August 22, 2013

As the number of foreign companies doing business in Mexico has increased, so too has the need for education as to the possible risks associated with these cross-border ventures. These background materials attempt to provide a flavor for the types of potential perils and pitfalls that may await entrants or existing participants in the Mexican market.

Potential risks faced in doing business in Mexico may be either transactional litigation based. On the transactional side, an example of the type of risks involved is found in recent changes to Mexican labor law that have impacted the viability of previously-used corporate structures. For years companies seeking to minimize their Mexican tax burdens had relied upon a two-tiered corporate setup. This traditional corporate structure involved the utilization of an operating company which was then assisted by a service company – tasked with hiring operating company employees. This system allowed payments to the service company to be treated as exempt from taxation while simultaneously allowing the operating company to avoid otherwise mandatory Mexican profit-sharing obligations.

In November of 2012 Mexican labor laws were amended, essentially prohibiting the previously utilized two-tiered corporate structure. As a result of the potential tax and profitability implications of these changes, companies operating under the two-tiered structure are now being forced to reevaluate the mechanisms by which they conduct business in Mexico.

In fact, even previously unformed companies face their own set of transactional barriers to the Mexican market. For example, investment by foreign entities in Mexico is generally governed by the Ley de Inversiones Extranjeras (Law of Foreign Investment or “LFI”). The LFI establishes the rights and obligations of foreign investors and establishes limits on their potential ownership interests. Importantly, the LFI not only limits foreign investment in certain commercial sectors but prohibits foreign investment entirely in others. For example, foreign investment is curtailed for both the transportation and telecommunications industries, while it is prohibited entirely in the development of hydrocarbons and nuclear energy.

Despite the presence of such transactional impediments and challenges, these materials will largely focus on the potential litigation risks that may await foreign individuals and companies transacting business in Mexico. These risks include, but are not limited to, changes to Mexico’s anticorruption laws, the potential perils of unmonitored powers of attorney, and litigation and debt collection in Mexico. Although these materials do not address every source of potential litigation risk, they do attempt to provide examples of the types of challenges present when doing business in Mexico.

This excerpt is from the Lorman Education course entering the Mexican Market: Risk Mitigation Issues.  The author Franciso Rivero is a Partner with Reed Smith LLP who Practices state and federal litigation as well as cross border disputes work.  For more information visit http://www.lorman.com.