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Foreign investment is a major part of the Mexican economy. Over the past two decades, the Mexican government has constructed a regime that encourages corporations to take advantage of the […]

Foreign investment is a major part of the Mexican economy. Over the past two decades, the Mexican government has constructed a regime that encourages corporations to take advantage of the country’s proximity to major markets and low-wage workforce to develop export-based industries. The passage of the NAFTA trade deal in 1994 gave these export industries another boost; with favored nation status, Mexico became a source for massive FDI inflows from the US. Today, it continues to enjoy the fruits of its investment-friendly regime while also engaging in political debate about opening up new sectors to foreign investors.

FDI in Mexico is governed by the Foreign Investment Law, which was developed in compliance with the NAFTA agreement and most recently updated in 2015. Full ownership is permitted with the exception of a handful of industries deemed of particular strategic importance, including transport infrastructure operations, hydrocarbon extraction, and electric utilities. Though recent reforms have allowed for increased private activity in the energy sector, foreign firms can only obtain exploration or extraction tenders through government tender, and these contracts are in the form of multi-year lease agreements. Mexico allows foreigners to own real estate, but the government has designated areas within 100km of the border or 50km of a beach as a “restricted zone” in which direct residential ownership is only permitted through the creation of a trust registered with the Ministry of Foreign Affairs. These trusts can last a maximum of 50 years, though they can be renewed. Elsewhere in the country, real estate investment trusts (REITs) have become an increasingly popular way for foreigners to invest; regulations require that these REITS register with the government and have a Mexican trustee.

Free trade zones have become essential tools for export-heavy economies all over the world, but perhaps nowhere are they as important as Mexico. The maquiladora program has become critical to the country’s economy, especially in northern states. Maquiladoras are sites where raw components are assembled into goods ready to be exported, most frequently across the US border. Regulations require that foreign maquiladora operators must be based in a country that has a tax treaty with Mexico and have a physical corporate presence in Mexico. Under the current regime, maquiladoras that meet certain criteria are exempt from a VAT on their imported raw materials. More recently, the Mexican government also set up a special economic zone (SEZ) system that allows for the creation of geographic areas where investors can establish production or service facilities and enjoy ceratin incentives including reduced taxes and customs benefit. Exports produced in SEZs are exempt from VAT, and income taxes are levied on a sliding scale depending on the amount invested in the site.

Outside of special zones, the general corporate income tax rate is 30%. Firms are also required to pay a 16% VAT, a 30% capital gains tax, and social security contributions. Mexico has a number of tax treaties with other countries to prevent double taxation; most of these treaties follow OECD models for documentation. Individuals are taxed at progressive rates up to 35% and are also subject to a 10% tax on their capital gains. Both individuals and firms are subject to taxation on their worldwide income and must also navigate state and local taxes. Payroll and real estate taxes, for example, are levied on the municipal level, The Mexican government has several environmental impact taxes, with deductions available for firms that meet certain standard; hydrocarbon firms are charged an environmental impact fee on a sqkm basis, while several sectors can qualify for reduced payroll taxes by launching sustainability programs.