The regulations are general, abstract, and impersonal rules issued by the holder of executive office, to ensure the proper application of a prior law.

The legal rationale for this authority is enshrined in Article 89 I of the Political Constitution of the United Mexican States, which establishes the following:

"Article 89 - The duties and powers of the President are as follows:

I. To promulgate and execute the laws issued by the Congress of the Union, ensuring full compliance therewith, by administrative means...."

The authority vested in the President is the basis for the Regulations of the Law to Promote Mexican Investment and Regulate Foreign Investment, published in the Official Bulletin of the Federation on May 16, 1989. These regulations continue to be valid insofar as they are not in conflict with the Foreign Investment Law.

In order to facilitate the proper application of the Foreign Investment Law, the Regulations of the Law to Promote Mexican Investment and Regulate Foreign Investment, enhance and expand the content of the law, by describing the organization and functioning of the competent authorities indicated in the law.

The constitutional references for specific areas related to the principles embodied in the foreign investment agreements or treaties are as follows:

Economic Governance of the State Article 25

National Development Plan Article 26

Expropriation Article 27, Paragraph and Subsection VI

Exclusive State Activities Article 28

Concessions Article 32

Yes. It is defined in Article 2.II and III of the Foreign Investment Law, which establishes:

Article 2. For the purposes of this law the following definitions shall apply: ...II. Foreign Investment:

c) Participation by foreign investors in the activities and acts envisaged in this law.

Yes. The National Registry of Foreign Investment exists for this purpose. It is the competent agency for the registration of all information related to foreign investment. The rationale for this institution is established in Article 31 of the Foreign Investment Law.

Yes, provided that their nationality is other than Mexican, as established by Article 2.III of the Foreign Investment Law.

No. As mentioned in the preceding response, their nationality must be other than Mexican, or they must be foreign entities with no legal personality.

Yes. They must resort to the Foreign Investment regime envisaged in the Foreign Investment Law. The obligations to which they are subject are established in that law.

No. The law establishes no requirements for the status of foreign investor. Time requirements are based on Articles 32 and 35 of the Foreign Investment Law, whereby the investor must register the investment within 40 working days of the establishment of the company or the investment by the foreign investor. They also must submit an annual economic-financial report to the National Registry of Foreign Investment in order to renew the registration. Failure to do so is punishable by a fine of 30 to 100 wages, pursuant to Article 38.IV.

Based on Article 7 of the Federal Labor Law, employers in every enterprise or establishment must ensure that at least 90% of employees are Mexican.

Workers in technical and professional fields must be Mexican, except where no Mexicans can be found for a particular specialization, in which case, employers may hire foreign workers in proportions not exceeding 10% of the staff with that specialization. The employer and foreign employees are obliged to train Mexican workers in the specialization in question. Physicians serving enterprises must be Mexican.

The provisions of this Article are not applicable to directors, board members, or general managers.

All sectors: No more than 10% of the members of a Mexican production cooperative may be foreigners. Foreigners may not hold management or general administration positions in such enterprises. (Political Constitution of the United Mexican States, Article 25. General Law on Cooperatives, Title I, Chapter I, Title II, Chapter II).

Firearms: Foreigners may not appoint or be appointed members of the boards of directors or occupy senior executive positions in such enterprises. (Federal Law on Firearms and Explosives, Title III, Chapter I, Foreign Investment Law, Title I, Chapters I, II, and III; Title II, Chapter I; Titles III and IV; Title VI, Chapter I, II, and III; Titles VII and VIII, Regulations of the Federal Law on Firearms and Explosives, Chapter IV, Regulations on the Law to Promote Mexican Investment and Regulate Foreign Investment, Title I; Title II, Chapter I; Titles IV and V; Title VIII, Chapters I, II, III, V; Title IX, Chapter I).

Religious services: Representatives of religious associations must be Mexican nationals (Law on Religious Associations and Public Worship, Title II, Chapters I, II).

Air transportation: The president and at least two thirds of the board of directors and two thirds of the senior executives of these enterprises must be Mexican nationals.

Only Mexican nationals and Mexican enterprises in which 75% of the voting shares are owned or controlled by Mexican nationals and in which the president and at least two thirds of the senior executives are Mexican nationals, may register an aircraft in Mexico. (Civil Aviation Law, Chapters I, III, IV, and IX. Foreign Investment Law, Title I, Chapter III).

The president and at least two thirds of the board of directors and two thirds of the senior executives of these enterprises must be Mexican nationals. Only Mexican nationals and Mexican enterprises in which 75% of the voting shares are owned or controlled by Mexican nationals and in which the president and at least two thirds of the senior executives are Mexican nationals, may license aircrafts in Mexico. (Foreign Investment Law, Title I, Chapter III; Civil Aviation Law, Chapters I, III, IV, and IX, among others.).

There is no exchange control in Mexico. Therefore any of the modalities established for this type of operation may be used.

The Constitution is strictly observed. There are rules for handling foreign investment to ensure greater legal security; more openness to foreign investment; legal deregulation; sectoral openness; and elimination of performance requirements.

Article 5 of the Constitution determines that no person may be prevented from engaging in the profession, industry, trade, or work of his choosing, provided that said occupation is legal. The exercise of this freedom may only be prohibited by judicial determination, when the rights of third parties are breached, or by gubernatorial resolution, issued in accordance with the terms of the law. Otherwise, Article 3.III of the Commercial Code determines that foreign firms or their agencies and branches, exercising their commercial activities within the national territory are commercial entities. Finally, Article 13 of the same Code states that foreigners shall be free to engage in commercial activities, in accordance with the treaties entered into with their respective nationals, and with the provisions of the laws governing the rights and duties of foreigners.

For the establishment of foreign investment, the Foreign Investment Law limits the activities in which foreigners can invest. Article 6 of the Foreign Investment Law, for example, establishes the activities reserved exclusively for Mexicans or Mexican firms with a clause excluding foreigners. However, once investment is made in an enterprise registered and organized in accordance with the laws in force in Mexico, it is considered to be a Mexican enterprise with the guarantees that this provides.

They compete on equal terms. However, Article 5 of the Foreign Investment Law indicates the strategic areas reserved exclusively for the State:

a) Oil and other hydrocarbons, with the exception of natural gas;

b) basic petrochemicals;

c) Electricity;

d) Nuclear energy production;

e) Radioactive minerals;

f) Telegraphy;

g) Broadcasting;

h) Postal services;

i) Issuing banknotes;

j) Minting coins;

k) Control, supervision, and surveillance of ports, airports, and heliports; and

l) Any others expressly indicated in the applicable legal provisions.

Article 4 of the Foreign Investment Law permits foreign investment in all sectors, except those mentioned in Articles 5 and 6 of the Foreign Investment Law.

Under the Mexican Constitution and Article 5 of the Foreign Investment Law, the functions determined by law in the following strategic areas are reserved to the State:

a) Oil and other hydrocarbons (the Decree reforming and adding various provisions to the Law Regulating Article 27 of the Constitution in the oil sector, published in the Diario Oficial de la Federación on May 11, 1995, states in Article 4 that transportation, storage, and distribution of gas can be carried out by the social and private sectors, with the prior permission of the competent authority);

b) Basic petrochemicals;

c) Exploitation of radioactive minerals;

d) Nuclear energy production;

e) Communication via satellite (On July 7, 1995, the Federal Law on Telecommunications was published in the Official Bulletin of the Federation. Subsection II of Transitional Article Two of that Law establishes a derogation from Article 5.VI of the Foreign Investment Law, which reserves all satellite communications exclusively for the State);

f) Electricity;

g) Railways (On May 12, 1995, the Law Regulating Railway Service was published in the Official Bulletin of the Federation. Transitional Article Three of that Law establishes a derogation from Article 5.X and Article 7.IV.s of the Foreign Investment Law, upon enactment of said ordinance);

h) Telegraphy and broadcasting;

i) Issuing banknotes and minting coins;

j) Control, supervision, and surveillance of ports, airports, and heliports; and

k) Any others expressly indicated in the applicable legal provisions.

In accordance with Article 6 of the Law, the following activities and corporations are reserved for Mexicans:

a) Broadcasting and other radio and television services, other than cable television;

b) National land transportation of passengers, tourism, and cargo, not including messenger and package delivery services;

c) Retailing of gasoline and distribution of liquid petroleum gas;

d) Credit unions;

e) Development banking institutions, under the terms of the law governing that area of activity; and

f) Provision of professional and technical services, expressly indicated in the applicable legal provisions.

a) Production cooperatives

Up to 25% in:

a) National air transportation

b) Air-taxi transportation

c) Specialized air transportation (On May 11, 1995, the Civil Aviation Law was published in the Official Bulletin of the Federation. Said law established that foreign equity in specialized air transportation could be as much as 100%).

Up to 30% in:

a) Companies controlling financial groups

b) Multiple banking credit institutions

c) Brokerage houses

d) Stock market specialists

Up to 49% in:

a) Insurance institutions

b) General deposit warehouses

c) Trust companies

d) Exchange bureaus

e) Financial leasing agencies

f) Financial factoring enterprises

g) Firms referred to in Article 12 bis of the Securities Market Law (on investment consultancy and supervision)

h) Shares representing the fixed capital of investment companies and corporations operating investment companies

i) Manufacturing and marketing of explosives, fireworks, firearms, cartridges and munitions; but not the use of these items for industrial and extractive purposes, nor the processing of explosive mixtures for use in such activities

j) Printing and publication of newspapers for exclusive circulation within the national territory

k) "T" series shares in agricultural, livestock, and forestry companies

l) Cable television

m) Basic telephone services

n) Freshwater fishing, coastal fishing and fishing in the exclusive economic zone, excluding fish farming

o) Integrated port management

p) Port services piloting ships for internal navigation operations, under the terms of the relevant law

q) Shipping companies operating ships commercially for internal navigation and coastwise trade, with the exception of leisure cruises and the use of dredgers and naval equipment for port construction, conservation, and operation;

r) Services related to the railway sector, consisting of passenger services, road maintenance and repair, deliveries, workshops on repairing traction and hauling equipment, organization and marketing of single-carriage trains, operation of domestic loading docks, and railway telecommunications (Derogation of Subsection IV.s of the Foreign Investment Law by the Law Regulating the Railway Service).

s) Supplies of fuel and lubricants for ships, aircraft, and rolling stock.

Approval of the Foreign Investment Commission with a majority of Mexican corporations:

With the approval of the Commission, and in accordance with Article 8 of the Foreign Investment Law, foreign investment may constitute more than 49% of the capital of corporations engaging in the following activities:

a) Port services to ships in conducting their internal navigation operations, such as towing, mooring, and lighterage;

b) Shipping companies that use ships exclusively for traffic on the high seas;

c) Management of air terminals;

d) Private pre-school, primary, secondary, mid-higher, higher, and combined education services;

e) Legal services;

f) Credit information firms;

g) Securities rating institutions;

h) Insurance agents;

i) Cellular telephones;

j) Construction of pipelines for oil and oil derivatives; and

k) Drilling oil and gas wells.

The principle of international reciprocity does not exist for investment, However, it is possible to reach an arrangement in this regard in certain sectors by agreement or international treaty.

There are none. However, Article 29 of the Foreign Investment Law indicates the criteria the Commission will use for evaluating requests submitted to it for consideration:

a) Impact on employment and worker training;

b) Contribution to technology;

c) Compliance with the environmental provisions in the relevant ecological ordinances; and

d) In general, the contribution to increasing the competitiveness of the country’s productive plant.

In deciding the outcome of a request, the Commission may only impose requirements that do not distort international trade.

Yes, provided that the sector is not reserved for Mexicans or Mexican enterprises, with a clause excluding foreigners.

In accordance with Article 4 of the Foreign Investment Law, treatment of investors and foreign investment is liberal. They may participate in any economic activity that is not restricted.

Regarding national treatment, foreign investors are given no less favorable treatment than the treatment given, under similar circumstances, to national investors, without the need for treaties and without prejudice to reservations to provide incentives or other subregional measures.

Most favored nation treatment is granted only when there is a treaty or agreement on investment signed with the investor’s State.

The second paragraph of Article 27 of the Constitution states:

"Expropriations may only be executed on grounds of public utility and by providing compensation."

Thus, there must be grounds of public utility and the State must compensate the expropriated person as requirements for expropriation.

The amount of compensation is fixed as follows:

a) In accordance with the Expropriation Law: the value of the expropriated property must be equivalent to the market value set, which may be no less than the book value recorded in the land registry or tax collection offices. However, the expropriated person is entitled to contest the fixed value in court.

The amount of compensation must be paid by the State when the expropriated property becomes a state asset.

The time limit for payment of compensation may not exceed one year from the date on which expropriation was declared.

Payment must be made in local currency, but it may be agreed that payment be made in kind.

b) Notwithstanding the provisions of the Expropriation Law, expropriation may be regulated differently under the international treaties to which Mexico is a party or the arbitration agreements it has signed.

The authorities may not materially take possession of the property until compensation is paid.

Yes, with the exception of the cases provided for in the Expropriation Law and other cases envisaged in special laws.

There is no restriction on the entry of capital.

Entry of goods must meet the requirements established for imports. Any technology transfer contract must be registered with the Mexican Industrial Property Institute (IMPI) to become effective against third parties.

There are no restrictions on the repatriation or remittance of capital or profits.

In Mexico, there are no different types of exchange markets, thus the investor has full freedom to acquire foreign exchange in exchange bureaus, banks, and so forth.

Taxes due are mainly the following:

Income tax

Under the Income Tax Law, all corporations must pay 34% of their net profits (after deductions). Some activities, such as agricultural, livestock, forestry, and fish farming services are exempt from this tax.

4.9% on interest paid to: a) financing institutions from foreign States; b) foreign banks; c) entities that place or invest in the country capital from loan securities, in accordance with the rules issued by the authorities.

10% on interest in the following cases: a) interest paid by credit institutions to residents abroad, other than the interest taxable at 4.9%; b) interest paid to suppliers abroad for transfers of machinery and equipment.

15% on the temporary use or enjoyment of copyright and, in general, for technical assistance or technology transfers.

35% on the temporary use or enjoyment of patents or investor’s or developer’s certificates, trademarks and commercial names, and on advertising.

If these services are provided in the national territory, they are taxed in relation to the value added at the same rate as services contracted and provided in the national territory.

There is also a 2% tax on assets, which is applied only in the event that no profits were made by the company during the fiscal year in question; this tax is obligatory only after the third year of operation.

The VAT, currently 15%, is the consumption tax which is actually paid by the final consumer and not by the enterprise, though there are exemptions, such as those on the basic basket of goods and drugs.

Lastly, there are also state or municipal taxes; in 18 states there is a special payroll tax, which varies from a minimum of 0.9% in Baja California to a maximum of 4.6% in Quintana Roo. Another major state tax is the property tax (land use tax), which is based on the determined value of the property.

There are special rules on investment incentive programs:

PITEX: The Program on Temporary Import of Goods Manufactured for Export, which allows tax-free temporary imports.

ALTEX: The Program for Primarily Export Enterprises, under which VAT balances due to these enterprises are immediately refunded.

Drawback: This consists in an export certificate for refunding to exporters any import taxes considered to be indirect.

Maquiladora: This a an Export Development Program under which offshore processing firms import into Mexico, under a temporary and tax-free regime, machinery, equipment, parts, raw materials, and other components used in the assembly or manufacture of semi-finished and finished goods.

There is a list of tax-free imports for the automatic replacement of machinery and equipment, as well as telecommunications instruments and computer equipment. The list also allows temporary tax-free imports of trailers and containers which may remain in the country for three months.

Instead of paying normal import taxes on materials and components, an offshore processing company may import them into Mexico without having to provide specific guarantees, because such imports are exempted upon presentation by the enterprise of the required authorization.

With Canada, Ecuador, and the United States.

Mexico provides the following investment incentives for both nationals and foreigners:

Offshore processing industry: Since January 1994, offshore processing plants can sell on the domestic market without the prior authorization of the Secretariat of Commerce and Industrial Development, though they must pay the relevant import taxes. The maximum amount of these sales is currently 60% of the value of their exports, and is to be increased to 100% by the year 2001. In this way, these industries will be gradually integrated into the rest of the national economy.

PITEX: The Program on Temporary Imports of Goods Manufactured for Export, which allows temporary tax-free imports, tax-free, and simpler customs procedures for goods used in the production of export items, which are nonoil and constitute a set percentage of the export product (more than 10%).

ALTEX: The Program for Primarily Export Enterprises was designed to support those enterprises that significantly help to generate foreign exchange by directly or indirectly exporting nonoil goods in the quantities or proportions established. ALTEX enterprises are mainly supported through financing from Bancomex, immediate refunds of VAT balances due to them, and simplification of external trade procedures.

The treatment established for investors investing in the offshore processing industry operations and in PITEX and ALTEX programs is very favorable for exports because the NAFTA does not apply special rules of origin to users of these programs. In other words, in order to benefit from the preferential tariff treatment offered by NAFTA, the goods produced under these programs must comply with the same conditions as other goods.

ECEX: The objective of the External Trade Enterprise Program is to foster the growth of enterprises specializing in international marketing that contribute to the development and consolidation of the exportable supply of Mexican goods. One of the benefits offered is the issue of an ALTEX certificate with the corresponding facilities and the authorization of a PITEX program using the specific project modality.

FEMEX: The Decree for Fostering Export Promotion Shows and Fairs is limited to supporting trade fairs and shows as vehicles for increasing and consolidating the share of the national industry in external markets.

Drawback: This consists of an export certificate for refunding to exporters import taxes considered to be indirect.

Foreign investors have the same procedural recourse as national investors. Special recourse for foreign investors is envisaged only in the dispute settlement sections of the free trade treaties to which Mexico is a party

Mexico is not a member of ICSID.

Mexico is a member of UNCITRAL, which has a Model Law on International Commercial Arbitration.

Currently, Mexico has not signed any reciprocal investment promotion and protection agreements with countries in the Americas. However, the free trade agreements with the G-3, NAFTA, Bolivia, and Costa Rica have chapters on investment with principles similar to those embodied in a reciprocal investment promotion and protection agreement.

Article 133 of the Constitution establishes the hierarchy of international treaties: the Constitution, the laws of the Congress of the Union derived therefrom, and all the treaties in accordance with the Constitution that have been and will be signed by the President of the Republic, with the approval of the Senate, constitute the supreme law of the entire Union. The judges of each state must conform to the Constitution, laws and treaties, despite provisions to the contrary in the constitutions or laws of the states.

Once approved by the Senate and in conformity with the aforesaid Article 133, these laws become the supreme law of the Union and are automatically applicable, requiring no subsequent act prior to their implementation in Mexican territory.

The dispute settlement mechanism in the Mexican model reciprocal investment promotion and protection agreement provides for recourse to international arbitration forums in the event of disputes among States or between a State and an investor from another State. This special mechanism is applied to violations by one of the States of the obligations established in the reciprocal investment promotion and protection agreement. Arbitration procedures may begin only six months after the act or event giving rise to the complaint or petition, during which time attempts are made to settle the dispute amicably. In Mexico, foreign investors must decide whether to submit the complaint to international arbitration or to the local judiciary, both procedures being mutually exclusive.

It should be noted that, in Mexico, this mechanism is not applicable to measures taken on grounds of national security or resolutions issued by the National Foreign Investment Commission concerning acquisitions of previously established companies by foreigners.

The Commission decides whether to accept private investment capital in activities or acquisitions, in accordance with the specific regulations referred to in Articles 8 and 9 of the Foreign Investment Law and, where necessary, dictates the terms and conditions under which such equity shares will be allowed, in compliance with the criteria established in Article 29 of the Law.

The Commission processes approval of specific investment projects through the Secretariat of Commerce and Industrial Development which, through the General Directorate of Foreign Investment confers legal status on the final authorization of the foreign investment, indicating the terms for compliance with the recommended criteria. The Commission, upon accepting a request, may not impose requirements that distort international trade.

The Commission also establishes criteria for the application of legal and regulatory provisions on foreign investment, by issuing general resolutions.

The General Directorate of Foreign Investment reports to Secretary of Commerce and Industrial Development and is responsible for conducting the final review of foreign investment in Mexico, from a legal and economic perspective. It does so with the approval and recommendations of the Commission. It also provides the relevant official authorization. The powers vested in this Directorate are derived from Article 18 of the Internal Regulations of Secretary of Commerce and Industrial Development.

The National Registry of Foreign Investment is not a public institution. All Mexican enterprises with foreign investment, all foreign individuals and corporations conducting commercial activities in Mexico, and trust funds of real property shares and assets must be registered in the National Registry of Foreign Investment. The National Registry of Foreign Investment not only records the data on foreign investment, but also monitors and analyzes the role of foreign capital in Mexico. Using the financial information presented annually by foreign investors, the Commission formulates general policy on foreign investment in Mexico.