In a previous post, I outlined the options for entity formation for companies establishing a presence in Mexico, noting that
Mexico Representative Offices “cannot enter into legal transactions in Mexico but can promote the products or services of the foreign company, or conduct activities such as market research.” Mexico Representative Offices can sign contracts on behalf of the parent company and receive funds from Mexican sources, but they cannot engage in profit-generating activities.
So what exactly is a Mexico Representative Office (oficina de representación) good for, and what sort of companies should consider forming one?
1. Foreign financial institutions
Banks and brokerage houses are keen on representative offices, which are mainly established to market credit and investment products to potential customers and provide services in Mexico to existing clients from the parent company. This type of representative office requires prior approval by the Mexican National Banking and Securities Commission (Comisión Nacional Bancaria y de Valores, or CNBV).
2. Foreign SMEs
Small and medium-sized enterprises (SMEs) often dip their toes into Mexican waters by establishing Mexico Representative Offices which can 1) conduct market research to determine which products or services to offer and how to adapt them to local markets, 2) develop analyses of competitors’ strengths and weaknesses, and 3) provide a base from which to forge local partnerships. As is true for financial institutions, SMEs often will form a Mexico Representative Office to provide support to the parent company’s Mexico operations.
3. Are Mexico Representative Offices the Right Choice?
Companies entering the Mexico market need to decide if they need a presence that will be able to generate profits. To merely promote products or services, conduct market research or service local partners/customers/clients, a Mexico Representative Office is often a good starting point.
But to engage in profit-generating transactions, an entity other than a representative office is needed. When deciding whether to establish a branch office or a subsidiary, there are all sorts of considerations to take into account, including capitalization, manpower and administrative structure. These Mexico type of entity decisions often revolve around complicated issues relating to regulatory requirements to establish a board of directors, hold owners’ meetings, pay taxes, report on the company’s foreign-invested capital, complying with employment and social security obligations.
The benefits of forming a company in Mexico can be significant and oftentimes a company is required to comply with Mexican law. Mexico has no capital controls for repatriation of profits, its judicial system is good at protecting property rights, and its initial capital requirements are minimal. The process of forming a business entity in Mexico typically takes 4-5 weeks.
Bottom Line: Mexico Representative Offices definitely make sense under some circumstances, but they can also be a time and money waste under other circumstances. In other words, YMMV.
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