FOREWORD

For many years, manufacturers located in the United States, as well as in other countries, have resorted to the manufacture or assembly of their products in countries such as Mexico, which offer attractive business incentives such as reduced labor costs and tax abatements. 

In this regard, Brauer y Duffy, as the Firm is called in Mexico, may provide assistance on how to establish a  “maquiladora” company (in-bond-processing plant) throughout Mexico.

After a thorough review with our client of its needs and expectations regarding its investment in Mexican production, the Firm will recommend the most suitable legal scheme under which the client may operate. Some of the proceedings that this Firm may handle with the Mexican authorities on your behalf are:

1) Incorporation of a maquiladora company, or purchase of an already existing one;

2) Procurement of governmental authorizations for said incorporation of purchase;

3) Filing with the Ministry of Commerce of documentation necessary to obtain an approved Maquila Program. This approved program will enable the maquiladora company to operate legally in Mexico. Other options, such as shelter programs, are readily available to the foreign investor.

Considering that a major incentive for the establishment of a maquiladora company in Mexico is the reduced labor cost, special attention must be given to areas such as the hiring and dismissing of personnel, adoption of non-confrontational labor policies, drafting of labor contract and, in general, conducting negotiations that will yield a more stable management-labor relationship.

Maquiladora companies receive preferential treatment from the Mexican Government in almost every respect. Whilst the necessary procedures are rather simple and devised for foreigners, there are some legal requirements imposed by the Mexican Government that call for specialized attention. In fact, in most aspects a Maquiladora company is just a regular stock corporation, with the difference that it is   engaged almost exclusively in processing and assembly operations for export purposes.

These requirements include filings with each of the authorities that regulate foreign investment, customs, taxes, social security, transportation, environmental protection and immigration. This Firm renders assistance in all of those areas, as well as in general corporate matters, thereby protecting our clients from fines, surcharges and lawsuits.

The purpose of this work is, then, to familiarize you with the basic legal concepts that must be taken into account when setting up and operating a maquiladora company.

MAQUILADORA COMPANIES

LEGAL INFORMATION

I.- WHAT DOES MAQUILA MEAN.- It seems the term “maquila” comes from Spain, where, many years ago, owners of mills converted into flour wheat and other grains produced by local growers. As consideration for the service, the mill owner sometimes kept a portion of the flour so produced. This process was called a “Maquila” and, with time, the full or partial processing of  products on behalf of others was know as maquila also.

II.- WHAT IS A MAQUILADORA.- A maquiladora company is a Mexican corporation operating under a special customs treatment, whereby it may temporarily import into Mexico machinery, equipment, replacement parts, raw materials, and, in general, everything needed to carry out its production activities.

It is legally possible to locate a Maquiladora anywhere throughout the United Mexican States, except in Mexico City and its suburbs. This restriction however, is not applicable to already existing companies that intend to perform maquila activities with their idle production capability.

In general terms, maquiladoras must export everything they produce. Nevertheless, maquiladoras may, under certain conditions, sell some of their products in the Mexican market, provided that permit for such sales is obtained from the Mexican authorities.

III.-  INCORPORATING A MAQUILADORA.- From the corporate law point of view,  a maquiladora is simply a commercial corporation that, as the holder of an approved Maquila Program, is entitled to certain tax, customs and other benefits. The requirements to form a Mexican corporation are discussed elsewhere in this site, and we can provide you with information upon request.

IV.- LOCATION OF A MAQUILADORA.- The United States-Mexico border area is of significant interest for U.S. and other manufacturers. Although is quite true that maquila companies are now spread out through Mexico, mainly because scarcity of labor and enticements by other cities and states make the location of manufacturing plants elsewhere a very viable proposition, the border area still plays a leading role.

V.- REQUIREMENTS TO QUALIFY AS A MAQUILADORA COMPANY.- In addition to the requirements to be attained and steps to be taken to incorporate any company in Mexico, maquiladora companies must apply for and obtain what is called a Maquila Program (“Programa de Maquila”). This program is a document containing general data of the maquiladora company, describing the manufacturing process, the characteristics of the products it shall manufacture, as well as a listing of the necessary equipment and raw materials to be temporarily imported into Mexico or bought in the Mexican market, stating the volume of labor to be used, as well as an exports program.

These programs are approved by the Ministry of Commerce and Industrial Development, and may be locally obtained, since said Ministry has offices in all major cities where maquiladoras are located. When an application is filed with said authorities, it is carefully analyzed, and when approved, they inform the Customs authorities, so that machinery, equipment and materials required to develop such program may be temporarily imported into Mexico.

It is important to point out that when a Maquila Program is approved, the applicant is granted a Maquiladora Registry Number, which shall be used in all governmental matters.

VI.- TEMPORARY IMPORTATION.- As it was mentioned above, the distinctive characteristic of any maquiladora company in Mexico is that it is capable of importing, on a temporary basis, machinery and equipment, replacement parts, raw materials, and in general, anything needed to carry out its activities and fulfill its production goals, without paying the otherwise applicable customs duties.

It should be noted that in order to carry out the importation procedures, a customs broker, or an attorney-in-fact for customs purposes, should handle such matters on behalf of the maquiladora company.

In general terms, there are three types of temporary importations related to maquiladora companies: a) initial importations, which are those authorized for the initiation of the Maquila Program; b) subsequent importations, which are those necessary to continue fulfilling the Maquila Program; and c) emergency importations, which are those imports needed at any given moment, which are not included in the Maquila Program.

Specifically, our customs regulations provide for the following temporary imports for a maquiladora company:

a). Raw and auxiliary materials required for the fulfillment of the manufacturing or assembly operations, pursuant to an approved Maquila Program and any additions or increases thereto.

b). Machinery, apparatuses, instruments, and equipment necessary to carry out manufacturing or assembly operations, together with those required for the quality control of its products.

c). Spare parts for the items referred to in the foregoing sub-section.

d). Tools and ancillary production and safety equipment, as well as environmental pollution control devices, telecommunication and computing equipment, work manuals and industrial blueprints; and

e). Containers, trailers, packaging material, tags and pamphlets.

VII.- IMMIGRATION MATTERS.- The Ministry of the Interior (Secretaria de Gobernación), is the Ministry in charge of immigration matters in Mexico, through the Instituto Nacional de Migración . Said authority may permit the entry into the country of the foreign administrative and technical personnel needed for the proper operation of maquiladora companies. These authorizations may be procured locally in most major cities.

In order to enable foreigners to work in maquiladora companies, they require the status of no inmigrante-visitante (working visa). This working visa, also known as an FM3, is valid for one year, renewable for the same time period up to four times.

FM3 visas may allow their holders multiple entries into Mexico without having to carry out the obtainment process every time. This very convenient, of course, and in border areas such permit allows US citizens to live in the US and work in Mexico.

VIII.- OTHER AUTHORIZATIONS.- It should be noted that in the event of certain specific activities intended to be performed by a maquiladora company, special authorizations may be needed, as in the case of industrial activities that pollute the air, water or soil, firearm manufacturing, and others.

IX.- ENVIRONMENTAL LAWS AND REGULATIONS.- Maquiladoras may import into Mexico materials required for their production processes, but everything these companies bring into Mexico must, in due time, be exported back to the country of origin. This includes the products themselves, of course, but also byproducts, waste, and all hazardous waste.

Since the re-export of non-hazardous waste could be a very expensive proposition maquiladora companies are allowed to destroy, donate or dispose of waste materials, but a permit must be obtained in such connection.

The bottom line is that maquiladoras may generally import into Mexico all those raw materials, hazardous or not, needed to carry out their production or assembly processes,  but all hazardous waste generated by hazardous materials or substances imported into Mexico must be re-exported.

There are only two cases when the importation of hazardous materials may be permitted,  which are for (i) recycling; and (ii) re-use.

Hazardous waste may be legally imported if said waste is subject to a recycling process by means of which it may be converted into useful material. Thus, maquiladora companies that recycle their hazardous waste may be exempted from re-exporting such materials, provided they comply with pertinent requirements.

FUTURE CHANGES

On November 13, 1998, the Ministry of Commerce published the terms under which the Maquila Program will operate through the year 2001 and thereafter, divided in two stages, the first from 1994 to 2000 and the second as of 2001.

Up until December 31, 2000, mechanisms for the free temporary import of inputs and machinery will remain as above described. Machinery imported temporarily may be maintained in Mexico as long as the Maquiladora has a valid Maquila Program.

As of the year 2001 temporary import mechanisms in effect in the NAFTA countries will be modified in order to equalize the tariff treatment that Mexico grants on non-North American goods and machinery for the production of goods destined for the North American market.

New rules apply for the temporary importation of inputs and components when they come from non-NAFTA countries and are bound to any NAFTA country. In this case an exemption will be applied for the lowest amount between the import tariff on these inputs and those to be paid for their import into the United States or Canada. Goods exempted from this practice are described in Appendix 2.4 or under number 6 of Attachment 300.B of NAFTA (Textile goods and women’s apparel) as well as operations similar to the maquila processing of textile goods and women’s apparel established by the United States and Canada.

Main objectives sought with this are to avoid:

(i) the extension of tariff preferences to countries other than NAFTA; and

(ii) double taxation.

NAFTA prohibits tax exemption on imports of machinery and equipment when it is a condition for exports. Therefore, Promotion Programs have been devised to create competitive conditions for the supply of inputs and machinery for the export industry, as well as to foster a greater integration of efficient productive chains.

The first two Programs were for the Electric and the Electronics Industries, and will be in effect as of November 1, 2000.

These programs contain a list of the goods which may be imported permanently under favorable conditions (exempt from payment of the ad valorem import tax or with a rate of 5%) when the goods are bound for these sectors.

FINAL COMMENT  

Mexico has signed free trade agreements with the United States and Canada, the European Union, Israel, several countries in Central and South America, and is negotiating others, Singapore and Japan amongst them. Its unique geographical location permits ready access to the largest markets in the world. A maquiladora company is  one of several production tools available in Mexico, but not the only one. We would welcome the opportunity of providing you more information on activities that may be carried out in Mexico, and their regulation.