Mexico is currently ranked as the ninth country in the world that received the largest amount of foreign investment during 2020, which represented an improvement over the fourteenth place it had in 2019, the above was revealed in a report by the United Nations Conference on Trade and Development (UNCTAD).
Taking into consideration the above, it is important to know what is a representative office in Mexico, a branch and a subsidiary with foreign capital.
Let’s start with Representative Offices, which are understood as those establishments installed in foreign locations either inside or outside a country, for communication purposes, marketing studies or representation of the parent company.
The main objective of representative offices is to conduct direct research in a target market in order to establish service and product offerings to potentially new consumers. Many companies use it as a strategy to later make larger investments when starting a national or international expansion process, they can even create strategic alliances with local firms and finally it aims at a detailed analysis of competing companies.
Finally, the establishment of a representative office without income, fiscally speaking, is convenient for a foreign company that does not wish to carry out acts of commerce, but exclusively activities of client acquisition, or as a point of contact between the foreign company and Mexican clients. This, however, is not a way to make an investment, since it does not imply the authorization of foreign capital, nor can it carry out activities in Mexico to produce profits. Nor is it necessary to register them in the National Registry of Foreign Investments.
Branches are defined as a type of quasi-corporation, wholly owned by its direct investor, i.e., it is not incorporated, but operates separately from its owners. It is a foreign legal entity that decides to have a physical presence in a country other than its own, because its economic activity, production of goods and services or commercialization, so warrants, but decides to do so without the participation of a Mexican company.
Starting operations in Mexico implies the entry of foreign capital in order to establish offices, industrial or commercial premises for the acquisition of machinery and equipment, as well as the hiring of local personnel.
Articles 3, 14 and 15 of the Commercial Code recognize foreign corporations, specifically Article 15 states:
“Companies legally constituted abroad that are established in the republic, or have in it any agency or branch may exercise acts of commerce…”
The registration of the foreign company under this modality will not have a new legal personality but will maintain the one it has abroad to carry out its mercantile operations.
Finally, both the branch and the representative office require the approval of the General Directorate of Foreign Investment to be established in the national territory.
In the case of subsidiaries with foreign capital, unlike corporations or limited liability companies (the most common types of companies in Mexico), they will have a legal personality different from that of the partners.
Clarifying the following points: they may only participate in economic activities that are not reserved or subject to maximum foreign investment limits, according to the applicable Law.
It is also not advisable to incorporate them as Simplified Joint Stock Companies since their income should not exceed 5 million pesos.
Now, according to the Foreign Investment Law, a foreign company must have the authorization of the Ministry of Economy to operate in Mexico, without prejudice to the compliance of other obligations established in provisions other than the Foreign Investment Law, which, as already mentioned, may be the Commercial Code, the Federal and/or local Civil Code of the Entity in which they are established, among others.
Finally, it is necessary to know that a company cannot have an authorization to exercise commercial acts and to have a representative office, that is to say, one excludes the other, when a company has a branch office authorization, it is because such company performs commercial acts. Only when it stops performing commercial acts and only represents the interests of such company in Mexico, it may request a new authorization to establish itself as a representative office.
Conversely, when a company has a representative office authorization, such company will not be able to perform commercial acts; therefore, if it intends to habitually engage in commerce, it must have the authorization to register its bylaws in the Public Registry of Commerce.
It is also important to know that on August 8, 2012, the General Resolution issued by the National Foreign Investment Commission was published in the Official Gazette of the Federation (“DOF”), which establishes the criteria for the application of Article 17 of the Foreign Investment Law, regarding the requirements for foreign legal entities to habitually carry out acts of commerce in Mexico or for the establishment of foreign legal entities in Mexico. By virtue of such Resolution, foreign legal entities incorporated under the laws of the United States of America, Canada, Chile, Costa Rica, Colombia, Nicaragua, El Salvador, Guatemala, Honduras, Uruguay, Japan and Peru that intend to habitually carry out commercial activities in Mexico are no longer required to obtain prior authorization from the Ministry of Economy to habitually carry out commercial activities in Mexico (open a branch) or to establish themselves in Mexico (representative office), such requirement being satisfied with the presentation of a written document.
If you wish to invest in Mexico and you have doubts about what is convenient for you or not, we have a team of experts at your disposal that will be able to advise you on all the steps and requirements for your incorporation or establishment in Mexico. Come to us.
Gloria Ponce de León & Hernández