DOING BUSINESS IN MEXICO: MEMORANDUM

*José Andrés Ferráez Quintanilla

This memorandum outlines and summarizes the most important legal issues for a foreign investor
wishing to establish a business presence in Mexico, and therefore does not include substantive
analyses of the aspects involved.

This memorandum is divided in the following sections:

A. Corporate Law.
B. Foreign Investment Aspects.
C. General Tax Aspects.
D. General Labor Issues.

A. Corporate Law.

Investors, whether individuals or companies, wishing to engage permanently in business activities

in Mexico, normally do so through a Mexican corporation. Although it is also possible for foreign
legal entities to establish a permanent business presence in Mexico through a locally organized
branch, a comparison of the advantages or disadvantages of these two forms of doing business in
Mexico by foreigners concludes that it in most cases it is advised to organize through a Mexican
corporation. These advantages and disadvantages are discussed below.

1. Available business association forms under Mexican Law.

Formal registration of companies has many immediate benefits for the companies and for
business owners and employees. Thus, ample consideration should be given to the type of
business association forms that are available under Mexican law.

The different forms of organization of business entities in Mexico are regulated by the
General Law of Mercantile Companies (Ley General de Sociedades Mercantiles), the
Commercial Code (Código de Comercio) or the Civil Code (Código Civil). The General
Law of Commercial Companies lists the following types of commercial legal entities:

a) General partnership (sociedad en nombre colectivo)

b) Limited partnership (sociedad en comandita simple)
c) Limited partnership with zares (sociedad en comandita por acciones)
d) Limited liability company (sociedad de responsabilidad limitada) and,
e) Stock corporation (sociedad anónima)
f) SAPI

Prior authorization to use a specific corporate name is required from the Ministry for
Foreign Affairs (Secretaria de Relaciones Exteriores) to form any business entity in
Mexico. No approval is needed to amend its charter or by-laws unless the amendment
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involves either a change in the corporate name of the substitution of a provision allowing
foreign participation for one prohibiting foreign participation.

In most cases, the foreign investor will seed limited liability in connection with his
investment in Mexico. Consequently, there are two types of entities that will provide the
desired limitations of liability; the limited liability company and the corporation. Even
though the limited partnership comes with some benefits; with or without shares, and the
general partnership is a legal entity independent from their members, the liability of the
partners to third parties is unlimited, and they do not, therefore, provide the desired limited
liability.

2. Corporation Versus Limited Liability Company.

Corporations have traditionally been the usual commercial vehicles, whereas family owned
businesses has generally used limited liability companies.

The major differences between these two types of entities relate to the transfer and
negotiation of the equity investment in their capital. Negotiable certificates (shares) cover
equity investments cannot be issued by a limited liability company. A receipt for his
investment may be delivered to the investor, but that certificate is merely evidence of the
investment and not a negotiable instrument. As a consequence, an equity investment in a
limited liability company may be transferred only by assignment of the participation in the
company.

In the case of shares issued by a corporation, such shares may be transferred by

endorsement of the corresponding share certificate and thereafter, the transfer must be
registered in the stock registry book of the company, since, under Mexican law all the
shares of corporation are nominative.

As mentioned above, the shareholders may freely transfer the shares of a corporation by
endorsement and registration of the transfer in the stock registry book. However, certain
restrictions for the transfer of shares may be established in the corporate charter of a
corporation, such as, a prior consent from the board of Directors for any transfer of shares
to the effective coupled with a right of first refusal granted to the other shareholders.

Other distinctions between the limited liability company and the corporation are the
following:

a) The limited liability company may have no more than twenty-five

members. No such restriction exists in a corporation. However, it should be noted that to
organize a limited liability company only two (2) persons are required whereas five (5)
persons are required to organize a corporation.

b) The minimum capital required to organize a limited liability company

is $5,000pesos, of which 50% must be paid in. a corporation, however, must be organized
with at least $ 25,000 pesos, of which only 20% must be paid in upon incorporation.

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 c) In a limited liability company profits may be distributed
disproportionately to the ownership of equity. In a corporation, however, such
disproportionate distribution is not available. Nevertheless, a corporation may issue certain
preferred shares which are entitled to a preferred dividend and have limited voting rights.

d) Provided each member in a limited liability company is entitled to one

vote for each $100.00 pesos of his equity investment, voting rights may be freely
determined by the members. Thus, preferred participations with additional votes are
allowed. On the other hand, the shareholders of a corporation are entitled to one vote per
share. The voting rights of certain shares in a corporation may be limited to certain cases,
provided in general terms, that a preferred dividend is paid to such shares, but shares with
more than one vote are not permitted.

3. Fixed Capital Versus Variable Capital.

The capital of a commercial entity may be either fixed or variable, and must be stated in its
charter.

In a fixed capital entity a certain sum is stated as the capital. In a variable capital entity a
certain sum must be stated as the so-called “minimum capital”. All capital in excess of the
minimum is called the “variable capital”. The variable capital may be unlimited in amount
and may be increased or reduced without many of the formalities attendant to the increase
or reduction of fixed minimum capital.

The major differences between corporations organized as fixed capital entities and those
organized as variable capital entities can be stated as follows:

a) Capital increases and reductions of a fixed capital corporation (“S.A.”) can only
be accomplished by the approval of its shareholders at an extraordinary meeting, called for
that purpose. Such approval requires a resolution adopted by the favorable vote of
shareholders owning at least 50% of the corporate capital. The charter of an S.A. would
then have to be amended at such meeting of shareholders. The amendment and the minutes
of the meeting approving such amendment would have to be filed with a Notary Public and
recorded at the appropriate Registry of Commerce. In the case of capital reduction,
publication (three times) would also be necessary, and such reduction could not become
effective before such publications were completed.

b) A variable capital corporation (“S.A. de C.V.”) may increase or reduce its

variable capital with considerable ease. If the corporate charter so provides, it is possible to
do so by a Board of Directors resolution or by a shareholder resolution taken at an ordinary
meeting. No charter amendment would be required. Consequently, the filing of the minutes
of such meeting with a Notary Public, publication in the case of capital reduction, and
recording at the Registry of Commerce would also be avoided.

c) The stated capital of an ordinary corporation (S.A.) must be fully subscribed. In

a variable capital corporation (S.A. de C.V.), only the so-called “minimum capital” is

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required to be subscribed. Twenty percent (20%) of the entire capital in an S.A. and of the
minimum capital in the case of an S.A. de C.V. must be paid in at the outset, upon
incorporation of the entity. The capital of an S.A. and the minimum capital in an S.A. de
C.V. may be as low as Mex. $25,000.00 pesos.

The so-called variable capital of an S.A. de C.V. which is the amount of capital in excess
of the minimum capital, need not be a sum certain nor subscribed or paid in until such time
as a Board of Directors’ or Shareholders’ resolution calls for a capital increase and
authorizes the issuance of the appropriate shares. Since the variable capital does not need to
be subscribed until an increase in capital is called for, the shareholders have no obligation
to pay in the par value of variable capital shares unless and until the shares have been
authorized and subscribed. On the other hand, since all shares must be subscribed at the
time the amount of the capital is established, if a high capital is stipulated in an S.A.
shareholders are under a standing obligation to pay in full that portion of par value of the
shares subscribed but not paid.

Evidently, the S.A. de C.V. allows greater leeway for capital increases and decreases, and
permits a new company to start out small and grow as conditions as conditions warrant,
without having to comply with the formal steps of a charter amendment to increase its
capital.

d) Whether a fixed or variable capital corporation, the shares of a Mexican

corporation must be registered. In both cases it is possible to have shares specifying the par
value shares. Registered shares require the endorsement of the owner for its transfer, and
the name of the new owner must be recorded in the company’s stock registry.

e) There is a greater difficulty in obtaining credit with an S.A. de C.V. than an

S.A. since the company may rapidly reduce the variable capital without notice to third
parties. A way of preventing this problem would be to raise the minimum capital, which
cannot be reduced without following the normal capital reduction procedures established
for an ordinary corporation (S.A.). As mentioned previously, this procedure involves notice
to the public through publication of the notice for a shareholders’ meeting to deal with the
matter, registration of the capital reduction with a Notary Public and at the Registry of
Commerce, And publication of the capital reduction.

4. Shareholders’ and Board of Directors’ Meetings.

Under Mexican Law management of a corporation is vested in the administrators, either in

the form of a Board of Directors or of a sole administrator. However, the supreme body of
the corporation is the general shareholders’ meeting.

Under Mexican Corporate Law there are three Kinds of shareholders’ meetings: Ordinary,
Extraordinary, and Special.

Ordinary Shareholders’ meetings can meet any time as the Board of Directors considers it
convenient, but at least once a year in order to approve the activities of the corporation
carried out during the previous fiscal year. Thus, the ordinary shareholders’ meeting
approves the directors’ report and the financial statements together with the examiners’

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report of the proceeding and /or corresponding fiscal year. Additionally, the ordinary
shareholders’ meeting can decide on any matters not solely reserved to the extraordinary
shareholders’ meeting.

Resolutions of ordinary shareholders’ meeting held as of first or subsequent call can be

passed with the majority of the votes represented at the meeting. In the case of an
extraordinary shareholders’ meeting held as of first or subsequent call, at least 50% of the
corporate capital is required.

The aforementioned percentages may be increased in order to provide for qualified

majorities for the resolution of certain specific matters. Qualified majorities are common in
Joint Ventures where there is a minority shareholder wishing to have an effective veto
power for the approval of certain matters.

When management of a corporation is vested in a Board of Directors, the individual

members of the Board cannot exercise their powers individually, and instead, exercised
through resolutions by the Board of Directors have to be approved by the majority of the
members preset at the meeting. In order to consider that a Board Meeting is legally
convened, at least 50% of its members must be present at the meeting. As in the case of
shareholders meetings, special qualified majorities can be established.

Capital increases of corporations having foreign investors, whether a majority or not, may
require the approval of the Foreign Investment Commission, although, in accordance with
the regulations under the Foreign Investment Law and the National Registry of Foreign
Investment (Registro Nacional de Inversiones Extranjeras), prior authorization is not
required in the majority of cases.

5. Mexican subsidiary versus Mexican Branch.

Following is a summary of the steps required for the organization of a Mexican corporation
and also a description of the steps required for the registration of a Mexican branch by a
foreign company and the establishment of a subsidiary wholly-owned by a foreign
company require the prior permit from the competent Mexican authorities as explained in
subparagraphs a) and b) below.

a) Mexican Corporation.

(i) Permit form the Ministry of Foreign Relations. In accordance

with the Foreign Investments Law, it is necessary to obtain a permit from the
ministry of Foreign Relations to incorporate a Mexican company. As regards
majority lf foreign ownership, this matter is discussed below in connection with the
Foreign Investment Law.

(ii) Execution of Articles of Incorporation.

The charter includes the by-Laws of the company and must be executed before a
Notary Public by five incorporators. All of the basic provisions relating to the

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 organization and management of the corporation, amount of capital stock, share
certificates, etc. must be included.

(iii) Registration of Articles of incorporation with the Public

Registry of Commerce. This registration must be obtained with the prior approval of
a judge in civil matters. In practice the judge’s approval may be obtained in a few
days, and the registration itself becomes a rather mechanical procedure and may take
a few weeks.

(iv) Notices to Tax Authorities. The company must register as a

taxpayer of the Value Added Tax whit the Treasury Department of the Federal
District, if that is them jurisdiction in which the domicile of the corporation is
located (or of the corresponding municipalities).

The company must also register at the Federal Registry of Taxpayers as a permanent
income taxpayer. This is accomplished at the Federal Income Tax Office of the
company’s domicile. The company must purchase accounting books that must be
authorized by the income tax office at the time of the company’s registration. There
may also be other registration requirements depending upon the activities of the
company.

b) Mexican Branch of Foreign Corporation.

It is definitely simpler to incorporate a Mexican subsidiary as opposed to registering a local branch

of foreign corporation.

(i) Before applying for the necessary permit from the Ministry of
Commerce and Industrial Promotion to register a branch, Mexican counsel must
study carefully the foreign parent company’s articles of incorporation and By-Laws.
If these documents contain provisions contrary to Mexican public policy (or do not
contain provisions which are required of all corporations by Mexican law), they may
require amendment.

(ii) All of the corporate documents (once amended, if necessary),

including the latest balance sheet showing allocation of capital assets to the branch,
must be authenticated by the proper foreign authorities and by the respective
Mexican diplomatic officials. Also, a Mexican Notary Public must authenticate the
documents. In order to have the documents notarized, it is necessary to secure a
permit from the Ministry of Foreign Affairs and an order from a judge in civil
matters. The Notary issues the necessary certified copies, which are then submitted
to the Ministry of Commerce and Industrial Promotion.

(iii) A certificate from the appropriate Mexican consul to the effect

that the foreign parent company was legally organized under the laws of the
respective jurisdiction is also necessary, and must be filed with the application.

(iv) Board resolutions of the foreign entity authorizing the

establishment of the branch and the appointment of officers of the Mexican branch

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 are also necessary. These resolutions should also state the powers and faculties
granted (in accordance with Mexican law) to the officers of the branch. As in the
case of the other corporate documents, the Board resolutions must also meet the
requirements mentioned in paragr4aph (ii) above.

(v) Once all of these requirements have been fulfilled and the
application has been filed with the Ministry of Commerce and Industrial Promotion,
that agency will study the application and may grant the necessary permit for
registration of the branch. The Ministry of Commerce and Industrial Promotion,
however, may refuse to issue a permit, since its permit-granting powers are
discretionary.

In addition to the foregoing registration requirements, Mexican branches of foreign entities must
also comply with the requirements that are necessary for Mexican corporations to carry out their
business activities.

B) Foreign Investments Aspects.

In connection with foreign Investments Law is that such foreign investment may not exceed 49%
of the corporate capital of the company in question, except in cases where no foreign investments
are allowed (e.g. radio and television, forestry, auto transport), or where a lower percentage is
established (autoparts 40%, ordinary mining 49%, special mining 34%, secondary petrochemicals
40%).

However, the Regulations of the Foreign Investments Law enacted on (the “Regulations”) establish
special rules in order to allow majority foreign investment in newly created or existing Mexican
companies, as explained below:

1) Newly created corporation.

According to Section 5 of the Regulations, foreign investors may suscribe up to 100% of

the capital of a Mexican company, at the time of its formation without the need of obtaining the
previous authorization from the National Commission of Foreign Investments (“CNIE”) or the
Ministry of Commerce and Industrial Promotion, provided that:

a) The company shall be engaged in an activity other than those expressly listed in
the Classification attached to the Regulations (the “Classification”).

b) There Shall be an investment in fixed assets for the activities of the company in
its preoperative period. The amount shall not exceed that established by the Ministry of Commerce
and Industrial Promotion from time to time (according to Section 4 th transitory of the Regulations
said maximum amount is currently Pesos $250 billion, that is less than U.S. $85 million at today’s
rate of

c) The investment must be financed with financial resources from outside Mexico.
In this regard, financial resources from outside of Mexico means contributions to the corporate
capital by the shareholders, including assets or, in the case of investment in fixed assets, the can be
carried out by foreign investors that are already established in Mexico, via reinvestment of

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dividends or earnings that have not been distributed or applied. Financial resources from abroad
can also include financing obtained by the foreign shareholders from foreign entities or credit
institutions with resources obtained from abroad.

d) The paid-in shares of the equity capital of the company shall equal at least 20%
of the investment in fixed assets at the end of the preoperative period 8the preoperative period
being the period from the time of incorporation until the date on which the company receives
income from the first commercial sale of its products or rendering of services).

e) The industrial facilities of these companies are established outside the most
heavily concentrated areas of Mexico in accordance with administrative regulations.

f) The companies so incorporated maintain at least a neutral (if not positive)

foreign currency balance of payments during its first three years of operations computed on a
cumulative basis.

g) The companies generate permanent employments and set up on-going training

and development programs for employees in accordance with labor regulations.

h) The companies so incorporated use adequate technology and comply with

environmental regulations.

Article 6 of the Regulations provides that no prior authorization from the foreign investments
authorities shall be required to incorporate a 100% foreign owned company if such company is to
be organized to operate as a “Maquiladora” (in-bond company) or other industrial or commercial
activities for exports, under the applicable administrative rules for exports programs.

2. Established corporations.

a) Likewise, Article 6 of the Regulations provides that foreign investors may

acquire up to 100% of established Mexican corporations engaged in maquila, or manufacturing,
operations or other industrial or commercial activities related to exports in accordance with special
rules regarding exports programs.

b) In addition to the above, transitory article 6 th of the Regulations authorizes

(without the need of any prior express permit) foreign investors, during a period of three years from
May 17, 1989, to acquire the shares of established Mexican companies, even if said acquisition
results in foreign investor participation in excess of 49% provided said foreign investors comply
with the following requirements:

(i) Make an investment in new fixed assets for at least 30 % of the net
value of the fixed assets of the Mexican company in question, as informed to the Mexican Treasury
for the last fiscal year.

(ii) The paid-in capital of the company at the time of acquisition shall be increased in an
amount equivalent to 20% of the additional investment in fixed assets.

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 (iii) The company reaches at least a neutral (if not positive) balance
of payments level during the three years following the date of acquisition of the shares, and

(iv) The provisions of paragraphs b), c), d), e) and f) of paragraph 1

above are also observed.

This automatic authorization is applicable only if the activities of the Mexican company are not
included in the classification.

3. Registration and Reporting Requirements.

Under the regulations, companies with foreign investment have to be registered with the National
Registry of Foreign Investment no later than 40 (forty) working days after the date foreign
investors acquire an equity participation, directly or through trust, in the relevant company.

If the company admitted foreign investment under the regime referred to in article 5 or transitory
article 6 of the Regulations, as explained above, the company has to file preformat programs and
commitments (e.g. programs regarding investment and financing, employment, production and
sales, export and balance of payments, development of suppliers). Such programs have to be filed
within 50 (fifty) working days after the date the company in question admitted foreign investment
in its corporate capital.

Notably, the company has to file yearly reports to the Foreign Investment Registry, containing
accounting, financial, and foreign currency budget information. These yearly reports must be filed
within 4 (four) months after the end of each fiscal year.

B. General Tax Aspect.

Mexican corporations (and branches of foreign companies established in Mexico are, as residents
of the country, subject to taxation under the applicable laws. The taxing system is largely one of
self-assessment by means of periodic tax returns subject to audit by the authorities. Great reliance
is placed on the requirements for tax withholding by those who make payments representing
taxable income to the recipient, except for payments to resident business enterprises.

Corporations are required to file an annual income tax return for each calendar year no later than
March 31 of the following year and to pay the balance of tax due at that time. A newly organized
company must file its first return for the period ending on December 31 of the year of
incorporation.

In the case of taxpayers obligated to have their financial statements audited by a certified public
accountant, these must be filed, together with the accountant’s opinion on the taxpayer’s
compliance with the tax laws, by June 30 of the following year. An annual information return must
be filed by February 15 of the following year providing details of suppliers and customers and the
volume of transactions with each. Penalty interest is payable on any unpaid amount.

1. Direct Taxing.

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The income tax (ISR) constitutes in Mexico the most important tax in terms of government
revenues.

This tax follows the principles of residence and of source of wealth for the generation of taxes.
Therefore, the subjects of ISR in Mexico are:

a) The residents in the country, with respect to all of their income.

b) The residents in other countries that have a permanent establishment in the country
with respect to the income that is attributable to that establishment.

c) The resident of other countries on the income with source of wealth in Mexico that do
not have a permanent establishment in the country or, in case of having it, said revenues are not
attributable to it.

This section will be limited to deal with the tax treatment of residents of Mexico (e.g. corporations
or branches established by foreign investors).

For fiscal purposes, those companies that have established the main administration of their business
in Mexico are considered to be residents of the country.

Now, with respect to the obligation to pay the IST, this will be determined in accordance with what
is established in Title II of the Income Tax Law (“LISR”) regarding mercantile Companies.

In accordance with these provisions, mercantile companies residing in Mexico will accumulate
their total income, whether in cash, in assets, in services or credits.

Of the accrued income, taxpayers have the right to deduct those expenses that are strictly
indispensable for the performance of their activity, and the investments that are carried out in the
maximum percentages authorized by the LISR, which depend on the asset(s). It should be noted
that dividends, are not deductible.

Commercial companies that make payments on the aformentioned concept, will have, the
obligation to withhold 28% of the distributed dividend if the same do not come from the so called
net fiscal profits account (UFN). However, no withholding shall be made if they do come from
UFN.

It should be noted that the so-called UFN must be kept by all the mercantile companies, with the
objective of promoting the reinvestment of their earnings.

The UFN of the fiscal year will be the amount resulting of substracting the participation of workers
in the earnings of the enterprise, the income tax on its charge, and the amount of the quantities that
are not deductible for effects of this tax from the fiscal result obtained.

On the other hand, the UFN of the fiscal year described in the preceding paragraph, will be added
with the UFN of each fiscal year and with the dividends stemming from other mercantile

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companies residing in Mexico and will be diminished by the amount of dividends or earnings that
are distributed in cash or are distributed in cash or assets stemming from that account.

The applicable tax rate of the fiscal result (cumulative income less deductions) had traditionally
been a progressive rate with a maximum limit of 42%.

Finally, the tax will be reported to the fiscal authorities through annual tax returns that will be filed
within the three months after the end of the fiscal year of the company. As part of the annual tax,
monthly provisional payments have to be made.

2. Indirect Taxing.

The withholding obligation exists in general for all payments to individuals, including employees,
and payments to foreign entities that are not registered in Mexico. This includes most payments
abroad. In all cases where the income tax law does not establish a specific period within which
corporations should remit taxes withheld, the period for payment will be the 17th of the month
following that in which the taxes should be withheld.

Generally, trusts are not considered taxpayers. However, when they are created to carry out
business activities in Mexico; they are treated as conduits of income to beneficiaries (taxpayers)
or, if these have not been named, to the trustor (grantor). Trusts set up to maintain the assets of
approved funds have
no tax obligations, if certain requirements as to their income are
complied with.

a) Value Added Tax.

Indirect taxing in Mexico rests mainly on the Value Added Tax (IVA) which came to
substitute the tax on mercantile income and other taxes of state nature.

As the IVA is a tax on consumption, the subjects of this tax are all those persons or
entities that, without any distinction of nationality, perform the following activities within
Mexican territory:

(i) Sell assets.

(ii) Give independent services.
(iii) Grant the temporary use or enjoyment of assets.
(iv) Import assets or services.

The general applicable rate is of 16% of the value of the operations.

There is also what is known as 0% rate activities that give the right to those persons or
entities that carry out this type of activities of not charging any IVA and to request the
refund of all the IVA that is paid to their suppliers of goods or services. The benefit that
this mechanism grants in terms of cost reduction in the final products, and the 0% is
reserved to priority activities (e.g. exports) and to the sale of merchandise of first necessity.

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 Taxpayers are obligated to pay this tax on a monthly basis at the collecting officers of the
IVA for operations corresponding to the previous month. This will be calculated by
crediting to the total IVA collected by the taxpayer that tax that in its turn, had been
collected by its suppliers.

b. Other taxes.

There are other taxes of less relative impact at a state or muncipal level, such as:

- Special tax on production and services.

- Tax on the acquisition of non-movable
assets.
- Local tax on payrolls.
- Tax on the assets of the companies

Regarding this last tax, it is important to point out its main characteristics. Those who are subjects
to this tax on the assets of companies are the persons, mercantile companies, the permanent
establishment of foreign companies, persons who grant the use of enjoyment of assets to be aimed
to business activities and civil partnerships and associations that carry out mercantile activities.

A 2% rate is established on the active annual value of the taxpayers’ assets, which will be
calculated in accordance to the procedure that is stated in the law.

This tax is creditable against the income tax of the fiscal year in question and that of the following
three years.

3. Special contributions.

Social security and other contributions derived from labor laws, in a general manner, must
be covered by companies in Mexico.

a) Sharing of profits with workers.

In accordance with the Federal Labor Law, employers will have to share with their workers
the profits of the companies in the workers render their services.

The sharing will be the equivalent to 10% of the calculated profit that is used for the
payment of the ISR.

b) Institute of the National Fund for the Housing of Workers (INFONAVIT).

INFONAVIT is an autonomous fiscal entity that constructs and promotes housing for
workers. Employers in Mexico have the obligation to contribute to the INFONAVIT the
equivalent of 5% of the salaries that they paid to their workers, through monthly payments
at the collecting offices that correspond to the domicile of the employer.

c) Social Security.

FBSI ABOGADOS, a member of IBG

FERRÁEZ, BENET, SEGOVIA & IGARTÚA, S.C.
PRADO SUR 435, LOMAS DE CHAPULTEPEC
MIGUEL HIDALGO, MEXICO CITY C.P. 11000
Tel. +52 (55) 5520.0882| www.fbsi.mx
 The Mexican Institute of Social Security (IMSS) was established in 1942 with the purpose
of giving social security, medical, and hospital assistance and pensions for retirement, old
age or temporary unemployment, to non government workers.

The fees that the employers have to pay to the Institute every two months is calculated by a
formula that take sinto consideration the degree of risk of the activity performed by the
worker and their salary.

2. Individual Labor Relationship.

The FLL is a statute of federal application throughout Mexico and governs the labor relationships
included in article 123 paragraph A) of the Mexican constitution.

The FLL defines the concepts of labor relationship, labor contract, enterprise, employer, worker,
employer representatives, and officers among other concepts.

It should be noted that in accordance with the FLL, the lack of a written labor contracts does not
exclude the existence of a labor relationship.

The FLL also establishes the minimum compensation to an employee is entitled to, including
fringe benefits to the employees. Among such benefits, the FLL provides for a maximum work
schedule of 8 hours per day, no more than 6 days within a week, the employee is entitled to one
day of rest, and certain mandatory days of rest. Such as vacations,. vacation premium, that is
equivalent to 25% calculated over the working days.

Minimum wage set by the mixed minimum wage commission, which at the present time in Mexico
City, is $66.00 pesos per day, Christmas bonus, and overtime pay that must be paid in double and
in the event the employee performs his services more than 9 overtime hours per week or 3 overtime
hours per day, he is entitled to triple payment.

2.1 Termination of the individual labor relationship.

The FLL provides that a labor relationship may be terminated if the following causes exists: I)
mutual agreement; ii) death of the employee; iii) termination of the specific job or the term of the
investment; iv) the physical or mental incapacity or disability of the employee; v) force majeure or
acts of God; vi) the self evident non profitability of the operation; vii) the depletion of the resources
of an extractive industry; and viii) insolvency or bankruptcy legally declared.

2.2 Rescission of the individual labor relationship.

The FLL provides that an employer may resign from an individual labor relationship if the
employee commits one or more of the specific causes provided in such law which justify dismissal
without liability for the employer.

On the other hand, the employee may also rescind the individual labor relationship if his
employer commits the specific causes provided in the FLL against him.

FBSI ABOGADOS, a member of IBG

FERRÁEZ, BENET, SEGOVIA & IGARTÚA, S.C.
PRADO SUR 435, LOMAS DE CHAPULTEPEC
MIGUEL HIDALGO, MEXICO CITY C.P. 11000
Tel. +52 (55) 5520.0882| www.fbsi.mx
 2.3 Severance payment.

An employee who is wrongfully discharged is entitled to receive the following severance payment:
i) 3 (three) months of integrated salary; ii) 20 (twenty) days of integrated salary per each year of
services rendered; iii) seniority premium, equal to 12 (twelve) days of salary per each year of
services rendered, with the salary limitation up to twice the minimum wage if his salary exceeds
such limitation; iv) back salaries twice the minimum wage if his salary exceeds such limitation; iv)
back salaries from the date of the dismissal through the date of payment; and v) accrued benefits.

It should be noted that in accordance with the FLL, an employee has the option, in the event of
unjustified dismissal, to receive the above mentioned severance payment or to demand
reinstatement on his job.

3. Special Jobs.

In terms of the FLL there are special regulations for certain kinds of jobs: such as confidence or
trust employee, workers on board ships, field workers, and similar agents.

4. Unions.

4.1 Introduction.

The FLL recognizes the freedom of coalition of workers and employers, defining it as the
temporary agreement of a group of workers or employers for the defense of their common interests.
The FLL defines a union as the association of workers or employers incorporated for the study,
improvement and defense of their respective interests.

Trade Unions are a substantial and important sector in the political organization of Mexico. Unions
have become a very strong force within the most representative political party (PRI) and also
within the Mexican Congress.

This sector has introduced and supported most of the so-called "social laws" in Mexico. Unions in
Mexico maintain representatives in all of the organisms responsible for the election of members of
state and Federal Labor Boards.

4.2. Types of Unions.

The FLL contemplates five different c1asses of unions:

1. Guild Unions, formed by workers of the same activity or specialization;

2. Company Unions, formed by workers under a sole employer;

3. Industrial Unions, formed by workers rendering their services to several employers in

the same industrial or commercial field;

4. National Industrial Unions, formed by workers under one or more employers in the same

FBSI ABOGADOS, a member of IBG

FERRÁEZ, BENET, SEGOVIA & IGARTÚA, S.C.
PRADO SUR 435, LOMAS DE CHAPULTEPEC
MIGUEL HIDALGO, MEXICO CITY C.P. 11000
Tel. +52 (55) 5520.0882| www.fbsi.mx
 field of production with installations in two or more states; and

5. Unions formed by workers of different activities whose speciality cannot amount to

more than twenty members in the same municipality.

4.3 Membership.

The law requires at least twenty members in order to organize a union. However, it is
sufficient for a union to prove that one or more of its members work in a company without a union,
in order for the union to force a collective bargaining agreement on the company, and thereby take
over the workers of such company. Of course, such union has to have jurisdiction over the activity
of the company.

4.4 Conclusions.

In general, the FLL and the labor authorities are definitely pro-union; however, when it
comes to unionizing attempts in the latter case the law allows a strike to be called and be
effective even before its legality is proven. If the union calling the strike evidences that at
least one of its members is a worker in the company, the Labor Board will order the
company to enter into a collective bargaining agreement with the union. In this case, the
remaining workers of the company who do not belong to the union are not obligated to join
it, but the union is entitled to fill in any subsequent vacancies.

5. Collective Labor Relationship

Almost all industrial companies sign collective labor contracts. Nevertheless, satisfactory
labor relations are maintained at most companies. Fringe benefits, including mandatory
profit sharing to employees and social security premiums to cover current medical
expenses and retirement pensions, are usually a significant portion of labor costs, often
about one-third of the

5.1 Collective bargaining agreement (CBA).

CBA is the agreement executed by and between one or more workers' unions and one or
more employers or one or more employers' associations for the purpose of establishing the
conditions according to which work is to be performed in one or more enterprises or
establishments.

In order for the CBA to be valid and enforceable, the CBA must be in writing and has to be filed
before the Conciliation and Arbitration Labor Board (Labor Board) with jurisdiction in the
industrial activity performed by the employer. In terms of the FLL the CBA must contain at least
the following elements: i) names and domiciles of the parties; U} the enterprises and
FBSI ABOGADOS, a member of IBG
FERRÁEZ, BENET, SEGOVIA & IGARTÚA, S.C.
PRADO SUR 435, LOMAS DE CHAPULTEPEC
MIGUEL HIDALGO, MEXICO CITY C.P. 11000
Tel. +52 (55) 5520.0882| www.fbsi.mx
establishments covered; Ui) its duration; iv} the days of rest and vacations; v} the amount of
salaries; vi} working schedule; vii} regulations of training; viii} rules for the constitution of the
mixed commissions in terms of the FLL; and ix} the other provisions agreed by the parties.

The CBA in terms of the FLL is subject to revision each year in connection with salaries and every
two years in connection with fringes and any other provision contained in the CBA. The union
must ask for the - review of the CBA at least 30 days before its expiration date if 5iUaries are to be
reviewed and at lest 60 days before the expiration date if fringes are to be considered.

The petition of revision must be filed before the Labor Board. In the event an agreement is not
reached by the parties, the union is legally allowed to a strike.

5.2 Suspension of the collective labor relationship.

The FLL provides that a collective labor relationship may be suspended if the certain causes exist,
such as force majeure or acts of God, the lack of raw material not imputable to the employer, an
excess in production in relation to the economic conditions of the enterprise and the market
conditions, the temporary and self evident non profitability of the operation, etc.

The employer must prove the suspension causes before the Labor Board in order to obtain its
approval.

The suspension may totally or partially affect the collective labor relationship and the suspended
employees are entitled to severance payrnents.

5.3 Termination of a collective labor relationship

The FLL provides certain causes for termination of a collective labor relationship, that are
basically the same as in the case of the suspension of such . relationship.

6. Strikes.

In terms of the FLL, a strike is defined as the temporary suspension oí the work carried out
by a coalition of workers, such strike being limited to the mere act of suspending the work.

The objectives of a strike are limited to the following: i) to obtain balance between the
production factors, harmónizing the rights of labor with the rights of capital; ii) to obtain
from the signing of a CBA and to demand its revision upon expiration; iii) to obtain from
the signing of a mandatory CBA; iv) to demand compliance with the CBA or mandatory
CBA in the enterprise in which it had been breached; v) to demand compliance with the
legal provisions on profit sharing; vi) to support a strike if the objective of the same is one
or more of the aforementioned.

FBSI ABOGADOS, a member of IBG

FERRÁEZ, BENET, SEGOVIA & IGARTÚA, S.C.
PRADO SUR 435, LOMAS DE CHAPULTEPEC
MIGUEL HIDALGO, MEXICO CITY C.P. 11000
Tel. +52 (55) 5520.0882| www.fbsi.mx
 6.1 Strike procedure.

A union attempting to strike, must comply with the following procedure:

a) Filing a strike call notice before the Labor Board, stating the objective of the same.

b) The strike call has to indicate the list of demands, advising of the intention of going on
strike if the demands are not met.

c) The designated date for the suspension of work has to be specified at least 6 days in
advance for normal industries and 10 days in advance for industries of public services. The
mentioned term will run from the date in which the Labor Board serves the employer.

After the Labor Board receives the strike call, it has to summon a conciliatory hearing before the
date of the strike, attempting to obtain a conciliatory agreement between the parties.

If the parties do not reach an agreement, the union is allowed to proceed striking the employer.

The Labor Board shaIl not rule in connection with the legality of the strike before this is due, and
wiIl only act as an observer in a conciliatory stage.

Once the strike is due, the employer is not allowed to perform any kind of work and it is forbidden
to cross "picked line". During a strike the employees are not allowed during the to be inside the
employer's premises.

6.2 Legality of a strike.

Once the strike is due, the employer has the legal right to request a ruling, stating the
illegality of the strike. The strikes are not legal in the foIlowing cases:

a) If the work was suspended by less than the majority of the unionized workers.

b) If the strike does not comply with the objectives referred to in Section 5 above.

c) If the union did not comply with the strike procedure referred to in Section 5.1
paragraphs a) through c) above.

The employer has a 72 hours period to demand the illegality of the strike.

The Labor Board, after receiving the petition of the employer, must serve the same to the
union and appoint a hearing in which the union has to answer the petition, both parties
being obligated to submit evidence supporting the petition or the answering.

In order for the employer to prove the illegality, the employer must call for a vote in which
the employees wiIl express". Whether or not they approve the strike.

This memorandum is intended only as an outline basic of some important aspects that a foreign

FBSI ABOGADOS, a member of IBG

FERRÁEZ, BENET, SEGOVIA & IGARTÚA, S.C.
PRADO SUR 435, LOMAS DE CHAPULTEPEC
MIGUEL HIDALGO, MEXICO CITY C.P. 11000
Tel. +52 (55) 5520.0882| www.fbsi.mx
investor should take into consideration when attempting to establish operations in Mexico.
Therefore, this document should not be considered as a legal opinion or document produced to give
legal advice, in view of the fact that the legal aspects in question should be reviewed on a case-by-
case basis under specific factual situations.

FBSI ABOGADOS, a member of IBG

FERRÁEZ, BENET, SEGOVIA & IGARTÚA, S.C.
PRADO SUR 435, LOMAS DE CHAPULTEPEC
MIGUEL HIDALGO, MEXICO CITY C.P. 11000
Tel. +52 (55) 5520.0882| www.fbsi.mx