Archive for Investment and Business in Mexico

Starting a Business in Mexico: Taxes, Immigration and Incorporation

May 5, 2012 / Solomon Freimuth / No comments

This article was originally published in November of 2011 on the Calderón & Asociados website, but as I am no longer part of that firm I am just now getting around to adding it to this site. Enjoy.

So you want to pack up and move to paradise? Before you put your house on the market and start selling off your ski gear, you may want to spend some time investigating your options as to moving to Mexico. Starting a business has worked for thousands of foreigners in Mexico, but the expat business-owner life is not all sitting on the beach sipping margaritas and hopping from cantina to cantina singing along with the Jimmy Buffet impersonators. In fact, most business owners in Mexico, unless they own a bar or beach club, are far too busy or tired to take part in these activities. This article is a very basic, very general, look at a few of the things you need to consider before you embark on your tropical dream.

What Sector?

One of the things you have to decide before you start the whole process of creating your enterprise is what type business are you going to do. You need to have your plan well laid out and determine beforehand if it is a business that you can take part in as a foreigner in Mexico. The Mexican Constitution reserves exercise of some commercial activities for the government and some others for Mexican citizens, you will need to make sure that the business you want to create is something you are allowed to do.

There is a long list of businesses that are reserved exclusively for exercise by the federal government, some make a lot of sense, because of their nature as publicly necessary, while others are nationalized as an attempt to keep the country’s wealth in the hands of Mexican citizens. The federal government has exclusive rights to: harvesting and processing petroleum, generating electricity and nuclear power, processing and handling of radioactive minerals, telegraph/radio-telegraph, mail, the creation of money and supervision of ports, airports and helipads.

As well as industries that are exclusively performed by the government, the Foreign Investment Law specifies some businesses that can only be performed by Mexican citizens and still others that can only have limited participation of foreigners. The businesses reserved exclusively for Mexican citizens are broadcast television, terrestrial transport, and distribution or sale of gasoline. As for businesses that allowed limited foreign participation: Production cooperatives are allowed 10% foreign participation; airlines which fly routes inside of Mexico may have up to 25% foreign participation; insurance companies, suppliers of bonds, exchange houses, financial institutions, firearm and ammo manufacturers, newspapers, commercial fisheries, harbor pilots, interstate shipping, port management and telecommunications companies may have up to 49% foreign participation; and finally, tugboat operators, marinas, boat ramps, private airfields, private schools, law firms, insurance brokers, cell phone service companies, oil pipeline builders, petroleum drillers and railroad builders need a special permission from the government if their foreign participation is more than 49%.

One more consideration about restrictions for business type is that while the law only limits the previous activities, by custom some businesses are only performed by members of certain unions or syndicates. If you are not a member of a particular syndicate it can be extremely difficult to obtain a business license or sellers permit in certain fields, therefore you will need to research local customs in respect to unionization as well.

What Structure?

You have your idea; you have checked that it is possible for you to perform. Now you need to look at the way in which you want your business to run. The most common way of starting and running a business, at least for foreigners, in Mexico is through a corporation, although it is possible to run your business in Mexico as a sole proprietorship in many circumstances.

Everyone who has ever mentioned starting a business in Mexico will get the standard expat advice that you must start a corporation to run your business, which can be true in some cases. There are a wide variety of corporate structures available in Mexico, the most common of them being the S.A. de C.V. or Anonymous Society with Variable Capital, which is very similar to the Inc. in many English-speaking legal systems. Even though the S.A. de C.V. is the most commonly used, in this author’s opinion the S. de R.L. or Limited Responsibility Society fits better with the needs of small business owners. Without going into too much depth, basically the S. de R.L. has more of a small business feel, allows restrictions on transfer of ownership and has a lower required startup capital. The most notable advantage of using a corporation to run the business are the corporate veil which limits liability to the owners/partners, but the drawbacks of a corporation are that start up costs will be increased and you, of course, a corporation requires partners.

Sole proprietorship is a great option if you want to go it on your own. Expat legend tells us that foreigners cannot run businesses through sole proprietorships, but the reality is that this is just not true. Sole proprietorships have big tax advantages, avoiding the classis double taxation incurred by corporations. Many will say that the major disadvantage of the sole proprietorship is that it will not offer the limitations on personal liability that a corporation would give, but in this author’s opinion that might not really be a big concerns considering that the biggest liability risk is labor-related, which is not protected under corporate shielding anyway.

What Do I Need To Be Ready?

You will need to get yourself legally ready to do business in Mexico, not just your corporation but also your personal documents. Before leaving your home country, it is a good idea to ready some of your pertinent documents for use overseas, then after arriving in Mexico you will need to have these documents translated into Spanish. Finally, once in Mexico you will need both a permit from immigration and a personal taxpayer ID number. Both of these can be obtained personally or with help from a consultant or attorney.

Most documents issued by foreign governments are not valid for use in Mexico, at least how they are issued. Your birth certificates, school records and/or professional degrees, as well as your marriage licenses or divorce decrees will all need to receive a special certification from your home government, and depending on which country you hail from you might also need to get the Mexican government to authorize the use of the document in Mexico. Once the documents have been properly authorized for use in Mexico, the will also need to be translated into Spanish by a translator who has been authorized by the Mexican government.

In order to work in Mexico as a foreigner you will need a special permission from the National Institute of Immigration (Instituto Nacional de Migración or INM in Spanish). These permits are widely given to entrepreneurs, investors and professionals who have migrated to Mexico, but obtaining one of these documents can be taxing on the patience, usually requiring multiple trips to the INM office and a plethora of documents pertaining to your personal, academic and financial background. Immigration law in Mexico is currently in the process of reform; apparently the new laws will make the migratory process more agile.

The Mexican Treasury Department, also known as Hacienda, issues to all taxpayers in Mexico a unique taxpayer ID that is based on your name, birthdate and a few random numbers and characters. The taxpayer ID is commonly known as the RFC, which stands for Registro Federal de Contribuyentes or Federal Registry of Contributors in English. If you are opening the business as a sole proprietor, you will use this number for tax purposes. If you are opening your business with a corporation, you will still need a personal taxpayer ID number in order to be the legal representative of the corporation. Getting your taxpayer ID is very simple, much of the inscription process is online and the people in the Hacienda office are usually very efficient.

Other Considerations

Doing business in Mexico has its own unique style and flavor; many people never adjust to the pace and therefore struggle unnecessarily in their business. Most people that are able to run a business in Mexico for any long period of time have an accountant and an attorney that they trust and use regularly for advice and help on various issues that they face.
Tax laws are different in Mexico than in other parts of the world, many foreigners find the tax system in Mexico frustrating and confusing. A good accountant can help you sort through what taxes have to be paid and when, giving advice and helpful reminders which can keep your business out of trouble in the long run.

Labor law, contract law and other aspects of the legal system in Mexico are very different from those we are accustomed to in our home countries. Mexico’s laws tend to be favorable towards the employee, the renter or the customer, although this tendency is progressive and humanistic, it can also be very frustrating for individuals trying to conduct business in Mexico. A good attorney will help new business owners by orienting them in the laws and customs of Mexican businesspeople, explaining the importance of good labor practices, rental contracts, etc.

In conclusion…

Mexico can be paradise for the expat business-owner, but preparation and patience are keys for anyone thinking of taking this life path. If after reading and contemplating the ideas mentioned here, you still are interested in setting up shop “South-of-the-border”, Mexico will welcome you with open arms.

Category: Blog, Corporations in Mexico, Investment and Business in Mexico, Running a Business /

Do I need an FM2 to get a capital gains tax exemption?

January 12, 2012 / Solomon Freimuth / 3 comments

I often receive emails asking about “capital gains tax” on real estate sales in Mexico. There is a common expat legend that in order to get out of paying the 30-35% tax on the profits from the sale of a piece of property, foreigners must show their FM2/Inmigrante documents to the notary to prove their resident status. Recently I had someone come to me worried that the “capital gains” exemption was going to disappear with the new immigration law. With all the speculation and guessing associated with this tax, I thought it would make an interesting topic for an article.

What does the law say about capital gains tax?

Lets start with the most fundamental part, where does the law say that we have to pay taxes? First, the constitution gives congress faculties to establish the expenditures and corresponding income for the nation. That income comes primarily from taxes, of which there are many, but the taxes that most commonly apply to common people are: Impuesto Sobre la Renta (Income tax), Impuesto de Valor Agregado (Value added tax) and Impuesto Empresarial de Tasa Unica (Enterprise tax). There are other taxes, but most of them don’t apply to common people or individuals, at least not in a manner in which we notice their existence.

Notice that I didn’t mention capital gains tax? Lets examine what capital gains tax really is: it is a tax on the income from the sale of capital, but more importantly it is just income. So it is regulated in the income tax. The law doesn’t give special treatment to capital sales because they are capital sales, but instead gives special treatment to real estate sales because they are, by legal disposition, carried out by means of public deed and registered by a notary public in the Public Property Registry.

Article 154 of the income tax law says that any property sold by means of public deed is subject to income tax that in cases of individuals will be paid no later than 15 days after the sale of the property. In order to ensure the payment of these taxes the law leaves it up to the notary to calculate and collect the payment. The notary then is solely responsible for making the payment to the tax authority.

So what about the capital gains tax exemption?

The law talks about income that is not subject to income tax in Article 109, and specifically talks about primary residences in fraction XV, subsection a:

Art. 109. – The following income is exempt from income tax:

XV. The sale of:

a. Residential housing, as long as the cost of the operation is does not exceed one million five hundred thousand UDI* (aprox. $7 million pesos or $525,000 dollars) and the transmission is formalized before a notary public…

The limit established in the first paragraph of this fraction will not apply when the seller demonstrates that he has resided in the home during the five years immediately preceding the date of the sale, according to the terms of the Regulations of this Law.

That is the exemption. It is pretty clear, but we need to pay attention to that last part: according to the terms of the Regulations of this Law. Here is what the regulations say:

Article 130. For effects of article 109, fraction XV, subsection a) of the Law, taxpayers must accredit before the public functionary that formalizes the operation that the property that is object of the operation is his residence with any of the evidentiary documents mentioned below, as long as the address expressed in said document coincides with the address of the sold real estate:

I. The electoral identification, issued by the electoral authority.
II. Paid electric or telephone bills.
III. Account statements issued by financial institutions, trading houses or non-bank credit cards.

The documentation mentioned in the previous fractions should be in the name of the taxpayer, his/her spouse or his or her direct ancestors or descendants (parents, grandparents, children, grandchildren, etc..).

Nowhere does it say that foreigners have to show their FM2’s or that an FM3 doesn’t work as a evidentiary document, in fact, the law doesn’t mention anywhere that you have to show your migratory document as proof of residence. There is a legal precept that states that, “For the individual, anything that is not expressly prohibited is permitted.” This should mean that because it is not mentioned in the law that foreigners, or people possessing No-Inmigrante documents, cannot take advantage of the income tax exemption, there is no legal basis for anyone requiring an FM2 for said exemption.

So this begs the question, why do the notaries insist that you must show your FM2 in order to be exempt from income tax on property sales? Remember when I mentioned that notaries are solely responsible for the payment of the tax? Your notary does not want to be on the hook for your 28.5% income tax; therefore, he does everything he can to protect himself. This means interpreting the law in a stricter manner than actually necessary. If pressed, many notaries will allow the sale to go through and the exemption to happen with just an FM3, but this may require that someone explain to him the currently valid tax law and these specific dispositions.

Now, I think that when the new law takes effect and everyone has a Temporary Resident visa, the confusion will be diminished, but for the next couple of months this information might be able to help you when you try to sell your home.

Knowing this little bit about the tax law and the exemptions laid out in it can save you money in the sale of your Mexican dream home. Remember, accepting expat lore as the law of the land can often cost you money. When you are dealing with decisions that can cost you tens of thousands of dollars, it is always a good idea to spend a little bit of money to hire someone who can advocate for your rights.

Category: Blog, Immigration Questions, Investment and Business in Mexico, Real Estate in Mexico / Tags: , ,

Buying a Yoga Studio — A different way to look at investing

November 18, 2011 / Solomon Freimuth / No comments

I had a client come into the office the other day asking about buying a yoga studio. She wanted to know whether we thought that the studio was worth the price that was being asked. She had very little paperwork showing the business’s income, but had been working there for the last six months on a barter program(she taught and received a place to stay).

The client had been working in the studio and had a pretty good idea of how many students pass through every month. She also had a few chaotic, wrinkled income receipts that showed there had been some income to the business, but there was no order or rhyme and reason to the system. After talking for a while and doing some calculations, we were able to put together that the business was making at least enough to pay its rent and expenses every month, but not a whole lot more. The studio is probably not making enough money to even let a staunch minimalist yogi live minimally, at least not from the information we saw.

There is a formula for judging investments that takes into account the principal and the expected return and calculates against the return that would be received by the “next best investment” in order to quantify what an investment is worth. Looking at this formula, this business isn’t actually even an investment, its more like acquiring a liability. The estimated return on investment on a monthly basis is negative, taking into account that she would be teaching classes in the studio every day, which means continually investing. So, this logic doesn’t work in this case.

So how do you qualify an business like this? It has students, a pretty loyal following actually. It is a one of a kind studio. It has potential, but I haven’t learned how to put a value on potential yet. So what do I tell her?

After thinking a lot about this, I had to re-evaluate my idea of what is a good investment, at least in this case. Isn’t teaching yoga a labor of love? Isn’t that sort of a lifestyle all on its own? So, judging whether or not a yoga studio is a good investment can’t be done by looking purely at the numbers.

So the question becomes, what is changing your lifestyle worth?

Category: Blog, Investment and Business in Mexico /

Power of Attorney/Carta de Poder

January 12, 2011 / Solomon Freimuth / No comments

In the civil law system, there is an important element in any contract or business dealing called personality.  Personality is that the person doing the business dealing is legally able to do the deal.  Huh?  You wouldn´t expect the company´s mail-clerk to be able to sign the sale of the company´s jet, right?  The accountant, on the other hand, might have that power, but not necessarily. Personality, or power, is very specifically outlined in the companies bylaws or in minutes to assembly meetings.

Remember that most of the legal system revolves around paper and registries, in order to have the power to represent a company or other person it almost always has to be written down and registered with the State.  This means you have to get a notary to certify many powers of attorney.  We will come back to this.

There are two broad classifications of powers of attorney:  General and Special.

General powers are defined in the civil code and can be broken down into three sub-categories: 

1. Pleitos y cobranzas (Disputes and payments), which means that the holder of this power can try to collect money in the name of the granter of the power and is empowered to act as the representative of the company in legal disputes;

2. Actos de Administración (Administrative Acts), this power allows the possessor to complete routine administrative tasks, such as appearing before Social Security or the tax authority for inscriptions or changes in status;

3. Actos de Dominio (Acts of Domain), power over the holdings of the issuer of the power, which allows the holder of the empowered to commit the holdings to sales, rentals or donations.

If the power of attorney is to be general and include all of the faculties previously mentioned, it is called Poder General Amplisimo (The broadest or very broad).

General powers must be given via notary public and registered with the Public Registry of Property and Commerce.  Depending on the scope of the power of attorney that is being granted, there is a section of the federal or state civil code which must be included with in the text of the power of attorney in order for it to be valid(Federal Civil Code Art.2554).

Special powers of attorney are more specific and are given on a case by case basis.  If you want to allow your property manager to vote in an assembly meeting for you, you would give him a special power, which can be written by you or a form can be purchased at most Papelerias. Special powers of attorney don´t need to be notarized, except when they are to be used in relation to a notary public in Mexico or in matters in which the object of the deal is greater than a certain amount (Quintana Roo: $5000 pesos, Federal: 1000 times the minimum daily wage).

When the power of attorney is not notarized, it must be given before two witnesses, who must sign the power as well.  The signature of the witnesses should be accompanied by a copy of their identification.

In cases where the signature is to be granted outside of Mexico for use in an notary or other public instrument in Mexico, a foreign notary public can certify the signature and the document will be valid for use in Mexico, as long as it has an apostille.  The power of attorney issued for use in Mexico should be in Spanish, though I like use a two-columned format with both Spanish and the language of the signer, so that there is no confusion about what is being signed.

Category: Investment and Business in Mexico, Useful Expat Info / Tags: , , , , ,
 
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