A new United States ambassador has arrived in Mexico, Kenneth Lee Salazar. He was appointed by President Joe Biden and is known for being well informed as to the issues that exist between the U.S. and Mexico, including opportunities that exist for the two countries to move forward with mutually beneficial projects that would strengthen their bilateral bond and create further possibilities for development.
Upon his arrival in Mexico, Ambassador Salazar began working in a promising way, handling matters directly and in person. He has already begun taking tours throughout Mexico, among which his tour through the state of Oaxaca stands out. On that tour, the Ambassador learned about the progress made on the Interoceanic Corridor of the Isthmus Tehuantepec. The long-existing idea of connecting the Atlantic and Pacific oceans has the potential to become one of the most important logistic centers in the world, and to generate development on Mexico’s southeast region, benefitting the population of Oaxaca. The Ambassador appeared to be genuinely interested and pleased. The Isthmus Tehuantepec Program is comprised of 79 municipalities, 46 of which are located in the state of Oaxaca, and 33 in the state of Veracruz. The projected benefits seem promising: providing assistance to 2.4 million Oaxaca residents, 35% of which are part of indigenous communities, and 59% of which live in extreme poverty.
United States of America ambassadors in Mexico play an important role, which is logical given the importance of the relationship between both countries. Mexico has historically benefited from the work of U.S. ambassadors who demonstrate sensibility, respect and commitment to Mexican projects, without forgetting about the connections with Mexican participants in the economic, social, academic and cultural fields. Welcome, Ambassador Salazar.
It is commonly thought, as supported by the rules on the separation of powers, that the Mexican Judiciary has the exclusive responsibility to apply the law and resolve legal disputes. Such position holds that the Judiciary’s duties must be distanced from politics to prevent conflicts between and among the three branches of government. Notwithstanding these precepts, the consolidation of Mexico’s Supreme Court of Justice as a constitutional court has put the Supreme Court in the national spotlight as an arbiter on important political matters.
The Supreme Court has the authority to resolve conflicts not only as to the constitutionality of general laws, but also the power to review matters arising from the actions of federal, state and municipal authorities, including those of independent constitutional bodies. The resolution of these types of conflicts invariably involves politics.
Recently, a PAN political party congresswoman and former president of the lower Chamber of Deputies, filed a constitutional lawsuit opposing a presidential Decree, based on a prior constitutional amendment, which provides that members of the Armed Forces and Navy may legally conduct public safety activities that were previously reserved to the exclusive jurisdiction of the civil police force.
Prior to that case, the Supreme Court agreed to preside over a constitutional lawsuit opposing Mexico’s proposed electricity reform, which favors the Federal Electricity Commission over the interests of private parties and foreign entities. Such lawsuit was filed by the Federal Antitrust Commission, the independent constitutional agency responsible for regulating antitrust practices in Mexico. Both cases demonstrate the relevance of the Mexican Supreme Court of Justice, whose authority as a constitutional court allows parties a forum to present a legal defense against political powers, including even against the president of the country. Such cases demonstrate the maturity and democratization of the Mexico’s political system.
In 2012, Mexico City’s Fourth Civil Court of Appeals issued the following Decision entitled “DOCUMENTS AND ELECTRONIC MAIL. THEIR EVIDENTIARY WEIGHT IN COMMERCIAL LAW.” This holding set forth the level of security and reliability given under Mexican law to electronic signatures and emails offered as evidence at trial, therefore establishing the probative value of each. Such holding provides that an advance electronic signature shall prevail over a simple electronic or digital signature because the requirements of an advance electronic signature make it more reliable than the latter. An e-mail containing an advance electronic signature which is offered as evidence at trial will have the same probative value as a physically signed document. On the contrary, if the document was not issued with an advance electronic signature, an expert witness must authenticate the document. Lastly, if a printed version of an email is offered as evidence, it will have the same probative value as a regular document. For these reasons, the most reliable manner in which to sign an electronic or digital document is to sign by means of an advance electronic signature. In regard to emails, it is necessary to maintain such and offer the digital version as evidence until such time as there is an e-mail service provider that requires a verifiable electronic signature.
As a consequence of social distancing triggered by the COVID-19 pandemic, several articles of the Civil Code and of the Notarial Law of Mexico City were amended by means of a decree published in the Official Gazette of Mexico City on August 4, 2021, for purposes of implementing the use of electronic media primarily with respect to the following legal acts:
Bequests of digital goods or rights.
A last will and testament may include a bequest of digital goods or rights with respect to any electronic media, for example: domains and websites, applications, electronic information files, videos and images, usernames and passwords for bank accounts, or values used or owned by the testator. Additionally, a testator may designate a special executor who is someone other than the general executor to receive the information requried to access the inherited digital goods and rights for distribution of the same.
Electronic public last will and testament.
A public last will and testament may be executed through electronic media. In such cases the Notary Public must clearly read aloud the provisions of the last will and testament to the testator or send such text to the testator by electronic media. Then, once the testator has accepted the provisions of the will, he will sign such with his electronic signature (e.firma) as recognized by the Notarial Law.
The amendments also provide that, in the event of imminent death or an extraordinary circumstance in which the testator is not able to appear before a notary, the last will and testament may be granted through electronic media, so long as the notary is able to hear and see the testator, as well as speak directly to him/her contemporaneously in real time during the granting of the will.
For purposes of granting a last will and testament as set forth above, two witnesses must be physically present with either the notary or the testator, and the notary must record the will ceremony by any electronic media, which includes audio and video. The granting of the will must be recorded from start to finish, including the testator’s declaration of his/her last will and testament, through the testator’s acceptance of the will in its entirety.
Execution of contracts.
The amendments provide that when an offer is made through electronic media without setting a deadline for acceptance, the offeror shall be released from the obligation if such offer is not immediately accepted. They also provide that no prior agreement is required as between the contracting parties to give effect to the electronic offer and acceptance.
Conducting Members’/Owners’ meetings.
Business entities may conduct meetings through videoconferences, so long as such are recorded and saved. A copy of such recording must be attached to the corresponding meeting minutes.
Members may also adopt resolutions in lieu of a meeting when such are unanimously approved and confirmed in writing, or by means of an electronic document signed by each member either physically or by means of an electronic signature (e.firma).
Mexico City Notarial Law. The amendments regulate the actions of notaries and notarial practices through electronic, optical scanning or other technological means, in connection with the new regulation of the Digital Notarial Record. New obligations and actions are also incorporated for the administration and conservation of the instruments, books, schedules and records to be maintained by notaries.
Determining the appropriate corporate structure for a U.S. entity with international owners involves factors such as limiting liability, tax considerations and often specific requirements for U.S. immigration and visa needs. A planning phase is advisable for foreign parties, which planning involves the participation of U.S. corporate counsel, accountants and fiscals advisors from both the U.S. and their home country, as well as their U.S. immigration counsel, if applicable. Decisions on choice of entity, ownership structure and place of formation can significantly impact international tax consequences and the company’s future. Below is an overview of some of the main considerations in forming a U.S. entity.
1. Choice of Jurisdiction. In the U.S., company formations are governed by state law, and an initial decision that must be made is where to form the new company. This decision depends on where company assets and operations will be located, as well as consideration to state and local taxes, privacy issues, and convenience for the company owners. As Texas attorneys, we most commonly form Texas entities for our international business clients who are entering the Texas market. Similarly, the State of Delaware is a relatively common jurisdiction for U.S. holding companies, although there are usually higher costs associated with using Delaware as the jurisdiction of formation.
2. Choice of Entity. While there are many forms of entities in the U.S., the two most common for international investors are the corporation (also called a “C-Corp”) and the limited liability company (LLC). Below is a table with some of the most important differences between an LLC and a corporation.
3. Choice of Tax Classification for LLC. By default, a single member LLC is taxed as a sole proprietorship, and a multi-member LLC is taxed as a partnership so that LLC income and losses pass through to the members. However, an LLC can elect to be treated for U.S. federal income tax purposes as a corporation, which protects foreign members from converting into U.S. taxpayers and may provide advantages under the Treaty. The classification is made by filing IRS Form 8832 Entity Classification Election and is handled by the company’s U.S. accountant after the LLC’s formation. As a result, an LLC that elects to be treated as a corporation for its tax classification can receive the favorable treatment under the Treaty at the 0% withholding rate otherwise used by C Corps. For this reason, and for the flexibility of management that an LLC allows, an LLC can be an appropriate choice for many international investors, although the facts and operational plans of each company needs to be carefully analyzed.
4. Applicable Treaties. Corporations that have shareholders that are Sociedades Anónimas de Capital Variable (S.A. de C.V.) formed in Mexico, the Treaty allows the C-Corp, after declaring U.S. federal income tax, to distribute dividends to its Mexican shareholder at a rate of zero percent (0%) of tax withholding on said dividends. Thus, during the planning phase, it is important to identify not only the choice of entity but also owner/shareholder of the new entity.
The above is a highlight of issues involved in the legal planning and choice of entity analysis to be considered by international clients when forming a new company in the United States. The formation process itself is relatively straightforward and can usually be completed within a few days once the planning phase has been completed. For any questions about legal planning and choice of entity, please contact the U.S. corporate practice group at Cacheaux, Cavazos & Newton:
Robert M. Barnett | email@example.com
Marissa Sandoval | firstname.lastname@example.org
Carrie Osman | email@example.com
Natalie Cerón-Cuellar | firstname.lastname@example.org
Ivan Castañeda Mora | email@example.com
In accordance with the recent amendment to Mexico’s Federal Labor Law in regard to outsourcing, entities or individuals who obtain a Specialized Service Provider or Specialized Work Registration (“REPSE” for its acronym in Spanish) must refrain from performing any work related to the principal business activity of the beneficiary of such services or work. They must also comply with the obligations established in Mexico’s Federal Labor Law, Social Security Law, National Institute for Employees Housing Fund Law, Income Tax Law (ISR), Value Added Tax Law (IVA), and any other applicable law, as well as any general REPSE rules set forth in article 15 of the Federal Labor Law.
The primary obligations of providers of specialized services or work include: i) maintaining a valid REPSE; ii) entering into a services agreement which includes the registration, a description of the specialized service or work to be performed, the purpose of the service or work, and the approximate number of personnel dedicated to such; iii) identifying all employees with a photograph, name, badge or identity code that identifies them as the service provider’s employees at the beneficiary’s workplace, and such badges or identifiers must be different from those used by the beneficiary’s employees; and iv) providing on a quarterly basis in the months of January, May and September, informational reporting regarding the services agreements entered into during such quarter, to the Mexican Social Security Institute (“IMSS”) and the National Institute for Employees Housing Fund (“INFONAVIT”).
Note that providers of specialized services or work, along with the beneficiary, will be jointly and severally liable for compliance with all applicable labor, social security and tax obligations. To evidence compliance with such obligations, the service provider must submit to the beneficiary: a) a compliance certificate issued by IMSS; b) a compliance certificate issued by INFONAVIT; c) a compliance certificate issued by the Tax Administration Service (“SAT”) d) copies of the internet digital tax invoices (“CFDI”) for employee payroll; e) copies of invoices issued by the bank evidencing the payment of employees’ tax withholdings, payment of employee-employer fees to IMSS, as well as the payment of the mandatory contributions to INFONAVIT; f) a copy of the IVA statement and receipt for the payment for the corresponding period; g) a copy of the ISR statement for salaries for such period, and h) proof of filing the quarterly informational notice with respect to the agreements covered.
It is necessary for both service providers and beneficiaries to comply with and verify compliance with the aforementioned obligations to avoid the imposition of fines levied by the respective Mexican labor, social security, or tax authorities.
Mexican tax authorities are sending notices to taxpayers inviting them to review and, if necessary, correct their tax filings (“Invitation Letters”). The Invitation Letters identify alleged discrepancies between amounts taxpayers claimed as authorized deductions and the expense and invoicing information they provided to support such deductions.
It is important to review the Invitation Letter carefully because Mexico’s tax regulations provide for several legitimate deductions that do not necessarily tie into an Internet Digital Tax Invoice (“CFDI” for its acronym in Spanish). For example, investment deductions, annual adjustments for inflation, and exchange losses, among others, fall into this category. Legitimate discrepancies may also exist when a CFDI has been issued, but the deduction is filed for a different time period, such as in the case of payments to individuals or business entities.
Likewise, it is important to consider that information filed by taxpayers may trigger certain tax programs, and that the failure to respond to these Invitation Letters may be an additional factor that tax authorities will consider when determining whether or not to initiate an audit.
If the Invitation Letters do not include a deadline for clarifying the alleged discrepancies or, if applicable, to file the corresponding corrections, keep in mind that Rule 2.11.14 of Mexico’s 2021 Miscellaneous Tax Rules and Decree 128/CFF of Annex 1-A of the aforementioned Rules, establish that taxpayers may make corrections or clarifications within 15 days following receipt an Invitation Letter.
Receipt of an Invitation Letter merits a case by case analysis for each taxpayer in order to review its compliance with tax matters and regulations, by using technological tools to identify the discrepancies mentioned in the Invitation Letters.
On September 9, high level representatives from Mexico and the United States, including Vice President Kamala Harris, several Department Heads and Ambassadors, relaunched High-Level Economic Dialogue (“HLED”), a dialogue mechanism implemented in 2013 during the administrations of Presidents Enrique Peña Nieto and Barack Obama. Attendees of the HLED discussed several important topics for both nations, including labor, immigration, automotive, energy and compliance with the USMCA.
The relaunched HLED will focus on four central pillars:
In furtherance of these goals, relevant topics were discussed in various industries, and in particular the automotive industry. This also included participation of Mexico in the supply of semiconductors, as well as topics relating to the access to financing for small-and medium-sized enterprises (SMEs) and financial inclusion. Additionally, U.S. authorities stated that the HLED will complement and reinforce the COVID-19 recovery process and have a positive impact on matters such as public security and climate change.
It was also established that both countries will regularly consult with civil society, private sector, academia, and other non-governmental organizations to contribute to the HLED, fostering open dialogue and ensuring transparency in decision-making.
Finally, to follow up with the goals established by the pillars, the countries created working-groups to focus attention on specific problems relating to supply chains and to work cooperatively in the investment in Central America.
The HLED represents an important milestone in the relationship between Mexico and the United States, and significant developments on the topics discussed are expected.