Doing Business in Mexico 2013 (B&M)

Doing Business in Mexico
Latin America 2013
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. B. C. D. E. F. G. H. I. Foreign Investment Law .......................................................... 2 Competition Law ..................................................................... 9 IMMEX or Maquiladora Program ......................................... 15 Company Law ....................................................................... 28 Taxes ..................................................................................... 40 International Trade ................................................................ 50 Labor Law ............................................................................. 53 Environmental ....................................................................... 63 Intellectual Property .............................................................. 72
Contact Details: Latin American Network ......................................... 78
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.
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
2 Baker & McKenzie
(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)
Baker & McKenzie 3
domestic and international 1 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
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
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;
5
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
6 Baker & McKenzie
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
Baker & McKenzie 7
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,
8 Baker & McKenzie
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.
Baker & McKenzie 9
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;
10
Baker & McKenzie
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.
Baker & McKenzie
11
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 pricefixing 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 3
The current DMW is $64.76 Mexican pesos as of January 1st, 2013. The exchange rate used to calculate the amounts in US dollars was of $13.00 pesos per US dollar.
Baker & McKenzie
12
The Commission has a term of 35 business days to issue its resolution, such term is computed since the date in which the notification is filed or, if it is the case, since the date in which it is filed any additional information requested by the Commission. In case the Commission does not respond during such 35 day term, the transaction will be deemed as duly approved.
3. Federal Competition Commission
As the agency responsible for enforcing the Competition Law, the Commission has broad investigative and enforcement powers. It may institute administrative procedures on its own initiative or at the request of third parties, investigate and resolve such cases, and enforce its orders through administrative penalties. It may also bring cases of a criminal nature to the attention of the District Attorney. It must be mentioned as well, that the Commission may also issue advisory opinions in antitrust matters.
4. Dawn Raids
During the investigation of a monopolistic practice or a prohibited concentration, the Commission may conduct visits of verification without prior notice (dawn raids), at the premises of the entities under investigation, to request documents and information related to the investigation.
5. Administrative penalties
In addition to the obligation to cease the prohibited practices or divest prohibited concentrations, violators may be subject to administrative penalties in the following amounts: Up to 10% of the annual income of the offender, for carrying out an absolute monopolistic practice; Up to 8% of the annual income of the offender, for carrying out a prohibited relative monopolistic practice or a prohibited concentration;
13
Baker & McKenzie
Up to 5% of the annual income of the offender, for failing to file a concentration before the Commission, if necessary under the terms of the Competition Law; Up to 200,000 DMW (approximately US$ 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.
14 Baker & McKenzie
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.
Baker & McKenzie 15
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.
16
Baker & McKenzie
(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
Baker & McKenzie 17
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
18 Baker & McKenzie
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.
Baker & McKenzie
19
(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 NonEUFTA 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
20
Baker & McKenzie
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 IMMEX NEEC (New Regime) 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). 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. Exclusive fast-lanes One vehicle with different customs transactions (temporary, definitive, returns) Processing of virtual transactions to nonIMMEX 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
21
Baker & McKenzie
NEEC IMMEX Controller companies
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) 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. 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.
NEEC MMEX Aeronautics
22
Baker & McKenzie
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.
Baker & McKenzie
23
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
24
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.
This special benefit is only applicable through December 31, 2013, but may be extended to apply for future years.
25
Baker & McKenzie
Activities that are also considered as transformation include: o o o dilution in water and other substances; washing or cleaning, including the removal of oxide, grease, paint or other coatings; the application of conservatives, including lubricants, protective encapsulation or painting for conservation, adjustment; sanding, filing or cutting; preparation in doses: packing and repacking; testing, marking, labeling or classification; product development or quality improvement of products, except when related to brands, commercial notices and trade names.
o o o o o
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
26
Baker & McKenzie
(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
Baker & McKenzie 27
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
28 Baker & McKenzie
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
Baker & McKenzie 29
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
30 Baker & McKenzie
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
Baker & McKenzie 31
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.
32
Baker & McKenzie
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.
Baker & McKenzie 33
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.
34 Baker & McKenzie
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
Baker & McKenzie 35
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.
36 Baker & McKenzie
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.
Baker & McKenzie
37
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
38 Baker & McKenzie
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
Baker & McKenzie
39
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
40 Baker & McKenzie
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.
Baker & McKenzie 41
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 aftertax 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
42 Baker & McKenzie
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
Baker & McKenzie 43
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-toback 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.
44 Baker & McKenzie
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.
Baker & McKenzie 45
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
46 Baker & McKenzie
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.
Baker & McKenzie
47
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 real estate investment trusts, among others. Taxpayers that purchase new fixed assets for the performance of their operations are allowed to choose between applying the normal depreciation rates set forth in the ITL or apply the accelerated depreciation rates. Taxpayers that employ handicapped individuals whose limited capacity has been certified by the Mexican Institute of Social Security are allowed to take a deduction towards their own income tax an amount equivalent 100% of the withheld and remitted income tax of said handicapped employees. Taxpayers that build or acquire real property intended for lease or its subsequent sale through a trust (provided that at least a four-year lease
48 Baker & McKenzie
has passed) are granted a tax incentive that includes: (i) exemption from estimated income tax and flat tax payments; and (ii) income tax exemption for the sale of the participation certificates, when the seller is an individual or nonresident. The application of these benefits is contingent on various requirements, such as: (i) the trust must be created pursuant to Mexican law; (ii) 70% of trust capital must be allocated to acquire property for lease and subsequent sale; and (iii) the remainder of capital must be invested in federal government securities. Some of these benefits are also available to resident entities, provided that the aforesaid requirements are met. Note that the above are the main tax incentives that may be applied by taxpayers doing business in Mexico; however, additional sector oriented tax incentives are available under federal and local laws. A Tax Amnesty Program was granted through the Federal Revenue Law for FY 2013 by means of which tax assessments of federal taxes and antidumping duties, will be pardon totally or partially together with their related surcharges and inflationary adjustment, as well as the fines resulting from failure to comply with federal tax liabilities other than payment obligations for FY 2007 to 2012.
7. Employee Profit Sharing
Under the Mexican Federal Constitution, employees are entitled to participate in the profits of the employer. This is commonly known as PTU (Spanish acronym for Participacin de los Trabajadores en las Utilidades). Employers have the obligation to pay an amount equal to 10% of their taxable base to their employees within sixty days after the employer is required to file its year-end income tax return. Fifty percent of the amount to be paid is required to be distributed in proportion to the number of days worked by each employee during the year, and the remainder according to the wages of each employee. Newly created companies are granted a holiday for PTU purposes, during their first year of operations.
Baker & McKenzie 49
Corporate taxpayers are allowed to deduct the employee profit sharing paid during the tax year from income tax taxable profits with certain limitations. The PTU, however, is not deductible for purposes of determining the PTU of the tax year in question. On November 30, 2012, a labor reform was published in the Federal Official Gazette including a special regime for outsourcing companies. These amendments may represent PTU risks for current structures using services companies. We recommend analyzing these structures in light of the reform.
8. Payroll Tax
Although taxed at a State level, most, if not all, States in Mexico have a payroll tax. The basis for this tax is usually all wages and other benefits that are paid to an employee. Rates vary from State to State but can range between 2%-3%.
F. International Trade
International trade agreements are part of Mexicos overall strategy to increase the competitiveness of its economy and become an important player in global trade. The strategy of an open economy began in mid1980s with Mexicos adherence to the GATT. Specifically, Mexicos network of Free Trade Agreements (FTA) has allowed it to one of the ten largest manufacturer for export in the world 5. As a result of an open economy, Mexico has had one of the fastest trade growth in the globe. Currently, Mexicos economy is the 14th place in the world6, therefore being included in the G-20, and the 16th place in general exportation. 7
http://www.wto.org/english/res_e/statis_e/its2012_e/its12_merch_ trade_product_e.htm http://www.economia.gob.mx/files/diagnostico_economia_mexicana.pdf https://www.cia.gov/library/publications/the-worldfactbook/geos/mx.html

Baker & McKenzie
6 7
50
1. Imports in General
Mexican import controls have been significantly eased up in recent years. Most products no longer require prior import permits and import duties have also been reduced. Duties are generally assessed based on the transaction value of the products imported into Mexico.
2. Mexicos Free Trade Agreements
Currently, Mexico has signed 12 FTAs giving preferential access to over 44 countries 8 in three different continents: United States and Canada in 1994, Colombia and Venezuela in 1995 (only Colombia since 2010), Costa Rica in 1995, Nicaragua in 1998, Chile in 1999, Israel in 2000, the European Union in 2000, El Salvador, Honduras and Guatemala in 2001, Norway, Switzerland, Iceland and Liechtenstein in 2001, Uruguay in 2003, Japan in 2005 and Peru in 2012. FTAs offer more than preferential duty access; they also provide legal certainty by allowing companies the ability to predict the treatment for their products and services in the importing country. FTA provisions include National Treatment for goods and investments from the other Party as well as Most Favored Nation treatment for goods and services. They also eliminate performance requirements by removing the need to comply with content requirements or to export a certain amount of production. Regarding investment, Mexicos FTAs provide for the free transfer of capital without restrictions and reimbursements in case of expropriations, and create dispute settlement mechanisms that are a strong guarantee of justice. Some of Mexicos FTAs cover the protection of intellectual property rights, anti-trust provisions, and better thresholds for government procurement. Additionally, FTAs commonly require the standardization of customs documents making import-export transactions faster and more efficient.
8
http://www.economia.gob.mx/comunidad-negocios/comercioexterior/tlc-acuerdos
51
Baker & McKenzie
In addition to FTAs, Mexico is a constant signatory of Agreements on the Mutual Protection and Promotion of Investments (APRIS for its initials in Spanish). These agreements protect investments made by investors from signatory countries. To date, Mexico has signed International Investment Agreements (AII) with 38 countries, from which eight countries have entered into an FTA with Mexico that includes an investments chapter. Mexico has signed APRIS in Latin America and the Caribbean with: Argentina, Cuba, Panama, Trinidad and Tobago and Uruguay; in Asia, Africa and Oceania with: Australia, China, South Korea, India and Singapore; in Europe: Germany, Austria, Belarus, Denmark, Spain, Finland, France, Greece, Iceland, Italy, Portugal, United Kingdom, Slovak Republic, Sweden, Switzerland, and Belgo-Lux Union. The FTAs that include an investment chapter are entered with the United States, Canada, Chile, Costa Rica, Colombia, Nicaragua, El Salvador, Guatemala, Honduras Uruguay and Japan 9. The combination of FTAs and APRIS give Mexico a leading edge over other countries around the world.
3. Foreign Trade Law
Mexico enacted its Foreign Trade Law (FTL) in 1993, effective on July 28, 1993. The FTL regulates international trade and prohibits unfair trade practices such as dumping and trade subsidies; additionally, it contains provisions on import quotas and non-tariff regulations and restrictions. The FTL follows GATT principles and conforms to the requirements of the NAFTA and FTAs.
4. Customs Law
This law was enacted on December 15, 1995. It contains provisions related with the customs clearance (importation, exportation and control of goods), duties and taxes payable upon importation and nontariff regulations and restrictions to foreign trade. It also sets forth the
9
http://www.economia.gob.mx/comunidad-negocios/comercioexterior/tlc-acuerdos/acuerdos-internacionales-de-inversion
Baker & McKenzie
52
customs regimes for importations and exportations, the requirements, rights and obligations of the customs brokers and in-house brokers, as well as infringements and sanctions related to foreign trade transactions. The provisions contained in the Customs Law are supplemented by the Customs Laws Regulations, the Foreign Trade General Rules issued by the Ministry of Treasury and Public Credit (Hacienda) and the Foreign Trade General Rules and Criteria issued by the Ministry of Economy.
G. Labor Law
The Mexican Federal Labor Law (FLL) regulates employment relationships in Mexico. The FLL is applicable to all employees in Mexico regardless of nationality or the place in which their employment agreement was executed. It was last amended on November 30th, 2012, after 42 years that the last substantive changes were made, and 32 years from the last procedural changes.
1. Mandatory Employee Benefits Profit Sharing
As of the second year of operations, all employers are bound to distribute among their employees an amount equal to ten percent (10%) of the employers pretax profit within 60 days after the employer is required to file its year-end income tax return. Fifty percent (50%) of such amount is to be distributed in proportion to the number of days worked by each employee during the year, and the remainder according to the wages of each employee. Certain managerial employees are not entitled to profit sharing.
Year-end Bonus
All employers must pay their employees a year-end bonus equal to at least fifteen days wages, payable before December 20th of each year.
Baker & McKenzie
53
Paid Holidays
Following are the mandatory paid holidays, which must be observed by employers. An employee required to work on any of these holidays must be paid as worked holiday a penalty equivalent to three times his or her regular wage, including the latter: January 1st; The first Monday of February in lieu of February 5; The third Monday of March in lieu of March 21; May 1; September 16; The third Monday of November in lieu of November 20; December 1 every 6 years for Inauguration Day; December 25; Those dates established by election law for ordinary elections.
Vacation and Vacation Premium
All employers must pay vacation days at a rate of at least 25% of the employees wage. Employees with more than one year of seniority are entitled to 6 business days of paid vacation. Such 6-day period is increased by 2 days per subsequent year of seniority up to twelve days. After the fourth year, minimum paid vacation is increased by two days every five years thereafter, as follows:
54
Baker & McKenzie
Years of service 1 2 3 4 5-9 10-14 15-19

Training
Business days 6 8 10 12 14 16 18
Vacation premium 25% 25% 25% 25% 25% 25% 25%
All employers are required by law to provide training to their employees. The employer must have a training program approved by the Ministry of Labor. A Joint Commission must implement the program or schedule, comprised of an equal number of representatives of the employees and of the employer. Companies with more than 50 employees are required to establish a Joint Commission for Training, Instruction and Productivity, comprised of an equal number of representatives of the employees and of the employer.
Housing Contributions
The FLL, LSS/INFONAVIT requires employers to pay an amount equal to five percent (5%) of each employees wages to the Federal Workers Housing Fund (INFONAVIT). Employers must deposit these contributions in a special account at a local bank, so that the INFONAVIT distributes the contributions among each employees housing account.
Minimum Wage
The FLL establishes a minimum amount of salary, that must be paid to all employees in cash, without deductions or withholdings, on a weekly basis. The National Minimum Wage Commission determines such minimum wage from time to time. The minimum wage varies for
Baker & McKenzie 55
each of two economic regions into which the country is divided. A general minimum wage applies to all employees within each economic region, except those that fall within a series of specific job categories. It is not a common practice to see companies paying such minimum wage. It regularly depends on the market conditions and on the benefit package that the surrounding companies are granting to their employees. Therefore, it is very important to be aware of the labor environment in the place in which the company is going to be located.
Maximum Workshift/ Overtime Payment
The maximum number of hours in which an employer may require its employees to work, without having to pay overtime, is 48 hours per week on the day shift. The employer must pay the first 9 hours of overtime at 200%, and overtime exceeding 9 hours at 300% of standard pay. An employer may not require its employees to work more than three hours of overtime per day, three times per week. Regular work hours may be distributed throughout the week as necessary as long as agreed in writing; most employers now distribute them in five days (9.6 hours per day). At least one paid full day of rest per week must be observed. Sunday work is subject to a 25% premium, notwithstanding of any overtime premium that may apply. If an employee works in excess of 57 hours a week, the labor authorities may penalize the employer.
Health and Safety
The employer is required to provide a safe and sanitary environment for the workers to render their services. A Health and Safety Commission must be created to investigate the causes of illness and accidents, and to propose resources to avoid them. In addition, employers are required to comply with Federal Health & Safety Regulations, and with a number of Official Mexican Standards dealing with all types of H&S issues such as fire and accident prevention, exposure to toxic substances, employee protective gear, etc.
56 Baker & McKenzie
Paid Maternity Leave
All employers must provide their female employees with a fully paid maternity leave of six (6) weeks prior to the approximate delivery date and six (6) weeks thereafter. After this twelve (12) week period, employers must offer such employees their former positions back, including any accrued rights there under such as accrued seniority and vacation pay.
Paid Paternity Leave
All employers must provide their male employees with a fully paid paternity leave of five (5) days after the birth of a child or after an adoption is granted.
Employer Social Security Contributions
See 5. Social Security below.

Additional Non-mandatory Benefits
Employers may voluntarily enhance the minimum benefits established by law. Benefits such as savings funds, punctuality and attendance bonuses, cafeteria and transportation subsidies, productivity bonuses, etc. are provided by many Mexican employers, depending on the market conditions and on the economical situation of each employer.
2. Severance Payments Occasion and Basis of the Payment; Reinstatement
Mexican employers may not freely dismiss employees without cause. To dismiss an employee without being liable for the severance pay described below, a Mexican employer must i) be able to prove, in labor court if necessary, that the dismissal was for a statutorilydefined just cause, and ii) give the employee, directly or through the Labor Board, prompt written notice of the dismissal and the just cause. If the employer fails to prove just cause as explained below, the employer must make the following severance payments: (i) 3 months of salary; (ii) a seniority premium, equal to 12 days of salary
Baker & McKenzie 57
per year of service (subject to salary limitation up to twice the minimum wage); (iii) back wages from the date of dismissal through the date of payment (back wages are limited to a maximum of 12 months of wages; once this period concludes, an interest shall be paid at a 2% monthly rate, considering as base 15 months of wages, capitalized upon payment); and iv) accrued benefits. If the employee ends the individual employment relationship for a just cause, the employer is required to pay, in addition to the foregoing, 20 days of salary per each year of services rendered. The payment of 3 months of salary and 20 days per each year must be calculated, considering an integrated salary, which is the standard pay plus the proportional part of the benefits. An employee dismissed without just cause has the option to be reinstated to his former job instead of receiving the severance payment. In some cases, e.g., dismissal of an employee of trust as described in 7.2.5 below, the employer may avoid having to reinstate the employee to his former job by making the payments mentioned in the two preceding paragraphs.
Just Cause for Dismissal
The FLL lists the specific causes for which an employer may dismiss an employee without being liable for severance pay. These causes include, for example, immoral conduct, sexual harassment, repeated absenteeism, unauthorized disclosure of trade secrets, unreasonable refusal to follow directions and engage in conducts lacking integrity in detriment of the employer, its clients or providers.
Employees Just Cause for termination
An employee may resign and be entitled to severance pay if his employer commits specified acts against him, which are listed in the FLL. Such acts include, for example, reduction of salary, engage in conducts in detriment of the employees dignity, sexual harassment, failure to pay salary when due, and causing or allowing unsafe working conditions. In this case, employees are entitled to ask for 3
58 Baker & McKenzie
months of salary, 20 days per each year of services rendered, seniority premium and accrued benefits as described above.
Termination of the Individual Labor Relationship
The FLL provides that a labor relationship may be terminated without either party being liable under certain circumstances, including: (i) mutual agreement of the parties; (ii) death of the employee; (iii) under limited circumstances, the conclusion of a specific job; and (iv) the physical or mental incapacity or disability of the employee.
Employees of Trust
The FLL creates a special category of employees for managers in general and other employees in positions of trust (trabajadores de confianza). Employers are not required to reinstate employees of trust, as mentioned in 7.2.1 above. Employees of trust may form unions, but they must be separate from those of other employees. The determination of whether an employee is an employee of trust depends not on his title but on his actual functions. The FLL defines functions of trust as those of direction, inspection, surveillance and supervision generally (direccin, inspeccin, vigilancia y fiscalizacin) and those that involve personal matters of the owner(s) of the company.
Seniority Premium
The seniority premium discussed in 7.2.1 above, equal to 12 days of salary (limited to twice the minimum wage) per each year of services rendered, must be paid to all employees who i) voluntarily leave their jobs after completing fifteen years of employment; ii) leave their jobs for just cause; iii) are dismissed by the employer with or without just cause; or iv) die while still employed, in which case their beneficiaries receive the seniority premium. Despite the current FLL provisions, employers have to determine the culture, needs, and way of thinking, among other factors, that characterizes the workforce in the place where is going to be
Baker & McKenzie 59
established before starting. Likewise, it is advisable to keep in mind that, for purposes of the interpretation of the FLL provisions, it also depends on labor authorities criteria and the fact that such legislation is likely to be amended.
3. Outsourcing Regime
The FLL establishes a legal framework for the outsourcing regime, which is defined as the employment whereby an employer, defined as a contractor, carries out works or provides services with his/her employees, under the contractors subordination, in favor of a contracting party, an individual, or a legal entity, which sets and supervises the contractors tasks during the development of the services and the performance of the assignments entrusted. This type of work must meet the following conditions: a. It may not cover all the activities, equal or similar, taking place in the workplace. b. It must be justified for its specialized nature. c. It may not include tasks equal or similar to those being carried out by the rest of the employees at the service of the contracting party. If all of the above conditions are not met, the subcontractor shall be considered as employer for all purposes of the applicable legal effects, including the obligations on social security.
4. New Ways of Hiring
The amendment to the FLL that took place in November, 2012, introduced new way of hiring employees. The Individual Employment Agreement (IEA) for a specific period of time, IEA for a specific task and IEA for an undetermined period of time are maintained. The new types of contracting are:
60
Baker & McKenzie
Trial Period
It is a period granted to employers to verify if the worker meets the requirements and has the necessary knowledge to carry out the job for which he is applying. This trial period is to be negotiated in the employment contract. Its duration will be 30 days maximum, and it may be extended to 180 days in specific cases. If after the completion of the period, the employee does not prove to meet the requirements, the employer at its sole discretion, prior hearing the opinion of the Joint Commission of Productivity, Training and Education, is entitled to terminate the employment relationship without responsibility (i.e. without paying severance).
Initial Training Contract
With this new type of contract the employee may be able to acquire the necessary knowledge and skills for the activity for which he/she will be hired. Its duration will be 3 months maximum, and it may be extended to 6 months in specific cases. If after the completion of the period, the employee does not acquire the knowledge and skills for the activity, the employer at its sole discretion, prior hearing the opinion of the Joint Commission of Productivity, Training and Education, is entitled to terminate the employment relationship without responsibility (i.e. without paying severance).
Seasonal work
This is a new hiring modality within the contracts for undetermined period of time. Apart from the seasonal period, the effects of the employment relationship are suspended, which are the obligations of providing services and paying a wage. The effects are reestablished within the next seasonal period.
Baker & McKenzie 61
The seasonal periods may be certain days of the week, certain weeks of the month or certain months of the year.
5. Social Security
The Social Security Law (SSL) first enacted on January 31, 1942, has undergone a series of amendments throughout the years 10. In accordance with the SSL, last modified on December 20, 2001, all employers must register their employees before the Mexican Social Security Institute (IMSS). Such registration relieves the employer from the following: (i) work related risks; (ii) health and maternity insurance; (iii) disability pension and life insurance (iv) retirement, old age pension and old age unemployment insurance; (v) child care and social benefits. Upon creation of an employment relationship, the employee automatically becomes entitled to the various social security benefits, which are funded by contributions paid by both employers and employees, depending on the risk factor of the company. The IMSS assumes all responsibility for providing the benefits and, unless the employer has not complied with its registration and payment obligations, the employer is released from any liability for work-related accidents or illnesses. If the employer does not comply with its registration and payment obligations, the IMSS will nevertheless provide the benefit to the employee but it will revert the actual cost thereof to the employer and will impose penalties. Social Security benefits are provided at the IMSS facilities located throughout Mexico. The basis for the Social Security contributions is the integrated wage, which includes all monetary and in-kind compensation and benefits received by the employee, excluding only the following:
10
In December 1995, the Mexican Congress approved a New Social Security Law which came into effect on January 1, 1997. On December 20, 2001, the Mexican Congress approved a reform which brought major changes to the current Mexican social security system.
Baker & McKenzie
62
Work tools and clothing; savings funds, provided they include matching contributions by the employer and the employee; contributions paid by the employers for social or union purposes; contributions made by the employer to the SAR for workers housing; profit sharing paid to the employees; food and shelter, provided the employee pays a portion thereof; food baskets; attendance bonuses; and
overtime pay, unless such service is agreed upon on a permanent basis, or exceeds the overtime allowed by the FLL. Any employer who fails to properly withhold and pay the corresponding social security contributions, who submits false information to the IMSS or who otherwise fails to fulfill its obligations under the SSL may be subject to a range of penalties.
H. Environmental
The General Law of Ecological Balance and Environmental Protection (the Environmental Protection Law), enacted in 1988, and amended in 2011, is the primary Mexican environmental statute. It contains specific chapters concerning environmental impact permitting, prevention and control or air, water and soil pollution and protection of natural resources. It also sets out enforcement procedures and other provisions concerning the respective responsibilities of the federal, state and municipal governments. The General Law for the Prevention and Integral Management of Waste (the Waste Law), enacted in 2004, and amended in 2007, establishes guidelines for the regulation
Baker & McKenzie 63
of soil pollution and waste handling, disposal and the implementation of management plans. The Regulations on Waste Law was published in 2006. In addition, all of Mexicos 31 states have also promulgated environmental laws. All activities conducted in Mexico must comply with federal, state and/or municipal laws.
1. Environmental Authorities
The Ministry of Environment and National Resources (SEMARNAT), is the federal authority entrusted with setting and overseeing national policy in the area of environmental protection. In addition, it is responsible for enacting Official Mexican Standards (NOMs) that establish maximum allowable pollutant limits for air emissions and wastewater discharges, as well as NOMs that establish the criteria to determine when wastes are considered legally hazardous. The Federal Bureau of Environmental Protection (PROFEPA) is an agency with technical autonomy of SEMARNAT in charge of carrying out enforcement activities. The Environmental Protection Law establishes an authorizations system based upon the maximum allowable limits for air emissions, in the sustainable management of water, soil and other natural resources, and for the generation, transportation, handling and disposal of hazardous waste. All companies operating in Mexico must limit the amount of pollutants that they release or discharge within the specific ranges decreed by laws and NOMs. The regulations and NOMs governing air pollution, for example, limit the amount of sulfur that a fixed source may emit. In addition, the Environmental Protection Law states that the glass, oil, petrochemical, chemical, automotive, paint, paper, iron and steel as well as hazardous waste management industries are considered stationary sources of air pollution subject to federal jurisdiction. Emission sources from industrial activities, other than those described above, are regulated by state or municipal environmental authorities. In the area of wastewater discharges, NOMs regulate wastewater discharged to national soils, national
64 Baker & McKenzie
waters, as well as the discharges into municipal sewer systems from industrial activities.
2. Environmental Impact Authorization
Prior to initiating operations, industrial facilities must secure an environmental impact authorization (EIA). If the activity to be carried out is federally regulated11 pursuant to the Environmental Protection Law, such an EIA must be secured from SEMARNAT. If the activity to be carried out is not federally regulated, the EIA must be secured from the corresponding State or Municipal Environmental Authority (the Local Environmental Authority), in accordance with the applicable municipal or state law. It is important to note that if an industrial facility uses or intends to use certain toxic, flammable or explosive substances, it may be considered a high-risk activity under Mexican law. High-risk activities are those in which specific threshold limits for toxic, flammable or explosive substances are surpassed. 12 For example, the use of 500 kilograms or more of propane gas is considered a high-risk activity. Facilities engaging in high-risk activities are required to file before SEMARNAT a risk study in addition to the environmental impact manifest necessary to secure an EIA. It is important to note that industrial facilities that initiated operations prior to 1988 (year in which the Environmental Protection Law was enacted) are not required to secure an EIA, as long as their production process has not been modified after the enactment of the Environmental Protection Law.
11
Federally regulated activities include oil, petrochemical, steel, paper, sugar, mining, cement and electricity generation industries, as well as hazardous waste treatment, confinement and disposal activities. The Mexican government has published Two Listings of High-Risk Activities. The first one in 1990 for toxic substances and the second one in 1992 for flammable and explosive substances.
65
12
Baker & McKenzie
3. Prevention and Control of Air Pollution
Industrial facilities that emit into the atmosphere gases, fumes or solid particles are required to secure an Operating License (state jurisdiction) or Consolidated Environmental License (federal jurisdiction). Such License must be secured from SEMARNAT if the stationary source in question is federally regulated. 13 Otherwise, such License must be secured from the Local Environmental Authority. In addition to the above, industrial facilities must comply with the following requirements: Operate air pollution control equipment should their pollutant emissions surpass the maximum allowable limits established under applicable NOMs; Keep an updated air pollution control equipment maintenance and operating log; Submit an air emissions inventory before SEMARNAT or the Local Environmental Authority; Periodically monitor their air emissions.
4. Water Quality
The National Water Law (Water Law) enacted in 1992, and its last amended published in 2008, establishes that all industrial facilities must secure a Wastewater Discharge Permit or Registration from the Local Environmental Authority if they discharge wastewater into a municipal or urban sewer system. If their wastewater is discharged into a federal body of water such as a river, pond, lake or natural or man-made waterway, they must secure a Wastewater Discharge Permit from the National Water Commission (CONAGUA). In
13
Federal fixed sources of air pollution include the following industries: automobile, chemical, oil and petrochemical, paint and ink, paper, metallurgic, glass, asbestos, cement, coal and hazardous waste treatment.
Baker & McKenzie
66
addition, industrial wastewater must not exceed the maximum allowable discharge limits established under the following NOMs: NOM-001-SEMARNAT-1996, which regulates wastewater discharges into federal land and water; NOM-002-SEMARNAT-1996, which regulates wastewater discharges into municipal or urban sewer systems.
The Water Law establishes that the use of National Waters (such rivers, underground water and lagoons) in interdiction or regulated zones will require the issuance of license by CONAGUA. Those concession titles are issued by the direction at each Water Basin Organism. Furthermore, the partial or total occupation of water ways requires the prior authorization by CONAGUA. The Water Law establishes the obligation to provide quarterly payments and reports for the use of these public goods.
5. Hazardous Waste Management
According to the Waste Law, a hazardous waste is defined as any waste in any physical form which is either corrosive, reactive, explosive, toxic to the environment, flammable or biologically infectious, and which represents a hazard to the ecological balance of the environment. Hazardous waste may include any of the following: Spent lubricant oil; Spent solvents; Chemical waste; Paint waste; Oil, solvent or paint-impregnated shop towels or rags;
67
Baker & McKenzie
Empty oil, solvent, paint or chemical containers; Polychlorinated biphenyls (PCBs); Asbestos fibers.
Reporting Requirements
Hazardous waste generators must meet the following reporting requirements, based on the annual amount of waste generated: Submit before SEMARNAT on a one-time basis, a Hazardous Waste Generator Notice for each hazardous waste generated; Keep an updated hazardous waste generation and storage log; Submit before SEMARNAT an annual hazardous waste transportation and disposal report, inside the corresponding Section of the Yearly Operating License.
Handling Requirements
In the area of hazardous waste handling, the following requirements apply: Generators must construct and operate a hazardous waste storage area. Such storage area must be kept separate from offices, raw material storage (even if hazardous materials are stored therein), production and finished product areas. It must also be located in areas in which the risk of possible emissions, leaks, fires, explosions or floods are reduced, and must comply with a number of technical requirements, depending on whether the storage area is enclosed or in the open. Hazardous waste containers must be properly sealed and must have adequate signs posted describing the type of waste being handled.
68
Baker & McKenzie
Transportation and Disposal Requirements
With regard to hazardous waste transportation and disposal, the following requirements must be met: The hazardous waste generator must make sure that the company hired to collect, transport, manage and dispose of its waste has secured an authorization from SEMARNAT and by the Ministry of Communications and Transports (SCT). Otherwise, liability related to the transportation and disposal of the waste stays with the generator, according to the Waste Law. Each time hazardous waste is collected for transportation and disposal, a Hazardous Waste Collection, Transportation and Disposal Manifest must be prepared. The generator transporter and consignee must sign such Manifest. Once the original Manifest has been received and signed by the consignee, it must be sent to the generator so that it may keep it for ten (10) years. Hazardous waste generated from raw materials imported into Mexico on a temporary basis (under an IMEX program, for example), must be returned to its country of origin. In order to return hazardous waste to the United States, the returner must submit before SEMARNAT a Return Notice. Upon filing such Notice, the returner has ten (10) days to return the waste. Once the hazardous waste has been exported to the U.S., the exporter or generator must provide SEMARNAT with a copy of the export manifest (pedimento de exportacin). As for hazardous waste that must be exported to a country other than the U.S. (such as PCBs which are exported to Finland), the exporter must first secure from SEMARNAT an Ecological Waybill (Gua Ecolgica).
6. Community Right to Know
As a result of the amendments to the Environmental Protection Law, SEMARNAT created a public pollutants registry, comprised of data
Baker & McKenzie 69
furnished by individuals and entities that (i) emit pollutants into the air, soil or water; and (ii) handle hazardous substances. This means that all information, subject to federal jurisdiction, regarding a facilitys air emissions, wastewater discharges and waste stream is made public. SEMARNAT is currently negotiating collaboration agreements with many states and municipalities in order to increase the information to be included in such registry. This is consistent with a chapter of the Environmental Protection Law that allows any person the right to receive environmental information from SEMARNAT as well as from State or Municipal authorities. The Regulations to the Environmental Protection Law in the Area of Emission and Pollutant Transference Registry were published on June 3, 2004. This regulation established a National Registry that has the purpose to contain an inventory of all pollutants generated in Mexico. It is therefore very important for industrial facilities to take the necessary actions to ensure that their air emissions, wastewater discharges and hazardous waste handling and disposal practices fully comply with applicable laws and regulations.
7. Protection of Collective Rights: Legal Standing and Class Actions
On July 29, 2010 a Constitutional Amendment was issued to add a paragraph to article 17 of the Constitution the authority to the Federal Congress to issue law that would incorporate into our legal system the Class Action procedure. This procedural law provides that the Federal Courts would have exclusive jurisdiction to adjudicate these cases. At this time there are several bills pending in the Senate and lower house that are being discussed for the issuance of the Class Action Law and specific provisions to issue new provisions for environmental matters. This legislative trend is part of a broader policy to have a more inclusive legal system that would provide the tools for every citizen to enforce collective rights and assist in the enforcement of constitutional guarantees such as the protection to an adequate environment.
70 Baker & McKenzie
As a consequence of this access to justice policy, on January 28, 2011 an amendment to the Environmental Protection Law and the Federal Procedural Law that introduces the concept of legitimate interest that would enable that person to contest through a review recourse or an annulment complaint before the Federal Fiscal and Administrative Justice Court, any administrative act from which a breach of environmental law may derive. This amendment may give raise to litigation derive from, for example, a work or activity that contravenes the provisions of the Environmental Protection Law, the legal provisions to which it applies in a suppletory manner, or if there is a violation of federal environmental regulations, official Mexican standards, ecological ordainment programs or natural protected land ordinances. Any interested party that is a member of a community possible affected by the work or activity in breach of the law, may contest the corresponding administrative acts, such as authorizations, licenses, permits or concessions, without a need for said works or activities to originate harm to the environment, natural resources, flora or fauna or to public health, because it will be sufficient to demonstrate that the harm may be caused. It is important to add that this language does not require the plaintiff to demonstrate the risk or immediacy of the same, in order to comply with this procedural requirement. Parties having a legitimate interest will have the option of contesting the administrative acts through the filing of a review recourse in the terms of the Environmental Protection Law, or through an annulment complaint filed before the Federal Fiscal and Administrative Justice Court.
8. Administrative Penalties & Criminal Prosecution
The Environmental Protection Law imposes administrative penalties, remedial actions and fines on violators. PROFEPA has wide authority to select and apply penalties. In the past, PROFEPA has generally handled violations of the environmental laws by ordering violators to
Baker & McKenzie 71
take corrective actions and, in certain cases, to shut down their businesses until the violations were corrected. PROFEPA may also order a violating business to close permanently. Moreover, PROFEPA has the power to (i) impose administrative fines and to double their amounts in the case of repeat offenses, (ii) order the seizure of pollutant equipment or devices, (iii) order the cancellation of environmental licenses or permits, and (iv) order the administrative arrest for up to 36 hours. PROFEPA may also seek criminal prosecution before the Attorney Generals Office. Environmental crimes are defined in the Federal Criminal Code. Prison terms may range from 6 months to 10 years depending on the seriousness of the violation - some of the criminal acts are classified as gross faults.
Occupational health & safety
In November 2012 important amendments to the Federal Labor Law were published which contain relevant provisions in the area of occupational health & safety. Employers are required to properly inform their workers of the risks involved in undertaking their activities aside from clearly informing them of all regulations and standards that are relevant to the activities they carry out at the workplace. Administrative penalties for failing to comply with these requirements have increases substantially. With regard to companies that sub-contract third parties (outsourcing), these are required to ensure at all times that their subcontractors fully comply with all relevant legal obligations in the area of environmental protection and occupational health & safety.
I. Intellectual Property
For the last decade, Mexico has taken a very aggressive policy towards protecting Intellectual Property Rights (IPRs). Mexico is part of most conventions and treaties concerning IPRs and related rights, etc. Mexico is part of the WTO and has entered into free trade agreements with the United States and Canada (NAFTA), Costa Rica,
72 Baker & McKenzie
the G-3 (Colombia and Venezuela), Bolivia, Chile, Nicaragua, Uruguay, Israel, El Salvador, Guatemala, Honduras, Switzerland, Liechtenstein, Norway, Sweden and the European Union. All these agreements include provisions for the protection and promotion of IPRs. Following international standards, the Mexican Intellectual Property system is divided in two, i.e. Industrial Property and Copyrights. The first one is regulated by the Mexican Industrial Property Law, and comprises patents, industrial designs, utility models, trade secrets, trademarks, trade names, and slogans; the second one is Copyrights and it is regulated by the Federal Copyright Law (FCL). The Mexican Industrial Property Law (MIPL) was enacted on June 27, 1991, and last amended on January 25, 2006 its purpose being to promote the improvement of Mexican processes and products, promote inventive creativity and the quality of goods, and to protect industrial property by regulating and granting patents, registering utility models, industrial designs, trademarks, slogans, publishing trade names, declaring the protection of appellations of origin and regulating trade secrets. Recently, Mexico has ratified the Madrid Protocol for the International Registration of Marks which is yet to be published in the Mexican Official Gazette stating the timeframe for its implementation process. This Agreement will not be binding and will not be in full force and effect until the publication of it in fact takes place.
1. Patent Protection
Under the MIPL, patents are protected in Mexico for an un-extendable period of 20 years counted as from the filing of the application. Since patents follow the principle of territoriality, the owner of a foreign patent may file an application for the corresponding patent in Mexico if the priority period under the Paris Convention or the National Phase Entry period under PCT for the protection of industrial property is observed.
Baker & McKenzie 73
Under the MIPL, any patent license or assignment of patent rights must be registered with the Mexican Patent and Trademark Office (MPTO). If they are not registered, such licenses or assignments will not be effective against third parties.
2. Utility Models and Industrial Designs
Deemed as utility models are the articles, utensils, apparatus, or tools that, present a different function with respect to the parts that compose them or the advantages insofar as their utility is concerned. Utility models have a life term of 10 years un-extendable counted as from the filing of the application The MIPL also grants protection to Industrial Designs, i.e., drawings or models, the industrial designs have a life term of 15 years un-extendable counted as from the filing of the application and corresponds to new designs of any tridimensional form (models) without any technical effects and drawings that refers to an ornamental plain design applied to any object.
3. Trademark Protection
Trademark protection and the exclusive use of a distinctive sign in Mexico arise only upon registration before MPTO. It is therefore an advantage to file an application for registration of a trademark as early as possible. In order to establish the earliest possible filing date it is important to ensure that the application is complete. Any change of ownership or address must be registered before the MPTO. The trademarks are registered according to the international classification of goods and services, of which 34 classes refer to goods and the remaining 7 to services. The system handled is a single class application. The life term of trademarks is of ten years as of their filing date and must be renewed for equal periods. Using the mark in at least one product or service, for which it was registered, will suffice to prove that its use has not been interrupted for 3 or more consecutive years.
74
Baker & McKenzie
Upon registration, the mark should be labeled with the legend Marca Registrada, or with the abbreviations Marc. Reg. or MR. The MPTO, also allows the use of the symbol to indicate registration. Besides Trademarks, the MIPL also grants protection to Commercial Slogans, Trade names and Appellations of Origin. Any trademark license or assignment of trademark rights must be registered with the MPTO. The registration procedure is similar to the one applicable to patents.
4. Trade Secrets
In Mexico, trade secrets are protected not only in the MIPL, but also in other statutes, including the Federal Labor Law and the Criminal Codes 14 both at Federal and at State level. The legal regime of trade secrets in Mexico is complex and full of requirements: The MIPL defines a trade (and industrial) secret as any information susceptible to industrial or commercial application, maintained in secrecy and useful to obtain or to maintain a competitive or economic advantage over third parties. The Banking Law also includes provisions dealing with the banks confidential obligations in the performance of economic activities, secrecy having been preserved by taking sufficient measures to keep it confidential and by restricting access thereto. Information comprising a trade secret must relate to the nature, characteristics, or purposes of products, production methods, or processes, or to ways or means of distributing or marketing products or rendering services. Unlike in many other countries, the MIPL provides that, for information to be considered a trade secret, it must be fixed in documents, electronic or magnetic media, optical discs,
14
The Banking Law also includes provisions dealing with the banks confidential obligations.
75
Baker & McKenzie
microfilms, films or other similar instruments, in order to avoid the complication of protecting intangible ideas. Apart from the requirements mentioned below, throughout the Third Title of the MIPL (the one dealing with trade secrets), there are additional requirements for information to be considered as secret. The actualization of these requirements is essential, especially in case of litigation. Their absence would make it easy for a violator to walk away unsanctioned after revealing a secret, leaving behind a company that would not be able to recuperate the lost information, since trade secrets, once revealed, completely lose their value. It is a common mistake of foreign companies to use their local confidentiality and nondisclosure agreements for transactions in Mexico. It is important to stress the fact that the MIPL includes provisions that must be observed in the transmission or authorization to use trade secrets or confidential information to employees, consultants, key personnel, etc. Consequently, in order to protect accurately trade secrets and confidential information in Mexico, the above-mentioned requirements must be observed. Finally, the MIPL and the Federal Criminal Code 15 consider as crimes the disclosure or use of third parties trade secrets or reserved communication learned as a result of a persons job or position, without proper authorization.
5. Copyright
Mexico is a signatory to the Universal Copyright Convention (UCC) and the Berne Convention. Consequently, by bearing the UCC copyright notice (i.e., [name of owner]), an original work is automatically susceptible of copyright in Mexico. The Federal Copyright Law (FCL) does not require works to be registered in Mexico to secure copyright protection, anyway the FCL establish a procedure to register works in Mexico.
15
As well as the local criminal codes of most states.

Baker & McKenzie
76
The FCL defines copyright as the recognition by the State in favor of the creator of literary and artistic works through which the creator receives protection of his patrimonial and moral rights in the work. The holder of the patrimonial rights may authorize the temporary or permanent exploitation of the copyright, through license or assignment agreements. The FCL establishes that the following types of works, among others, may obtain copyright protection: literary, musical, dramatic, dance, pictorial or drawing, sculptural or plastic, cartoons, architectonic, cinematography, audiovisual, radio and TV programs, computer software (data bases are included, but software created to produce harmful effects to other software or hardware is excluded from protection), and photographic, as well as compilations, provided they constitute intellectual creations. Copyright infringement is considered a crime penalized by imprisonment. In addition, Mexican law allows copyright holders whose rights have been infringed, to seek civil remedies, which include damages, lost profits and injunctive relief. The maximum amount of damages is not limited by statute; nonetheless, the CL states that the amount shall be at least equal to 40 percent of the value of the total sales of the violator. Very recently, in an attempt to further increase the protection granted to copyrighted works, the Mexican Criminal Code was amended imposing higher penalties on those who unlawfully use copyrighted works without the consent of their rightful owner.
Baker & McKenzie
77
Contact Details: Latin American Network

ARGENTINA Buenos Aires Avenida Leandro N. Alem 1110, 13th Floor C1001AAT Buenos Aires Telephone: +54 11 4310 2200 Fax: +54 11 4310 2299 BRAZIL Trench, Rossi e Watanabe Advogados Braslia SCN - Q2 - Bloco A- Ed. Corporate Financial Center Side A, Suite 301 Braslia-DF 70712-900 Telephone: +55 61 327 3273 Fax: +55 61 327 3274 Porto Alegre Av. Borges de Medeiros, 2233, 4th Floor 90110-150 Porto Alegre, RS Telephone: +55 51 3220 0900 Fax: +55 51 3220 090 Rio de Janeiro Av. Rio Branco, 1, 19th Floor, Sector B 20090-003 Rio de Janeiro, RJ Telephone: +55 21 2206 4900 Fax: +55 21 2206 4949 So Paulo Av. Dr. Chucri Zaidan, 920 - 13th floor Market Place Tower 04583-904 So Paulo, SP Telephone: +55 11 3048 6800 Fax: +55 11 5506 3455 CHILE Santiago Nueva Tajamar 481 Torre Norte, 21st Floor Las Condes, Santiago Telephone: +56 2 367 7000 Fax: +56 2 362 9875 COLOMBIA Bogota Avenida 82 No. 10-62, 6th Floor Santa Fe de Bogota, D.C. Telephone: +57 1 634 1500 Fax: +57 1 376 2211 MEXICO Guadalajara Blvd. Puerta de Hierro 5090 Fracc. Puerta de Hierro 45110 Zapopan, Jalisco, Mexico Telephone: +52 33 3848 5300 Fax: +52 33 3848 5399
78
Baker & McKenzie
Juarez P.T. de la Republica 3304, 2nd Floor 32330 Juarez, Chihuahua Telephone: +52 656 629 1300 Fax: +52 656 629 1399
VENEZUELA
Caracas Torre Edicampo, P.H. Avenida Francisco de Miranda Cruce con Avenida Del Parque Urb. Campo Alegre, Caracas 1010-A Mexico City Edificio Scotiabank Inverlat Blvd. Telephone: +58 212 276 5111 Fax: +58 212 264 1532 M. Avila Camacho 1, 12th Floor Col. Valencia Polanco, Edificio Torre Venezuela, 4th 11009 Mexico, D.F. Floor Telephone: +52 55 5279 2900 Av. Bolivar cruce con Calle 154 Fax: +52 55 5279 2999 (Misael Delgado) Urbanizacion La Alegria Monterrey Telephone: +58 241 824 8711 Edificio Oficinas en el Parque Fax: +58 241 824 6166 Torre I, 10th Floor Blvd. Antonio L. Rodriguez 1884 Pte. 64650 Monterrey, Nuevo Len Telephone: +52 81 8399 1300 Fax: +52 81 8399 1399 Tijuana Edificio Centura, 1st Floor Blvd. Agua Caliente 1061122420 Tijuana, Baja California Telephone: +52 664 633 4300 Fax: +52 664 633 4399
Baker & McKenzie
79
www.bakermckenzie.com
Baker & McKenzie has been global since inception. Being global is part of our DNA.
Our difference is the way we think, work and behave we combine aninstinctively global perspective with a genuinely multicultural approach, enabled by collaborative relationships and yielding practical, innovative advice. Serving our clients with more than 4,000 lawyers inover 40 countries, we have a deep understanding of the culture of business the world over and are able to bring the talent and experience needed to navigate complexity across practices and borders with ease.
2013 Baker & McKenzie. All rights reserved. Baker & McKenzie International is a Swiss Verein with member law rms around the world. In accordance with the common terminology used in professional service organizations, reference to a partner means a person who is a partner, or equivalent, in such a law rm. Similarly, reference to an ofce means an ofce of any such law rm. This may qualify as Attorney Advertising requiring notice in some jurisdictions. Prior results do not guarantee a similar outcome.

Doing Business in Mexico 2013 (B&amp;M)

Uploaded by

Document Information

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Doing Business in Mexico 2013 (B&amp;M)

Uploaded by

Copyright:

Available Formats

Doing Business in Mexico

Latin America 2013