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)

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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 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
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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.

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

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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 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
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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’ 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.

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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.

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 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 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
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 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
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

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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 4th 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 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
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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 6th 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.

(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.

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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.

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.

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 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 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.

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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
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 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.

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.

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
 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.

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.

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 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.

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

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
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 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.

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
 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 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

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
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.

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 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 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