© Grant Thornton Setting up a Distribution Business in Mexico: Considerations for U.S. and Foreign Investors Andrew Speer Grant Thornton LLP

© Grant Thornton WHAT TYPE OF DISTRIBUTION BUSINESS? A.Wholesale to Maquila/PITEX customers B.Wholesale to non-Maquila/PITEX C. Retail

© Grant Thornton Can invoice from U.S. & incorporate a Mexican company to provide warehouse services –Advantages Easier to coordinate with parent than buy/sell operation Provides greater flexibility for income distribution and tax planning –Requirements Incorporation of company Standard licenses Service Maquila license Operating agreements Transfer pricing support WHOLESALE DISTRIBUTION TO MAQUILA/PITEX CUSTOMERS

© Grant Thornton U.S. Parent Mexican Sub U.S. Customers Mex Customers Invoice (B) Shipment Invoice (A) WHOLESALE DISTRIBUTION TO MAQUILA/PITEX CUSTOMERS Shipment

© Grant Thornton Warehouse structure complications –VAT Issue: May be unable to recover import VAT –Invoicing Issue: Sales within Mexico subject to Mexican invoice rules WHOLESALE DISTRIBUTION TO NON- MAQUILA/PITEX CUSTOMERS

© Grant Thornton Wholesale Distribution requirements: –Incorporation of 2 companies Company number one: –Import licenses –“NOM” compliance –Mexican invoicing system –Transfer pricing support Company number two: –Mexican invoicing system WHOLESALE DISTRIBUTION TO NON- MAQUILA/PITEX CUSTOMERS

© Grant Thornton Wholesale Operations –1st Company performs import duties & warehousing –2nd Company buys from import company & sells to customer Limits impact of invoicing requirements that state first hand, wholesale import sales must provide detailed customs information on invoice WHOLESALE DISTRIBUTION TO NON- MAQUILA/PITEX CUSTOMERS

© Grant Thornton Parent Customer Service Customer Shipment + Invoice WHOLESALE DISTRIBUTION TO NON- MAQUILA/PITEX CUSTOMERS Import & Warehouse Shipment + Invoice

© Grant Thornton RETAIL DISTRIBUTION Difficult to implement warehouse operation for same reason VAT recovery reason as wholesale operations Retail invoices do not require customs information, however

© Grant Thornton RETAIL DISTRIBUTION Requirements: –Incorporation of one company –Import Licenses –“NOM” compliance –Transfer Pricing Support

© Grant Thornton Parent Mex Company Shipment + Invoice RETAIL DISTRIBUTION Product + Invoice Customers

© Grant Thornton GENERAL REQUIREMENTS / ISSUES WHEN ENTERING THE MEXICAN MARKET Incorporation Licenses Operating Agreements Labor Issues Administration Customs Taxes

© Grant Thornton GENERAL REQUIREMENTS / ISSUES WHEN ENTERING THE MEXICAN MARKET Incorporation: 4-8 weeks –Articles of incorporation / Corporate Purpose –Powers of attorney –Notarization –Taxpayer i.d. number

© Grant Thornton GENERAL REQUIREMENTS / ISSUES WHEN ENTERING THE MEXICAN MARKET Obligatory licenses –Importer registration –Foreign investor registration Licenses that may be required –Service maquila license and RECIME registration –Padron Sectorial –Environmental Permits –“NOM” compliance

© Grant Thornton GENERAL REQUIREMENTS / ISSUES WHEN ENTERING THE MEXICAN MARKET Operating agreements that may be required –Warehouse agreement with third party –Intercompany warehouse agreement (earnings stripper) –Equipment lease agreement (earnings stripper) –Employee lease agreement

© Grant Thornton GENERAL REQUIREMENTS / ISSUES WHEN ENTERING THE MEXICAN MARKET Labor issues –Collective bargaining agreement with unions –Individual labor agreements –Human resources procedures consistent with Mexican law –Mandatory profit sharing of 10%

© Grant Thornton GENERAL REQUIREMENTS / ISSUES WHEN ENTERING THE MEXICAN MARKET Administration –Accounting –Payroll –Tax filings –Audit requirements

© Grant Thornton GENERAL REQUIREMENTS / ISSUES WHEN ENTERING THE MEXICAN MARKET Customs requirements –Customs agent –Duties, possible NAFTA benefits –“NOM” requirements Benefits under Service Maquila license Provide customs classification number

© Grant Thornton GENERAL REQUIREMENTS / ISSUES WHEN ENTERING THE MEXICAN MARKET Tax requirements –Income tax U.S. considerations Mexican considerations –Value Added Tax (VAT) –Asset Tax –Profit sharing “Tax”

© Grant Thornton QUESTIONS?