Mexico has become one of the most competitive countries for investments at an international level, thanks to factors like the size and strength of its consumer market and predictable inflation patterns.
However, it is also an extremely complex jurisdiction in which to do business, laden with bureaucracy and face-to-face requirements. Success depends on effectively navigating such challenges.
Mexico, officially the United Mexican States, is the world's 10th most populous country and ranks 12th by nominal GDP.
It has established its position as the 2nd largest economy in Latin America and continues to grow at an impressive rate. In fact, it has emerged as one of the most dynamic and influential economies in the world and is predicted to become the 7th largest global economic power by 2050.
Mexico is also considered one of the world's most proactive countries for membership of international bodies and free trade agreements. Its most prominent memberships include the US-Mexico-Canada Agreement (USMCA), the Organisation for Economic Cooperation and Development (OECD), the World Trade Organisation (WTO), the TransPacific Partnership (TPP), the Free Trade Agreement between Mexico and the European Union (FTA EU-MX) and the International Monetary Fund (IMF).
Fast facts
- In 2023, Mexico had a GDP of US$1.81 trillion [Statista].
- Currency – Mexican Peso (Sign: $; Code: MXN).
- Language – Spanish is the official language and Native American languages are prominent throughout the country (Nahuatl, Maya, Mixteco, and Zapoteco).
- GDP per capita – US$13,804 in 2023 [Macrotrends.net].
- Population – 129.2 million [Worldometer, April 2024].
- Capital – Mexico City.
- Key sectors: manufacturing (automotive industry, food, electronics, oil and medical equipment and devices), energy, tourism, finance and banking sectors.
- Key cities: Mexico City, Guadalajara and Monterrey.
While Mexico is a dynamic market, it also ranked 4th in the world for the complexity of its business environment in TMF Group's Global Business Complexity Index 2023.
This high ranking is mainly due to the mandated processes in place, such as many face-to-face meeting requirements, that present challenges for international businesses with senior directors residing elsewhere.
Companies doing business in Mexico must therefore ensure they have a thorough understanding of the local economic landscape and its various rules and regulations as well as the country's business customs.
Business opportunities and benefits of doing business in Mexico
Mexico has become one of the most competitive countries for investments at an international level, thanks to factors like the size and strength of its consumer market, predictable inflation patterns and its strategic geographical location.
Some of the benefits to doing business in Mexico are the tax incentives. These include deductions ranging from 56%-89% in fixed assets investments and additional deductions on labour training expenses across 10 key sectors. There are also tax exemption benefits associated with 11 economic activities conducted in the Istmo de Tehuantepec region.
Thanks to its proximity to the US, robust manufacturing capabilities, skilled workforce, cost-efficiency, supply chain resilience and comprehensive trade agreements, Mexico is now leading the charge in new nearshoring investments – that is, the practice of establishing or moving outsourced business operations close to domestic markets.
Despite the advantages on offer, there are some complexities to navigate when moving your outsourced operations to Mexico. To highlight the potential risks, read our article covering what foreign companies need to know about Mexico's nearshoring resurgence.
Mexico offers a number of business-friendly cities that are attracting investors. Mexico City has a good infrastructure and a skilled talent pool to tap into. It is also home to the largest number of startup companies in the country, followed by Guadalajara and Monterrey.
When expanding into Mexico, it is crucial to understand the intricacies of the country's economic system and how to work with knowledgeable partners to navigate the cost of doing business in Mexico.
Business culture in Mexico
Work etiquette in Mexico is similar to that of many other Latin American countries, although the country's proximity to the US and strong trade between the two nations have also impacted the business culture.
Strong personal relationships and loyalty are key features of the work culture. While the business environment is still formal, it is slowly changing and the traditionally hierarchical structure is turning more towards a horizontal one.
Mexicans prefer face-to-face communication and like to do business with people they know well and trust. It is good practice to show eagerness and advisable to confirm the date and appointment several times in advance of any meeting to show diligence.
Challenges of doing business in Mexico
There are still many hurdles to overcome when doing business in Mexico. Local knowledge of the investment environment and detailed information about the legal, accounting and taxation frameworks are therefore crucial for overseas ventures and can help you bypass many of the risks.
A common challenge is getting connected to the power network. According to the World Bank, Mexico ranks 106th in the world for ease of getting electricity, which underlines the complex nature of the task.
Power connection is laden with bureaucracy and foreign companies must submit applications and obtain certificates and inspections from the Comisión Federal de Electricidad (CFE) before a contractor can carry out any work.
Registering property can also be a lengthy task, taking almost double the average time when compared to OECD countries. Dealing with the Public Registry of Commerce and Property can be particularly time consuming. In addition, obtaining a certificate of good standing with the water service and the zoning certificate for the property can also take a long time.
Whilst these procedures can be lengthy, some are becoming more digital. This means they can be followed up electronically rather than necessitating face-to-face contact.
Accounting and taxes in Mexico
Paying taxes is a laborious and complicated process in Mexico, with estimates suggesting it takes more than 240 hours of a company's time each year, despite the fact there are typically only six types of payments to be made.
For those wishing to start a business, the electronic accounting system required by the Mexican tax authority must be considered. It is important to have a system connected to the Secretaría de Hacienda y Crédito Público (SHCP), through the Servicio de Administración Tributaria (SAT), to comply with this obligation, which is mandatory for all Mexican contributors.
Taxes at a glance
- VAT: general rate is 16%; 0% for some services and goods (basic and some exports).
- Corporate Income Tax (CIT): 30% for companies and 35% for individuals.
- Customs duty: 20%.
From incorporation to dissolution, the SAT requires that all transactions, internal or with interested parties, be diligently recorded in the electronic accounting system. This procedure has been in effect since 2014 and must be observed from the perspective of its ultimate purpose: to trace all transactions, money and beneficiaries.
According to the tax legislation in Mexico, it is mandatory for vendors and customers to issue digital invoices to promote the tracking of taxpayers' transactions.
The country has now adopted International Financial Reporting Standards (IFRS), and the listed entities - other than financial institutions and insurance companies - who apply it. However, it is crucial for every foreign business entering Mexico to carefully analyse the regulatory and reporting differences, particularly between industries.
HR and payroll
Another fundamental driver of business complexity in Mexico is the in-depth and protective nature of Mexican labour law towards employees, which in turn is based on constitutionally granted rights. These include the right to access socially useful work, limited working hours and a good compensation.
There are two main pieces of labour legislation that cover HR and payroll matters in Mexico: the Federal Labour Law and the Social Security Law. These laws regulate the terms and conditions of employment contracts, covering areas such as wages, working hours, statutory holidays, paid vacation, labour unions, strikes and severance compensation.
Following the implementation of the USMCA trade agreement, there have been significant reforms of the labour laws.
Changes include new rules around outsourcing, gender equality and labour democracy – along with the consolidation of several workers' rights. The payroll cycle in Mexico is typically bi-weekly (or weekly for blue collar workers), with employees paid on the 15th and then the last day of each month.
Mandatory employee benefits in Mexico include vacation days (12 days for the employee's first year), vacation bonus (25% of the employee's salary for the vacation period), profit sharing, seniority bonus and year-end bonus (15 days of salary). As part of the government's ongoing efforts to maintain competitive working conditions, this year-end bonus - known as the Aguinaldo - is expected to increase to 30 days of salary in 2024.
It's also important to be aware that Mexico has different payroll-related rules and regulations in its Northern Border zone – a defined set of Mexican municipalities bordering the US. Here, the minimum wage is set at a significantly higher level and the requirements for 90% of the Mexican workforce do not apply.
Effective from January 2024, the daily minimum wage rate in the Free Trade Zone of the Northern Border increased to MXN$374.89, while the daily minimum wage rate in the rest of the country rose to MXN$248.93.
Regulations and legislation
Regulations and legislation in Mexico can often be unclear and open to interpretation.
For example, in 2022 Mexico introduced UBO requirements. When they were launched, there was a general lack of clarity around exactly what documentation was needed for businesses to incorporate. Notaries who approve businesses without the correct documentation are subject to hefty fines and sanctions, so they tend to take a more risk-averse approach to signing off the required documents. This means that organisations can sometimes find it difficult to incorporate in Mexico.
Currently, the Federal Labour Law requires a working week of 48 hours spread over six days with a day of rest. However, there is a Bill under consideration to constitutionally reduce working hours to 40 hours a week and grant employees two mandatory rest days per five working days a week.
If the Bill is passed, employers' costs would significantly increase with the need for additional employees, overtime payment and compensation for rest days worked. For these reasons, the reform has been met with resistance from businesses and the debate on its possible implications is fierce.
The Mexican government is also facing some controversy due to its position on renewable energy, taking a clear stance to block foreign investment into renewables in favour of supporting more traditional fossil fuel-based energy sources.
This is a polarising decision as the negative environmental impact is countered by the financial support it provides to the many Mexicans who are still working in fossil fuel industries.
Starting a business in Mexico
The process of incorporation in Mexico can be complex and time-consuming, mainly due to the time it takes to comply with the identification of the Beneficiary Controller and to open a bank account, which must be authorised by the SAT. Companies should also note that it is mandatory to pay taxes through the electronic system.
However, if you are fully aware of the local regulations and policies and plan around them, starting – or expanding – a business in Mexico can be somewhat simplified.
Doing business in Mexico requires an in-depth understanding of the country's economic system, and working with a partner that has local knowledge can help to smooth the way.
Download our definitive guide to doing business in Mexico.
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The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.