MANAGING LEGAL RISKS IN MEXICO

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1 MANAGING LEGAL RISKS IN MEXICO New Entrants and Continuing Operations James C. Bruno Butzel Long, a professional organization 150 West Jefferson, Suite 100 Detroit, Michigan bruno@butzel.com Tel: (7/23/13)

2 Topics 1. Structuring Investments 2. Use of Shelter Companies and Key Clauses to Negotiate 3. Mexicanization of U.S. Terms and Conditions 4. Shareholder, Director and Officer liability 5. Compliance with Laws 6. Sales Representative and Other Agents 7. Expatriate Structures 8. Protection from Ex-Employee 2

S. Terms and Conditions 4. Shareholder, Director and Officer liability 5.

3 3 1. Structuring Investments Currently Mexican income tax is 30% (withholding technology agreements 10%, interest 15%, capital reduction is 0%, dividend is 0%). Check the box as pass-through for SRL de C.V. (capital variable). Similar to investing in U.S. a mix of equity capital, loan capital, trade credit, installment sales, leases of equipment, and IP licensing. Possible additional complexity if a profit center (not cost center) formation of captive employee leasing company (or use local employee leasing company) to limit required 10% profit sharing other liabilities. But new law provides that labor law may be applied (e.g., Christmas bonus).

Possible additional complexity if a profit center (not cost center) formation of captive employee leasing company (or use local employee leasing company) to limit

4 1. Structuring Investments (continued) Obtain and perfect lien on subsidiary assets to secure parent loans and other obligations use real estate mortgage and new Mexican Registry and signage. Employees, taxes, perfected liens (real estate and personal property), and general creditors. Negotiate parent guarantees with third parties. Insurance. 4

5 2. Use of Shelter Companies and Key Clauses to Negotiate Often first step to manufacturing for Mexican and/or export markets. Avoid Permanent Establishment ( P.E. ), import duties, and VAT. Range - Contract manufacturing, to logistics, to employee leasing. Key clauses to negotiate (consider effect on P.E., e.g., lease and payment of utilities): Clear SOW with beginning and ending provisions (variable costs). Early termination of leases, options to purchase of facilities or portions of facilities (fixed costs). Fixed costs for labor and services. 5

Key clauses to negotiate (consider effect on P.E., e.g., lease and payment of utilities): Clear SOW with beginning and ending provisions (variable costs).

6 2. Use of Shelter Companies and Key Clauses to Negotiate (continued) Key clauses to negotiate (consider effect on P.E., e.g., lease and payment of utilities) (continued): Shelter responsible for severance pay. No reassignment of employees to competitors. Maintenance of IMMEX Program and other licenses. Confidentiality and IP. General indemnity. Cooperation at termination (resourcing) and placement fees. Waiver of shelter company liens (acknowledgment of bailment and signage). Bonds and affiliate guarantees. 6

No reassignment of employees to competitors. Maintenance of IMMEX Program and other licenses. Confidentiality and IP.

7 3. Mexicanization of U.S. Terms and Conditions Start with U.S. Terms; can remain in English, but better to translate to have better translation than court translator and translation required in litigation. Choice of law and jurisdiction U.S. possible but practically use Mexican law and courts. Difficult to oust Mexican courts of jurisdiction. U.S. arbitration possible. Need to have document signed by seller and Terms should be printed or attached. The battle of the forms is a U.S. concept. Use Supply Agreements. 7

8 3. Mexicanization of U.S. Terms and Conditions (continued) Important contracts should be signed by the person holding power of attorney. As a seller there may be limitation on damages to the amount of the purchase order and attorney fees to a set schedule (liquidated damages more popular). Guarantees of U.S. parent companies common but not always done. 8

9 4. Shareholder, Director and Officer Liability Shareholder s/parent s liability to limited equity (investment and profits). Who will hold the equity? Officer and director liability generally limited to fiduciary duty. Officers and directors often named in labor claims for discovery purposes. Insurance. The assets at the taxpayer s address can be seized to pay taxes. 9

Officer and director liability generally limited to fiduciary duty.

10 5. Compliance with Laws Federal Foreign Corrupt Practices Act. Require certifications from suppliers, customers, and third party contracting parties. Be aware of red flags. Educate Mexican employees. Increased Mexican enforcement against payors of bribes including hot lines (PEMEX, Mexico City electrical contracting union, and Walmart). Mexican Anti-Trust Law including HSR version. Transfer Pricing. 10

Be aware of red flags. Educate Mexican employees.

11 6. Sales Representatives and Other Agents Need written agreement as independent contractor. Appoint entities not individuals. Prohibit use of principal s name in entity name to avoid principal s liability. Post-appointment non-compete by entity permitted. 11

Prohibit use of principal s name in entity name to avoid

12 7. Expatriate Structures Major Issues: Contractual Structure Contractual Employment Relations U.S. Tax Issues Mexican Tax Issues Tax Equalization 12

13 7. Expatriate Structures (continued) Contractual Relationships Secondment Agreement U.S. Company Home Country Employment Agreement Mexican Company Secondment Agreement A. Establishes relationship between companies. B. Responsibility and control of employee (important for Permanent Establishment issue). C. Intercompany payment liability. D. Responsibility for withholding and paying taxes. 13 Local Country Employment Agreement Employee Host Mexican Company and Home Company Employment Agreements A. Identity of Employer and reporting relationship there will be by law a dual employment relationship. B. Dates of employment match Visa dates. C. Title and duties match Visa. D. Restrict Powers in Mexico on behalf of foreign entity top avoid P.E. E. Compensation salary and bonus (based on U.S., Mexican, worldwide, or other performance metrics). (Where paid?) F. Benefits list available on request.

Responsibility for withholding and paying taxes. 13 Local Country Employment Agreement Employee Host Mexican Company and Home Company Employment Agreements A.

14 7. Expatriate Structures (continued) U.S. Tax Issues U.S. Citizens, Permanent Residents, and 183-day Residents taxed on worldwide income. U.S.-Mexican tax treaty provides relief from double taxation for income taxes. No U.S.-Mexican totalization agreement results in double employment taxes. U.S. Citizens and Permanent Residents want to continue to pay into U.S. Social Security and Unemployment Insurance Funds. W-2 and Mexican reporting (federal and state) for all monies paid by U.S. Company. 14

U.S. Citizens and Permanent Residents want to continue to pay into U.S. Social Security and Unemployment Insurance Funds.

15 7. Expatriate Structures (continued) 15 Mexican Tax Issues All compensation for work in Mexico subject to Mexican income tax regardless as to paymaster (U.S. or Mexican entity). Company cost of Mexican employment taxes are approximately equal to 25% of income and employee pays 10%. Withholding and employment taxes must be paid by a company registered in Mexico (i.e., the Mexican affiliate). If the employee is being transferred from Mexico must consider advising the Mexican labor board and tax agencies.

Company cost of Mexican employment taxes are approximately equal to 25% of income and employee pays 10%.

16 7. Expatriate Structures (continued) Tax Equalization Policy Estimate total taxes payable by Employer as though all Companyrelated income received in U.S. which is Responsibility of Employee. Employer pays any excess. Employer provides tax accounting service. Host Company withholds and pays taxes to Host Country on Phantom Host Company compensation. Employee pays taxes on personal (non-company related) income at the higher marginal rates. The employee withholding by U.S. Company is only an estimate of the hypothetical tax with year and true-up. The Company (U.S. and/or Mexican) pays the actual tax on Company related compensation and international assignment benefits. 16

Employee pays taxes on personal (non-company related) income at the higher marginal rates. The employee withholding by U.S.

17 7. Expatriate Structures (continued) What are the Best Practices Accept that it is costly. Complicated and requires discussion and negotiation with employee. Requires coordination with U.S./international tax preparer. Mexican and U.S. legal issues need to be cleared with U.S. and Mexican counsel. Goal Reduce surprises and have a productive employee. 17

Requires coordination with U.S./international tax preparer. Mexican and U.S. legal issues need to be cleared with U.

18 8. Protection from Ex-Employee Non-competition covenants generally not enforceable in Mexico consider three agreements: Mexican agreement with continued compensation. U.S. agreement with standard non-compete (not enforceable in Mexico). Non-poaching agreement with third party suppliers and customers. Trade secret and NDAs. Penalties for false declarations/publicity against the former employer. 18 ( )

agreement with standard non-compete (not enforceable in Mexico).

Mexico. Rodolfo Trampe, Jorge Díaz, José Palomar and Carlos López. Von Wobeser y Sierra, S.C.

Mexico. Rodolfo Trampe, Jorge Díaz, José Palomar and Carlos López. Von Wobeser y Sierra, S.C. Mexico Rodolfo Trampe, Jorge Díaz, José Palomar and Carlos López Market overview 1 What kinds of outsourcing take place in your jurisdiction? In Mexico, a subcontracting regime (understood as the regime