on the income derived


Baker & McKenzie 47

from the sale of real and personal property, rendering independent services, and granting of the temporary use or enjoyment of real or personal property, as such activities are defined in the Value Added Tax Law. The applicable tax rate is 17.5%.

The income to be recognized is the price or consideration obtained by the taxpayer and any other amounts payable by the acquirer for taxes (excluding indirect taxes, such as VAT), governmental fees, interests, penalties, or the like. The taxable income also includes income in goods or services, determined considering the market value or the appraisal value of the good or service received. When the transaction is for no consideration also the market value or the appraised value has to be considered.

The taxable income is the recognizable income minus allowable deductions. The deductions are limited and include acquisition of goods, independent services or temporary use of goods, used to carry out the IETU taxable activities; expenses for the administration of said activities; expenses for the production, commercialization or distribution of goods or services subject to IETU; taxes, except income tax, IETU, tax on cash deposits and social security; value added tax if not creditable; returns and discounts received on sales already paid; damages and penalties; and others.

Certain credits may be applied against the tax to be paid, such as income tax, taxable salaries and social security contributions, and income tax paid abroad for IETU taxable activities.

When the allowable deductions exceed the taxable income, the taxpayer may credit against the IETU the excess of the deductions times the IETU rate. Certain rules apply for a 10 year carry forward.

The IETU is determined annually with monthly estimated payments due on the same dates as the income tax.

48 Baker & McKenzie

5. Tax on Cash Deposits

Tax on Cash Deposit (IDE for its acronym in Spanish) entered into effect as of tax year 2008.

Cash deposits are subject to IDE when they exceed a monthly threshold of MXN $15,000 (approximately US$1,200.00 at the exchange rate of MXN$12.50 per US$1.00). The applicable tax is computed by applying to the exceeding amount a 3% rate.

This tax does not apply to electronic transfers, transfers between bank accounts, negotiable instruments, etc. The amounts paid for this tax are creditable against the annual income tax and the income tax withheld to third parties or could be offset against federal taxes.

6. Tax Incentives

Tax incentives have been granted by the Mexican Government to promote investments and development of certain type of industries and projects. There are incentives for technology research and development, maquiladoras, cinematography, theatrical industry, first employment, those who acquired new fixed assets, those who hire handicapped employees, as well as for

doing business in mexico 2013 (b&m)

Documents

company law

competition law

labor law

areas of law

foreign investment law

mexico baker mckenzie

preceding areas of mexican

baker mckenzie abogados