Conducting cross-border transactions and taking advantage of the resources in Mexico can present fruitful opportunities for U.S. businesses. There are some key considerations for U.S. businesses looking to explore working with companies in Mexico.
The first critical piece in setting up a successful cross-border transaction is having effective communication with one’s counterparts in Mexico. Being able to effectively communicate at the transaction level is key to understanding everyone’s expectations in the transaction. The laws in Mexico and the way business is conducted are different from in the U.S. When a U.S. business engages an attorney or other specialized professional, it’s important to take the time to ensure that the professional is well versed in the subtleties of cross-border trade with Mexico. It is very helpful if the professional is also a fluent Spanish speaker, as this will go a long way in streamlining the transaction with counterparts in Mexico. Translators can be used effectively, but there is always something lost in translation.
The second key consideration is due diligence. This is often a step that companies miss. It is critical to gather certain information in order to make informed business decisions. In the context of the produce industry, for example, many U.S. distributors do not search for registered security interests or liens against a grower before entering into a transaction or lending money to growers in Mexico. Because the grower is an entity or individual in Mexico, there are nuances regarding where to search for security interests. Due diligence may reveal the Mexican grower has multiple outstanding security interests registered against it, which may be a key consideration when deciding whether move forward with a transaction.
The next vital consideration is to make sure that a cross-border transaction is structured properly. This is where good counsel on both the U.S. and Mexico sides is crucial to making sure the transaction is structured in a way that is both economically beneficial and legally sound. For example, it is usually not beneficial for a U.S. entity to conduct business directly in Mexico because of the registration and legal reporting requirements in Mexico. When possible, a U.S. entity will want the transaction to occur and be governed by the laws of the U.S. so that the company can take advantage of remedies under U.S. law and have access to the U.S. court system. Structuring a transaction properly is also critical from a tax perspective. The tax laws related to foreign individuals with business interests and assets in the U.S. are very different from those for U.S. citizens, and there are many pitfalls that can have impactful tax consequences if a transaction is not structured properly.
The fourth consideration is tied very closely to structure and that is to make sure to take advantage of U.S. laws whenever possible. There are laws specific to certain industries that can benefit a U.S. client conducting cross-border trade with Mexico. For example, the IMMEX program has great tax and duty advantages for manufacturing in Mexico, but there are very specific requirements that need to be followed in order to qualify for those benefits. There are treaties, trade programs and many bodies of law that need to be followed and that create a competitive advantage for U.S. businesses if the transaction is documented and structured properly.
The final consideration is being aware of changes in the law in both countries. Changes in the law may require changes in structure to a transaction. Recently, there have been significant changes in the IMMEX program due to a reform of the laws in Mexico. Even the common practice of having independent contractors working in Mexico has changed due to a change in the laws in Mexico. If businesses and their counselors are not up to date on these changes, they risk losing the advantages the business has enjoyed from cross-border trade.
Daniel Arana is an attorney with Fennemore working in the firm’s business and finance law group. His practice focuses on agribusiness, international trade and tax law, international transactions, and mergers and acquisitions. The son of attorneys and fluent in Spanish, Daniel takes great pride in becoming an integral member of his clients’ teams, knowing their businesses, families and culture, and guiding them to success.
Did You Know: IMMEX, formally known as the IMMEX maquiladora program, is a program that enables foreign companies to operate in Mexico under a preferential, low-tax cost structure while still taking advantage of Mexico’s lower-cost labor.
