Mexico is a competitive country for investments, thanks to its many opportunities, localization, international trade treaties, macroeconomic stability, and the size and strength of its internal market. However, it can still be challenging to incorporate a business in the country.
The process of incorporation in Mexico is complex and can take a long time, without a good understanding of the local regulations and policies. TMF Group is your subject matter expert to guide you through this process and navigate the complexity; something that is particularly relevant given that Mexico recently moved up ten places in our Global Business Complexity Index 2021, and is now ranked as the third most complex place to do business.
Major drivers of this increase in complexity are the requirements for in-person interactions with the state and a reliance on hard copy documents to incorporate. These factors are further compounded by restrictions introduced during the Covid-19 pandemic.
Here are a number of factors to address when considering Mexico as the jurisdiction for your entity.
1. Choose the type of entity
The first step to incorporating a business in Mexico is to decide if the business will be either an entity, a branch, or a representative office. Understanding the nature of the business to be conducted will help with the decision-making process. It is also important to determine if a company will have a person located on the ground in Mexico to oversee the incorporation, or if an expert in Mexico will be assigned to assist.
2. Choosing a name
If an entity is chosen over a branch or representation office, it is time to decide on the entity name. Choosing three to five options is the best practice when requesting entity names from the Ministry of Economy. This process may take between three business days and a week before approval or rejection of any proposed entity name.
In Mexico, the corporate name of an entity does not have any relation to trademarks which need to be managed separately.
It is also important to note that Mexican governmental authorities are not linked; rather, all registrations with different government bodies are independent of each other.
If the Mexican entity has foreign shareholders, there are many documents needed to support incorporation. Some of these documents need to be notarized and apostilled, or legalized (depending on if the country has entered into The Hague Convention), in order to be effective in Mexico.
The role of a public notary in Mexico differs greatly from in many other countries. In other countries, a public notary will be a witness and also sign documents. In Mexico, a public notary is an experienced lawyer appointed exclusively by the Governor of State. Their role is to sign and authenticate documents and provide legal advice if necessary.
If someone in Mexico assists with incorporation and acts on behalf of foreign shareholders, a specific Power of Attorney (PoA) needs to be prepared and sent in order to be signed by the shareholder or their representative(s), which will also have to be notarized and apostilled in order to be effective in.
While all incorporation documentation and information is being formalized, company bylaws must be drafted, as all corporate entities in Mexico must have these. The articles of incorporation will be added according to the bylaw specifications (and included in the same public deed). It is mandatory that the bylaws of any company be notarized. After the documents are signed and submitted to the public notary, the legal process of incorporation is complete. The timeline to finish this step may vary depending on when the signed, notarised and apostilled original documents are received by the Mexican public notary. Whenever the public notary receives all required documentation, signing off on the incorporation should take less than ten business days.
All hard copy entity documentation must be sent to the Mexican public notary with “wet ink” signatures. Digital signatures are not currently allowed by the Mexican authorities.
Even with a subject matter expert in Mexico supporting the incorporation, it is also worth considering that an apostille or legalization could take an additional two to three, depending on the other countries involved.
The steps described here must be done in person, not virtually or online. The Mexican public notary also oversees the registry of the company before the Public Registry of Commerce in the city where the company will have its social domicile. This process, which used to take a month, can now be done in a day.
4. Get a tax ID
Your newly incorporated company must have a tax ID number to conduct business in Mexico. Foreign shareholders must note that a tax ID can only be requested by a Mexican resident or citizen.
With this, the correct person would then be granted a PoA to get the tax ID. If this is not done, the shareholders would hold a meeting to pass a unanimous resolution granting a PoA to a Mexican resident or citizen.
Without a tax ID number, all mandatory registrations, including registering before the National Foreign Investments Registry and Social Security Mexican Institute, when applying to open a bank account or issuing invoices, are not possible.
The person acting on behalf of the entity will go in person to the tax authority with the articles of incorporation to request the tax ID. This step can also be fulfilled by the public notary; however, the representative must go to the public notary’s office to sign the tax ID request. It is important to be aware that not all public notaries in Mexico provide this service and, notably, that appointments have been hugely limited recently due to pandemic-related regulations, resulting in significant waiting times. Some interactions can take over two months.
Finally, it is very important to know that in order to obtain a tax ID, the business must have a physical office in Mexico with an authorized proof of domicile. This physical location will be registered before the Mexican authorities and is also where the company can be located to verify its legal existence and receive memoranda or notifications from the Mexican authorities. This is one of the most challenging parts of the incorporation process, given that there are very few documents that the tax authority and other governmental authorities will accept. The tax ID process is also an in-person procedure and cannot be done virtually or online.
5. Get a bank account
Newly incorporated companies must have a Mexican bank account since taxes can only be paid by certain Mexican banks. Non-Mexican banks do not have the platforms used by the Mexican tax authorities to receive tax payments. This process can only take place after the business has already received its tax ID, which can take between six weeks and three months to be set up.
The first step in opening a bank account is to complete the necessary ‘Know Your Customer’ process issued by banking institutions, in accordance with their own internal policies. This step takes up more than half of the aforementioned timeframe or, in some cases, up to a month to set in place.
Banking institutions in Mexico cannot start the process of opening a bank account without a tax ID being provided and, as of now, digital signatures are not accepted. This is why this process should be done in person, in a branch of the relevant banking institution.