López, Martínez Kawarabata, S.C.

Following you will find a general guideline of the legal forms of structuring your commercial corporation to be legally incorporated in Mexico to do business and manufacture industrial products in the State of Baja California – Mexico .

There are three different legal forms that are normally used by investors in Mexico :

a Branch,
an S.A. de C.V.Sociedad Anonima de Capital Variable (similar to a U.S. Corporation),
an S. de R.L. de C.V.Sociedad de Responsabilidad Limitada de Capital Variable (similar to an LLC of the United States of America )

Please allow us to comment as follows on these different forms of legal entities in Mexico :

Your company may do business in Mexico by setting up a Branch, but most of the foreign companies choose to operate through subsidiary corporations. Branches may find it more difficult to obtain tax and other incentives than corporations. A branch would expose your U.S. parent company to civil and tax liabilities in Mexico .

To set up a branch, your company must fulfill formal requirements such as obtaining authorization from the Ministry of Economy. A branch must also be registered with the Public Registry of Commerce after obtaining authorization and publish the corresponding permit in the Federal Official Gazette.

Further, below you will find a general guideline for the Taxation system in Mexico applicable for Branches:

Non-resident foreign companies (called “Branches”) that conduct business through a permanent establishment in Mexico are subject to income tax under the rules applicable to resident business entities, with the exceptions described in the following paragraphs.

The term “permanent establishment” is defined under the Mexican tax law and includes entities that own inventory located in Mexico that has the power to bind the parent company contractually.

All income derived from activities carried out in Mexico .
Income obtained from the sale of goods or services in Mexico (if the transaction or operation passes in Mexico ) by the parent or by any establishment of the parent abroad.
Gains derived from the sale of real estate property located in Mexico .

If the transaction or billing is submitted outside Mexico , sales of goods or services are nevertheless subject to Mexican income tax if either of the following applies:

The goods are held by the permanent establishment in Mexico (in a warehouse in Mexico for example).
The services are provided by the permanent establishment in Mexico (in an office in Mexico for example).
Employees of the permanent establishment perform installation services in connection with the sale, and the cost of such services is included in the sales price.

Income of permanent establishments, like that of resident companies, is taxed at a 34% rate. Revenue subject to withholding tax that is attributable to an office of the company other than a branch office is not included in the branch’s taxable income.

This type of company is the Mexican equivalent to a U.S. Corporation (Inc.). The capital of the company is provided by shareholders (accionistas), whose liability is limited to the face value of their shares (acciones). The minimum share capital is 50,000 Pesos (ca. 5,500 U.S. Dollars).

This company has no limitations as to the maximum amount of shareholders permitted and is usually the form chosen by larger foreign corporations. An S.A. de C.V. may increase or decrease its capital without changing its articles of incorporation. Increases and decreases in capital must be recorded in a register ledger book kept by the administration of the company for this purpose. Shares must be drafted and registered.

The normal requirements for establishing a Mexican corporation with fixed or variable capital are as follows:

At least two founders-shareholders are required. This minimum number of shareholders must always be maintained (they can be entities or individuals)
An organization or general formation meeting of shareholders must be held to adopt the draft articles of incorporation, appoint board members and managers, and conduct other related business. Founder-shareholders may act personally or through representatives in Mexico .
The articles of incorporation, the minutes of the first shareholders meeting, and other corporate documents must be signed by founder-shareholders in the presence of a notary public.
An application for registration, together with the corporate documents, must be registered at the Public Registry of Property and Commerce. This registration brings the corporation formally into existence.
The official domicile (registered address or legal seat) must be in Mexico .

iii. S. de R.L. de C.V. (Sociedad de Responsabilidad Limitada de Capital Variable)

This is the Mexican type of the limited liability company with variable capital. The minimum share capital of this company is $3,000.00 Pesos (ca. 330 U.S. Dollars). The variable (authorized) capital can be unlimited. We recommend incorporating a LLC with capital of 50,000 Pesos (ca. 5,500 U.S. Dollars). At least two partners are required. This minimum number of partners must always be maintained (they can be entities or individuals)

This company form can be used for the same purpose as a corporation and is usually chosen by smaller U.S. companies other than corporations (for example U.S. LLCs) because under U.S. tax law, an S. de R.L. de C.V. allows certain U.S. entities to deduct the taxes paid by their Mexican entity.

The S. de R.L. de C.V. combines aspects of the partnership and the corporation. Members are liable only to the extent of their capital contributions, but participatory interest are represented by shares (partes sociales) that are not freely negotiable.

The advantage of this corporate structure is that the sale of share requires the consent of the majority partners.

We suggest to incorporate your Mexican Commercial Corporation as LLC to avoid liability for your investment and participation into capital value of the Corporation . Also, a LLC must be a good option and solution for a closely held company.

For additional information, please contact Luis Humberto Lopez or Eduardo Martinez at lhlopez@lmklaw.com and emartinez@lmklaw.com or at (++52664) 686.1006 extension 104 or 107 or (++52664) 686-1036 (fax) at our Tijuana offices or at (619) 595-3173 or (619) 595-3176 (fax) at our San Diego office.