Foreigners have the option to establish a Mexican company or to acquire stock in an already established one; it all depends on the party's need to have a presence and an involvement in Mexico from a commercial and/or a tax point of view. The basic procedures related to the organization of a new Mexican company (hereinafter the 'Company') with 100% of foreign capital participation are as follows:

1. Corporate Forms

The General Law of Commercial Companies (Federal Law) provides for several types of companies that can be organized and, depending on the form chosen, there are various differences in their legal and tax treatment.

    a) Sociedad Anónima (S.A.):

    It is usually recommended to incorporate a limited liability stock corporation, which may adopt the form of a fixed capital company or that of a variable capital company (S.A. de C. V.). The principal difference between the two is that the latter may increase or decrease its capital within the limits established in the by-laws by a mere Stockholders' Meeting resolution without the need to fulfill the formalities applicable to the S.A. Nevertheless, both types of companies must notify the National Registry of Foreign Investments and other applicable Government Agencies of any capital amendment.

    Key characteristics of both types of companies:

    • The shareholder's liability is limited to their stock interest in the company and the directors are fully liable for the loyal and diligent administration of the company.
    • There must be at least two shareholders and a minimum capital of fifty thousand Mexican pesos, of which 20.0% must be paid at the time of incorporation.
    • They must appoint a statutory examiner who is a third party who supervises the operations of the company and represents the interests of the shareholders.
    • The shares, which represent the capital stock of the company, are freely transferable and can be traded publicly, after the corresponding filings have taken place.

    b) Sociedad de Responsabilidad Limitada (S. de R.L.): Recently, this form of Limited Liability Corporation or limited partnership has become popular among foreign companies; in particular, those who want to reduce their tax liabilities in the US. This type of company is viewed for US tax purposes as a partnership and the key characteristics are as follows:

    • The partners' liability is limited to their partnership interest in the company and the directors will be fully liable for the loyal and diligent administration of the company.
    • It must have at least two partners with a maximum capital of fifty thousand Mexican pesos, and a minimum capital of three thousand Mexican pesos, of which 50% must be paid at the time of incorporation;
    • There is no requirement to appoint a statutory examiner;
    • The tax rate will be the normal corporate tax rate of 34.0%;
    • The shares representing the partnership interest in the company must not be freely transferable and cannot be traded publicly.

    c) Sociedad en Nombre Colectivo (SNC):

    This entity (General Partnership), if properly structured, will also have many of the same tax advantages as the "S. de R.L." However, a distinct disadvantage of the "SNC" is that all of the partner(s) will have unlimited liability with respect to the obligations and debts. This corporate form is not frequently used in Mexico.

    d) Sociedad en Comandita Simple (SCS):

    This limited partnership can also have many of the tax advantages of the "S. de R.L." and the "SNC." The "SCS" has two types of partners: the active partners who have unlimited liability, and the silent partners who are liable only for their capital contribution. This corporate form is not frequently used in Mexico.

    e) Mexican Branch: Another possibility for a foreign company is to operate through branch offices in Mexico. As foreign companies are legally recognized in Mexico, they retain their liability characteristics from abroad. However, to carry out business operations, such branches must be approved by the National Commission of Foreign Investments and the Ministry of Foreign Relations, and must be registered at the Public Registry of Commerce.

    f) For tax purposes, the foreign company will receive the same treatment as a permanent establishment in Mexico and will pay taxes on the income generated from such branch offices at the normal corporate tax rate of 34.0%. However, the foreign company should be careful to avoid the possibility of having the income generated by the foreign company outside of Mexico to become attributable to the operations in Mexico. This possibility is due to the "force of attraction" rules contained in Mexico's tax legislation, which will sometimes require a taxpayer to include this in his/her taxable income that is generated abroad.

    g) Asociación en Participación (AP): Although not a separate legal entity, the Association in Participation is another common form of doing business "in" Mexico. Generally, an AP is an agreement in which one or more partners ("asociados") give goods or services to a managing partner ("asociante") in exchange for the right to participate in the profits of a commercial operation, which is controlled by such a managing partner.

    h) Joint Venture Agreement: Generally, a joint venture agreement is an association of persons (individuals or legal entities) for a limited period of time in which such persons jointly undertake a specific business enterprise. Although a joint venture agreement is sometimes mistakenly categorized only as an AP. A joint venture agreement can take any form in which the parties agree to develop their business and agree to provide their respective services and contributions of capital or resources, to the by-laws of a new independent company, or both.

    The exact type of business venture to be undertaken determines the liability and tax treatment of such an agreement.

2. Steps for Incorporation

To establish a Sociedad Anónima or a Limited Liability Company (the two most common corporate forms), the steps will be essentially the following:

    a) File for a Permit of Incorporation for the company under a proposed name before the Secretariat of Foreign Relations. For this, two or three names are needed in order of preference. The authorization will take about two to three working days.

    b) Incorporate the company before a Notary Public. The Company's initial capital must be paid in full if contributions are paid in kind, or it can be partially paid at a minimum of 20% if capital contributions are in cash. In the case of the "S. de R.L.", the initial amount is 50%. The company must issue registered share certificates, and the shareholders must be registered in the Company Stock Registry Book.

    c) At the time of the incorporation, the shareholders should hold a General Ordinary Shareholder's/Partner's Meeting resolving: (i) the structure of the capital stock; (ii) appointing a Sole Administrator or a Board of Directors, as the case may be; (iii) appointing at least one "Examiner" (statutory auditor) to monitor the Company's administration on behalf of the shareholders (in the case of a S.A.) and (iv) appointing a General Manager, and any other officers or agents.

    d) The Sole Administrator or Members of the Board of Directors' meetings may be held in or outside Mexico. If the Sole Administrator or Directors are not Mexican citizens and will be acting in Mexico, they will need a migratory permit.

    e) The Examiner (in the case of a S.A.) is usually an accountant from a firm who regularly audits the company. A deputy examiner could be appointed if this position cannot be delegated at will.

3. Time frames

Besides the granting of the prior approval by the Foreign Investments Authorities (if necessary), as indicated below, the incorporation date of the Company is dependent upon:

    • drafting of the by-laws to be used for the company;
    • execution and formalization of the special powers of attorney to incorporate the new company (if any),
    • the approval of the corporate name by the Ministry of Foreign Relations, and
    • the granting of an appointment date by the Notary Public for the actual incorporation.

The concept of "Company" includes all legal entities incorporated into Mexico's commercial legislation, partnerships and associations established under the Civil Code of each State including Mexico City. Equity participation in legal entities will be considered in the stock and the corporate parts that represent the capital of a legal entity.