How to do

Business

in Mexico

GUILLERMO PÉREZ DIONISIO, CPAOctober 2012

1

OV

ERV

IEW This is a general

description of the main aspects a company or an individual might face when planning to initiate a business in Mexico. It is intended to provide the reader a background on the country as well as accounting and tax requirements.

2

Conte

nts

1.Country Profile

2.Business Entities

3.Accounting and auditing requirements

4.Taxation

5. Investment incentives

6.Labor

7.Highlights

8.Conclusion

9.Sources 3

1.Country Profile

1.1 Location• Mexico is located in the American continent and belongs to North America.

1.2 Population• 108 million

1.3 Language• Spanish. • English is also widely understood.

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1.4 Geography • 1,970,000 sq. km. (1,224,000 sq. miles)

1.5 Economy• Gross domestic product was estimated at US $1,750,000 billion in 2012.

• Industrial production growth rate: 1.6%• Real growth rate: 4.1%.

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1.6 Main Industries

• Petroleum, mining.• Tourism.• Food and beverages, tobacco.• Chemicals, iron and steel.• Textiles, clothing, motor vehicles; consumer durables.

 1.7 Principal Trading Partners

4814

511

Imports United StatesChinaJapanEuropean Union

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80

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Exports

United StatesRest of the World

1.8 Political system• Federal democratic republic.

• 31 States, one Federal District.

1.9 Currency and exchange control.• The currency is Mexican peso.• Peso is freely converted in to any currency

1.10 Religion• Mainly Catholics 77%.

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2. Business Entities

2.1 Stock Corporation (S.A.)• Most common type of business entity used in Mexico. • Shareholders only are liable for an amount up to the

value of their shares. • Must have at least two shareholders.• No minimum capital is required

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2.2 Limited Liability Company (LLP)• Same limited liability as the stock corporation. • No minimum capital required.• At least two partners.

2.3 Civil Enterprise (S.C.)• Professional service providers, use this form of

corporation.• It has no minimum capital requirements. • There are no limits on the number of partners.

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2.4 Branch

• Instead of incorporating an entity in Mexico, some companies choose to register their existing foreign company as a branch in Mexico.

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However, the most common types of mercantile entities used by foreign and national investors in Mexico are the following:

• Limited Liability Company: A partnership with limited liability for all its members, in which social interests represent the capital.

• Stock Corporation: Entity similar to the US Corporation, its capital is represented by common shares.

Both Mexican legal entities provide limited liability to Shareholders and are subject to the same tax treatment under Mexican law.

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2.5 Requirements for Stock Corporation and Limited Liability Company

• Minimum of two shareholders.• Transfer of an LLP social parts or any new admission

of new partners will require a partners meeting approval.

• Legal representatives.• Sole director or a board of directors.• Annual financial statements.• Variable capital can be established.

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3. Accounting and Auditing Requirements.

• Shareholder and capital registry. • Books must be recorded in Spanish.• Shareholders minute’s book of meetings held.• With gross revenue exceeding 2,700,000 USD a

special fiscal report must be filed.

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4. Taxation4.1 Income Tax (ISR)

IndividualsMexico's individual income tax rates for 012 are progressive, from 1.92% to 30%.

Personal annual tax rates 2012Income (USD) %

0.00076-457.9 1.92

457.9-3,886.53 6.4

3,886.5-6,830.23 10.88

6,830.23-7,939.84 16

7,939.84-9,506.16 17.92

9,506.17-19,172.57 21.36

19,172.57615-30,218.6

23.52

30,218.6 and over 3014

Corporate Tax• Mexico's corporate tax rate for 2012 is 30%.

The corporate rate will be reduced to 29% in 2013 and 28% in 2014.

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4.2 Flat Rate Corporate Tax • 17.5% rate to income determined based on cash

flows.• Co-exists with Income Tax.

4.3 Value added Tax (VAT)• VAT consists of a 16% tax (reduced to 11% in the

borders and certain States) applied to each transaction.

4.4 Capital Gains/ Losses The concept of capital gains in Mexico does not exist.

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4.5 State level Taxation• Transfer and acquisition of real estate, salaries,

wages and payroll.

4.6 Social Security• Medical attention, disability pension, retirement

pension and housing. • Rate of approximately 25% over the amount of

the salaries. • These contributions are Income Tax deductible.

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4.7 Treaties to avoid Double Taxation Mexico has different treaties to avoid double taxation with its main trading partners.

1. Argentina

2. Australia

3. Austria

4. Belgium

5. Belize

6. Brasil

7. Canada

8. Chile

9. China

10. Colombia

11. Costa Rica

12. Czech Republic

13. Denmark

14. Ecuador

13. Finland

14. France

15. Germany

16. Greece

17. Indonesia

18. Hong Kong

19. Hungary

20. India

21. Ireland

22. Israel

23. Italy

24. Japan

25. Korea

26. Luxembourg

27. Norway

28. New Zealand

29. Netherlands

25. Panama

26. Peru

27. Portugal

28. Poland

29. Romania

30. Russia

31. United Kingdom

32. United States

33. Slovakia

34. Spain

35. Singapore

36. South Africa

37. Sweden

38. Switzerland

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4.8 Withholding

• Mexico’s treaties generally apply different withholding rates, to interest 4.9-30%, royalties 10-30%, technical services fees 0-30% and none for dividends.

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5. Investment Incentives

5.1 Subsidies• Negotiated directly with the State or

municipality where the investment will be made.

These may include, among others:• Discount on the land purchase price.• Reduction of State taxes

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5.2 Tax incentives

• Entities dealing exclusively in agricultural, livestock breeding, forestry or fishing activities are exempt from income tax when their gross revenues do not exceed the limit established in the law.

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6. Labor • 90% Mexican Workers required.• Sharing 10% of taxable income among workers.• Christmas Bonus • Mandatory holidays are: January 1, the first

Monday of February, the third Monday of March, May 1, September 16, the third Monday of November December 25, any elections day as determined by electoral authorities and December 1 of every 6 years.

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7. Highlights

• México is the world’s eighth-biggest trading country and the largest in Latin America.

• It has a free market economy.• Cheap production and manufacturing costs.

Cheaper labor. (Comparable to China).

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8. Conclusion

With a growing consumer market fuelled by macroeconomic stability, a strategic geographic location, renowned high-quality labor force, open trade and investment policies there’s no denying that investing in Mexico is a smart choice for financial growth.

If you’re interested in investing in Mexico, contact us for assistance at.

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9. Sources

• http://espanol.doingbussiness.org/data/exploreeconomies/mexico/

• Taxation and Investment in Mexico 2012: Reach, relevance and reliability. UK. Deloitte Touche Tohmatsu Limited.

• Meyer, Michael C.; William H. Beezley, editors (2000). The Oxford History of Mexico. Oxford University Press. p. 736.

• Krauze, Enrique (1998). Mexico: Biography of Power: A history of Modern Mexico 1810–1996. New York, New York: Harper Perennial. p. 896.

• www.pwc.com/mx/db2011 25