Set forth below is a brief overview of the Mexican "Program for Maquiladora and Manufacturing Exporting Industry" (hereto referred as "IMMEX" and popularly known as the "maquiladora" or "maquila" industry).

The maquiladora industry represents the second most important source of Mexican exports (after the oil industry), and employs approximately two million workers. To this effect, the Mexican Government has registered more than 6,000 manufacturing maquiladora facilities. Among the most representative sectors using the maquiladora program are the automotive, aeronautical, pharmaceutical, textile, household appliances, and heavy machinery sectors.

In the late 90s, many companies using the maquila program left Mexico (or reduced their investments) and moved to China and other Asian countries in an effort to reduce their labor costs. However, a variety of factors, including rising labor costs in China, the global financial crisis, and a realization that other considerations such as higher transportation costs and the remoteness between the design and the manufacturing functions were resulting in higher overall manufacturing costs, which in turn prompted multinational companies to reconsider their maquila programs.

  1. Overview. As mentioned above, the maquila industryis one of the main sources of foreign currency in the country and an important form of doing business in Mexico. In addition, it is an important source for inputs and services for national retailers. The Maquila industry is governed under the Decree for the Development and Operation of Exportation Maquila Industry(the "Decree"), published in the Federal Official Gazette on November 1, 2006, as well as by other related tax and customs lawsand regulations. In general, there are several tax and custom benefits for maquila industry companies regarding the temporary importation of merchandise that is intended to be transformed, manufactured, or repaired, as well as for the rendering ofservices related to these activities.
  2. Authorization of a Maquila Program. The Decree establishes the basic requirements to obtain a program authorization from the Ministry of Economy (e.g., proof of existence of the company, an agreement signed witha foreign party, registration before the tax authorities, lease agreement or other indicia of right to occupy the facility, etc.). Moreover, in order to maintain in force a maquila program once authorized, the holder of the maquila authorization must show on an annual basis annual sales abroad exceeding US$500,000, or the issuance of export invoices exceeding 10 percent of the total sales. Moreover, in the petition for the authorization of a maquila program, the company must select one of the following business models:
    1. "Maquila Controlling Company." Under this model, the company is authorized to integrate the maquila operations of two or more legal entities in the same economic group. It also requires an authorization provided by the Tax Ministry to be a certified company for customs purposes under the Mexican Customs Law.
    2. "Industrial Maquila Company." Under this model, the company is authorized to manufacture or transform merchandise. This model is used for the general type of maquila manufacturing.
    3. "Service Maquila Company." Under this model, the company is authorized to render services regarding merchandise designed for exportation. The services that can be authorized are determined by the federal government pursuant to the Decree.
    4. "Shelter Maquila Company.” Under this model, a foreign company supplies technology and production material from abroad to a local maquila, rather than operating in Mexico itself.
    5. Third Party Authorization. Under this model, a certified company for customs purposes without facilities to conduct a manufacturing process hires a third party to perform such work.

There is also an additional model called a “sub-maquila,” which is a complementary industrial process that is directly related to the operation of a maquila program, although it is performed by a third person (i.e., different from the holder of the maquila program authorization). The selection of the best business model will enable the applicant company to optimize its benefits under the IMMEX program.

  1. Annual Report. Maquila companies must deliver an annual report to the Ministry of Economy and the Tax Administration Service regarding the foreign trade transactions that were carried out under their authorized program. If the report is not filed properly, the program will be suspended by the authorities.
  2. Term. A maquila program will be in force as long as the holder of the maquila authorization complies with all of the corresponding legal requirements. Only the Ministry of Economy is allowed to cancel a program (even if the tax authorities requested it), in the event there is a violation of the applicable rules.
  3. Customs Treatment. Maquila companies may import into Mexico those goods that are necessary for the manufacturing process (e.g., inputs and equipment) on a temporary basis, with the possibility to be exempt from duty, or to defer them, as long as the legal term described above for the temporary importation is not exceeded.

At the end of the term of the temporary importation, all merchandise should: (i) be re-exported in the same condition in which it was imported (e.g., tools and equipment are common examples of items imported under this regime), (ii) be returned as part of a finished product that results from the maquila process, or iii) be imported into Mexico on a definitive basis (and corresponding duty and other fees paid).

The general terms for the legal stay in Mexico of merchandise imported on a temporary basis are the following:

  1. Up to eighteen months for fuel, lubricants, other materials to be consumed in the process of production of merchandise for export, raw materials, parts or components,the entirety of which are intended to become part of merchandise for export, packaging, labeling,and brochures.
  2. Up to two years, for containers and house trailers.
  3. With respect to machinery and general equipment, for as long as the maquila program is in force .

In order to diminish the effect of any import duties, the Mexican government authorized Sectorial Programs (“Prosec”), which allow for either the exemption of taxes, or the obligation to pay it at an average rate of 4 percent or a maximum rate of 10 percent. Authorization from the Ministry of Economy is required.

In the event the merchandise or finished products are intended to remain in Mexico, it is necessary to change the import status from temporary to definitive and pay the applicable taxes and duties. Tax exemptions may be applied taking into account the type of product and its origin. Moreover, tax and customs benefits exist for waste products and from the maquila industrial process.

  1. Transfer of Merchandise. One of the biggest advantages of the maquila program is the possibility to avoid the applicable taxes and duties in accordance with the applicable legal provisions regarding the sale or the physical transfer of the merchandises to third parties. In this regard, any good imported under a temporary basis may be transferred to a third party that has a maquila program or is authorized as an automotive industry, either to finish the transformation, manufacture or repair process, or to return such merchandise, as long as they have an exportation petition under the name of the person who makes the transfer and an importation petition under the name of the person whoreceives them.
  2. Value Added Tax. Application of the VAT for maquila operations is as follows:
    1. Importations made into to the northern or southern border of Mexicoare taxed at 11percent. Nevertheless, if temporary importations are covered by a maquila program, the products will be exempt as long as the merchandise does not exceed the authorized term of stay in the country.
    2. Services. Those services rendered by a Mexican resident as maquila and sub-maquila operations on behalf of foreign parties and with advantages exclusively in another country are considered as exported services, and therefore the applicable rate for value added tax is 0 percent. In order to qualify for this treatment, specific rules must be complied with to show that the services are being exported and no advantage is being received by a Mexican party.
    3. Sale of temporarily imported merchandises. VAT will be exempted for sales of merchandise that were imported under a temporary basis between foreign parties, from foreign parties to a maquila company, and in the event of sales between two maquila companies. Equipment should always be imported temporarily by a maquila company.

Hence, a 0 percent VAT rate may be applied to sales of merchandise between: (i) foreign parties, (ii)twomaquila companies, or (iii) a foreign party and a maquila.

  1. Permanent Establishment. Since January 1, 2000, the Mexican Income Tax Law has provided that the legal and economic relationships held by foreign parties and maquila companies may be deemed as constituting a permanent establishment in Mexico. Under such circumstances, a permanent establishment would cause the maquila company to pay income tax in Mexico derived from its own activities, and the foreign party would have to pay such tax in Mexico due to the income imputable to the permanent establishment.

Notwithstanding the above authority, Article 2 of the Mexican Income Tax Law provides that no permanentestablishment will be deemed to have been established as long as the following requirements are met:

  1. The maquiladora must comply with transfer pricing rules,1
  2. The foreign party must be from a country with a double taxation treaty in force with Mexico,
  3. The raw materials must be owned by the foreign party,2
  4. A part of the assets used in the maquila operation must be owned by the foreign party; and
  5. The Mexican maquila must comply with the terms established in the Decree


  1. Some Advantages of the IMMEX program.Proper planning for a maquila operation can generate important tax and customs benefits. Among its possible benefits are:
    1. Importations. Regarding import duty, the same will be exempted or reduced significantly with the program. Moreover, no value added tax will be caused in case of temporary importations.
    2. Exportations.The exportation of the finished products by the maquila company does not trigger the payment of export duties. The VAT related to the exportation of the finished products will be 0 percent.Likewise, maquila services rendered to a foreign party will be deemed as exportation services and the 0 percent rate will be applicable.
    3. Profit Margin. A maquila services mechanism may be settled with the foreign principal, reducing the profit margin that shall be paid to the Mexican entity. The maquila operation can be structured on a cost plus basis where the profitability of the maquila is controlled pursuant to a services model.
    4. Transfer Pricing. The legal frameworkprovides maquila companies additional alternatives to comply with transfer pricing in comparison to non-maquila entities.
    5. Exemption of the Income Tax and Entrepreneurial Tax. Through the Executive Orders dated October 30, 2003 and November 5, 2007, the possibility of a partial exemption of the Income Tax and the Entrepreneurial Tax for maquila activities, is available if certain requirements are met.
  2. Recent Developments. In 2012, the Mexican Government introduced new foreign trade programs to speed upthe import/export processes. One of them is a certification for customs purposes issued by the Mexican Government in order to consider an importer or exporter as a trustworthy shipper. This program is also reciprocal with the U.S. trustworthy shipper program known as Customs Trade Partnership against Terrorism (“CTPAT”) such that a Mexican entity may apply for a CTPAT certification and, upon approval, U.S.Customs will deem the shipper to be trustworthy for US Customs purposes. The other recent program by the Mexican Government is the Single Window Program, by which import and export documents are provided to the Mexican Government electronically prior to the actual arrival of the goods at customsin order to speed up the customs clearance process.