Corporate legal considerations in Mexico: Establishment of Branches

Additionally, to the incorporation of a commercial corporation in terms of the provisions of the Mexican General Law of Commercial Corporations (Ley General de Sociedades Mercantiles), another way of doing business in Mexico is through the establishment of a branch of a foreign corporation.

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The simplicity of establishing a branch instead of a incorporating a commercial corporation that is a subsidiary of the foreign corporations is diminished, among others, by liability issues. The foregoing, considering that the branch is an extension of the main corporation, so that all its acts will bind it directly. Consequently, foreign investors do not usually operate their businesses in Mexico through branches, which is why it is a practice that could be considered obsolete.

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Although some investors decide to choose to establish a branch of a foreign corporation in order to simplify its operation (costs) and consolidate the advantages between the branch and the holding company (foreign corporation), opting for this type of vehicle results sometimes to be more expensive and its processing requires more time than the incorporation of a Mexican subsidiary.

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Fiscally, both the subsidiary corporation and the branch are subject to the same tax treatment since the branch is considered a permanent establishment when conducting business operations in Mexico on a regular basis.

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It is important to mention that the branch does not have limited liability in Mexico, so the holding company (foreign corporation) is the one that has to meet the obligations of the branch in its entirety.

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Once the subsidiary corporation or the branch are established in Mexico, both must be registered in the Public Registry of Commerce corresponding to their domicile in order for them to be valid and enforceable against third parties.

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In the case of the branch, it is necessary to obtain authorization from the Ministry of Economy (Secretaría de Economía); submit documentation detailing the location and specific line of business; audited balance sheets and financial statements and a certification confirming that the foreign company has been incorporated in accordance with the laws of the country of origin, the rules to which a subsidiary company is subject for its registration are much more expeditious.

Likewise, the subsidiary corporation may start its activities in Mexico from the moment of its incorporation, while, in the case of the branch, it may not do so until the aforementioned registration has been obtained.

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It should be noted that the branches may not participate in those activities that, in accordance with the Mexican Foreign Investments Law (Ley de Inversiones Extranjeras), require certain Mexican participation.

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The procedure to establish a branch and for it to start operations is much longer than that to establish a subsidiary corporation and could be completed between two and three months. Additionally, it must be considered that the obsolete of the figure of the branch can generate practical problems when contracting with third parties who do not know this structure.