Issues Relating To Organizational Forms And Taxation MEXICO Basham, Ringe y Correa, S.C. CONTACT INFORMATION Miguel A. Peralta and Christian Dorantes Picazo Basham, Ringe y Correa, S.C. Paseo de los Tamarindos No. 400, Torre A, Piso 9 Col. Bosques de las Lomas, C.P. 05120 México, Distrito Federal 52(55) 5261 0474 peralta@basham.com.mx http://www.basham.com.mx 1. Identify the forms of organization available in your jurisdiction and discuss the advantages and disadvantages of each (eg., corporation, limited liability company, partnership, limited partnership, co-operative, etc.), describing which type of legal entity is mostly used or is of special interest, namely by foreign investors. Pursuant to the General Corporation and Partnership Law, there are 6 types of business corporations: a) General Partnership (sociedad en nombre colectivo): A partnership where all of the partners are jointly, severally and absolutely liable for the partnership s business, though they may contractually agree among themselves to limit their individual liability; its corporate name must always be followed by the words y compañia (and company). b) Limited Liability Partnership (sociedad en comandita simple): A partnership in which one or more general partners (socios comanditados) are absolutely and jointly and severally liable for the partnership s business, and one or more limited partners or partners in commendam (socios comanditarios) are only liable for the partnership s liabilities up to the amount of their investment; its corporate name must always be followed by the words sociedad en comandita or the abbreviation S. en C.. c) Limited Liability Company (sociedad de responsabilidad limitada): A company formed by no more than 50 members who are only liable up to the amount of the
ownership interest (partes sociales) that they hold; since a regular partnership cannot switch to this type of business entity without being deemed to have altered its legal nature, this business form more closely approximates a limited liability company in the U.S. than a limited liability partnership (this latter often allows partnership to switch to it without this being deemed the creation of a new business entity); its corporate name must always be followed by the words sociedad de responsabilidad limitada or the abbreviation S. de R.L.. d) Corporation (sociedad anónima): A legal entity owned by shareholders whose liability is limited to the amount of their ownership share in the entity; a corporation s name always must be followed by the words sociedad anonima or the abbreviation S.A.. e) Limited Liability Stock Partnership (sociedad en comandita por acciones): A type of limited liability partnership that issues shares of stock; its corporate name must be followed by the words sociedad en comandita por acciones or the abbreviation S. en C. por A. f) Cooperative (sociedad cooperativa). This type of company is contained in the General Corporation and Partnership Law but has its own regulatory law called the General Law of Cooperatives. It is a form of corporate organization formed by individuals with common interests based in the principles of cooperation and for the purpose of satisfying its individual and common needs through producing, distributing and consuming goods and services. The corporation and the limited liability company are the type of legal entities most used in Mexico, the latter being the one most used by foreign investors due to tax benefits. 2. Are there attributes of the form that you consider unique to your jurisdiction? Pursuant to Mexican Law, every business corporation requires at least two shareholders/partners. 3. Describe the management and governance structure for each organizational form. As stated above, the corporation and the limited liability company are the two most used types of legal entity; thus we will refer in this section only to them: a) Corporation: The management of a corporation is entrusted to one or more directors who need not be shareholders. Two or more directors will constitute a board of directors and when there is only one director, the director will be referred to as a sole administrator or a sole director. The corporation, by shareholders meeting or decision of the board of directors or the sole director, as the case may be, may appoint one or more officers to manage the affairs of the corporation. It is important to point out that in Mexico, officers only have the authority expressly vested in them by powers of attorney granted to them.
Under Mexican law, one or more statutory examiners must be appointed by shareholders meeting to supervise the affairs of the corporation. Statutory examiners need not be shareholders. A statutory examiner has certain supervisory and other statutory powers designed to protect the interests of shareholders by watching over the affairs of the corporation. In general terms, the obligation of the statutory examiner is to supervise the performance of the board of directors or the sole director, as the case may be, make reports to the shareholders and protect shareholder rights in the corporation. Among other disqualifications, a statutory examiner may not be an employee of the corporation, or broadly speaking, an employee of a related corporation or a relative of a director of the corporation. Normally the external auditing firm appoints a partner to act as the statutory examiner. b) Limited Liability Company: The management of a limited liability company is entrusted to one or more managers (who would be called directors in a Corporation) who need not be members. Any member has the right to withdraw from the limited liability company when an outsider is appointed as a manager in opposition to that member's vote. As in the case of a corporation, the limited liability company may designate one or more officers to manage its affairs. Such officers will only have the authority granted to them by the limited liability company in powers of attorney. The appointment of a statutory examiner in a limited liability company is optional. 4. Is there a residency requirement for management or owners? In particular, are there restrictions or prohibitions on foreign investors to perform, or have interests in, specific activities? There are no restrictions on residency for managers or shareholders of Mexican companies, provided that they comply with the immigration laws with respect to its resident status. Mexico s Foreign Investment Law and its regulations impose some restrictions on foreign investment in Mexico, which while considerably relaxed in recent years, still have an impact upon foreign investors in Mexico. In this respect, there are some strategic areas reserved exclusively for the state such as petroleum, basic petrochemicals, electricity, nuclear energy generation, radioactive minerals, telegraph, post services, coinage, control, monitoring and surveillance of ports, airports and heliports. There are also some activities reserved exclusively for Mexican individuals or entities such as national land transport of passengers, tourists and cargo, retail gasoline sales and distribution of liquid gas, broadcasting and other radio and television services other than cable television, and development banking. Finally there are some activities and entities which have certain limitations as to the percentage of foreign investment such as: a) Up to the 10% in production cooperatives. b) Up to 25% in national air transport, aero taxi services and specialized air transport.
c) Up to 49% in insurance and bond companies, money exchange companies, public warehouses, pension funds, manufacturing and marketing of explosives, firearms, cartridge, ammunition and fireworks (without including the acquisition and use of explosives for industrial and mining, printing and publication of newspapers within Mexico, Series T shares of companies owning livestock, farms, and forests, freshwater and coastal fishing (including in the exclusive economic zone), port administration, port services for piling, shipping companies engaged in the commercial operation of vessels in inland navigation, supply of fuel and lubricants for ships, aircrafts and railroad equipment, public telecommunication network concessions. 5. Describe the extent to which management and owners are exposed to liability. The liability of stock owners depends on the type of legal entity (see answer No. 1 above). Managers in all cases are liable for the performance of their duties. 6. Ownership interest: (i) how is it represented? (ii) is it transferable?; and (iii) is there a minimum number of owners? In some types of legal entities, the ownership interest is represented by shares, such as in corporations. The ownership interest in other type of legal entities, such as the limited liability company (although the members may be issued a type of participation certificate), is not represented by shares and in these cases the ownership interests are recorded in the companies corporate books. In general terms, stock must be considered to be freely transferable unless the contrary is agreed to in the by-laws or in a shareholders agreement. The company s bylaws may foresee that a transfer of shares may only be carried out with the board s previous authorization. As stated above, every business corporation requires at least two shareholders/members. 7. Is there a minimum capitalization? Minimum capital requirements are applicable under Mexican law which provides that a corporation s capital stock may not be less than $50,000 (fifty thousand pesos 00/100 Mexican Cy) and as for the limited liability company, the capital may never be less than $3,000 (three thousand pesos 00/100 M.N.). 8. Is there a security that can be issued to the public? Yes. According to the Mexican Securities Law (the Securities Law ), a Public Offering is defined as any offering, with or without consideration, made in Mexico through any means of communication to the general public and to unspecified persons for purposes of subscribing, acquiring or transferring securities. The Securities Law defines securities as the shares of stock, equity interests, debentures, bonds, títulos opcionales (or warrants), certificates, notes, drafts or bills of exchange and other negotiable instruments, known or unknown, registered or not with the Registry, which are subject to being traded on the securities exchanges referred
to in the Securities Law, issued in series or otherwise, and representing the capital stock of an entity or a share in a good or participation in a collective credit or any right under an individual credit, under any applicable national or foreign laws. The public offering of securities requires prior registration with the National Securities Registry. 9. Can the form incur debt, or grant security for debt? Yes provided that its bylaws have an express provision thereto. 10. What is the duration of the form? Can it be renewed? There are no restrictions on duration; the law allows shareholders/members to agree upon it. However, it is very common to establish a duration of 99 years or leave the duration indefinite. 11. Describe the process, customary time period and approximate cost of establishing the form. a) An authorization from the Department of Foreign Relations must be obtained in order to use the corporate name of the entity. b) The shareholders/members must agree upon the by-laws of the entity. c) The by-laws must be notarized before a notary public. d) The incorporation deed must be filed before the Public Registry of Commerce. e) If the entity has foreign investment, it must be registered with the National Registry of Foreign Investment. f) The entity must be registered as a taxpayer with the Federal Taxpayer Registry. As to the customary period of time, an entity can be formed within a week. However, the federal government launched a website called Tu Empresa (Your Company) which supposedly allows the people to incorporate an entity in 45 minutes, subject to the fulfillment of all the requirements and payments therefor. As to the costs, an entity can be incorporated with approximately $10,000 (ten thousand pesos) which is approximately US$770 (seven hundred dollars)his amount includes registration fees and notary fees but does not include other fees such as lawyers fees. 12. Are there requirements for the government (central or local) to be part of a project or investment vehicle or receive part of the profits arising therefrom (apart from taxes)? As a principle of law, the authorities may only carry out the activities which they are expressly allowed to, thus they may take part in a project or an investment vehicle provided that its investment regime allows them to. As a general rule, no government participation in a project is necessary unless the specific project so requires this, usually because of the investment of public funds or you use of public property. 13. For what taxes is the form liable?
a) Income Tax Copyright Lex Mundi Ltd. 2010 Mexican corporations are under an obligation to pay income tax at the rate of 30%. Net profits are obtained by deducting from all taxable income earned in the fiscal year, the deductions authorized by law, as well as workers profit sharing and tax loss carry forwards. Should the amount of the authorized deductions exceed the amount of gross income, a tax loss is incurred which may be carried forward up to ten years and set off against profits in those years. Mexican taxpayers are required to file annual tax returns, which must be filed within three months following the closing date of the fiscal year. In Mexico, the fiscal year runs from January 1 to December 31. Nevertheless, short fiscal years apply in certain cases, such as the year in which operations begin. During the fiscal year, corporations must calculate monthly estimated tax payments, which are credited against annual income tax. No estimated payments have to be made during the fiscal year of incorporation. b) Single Rate Business Tax As of 2008 a new tax came into effect, called the Impuesto Empresarial a Tasa Única or IETU. This new tax is introduced as a minimum tax, supplementary to income tax. The tax applies to individuals and entities resident in Mexico as well as to foreign residents with a permanent establishment in Mexico, in connection with sales of goods, provision of independent services and lease of goods. This tax would apply to taxpayer s net income at the rate of 17.5%. Exemptions would apply to certain transactions, such as sales of shares, as well as to certain entities, such as charities, provided that certain requirements are met. c) Value Added Tax ( VAT ) Taxpayers are required to pay VAT upon any of the following activities when carried out in Mexico: (i) transferring goods; (ii) providing independent services; (iii) granting the temporary use of goods; or (iv) importing goods or services. The tax is calculated by applying a 16% rate to the value of the transactions. In very few cases, such as a sale of food or export of goods or services, the tax is at a 0% rate. d) Cash Deposit Tax This tax is triggered when monthly bank cash deposits exceed MXP $15,000.00 (about $1171.87 USD). All cash deposits in the same financial institution carried out within the same month must be considered to determine whether the threshold is exceeded. The tax is calculated and withheld directly by financial institutions at the rate of 3% on the total amount of the qualified deposits. This tax may be offset against taxpayer income tax. e) State Taxes These taxes are triggered depending on the local laws of every State. The most common state taxes are property tax, the tax on the acquisition of real estate, and the payroll tax.
14. What is the tax treatment of payments to foreign owners? Foreign owners may receive income from different sources. Accordingly, a specific analysis of the tax regime in Mexico applicable to each type of income is required to be able to answer this question. Nonetheless, if a Mexican entity pays dividends to foreign shareholders, the tax regime in Mexico applicable to those dividends is the following: If dividends are paid out of profits on which the company has already paid corporate income tax, such dividends are tax-free in Mexico. For this purpose, companies are entitled to create an after tax profits account or Cuenta de Utilidad Fiscal Neta ( CUFIN ), where aftertax profits are recorded. Once the applicable corporate tax has been paid, any dividend or profit distribution made from this account is not subject to further taxation regardless of the nationality or residence of the recipient. If corporate income tax has been not paid on the profits from where the dividends arise, then the corporation must pay a dividend tax, on a grossed up basis, and then apply the 28% corporate rate (30% from 2010 through 2012; 29% in 2013; and 28% again as of 2014). In this case, no tax withholding is applicable regardless of the tax residence or nationality of the recipient. Conversely, if the foreign owner receives payments for income other than dividends (i.e. interest, royalties, sale of shares, among others), then according to the Mexican Income Tax Law, in principle, tax withholding would be applicable to the income. It is noteworthy to mention that tax treaties may provide relief from the tax treatment applicable under Mexican law. 15. Is there a tax treatment which would impact foreign owners differently than owners resident in the jurisdiction? No, it is the same tax treatment.