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Cross-Border Joint Venture and Strategic Alliance Guide (Mexico)

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Cross-Border Joint Venture and Strategic Alliance Guide (Mexico) Practical Guidance® Cross-Border Joint Venture and Strategic Alliance Guide (Mexico) A Practical Guidance® Practice Note by Jesus Manuel Colunga Victoria and Juan Carlos Serra, Basham, Ringe Y Correa, S.C. The most common legal forms of joint ventures agreements are: • Joint venture agreements • Joint venture entity(ies) taking the form of commercial Jesus Manuel Colunga Victoria structures identified under the Mexican General Basham, Ringe Y Correa, S.C. Corporations Law (GCL) or Commercial Laws –and– • Unincorporated partnership consortiums (asociación en participación) In addition, Mexican law allows the parties to contractually agree on any matter not contrary to Mexican law. Juan Carlos Serra What are some of the key corporate Basham, Ringe Y Correa, S.C. governance, tax, regulatory, and timing considerations that could impact the choice of This Cross-Border Joint Venture and Strategic Alliance Guide (Mexico) discusses relevant law and practice related structure? to the formation and operation of cross-border joint As will be more fully described below, the most common ventures, including corporate and contractual joint ventures, commercial business structures in Mexico are limited liability in Mexico. For other jurisdictions see the Cross-Border Joint stock corporations and limited liability companies. These Venture and Strategic Alliance Resource Kit. structures provide similar treatment and benefits from a corporate governance, tax regulatory, and timing standpoint. Structures In addition, the Mexican Securities Market Law, effective as of June 28, 2006, introduced a new type of corporation What are the standard forms of joint ventures/ known as “investment promotion companies” or “sociedad strategic alliances and common features of anónima promotora de inversion” (SAPI). Because this structure provides more flexibility regarding corporate each? governance, it has gained popularity, particularly in private Joint ventures are not expressly regulated under Mexican equity transactions, as more fully described below. This law. As a result, private parties may agree to form a type of commercial structure provides an ideal vehicle joint venture either (1) contractually or (2) by creating a for purposes of creating joint-venture entities, since separate entity to operate the business or to implement the they provide flexibility with the type of agreements and transaction. provisions that may be agreed by the parties, such as (i) Once the joint-venture entity or strategic alliance is created non-compete provisions, (ii) drag-along and tag along rights or entered, the corresponding permits and authorizations as well as limitation for the transfer of shares and (iii) the shall be obtained with the relevant governmental agencies possibility of creation shares with different corporate and for the development of the corresponding scope of economic value. activities. It is important to consider that, based on foreign tax laws Are there any forms of joint ventures or and regulations, certain jurisdictions may consider limited liability companies as suitable from a tax standpoint. strategic alliances that are more typically used in certain industries (such as real estate, In addition, from a tax perspective, the Mexican Income Tax pharmaceutical, or technology)? Why are such Law (MITL) includes certain limitations on the deduction forms favored? of payments made by Mexican parties to foreign residents. The most common joint venture and strategic alliance In particular, should any of the following conditions exist, vehicles in Mexico are (1) limited liability stock corporations, then interest (or royalty) payments to foreign entities, as (2) limited liability companies, and (3) investment promotion well as fees for technical assistance, will not be deductible companies. These corporate structures are commonly expenses for the Mexican subsidiary. accepted for every industry due to flexibility, a simple • Payments made to a foreign entity that controls or is incorporation process and especially, the fact that it controlled by a foreign taxpayer. The term “control” provides the shareholders/partners with limited liability for means when one of the parties has actual control over activities carried out by the company. the work or the administration, to the extent that No general restrictions or other provisions apply that may the taxpayer may decide the schedule governing the prevent these types of corporate structures from being distribution of revenue, profits or dividends, whether used by a joint venture in any particular industry in Mexico, directly or by proxy. other than as discussed below. • The foreign entity being paid is considered as a pass- through entity for tax purposes. Are there any industries that would not permit • The payment is considered nonexistent for tax purposes or would not be conducive to a joint venture or in the country or territory where the foreign entity is strategic alliance? located. As mentioned above, the particular industry in which a joint • The foreign entity does not consider the payment taxable venture or strategic alliance is operating has no bearing on revenue. the choice of structure. However, the public bid process for participation with governmental agencies in public/private In addition, Mexican transfer pricing rules apply to business projects, or requirements for a particular project, may transactions carried out between related parties, which are impact the choice of structure. based on the arm’s-length standard. How is a joint venture or strategic alliance Can a joint venture or strategic alliance be structured to minimize potential liability? Are formed for any purpose? Joint ventures or strategic alliances are agreements, there instances where parties to a joint venture contracts, or entities entered and/or created for the or strategic alliance may knowingly choose a purpose of developing and implementing specific activities vehicle without limited liability and, if so, why or projects, which is not contrary to Mexican Law. would such party make that choice? Mexican corporate structures limit the liability of As such, the purpose of a joint venture or strategic stockholders or partners, since they provide a corporate allegiance may consist of anything the parties agree to, veil in favor of the shareholders that may only be provided it is not against the law or its activities are pierced in specific events as provided by law. Therefore, restricted as a matter of law. the incorporation of a company is an ideal vehicle for It is noteworthy to mention that the documentation operating a joint venture, since the stockholders will derive governing a joint venture (a contract in the case of a the benefit of limited liability (except in specific cases contractual joint venture, or the bylaws in the case of an as mentioned above, such as cases of fraud or willful entity-based joint venture) expressly specify the scope and misconduct). objective(s) of the joint venture or strategic alliance. The Mexican limited liability stock corporation and the The management of the corporation is entrusted to a sole limited liability partnership are favored structures under administrator or a board of directors. Mexican practice that provide a limitation of liability for the benefit of shareholders/partners. This type of corporation is forbidden to acquire its own shares, except by judicial adjudication in payment of the Notwithstanding, although there may be a limitation of company debts. liability with respect to third parties, joint venture parties may enter into an agreement allocating their rights, duties, Limited Liability Company (Sociedad de and obligations among themselves. Responsabilidad Limitada) This structure is treated as a partnership for U.S. tax Statutory Framework purposes and is formed by members whose obligations are limited to the payment of their capital contributions. What is the applicable statutory framework for Ownership is not represented by negotiable stock each structure discussed above? certificates (whether registered or bearer) and are transferable only in specific cases provided in the GCL. The Mexican GCL recognizes the existence of seven types After the limited liability stock corporation (S.A.), this is the of commercial structures, which are: next structure most commonly used. • General partnership (sociedad en nombre colectivo) The commercial name of a limited liability company consists • Limited partnership (sociedad en comandita simple) of the names of one or more associates, followed by • Limited liability company (sociedad de responsabilidad the phrase “sociedad de responsabilidad limitada” or its limitada) abbreviation, “S. de R.L.”. • Limited liability stock corporation or (sociedad anónima), A limited liability company may not consist of more than which may adopt the modality of a sociedad anónima 50 members. The company may also be formed as a promotora de inversión (SAPI) variable capital corporation, or “S. de R.L. de C.V.,” which • Limited partnership with shares (sociedad en comandita means that the partners have the flexibility to effect capital por acciones) contributions or withdrawals without having to amend the articles of incorporation. • Cooperative association (sociedad cooperative) • Simplified share entity The capital of the company is determined by the partners. Ownership is divided into “parts” that may be unequal in The limited liability company (sociedad de responsabilidad value and category, but which must always represent one limitada) and
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