López, Martínez Kawarabata, S.C.

Mexico has in the past years created a favorable environment for foreign investors and to a great extent simplified the procedures to be followed by foreign individuals who desire to invest in Mexico . Mexico ’s foreign investment law is mainly based on the Mexican Foreign Investment Law of December 27, 1993 (“FIL”) as amended on December 24, 1996 and its Regulations as amended on September 8, 1998 (“FIR”).

Generally speaking, Mexican foreign investment law distinguishes between activities that can only be performed by the Mexican government ( see below 2.), those reserved to Mexican nationals ( see below 3.), those whose foreign capital participation is limited ( see below 4.), and those for which a foreign capital participation exceeding 49% requires authorization by the Mexican Foreign Investment Commission ( see below 5.). Also, the purchase of real estate by aliens is subject to restriction in some areas ( see below 6.).

Investment of foreign capital is, however, not limited regarding all other activities that do not fall under the above categories.

The Mexican Government can only perform the following activities: activities related to

Petroleum and other hydrocarbons;
Basic petrochemicals;
Electricity (except for the generation of electricity for self-supply and other minor exceptions);
Generation of nuclear energy;
Radioactive minerals;
Radiotelegraph;
Mail;
Issuance of currency bills;
Coining of money;
Supervision of ports, airports and heliports; and
Activities expressly reserved to the Mexican government pursuant to applicable provisions from other legal areas.

The following activities can only be performed by Mexican nationals and Mexican entities that explicitly exclude foreign participation in their by-laws and articles of incorporation:

V. Supply of other professional and technical services as expressly stated in the applicable laws.

In the following activities foreign capital may only participate up to a certain percentage:

Up to 10 % in:
Production cooperatives.
Up to 25 % in:
Domestic air transportation;
Transportation by air taxi; and
Specialized air transportation.
Up to 49 % in:
Controlling entities of financial groups;
Multiple bank institutions;
Stock exchanges;
Stock exchange specialists:
Insurance institutions;
Bonding institutions;
Currency exchange houses;
General deposit warehouses;
Financial leasing companies;
Financial factoring companies;
Financial companies with limited purpose;
Stock brokers;
Fixed share capital of investment companies;
Operating companies of investment companies;
Administration of retirement funds;
Manufacturing and commercialization of explosives, firearms, cartridges, munitions and fireworks, excluding acquisition and use of explosives for industrial and extraction activities;
Printing and publication of newspapers for exclusive circulation in the national territory;
Series T shares (shares issued for agricultural, ranching and forestry land) of companies or the part of the share capital assigned to the purchase of such land;
Fresh water, coastal, and exclusive economic zone fishing, excluding aquaculture;
Integral port administration;
Piloting port services for vessels to carry out navigation operations within the port pursuant to the applicable law;
Shipping companies engaged in commercial exploitation of ships for inland and coastal navigation, excluding tourism cruisers and exploitation of marine dredging and implements for port construction, conversation and operation;
Supply of fuel and lubricants for ships, airplanes, and railway equipment;
Holders of licenses in the telecommunication area, in particular basic telephone services and the use of satellite technique; except for cellular telephone services;
International ground transportation of passengers, tourism and freight between Mexican destinations, the administration of passenger bus stations and auxiliary services (however, from January 1, 2001 51%, and from January 1, 2004 100% of foreign capital can participate in such activities).

These limitations for foreign investment participation cannot be exceeded directly, nor indirectly through trusts, agreements, corporate participation or shareholder agreements, multilevel schemes or any other scheme that grants foreign investors control or capital participation exceeding the percentage established above, except through Neutral Investment ( see below 7.b.).

5. Activities whose foreign capital participation exceeding 49% requires authorization by the Foreign Investment Commission (Ministry of Economy).

Regarding the following activities foreign capital participation can exceed 49% with authorization by the Foreign Investment Commission:

I. Port services for vessels to realize their navigation operations within the port, such as towing and tying services and freight charge;

Ship owner companies dedicated exclusively to deep-sea traffic;
License and permit holder companies of airdromes that offer services to the public;
Private education services for pre-school, elementary, secondary, intermediate superior, superior and combined education;
Legal services;
Credit information companies;
Securities assessment institution;
Insurance agencies;
Cellular telephone services;
Construction of ducts for the transportation of petroleum and its derivatives;
Perforation of petroleum and gas wells;
Construction, operation and exploitation of railways that qualify as general ways of communication, and railway services to the public.

Foreigners (meaning foreign individuals and entities incorporated abroad as well as Mexican entities that admit participation of foreign capital) with legal abode in Mexico are free to acquire real estate unless such real estate property is located within a zone of 100 kilometers along the national borders and of 50 kilometers along the beach (“restricted zone”). Prior to acquiring real estate property outside the restricted zone the future owner must agree in writing before the Ministry of Foreign Affairs not to seek the protection of a foreign law or a foreign governmental authority regarding the real estate property to be acquired.

Real estate property located within the restricted zone can be acquired by foreigners for non-residential purposes only. Foreigners who wish to purchase a piece of real estate situated in the restricted zone for residential purposes can do so only indirectly through a trust (“fideicomiso”, see below 7.c.).

The Mexican law offers three different forms of direct investment by foreign nationals:

Non-Mexican entities can establish a Mexican subsidiary and hold up to 100% of its share capital depending on the activity of such corporation (see above 1.-5.). Prior to the incorporation of a Mexican subsidiary, permission by the Ministry of Foreign Affairs for the corporation’s name must be obtained. In addition, the Mexican subsidiary must be registered with the State’s Public Registry of Property and Commerce and the National Registry of Foreign Investment. Every Mexican Corporation must determine in its articles of incorporation whether foreigners are permitted or excluded to become shareholders.

Branches and representation offices of foreign entities must register with the State’s Public Registry of Property and Commerce and the National Registry of Foreign Investment and require authorization by the Ministry of Commerce to exercise commercial activities. Representation offices of foreign entities whose only activities consist in the representation and assistance of their foreign parent company do not need to be registered but require authorization by the Ministry of Commerce.

The acquisition of stock that does not confer voting rights to the investor is considered “neutral investment” and does not count for the computation of the foreign capital participation set forth in 1.-5. above. Neutral investment requires authorization by the Ministry of Commerce and, in some cases, by the National Securities and Exchange Commission.

Investment through a trust – which requires the authorization of the Ministry of Foreign Affairs - can be established for an extensible initial period not exceeding 50 years. Under this construction – whereby a trust established under Mexican law holds the property, a Mexican financial institution acts as trustee and the foreign national or Mexican corporation with admission of foreigners is the beneficiary of such trust - the latter obtains the benefits of the property (e.g. right to use the property for residential purposes or profits derived from such property) without direct ownership of such property.

The FIL confers authority upon the Ministry of Commerce to make null and void the authorizations and permits obtained in violation of the law.

In addition, the FIL provides for a catalogue of fines in the amount between 30 and 5,000 minimal salaries (actually approximately between 900.00 and 152,000.00 Mexican Pesos) for different infractions of the law.

As demonstrated above, foreign capital can as of today participate without restriction in most areas of the Mexican economy. Still, seeking qualified legal advice in an early stage of planning an investment project usually saves an investor a substantial amount of time and money. The capital stock of any Maquiladora Corporation may be 100% foreign owned. A Maquiladora Program is granted to a legal entity that is formed in Mexico with the purpose of manufacturing, assembling, repairing, or other processing of goods that are destined mainly for the exportation.

For additional information, please contact Luis Eduardo Martinez at emartinez@lmklaw.com or dial to (++52) (664) 686.1006 extension 107 or (++52) (6664) 686-1036 (fax) at our Tijuana Offices or at (619) 595-3173 or (619) 595-3176 (fax) at our San Diego Office.