As the third-largest trading partner of the United States (behind Canada and China, but ahead of countries such as Japan and Germany), and a member of the 1994 North America Free Trade Agreement (NAFTA),2 Mexico has become a huge host of foreign investment in most sectors of its economy, from manufacturing to import and export of goods. By way of example, Mexico is now seventh among car-manufacturing countries in the world, an achievement that would not be possible without the participation of foreign automotive manufacturers in Mexico.3
In the past few years, Mexico has embarked on an ambitious programme of legal and structural reforms directed at overhauling its economic appeal and in an attempt, among other things, to encourage an increase in the flow of foreign investment into the country. Although Mexico has historically been open to foreign investment, and indeed is one of the top recipients of foreign direct investment in Latin America,4 the recent structural reforms have focused on the energy and telecommunications sectors, which had lagged behind significantly on account of previous foreign investment restrictions. As a result, in 2014, the Mexican Congress enacted a series of reforms to promote and kick-start economic growth in those sectors. Among these reforms, Mexico significantly deregulated the energy sector and eliminated foreign investment restrictions that used to exist in the financial and telecommunications sectors.
Generally speaking, foreign investment in Mexico is regulated by the 1993 Foreign Investments Law and its Regulations (as amended) (jointly, FIL), which provide, and describe, the main framework for the topic; the FIL is discussed further in the following sections.
In addition to establishing the framework for foreign investments, the FIL also sets forth a brief description of each relevant business sector, any remaining restrictions with respect to foreign investments, and the extent of those restrictions. Regardless, as a general rule, all foreign investments in Mexico must be reported to the Foreign Investments National Registry (RNIE), which is dependent on the Ministry of Economy.
II FOREIGN INVESTMENT REGIME
As previously mentioned, the FIL is the main legal instrument regulating foreign investment in Mexico. The FIL defines a ‘foreign investment’ as the participation, of any percentage, by foreign investors in the corporate capital of Mexican entities; investments in Mexican companies where the majority interest is made up of foreign capital or the participation by foreign investors in the activities and sectors contemplated under the FIL. A ‘foreign investor’ is defined as any individual or entity of any nationality, other than Mexican and foreign entities with no legal independent existence.
While in general foreign investors may participate in Mexican projects without major restrictions (such as being allowed to participate directly in the corporate capital of Mexican legal entities, purchase and sell assets, manufacture, import and export products, open and operate establishments or businesses of any legal nature, etc.), some limitations apply to certain economically ‘strategic’ activities, with foreign investment restricted or, in some specific cases, not permitted at all.
Certain strategic activities are actually established in the Mexican Constitution and expressly reserved exclusively for the state, either in whole or in part. The strategic activities reserved for the state are: (1) the postal service, telegraphy and radio-telegraphy; (2) radioactive minerals and nuclear energy; (3) the control of the National Electricity System; (4) the printing of money and coinage; (5) hydrocarbons; (6) basic petrochemicals; (7) control, supervision and oversight of airports, ports and heliports; and (8) the transmission and distribution of electricity.
As part of the recently enacted reforms, the transmission of electricity and the exploration and extraction of hydrocarbons have been significantly deregulated and, although still restricted, private entities, both foreign and domestic, are now allowed to participate to a certain extent in these activities.
In some economic sectors foreign investment is allowed but also in a restricted manner (i.e., capped), and these are further discussed in Section IV.
Regarding real estate, there are no restrictions for Mexican commercial companies seeking to acquire urban real property, even if non-Mexican equity holders participate in the capital stock, whether as minority or majority stakeholders. However, companies may only acquire rural property to the extent that it is necessary for the fulfilment of their corporate purpose. In no event may these corporations acquire real property dedicated to agricultural, cattle or forestry activities of an area larger than the thresholds established for these activities.
Further, acquiring property in a restricted zone (which covers an area creating a belt around the country of 100 kilometres wide in the border regions and 50 kilometres wide along the coast) requires, inter alia, Mexican companies to include a ‘Calvo Clause’ in their corporate by-laws. A Calvo Clause is a requirement for foreign shareholders to consider themselves as Mexican nationals in respect of the company’s property, and also includes an express agreement not to invoke the protection of a foreign government, under penalty of forfeiting their property for the benefit of the nation if they breach the agreement.
Mexican companies with a Calvo Clause included in their by-laws are authorised to acquire real properties located in the restricted zone for non-residential and residential purposes. If acquiring real property for non-residential purposes, the corporation is required to register the acquisition with the Ministry of Foreign Affairs. Mexican companies may acquire real property in a restricted zone for residential purposes only when they fulfil certain obligations.
Foreign citizens cannot acquire real property within the restricted zone by any means; however, they can hold beneficiary rights in trusts established for the purpose of holding ownership of the relevant real estate, subject to securing a prior authorisation from the Ministry of Foreign Affairs.
III TYPICAL TRANSACTIONAL STRUCTURES
Investors seeking to establish a presence in Mexico have a variety of options to achieve that goal. They can do so directly, by means of a representative office or a branch office, or may choose to establish a local corporate entity.
Representative offices are an easy and inexpensive way of exploring the Mexican market. This type of vehicle allows an interested investor to test the waters and lay the groundwork for a more substantive incursion into business activities in the country. Through a representative office, the interested party may distribute information about its business, as well as advertising materials, but it falls short of actually being allowed to perform business transactions (understood to be those activities that generate income).
Because the condition precedent to establishing a representative office is that the activities performed by the entity are not income generating, such offices are not subject to significant tax obligations and liabilities (except, of course, withholding taxes if the entity has local employees).
For certain industry sectors, such as banking and insurance companies, establishing a representative office in Mexico requires prior approval from the agencies regulating those sectors (the National Securities and Banking Commission, for example), and in some cases will also require authorisation from the Foreign Investments National Commission (CNIE).
Branch offices, like representative offices, do not require the foreign investor to incorporate a new legal entity in Mexico. These allow for the investors to act in Mexico and conduct business transactions through their corporate entities incorporated abroad.
The investors must secure a prior authorisation from the Ministry of Economy and subsequent registration in the Public Registry of Commerce. Once authorised, the branch offices may perform any business activity that is not otherwise limited to the Mexican state, to Mexican nationals or to Mexican companies.
Of course, it is significant that without a separate corporate presence in Mexico liability is directly attributable to the foreign corporation, as there is no ‘buffer’ between it and the local business operations.
As an alternative to representative offices and branch offices, investors may choose to incorporate a new commercial entity in the country, separate from the original foreign corporation. Depending on the corporate vehicle chosen by the investor, in most cases this will shield the investor from liability for operations carried out in Mexico by the new local vehicle.
There are two main commercial structures that shield the foreign investor from liability: the corporation (SA) and the limited liability company (SRL).
Both the SA and the SRL are allowed to enter into the same business activities and markets, and are treated equally for tax purposes in Mexico.5
In terms of protecting the investors from liability, both corporate vehicles are limited liability entities, in which their stakeholders are only liable up to the value of the contributions made to the company, and are not liable for the operations of the company itself (the company is liable in these cases). This protection, of course, has certain limits, as illegal activities may pierce the corporate veil.
To provide a general overview of these two vehicles without going into too much detail on the internal organisation of either of them, we will briefly discuss the main guiding principles of these entities.
First, a few general principles of law govern the liability of the directors and officers of both types of companies, except in the case of publicly held corporations, for which more detailed regulations exist. Generally, directors must act reasonably, in the best interests of their principals, and must excuse themselves from the discussion of and approval of transactions when they are faced with a potential conflict of interest.
Minority investors in an SA have more statutory rights than those in an SRL. For instance, equity holders in an SA representing 25 per cent or more of the capital stock may challenge and suspend the adoption of any resolution. Likewise, shareholders in an SA have a statutory right to postpone a shareholders’ meeting for a legal term of three days if they need additional information on the subject matter to be discussed at the meeting.
The equity holders in an SRL and in an SA may be subject to involuntary separation on certain specific and limited grounds. The grounds for separation in an SRL are provided for in the General Law of Commercial Companies, and include scenarios such as an equity holder using the company for its own private business, infringing the by-laws or applicable laws, fraud against the company or insolvency. In the case of SAs, the grounds for separation may be set forth in the by-laws, on the understanding that the General Law of Commercial Companies does not provide a limited list of scenarios.
Capital calls, capital redemption, transformation, spin-off and mergers, and capital contributions, both in kind and in cash, follow the same principles in both companies. One difference is that the by-laws of an SRL may require additional contributions from its partners. In both cases, the by-laws may provide for negative controls and special provisions for the adoption of decisions.
In SRLs, any partner in the company has a statutory right to withdraw from the company when management is conferred on a person that is not a partner or whenever management is delegated to a non-partner. In practice, this statutory right is difficult to enforce since it is unclear how the equity should be redeemed by the company and at what value. The shareholders of an SA and the SAPI (discussed below) are not granted separation rights in this instance.
The rules for the SA have been recently amended to make it a more interesting vehicle for private equity investors and for joint ventures. The shareholders of an SA may agree the following: (1) rights and obligations of purchase and sale options; (2) stock sales and all other acts related to first refusal rights; (3) agreements to exercise voting rights (i.e., shareholders’ agreements), and (4) agreements for the sale of their shares in a public offer. Notwithstanding the foregoing, the provisions regarding minority rights must always be taken into consideration.
Furthermore, there is a subtype of the SA, an investment promotion corporation (SAPI), which is a corporate vehicle originally created to foster the establishment of joint ventures and private equity investments. Although it is regulated in the Securities Exchange Law, it is not a public entity, and it is not subject to the governance rules of public entities. The shareholders of a SAPI may, however, elect to be governed by the directors’ liability regime established for public companies.
Currently, the differences between the regulation of an SA and a SAPI are not really relevant. However, unlike the SAPI, an SA is still not allowed to include restrictions on shareholders receiving dividends or otherwise limiting their economic rights, and it is not allowed to purchase its own shares, so from this perspective SAPIs are still more flexible than traditional SAs. SAPIs, on the other hand, may not be governed by a sole director whereas SAs may choose to have a sole director instead of a board.
We will now give a brief explanation on the main differences, advantages and disadvantages between asset purchases or shares purchases. Before we enter into substantive discussions, it is worth noting that there are no restrictions on transferring capital or profits into or out of Mexico. Additionally, there are no currency restrictions in Mexico, and repatriation of funds is unlimited. As such, foreign investors are allowed to purchase directly assets or ownership interests in Mexican entities, subject only to restrictions such as those described in Section II.
From a business perspective, the easiest and most common method used to acquire an ongoing business in Mexico is through the purchase of all, or a controlling portion of, the equity representing the corporate capital of the target entity.
The transfer of the equity is usually done by a simple endorsement of the stock certificates representing the corporate capital in the case of an SA; or through the transfer, by means of an assignment agreement, of the equity quotas representing the corporate capital of an SRL (the General Law for Commercial Companies provides that the partners holding the majority of the equity interest of an SRL must approve the transaction, and this threshold may be set higher in the corresponding by-laws of the target entity). The business terms (e.g., purchase price, representations and warranties, conditions precedent, etc.) are usually documented through a US-style stock purchase agreement, which will contain customary terms and conditions, as well as representations and warranties concerning the underlying business being purchased.
Some of the main advantages of acquiring an ongoing business through a stock purchase are that (1) the business suffers no discernible changes to its operations as of the moment of the acquisition; notwithstanding that the new owners may at a later point make any adjustments they find convenient; (2) the transaction is fairly simple and straightforward, with minimum corporate requirements besides the assignment or endorsement of the certificates representing ownership of the entity; and (3) apart from any sector-specific requirements, there is no need for further action once the transfer of the ownership interest is perfected, as the assets, operating permits, employees, tax benefits, etc. are not subject to transfer.
One of the downsides of effecting a stock purchase is that all liabilities accrued by the company prior to the purchase are transferred to the new owner (including tax and employment liabilities). Although these liabilities may be covered and transferred to the seller in the stock purchase agreement, it could result in a judicial process that could prove costly and burdensome to the buyer.
The purchase of assets, on the other hand, is a safe choice when the buyer is looking to limit liability resulting from accrued obligations generated by the target entity prior to the purchase.
By its very nature, the purchase of assets is a more burdensome and complicated transaction, and thus more expensive than a ‘traditional’ stock purchase, as the buyer and seller must agree on exactly what assets and liabilities (e.g., accounts payable, debts, current employees, etc.) are to be transferred into the purchasing entity. Both from a business perspective and as a tax obligation, each transferred item must be identified in the asset purchase agreement, along with the price allocation for each such item.
Additionally, when purchasing assets, there is an actual transfer of ownership of each asset. As such, the acquiring entity may need to obtain permits to operate or use the assets, may have to hire or transfer the employees into the purchasing entity, etc. Further, the transfer of certain assets is subject to certain formalities, or certain specific governmental authorisations (such as registrations on machinery) would be required to identify the features dealing with the transfer (e.g., notarial deeds, government authorisations and consents from third parties). If these assets are subject to lien, security or collateral, or are subject to an attachment, or the selling entity is a depository for such items, there could be restrictions on their transfer.
Some of the main advantages of pursuing an asset purchase over a stock purchase are that the purchaser will have certainty that it is not acquiring contingent liabilities or undisclosed liabilities from the selling entity. However, parties should consider that if the authorities find that the purchaser acquired an ongoing concern, the purchaser could be jointly liable for unpaid taxes and, in the case of a finding that the employees that were transferred form part of the deal, also liable for employment obligations.
The primary disadvantage of an asset purchase is the tax cost for the parties (depending on whether the assets were already highly depreciated or not) and the labour implications. From a labour standpoint, the seller may be required to transfer personnel to the entity designated by the purchaser, and this might involve severance costs for the selling entity, with immediate hiring by the buyer. However, it is not unheard of for the parties to agree that the purchaser will assume all the corresponding obligations of the seller, as a ‘substitute employer’, subrogating in all the seller’s obligations with respect to seniority, benefits, amounts owed on account of salaries, and similar labour-related obligations.
There are certain delays in implementing a sale-of-assets transaction, insofar as it might be necessary to obtain new registrations and authorisations for the activity, product or service (e.g., environmental authorisations, official standards and registrations for imports). Not only may all this represent a delay, but it could also entail costs that would need to be properly evaluated.
A brief final note regarding taxation: a company’s tax obligations depend on whether it is considered a Mexican resident for tax purposes or whether a foreign company is considered to have a permanent establishment in Mexico. For a legal entity to be considered a Mexican resident for tax purposes, its main office or effective management must be established within the country.
Non-resident companies are considered to have a permanent establishment in Mexico when their businesses are carried out completely or partially in Mexico. This is done either through any offices, branches or agencies located in Mexican territory, or through an agent (of dependent or independent status in some cases) with the power to enter into agreements on the company’s behalf. However, this does not apply in the case of truly independent agents. Tax laws and treaties further regulate the status of non-residents, when they may be deemed to be doing business in Mexico, and the creation of permanent establishments.
IV REVIEW PROCEDURE
As briefly mentioned in Section II, certain economic activities are capped at a certain percentage of foreign investment participation. These restrictions are found in the FIL and include the following:
- a a limit of up to 10 per cent foreign investment in the case of cooperative companies for production;
- b a limit of up to 49 per cent foreign investment in (1) explosives and firearm-related industries; (2) printing and publishing of national-circulation newspapers; (3) fishing; (4) port administration; (5) port piloting services of vessels to perform inland navigation transactions; (6) broadcasting; (7) supply of fuels and lubricants for vessels, aircraft and railway equipment; (8) shipping companies dedicated to the commercial exploitation of vessels for inland navigation and coastal shipping, except for cruises; and (9) domestic air transportation and specialised air transportation.
The limits on foreign investment participation in the above-mentioned ‘capped’ economic activities may not be surpassed directly or through trusts, contracts, partnership or by-law agreements, pyramiding schemes or other mechanisms granting any control or higher participation than that established. However, neutral investment, which is a sort of preferred non-participatory financial investment equity that is not characterised as foreign investment for the purposes of the limitations provided by the FIL, has made it possible to have equity participation in spite of these foreign investment restrictions.
Neutral investment allows economic, but very limited, corporate rights and it certainly will not grant the foreign investor control over the corresponding company or trust. Therefore, foreign investors may participate in Mexican companies or in trusts through a special class of stock that the Ministry of Economy authorises and that is not taken into account in determining the percentage of foreign investment in the company’s capital stock.
Moreover, a foreign investor must obtain approval from the CNIE for a participation at a percentage higher than 49 per cent in these activities: (1) port services of vessels to perform inland navigation transactions; (2) navigation companies dedicated to the exploitation of vessels; (3) entities that are concessionaires or holders of permits of public-service airports; (5) legal services; and (6) construction, operation and exploitation of railroads.
Further to the above, foreign investors require an authorisation from the CNIE whenever they acquire, directly or indirectly, equity of a company whose assets are above the amount fixed each year by the CNIE (currently, around US$910 million).6 The time taken by the CNIE to authorise such transactions may vary but is not usually considered to be a relevant obstacle. The CNIE may demand certain undertakings related to employment, technology transfer or investment by the foreign investors as conditions to granting the authorisation. However, 95 per cent of all foreign investment transactions in Mexico do not require governmental approval.7
As further discussed in Section V, in general terms and subject to the restrictions discussed in Section II, foreign investors receive the same treatment as domestic investors when acquiring or becoming involved in the restricted areas, including in matters such as antitrust approvals, where the focus would be on the nature of the transaction, and not necessarily on the nationality of the parties involved. The only difference for foreign investors is the percentage of ownership interest that they can hold, either directly or indirectly.
For information purposes, the Mexican government relies on the statistics on foreign investment provided by the RNIE, which monitors, collects statistics on, and surveys foreign investment in the country. Specific information about investors and investments is not generally available to the public, except for the statistical data available through general publications or aggregate data available on the RNIE website.8
All foreign investors and Mexican companies with foreign participation in their ownership are subject to registration. Upon registration before the RNIE, periodic reporting obligations arise; failure to comply with reporting obligations may trigger the imposition of fines.
V FOREIGN INVESTOR PROTECTION
The first protection is the standard of treatment afforded to foreign investment. There are three major standards: minimum, national and ‘most favoured nation’.
The minimum standard requires Mexico to provide foreign investors with fair and equitable treatment in accordance with international standards, including full protection. The national standard implies the absence of discrimination based on nationality. Thus, foreign investors must enjoy a treatment no less favourable than that applied to Mexican investors in similar circumstances. Finally, the most-favoured-nation standard implies that Mexico must grant at least the same treatment to the investor as that provided to other investors in similar circumstances.
An additional protection relates to specific rules safeguarding against expropriation or measures equivalent to expropriation. Expropriation, nationalisation and equivalent measures (e.g., regulatory seizures) should only take place when they are required for reasons of public purpose, on a non-discriminatory basis, observing due process and through fair market-value indemnification related to the foreign investment.
Another fundamental protection is the prohibition of performance requirements. Mexico may not condition the receipt or continued receipt of an advantage or incentive on the meeting of any requirements. There is also the principle of free transfer of currency, which has already been briefly mentioned above. Foreign investors may freely transfer, without delay and in hard currency, profits, dividends and any type of cash stemming from or involving their investment.
Finally, bilateral investment treaties (BITs) usually prohibit the requirement that Mexican nationals occupy senior management positions.
As of August 2017, Mexico has entered into an important network of 31 BITs with 16 European Union countries (Austria, Belgium, Czech Republic, Denmark, Finland, France, Germany, Greece, Italy, Luxembourg, Netherlands, Portugal, Slovakia, Spain, Sweden and the United Kingdom), as well as Argentina, Australia, Bahrain, Belarus, China, Cuba, Iceland, India, Kuwait, Panama, Slovakia, South Korea, Switzerland, Trinidad and Tobago, and Uruguay.
Currently the country is also negotiating BITs with Brazil, the Dominican Republic, Malaysia, Russia, Saudi Arabia and Singapore.
Although certain differences may exist in BITs depending on specific negotiated terms, the content of these treaties is by and large homogeneous. The BITs generally include two sections: investment protection principles and dispute resolution mechanisms.
Most relevant for the business environment in Mexico is NAFTA, which includes provisions regulating investment between the three signatories (Mexico, Canada and the United States). The NAFTA treaty created the largest free trade region in the world in terms of volume of trade9 and grants most-favoured-nation treatment to US and Canadian investors. Negotiations to update NAFTA are currently under way, and it is widely expected that the agreement will be modernised to include activities and sectors that were not relevant or in existence when the agreement came into force (such as telecommunications, internet commerce and minimum labour standards).
In addition to NAFTA, Mexico currently has several free trade agreements with investment clauses, with countries such as Bolivia, Chile, Colombia, Costa Rica, El Salvador, Guatemala, Honduras, Japan and Nicaragua, and a free trade agreement with Peru and with the nations of Central America is pending ratification by the parties thereto.
Both the BITs and the free trade agreements generally grant foreign investors the right to bring an action against the Mexican state in the event of a breach or a supposed breach of the specified disciplines.
The dispute resolution mechanism in the BITs and the free trade agreements is arbitration, usually preceded by negotiation. The investors will usually select a three-member arbitration tribunal. The goal is to ensure equal, impartial and non-discriminatory treatment for the foreign investor and the host state, which would be difficult to ensure by resorting to the courts of either country. In the case of NAFTA, arbitration is made through the UNCITRAL Rules or the ICSID Convention, although parties are allowed to pursue their claims using the domestic court system. It is expected that some changes may be included in the resolution mechanism set in NAFTA, although as yet no information has been published by the governments involved.
VI OTHER STRATEGIC CONSIDERATIONS
As part of the high-level analysis to be undertaken before investing in Mexico, investors should consider the well-known social and economic circumstances.
Although most investors should not expect to face overly cumbersome regulatory hurdles when investing in the more traditional aspects of the Mexican economy, there are several hot-button issues that may bring headaches to even the most well-intentioned foreign investor.
Because government corruption is notorious, and particularly in the infrastructure sector, entities involved in this area of business should exercise additional caution (e.g., strict compliance with their domestic anti-corruption laws, and strict local compliance and anti-money laundering standards) should they wish to avoid being faced with judicial review and sanctioning procedures. Nonetheless, businesses engaged in activities that require constant and close work with the government should be careful about independence and fair dealing with governmental officials. While maintaining good relationships with government officials is important, there are strict guidelines concerning what sort of gifts or ‘privileges’ the private entity may give to an official, with the general rule being that no gifts amounting to a value over US$40, in aggregate over the course of one year, should be offered in any scenario.
Finally, because of anti-corruption regulations, and the possibility of accidentally getting involved in illegal activities, it is important for foreign investors to be careful when choosing local counsel for any and all business undertakings.
VII CURRENT DEVELOPMENTS
The President Trump administration launched rhetoric that initially created a negative perception for foreign nationals looking to invest in Mexico. Fortunately, those initial threats did not find their way into actual implementation. Hence, investments have not suffered, and we have seen a constant and significant flow of cross-border transactions.
Further, although the Trans-Pacific Partnership Agreement was de facto scrapped upon the decision by the United States to withdraw from negotiations, Mexico and the rest of the signatory countries are actively engaged with and looking to push forward the TPP-11 agreement (excluding the United States). Should this agreement or a similar one come into effect, we can expect a further expansion of foreign investment flows into Mexico.
On a final note, Mexico and the European Union are currently overhauling their trade agreement, which is likely to lead to a modernisation of its terms and the inclusion of standards that will make our country a more attractive place to invest and work in, as Mexico and the more industrialised nations become increasingly homogeneous.
1 Juan Francisco Torres Landa and Federico De Noriega Olea are partners, and Pablo Corcuera Bain is an associate at Hogan Lovells BSTL, SC.
2 United States Census Bureau, Foreign Trade: Top Trading Partners – June 2017,
4 UNCTAD, ‘World Investment Report 2015: Reforming International Investment Governance’,
5 Refer to your local counsel to discuss any tax effects in your local jurisdiction.
6 This threshold was recently increased to facilitate foreign investments into the country. Note that the official threshold is denominated in Mexican pesos, and as such the par value in relation to the US dollar may fluctuate significantly from time to time.
8 The registry (in Spanish) is accessible through the website of the Ministry of Economy at
9 Government of Canada, Global Affairs Canada (2016),