Direct Foreign Investment in Mexico: Opportunities, Risks, and Compliance

Mexico is one of the most attractive destinations for foreign direct investment (FDI) in Latin America. Its strategic location and skilled workforce make it a magnet for global investors. However, like any market, there are opportunities, risks, and compliance requirements that investors must consider.

Risks

2024 is undoubtedly a turning point for the countries located in North America. This year, Mexico elected its first female president, Claudia Sheinbaum, and the United States is also approaching its election period.

While Mexico has shown stability in recent years, during recent months there has been changes in government policies, constitutional reforms, and spikes in insecurity in certain areas of the country. These have created instability and uncertainty, triggering economic volatility that affects investor’s confidence.

It will be a key responsibility for the incoming president to focus efforts on mitigating these obstacles. Luckily, it appears that a substantial part of her agenda will indeed have this focus. In recent years, while Mexico has experienced modest economic growth, macroeconomic stability has also been achieved. According to estimates from various organizations such as Deloitte and BBVA, Mexico's growth in the coming years (2025-2030) is expected to be approximately 2.1%.

Opportunities.

In recent years, the impact that nearshoring can bring to Mexico has gained significant attention. Some of the most relevant examples of investors tooking advantage of it are:

• TESLA: In 2023, intentions and dialogues with government took place to open a giga manufacturing plant in our country (which, by the way, have not yet been formalized).
• BMW and the expansion of its automotive plant with an investment of approximately 800 million dollars.
• Foxconn and the expansion of its capacity for electronic components aimed at the American market, among many others.

Through this business practice, international companies seek to relocate their operations or parts of them to territories close to their home or target markets. For those who choose Mexico, it is to take advantage of benefits such as geographical proximity to the US, reduced transportation costs, a skilled workforce, and ease of communication and coordination due to smaller time and cultural differences.

Taking advantage of Mexico's strategic location is undoubtedly one of the main incentives for foreign investment. This nation shares its largest border with the United States. Being part of the USMCA, the United States-Mexico-Canada Agreement, offers Mexico tariff and trade advantages. Additionally, it is a member of NAFTA, OECD, G20, and the Pacific Alliance.

In addition, according to UN Trade and Development, Mexico has signed more than 35 Bilateral Investment Treaties (BITs), highlighting some of them here:

Hong Kong, China: Signed in 2020 and in force since 2021.        

United Arab Emirates: Signed in 2016 and in force since 2018.        

Brazil: Signed in 2015 and in force since 2018.        

Turkey: Signed in 2013 and in force since 2017.        

Kuwait: Signed in 2013 and in force since 2016.        

Singapore: Signed in 2009 and in force since 2011.        

China: Signed in 2008 and in force since 2009.        

According to the latest governmental data, foreign investments come mainly from the United States (46.7%), Spain (13.7%), Canada (7.4%), Japan (4.6%), and Germany (4.5%).

If we add to the strengths the governmental incentives created for the entry of foreign capital, as outlined below, we undoubtedly have a country worth considering when deciding to venture, especially if the target market is the US.

• IMMEX Program: Allows foreign manufacturers to import raw materials and components tax and duty-free, provided all finished goods are exported within a specified timeframe.
• New Certified Companies Program (NEEC): Facilitates quicker and less paperwork-intensive movement of goods in and out of Mexico.
• Real Estate Investment Trusts (REITs): Investment funds focused on real estate.
• Free Trade Zones (FTZs): Goods destined for foreign markets can leave Mexico duty-free.
• Import Duty Refund: Importers can receive a refund on import duties paid on raw materials or finished goods if exported within 12 months.

Compliance

While it would take much more than an article to explore the multiple industries and compliance requirements in Mexico to minimize risks and enhance the growth and operation of companies, I will outline the key legal areas that foreign investors in the industrial sector (manufacturing) should consider.

First, it is important to know that in Mexico there are restrictions or limitations on foreign participation in certain areas and sectors, such as the financial sector. Therefore, it is necessary to consult the Foreign Investment Law to know the specifics to the activities to be carried out, as well as to consult specific decrees and regulations; for example, those established for the automotive sector.

Now, focusing on the manufacturing industry, the main areas to observe are:

Environmental Regulations:

In Mexico, regulations in this area control pollutant emissions, waste management, water use, and discharges, among others.

Labor and Social Security:

Mexico has taken significant actions to maintain a skilled workforce and protect workers' rights (such as wages, working hours, and certain benefits). Additionally, there are occupational health and safety guidelines.

Corporate and Commercial Regulations:

Whether foreign entrepreneurs looking to establish a new business or facility in Mexico opt to a) create a new corporate structure in our country, b) seek to merge or acquire an existing foreign company, or c) form joint ventures with a local company, it will be vital to document all actions with the appropriate formalities, such as notarizing constitutive acts before public notaries or, for example, creating joint venture contracts with the correct and complete protections and clauses.

Tax Regulations and Obligations:

Tax legislation in Mexico is robust, so without going into detail, I'll outline the main obligations:

• Registration with the Federal Taxpayer Registry (RFC): to obtain a unique tax identification number. This is essential for issuing invoices, filing tax returns, and fulfilling other tax obligations.
• Electronic Invoicing: Companies are required to issue electronic invoices. This ensures transparency and proper documentation of all business activities.
• Accounting Records: Maintaining accurate and up-to-date accounting records is mandatory. This includes keeping detailed records of all financial transactions and ensuring they are available for inspection by tax authorities.
• Monthly and Annual Tax Returns: Companies must file monthly tax returns for Income Tax (ISR) and Value Added Tax (IVA), reporting the taxes withheld and payments made. An annual tax return is also required at the end of the fiscal year.
• Special Taxes: Depending on the nature of their operations, companies may also be subject to other taxes such as the Special Tax on Production and Services (IEPS) and payroll taxes.
• Transfer Pricing: For companies involved in cross-border transactions, compliance with transfer pricing regulations is crucial. This includes preparing transfer pricing documentation and ensuring transactions with related parties are conducted at arm’s length.

Sectoral or Specific Regulations (NOMs):

Like many countries, to ensure that the products created meet minimum quality standards and to protect the impact of companies on consumers, the Mexican state can establish in Official Mexican Standards (NOMs) additional requirements to those established by law.

AML:

The manufacturing industry in Mexico is subject to anti-money laundering (AML) regulations. Key obligations and regulations to take into account are:

• Federal Law for the Prevention and Identification of Operations with Illicit Resources: Known as the Anti-Money Laundering Law, it sets specific obligations for vulnerable activities, including certain manufacturing operations.
• Know Your Customer (KYC): Companies “must” in some cases, but are always recommended to implement KYC procedures to identify and verify the identity of their customers and beneficiaries, including detailed information collection and record-keeping.
• Suspicious Activity Reporting: Manufacturing companies shall report any suspicious activities to the Financial Intelligence Unit (UIF) to help authorities detect and prevent money laundering.
• International Collaboration: Mexico works with international bodies like the Financial Action Task Force (FATF) to align its monitoring practices with global standards, sharing information and best practices to combat money laundering.

Understanding Mexican key legislation is essential to successfully running any type of business. Complying with it will not only help to avoid liability and minimize risk but in this global economy, will also contribute to staying competitive and protecting a company’s reputation in the international market.

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