Key changes to Mexico's legal framework

An executive order was published in the Federal Official Gazette on August 11, 2014, amending various provisions of the Foreign Investment Law. The amendments came into force on August 12, 2014. The following are the most important aspects of these changes to be taken into consideration by foreign investors: a) The exploration and production of hydrocarbons, as well as the planning and control of the national electric grid and the transmission and distribution of electricity will remain strategic activities of the state, with the participation of the private sector. b) Several articles of the law were amended to enable:

  • The free participation of foreign investment in gasoline and liquefied petroleum gas marketing and the supply of fuel and lubricants for ships, aircraft and railway equipment;
  • The free participation of foreign investment in the use of vessels operating in inland and coastal waters, and in the high-seas that offer support services for the exploration and exploitation of hydrocarbons;
  • The free participation of foreign investment in the construction of pipelines for the transportation of oil and its derivatives, as well as in drilling oil and gas wells;
  • Basic petrochemical manufacturing is removed as a strategic activity of the state; and
  • From January 1, 2017, the Energy Regulatory Commission (Comisión Reguladora de Energía, CRE) will grant permits for the sale of gasoline and diesel to the public, and Petróleos Mexicanos (Pemex), its production companies, subsidiaries or its affiliates may not limit the supply of these products to only those who have franchise agreements with it.

New Hydracarbons Law

From January 1, 2019, the CRE will grant permits to private parties to import gasoline and diesel fuel. The Hydrocarbons Law entered into force on August 12, 2014. The most important aspects of the law are:

  • Subsurface hydrocarbons are the property of the nation and exploration and exploitation of petroleum and other hydrocarbons is a strategic activity to be carried out by the state through assigning geographic areas for this purpose by the Ministry of Energy (Secretaría de Energia, SENER) to state production enterprises or through contracts with such enterprises or private entities.
  • Pemex will be transformed into a state production enterprise, whose purpose will be the creation of economic value and an increase in national income. It will have budgetary, technical and managerial autonomy, and its organisation, administration and corporate structure will be in accordance with best international practices.
  • Pemex may, with the permission of SENER, change the assignment of areas to it arising from the “round zero” to contracts with private parties. If partnering with private parties is deemed appropriate, the National Hydrocarbons Commission (Comisión Nacional de Hidrocarburos, CNH) will hold a public tender for that purpose, subject to the guidelines issued by SENER and the Ministry of the Treasury.
  • Exploitation of petroleum and other hydrocarbons through contracts will be conducted under the rules for service, use or shared production, or licence contracts, or a combination thereof, through tenders conducted by the CNH in which Pemex, state production enterprises and private parties may participate.
  • In areas under contract where there is the possibility of finding cross-border reservoirs, Pemex will participate with at least 20% investment in the project.
  • In order to carry out the marketing of the hydrocarbons that the state obtains as a result of exploration and extraction contracts, the CNH may hire Pemex, another state production enterprise or a company, by public tender.
  • The rest of the activities in the value chain, such as refining, petrochemicals production and transportation, storage and distribution of petroleum, natural gas and hydrocarbons derivatives will no longer be considered strategic activities, therefore private party participation will be allowed, although they will require authorisation or a permit issued by SENER or the CRE, as applicable.
  • Petroleum refining and processing of natural gas will be subject to permits issued by SENER.
  • Transport, storage, distribution and sale to the public of liquefied petroleum gas will be subject to permits issued by the CRE.
  • Transport, storage, distribution, sale to the public, processing, compression, decompression, liquefaction and regasification of natural gas will be subject to permits issued by the CRE.
  • Transport, storage, distribution and sale to the public of petroleum will be subject to permits issued by the CRE.
  • The transport by pipeline and storage linked to petrochemical products will be subject to permits issued by the CRE.
  • The creation of the National Centre for Natural Gas Control is foreseen. This entity will be responsible for the operation of the National Pipeline Transportation and Integrated Storage System.
  • The respective contracts for exploration and production of natural gas in coal seams can be awarded directly to the holders of mining concessions.
  • Regarding the use and occupation of the surface of land in order to carry out the exploration and extraction of hydrocarbons, the owners of the land, affected goods or associated rights are entitled to be paid for damage caused and rent for the occupation and/or use of the same.
  • For projects that reach commercial extraction, the compensation due to the land owner must include a percentage of the revenue corresponding to the assignee or contractor of the project in question, which will be calculated once the payments to the Mexican Petroleum Fund are deducted. This is determined so that the portion of the proceeds to be distributed will be before and not after income tax.

The above percentage may not be less than 0.5% or more than 2% in the case of petroleum, and may not be less than 0.5% or greater than 3% in the case of non-associated natural gas.

Pension Funds

In addition to Mexican Federal Labour Law, other general laws exist that regulate labour relationships in Mexico, such as the Social Security and Workers’ Housing Fund laws, as well as the Employer Savings Fund Law. Employer obligations with the Mexican Institute of Social Security (Instituto Mexicano de Seguridad Social, IMSS) include registering employees with the IMSS within five days after hiring, and calculating and paying the dues owed by the employer. Employees are obligated to turn into the IMSS a copy of their financial statements, along with a tax opinion done by an accounting firm in accordance with IMSS requirements and which includes a list of employee benefits given by the employer.

Mandatory insurance required by the Social Security Law and granted by registering employees in IMSS consists of occupational hazards; illness and maternity; infirmity and life; retirement, advanced age retirement and old-age; and day-care centres and additional benefits. It is not mandatory to provide retirement or pension benefits outside of mandatory social security. This is because this retirement benefit is included in the benefits afforded by IMSS. Any additional benefit may be granted as agreed between the parties.

There are tax laws that grant certain tax concessions on pension programmes. The main tax advantage of a formally organised pension programme is the deductibility of company contributions and preferential tax treatment of pension payouts to the participants.

The most important requirements to be eligible for tax-preferred treatment of pension plans include:

  • The plan’s benefits must be offered to all employees (principle of generality). Pension plans may be offered to unionised or non-unionised employees exclusively and still be regarded as compliant with the principle of “generality” of coverage for as long as it is offered to all the employees of the selected group.

The same applies for employers with several unions.

  • The plan’s benefits must be complementary to the social security pension benefits. However, benefits may be advanced prior to retirement or termination of employment.
  • The financial resources to meet the benefits must be funded outside the sponsoring company under a trust (fideicomiso) devoted exclusively for this purpose and be managed by an insurer, a trust bank, an investment house or an official administrator of retirement funds.
  • The plan’s assets must be invested in securities approved by the National Banking and Securities Commission and at least 30% must be invested in federal government debt or in approved fixed-income securities.
  • The plan’s benefits must be financed in accordance with actuarial principles, and the tax authorities specify a company contribution limit of 12.5% of the employee’s net salary.

Foreign Investor Protection 

The Foreign Investment Law requires that the National Foreign Investment Commission approve any foreign investment of more than 49% in the following sectors: Activities solely carried out by the state:

  • Basic petrochemicals;
  • Electricity;
  • Generation of nuclear energy;
  • Radioactive minerals;
  • Telegraphs;
  • Radiotelegraphy;
  • Mail services;
  • Issuance of paper currency;
  • Production of coins; and
  • Control supervision and surveillance of seaports, airports and helipads.

Activities reserved exclusively to Mexicans or to Mexican companies, with a clause excluding foreign nationals. Any foreign national that invests in Mexican corporations must act as a Mexican in said investment and renounce their consular protections over that particular investment. Such activities include:

  • Domestic land transportation of passengers;
  • Tourism and freight; and
  • Development bank institutions.

Energy & Electricity

On December 12, 2013, the Mexican Congress approved amendments to the federal law that allows private investment in the oil and hydrocarbons industry, allowing any individual to act in these activities and thus ending the state’s monopoly in this sector with the following purposes:

  • Maximising oil revenues;
  • Carving out new technologies;
  • Developing clean, cheap and efficient energy;
  • Reducing the cost of electricity; and
  • Strengthening energy independence.

In the electricity sector, certain stages of the process are still reserved for the government but private individuals and companies are allowed to assist in the process. These activities will be granted to private individuals and companies through a contract method by means of public bids. It is envisioned that foreign investment will increase in the sector as a result of these changes.

Financial Reform

On January 10, 2014, the Financial Reform was published. Several statutes were amended and a new act to regulate financial institutions was issued. The most relevant aspects of the reform are:

  • Promulgation of a new act to regulate financial institutions, the purpose of which is to strengthen the corporate governance of holding companies;
  • Strengthening the National Financial Services Users Protection Commission;
  • Multiple-purpose financial institutions and general deposit warehouses;
  • Development banking system: the financial reform also aims to make the legal framework governing development banks more flexible;
  • Several provisions of the Community Savings and Loan Act and Cooperative Savings and Loan Associations Act are amended or repealed; and
  • The financial reform removes limits to foreign investment in financial institutions.

Insurance & Surety Companies Law

On April 4, 2013 the Federal Official Gazette published an executive order issuing the Insurance and Surety Companies Law. The Insurance and Surety Companies Law came into force on April 4, 2015 and repeals the Mutual Insurance and Insurance Companies Law and the Federal Surety Companies Law in their entirety. The purpose of this law is to govern the incorporation and operation of insurance, surety and mutual insurance companies, as well as their activities and transactions.

New Law On Telecoms & Broadcasting

On July 14, 2014, the Federal Official Gazette published the Federal Law of Telecommunications and Broadcasting, after the passage on Thursday, July 10, of the new law by the federal Congress. This reform in telecommunications, radio broadcasting and antitrust matters was proposed on March 12, 2013 by the federal government and the coordinators of several political parties. It is intended to strengthen the rights related to freedom of expression and information; to adopt measures in order to encourage competition in free and pay television, radio, mobile and fixed telephony, data and telecommunications services in general; to ensure effective competition in all sectors; and to create conditions to increase substantially the telecommunication infrastructure and the obligation to make its use more efficient, which has a direct impact on the lowering of prices and increase of service quality.

Moreover, this reform also includes the state’s obligation to ensure access to information and communication technologies, as well as broadcasting and telecommunications services, including broadband and internet.

The law also creates the Federal Institute for Telecommunications (Instituto Federal de Telecomunicaciones, IFT) as an independent constitutional body established for the efficient development of broadcasting and telecommunications, whose duties shall be the regulation, promotion and supervision of the use, development and exploitation of radio spectrum, networks and the provision of broadcasting and telecommunication services, as well as access to active and passive infrastructure, and other essential inputs. The IFT is entitled to grant, revoke and authorise concessions and act as the authority in antitrust matters regarding the broadcasting and telecommunications sectors.

New Federal Antitrust Law

This law was published on May 23, 2014 in the Federal Official Gazette, to enter into force on July 7, 2014. The law arises from the June 2013 amendments to Article 28 of the Mexican Constitution that had, as their specific purpose, to create both the Federal Antitrust Commission (Comisión Federal de Competencia Económica, COFECE) and the IFT as constitutionally autonomous agencies independent from the executive branch, and to set their basic organisation and operating principles.

As a result, most of the changes in the new law specifically deal with COFECE’s organisation, powers and composition. With regard to its substantive or underlying aspects, the new law essentially continues the framework of the repealed law concerning the analysis and management of monopolistic practices, with the addition of new concepts such as barriers to competition and access to essential raw materials.

The new law also incorporates innovative procedures, including those used to analyse and regulate barriers to competition and access to essential raw materials, and amends the rules on processing the issuance of opinions and investigations.

In this latter case, this is with the specific intention of conforming to the principle of impartiality in decision-making as set forth in Article 28 of the Constitution. Finally, several aspects formerly in effect at the regulatory level are raised to the statutory level.

Identifying Illegaly Funded Transactions

undefined On August 16, 2013, the Federal Official Gazette published the Regulations to the Federal Act to Prevent and Identify Illegally-Funded Transactions. The purpose of this law is to protect the financial system and the economy of the country by providing means and procedures to detect and prevent activities or transactions involving illegally-obtained funds. Through this law, parties with contractual bonds are well protected in obtaining certain information about their counterparty that is required by the law.

Tax Reform

After obtaining the opinion of the Commission of Finance and Public Credit, in October 2013, Congress approved the economic package proposed by President Enrique Peña Nieto on September 8. This package includes substantial amendments to various tax laws including the repeal of the tax deposits in cash and the single-rate business tax, as well as new provisions regarding value-added tax, special tax on production and services, federal fee law, income tax, etc.

Contracts

The government has initiated reforms that seek to boost technological use in certain contracts that need publishing. In June 2014, the Commercial Code and the General Corporations Law were amended, implementing an electronic system controlled by the Ministry of Economy to publicise all acts required to be published on the Federal Official Gazette. This system will be operational in June 2015.

Contractual subjects are regulated by the principle of freedom of contract. Parties must agree the terms and conditions in which they intend to engage. The parties can agree upon resources in case any of them fails to meet its contractual obligations. These resources may be a contractual penalty established within the agreement or the submission to arbitration, which is a more effective and faster means of dispute resolution, although it may involve higher costs for the parties.

Finally, in Mexico the main difficulties in contractual matters arise from the notary public system. Certain acts require specific documents in order to prove the identity in a contract or a public instrument, which in some cases may slow down contractual operations.

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The Report: Mexico 2015

Legal Framework chapter from The Report: Mexico 2015

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