Legal Considerations for Operations in Mexico Options for Operations in Mexico Option A-1 Contract Manufacturing Chinese Trading Company Manufacturing Agreement Mexican Manufacturing Company

Legal Considerations for Operations in Mexico Options for Operations in Mexico Option A-2 Contract Manufacturing Chinese Trading Company U.S. Manufacturing Company Manufacturing Agreement Manufacturing Subcontract Mexican Manufacturing Company

Legal Considerations for Operations in Mexico Options for Operations in Mexico Options A-1 and A-2 - Continued Contract Manufacturing Chinese Trading Company provides raw materials, tooling, some or all equipment, manufacturing process and start-up procedures, production volume and price commitment, delivery schedule and material sourcing assistance. Contractor/Subcontractor provides regulatory compliance, direct and indirect labor, customs and shipping, production control, finished goods to required specifications, materials requirements management planning (“MRP”) and distribution services.

Legal Considerations for Operations in Mexico Options for Operations in Mexico Option B Joint Venture Chinese Joint Venture Partner Joint Venture Agreement Mexican Joint Venture Partner Jointly Owned Mexican Manufacturing, Sales and Distribution Company

Legal Considerations for Operations in Mexico Options for Operations in Mexico Option B - Continued Joint Venture Example of strategic alliance with Mexican investor to share strengths. Each partner contributes to capital of Mexican company and participate in administration. Chinese partner provides know-how on production, productivity and quality. Mexican partner provides expertise and resources for administration, operations, regulatory compliance, sales and distribution.

Legal Considerations for Operations in Mexico I. Options for Operations in Mexico Option C Mexican Shelter Manufacturing Company Chinese Trading Company 1. Chinese Trading Company delivers possession of parts, components and equipment under consignment 2. Temporary importation of materials, components and equipment Shelter Contract / Bailment Contract Mexican Shelter Manufacturing Company 3. Manufactures and export products

Legal Considerations for Operations in Mexico I. Options of Operations in Mexico Option C - Continued Mexican Shelter Manufacturing Company Designed for client to explore opportunities and minimize risk. Limited capital investment. Quickly bridges cultural gap. No learning curve. Chinese Trading Company has no legal presence in Mexico. Chinese Trading Company provides all materials, components, tooling/fixtures, production equipment, on-site technical training, and volume commitment. Shelter serves as importer of record of all materials, components, equipment, etc. into Mexico. Shelter provides start-up capital, direct/indirect labor, industrial facility with utilities, logistics support, regulatory compliance, MRO procurements and union/government relations. Chinese Trading Company participates in manufacturing activities, directs production schedule, quality systems and MRP systems, and supervises quality and timeliness of production. Service hourly rate fee based on direct labor count and space requirements, plus pass through of certain costs. Shelter contracts subject to term limit. (Other options may be available after expiration of the term). Provisions for transition to wholly owned operation or other operating structure required. Customer requirements for sales in Mexico requires special planning including a AAA value-added tax certification and, possibly, a Client-owned Mexican sales and distribution company with a service IMMEX.

Legal Considerations for Operations in Mexico Options for Operations in Mexico Option D U.S. Based Shelter Structures Creation of a dedicated Chinese-owned Mexican maquiladora manufacturing subsidiary and use of U.S. shelter to administer Mexico Operations under shelter management contract. Possible joint venture with U.S. based shelter operator.

Legal Considerations for Operations in Mexico I. Options for Operations in Mexico Option E Wholly Owned Mexican Maquiladora Subsidiary Chinese Entity (1% owner) Chinese or U.S. Trading Company (99% owner) 1. Trading Company delivers possession of parts, components and equipment it owns to Mexican Maquiladora on consignment 2. Temporary importation of materials, components and equipment Maquila Contract / Bailment Contract Mexican Maquiladora Manufacturing Subsidiary 3. Manufactures products under IMMEX license

Legal Considerations for Operations in Mexico I. Options for Operations in Mexico Option E - Continued Wholly Owned Maquiladora Subsidiary Chinese Trading Company has full control over site selection, labor union selection, work environment, selection of all suppliers and service providers and all other aspects of the Mexico manufacturing operation. Designed as manufacturing cost center in Mexico. Requires compliance with Mexico’s transfer pricing rules applicable to related parties. Benefit of favorable government regulations. Chinese Trading Company fully controls directly or through a fully-owned U.S. subsidiary the Mexican Maquiladora Manufacturing Subsidiary. Mexico Maquiladora Manufacturing Subsidiary exports products or delivers products to Chinese Trading Company’s customers in Mexico by virtual customs transfers or Certificates of Transfer of Material (“CTM”) issued by customers. Chinese Trading Company may sell the products to customers in Mexico who receive products by virtual or customs transfers but may only issue invoices in China or otherwise outside of Mexico.

Legal Considerations for Operations in Mexico I. Options for Operations in Mexico Option F U.S. Based Manufacturing, Sales and Distribution Company May be better option depending on whether operations are capital or labor intensive and on production volume requirements. Use of McAllen Foreign Trade Zone. U.S. Immigration considerations.

Legal Considerations for Operations in Mexico II. Maquiladora Manufacturing Start-up Considerations Choice of Entity and Operating Structure Parent Company’s Operating Structure Chinese controlled Mexico operation U.S. controlled Mexico operation Type of Mexico Entity S.A. de C.V. S. de R.L. de C.V. Structure of Mexico Operations Required Registrations, Licenses and Agreements Registration with Public Register of Commerce Federal taxpayers’ identification number/electronic signature Application for IMMEX Program license/Application for Sectorial Program VAT Certification/bond OEA Registration Employer related registrations Intercompany agreements a. Maquila Services Agreement b. Bailment Agreement

Legal Considerations for Operations in Mexico II. Maquiladora Manufacturing Start-up Considerations B. Mexican/U.S. Taxes 1. Federal Taxes Income taxes Value-added taxes 2. State Taxes Payroll taxes Property taxes 3. Other Fiscal Obligations Social Security INFONAVIT (Housing) SAR (Retirement) Taxation of foreigners 4. Taxation of U.S. Resident Employees

Legal Considerations for Operations in Mexico II. Maquiladora Manufacturing Start-up Considerations C. Customs 1. Temporary Importation 2. Permanent Importation D. Immigration Authorizations FMM (Multiple Immigration Form) FMNI (Temporary Resident Card - Consulate/Immigration Department) Training Visas D. Real Estate 1. Purchase of Real Estate Existing facility Purchase of land/construction of facility 2. Lease of Real Estate Build-to-Suit lease

Legal Considerations for Operations in Mexico II. Maquiladora Manufacturing Start-up Considerations E. Labor Considerations Labor Reform Registered unions 2. Workforce Non-Union (confidential) Union Independent employee doing union employee’s work 3. Collective Bargaining Agreement Registration with labor authorities Internal Work Regulations Individual Employment Agreements Labor Terms and Conditions

Legal Considerations for Operations in Mexico II. Maquiladora Manufacturing Start-up Considerations E. Labor Considerations 5. Mixed Committees 6. Labor Wages/Benefits Border minimum wages/ Interior Mexico minimum wages Mandatory benefits Discretionary benefits Termination of Employment Severance payments Conciliation Center and Labor Registry

Legal Considerations for Operations in Mexico II. Maquiladora Manufacturing Start-up Considerations F. Environmental Considerations 1. Federal Laws and Regulations Preparation of Environmental Impact Statement/Environmental Preventative Report Environmental registration number before INE Registration as a hazardous waste generator Obtain permits from CNA, if will source water from wells or discharge into federal body of water Filing of Annual Environmental Report (COA) 2. State Laws and Regulations Preparation of Environmental Impact Statement / Environmental Preventative Report State Environmental Registration Number (some states) Registration with the State Environmental Registry (REA) Registration as special waste generator Registration with State residual water registry (REDAR) Filing of Annual Environmental Report (State – COA)

Legal Considerations for Operations in Mexico II. Maquiladora Manufacturing Start-up Considerations F. Environmental Considerations 3. Municipal Laws and Regulations Registration as disposer of solid non-pollutant waste Registration with Municipal water department Contracts with Service Providers DISCLAIMER THIS PRESENTATION IS INTENDED TO PROVIDE GENERAL INFORMATION REGARDING THE SUBJECT MATTER COVERED. IT IS PROVIDED WITH THE UNDERSTANDING THAT CACHEAUX, CAVAZOS & NEWTON, L.L.P. HAS NOT BEEN ENGAGED IN RENDERING LEGAL SERVICES HEREBY TO ANY PERSON. IF LEGAL ADVICE IS REQUIRED, AN ATTORNEY WITH CACHEAUX, CAVAZOS & NEWTON, L.L.P. SHOULD BE RETAINED SO THAT ADVICE RELEVANT TO SPECIFIC FACTS MAY BE RENDERED. Adapted from a Declaration of Principles jointly adopted by the Committee of the American Bar Association and a Committee of Publishers and Associations.

Cacheaux, Cavazos & Newton, L.L.P. Daniel Cavazos Cacheaux, Cavazos & Newton, L.L.P. 1401 North Main Street  McAllen, Texas 78501 Tel: (956) 686-5883 Fax: (956) 686-0142 dcavazos@ccn-law.com www.ccn-law.com  Copyright © 2019