Baja Business Information
 


San Felipe, Baja, Mexico
State Tourism of Baja
BUSINESS INFORMATION

LEGAL MARGIN AND INCENTIVES FOR TOURIST INVESTMENTS IN BAJA CALIFORNIA

The Mexican Government has made diverse reforms to investments legislation including the passing of various economic areas to the private sector and it has turned the Mexican economy into one of the most open economies in the world.

Currently, investors from all over the world participate in the Mexican economy and they have a solid and well-articulated protection for their investments in Mexico.

The Mexican Legal System

Mexico is a federal democratic republic divided in to 31 states and one Federal District. Each state has its own Constitution based on the Federal Constitution, and it is free and sovereign to legislate in areas not included in the Federal Constitution.

The Federal Government and each one of the states and cities have three government branches: legal, executive and judicial.

It is different than other legal systems and opposite to the common law system. Laws are contained in codes, regulations and enactment, nonetheless the judicial interpretation of the law is limited to the parties involved in a particular case, bearing in mind as an option, judicial resolutions that are not contemplated in any code. Thus, it is up to the judge to apply adequate dispositions and to reason in a deductive manner, consulting the judicial precedence.

National Law for Foreign Investments

The Law for Foreign Investments allows people of any origin to participate in the formation of Mexican Commercial Groups dedicated to productive activities at up to 100% of the capital.

This law allows commercial groups that have been constituted according to Mexican legislation to directly obtain real estate property located within the "restricted zone", between the limits of 100 Km from the international border or less than 50 Km from the coast, if and when the property is to be used for productive activities - non residential - and it, is registered under the Foreign Affairs Secretariat.

In the same fashion, the Law stipulates that Mexican corporations/societies with foreign investors, as well as foreign free-lance workers and hired personnel can acquire indirectly real estate in restricted zones for residential purposes. For such a step to take place, a trusteeship must be made through a credit institution (banck) for a maximum period of 50 years that can be extended at the petitioner's request, with a previous authorization of the Foreign Affairs Secretariat.

Economic Promotion Law of the State of Baja California

Through the Economic Promotion Law of the State of Baja California, it is possible to support the establishment of new companies and the growth of those that already exist through the act of granting the following incentives:

Reduction of temporary exemption of taxes and rights.

Possibility to use personal property and real estate owned by the state or the city.

State participation in infrastructure related works that generate and help develop new investments.

Access to pre-investment and feasibility research studies.

The incentives are granted to companies that comply with the establishing requirements in areas previously defined as of a main priority, that develop exports or substitute imports, invest in technological development, job training or in goods that generate jobs.

Land Ownership

The Mexican Constitution of 1917 established the more extensive form of land use: The common land. These are federal land properties transferred in through grants to agricultural cooperative groups that used to maintain only the right to use the land, without being able to sell, alienate or transfer it.

With the purpose of increasing the economic activity of the common lands, in 1992 modifications to Article 27 of the Constitution were approved by which common land users can acquire direct property from the common lands for its later sale, alienation or change in its use.

This was a significant change that broadens the range of possibilities for the tourism industry in the country and in Baja California in particular, because now national or foreign investors can participate, with absolute reliability in the development of these traditionally untouchable lands, through its presence in a Mexican company.

Protection of Trademarks and Licenses

An element of great importance for the Mexican Government is promoting a technological innovations culture and, because of this, the protection of industrial property rights. The Mexican Industrial Property Institute (IMPI in Spanish) watches and protects the property rights of licenses and trademarks as well as other forms or industrial property in two contexts:

Inventions and innovations through the registration of licenses, utility models, industrial designs and industrial secrets.

The creation of distinctive signs such as: brands, labels and commercial names as the denominations of origin.

Environmental Legislation

There are federal, state and city laws oriented/addressed to the care and protection of the environment in Mexican territory to regulate the use of protected natural areas and endangered species, as well as to avoid pollution due to a bad use of industrial waste. These laws guarantee an environmental quality that has become an important factor as far as attracting tourism goes.

This is why, before beginning operations, companies must submit to the proper authorities an environmental impact study that guarantees the environmental care conditions of the project to obtain authorization to operate.

Law for Ecological Balance and Protection of the Environment of the State of Baja California

For the State Government of Baja California, protecting its natural resources and reasonably taking advantage of them is a priority. The Law for Ecological Balance and Protection of the Environment of the State of Baja California has the purpose to regulate the preservation, prevention, protection and restoration of ecological balance within the territory of the state. The institution in charge of applying and following this law is the General Ecology Office (Direccion Estatal de Ecologia) that operates under the supervision of the State Ecology Council, a group that gives standars and balance between society and the government, creating with the goal to enrich and broaden the alternatives for solution to the environmental problem that the State deals with.

The Ecology office has internal and external auditors who, among other duties, support investors and businessmen to formulate environmental management plans to obtain ecological permits or licenses to operate, as well as supervise industrial processes, a job that follows the proper functioning of anti-pollution equipment and all the information required by the Ecology Office, and indicating urgent corrective technical procedures that must be applied.

Mexican Corporate Figures

The General Law of Commercial Companies (Federal Law) grants diverse alternatives to organizations so that they can establish a company; each one varies in its legal and tax structure.

Concerning corporations with limited liability actions, the joint stock Company (S.A. in Spanish) is the legal figure more frequently used to establish companies with Variable Capitals (S.A. de C.V in Spanish). Recently the Limited Liability Company (S. de R.L. in Spanish) has been formed and it has become popular when it comes to establishing corporations controlled by a small number of stock holders, and it can also have a Variable Capital.

The Participation Company (A.P in Spanish) is another common way of making business in Mexico. An A.P. is an agreement in which one of many associates grant good or services to an "associated manager" that is responsible for the negotiations made with third parties, in exchange he/she will be able to participate in the profits derived from the commercial operations made by him/her. Mexico has yet to issue an Agreements or Technology Transfer Act.

The Articles of Incorporation and Statutes By-laws of the companies establish limitations for the execution, performance and causes for termination.

The legal mechanisms already mentioned are directed by the contractual provisions that will be determined in its jurisdictions, as well as in other Latin American countries. The Articles of Incorporation and Statutes By-laws establish limitations in the execution, functioning and causes for termination of the contracts. Any of the proceeding vehicles will operate under a general contract stipulations by the parties involved.

Foreign companies are legally acknowledged and can operate through Mexican branches. However, they must be approved by the National Foreign Investments Commission and by the Foreign Affairs Secretary. Also, later they must be registered in the Public Commerce Registry.

The companies that have foreigners participating in them only can acquire goods in the restricted areas though trusteeships.

Trusteeship

The trusteeship in made up by a fiduciary that, without any variation, must be a Mexican bank that will be the legal holder of the property; a trustee that is the one that contributes the resources to the trusteeship and another trustee that is in control of the administration and operation of the goods and properties and he/she can be the same trustee that handles the other aspects just mentioned.

The fiduciary will act in behalf of the trustee in transactions that involve the property maintained in trusteeship, nonetheless the trustee controls and makes decisions with regards to the property including the decision to transfer such property to another investor, national or foreign, to assign or dispose of the resources in the trusteeship according to his/her interests.

Labor Regulations

Labor regulations are established in spite of the labor agreement when there is an element of subordination (the employee follows the instructions given by his/her employer) and of economic dependence of the employee. In this context, commercial agents and promoters are considered employees when their activity related with the hiring company is a permanent one. The employees can be fired because of the reasons defined in labor contracts as well as by serious violations to the employer.

In cause of unjustified dismissal the employee has the following options:

  • Demand his/her reinstallation
  • Three month compensation fee
  • 20 days of salary per labored year
  • His/her vacations in proportion, annual bonuses and the sharing out of the company profit until the moment the dismissal was put in effect
  • Accumulated interest from the date of termination to the day of payment

Taxes

The corporate tax is a maximum of 34% and must be paid annually from taxable profits. The largest part of the income of the companies accumulates at the moment in which bill is issued or when the goods are delivered to the buyer if the bill is not yet issued. Deductible expenses are only those that directly refers to the operation and administration of the company. Allowed. The Federal Tax over assets is of 1.8%.

Employees who receive a salary pay a tax of up to 35%. Companies contribute to concepts such as social security and others that ascend to plus 35% of the payroll.

The Added Value Tax (what is equivalent to a Sales tax) is charged to all the goods, based on the selling, rent, import or export price of goods and services. Companies deduct the paid IVA (IVA in Spanish meaning Impuesto al Valor Agregado) from the IVA that has been transferred to the consumers, so only the difference is paid to the government.

Temporary Migration of Persons

There are different types of visas. The most commonly used is the Visitor Visa. If a foreign company sponsors the visa, the visitor will not be allowed to embark in paid activities in the country. However, if a Mexican company sponsors the visa a person can be employed in Mexico and engage in productive activities.

Both types of visas must be renewed each year.

Recently a new visa has been put into effect called "FM-N" that allows businessmen to

CEOs who are from countries in the Free Trade Agreement (Canada and the U.S.A) to remain in Mexico for up to 30 days to do business as long as they are not paid in Mexico.

Non Immigrant Right (DNI in Spanish)

The purpose of the non-immigrant right is to modernize the Mexican immigration mechanism and procedures to boost international tourism promotion. It has a charge of $170.00 pesos (around $16.00 dollars) or its equivalent in dollars for foreigners (non-immigrants) that visit Mexico. It applies to foreigners that enter Baja California through the northern border and travel more than 26.30 km or 16 miles except:

  • Those that travel by land along the Tijuana-Ensenada corridor for less than 72 hours.
  • Those that travel by land to San Felipe as long as their visit does not exceed 72 hours
  • Those that arrive by sea and that their visit does not exceed 72 hours
  • Mexicans that live abroad
  • Those that visit as students, are distinguished visitors as defined by Mexican migration law or those that request political asylum.

Decrees

The Mexican government has implemented different programs that boost exports and that have an application in the State of Baja California, the more important ones are the following:

  • Maquila regimen
  • Temporary Import Program to produce articles to Export (PITEX in Spanish)
  • Custom Accounts System
  • Import and Export Tax Return
  • Outline for Companies with a High Export rate (ALTEX in Spanish)

Both the Maquila Regimen and the Legal Import Program to Introduce Export Articles (PITEX) allow companies to import raw materials, parts, components, bottles, container packages, machinery, equipment, instruments, moulds and tools, without paying import taxes. At the same time, the outline for Custom Accounts and the Tax Return system for exporters, grant the exporter the possibility to recover the import tax costs covered because of raw materials, part or component that were incorporated in the exported products, and both these outlines are used in those cases in which the exporter does not have any of the two mentioned in the beginning.

The outline for Companies with a High Export Rate in a group of support mechanism that are granted to certain companies that develop exports for a minimum annual quantity or that they direct an important portion of their production to the external market.

Decrees for supporting imports from companies established in the border region

Companies established in the border region, such as Baja California, also have the possibility of importing in preferential conditions with regard to import taxes. These advantages are incorporated in the following two decrees:

  • Decree for companies dedicated to industry, construction, fishing, maintenance and repair workshops, that offer the benefit to import in a definitive manner equipment and input without paying import taxes.
  • Decree for companies dedicated to commerce, restaurants, hotels and certain services, offers the benefit of importing in a definitive manner merchandise and equipment with a maximum rate of 5% in import taxes.

International Treaties

Mexico has signed commercial treaties with different countries and it is in the process of initiating negotiations to open even more its commercial exchange with other regions of the world. Currently the following commercial agreements are in practice:

  • Economic Complement Agreement with Chile.
  • Free Trade Agreement with the United States and Canada.
  • Free Trade Agreement with Colombia and Venezuela.
  • Free Trade Agreement with Bolivia.
  • Free Trade Agreement with Costa Rica.

The result of having an open attitude with countries with which commercial agreements have been signed is that merchandise produced in Mexico will be able to participate in the markets of these countries without covering normal customs duties, because this way the right is obtained to have a presence in various markets at the same time without having to pay duty taxes.

The location of Baja California and the capacity to compete of the local industry, has made it possible to capitalize in a very special way the conditions of the North American Free Trade Agreement that disposes that:

  • The cancellation of custom and non-customs barriers that limited the flow of merchandise between Mexico and the United States.
  • The possibility of free transit within the United States beginning in 1997 and for the rest of the countries in the year 2000.
  • The maquiladora industry that is not a part of the North American block must incorporate more input per zone due to the new dispositions that, as far and international commerce goes, are enforced by NAFTA. To comply with the original set of rules means that the maquiladora industry, located out of the zone, has to be incorporated to the national economy; and this represents a great opportunity for national companies and foreign capital input vendors to be a part of this important industry.

Financial Support for Tourism on a Federal Level

In Mexico, the sources of credit and financing for companies are the Bank of Development (Banca de Desarrollo), the Commercial Bank (Banca comercial), the financial intermediary bankers and non-bankers, as well as the capital market through the Mexican Stock Exchange or the private allocation of paper.

The Bank of Development plays a key role when it comes to financial support, more so with regards to the attention given to small and medium sized companies.

FIDEC is Organism of the Bank of Mexico that traditionally has supported small businesses such as travel agencies and restaurants; it has developed an aggressive financing program for tourist transport and recently for remodeling hotels.

Nacional Financiera (National Finance) has reopened its second level support to tourism companies as a part of its services. Also, it has instrumented a program of warranties destined to the Commercial Bank to facilitate credit to small and medium sized companies that did not have access to financing because of a lack of collateral support.

The Foreign Commerce Mexican Bank, Bancomext in Spanish, has opened a larger support channel in a direct manner to tourism companies, handling more than 30% of financing deals as a first level bank. In 1998 it channeled more than 462 million dollars to the tourism industry, reason for which tourism was the third most supported system, next to the textile and the metal-mechanic sectors. The main support mechanism in the tourism branch was aimed at developing investment projects, labor capital, buying-selling hotel spaces and rights to use shared time residential complexes.

As a necessary complement to improve tourist destinations, the National Bank for Public Works and Services, Banobras in Spanish, has designed diverse programs to channel financial resources to cities with tourism activity, this way accelerating the improvement process as far as urban infrastructure goes.

Within its lines of action, the financial distribution and technical assistance for research and projects for tourist development programs stands out, strengthening city administrations and decentralized organisms that provide public services (drinking water, sewage treatment plants, housing, transportation, waste collection and treatment, among other); improvement of the city tourist infrastructure in historic quarters, ecological areas, convention and exhibit centers.

Promotion Instruments for the Tourist Development of the State of Baja California

The three levels of Government and the Private Sector have joint efforts to promote actions and attract more investments to the state, for example:

  • Special trusteeships for tourism promotion in every destination, aimed to promote the existing tourist offer. Such trusteeships receive resources for the hotel service charge, also, for each dollar that the Private Sector invests in promotion, the Federal and State Governments donate another. This way, the Private Sector receives the benefits obtained through promotion.
  • Due to the increase in the number of conventions and exhibits in the main cities, efforts and resources have been unified to perform feasibility studies to guide the construction of convention and multiple use centers for the city of Tijuana and the port of Ensenada. These studies will give promoters and investors a clearer idea of what this growing market demands.
  • Having a correctly organized growth is of vital importance for the productive sectors and the three levels of Government. This is why the Regional Programs for Urban, Tourist and Ecological Development have been created, to be practiced in the two main tourist corridors within the state: in the Pacific coast, in the San Felipe-Puertecitos, Sea of Cortes corridor. This way, the investor or developer has a legal guide of both areas and can avoid mishaps.
  • The state has an Investment Promotion Office that is a part of the State Tourism Secretary in charge of promoting, facilitating legal procedures and ensuring a well ordered growth in the sector.

All of this is of great value for tourist development, however, the biggest attraction is in the spirit of collaboration of the three levels of Government with private investors that have created a highly favorable climate to promote the development of tourist infrastructure and preserving the ecological balance of the region to development world-class tourist destinations.