Entering the Mexican Market

The Mexican Market

Mexico is the world’s 15th largest economy with a GDP of US$1.27 trillion and is the major player in Central America. In an ideal geographic location for trade and commerce, Mexico has land borders with the USA and South America plus Pacific and Atlantic coastlines. These trading routes by land and sea give access to over 50% of the world’s leading GDP economies.

Foreign Direct Investment (FDI) into Mexico increased by over US$2,500 million in the final quarter of 2020. The United Nations’ 2020 World Investment Report placed Mexico 14^th in the world for attracting FDI and 6^th among developing economies.

However, the World Bank placed Mexico 60^th out of 190 nations in ‘Ease of Doing Business’ and outside the top 100 for starting a business, connecting electricity supplies and registering properties. These are among the considerations that should make foreign companies cautious when planning an international expansion into Mexico.

Registering businesses is a long process, complicated by Mexico having 31 federal states plus Mexico City. All businesses are governed by the General Law of Commercial Companies, and although employment laws are codified by the Mexican Constitution and Federal Labor Law (FLL), the states can apply their own rules.

Starting a business in Mexico

International companies establishing their presence in Mexico generally select a limited liability subsidiary (Sociedad de Responsabilidad Limitada, SRL). After the initial step of registering with the Ministry of Foreign Affairs they must complete a string of procedures. These include:

• Register authorized company name with the Ministry of Foreign Affairs (Secretaria de Rellaciones Exteriores)
• Obtain an RFC (Registro Federal de Contribuyentes) tax number/ID after signing deeds of incorporation with a notary and registering the deed with the Public Commerce Register (Registro Publico de Comercio)
• Register tax ID number with the Ministry of Finance and Credit (Secretaria de Hacienda y Credito Publico)
• Register with the Mexican Social Security Institute (Instituto Mexicano del Segura Social)
• Register with theirrelevant local tax administration for payroll (Secretaria de Finanzas del Gobierno de Distrito Federal).
• Finally, register with the Sistema de Informacion Empresarial Mexicano (SIEM), which keeps a register of all Mexican businesses

Other requirements include:

• Draft Power of Attorney (POA) for Mexican representative to act on your behalf where required
• Provide passports of directors/shareholders, a minimum of two, who will sign for the proposed company and proof of their addresses
• Certificate of directors, detailing their responsibilities
• Confirmed amount of share capital, minimum of MXN 50,000 (US$2,500)

Additionally, to payroll staff and remit taxes to the authorities the company must:

• Register with the Mexican Social Security Institute (Instituto Mexicano del Segura Social, IMSS), andthe relevant local tax administration (Secretaria de Finanzas del Gobierno de Distrito Federal)

Expanding Business into Mexico

The rapidly developing Mexican economy poses many questions to be considered alongside the attractions of entering the world’s 15^th largest economy and the largest in Central America. Mexico has borders with South America and the USA, plus Pacific and Atlantic coastlines that give maritime access to over 50% of global markets.

Questions include, will staff be migrated across the world or recruited in-country? Who will handle payroll? How will your company deal with regulations surrounding taxation, entitlements and benefits, severance, and termination?

Decisions must be based on exhaustive research before drawing up a blueprint for the new territory and the business plan will have to answer these questions.

In Mexico, issues surround not just business culture, but also the stringent application of taxation and employment laws which can vary between the 31 federal states as well as the capital, Mexico City. In this complex geographical and economic landscape where will you find distributors, manufacturers, and offices?

Mexican Business Facts

• Capital– Mexico City
• Population – 130 million
• States – 31 federal states plus Mexico City
• Official Language – Spanish
• Economy and world ranking – US$1.27 trillion GDP; 15th largest economy; economic freedom 66^th
• Leading sectors – Service sector, hi-tech and software, oil and minerals, manufacturing, agriculture, beverages, animal husbandry
• Main exports – Manufactured products, vehicles, electrical machinery, computers, vehicle parts, oil and fuels, food, and beverages
• Main imports – Metalworking machinery, electrical equipment, steel and refined oil, vehicle parts, aircraft, and parts
• Main trading partners – USA, Canada, Germany, China, S. Korea, and Japan
• Government – Federal and constitutional republic with a Presidential system
• Currency – Mexico peso MXN

Advantages and Challenges of the Mexican Market

Advantages of expanding into the Mexican economy include:

• Incentives: Government encourages foreign investment targeting increased employment, industrial development, research and development and manufacturing
• Attractions: Taking a foothold in a steadily developing economy with a growing consumer sector
• Location: Shares borders with South America and the USA for easy trade links; west and east coast access to the Pacific and Atlantic Oceans
• Market: Stable and diverse market capable of riding out economic downturns, as it proved in 2008
• Currency: Mexican peso exchange rates are beneficial for most countries, keeping capital and manufacturing costs down
• Outgoings: Low labor costs in a predominantly young workforce
• Free trade: Agreements allow cost-effective access to other markets

Challenges of operating in the Mexican economy:

• Red tape: Complex bureaucratic processes for registering businesses, properties and filing tax returns for payroll, VAT, and corporation tax. Dealing with paperwork can be a major issue
• Business culture: Adapting to the workplace and business environment
• Safety: Crime and security issues will deter some companies from expansion
• Language: Authorities usually deal only in Spanish

Health concerns: Public healthcare is universal, but standards are uneven. The private sector accounts for 60% of Mexican hospitals

Limited Company / Subsidiary or Branch in Mexico?

International businesses planning expansion into Mexico must choose between several types of company structure. The most typical choice is for a Limited Liability Company (Sociedad de Responsabilidad Limitad, SRL) operating as a Subsidiary (Subsidiario). A Branch (Sucursal) is another option. Key differences will apply to which route is taken into Mexico.

A subsidiary is a separate legal entity from the foreign parent company, which is protected from responsibility for liabilities or debt beyond the initial investment in shares. It is advised that subsidiaries have a minimum share capital of MXN 50,000 (US$2,500), with 50% paid at incorporation. Shareholders and directors can be based outside Mexico, but one legal Mexican resident must be appointed with Power of Attorney as representative to deal with authorities. The subsidiary operates as an independent business from the parent company, with a different name if preferred, and can pursue its own activities and contracts. The subsidiary is taxed on Mexican income.

International companies can establish branches with permission from the Ministry of Economy, but the branch operates the same business activities as the parent company and has the same name. The parent company is responsible for all liabilities, financial, legal or others and the branch is taxed on Mexican income.