How to Manufacture in Mexico: Legal Structures & Staying Compliant

April 08, 2020

Are you thinking about setting up a factory in Mexico? If so, it’s important to understand the different entry options, legal structures, and compliance regulations for manufacturing in Mexico. In this post, learn about the different modes of entry, options for forming a legal entity in Mexico, and how a shelter services provider can make these tasks easy to manage.

How do you manufacture in Mexico? 

Most foreign companies choosing to manufacture goods in Mexico do so under one of five conventional entry models: standalone, contract, merger/acquisition, joint venture, or shelter. Each mode of entry has advantages and disadvantages, and companies should be sure to consider each option carefully before choosing an entry strategy for manufacturing in Mexico.

Below is a comparison of the various modes of entry for manufacturing in Mexico and factors to be aware of for each model:

Model

Definition

Advantages

Disadvantages

Standalone

Formation of a standalone entity in Mexico by the foreign company.

·  Independence from third parties

·  Total control of all operations, from administrative to execution

·  Must handle all functions and build teams from scratch

·  Formation of a standalone entity can be complicated for newcomers

·  Significant upfront investment

Contract

Contract agreement between the foreign company and a Mexican manufacturer for fee-based production.

·  Low maintenance and hands-off; the contracted company is responsible for all aspects of production

·  Minimal control over the process, quality, and other factors

·  Potentially costly compared to other models; the contractor determines the fee

 

Merger/ Acquisition

The merger of a foreign company and an established Mexican manufacturer (or the acquisition of one outright).

·  Potential to drastically flatten the manufacturing learning curve

·  Ownership and control of production

·  Can be extremely costly given manufacturer quality

·  Possibility of inheriting suboptimal ingrained workplace culture and leadership practices

 

Joint Venture

Equal partnership between a Mexican manufacturer and a foreign company.

·  Each partner can contribute unique strengths

·  Beneficial for captive markets in which the Mexican manufacturer is experienced

·  Requires more upfront investment than some models

·  Reliance on the partnership to achieve the goal; may not work well if company leadership, practices, or other factors are not complementary

 

Shelter

The foreign company operates through a “shelter” legal partnership.

·  Full ownership and control over manufacturing

·  Ability to outsource administrative tasks

·  Government-supported programs for tax and legal incentives

·  Drastically reduced learning curve

·  Can be challenging to determine which partner to work with, as many have overlapping services

 

Learn more about the various modes of entry for manufacturing in Mexico here.

The shelter service model is the easiest way to manufacture in Mexico

Of the entry models for manufacturing listed above, the easiest to implement for most companies is the shelter model. As opposed to establishing a wholly-owned subsidiary in Mexico, purchasing a Mexican company, or relying on a partner (either as a joint venture or in a contract agreement), the shelter service model allows total manufacturing control that is unburdened by the typically troublesome headaches of administrative and legal maintenance.

As the legal entity acting on the foreign company’s behalf, the shelter service provider shoulders the administrative burden and serves as the liaison between the ownership company and the various regulatory bodies in Mexico for tax, trade, and labor. The shelter service provider also acts as a knowledge repository, which helps the foreign company understand the many implications and obligations of running a manufacturing operation in Mexico, including:

  • Payment of corporate taxes (including income tax, VAT and payroll taxes)
  • Compliance with labor and employment laws
  • Understanding of international trade laws, import/export regulations, and customs practices
  • Understanding how transactions work in Mexico
  • Properly handling shareholder liability, profits, and losses
  • Understanding immigration laws
  • Compliance with other regulatory requirements that apply to the company’s business activity

Because the shelter provider acts on the company’s behalf, many of the risks of forming a company and legal entity in Mexico are drastically reduced. This allows the foreign company to focus on its competitive advantage – manufacturing excellence – with less worry.  

How do shelter services help companies stay compliant in Mexico?

Compliance with tax and fiscal regulations laid out by Mexican federal, state, and local laws is one of the most critical aspects of operation. However, understanding the many nuances of these regulations can be cumbersome to manage when starting a new business in Mexico as a foreigner. By choosing to use a shelter services provider, companies have the benefit of years of know-how, without having to start from scratch.

Many providers offer legal and compliance services that assume all fiscal liability, as well as ensure proper reporting to the appropriate regulatory entities. However, it is vital to ensure that the provider you choose to work with offers the right combination of legal services your company requires. Not all providers offer the same depth of service, particularly concerning the management of legal and compliance issues. Be sure to ask these five essential questions when choosing a shelter service provider.

What shelter services does Tetakawi offer?

 

At Tetakawi, we have several teams experienced in all aspects of Mexico manufacturing administration, including tax and accounting regulations, customs compliance, and labor law.

  • Tax and Accounting Regulations: Our experts ensure that your reports are filed accurately, on-time, and with the proper authorities. We provide accurate calculation, fiscal reporting, and management for corporate income tax, payroll tax, and value-added taxes (VAT).
  • Customs Compliance: As the importer and exporter on record in Mexico, our team manages every aspect of customs compliance, from tariff classifications and import duties to management of trade agreements, permits, and reporting. We also comply with inventory control per Anexo 24, manage external regulatory audits, and research and interpret pertinent Mexican customs law on your behalf.
  • Labor Law and Unions: In addition to a full suite of recruitment and employee management services, our teams negotiate terms with local labor unions in Mexico to ensure that labor contracts are not only favorable to all parties but also legally compliant.  

Get more information on legal structures for manufacturing in Mexico

Have questions about entry strategies or the best way to quickly set up a maquiladora in Mexico? We can help. To learn more about our offerings for shelter services in Mexico and get your questions answered, contact Tetakawi today.

 

 

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