These are interesting times economically for Mexico, making it an equally interesting time to form a business there. However, if you’re willing to weather a little uncertainty, it’s a great time to do so.
The Benefits and Risks of Forming a Mexican Business Now
In October 2021, the International Monetary Fund (IMF) cited the Mexican economy as “rebounding from its deepest downturn in decades [and] set to grow by 6.2 percent in 2021 and 4 percent in 2022.”[1]. The demand for domestic services has gone up and the current administration remains committed to reducing bureaucratic spending in favor of increased social spending and infrastructure projects. Furthermore, the amended United States-Mexico-Canada Agreement provided a boost to investors seeking a deeper economic alliance in the region[2].
The Mexican economy is rebounding from its deepest downturn in decades [and is] set to grow by 6.2% in 2021 and 4% in 2022.
There are, of course, points of concern, such as low productivity growth, corruption, and poverty. PEMEX (Petroleos Mexicanos) has been negatively affected by the decline in oil production and prices, resulting in a significant increase in debt. Recent reforms have loosened restrictions for foreign investors of certain sectors like retail fuel sales, but the current administration has adopted an approach that continues to favor PEMEX over private parties. According to Transparency International, Mexico ranks 124 out of 180 on the Corruption Perceptions Index for year 2020.
Finally, COVID-19 had a devastating effect on Mexico as it contributed to nearly half a million deaths, increased unemployment, and already high levels of poverty have skyrocketed.
If your entity needs to expand to Mexico, the process for formations is known and proven --- although there are some requirements that are unexpected to those who have only formed entities in the U.S.
Mexican Entity Types and Their Requirements
The two most popular entity types in Mexico are the Corporations (Sociedad Anonima or “S.A”) and the Limited Liability Company (Sociedad de Responsabilidad Limitada or “S. De R.L.”). But there is a third type of entity that is gaining popularity: the “S.A.P.I.” -- Sociedad Anónima Promotora de Inversion (Mexican investment promotion company).
The corporation (S.A.) and limited liability company (S. De R.L.) have similar features and requirements, which include:
- Limited liability
- A resident Mexican legal representative
- Mandatory shareholder annual meetings
- A domestic address
- Required tax return and financial statement filings
- A minimum of one director/manager and a minimum of two stockholders/partners (the S.De R.L has a maximum of 50 while the S.A has no minimum).
The minimum capital amount is 50,000 Mexican pesos for the S.A., and for the S De R.L., it cannot be less than 3,000 Mexican pesos. Only the S.A. may have multiple share classes and special shares for employee stock options.
The S.A.P.I. is a special investment corporation similar to the S.A. but with more robust minority shareholders’ rights and tax advantages. It is commonly used in real estate and capital-intensive projects.
Another type of company worth mentioning is the Sociedad Acciones Simplificadas (S.A.S.) This type of company can be registered online, however, it is geared to the domestic entrepreneur (the owner needs to have a Mexican Resident tax I.D.).
Watch our short video, "The Decision Tree: Going GLOBAL Doesn't Have to Be Complicated" to learn more about our International Corporate Services.
How to Form an Entity in Mexico
Once the desired entity type for the foreign owned entity is identified, the process for formation includes obtaining approval for the name from the Ministry of Foreign Affairs, providing an international power of attorney (duly notarized and apostilled) to the resident legal representative, drafting the Articles of Association and by-laws and executing the Articles before a notary in Mexico (if qualified, the Mexican resident legal representative can do this). Once the Articles are signed and notarized, you have your Mexican entity!
With your company established, it is time to register! All companies with foreign investors must register at the Registry of Foreign Investment within 40 working days.
Similarly, the company is required to obtain a tax identification number, a digital signature and a digital symbol within 30 days of formation.
There are other possible registrations after the company is formed, including the Public Registry of Commerce, the Social Security Institute and the National Business Information Registry.
Once your company is formed and has a Tax I.D., monthly tax filing obligations arise. The Mexican tax authority, the SAT (Sistema de Administración Tributaria), requires all legal entities to submit tax filings on a monthly basis even if the company has not initiated business operations, has no transactions, and isn’t operating.
Mexican tax law is among the most complicated in the world and a Mexican accountant must oversee accounting operations in Mexico – it’s often assumed that a company’s accounting & finance department in the home country can make all required tax filings in Mexico, but this is not the case.
Are You Ready to “Take the Plunge”?
The economic outlook in Mexico is positive, but not without risks. Depending on what business you’re in, you may determine that the potential rewards of doing business in Mexico outweigh the risks. If/when you decide to “take the plunge”, you’ll find that the formation process is relatively pain-free, although there are some additional hoops to jump through (vs. forming in the U.S.). Are you ready to start doing business in Mexico?
[1] International Monetary Fund; Staff Concluding Statement of the 2021 Article IV Mission, October 8, 2021
[2] U.S. Department of State; 2021 Investment Climate Statements; Mexico, July 21, 2021
This content is provided for informational purposes only and should not be considered, or relied upon, as legal or tax advice.
