By Juan Najera
Foreword
Workforce mobility is not a new trend akin to today’s “globalization”. It dates back to ancient times, as in the Greek and Roman ages, continued during the expansion of the Ottoman empire, and throughout the 3 subsequent periods of globalization explained by Friedman[1]: Globalization 1 -of countries- (1492–1800), Globalization 2 -of companies- (1800–2000), and Globalization 3 -of individuals- (2000–present).
Globalization is not only an economic phenomenon. It is also a social and legal phenomenon. In today’s increasingly competitive economies, a two-way exchange of “mind workers” and “production workers” occurs[2]. The scope of this work is only to describe in general terms the various legal implications of skilled professional employees sent by their employers to their Mexican subsidiaries or business partners or when employers located anywhere in the world, not finding the skill in the Mexican market could effectively turn to recruitment on a global scale, such as a UK based company that may hire a Costa Rican executive to head its new Mexican subsidiary (“corporate expats”), and not other types of expatriates, as “pensioner expats” or “migrant workers”[3].
There are several advantages and disadvantages of using expatriate employees to staff international company’s subsidiaries. Advantages include permitting closer control and coordination of international subsidiaries and providing a broader global perspective. Disadvantages include high transfer costs, the possibility of encountering government restrictions in the country of destination, and possibly creating a problem of adaptability to foreign environments[4].
Overseeing, managing, or supporting domestic and international employee transfer presents the employer with great challenges for which an international company should have experienced staff or adequate consultants and follow proper procedures to mitigate the cost, the associated risks and to secure compliance in all involved jurisdictions (origin and destination, and even third countries).
There are two main types of “expats”, i) those on time limited “secondment agreements”, “expat contracts” or “assignments”, usually living in housing provided by the employer, with most other expenses such as children's education also paid by the employer while they are still maintaining a home in their country of origin. At the expiration of their assignment these expats either move on to another assignment, or are given a local contract without expat subsidies; and ii) those on "local" contracts who are treated and paid like other locals (but that may still receive some of the benefits described below to compensate them for the costs arising from relocation or local cost-of-living).
Overview of the Mexican legal system
The Mexican Legal System is inspired by the Greek and Roman traditions and by the French civil law system. Its main foundations are the Federal Constitution and the Civil Codes system which regulate, among others, human and civil rights, legal capacity of natural persons, domicile, marriage/divorce, minors and incapacitated persons (custody, guardianship, adoptions, etc.), estates, and others, as well as civil contracts such as rental/lease agreements, purchase agreements, donations, abandoned property, etc. The Mexican legal system is more comparable with other legal systems throughout Latin America and continental Europe than with the U.S. legal system. It is important to mention that Mexican law (with some exceptions for international or tax laws) is based on a “short arm” statute, which renders it valid and enforceable only within the Mexican territory.
Non-Mexican nationals are entitled to all rights and privileges under the Mexican legal system, except for directly owning real estate properties located within a strip of 100 kilometers (62.50 miles) from the international border lines (U.S. in the North and Guatemala and Belize in the South) and 50 kilometers (31.25 miles) from coast lines (Pacific, Sea of Cortez, Gulf of Mexico and the Caribbean), which cannot be directly owned by foreign nationals, except through a real estate trust, or owning majority business interests in regulated activities (oil, transportation, telecommunications, etc.) or engaging in political activities. As a separate note, we strongly advise against use empty Mexican corporations, figureheads or “trusted friends” to acquire real estate.
Personal status (i.e. minor, married, single, divorced, under guardianship or custody, etc.) acquired in a foreign jurisdiction is normally recognized in Mexico, unless it is against Mexican law. Commonly the most beneficial status is recognized for any person within the Mexican territory.
Labor matters such as individual employment contracts or collective bargaining, labor outsourcing, termination, salary and benefits, profit sharing, accident compensation, labor unions or strikes, are regulated at federal level by the “Ley Federal del Trabajo” (Federal Labor Law or “LFT”). The competent authorities are the federal Ministry of Work (Secretaría del Trabajo y Previsión Social or “STPS”), through its various agencies, such as the Federal Work Inspection, the Federal Labor Board (Junta Federal de Conciliación y Arbitraje or “JFCA”, a labor tribunal competent to adjudicate disputes between employees and employers which business activities are regulated at federal level, such as transportation, banking, oil, etc.). There are also Local Labor Boards (Juntas Locales de Conciliación y Arbitraje or “JLCA”, which are labor tribunals in each state jurisdiction competent to adjudicate disputes between employees and employers which business activities are not regulated at federal level).
Social security, housing, and retirement savings are all regulated by federal law and enforced by federal authorities. It is important to mention that recently enacted amendments to the Social Security law impose strict reporting requirements (and penalties) upon labor outsourcing companies and their clients, which make it easier for the authorities to monitor compliance by primary and secondary employers. There are also Social Security or Pension Transfer Treaties signed by Mexico with other countries, which are promoted by the International Labour Organization[5], an agency of the United Nations.
Visas, resident aliens and immigration matters are regulated at federal level by the brand new Migration Law[6] (Ley de Migración). The competent authorities are the National Migration Institute (Instituto Nacional de Migración or “INM”) and the Mexican Consulates in more than 130 countries.
Mexico is a “global income” jurisdiction for Income Tax purposes, so when a foreign national becomes a resident of Mexico (through an authorization granted by the INM), he or she must get a Mexican Tax Id number (”RFC” or Registro Federal de Contribuyentes) to declare and pay Income Tax in Mexico over his/her total worldwide income. Double taxation effects can be then mitigated or offset by claiming benefits under current Double Taxation Treaties -DTTs-[7] between Mexico and the country of tax residency or citizenship of the expat. The tax system is administered by the Internal Revenue Service of Mexico (Servicio de Administración Tributaria, or “SAT”[8]) and structured around a Federal Tax Code (Código Fiscal de la Federación or “CFF”). Income Tax is regulated only at federal level through the Ley del Impuesto Sobre la Renta or “LISR”. There is no local (state) income taxation. There is, however, a local payroll tax imposed in the majority of state jurisdictions (Impuesto Sobre Nóminas or “ISN” of between 1.5 and 3.5% over the payroll amount). The Income Tax rates are very competitive and currently capped at 30% over the taxable income. One important advantage is that gifts among family members (vertical) are not taxed at all. Inheritances are not taxed at all either, as there is no Estate Tax anywhere in Mexico.
Please keep in mind that Mexico has a Value Added Tax (“IVA”) imposed on virtually all sales at a rate of 16%.
Particular legal issues regarding Expatriates
Key labor issues
The LFT is a public interest law, which is very protective of workers or employees irrespective of their national origin or residency status in Mexico and applies even if there are any contradictory provisions in the secondment, relocation or assignment agreement between the Company and the expat employee.
Under the LFT system, a labor contract is deemed to exist whenever a person renders his or her personal services to any other person[9], business or employer (including foreign embassies, consulates or offices of international organizations), even if an intermediary is used under an “independent contractor” or “labor outsourcing” agreement and regardless of whether the employee goes to work regularly or not.
Absent a written agreement, or if the current written agreement does not include a specific provision required by law, or its provisions are against the law, then the labor relation is governed by the LFT.
Total salary in Mexico must include payments for the following: i) 1 or 2 resting days per week; ii) Christmas bonus of 15 days each year (or fraction thereof); iii) annual vacations + a 25% vacation premium; iv) employee profit sharing. Salary of internationally assigned personnel customarily consists of standard salary and monetary benefits such as cost of living and/or hardship allowances supported by non-monetary incentives i.e. cost of living allowance, tax equalization, mobility premium, hardship allowance, housing, education and other benefits.
Employment may be terminated for cause, provided that the employer has sufficient proof to support the cause of termination. Wrongful dismissals can be costly, as the wrongfully dismissed employee may be adjudicated with a mandatory severance payment of 3 months + 20 days of salary per each year of service, plus accrued unpaid salary while the lawsuit proceeds[10], among others.
It is important to mention that, regardless of what the “secondment agreements”, “expat contracts” or “assignment agreements” might establish, a labour relation is created between the expat employee and the Mexican employer and give said employee various rights.
Key immigration issues
It is important to mention that any foreigner who enters Mexican territory must follow a procedure to obtain the adequate visa or migration status to be able to be employed and to perform the duties for which he or she was engaged. Failure to comply with Migration Law could result in fines, expiration of rights, administrative sanctions or even prison or deportation.
The employer is made liable by the Mexican government for all the repatriation expenses of the expat.
In many cases the expat is entitled to import duty free a full set of used furniture and household goods[11].
Key tax issues
As soon as the expat becomes a resident of Mexico or establishes his or her residence in Mexico (animus residendi), he/she is deemed to be a resident of Mexico. Any and all earned income is then taxed under Title IV of the Income Tax Law and on global basis.
If a foreign employee is assigned to work in Mexico for a time period of less than 180 days or does not become a permanent resident, a tax withholding must be made on all sources of local income. These tax withholdings may not entitle the foreign employee to claim benefits under a DTT.
Because residence is defined so broadly, most treaties recognize that a person could meet the definition of residence in more than one jurisdiction (i.e., "dual residence") and provide a “tie breaker” clause[12]. Such clauses typically have a hierarchy of three to five tests for resolving multiple residencies, typically including permanent abode as a major factor. Tax residency rarely impacts citizenship or permanent resident status, though certain residency statuses under a country's immigration law may influence tax residency[13].
It is important to mention that when there is a flux of money between two or more related companies, most tax systems, including Mexico’s consider these as related party transactions which give rise to “Transfer Pricing” issues. Also, when key employees are assigned to foreign subsidiary or affiliate company, especially to start new facilities, some tax authorities may consider it as a transfer of intangibles, for the experience and knowledge of the expatriate. In this case, it is deemed that the company receiving the employee should pay a royalty fee, at fair market price.
Key social security issues
Affiliation of employers and enrollment of all permanent or temporary employees is not optional. Lack of compliance may carry stiff fines and penalties.
There are useful ways to eliminate or minimize double taxation on Social Security or Pensions by requesting the issuance of coverage or transfer certificates under a current bilateral Social Security or Pension Transfer Treaty.
Please keep in mind that Mexican law expressly prohibits the procurement of insurance coverage from foreign insurance companies not licensed in Mexico and punishes this as a federal crime. Life or medical insurance may be procured locally to supplement social security coverage.
Recommendations upon the arrival of the expat employee
· Execute a well-written labour agreement.
· Get the person to enroll with the RFC and get his or her electronic signature (“FIEL”).
· Enroll the employee and his or her family members with the SAR, IMSS and INFONAVIT (and keep the records current).
· Make sure that the proper documents are filed in the country of origin to reflect the change or termination of tax residency.
Recommendations prior to the departure of the expat employee
· Execute a well-written labour termination and release agreement.
· File a change of taxpayer’s status notice (“suspension de actividades”) with the SAT.
· Get a “certification of tax residency” of the expat.
· File the termination notices (“baja”) of the employee and his or her family members with the SAR, IMSS and INFONAVIT and get any benefit certificates as needed.
· Get a notarized power of attorney to address tax issues that may arise after the expat’s departure.
A final word
By knowing what is required for good management of expat employees, you will make sure that your company is able to better serve its expat staff through various important issues such as international taxation, immigration, labor and social security. In addition, accounting planning will let you legally make tax deductible all benefits paid or spent on behalf of the employee, as these allowances could easily double the annual employee costs and may also cause in unplanned or unexpected costs, such as double or even triple taxation at income tax, social security or pension levels, as well as to prevent any complications for your company and your expat employees, including having to pay late interest or fines, while maintaining current all social security and pension benefits current in the country of origin and securing international compliance of all related obligations.
Workforce mobility is not a new trend akin to today’s “globalization”. It dates back to ancient times, as in the Greek and Roman ages, continued during the expansion of the Ottoman empire, and throughout the 3 subsequent periods of globalization explained by Friedman[1]: Globalization 1 -of countries- (1492–1800), Globalization 2 -of companies- (1800–2000), and Globalization 3 -of individuals- (2000–present).
Globalization is not only an economic phenomenon. It is also a social and legal phenomenon. In today’s increasingly competitive economies, a two-way exchange of “mind workers” and “production workers” occurs[2]. The scope of this work is only to describe in general terms the various legal implications of skilled professional employees sent by their employers to their Mexican subsidiaries or business partners or when employers located anywhere in the world, not finding the skill in the Mexican market could effectively turn to recruitment on a global scale, such as a UK based company that may hire a Costa Rican executive to head its new Mexican subsidiary (“corporate expats”), and not other types of expatriates, as “pensioner expats” or “migrant workers”[3].
There are several advantages and disadvantages of using expatriate employees to staff international company’s subsidiaries. Advantages include permitting closer control and coordination of international subsidiaries and providing a broader global perspective. Disadvantages include high transfer costs, the possibility of encountering government restrictions in the country of destination, and possibly creating a problem of adaptability to foreign environments[4].
Overseeing, managing, or supporting domestic and international employee transfer presents the employer with great challenges for which an international company should have experienced staff or adequate consultants and follow proper procedures to mitigate the cost, the associated risks and to secure compliance in all involved jurisdictions (origin and destination, and even third countries).
There are two main types of “expats”, i) those on time limited “secondment agreements”, “expat contracts” or “assignments”, usually living in housing provided by the employer, with most other expenses such as children's education also paid by the employer while they are still maintaining a home in their country of origin. At the expiration of their assignment these expats either move on to another assignment, or are given a local contract without expat subsidies; and ii) those on "local" contracts who are treated and paid like other locals (but that may still receive some of the benefits described below to compensate them for the costs arising from relocation or local cost-of-living).
Overview of the Mexican legal system
The Mexican Legal System is inspired by the Greek and Roman traditions and by the French civil law system. Its main foundations are the Federal Constitution and the Civil Codes system which regulate, among others, human and civil rights, legal capacity of natural persons, domicile, marriage/divorce, minors and incapacitated persons (custody, guardianship, adoptions, etc.), estates, and others, as well as civil contracts such as rental/lease agreements, purchase agreements, donations, abandoned property, etc. The Mexican legal system is more comparable with other legal systems throughout Latin America and continental Europe than with the U.S. legal system. It is important to mention that Mexican law (with some exceptions for international or tax laws) is based on a “short arm” statute, which renders it valid and enforceable only within the Mexican territory.
Non-Mexican nationals are entitled to all rights and privileges under the Mexican legal system, except for directly owning real estate properties located within a strip of 100 kilometers (62.50 miles) from the international border lines (U.S. in the North and Guatemala and Belize in the South) and 50 kilometers (31.25 miles) from coast lines (Pacific, Sea of Cortez, Gulf of Mexico and the Caribbean), which cannot be directly owned by foreign nationals, except through a real estate trust, or owning majority business interests in regulated activities (oil, transportation, telecommunications, etc.) or engaging in political activities. As a separate note, we strongly advise against use empty Mexican corporations, figureheads or “trusted friends” to acquire real estate.
Personal status (i.e. minor, married, single, divorced, under guardianship or custody, etc.) acquired in a foreign jurisdiction is normally recognized in Mexico, unless it is against Mexican law. Commonly the most beneficial status is recognized for any person within the Mexican territory.
Labor matters such as individual employment contracts or collective bargaining, labor outsourcing, termination, salary and benefits, profit sharing, accident compensation, labor unions or strikes, are regulated at federal level by the “Ley Federal del Trabajo” (Federal Labor Law or “LFT”). The competent authorities are the federal Ministry of Work (Secretaría del Trabajo y Previsión Social or “STPS”), through its various agencies, such as the Federal Work Inspection, the Federal Labor Board (Junta Federal de Conciliación y Arbitraje or “JFCA”, a labor tribunal competent to adjudicate disputes between employees and employers which business activities are regulated at federal level, such as transportation, banking, oil, etc.). There are also Local Labor Boards (Juntas Locales de Conciliación y Arbitraje or “JLCA”, which are labor tribunals in each state jurisdiction competent to adjudicate disputes between employees and employers which business activities are not regulated at federal level).
Social security, housing, and retirement savings are all regulated by federal law and enforced by federal authorities. It is important to mention that recently enacted amendments to the Social Security law impose strict reporting requirements (and penalties) upon labor outsourcing companies and their clients, which make it easier for the authorities to monitor compliance by primary and secondary employers. There are also Social Security or Pension Transfer Treaties signed by Mexico with other countries, which are promoted by the International Labour Organization[5], an agency of the United Nations.
Visas, resident aliens and immigration matters are regulated at federal level by the brand new Migration Law[6] (Ley de Migración). The competent authorities are the National Migration Institute (Instituto Nacional de Migración or “INM”) and the Mexican Consulates in more than 130 countries.
Mexico is a “global income” jurisdiction for Income Tax purposes, so when a foreign national becomes a resident of Mexico (through an authorization granted by the INM), he or she must get a Mexican Tax Id number (”RFC” or Registro Federal de Contribuyentes) to declare and pay Income Tax in Mexico over his/her total worldwide income. Double taxation effects can be then mitigated or offset by claiming benefits under current Double Taxation Treaties -DTTs-[7] between Mexico and the country of tax residency or citizenship of the expat. The tax system is administered by the Internal Revenue Service of Mexico (Servicio de Administración Tributaria, or “SAT”[8]) and structured around a Federal Tax Code (Código Fiscal de la Federación or “CFF”). Income Tax is regulated only at federal level through the Ley del Impuesto Sobre la Renta or “LISR”. There is no local (state) income taxation. There is, however, a local payroll tax imposed in the majority of state jurisdictions (Impuesto Sobre Nóminas or “ISN” of between 1.5 and 3.5% over the payroll amount). The Income Tax rates are very competitive and currently capped at 30% over the taxable income. One important advantage is that gifts among family members (vertical) are not taxed at all. Inheritances are not taxed at all either, as there is no Estate Tax anywhere in Mexico.
Please keep in mind that Mexico has a Value Added Tax (“IVA”) imposed on virtually all sales at a rate of 16%.
Particular legal issues regarding Expatriates
Key labor issues
The LFT is a public interest law, which is very protective of workers or employees irrespective of their national origin or residency status in Mexico and applies even if there are any contradictory provisions in the secondment, relocation or assignment agreement between the Company and the expat employee.
Under the LFT system, a labor contract is deemed to exist whenever a person renders his or her personal services to any other person[9], business or employer (including foreign embassies, consulates or offices of international organizations), even if an intermediary is used under an “independent contractor” or “labor outsourcing” agreement and regardless of whether the employee goes to work regularly or not.
Absent a written agreement, or if the current written agreement does not include a specific provision required by law, or its provisions are against the law, then the labor relation is governed by the LFT.
Total salary in Mexico must include payments for the following: i) 1 or 2 resting days per week; ii) Christmas bonus of 15 days each year (or fraction thereof); iii) annual vacations + a 25% vacation premium; iv) employee profit sharing. Salary of internationally assigned personnel customarily consists of standard salary and monetary benefits such as cost of living and/or hardship allowances supported by non-monetary incentives i.e. cost of living allowance, tax equalization, mobility premium, hardship allowance, housing, education and other benefits.
Employment may be terminated for cause, provided that the employer has sufficient proof to support the cause of termination. Wrongful dismissals can be costly, as the wrongfully dismissed employee may be adjudicated with a mandatory severance payment of 3 months + 20 days of salary per each year of service, plus accrued unpaid salary while the lawsuit proceeds[10], among others.
It is important to mention that, regardless of what the “secondment agreements”, “expat contracts” or “assignment agreements” might establish, a labour relation is created between the expat employee and the Mexican employer and give said employee various rights.
Key immigration issues
It is important to mention that any foreigner who enters Mexican territory must follow a procedure to obtain the adequate visa or migration status to be able to be employed and to perform the duties for which he or she was engaged. Failure to comply with Migration Law could result in fines, expiration of rights, administrative sanctions or even prison or deportation.
The employer is made liable by the Mexican government for all the repatriation expenses of the expat.
In many cases the expat is entitled to import duty free a full set of used furniture and household goods[11].
Key tax issues
As soon as the expat becomes a resident of Mexico or establishes his or her residence in Mexico (animus residendi), he/she is deemed to be a resident of Mexico. Any and all earned income is then taxed under Title IV of the Income Tax Law and on global basis.
If a foreign employee is assigned to work in Mexico for a time period of less than 180 days or does not become a permanent resident, a tax withholding must be made on all sources of local income. These tax withholdings may not entitle the foreign employee to claim benefits under a DTT.
Because residence is defined so broadly, most treaties recognize that a person could meet the definition of residence in more than one jurisdiction (i.e., "dual residence") and provide a “tie breaker” clause[12]. Such clauses typically have a hierarchy of three to five tests for resolving multiple residencies, typically including permanent abode as a major factor. Tax residency rarely impacts citizenship or permanent resident status, though certain residency statuses under a country's immigration law may influence tax residency[13].
It is important to mention that when there is a flux of money between two or more related companies, most tax systems, including Mexico’s consider these as related party transactions which give rise to “Transfer Pricing” issues. Also, when key employees are assigned to foreign subsidiary or affiliate company, especially to start new facilities, some tax authorities may consider it as a transfer of intangibles, for the experience and knowledge of the expatriate. In this case, it is deemed that the company receiving the employee should pay a royalty fee, at fair market price.
Key social security issues
Affiliation of employers and enrollment of all permanent or temporary employees is not optional. Lack of compliance may carry stiff fines and penalties.
There are useful ways to eliminate or minimize double taxation on Social Security or Pensions by requesting the issuance of coverage or transfer certificates under a current bilateral Social Security or Pension Transfer Treaty.
Please keep in mind that Mexican law expressly prohibits the procurement of insurance coverage from foreign insurance companies not licensed in Mexico and punishes this as a federal crime. Life or medical insurance may be procured locally to supplement social security coverage.
Recommendations upon the arrival of the expat employee
· Execute a well-written labour agreement.
· Get the person to enroll with the RFC and get his or her electronic signature (“FIEL”).
· Enroll the employee and his or her family members with the SAR, IMSS and INFONAVIT (and keep the records current).
· Make sure that the proper documents are filed in the country of origin to reflect the change or termination of tax residency.
Recommendations prior to the departure of the expat employee
· Execute a well-written labour termination and release agreement.
· File a change of taxpayer’s status notice (“suspension de actividades”) with the SAT.
· Get a “certification of tax residency” of the expat.
· File the termination notices (“baja”) of the employee and his or her family members with the SAR, IMSS and INFONAVIT and get any benefit certificates as needed.
· Get a notarized power of attorney to address tax issues that may arise after the expat’s departure.
A final word
By knowing what is required for good management of expat employees, you will make sure that your company is able to better serve its expat staff through various important issues such as international taxation, immigration, labor and social security. In addition, accounting planning will let you legally make tax deductible all benefits paid or spent on behalf of the employee, as these allowances could easily double the annual employee costs and may also cause in unplanned or unexpected costs, such as double or even triple taxation at income tax, social security or pension levels, as well as to prevent any complications for your company and your expat employees, including having to pay late interest or fines, while maintaining current all social security and pension benefits current in the country of origin and securing international compliance of all related obligations.
Juan Najera, Najera Danieli & Asocs, Mexico
[1] Thomas L Friedman, "It's a Flat World, After All", New York Times Magazine; Apr. 3, 2005.
[2] Reich, Robert. The Work of the Nations, Preparing Ourselves for 21st Century Capitalism. Alfred A. Knopf, Toronto, 1992
[3] "Expatriate Movements and Trends" in http://www.theexpatdirectory.com/
[4] Gomez-Mejia, Luis; Balkin, David B.; Cardy, Robert L. MANAGEMENT OF HUMAN RESOURCES, Pearson Prentice Hall, 2008.
[5] See: http://www.ilo.org/global/topics/social-security/lang--en/index.htm
[6] Enacted into law as of May 25, 2011. However, many provissions of the old “Ley General de Población” will still be applicable during a period of 180 days, while the new executive regulations manual (Reglamento) is enacted.
[7] As of May, 2011, there were 48 DTTs in force, whith more than 20 under negotiation.
[8] See: http://www.sat.gob.mx/sitio_internet/asistencia_contribuyente/principiantes/eres_extranjero/78_9768.html
[9] In this vein, it is important to mention that domestic personnel is considered as a worker under the LFT and the Social Security Law.
[10] However, this is not automatic, so we recommend against yielding to pressure to pay any such amount just by the mere threat of being sued.
[11] Known in Spanish as “menaje de casa”
[12] See article 4 of the US-Mexico DTT
[13] See: http://www.irs.gov/taxtopics/tc851.html
