Why do business in Mexico?
Mexico may not be regarded as a business powerhouse, but a surprising number of opportunities can be found south of the US border. The Mexican market is comparable in size to western Europe, and Mexico has more free trade agreements than any other country.
Alongside Indonesia, Nigeria and Turkey, Mexico has been dubbed a ‘MINT country‘ – an expanding and emerging market, likely to provide significant rewards to entrepreneurial business minds. This, coupled with the second-largest economy in Latin America, makes Mexico an appealing location for any business looking to globalise.
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Tax rates 2020
How to set up payroll in Mexico
If you’re looking to set up a Mexican payroll, it will take around 12 weeks to have your business registered. You should be able to make your first hire almost immediately, though – certainly within 2 weeks.
Choose your business type (we will discuss these options in more detail later) and prepare the necessary documentation. The actions you need to undertake include:
- Registration with the Mexican Tax Administration Service. This will provide your business with a taxpayer registration number, an electronic signature and a certificate of digital stamp
- Obtaining a Confidential Electronic Identification Key (CIEC)
- Creating social security accounts for all new hires with the Mexican Social Security Institute, Retirement Insurance Fund and National Workers Housing Fund
- Registering to pay your payroll taxes
- Opening a local bank account
We’ll be blunt – payroll can be complicated in Mexico. Employees are paid bi-weekly and there are multiple social security considerations to take under advisement. With this in mind, it is advisable to consider bringing in an external payroll administration service to ensure your business remains legally compliant at all times.
Mexican employment law and HR considerations
Mexican employees are well cared for under the law of the country. You will need to pay an additional around 7.58% of an employee’s salary in social security. This includes 5% to the National Workers Housing Fund, a federal mortgage broker. The remaining 2.58% covers health insurance, pensions and social benefits. Employees in Mexico pay 1.65% of their salary in social security taxes, which are withheld from a salary upon release of payroll.
Mexican staff will be entitled to overtime pay at a rate of 150% if asked to work more than 11 hours in a day, or 50 hours in a week. If you wish an employee to work a Sunday or public holiday, you will need to pay double. You’ll also need to ensure your employees have at least one day off per week. Family time and religious holidays are extremely well protected in Mexico. This dedication to family life means that new mothers who are lactating are also entitled to two rest periods of 30 minutes per day in a private location so they can express.
Holiday allowance starts at 6 days and peaks at 14 days after 5 years (senior employees may be entitled to more holiday). All Mexican employees are entitled to an Aguinaldo – essentially a Christmas bonus. This is traditionally 4 weeks bonus pay released in December. Employees taking a holiday are also entitled to a Prima, or vacation premium. The minimum payment for a Prima is 25% of a daily rate of pay, multiplied by the length of the holiday.
As always, income tax in Mexico payable by employees varies depending on salary. The tax rates begin at 1.92% and peak at 35%. To be precise, income tax will be calculated as follows:
- Salary up to MXN 7,734.99 – 1.92%
- Salary between MXN 7,735 and MXN 65,651.07 – 6.4%
- Salary between MXN 65,651.08 and MXN 115,375.90 – 10.88%
- Salary between MXN 115,375.91 and MXN 134,119.41 – 16%
- Salary between MXN 134,119.42 and MXN 160,577.65 – 17.92%
- Salary between MXN 160,577.66 and MXN 323,862 – 21.36%
- Salary between MXN 323,862.01 and MXN 510,451 – 23.52%
- Salary between MXN 510,451.01 and MXN 974,535.03 – 30%
- Salary between MXN 974,535.04 and MXN 1,299,380.04 – 32%
- Salary between MXN 1,299,380.05 and MXN 3,898,140.12 – 34%
- Salary of MXN 3,898,140.13 or over – 35%
The average salary in Mexico varies wildly depending on the industry.
Setting up a subsidiary entity in Mexico
You will be welcome to open a branch of an existing business in Mexico, but this is not common practice. You’ll run into a lot of red tape, and the process can be quite lengthy. Subsidiary companies are much more popular.
The three main types of business in Mexico are:
- Stock Corporation, aka Sociedad Anónima de Capital Variable (SA)
- Limited Liability Company, aka Sociedad de Responsabilidad Limitada de Capital Variable (SRL)
- Simplified Shares Company, aka Sociedad por Acciones Simplificada (SAS)
Whichever business structure you decide to follow, corporate taxation in Mexico is charged at a flat rate of 30% on gross profits.
The SA is the most popular business model in Mexico. If you open an SA, your business value will be divided into shares. You can have as many shareholders as you like, which means that – theoretically – you can attract as much domestic or overseas investment as you want.
However, under Mexican law, an SA is responsible for the actions of its shareholders. A bad investment from one shareholder could bring your entire business to its knees. You’ll also need a minimum capital investment of MXN 50,000 (around £1,750 or $2,400), placed into a local Mexican bank to get started.
An SAS is a comparatively recent addition to the Mexican business landscape, designed primarily to attract overseas investment. This is the fastest and easiest company structure to set up, and as with an SAS, you can have unlimited shareholders. However, your annual trading profits will be limited to MXN 5 million (around £175,000 or $242,000). Once your business starts to earn more than this, you’ll need to ‘upgrade’ to the SA structure.
If you’re running an SME and are not looking for significant external investment, an SRL is the safest business structure. As with all Limited Liability Companies, the fortunes of the business are not tied to any individual. You will not be personally responsible for any financial or legal woes. This business type also has a lower minimum capital investment – MXN 3,000, which works out at around £100 or $145.
As with any nation, there are a handful of nuances that you will need to be familiar with before successfully trading in Mexico. Perhaps the most important is that payroll is run bi-weekly, as opposed to monthly – and the mandatory payments to INFONAVIT make social security payments a little more complicated. If this sounds like more administration than you are comfortable with, look into the possibility of outsourcing your payroll. The tax year also follows the calendar year.
You’ll also need to ensure that you have at least one senior hire acting as a representative in Mexico. While your business can be 100% foreign-owned, at least one director needs to be a resident. It’s up to you whether you make this staff member a shareholder. If you open a Sociedad Anónima de Capital Variable that will be necessary, though operating a Sociedad de Responsabilidad Limitada de Capital Variable negates the need to offer shares.
When it comes to doing business in Mexico, your potential trading partners will expect a personal relationship. You will likely be invited to their homes and introduced to their families ahead of sealing a deal and will be expected to return this favour. In Mexico, people like to do business with people they trust and like. Try to hablas Español – at least a little. Most senior executives in Mexico will speak English. Showing a willingness to learn the Spanish language will endear you to associates, though. It shows a willingness to embrace the local culture.
Do not show visible frustration if a counterpart is late for a meeting. Many Mexican executives also like to do business over long, leisurely lunch meetings. Expect to spend several hours making conversation (keep things light-hearted – avoid controversial topics), then cramming shop talk into the last half an hour. Mexicans are also a little more polite than you may be used to, so learn some of the subtleties of business language. “Let me think about that and get back to you” often means, “no thank you” – Mexicans just do not want to appear rude or dismissive.
Dress to impress, and avoid scheduling meetings during public holidays, especially those centred around religion. Many Mexicans pay strict adherence to Catholic celebrations and holidays, and very few associates will even consider a business discussion that cuts into treasured family time. However, Mexicans feel strongly about formality in other areas of business. Use titles (especially a professional title, like Doctora) and surnames. If you do not know somebody’s surname, a generic courtesy (such as Señor or Señorita) is preferred to a first name unless expressly invited to use this.
Setting up in Mexico FAQs
Expect to wait around 12 weeks for your business entity be ready to trade in Mexico. You should be able to make your first hire within 2 weeks of this conclusion.
A Sociedad Anónima de Capital Variable (SA) is the most popular business model in Mexico, as it boasts the greatest growth potential. There is no limit to the number of shareholders in an SA. This means that you can attract an infinite number of shareholders – and, by extension, an infinite number of investors.
Be aware that your business will be held accountable for the actions of these shareholders, though. If you’re running an SME, a Sociedad de Responsabilidad Limitada de Capital Variable (SRL) – the Mexican equivalent of a Limited Liability Company – offers greater protection.
There is no minimum statutory sick minimum sick leave in Mexico. An employee that requires time off due to illness must have their request ratified by the Mexican Social Security Institute. Employees can take up to 52 weeks off as sick leave. After this point, if the problem persists, they must file for disability payments.
The Institute of the National Housing Fund for Workers (Instituto del Fondo Nacional de la Vivienda para los Trabajadores, or frequently known simply as INFONAVIT) is a federal mortgage lender in Mexico.
Employers are legally mandated to contribute an additional 5% of an employee’s salary to INFONAVIT. INFONAVIT uses these funds to offer mortgages to employees. Mortgage repayments are then deducted from the employee’s salary directly by INFONAVIT.
Yes, your business must have at least one representative with boots on the ground in Mexico. Your business can be 100% foreign-owned, though. If you run a Limited Liability Company, this representative does not need to be a shareholder. A nominee can be appointed to this role if required.
Employers pay an additional 7.58% of an employee’s salary in social security payments. This includes 5% to INFONAVIT, in addition to an extra 2.58% to cover a federal pension and various insurances.
Employees pay 1.65% of their salary, in addition to their income tax. This contribution is withheld at payment and filed with the Mexican Institute of Social Security.
Most roles in Mexico have a standard probationary period of one month. This can rise to 3 months for senior or technical positions.
After factoring social security payments into the equation, prepare to pay between 1.1 and 1.5 times an employee’s salary for each hire you make in Mexico.
To open a Sociedad Anónima de Capital Variable (Stock Corporation), the most popular business structure in Mexico, you’ll need a minimum capital of MXN 50,000 (around £1,750 or $2,400).
A Sociedad de Responsabilidad Limitada de Capital Variable, or Limited Liability Company, the minimum capital required is much lower at MXN 3,000 (around £100 or $145).
Yes, you will need to open a business account with a local bank to trade in Mexico.
Standing working patterns in Mexico are 8am to 6pm, Monday to Friday. Many employees work later than this, the law dictates that Mexican employees cannot be asked to work more than 11 hours in a day or 50 hours per week without overtime.
Overtime in Mexico is paid at time-and-half once these limits are breached. If you ask your employees to work Sundays or public holidays, they are entitled to double pay. This will not endear you to employees, though – Mexicans value religion and family time.
As Mexican employees are so well protected, few businesses feel the need to offer supplementary benefits. You may wish to entice senior employees with additional paid vacation days, but that’s about it. Contact UnaTerra if you have ideas of supplementary benefits that you’d like to offer.
Employment contracts can be terminated without warning or notice in Mexico. However, you will need to make a generous severance payment – usually 3 months of salary – when terminating a contract, including making a role redundant.
The only exception to this is termination on the grounds of, “just cause.” The following grounds for dismissal are considered just cause for immediate termination without severance pay.
• Inability to perform a job (gross incompetence)
• Evidence of falsified qualifications and credentials
• Physical, verbal or sexual harassment against colleagues, suppliers or clients
• Wilful negligence that endangers the safety of colleagues
• Reporting for work under the influence of alcohol or narcotics
• Wilful disobedience without justifiable cause
• Damaging an employer by revealing private or reserved trade secrets and information
If you wish to terminate an employee on these grounds, notify a trade union and provide evidence of the wrongdoing. This will entitle you to end the contract without severance pay.
Mexico observes 8 public holidays each year. Employees are entitled to 6 personal holiday days once they have completed a year of service. This is increased by 2 more days after each additional year of service. This is capped at 14 days, after 5 years of service.
After this, the employee must offer another 5 years of service to gain an additional 2 holiday days. However, it is common for senior roles to be offered additional holiday days as part of their starting contract package.
You will be entitled to open a branch of an overseas business in Mexico if you have the permission of the National Commission of Foreign Investment and Secretariat of Foreign Affairs. This is not common practice, though. Most businesses opt to open a subsidiary company.
When setting up a Mexican payroll, undertake one of the following options.
Remote Payroll – paying your Mexican employees from another country. This will be a popular choice if you are opening a branch – your Mexican payroll can be added to your existing local duties
Local Payroll Administration – bringing in an external business to handle payments to your employees and filing your tax returns. This company will not get involved in checking the legal status of new hires, though
Fully Outsourced Payroll – have a local business in Mexico take care of everything, from legal compliance to paying employees and filing taxes. This is the most expensive option but involves no interaction from you as a business owner and protects your company from any oversights
Internal Payroll – The opposite of the above – handle everything yourself, from within Mexico. While this keeps costs down, it’s a lot of administration and you’ll need to ensure you understand all legal implications. As payroll in Mexico is complex, only attempt this if you are extremely confident in your knowledge base
An overseas hire on a long-term contract in Mexico will need a Permanent Resident Visa. This entitles the employee to live and work in Mexico. However, these are not granted to just anybody. Priority will be given to employees with existing familial or business links to Mexico, or those with particular skills and high salaries.
One alternative could be an application for a Temporary Resident Permit. Unlike a Tourist Visa, this entitles the holder to work in Mexico for the duration of their stay. A Temporary Resident Permit must be renewed annually for up to 4 years. After 4 years, the employee will have a much greater chance of obtaining a Permanent Resident Visa.