Mexico has recently evolved into a business hub, with several businesses having now established their verticals or branches in the country. The country is an ideal location for you to expand your business as it is ranked 60th among 192 nations on the ease of doing business index. This shows the country has easy credit policies and a simple taxation system, which has opened up opportunities for other firms planning to set up a subsidiary in Mexico. Understanding the taxation of foreign subsidiaries in Mexico is quite easy. Hence, businesses don’t have to put a lot of efforts in staying compliant with the tax laws in the country and they can focus solely on their business.
The Mexican market is known for its versatility, and it adopts any products or services rather quickly. Mexico’s GDP has also seen considerable growth to reach 2.412 trillion at the end of 2021. The country has also signed the North American Free Trade Agreement (NAFTA), eliminating tariffs between countries. The country’s culture is immersive, and its rich heritage opens up several business opportunities for companies as they get a diverse consumer base. Hence, it is ideal for business expansion as it allows businesses to interact and do business with different people.
If you plan on growing your business in Mexico, you can start by establishing a subsidiary. The guide will aid you in setting up a subsidiary in Mexico and offer an in-depth understanding of everything involved in the process.
What are the Types of Subsidiaries in Mexico?
Like other countries, there are different types of subsidiaries that you can set up in Mexico. If you want to set up a subsidiary business in Mexico, you can choose from any of the options listed below based on your budget, requirements, the scope of work, etc.:
- Stock corporation: Also known as Sociedad Anónima de Capital Variable, it is one of Mexico’s most popular types of business. Some of the critical characteristics of this subsidiary are:
- Most companies prefer the structure as it provides an excellent opportunity for growth and profit.
- The company’s entire value gets divided into shares, and the company’s creditors are vested with the responsibility to protect these shares.
- Stock Corporations are managed by a Board of directors or an administrator. In this subsidiary form, conducting an annual general meeting is mandatory.
- Several shareholders invest in the company by buying these shares. In Mexico, there is no limit on the number of shareholders a stock corporation can have.
- You must invest at least MXN 50,000 (USD 2,500) to start a stock corporation.
- Limited liability company: This is a common subsidiary form that organizations can establish across Mexico. It is known as Sociedad de Responsabilidad Limitada de Capital Variable in Mexico. It is not as popular as a stock corporation. However, many companies still choose this form of business, as setting up an LLC is more straightforward than other types of subsidiaries. This option is preferable if you plan to incorporate a small or medium-sized company.
- You need MXN 3,000 (USD 150) to start an LLC in Mexico.
- All members of the LLC must pay their individual tax shares as they cannot pay them collectively on behalf of the company.
- All assets put in by the members of LLC come with guaranteed protection, and the accountability of members is limited to their shares.
- Simplified shares company: This subsidiary is also called Sociedad por Acciones Simplificada in Mexico. In 2016, as a part of the General Law of Commercial Companies, simplified shares company became famous amongst organizations.
- Establishing a simplified shares company is much less expensive than a stock company or an LLC.
- The simple structure allows SMEs to expand into foreign territories easily.
- There is a limit in the annual income of an LLC in Mexico. A simplified shares company can earn a maximum revenue of MXN 5,000,000; hence, it is not the ideal type of subsidiary if you have high aspirations of growing the company.
- Investment promotion corporations: Popularly known as Sociedad Anónima Promotora de Inversión, these companies are designed to adapt to the prevailing market practices. This type of company came into existence in June 2006 via an amendment to the Mexican Securities Law. Some of the key characteristics of this relatively new entity are:
- These companies allow a great degree of flexibility and come with several corporate governance features.
- As the name suggests, investment promotion companies promote investment under the Mexican Securities Market Law.
- These companies are a lucrative type of subsidiary for corporations that want to get into joint ventures in a foreign country.
- The primary objective of this company is to engage with different kinds of investors to bring in private equity funds.
- Only a board of directors manages investment promotion companies.
When setting up a subsidiary business in Mexico, you can choose from all the options listed above based on the scale of operations, budget, etc.
How to Set Up a Subsidiary in Mexico?
Multiple steps go into incorporating a subsidiary in Mexico. The process can be a little challenging given it is bureaucratic, and you will need several documents to register your business. Getting in touch with a local partner like Multiplier is advisable to help you navigate the entire process.
Listed below are a few steps that you must follow to set up a subsidiary in Mexico:
Selecting the type of entity
- Organizations should first decide on what type of entity they can establish in Mexico.
- Consider the nature of your business to be conducted through the subsidiary while making your decision.
Choosing a name
- While setting up a new subsidiary, companies should consider selecting a name.
- Once decided, you can suggest the entity name to the Ministry of Economy for approval. It usually takes 3-7 days to approve or reject the proposed entity name.
Drafting a power of attorney for the business
- You need to draft a power of attorney with the name of your business to aid your local partner in getting permission to set up the subsidiary on your behalf.
- You will need the passports of all the directors of the newly incorporated subsidiaries.
- You must submit a proof of address for all the directors, like a utility bill, which cannot be older than three months.
Having a legalized power of attorney for each shareholder
- In Mexico, at least two shareholders must come together to complete the registration process.
- Several documents need to be submitted, such as a passport, and all of these documents need to be legalized before you submit them.
- Once you submit all the documents and POAs, they are translated into Spanish.
- To prepare the company bylaws, you need to submit the following details:
- Select five names for your business and check their availability before you submit these names to the Registrar.
- Write a summary of the business’ purpose and the activities it will take up in Mexico.
- Now, provide the value of the preferred share capital in Mexican Pesos—the minimum amount required to incorporate a company in MXN 50,000.
- Select a legal representative for the company. It can either be a sole administrator or a board of directors.
- You need to onboard a Mexican national or a foreigner who has the right to live in Mexico as one of your legal representatives so that they can take care of the other formalities involved in the registration process.
Finalizing the bylaws and get them approved
- A company’s bylaws define its purpose and how it will operate.
- Once the bylaws are in place, you will need to engage with an official translator who can translate all the legal documents into Spanish.
Registering your company
- After the company’s bylaws are validated, your legal representative can proceed to register the company.
- Company registration takes place with the Public Registry of Property Commerce.
- During the process, legal representatives must specify the real estate ownership for the company’s commercial purpose.
Applying for a corporate tax ID number
- A corporate tax ID number is provided by Mexico’s Tax Administration System (SAT). You need to register with the national tax authority and get the corporate tax ID number.
- It helps to identify the entity in invoices and financial documents.
Setting up a bank
- You must set up a Mexican bank account to run a business in Mexico.
- Once the company is incorporated and you have a tax ID number, you can submit the Business Registration Number and other documents.
- After that, you can submit the initial investment required to start the entity. Once this is cleared, you are set to start the business.
The entire process will need about 8 to 10 weeks, and once all the documents are verified, the company will be incorporated.
Benefits of Setting Up a Mexico Subsidiary
There are several benefits of setting up a subsidiary in Mexico. It will aid the business in building a brand name, expanding its operations, and earning regular profits. Some other benefits include:
- Once you set up a subsidiary in Mexico, you enjoy the legal rights to run the business and its operations in the country.
- You can start onboarding the employees who will help you run the business in Mexico.
- The benefit of establishing a subsidiary in Mexico is that it will receive complete guidance and support from the parent business. Though, it can still run successfully without much parental corporate involvement.
- A stock corporation is the most commonly incorporated subsidiary in Mexico. The company’s operations will be handled by the board of directors or administrator that the company onboards for the subsidiary in Mexico.
- A subsidiary enjoys the right to incorporate its culture and create its policy in line with other companies established in Mexico. However, all of these policies should be in line with Mexican Federal law.
- The subsidiary’s management can oversee decision-making and the general operation of the company.
- The cost of labor in Mexico is competitive. Additionally, the transportation cost of sold goods in the export market is also low.
- You can protect a company’s patent owing to Mexico’s strong intellectual property rights.
Documents to Prepare When Opening a Subsidiary in Mexico
To set up a subsidiary in Mexico, you need to submit proper documents supporting the authenticity. For each step of the process, companies are required to furnish the following documents:
To incorporate the company
You can visit the Registrar of Companies, fill out the incorporation form, and submit all the necessary documents there. You need to get authorization from the Mexican Government and pay a fee of $100. You must submit a declaration form to the Ministry of Economy and all the documents required for incorporation. The declaration must be translated into Spanish with the help of an official translator. You must attach a letter to the Government that includes:
- An official statement confirming that the holding company was formed in accordance with local legislation and that its bylaws do not violate the law.
- An outline of the tasks your subsidiary will perform in Mexico.
- The actual location of the subsidiary’s commercial operations
You must proceed to the Public Register of Trade to secure the subsidiary’s registration when the Mexican Government accepts your request and permits you to form it. You must present the holding company’s incorporation papers and the authorization paperwork issued by the Mexican Ministry of Economy to secure this registration.
To get POA
You need to attach the following documents along with your form to incorporate your company to get Power of Attorney (POA):
- Passport of the directors appointed as the legal faculties of the newly formed subsidiaries
- Proof of address of all the directors appointed as legal faculties
To get POA legalized for each shareholder
Each director needs to provide:
- A certificate of incumbency
- The deed of incorporation
- The document that lists all the official directors of the company and the legal faculties
- Proof of address of the company
- Passport of signing Director
- Information about the person deemed to be the ultimate owner or beneficiary of the company’s shares
- KYC of the directors
All documents listed above and a power of attorney must be legalized before submission.
What Business Forms can Mexico Subsidiaries Take?
If you plan to incorporate a wholly-owned subsidiary in Mexico, you need to own 100% of the business. You can call a company a subsidiary when the owner or the parent firm holds at least 51% of the shares of the company.
The subsidiaries in Mexico can take up the following forms:
- Stock corporation
- Limited liability company
- Simplified shares company
- Investment promotion corporation
The stock corporation and LLCs are Mexico’s most commonly established subsidiaries. Before choosing the type of company for your subsidiary, you must consider the tax rates, the advantages of each subsidiary, the registration procedure, the nature of your business, etc.
Mexico Subsidiary Laws
As soon as you create a subsidiary, you are legally bound to follow Mexican subsidiary laws, including zoning, the environment, health and sanitary conditions, and immigration. You must ensure that your company follows subsidiary requirements such as minimum capital requirement, numbers of shareholders, etc. while setting up a subsidiary.
One of the most critical components of Mexican subsidiary law is taxes. You must register for taxes and become an employer with the Mexican Social Security system. Parent companies must adhere to Mexican tax rules to avoid any exorbitant penalties.
Moreover, employees must be paid in pesos through a local bank account for subsidiaries in Mexico. This is also how you pay your taxes to social security and other taxing authorities.
Post Incorporation Compliance
After the registration process, you need to have access to the following per the foreign subsidiary’s compliance in Mexico:
- Visit the Registrar of Companies to obtain the certificate of incorporation.
- Gather the unique company number.
- Send the Registrar all the shareholder information.
- In the case of a public corporation, provide share certificates to all stockholders.
- Bring in an auditor for the business.
- To begin all kinds of business transactions, open a bank account.
Taxes on Subsidiaries in Mexico
All the subsidiaries set up in Mexico are subjected to income tax on the income they earn in the country. The federal corporate tax rate stands at 30%. All the companies, including any branches, subsidiaries, etc., will be taxed at the same rate. The net income of the corporation is exempt from state taxes in Mexico.
Tax Incentives for Businesses Setting Up a Subsidiary in Mexico
Mexican subsidiaries and individuals may claim a credit for foreign income taxes paid with revenue from sources elsewhere than Mexico under the country’s income tax law. If the relevant non-Mexican income item is taxable for Mexican tax purposes in respect of the whole amount, only then would the tax credit be applied.
Companies planning to open subsidiaries in the Northern border region of Mexico get additional tax benefits. The Presidential Decree, published on December 31, 2018, provides tax and VAT benefits. Businesses established or functioning in the Northern Border Region can claim their tax credit 1/3rd of the income tax liability. Based on the Decree, taxpayers can also claim a tax credit of 50% of the VAT. Businesses involved in fields like real estate, digital content, and intangibles are not included in the VAT benefits.
Other Important Considerations
Establishing a subsidiary in Mexico takes a tremendous amount of time, money, emails, and travel. Parent companies must comply with the local laws while setting up a subsidiary. They have to stay updated on taxation, legislation, and other aspects. From beginning to end, the process will take months and may cause operations to be delayed. Additionally, you cannot hire until you establish a subsidiary, which may cost you top talent who start looking for work elsewhere.
How Multiplier’s Employer of Record Can Help You Hire & Expand in Mexico?
Whether you are planning a business expansion in your own country or abroad, it takes time and money. However, adhering to its labor laws and industry norms may prove difficult when extending to a foreign country.
Why not use a third-party service company like Multiplier to smooth over this hiccup in your business expansion?
You don’t have to worry about anything because Multiplier takes care of all the formalities in entering a new market. While ensuring complete adherence to Mexican norms and labor laws, we assist you in onboarding local and international talent. Our team of experts will help you to onboard highly skilled staff without setting up a subsidiary in Mexico. We offer payroll and employee management services to our clients as well.