SECTION 1: Market outlook
1.1 How would you summarise your jurisdiction's attitude towards the influence of Japanese corporate culture in its industries?
Mexico has great respect and admiration for Japanese corporate culture, given its structure and hardworking principles.
The foregoing has resulted in more investment each year from Japanese companies in our country, especially in the automobile and manufacturing industries.
1.2 What is the outlook for Japanese investment into your jurisdiction over the next 12 months?
Although there is no official investment forecast, the Mexican government expects that total annual Japanese direct investment in the country will remain within the same range as that of the previous five years ($1.2 billion to $2 billion).
SECTION 2: Approving foreign investments
2.1 Explain the foreign investment approval process and approval timetable.
In principle, foreign investment does not require any approval to establish in Mexico. However, there are certain activities that are restricted under the law to be performed exclusively by governmental entities, private Mexican entities and private entities with limited foreign investment.
In certain cases where foreign investment is limited to determined percentage participation, investors may request a special authorisation from the National Commission for Foreign Investments (Comisión Nacional de Inversiones Extranjeras) to exceed such limits.
Such request must be done filing a written questionnaire to the Commission, which must confirm or deny such petition in a period no longer than 45 business days.
2.2 Are there any investment restrictions in specially regulated sectors and is the government entitled to any special rights in these sectors?
In general, there are few restrictions to establish foreign investment in Mexico. The Foreign Investment Law (Ley de Inversión Extranjera) provides certain limits for foreign direct investment in specific industries, such as aviation, shipping, port services, cabotage, financial services, power transmission and distribution, nuclear power generation and radio broadcasting, among others.
The participation of governmental entities is restricted to a small amount of activities, and is usually linked to those activities considered by the Mexican Constitution as strategic for the Mexican State.
2.3 Which authority oversees competition clearance? Please give a brief overview of the merger clearance process.
The Mexican authorities that oversee competition clearance are the Federal Antitrust Commission (Comisión Federal de Competencia Económica) and the Federal Telecommunications Institute (Instituto Federal de Telecomunicaciones).
The Federal Antitrust Law (Ley Federal de Competencia Económica) establishes that when transactions, such as acquisition of assets and/or shares, mergers, among others (also known as concentrations), reach any monetary threshold provided by law, they must be subject to prior approval from the competent commission/institute.
According to the applicable law, all transactions must be notified to the antitrust authorities before they take place; parties must refrain from closing any transaction prior to obtaining such approval.
After filing a concentration notification, governmental agencies must evaluate whether the requirements under the law were met, and, if necessary, they may request additional information related to the transaction.
The aforementioned procedure may be subject to several extensions for justified causes. A transaction that does not raise serious competitions concerns should have a resolution from authorities within the three months following the concentration notification filing. The period to obtain a final resolution may increase up to eight months as of the corresponding filing for transactions that are considered more complex or those that raise several concerns for competition in the market.
2.4 Are there further approval requirements that foreign investors should be aware of?
Other than the aforementioned approvals and restrictions to foreign investment, there are no other requirements that Japanese investors should be aware of.
SECTION 3: Investment techniques
3.1 What are the most common legal entities used for Japanese investment in your jurisdiction?
The two most common legal entities used for Japanese investment in Mexico are: the variable capital limited liability company (sociedad de responsabilidad limitada de capital variable or S de RL de CV); and the variable capital stock corporation (sociedad anónima de capital variable or SA de CV). Please be advised that both entities are regulated under the General Law of Commercial Companies (Ley General de Sociedades Mercantiles).
According to the applicable law, the limited liability company shall exist under a commercial name or a firm name. It is formed by partners, who are only obligated to the payment of their contributions. The equity participation representing the corporate capital cannot be represented by negotiable instruments, and such may only be assigned or transferred if approved by the partners pursuant to the terms and conditions established in the law and the by-laws of the company.
On the other hand, the capital stock corporations operate under a corporate name and its shareholders are liable only for up to the amount of their contributions. Furthermore, their corporate capital is represented by stock certificates, which are, in principle, freely negotiable and transferable.
It is important to note that although both entities are substantially similar, a considerable amount of foreign investors prefer using limited liability companies as vehicles for their investments, as they are considered by many jurisdictions as check-the-box or flow-through companies for tax purposes.
3.2 What are the key requirements for establishment and operation of these legal entities?
The establishment and operation of the aforementioned legal entities require obtaining several permits, filing for registration before several governmental authorities, and the drafting and formalisation of certain documents before a notary public in Mexico.
The general requirements for incorporating such companies are:
- Powers of attorney granted abroad. Each of the shareholders must grant a special power of attorney so that they can be represented before a Mexican notary public at the moment of establishing the new company.
- Corporate Name Authorisation. An authorised representative of the shareholders must file and obtain an authorisation from the Mexican Ministry of Economy (Secretaría de Economía) to incorporate the new company under the desired corporate name.
- By-laws. The shareholders must draft the by-laws of the new company, which should determine the terms and conditions for its operation. These by-laws must be formalised in form of a public deed before a notary public in Mexico (the Articles of Incorporation).
- Registration with the Public Registry. Once the notary public in Mexico has issued a deed containing the company's Articles of Incorporation, the first original counterpart of such deed must be registered before the Public Registry of Commerce (Registro Público de Comercio) of the company's corporate domicile.
- Tax ID. For tax purposes, once the company is duly incorporated, it must be registered before the Mexican Taxpayers' Registry (Registro Federal de Contribuyentes) of the Ministry of Finance and Public Credit (Secretaría de Hacienda y Crédito Público). In order to obtain such registration, the company must have an address for tax purposes in Mexico.
- National Registry of Foreign Investments. Furthermore, the company must be registered before the National Registry of Foreign Investments (Registro Nacional de Inversiones Extranjeras).
SECTION 4: Dispute resolution
4.1 How effective are local courts' enforcement and dispute resolution proceedings, and what should Japanese investors be particularly aware of?
Although local courts' resolutions are enforceable, Japanese investors should be aware that legal proceedings resolved by courts in our jurisdiction are typically lengthy and time consuming.
In consequence, many parties involved in transactions agree on more dynamic dispute resolution proceedings, such as arbitration, to avoid solving disputes through local courts.
4.2 Does your jurisdiction have a bilateral investment protection treaty with Japan and is that commonly used by investors?
Yes. Mexico and Japan have both signed a bilateral Agreement for Strengthening Economic Partnership (Acuerdo para el Fortalecimiento de la Asociación Económica entre los Estados Unidos Mexicanos y el Japón). This Agreement entered into force in 2004.
4.3 Do local courts respect foreign judgments and are international arbitration awards enforceable?
Although foreign judgements may be subject to revision by local courts, international arbitration awards are enforceable under Mexican law and respected by local courts.
SECTION 5: Forex controls and local operations
5.1 What foreign currency or exchange restrictions should foreign investors be aware of?
There are no legal restrictions to foreign currency exchange in Mexico. However, large foreign exchange transactions are monitored by the Bank of Mexico (Banco de México).
SECTION 6: Tax implications
6.1 Are there tax structures and/or favourable intermediary tax jurisdictions that are particularly useful for Japanese investors into the country?
Any tax strategy that involves the flow of financial resources between one or more jurisdictions should be analysed individually and carefully, to determine the benefits and risks it entails, and all the relevant variables and circumstances. Notwithstanding the above, it is worth noting that Mexico is the country that has entered into the largest number of Double Taxation Treaties in Latin America, and as such, it may provide with an interesting number of options for a tax strategy over several jurisdictions.
6.2 What are the applicable rates of corporate tax and withholding tax on dividends?
A 30% corporate income tax applies to legal entities that have tax residency in Mexico. In this regard, Mexican Tax Law contemplates a special Net Tax Profit Account (Cuenta de Utilidad Fiscal Neta – CUFIN), that holds the profits that have already paid the corresponding income tax at a corporate level. When making dividend distributions, if the distributed amounts are less than or equal to the amount of the CUFIN, no additional taxes must be paid by the entity for such dividends.
Additionally, when paying dividends to an investor that does not have tax residency in Mexico, a withholding rate applies. Generally a ten percent withholding rate applies, but it may vary if Mexico has executed a Double Taxation Treaty with the country where the beneficiary of those dividends has its tax residency.
Specifically in the case of Japan, Mexico has a Double Taxation Treaty pursuant to which a five percent withholding tax may apply if certain conditions are met.
6.3 Does the government have any tax incentive schemes in place?
The Mexican government has a wide range of tax incentives, which are constantly adjusted and modified to foment the development of certain activities in Mexico. These incentives include accelerated depreciation of assets for tax purposes, certain subsidies, and taxation schemes that allow tax transparency of investment vehicles to make the corresponding income tax calculation and payment at a beneficiary level, among others. However, the identification of the specific benefits that apply to certain investments or activities would have to be done on a case-by-case basis.
6.4 Are there any reciprocal tax arrangements between your jurisdiction and Japan? If so, how can they aid investors?
As stated in Question 6.2, Mexico and Japan have entered into an Agreement to Avoid Double Taxation and Prevent Income Tax Evasion (Convenio entre los Estados Unidos Mexicanos y el Japón para evitar la doble imposición e impedir la evasión fiscal en materia de Impuesto Sobre la Renta). Pursuant to the terms of such treaty, a preferential five percent withholding rate in Mexico may apply if: the receiver of the dividend is the effective beneficiary of such distribution; and the receiver of the dividend holds at least 25% of the voting shares of the distributing entity, during the six months prior to end of the tax year where the dividend is distributed.
Thus, Japanese investors may benefit from the preferential tax-withholding rate in Mexico when they hold significant participation in Mexican entities, and may even be eligible to tax exemption in Japan for the dividends distributed by Mexican companies, if certain conditions are met. These potential benefits should be taken into account when deciding the type of investment they want to make in Mexico.
|About the author|
Jesús Rodríguez Dávalos
Rodríguez Dávalos is the founding partner of the law and consulting firm Rodríguez Dávalos Abogados (RDA), a law firm specialised in Mexico's energy sector. For over 20 years, RDA has led numerous projects considered first-of-a-kind in Mexico, such as the first SWAP operation of natural gas; the first private transmission pipeline for LPG; the development of the legal and financial strategy for the first private pipeline in Mexico for the transmission of petrochemicals; the first cross-border wet gas export pipeline to the USA; the development of the legal, contractual and regulatory strategy of the Los Ramones natural gas pipeline; and the first naphtha private processing plant, among others.
Rodríguez is chairman of the Mexican Rights of Way Association (ADDV); board member and secretary of the Mexican Natural Gas Association (AMGN); legal advisor to the World Energy Council, Mexico Chapter; and founding member of the Mexican Energy Law Academy.
|About the author|
José Eduardo Pumarejo
José Pumarejo is an associate at Rodriguez Dávalos Abogados. His practice focuses in corporate consulting and M&A transactions, as well as energy and infrastructure projects.
During his professional experience, Pumarejo has represented both domestic and foreign clients in numerous transactions and public tenders. He participated in the so-called Round One public tender process and worked on setting up AT&T's subsidiary in Mexico, including the processes for its acquisition of the Mexican mobile telephone companies Nextel Mexico and Iusacell. He contributed in Komatsu's acquisition of several distributors and the restructuring of its construction and mining equipment distribution business, and worked on the sale of Sanyo Corporation's television manufacturing division in Mexico.
Pumarejo received his law degree from the Instituto Tecnológico Autónomo de México (ITAM), graduating with honours. He was recipient of the XXI ITAM Alumni Investigation Award in the law category for his thesis entitled Orphan Drugs: alternative regulation for efficient and effective delivery. He is currently actively engaged in several pro bono endeavours focused on animal protection and environmental conservation, and is also a member of the International Bar Association (IBA), among other associations.
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