Mexico: Doing Business in Mexico
Contrary to the beliefs widely held abroad regarding the nature and function of Mexico’s legal system, Mexico does, in fact, enjoy a highly evolved and organized legal system which with few exceptions is functional. The origins of Mexico’s legal system are both ancient and classical, based on the Greek, Roman and French legal systems, and the Mexican system shares more in common with other legal systems throughout the world (especially those in Latin America and most of continental Europe) save for those common law systems.
- I. Civil Law System.
Mexico has a “civil law” system, however, case law in Mexico should not be ignored; certain judgments of the federal courts including the Mexican Supreme Court and the circuit courts, and, at the state level, judgments issued at the appellate level have persuasive value and are published although they are not widely circulated. In Mexican administrative law, such as taxation, labor, banking and financial service law, binding rulings and regulations are frequently issued by the corresponding regulatory agencies. These rulings and regulations have the effect of binding case law. Also, binding case law precedents not unlike common law precedents do exist in Mexico. These are called jurisprudence, are published from time to time and are supplemented through restatements, or summaries of what the law is and how it has changed. To qualify as jurisprudence defined; the legal principle set forth in a case must interpret Mexican law under a Writ of Amparo, which is a summary proceeding that serves to guarantee constitutional rights.
II. Litigation. In Mexico litigation is expensive, there are no punitive damage awards, parties must pay for their own attorney’s fees and costs, and the litigation process is very lengthy. Accordingly, litigation in Mexico is not practical unless unavoidable to accomplish a vital business objective. Although there are no strictly punitive damage awards in Mexico, awards for “moral damages” (daños morales) are possible under certain circumstances set forth in the Civil Code. These awards, however, never amount to the astronomical figures often seen in U.S. decisions.
Litigation in Mexico is without jury; however, negotiation and mediation are encouraged and is also growing. In Mexico the judge controls his process. Mexican judges have a significant active role in developing a case.
Excluding administrative proceedings, most litigation is settled for the above stated reasons and because in Mexico, judgments are often difficult to enforce against even a solvent defendant, given that judgments can be contested in a separate amparo proceeding, which can drag on for several years.
III. Mexican Notary Public.
In Mexico, a “notary public” (Notario Publico) is, in fact, a lawyer who is also a public official appointed by a Mexican State selected after a rigorous application process and examination. Such an appointed is considered a delegation of governmental authority for the certification or official recognition of certain acts and documents. Their public duties and authority include authenticating facts which become irrefutable, unless the notary is proven to have committed fraud; conducting title searches; acting as public recorder and examining wills and contracts as to proper form.
IV. Mexican Contract Law.
The general principle of freedom of contract between individuals and entities is the backbone of contract law. The common fundamental principles of contract law include the initial offer, negotiation of the terms, acceptance, formalization of the contract, including the establishment of liquidated damages or other penalty provisions and conditions of default, and termination of the contractual obligations.
The parties need not present “legal consideration” to bind them, their intent to agree is suffice. However, in Mexico, freedom of contract depends on “the legality of the subject of the contract”, and accordingly, contracts involving illegal activities are void. Mexican contract law imposes certain degree of formality for contracts, in certain events (depending of the underlying business) the presence of witnesses to contracts is almost a sacramental practice. Further, the system of public registries for the registration of contracts so that the acts of the contracting parties will be binding on third parties is a peculiar characteristic of Mexican law. Finally, Mexican guaranty agreements are “accessory or secondary contracts” because they require the prior existence of a principal contract, a special characteristic of Mexican law. One example of this is the case of a mortgage contract (contrato de hipoteca) which cannot be granted without a prior contract that gives rise to the obligation or obligations to be guaranteed or secured by the mortgage.
V. Real Property.
Real property is defined to include the following: (1) the land and the improvements (including new buildings or new floors added to the mortgaged buildings); (2) plants, trees and fruits which have not yet been separated by harvest; (3) objects attached to the improvements which cannot be separated without damage to either the improvements or the object; (4) statues, paintings and other ornamental objects placed upon the property in such a way as to reveal an intention to attach them permanently; (5) objects which the owner keeps upon the property to propagate birds, fish, bees, etc.; (6) machinery and implements used directly and exclusively for the activities conducted upon the property; (7) fertilizers and seeds necessary to cultivate the property; (8) electrical apparatus and accessories which are attached to the land or improvements; (9) sources of water and aqueducts or pipelines for transporting water or other liquids or gasses on rural property; (10) animals used for breeding purposes; (11) working animals which are indispensable for the cultivation of the property; (12) improvements constructed in waterways, rivers or lakes with the intent that they remain at a fixed point; (13) rolling stock of railroads, telephone and telegraph lines and radio stations, and (14) any other in rem rights. An appraisal of the real estate, however, may not consider the value of anything other than what appears to be immovable.
The Mexican nation is deemed to be the owner of all minerals and substances which exist as deposits beneath the surface (oil and lithium, amongst others).
VI. Foreign Investment in Real Property.
The Mexican Constitution and the Foreign Investment Law prohibited “direct” foreign ownership of land or water within those border and coastal areas known as the restricted zone except through a title holding “fideicomiso” – a bank trust. Until recently, a fideicomiso for restricted zone property could last not more than 50 years. After that, the trustee had to sell the property to a “qualified” buyer (a Mexican citizen or another trust). Indirect ownership through a Mexican company owned by foreign investors also was prohibited.
The foreign investment law also allows ownership of “non-residential” real estate within the restricted zone through a foreign-owned Mexican corporation, provided that formal approval is obtained from the Ministry of Foreign Affairs (SRE). Otherwise, all foreign individuals and foreign corporations as well as Mexican corporations which include any foreign investment may hold title to property within the restricted zone only “indirectly” through a bank trust arrangement known as a “fideicomiso”.
Mexican law creates a presumption that the person in possession of property is entitled to continue in possession and has all related ownership rights. This presumption is designed to prevent a breach of the peace. Before acquiring any real estate, it is important to verify that no one is in possession of the property.
In Mexico, the concept of adverse possession is referred to as “prescription”. The possession must be under claim of ownership, continuous, quiet and public. Acquisition by prescription occurs when real property is possessed for five years either in good faith or by evidence of possession recorded in a public registry. In the case of bad faith, the period is ten years. Prescription does not operate as to federal zone lands, and does not run between husband and wife, between parents and children, between or among co-owners, between an incapacitated person and his or her guardian, or against soldiers in active service in time of war.
Various states of Mexico have adopted local statutes to govern condominiums and these may vary significantly from one state to another. A condominium owner is the individual or legal entity who owns and is entitled to the exclusive right to possession of the premises and has a co-ownership right to the common areas. The condominium owner’s interest in the common areas is proportional to the respective original values of the units as determined in the condominium’s title documents. Common walls and floors that separate only particular individual units are deemed to be owned by the contiguous owners. When a condominium development includes staircases, courtyards or gardens, the related maintenance expenses may be allocated in the condominium documents primarily to those benefitted.
VII. Mexican Labor Law.
Mexico’s labor laws include extensive rights for workers, designed to provide a mechanism promoting a “just” society. The cornerstone of Mexico’s labor laws is Article 123 of the Constitution, stating that every person “is entitled to suitable work that is socially useful. Toward this end, the creation of jobs and social organizations for labor shall be promoted in conformance with the law”, and provides various protections and guarantees to workers, including:
- (i) an eight-hour workday,
- (ii) a maximum workweek of six days,
- (iii) equal pay for equal work, and
- (iv) mandatory childbirth and maternity and fatherhood leave.
Workers are entitled to double pay for overtime work. Also, employers are required to provide employees with a safe workplace and disability pay for work-related injuries. Workers are guaranteed the right to form unions and bargain collectively. Workers’ rights to organize strikes are recognized, and the rights of employers to impose a lockout, under certain conditions, are recognized. Workers are legally entitled to an 8% share of the taxable income of their employers.
All Mexican workers are protected from arbitrary dismissal (unjustifiable discharge). Thus, to some extent, job security is constitutionally guaranteed to the Mexican people. If a business is sold, the new owner must adhere to any existing contract with the workers. Various federal labor “decrees” supplement the provisions of Article 123 of Mexico’s constitution. The most extensive of these is the Mexican Federal Labor Act (FLA), which is a lengthy, detailed statute strengthening the constitutional rights of Mexican workers and placing additional restrictions and duties on employers. Collective bargaining agreements are enforced with the same force as if they were law. A collective bargaining agreement may contain a “closed shop” clause, so long as it is not applied against nonunion workers who were employed prior to the adoption of the agreement. The FLA provides that upon a showing of a minimum of 20 workers, workers can form a union that must be recognized by the employer. Unionization is more prevalent in manufacturing than in service-related work.
VIII. Commercial Companies.
Commercial companies in Mexico are regulated through the General Act of Commercial Companies (Ley General de Sociedades Mercantiles). Foreigners can opt to establish a Mexican company or to acquire stock in an already established Mexican company to do business within Mexico, depending upon the need to have a presence and involvement in Mexico from the commercial and tax point of view. The basic procedures related to the organization of a new Mexican company with 100% of foreign capital participation are as follows.
The most popular types or companies, are:
- (i) Sociedad Anonima. It is a limited liability stock corporation, which may adopt the form of a fixed capital company (“S.A.”) 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. Its key characteristics: (i) 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, (ii) must have at least 2 (two) shareholders and no minimum capital is required but whatever amount is decided has to be paid at the time of incorporation; (iii) must appoint a statutory examiner who is a disinterested third party who supervises the operations of the company and represents the interests of the shareholders, (iv) the shares which represent the capital stock of the company are freely transferrable and can be traded publicly, after the corresponding filings take place.
(ii) Limited Liability Company. Has become popular among foreign companies that want to reduce their tax liabilities. Its key characteristics are: (i) like a “S.A.” and “S.A. de C.V.”, 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, (ii) it must have at least 2 (two) partners to a maximum of 50 (fifty), and a no minimum capital is required but whatever amount is decided, has to be paid at the time of incorporation, (iii) there is no requirement to appoint a statutory examiner; (v) the tax rate will be the normal corporate tax rate, and (vi) the shares which represent the partnership interests in the company must not be freely transferrable and cannot be traded publicly.
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 Ministry of Economy and be registered at the Public Registry of Commerce. 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; 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 in his taxable income, income generated from abroad.
IX. Negotiable Instruments.
Negotiable instruments, primarily promissory notes, are the primary document used to establish the obligation to pay money. The instruments are also critical tools in structuring international transactions. In the context of an international transaction, the goal is to draft the negotiable instrument in such a way as to maximize the enforcement options. Negotiable instruments can be drafted so that they are valid in both the United States and in Mexico. However, to be valid in both jurisdictions, one needs to be aware of certain differences, and take steps to harmonize those differences, so that the laws of both jurisdictions are satisfied. A negotiable instrument is worthless unless there is someone to pay it. Therefore, before accepting an instrument, one needs to determine if the maker has sufficient assets to collect if a payment is withheld, and if an acceptable court can obtain jurisdiction over that person and his assets. The existence of collectable assets can be verified through a variety of means. To secure the desired jurisdiction, one should consider the use of a forum selection clause. When all these factors are properly considered and investigated prior to drafting the negotiable instrument, a fully valid, enforceable, and collectible instrument will be the result.
X. Energy Law.
Though Mexico’s energy -mainly, power- sector has been under pressure by the current administration, its notably say that oil & gas business have gain a lot of traction. This is thanks to the Dos Bocas -Refinería Olmeca-, oil refinery. It is notable to say, that the power industry will definitely be on the spotlight for the next couple of years, thanks to the “near-shoring”.
Oil & Gas. Mexico has a federal system of government, with the power to regulate the oil & gas industry vested only at the Federal level. The primary laws governing the Mexican oil & gas sector are the (a) Constitution, (b) Hydrocarbons Law, (c) Mexican Petroleum Law, and (d) their respective regulations issued by the Ministry of Energy and the Energy Regulatory Commission (CRE). The Hydrocarbons Law establishes the legal framework for exploration, extraction, and production of hydrocarbons, while the Mexican Petroleum Law regulates the activities of the state-owned oil company, Pemex, and its subsidiaries. The Mexican energy sector had a mayor reform in 2013 -at the Constitutional level- and 2014 the issuance or promulgation of the applicable laws-, which ended Pemex’s monopoly and liberalized the businesses to private investment, while still maintaining significant market share. Now days, private investors -whether foreign or domestic- are able to participate in the (a) exploration, (b) production, (c) refining, and (d) commercialization of hydrocarbons in Mexico. Commercialization of hydrocarbons requires among other permits -mainly at the gasoline station permits and cross border commerce-, the permit issued by the CRE.
Power Industry. As in the case of the Oil & Gas Industry, the power industry, that is, generation, transmission, distribution, and power retail -and other products- are of Federal jurisdiction.
The primary laws governing the power industry in Mexico are the (a) Constitution, (b) Federal Electricity Law, (c) Federal Law of Public Services, (d) Mexican General Law on Climate Change, (e) Mexican General Law on Sustainable Energy, and (f) their respective regulations, issued by the Ministry of Energy, Environment and the CRE.
The Federal Electricity Law establishes the legal framework for the power industry in Mexico, while the Federal Law of Public Services regulates the provision of public services, including electricity. The CRE is the regulatory agency responsible for policing the power industry operates in a transparent and competitive manner. Private companies are able to participate in the power industry in Mexico, either through independent generation schemes, or by participating in competitive tenders for energy generation projects, which power is to be sold to the basic supplier of power in Mexico. The prior administration implemented a series reforms aimed at increasing private sector participation in the electricity sector, while still maintaining state control through the transmission and distribution of power.
The Mexican power industry used to be focused on renewable energy, however, the current administration has established a number regulations to prevent that private participants in the power industry fully develop and operate renewable projects. Notwithstanding the foregoing there are a series of incentives and subsidies to encourage the development of renewable energy projects. These incentives are among others, the clean energy certificates, which allow a renewable project maximize its profits by means of the sale of such certificates to the energy consumers that are obliged to purchase such certificates based on their annual energy consumption.
MEM. The energy wholesale market (MEM) in Mexico refers to the market where electricity is bought and sold in large quantities by electricity generators, suppliers, and wholesalers. The threshold of energy to starts at 1 MW in order for energy consumers to be able to purchase power through a qualified suppliers and 20 MW in order to be a market participant and purchase the power -and ancillary products thereunder- in a directly manner.
The MEM is operated by the National Energy Control Center (CENACE), which in charge of the dispatch of electricity from generating plants to distribution companies – actually to basic supplier and qualified suppliers- and end-users -those who are capable of purchasing the power directly. The market operates on a day-ahead and real-time basis, and its pricing is determined by supply and demand dynamics. Local marginal prices are applied to the different regions of the MEM. The MEM is policed the CRE and the Ministry of Energy.
In summary, the Mexican legal framework for the power industry provides for a mix of private and public sector participation, with a focus on promoting renewable energy and ensuring transparent and competitive market conditions.
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