Located at the southern end of North America, Mexico is one of the most important economic partners to the United States and Canada. Mexico’s rich history and its ever growing economy has turned the country into an appealing destination for digital nomads. The country’s strong university system also makes Mexico one of the best places to recruit developers, marketers, and other knowledge workers.
Deciding to set up a subsidiary in Mexico can be a long and tricky process.
The process can take months, since your business will need knowledge of tax and business laws, as well as the time and money to actually establish the business. A subsidiary in Mexico allows you to operate within Mexico as a branch of a foreign parent US company.
In Mexico, a subsidiary allows a foreign parent company based in a different country such as the US or Spain to open a branch in the country. By setting up a subsidiary, businesses can meet the needs of customers within the country, hire employees in Mexico compliantly, and expand their business.
There are two main types of subsidiaries in Mexico. S.A. de R.L. (Anonymous Society of Limited Responsibility) and S.A. de C.V. (Anonymous Society of Variable Capital).
An S.A. de R.L. is similar to a corporation in the United States. This type of subsidiary has a smaller number of shareholders and is better for subsidiaries whose primary mission is import and export.
However, an S.A. de C.V. is better if the parent company is hoping to establish multiple subsidiaries–and if upon selling–hopes to liquidate the assets of the company.
Most tax experts compare setting up a subsidiary in Mexico to establishing an LLC in the United States. Both allow for some independence from the parent company in the US, even though the parent company is still legally liable for the subsidiary’s operations
To establish a subsidiary in Mexico, there are steps that must be taken in order to comply with both Mexican business laws as well as Mexican tax laws.
Choosing a corporate name and registering it with the Ministry of External Affairs (SRE)
Entering a pro forma agreement where any non-Mexican shareholder is legally bound by Mexican laws
Hiring a local attorney to prepare the necessary documents to establish the subsidiary. A local attorney should also have a background in compensation and tax laws
Notarize necessary documents and establish a power of attorney
In Mexico, there are two subsidiary structures that allow for a smooth and legal establishment of a business. These two structures should be taken into consideration when establishing a subsidiary to reduce or eliminate double-taxation for the parent company in the United States.
The first subsidiary structure is the most simple. This structure is helpful for establishing basic important and export operations. This is a good option for companies that only need one facility or line of business. This subsidiary is most commonly used for parent companies that are trying to distribute goods to customers within Mexico. A Basic Foreign Subsidiary operates as a free entity. They import and export products in the subsidiaries own name.
To establish this subsidiary, the company must set up and register as a S.de R.L. The home company in the United States receives tax credits to avoid double-taxation. This subsidiary exists primarily for legal purposes.
The basic foreign subsidiary helps companies avoid having to pay a percentage of shipments to a broker who imports and exports throughout Mexico.
The second type of subsidiary in Mexico is the Multilevel Holding Company Structure. This subsidiary is much more complex and is established if the parent company needs multiple subsidiaries in Mexico to operate. This structure is recommended by tax and legal experts if the holding company needs direct control of the subsidiaries.
For parent companies that need multiple lines of business or need to establish multiple manufacturing facilities with a number of legal entities, this structure is strongly recommended to establish a business.
To establish this type of subsidiary, the company can set up either an S. de R.L. or an S.A. de C.V. Organizing as an S. de. R.L may provide tax incentives but an S.A. de C.V. is recommended when multiple subsidiaries are necessary for the parent company. Further, this type of subsidiary is important because the holding company can transfer cash for investment or operational purposes between subsidiaries without being double-taxed on profits. If the company is sold or liquidated the earnings from the sale can be reinvested to the holding company to provide further tax benefits.
Many benefits come along with setting up a Mexican subsidiary. It allows the company to grow and the parent company to retain some control. The parent company is able to operate and expand, but they need to navigate Mexican laws and the culture.
However, setting up a subsidiary takes significant time and knowledge. The process can take months and the company is unable to hire anyone until the subsidiary is fully set up, so recruiting possible employees poses a difficult task until the subsidiary is established.
In 2021, Mexico passed a sweeping labor reform legislation that made it more difficult for companies based outside of the country to outsource their payroll in Mexico to third-party PEO and EOR services.
However, Mexican companies can partner with an EOR service to hire talent in different countries, and Mexicans can work abroad with the help of an EOR like Via.
Businesses looking to establish a presence in Mexico, however, should plan to open a subsidiary or entity.
Many companies based in Mexico want to hire talent in different countries, but aren’t exactly sure how to go about onboarding and paying employees across borders compliantly. Maybe you want to hire a software engineer based in Colombia, or a designer living in Canada.
With Via, we help you hire, onboard, and pay remote employees across the world. As your employer-of-record abroad, we take care of the local HR logistics, such as payroll, benefits, taxes, and obtaining work permits. Maintaining compliance is our responsibility. You simply focus on building your team and running your business.