Mexico City Monterrey Paseo de los Tamarindos 150-PB Ave. Ricardo Margain 444 Bosques de las Lomas Torre Norte Mezzanine A 05120, México, Distrito Federal 66265, San Pedro Garza García, N.L. Tel. +52 (55) 5091-0000 Tel. +52 (81) 8220-1500

DOING BUSINESS IN MEXICO PREFACE .............................................................................................................................................................................................. 1

I. ESSENTIAL FACTS ABOUT MEXICO ........................................................................................................................................ 2

A. Geographic and Historic Information ................................................................................................................................................. 2

B. Key Economic Information ................................................................................................................................................................. 2

C. Federal Government .......................................................................................................................................................................... 3

II. LEGAL SYSTEM ......................................................................................................................................................................... 4

A. General .............................................................................................................................................................................................. 4

B. Civil Law and Comparison to Common Law ...................................................................................................................................... 4

C. Federal and State Legislation ............................................................................................................................................................ 4

III. JUDICIAL SYSTEM ................................................................................................................................................................... 6

A. Mexican Courts & Litigation ............................................................................................................................................................... 6 1. Federal Courts ......................................................................................................................................................................... 6 2. The Federal Judiciary Council (Consejo de la Judicatura Federal “FJC”) ............................................................................... 7 3. State Courts ............................................................................................................................................................................. 7 4. Court Clerks ............................................................................................................................................................................. 8 5. District Attorneys ...................................................................................................................................................................... 8 6. Administrative and Tax Courts ................................................................................................................................................. 8

B. Criminal Law ...................................................................................................................................................................................... 8

C. General Comments about Litigation in Mexico ................................................................................................................................ 10

D. Arbitration ........................................................................................................................................................................................ 11

IV. IMPORTANT POSITIONS TO KNOW ..................................................................................................................................... 13 1. Lawyer ................................................................................................................................................................................... 13 2. Public Notary ....................................................................................................................................................................... 13 3. Customs Broker .................................................................................................................................................................... 14 4. Accountants and Auditors ..................................................................................................................................................... 14

V. PRACTICAL DIFFERENCES ABOUT DOING BUSINESS ..................................................................................................... 15

A. Introduction ...................................................................................................................................................................................... 15

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B. Tips on Dealing with your Mexican Counterpart .............................................................................................................................. 15 1. Avoid Misunderstandings ....................................................................................................................................................... 15 2. Learn the Local Business Schedule ....................................................................................................................................... 16 3. Dress Appropriately ............................................................................................................................................................... 16 4. Take the Time Necessary to Build Personal Relationships ................................................................................................... 16 5. Be Polite ................................................................................................................................................................................ 17 6. Expect Generosity and Be Prepared to Reciprocate ............................................................................................................. 17 7. Understand the Importance of Meals and Other Social Events ............................................................................................. 17 8. Select the Appropriate Means of Communication .................................................................................................................. 18 9. Prepare for Uncertainty and Delay ........................................................................................................................................ 18 10. Lack of Guidance ................................................................................................................................................................ 18 11. Need for Bureaucratic Approval .......................................................................................................................................... 18 12. Develop Realistic Time Lines .............................................................................................................................................. 19 13. Need for Regular Follow-Up ................................................................................................................................................ 19 14. Allow More Time .................................................................................................................................................................. 19

VI. TRADE AND INVESTMENT TREATIES ................................................................................................................................. 21

A. Introduction ............................................................................................................................................................................... 21

B. Free Trade Agreements ............................................................................................................................................................ 21 1. General Overview .................................................................................................................................................................. 21 2. Free Trade Agreements in Effect ........................................................................................................................................... 21 3. Fundamental aspects of existing free trade agreements. ...................................................................................................... 23 4. Bilateral Investment Treaties ................................................................................................................................................. 24

VII. REGULATION OF FOREIGN INVESTMENT .......................................................................................................................... 28

A. Foreign Investment ..................................................................................................................................................................... 28

B. Economic Activities that are Restricted under the FIL ................................................................................................................ 28

C. Investment by Foreign Corporations .......................................................................................................................................... 29

D. Neutral Investment ..................................................................................................................................................................... 29

E. National Foreign Investment Registry ......................................................................................................................................... 29

F. Acquisition of Real Estate .......................................................................................................................................................... 30 1. Mexican Companies .............................................................................................................................................................. 30 2. Mexican Corporations without Foreign Investment ................................................................................................................ 31 3. Non-Mexican Individuals ........................................................................................................................................................ 31

VIII. CORPORATE STRUCTURES FOR DOING BUSINESS ....................................................................................................... 32

A. Representative Office ................................................................................................................................................................. 32

B. Branch Office .............................................................................................................................................................................. 32

C. Partnership Venture (a.k.a. “Contractual Joint Venture”) ........................................................................................................... 33

D. Corporate Presence ................................................................................................................................................................... 33

E. Limited Liability Company (Sociedad de Responsabilidad Limitada “SRL”) ............................................................................... 33

F. Stock Company (Sociedad Anónima “S.A.”) ............................................................................................................................... 33

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G. Variable Capital Companies (Capital Variable “CV”) ................................................................................................................. 34

H. Process for Incorporating a Mexican Company .......................................................................................................................... 34 1. Select Corporate Name ......................................................................................................................................................... 34 2. Charter and By-laws .............................................................................................................................................................. 34 3. Appearance before a Notary Public. Registration .................................................................................................................. 34 4. Directors, Statutory Auditor and Officers ............................................................................................................................... 35 5. Post Incorporation Registrations ............................................................................................................................................ 35 6. Operating a Mexican Company ............................................................................................................................................. 36 7. Minority Rights in a Stock Corporation (SA) .......................................................................................................................... 38 8. Conflict of Interest .................................................................................................................................................................. 39 9. Distribution of Earnings and Payment of Dividends. Legal Reserve ..................................................................................... 39 10. Accounting Records and Book-keeping .............................................................................................................................. 39 11. Mergers and Spin-offs ......................................................................................................................................................... 39 12. Dissolution and Liquidation of a Mexican Company ............................................................................................................ 41 13. Corporate Governance Issues ............................................................................................................................................ 41 14. Publicly Traded Companies ................................................................................................................................................ 43

IX. GENERAL PRINCIPLES OF CONTRACT LAW ...................................................................................................................... 44 1. General Principles of Contract ............................................................................................................................................... 44 2. Construction of a Contract ..................................................................................................................................................... 45 3. Termination of an Agreement ................................................................................................................................................ 46 4. Contractual Liability ............................................................................................................................................................... 48 5. Election of Jurisdiction ........................................................................................................................................................... 49 6. Submission to Local Courts ................................................................................................................................................... 49 7. Arbitration .............................................................................................................................................................................. 49 8. Confidentiality Agreements .................................................................................................................................................... 49 9. Non-Compete Provisions ....................................................................................................................................................... 50 10. Asset vs. Stock Acquisitions ..................................................................................................................................................... 51

X. E-COMMERCE ........................................................................................................................................................................... 52

A. Applicable Laws and Jurisdiction ............................................................................................................................................... 52

B. E-Commerce Law ....................................................................................................................................................................... 52

C. On-line Consumer Protection ..................................................................................................................................................... 53

D. Privacy Notice ............................................................................................................................................................................. 54

E. Electronic Invoices ...................................................................................................................................................................... 54

F. Electronic Evidence in Judicial Proceedings .............................................................................................................................. 54

G Domain Name Registration ......................................................................................................................................................... 55

XI. COMPETITION LAW ................................................................................................................................................................ 56

A. General ....................................................................................................................................................................................... 56

B. Specific Practices or Restraints .................................................................................................................................................. 56 1. Absolute Monopolistic Practices (Horizontal Restraints) ....................................................................................................... 56 2. Relative Monopolistic Practices (Vertical Restraints) ............................................................................................................. 57

C. Concentrations ........................................................................................................................................................................... 58

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D. Privatizations, Publications and Opinions .................................................................................................................................. 60

E. Private Actions ............................................................................................................................................................................ 60

F. Leniency Program and Settlement .............................................................................................................................................. 60

G. Statute of Limitations .................................................................................................................................................................. 61

H. Possible Amendments to Competition Regulation ..................................................................................................................... 61

XII. LABOR ISSUES ...................................................................................................................................................................... 62

A. General ....................................................................................................................................................................................... 62

B. Legal Framework ........................................................................................................................................................................ 62

C. The Concept of the Employment Relationship ........................................................................................................................... 63 1. Regulation of employment through written agreements ........................................................................................................ 63 2. Subjects of Employment ........................................................................................................................................................ 63 3. Term of Employment ............................................................................................................................................................. 64 4. Employer Substitution ............................................................................................................................................................ 64

D. Minimum Terms and Conditions for Rendering Services ........................................................................................................... 64 1. Salary. Base Salary & Integrated Salary ............................................................................................................................... 64 2. Working Hours ....................................................................................................................................................................... 65 3. Vacations and legal holidays ................................................................................................................................................. 65 4. Christmas bonus .................................................................................................................................................................... 66 5. Profit sharing .......................................................................................................................................................................... 66 6. Contractual benefits ............................................................................................................................................................... 66

E. Collective Labor Relationships ................................................................................................................................................... 66 1. Unions .................................................................................................................................................................................... 66 2. Collective Bargaining Agreement .......................................................................................................................................... 67 3. "Contrato-Ley" ........................................................................................................................................................................ 67 4. Internal Working Regulations ................................................................................................................................................. 68

F. Health and Welfare of Employees at Work Sites ........................................................................................................................ 68

G. Labor Conflicts in Mexico ........................................................................................................................................................... 68

H. Individual Conflicts ...................................................................................................................................................................... 69

I. Collective conflicts ........................................................................................................................................................................ 70

J. Termination of Employment ...................................................................................................................................................... 70 1. Individual labor relationships ................................................................................................................................................. 70 2. Collective Labor Relationships ............................................................................................................................................... 71

K. Social Security System ............................................................................................................................................................... 72

L. Low Cost Housing Fund .............................................................................................................................................................. 73

XIII. TAXATION .............................................................................................................................................................................. 74

A. Income Tax ................................................................................................................................................................................. 74 1. Subjects of the Tax ................................................................................................................................................................ 74 2. Residency for Tax Purposes .................................................................................................................................................. 74

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3. Permanent Establishment ...................................................................................................................................................... 74 4. Determination of the Tax and Rate ........................................................................................................................................ 75 5. Offset or Credit of the Tax ..................................................................................................................................................... 75 6. Taxable Income ..................................................................................................................................................................... 76 7. Timing of Accruable Income .................................................................................................................................................. 77 8. Allowed Deductions ............................................................................................................................................................... 77 9. Net Operating Losses ............................................................................................................................................................ 79 10. Tax Consolidation ................................................................................................................................................................ 79 11. Regime Applicable to Dividends Distributed ....................................................................................................................... 80 12. Income Tax Applicable to Resident Individuals ................................................................................................................... 80 13. Non-Resident Taxation ........................................................................................................................................................ 81 14. Tax Representative ............................................................................................................................................................. 82 15. Tax Treaties ........................................................................................................................................................................ 83 16. Agreements Regarding Exchange of Information ............................................................................................................... 83 17. Controlled Foreign Company .............................................................................................................................................. 84 18. Related party Transactions; Transfer Pricing ...................................................................................................................... 84 19. Mutual Administrative Assistance on Fiscal Matters ........................................................................................................... 85 20. USA/Mexico FATCA (Foreign Account Tax Compliance Act) ............................................................................................. 86

B. Single Rate Business Tax ("IETU") ........................................................................................................................................... 86 1. General Overview .................................................................................................................................................................. 86 2. Tax Elements ......................................................................................................................................................................... 87

C. Value Added Tax (“IVA”) ............................................................................................................................................................ 88 1. General Characteristics of the VAT ....................................................................................................................................... 88 2. VAT Rates ............................................................................................................................................................................. 89 3. Taxed Transactions ............................................................................................................................................................... 89 4. Persons Required to Withhold the Tax .................................................................................................................................. 91 5. Obligations of Taxpayers ....................................................................................................................................................... 91 6. Filing of the Corresponding Tax Return ................................................................................................................................. 91 7. Crediting of the Tax ............................................................................................................................................................... 91

D. Cash Deposit Tax ....................................................................................................................................................................... 92

E. Other Issues ............................................................................................................................................................................... 92 1. Obligation to Register with the Federal Taxpayers’ Registry ................................................................................................. 92 2. Supporting documentation ……………………………………………………………………………………………………….92 3. Profit Sharing ......................................................................................................................................................................... 93 4. Audits ..................................................................................................................................................................................... 93 5. Late Payment Penalties ......................................................................................................................................................... 94 6. Statute of Limitations ............................................................................................................................................................. 94 7. State Taxes ............................................................................................................................................................................ 94 8. Payroll Tax ............................................................................................................................................................................. 94 9. Real Estate Transfer Tax ....................................................................................................................................................... 94 10. Excise Taxes ......................................................................................................................................................................... 94

XIV. CUSTOMS ............................................................................................................................................................................. 95

A. Background ................................................................................................................................................................................ 95

B. Clearance of Goods .................................................................................................................................................................... 95

C. Tariff considerations, Regulation Measures and Non-tariff Restrictions ..................................................................................... 95

D. Customs Regimes ...................................................................................................................................................................... 96

E. Customs Violations and Fines .................................................................................................................................................... 96

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F. Customs Brokers and Attorneys ................................................................................................................................................. 96

G. Dumping ..................................................................................................................................................................................... 97 1. Mexican Legal Framework ..................................................................................................................................................... 97 2. What is Dumping Practice? ................................................................................................................................................... 97 3. Standing to Petition an Anti-dumping Investigation ............................................................................................................... 98 4. Injury ...................................................................................................................................................................................... 98 5. Course of the Investigation .................................................................................................................................................... 99 6. Anti-dumping or Countervailing Duties ................................................................................................................................ 100 7. Appeals ................................................................................................................................................................................ 100 8. Review of Anti-Dumping Duties ........................................................................................................................................... 101

XV. MAQUILADORA (IN-BOND ASSEMBLY PLANTS) AND EXPORT PROGRAMS .............................................................. 102

A. Overview of Export Programs ................................................................................................................................................... 102

B. Maquiladoras ............................................................................................................................................................................ 102 1. Overview .................................................................................................................................................................................. 102 2. Special Customs Treatment ..................................................................................................................................................... 104 3. Process to Establish a Maquiladora ......................................................................................................................................... 106 4. Maquiladora Sales to the Domestic Market ............................................................................................................................. 107 5. Transfer or Sale of Merchandise .............................................................................................................................................. 107 6. Value Added Tax (Impuesto al Valor Agregado) ..................................................................................................................... 107 7. Transfer pricing in the Maquiladora Industry ............................................................................................................................ 108

XVI. SECURITIES ........................................................................................................................................................................ 111

A. General ..................................................................................................................................................................................... 111

B. Mexican Stock Exchange ......................................................................................................................................................... 111

C. Securities/Public Offers ............................................................................................................................................................ 111

D. Approval and Registration of a Public Offer ............................................................................................................................. 112

E. Listing with the International Quotation System of the BMV ..................................................................................................... 113

F. Ongoing Reporting Obligations and other Relevant Information ............................................................................................... 114

G. Minority Rights ......................................................................................................................................................................... 114

H. Underwriting Agreements ......................................................................................................................................................... 115

XVII. BANKING ............................................................................................................................................................................. 116

A. General ..................................................................................................................................................................................... 116

B. Authorities ................................................................................................................................................................................. 117 1. Bank of Mexico .................................................................................................................................................................... 117 2. Ministry of Finance and Public Credit .................................................................................................................................. 117 3. National Banking and Securities Commission ..................................................................................................................... 117

C. Protection of the Interests of the Public .................................................................................................................................... 118 1. National Commission for the Protection and Defense of Users of Financial Services ......................................................... 118 2. Institute for the Protection of Bank Savings ......................................................................................................................... 118 3. Credit Information Entities ................................................................................................................................................... 118

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D. Financial Agents ....................................................................................................................................................................... 118 1. Commercial Banks ............................................................................................................................................................... 118 2. Affiliates of Foreign Financial Entities .................................................................................................................................. 119 3. Development Banks ............................................................................................................................................................. 119 4. Non-Banking Financial Agents ............................................................................................................................................ 119

XVIII. SECURED TRANSACTIONS ................................................................................................................................................. 121

A. Principles Applicable to Security Interests ................................................................................................................................ 121

B. Personal Property ..................................................................................................................................................................... 121 1. Personal Guarantee (Fianza) .............................................................................................................................................. 121 2. Pledge .................................................................................................................................................................................. 121 3. Trust Agreements ................................................................................................................................................................ 122 4. Chattel Mortgage ................................................................................................................................................................. 122

C. Mortgage of Real Property ....................................................................................................................................................... 123

XIX. GOVERNMENT PROCUREMENT ...................................................................................................................................... 124

A. General Scope .......................................................................................................................................................................... 124

B. Contracting Procedures ............................................................................................................................................................ 124 1. Competitive Bidding ................................................................................................................................................................. 124 2. Restricted Invitation and Direct Award ..................................................................................................................................... 125

C. Execution of a Procurement Contract ....................................................................................................................................... 126

D. Sanctions .................................................................................................................................................................................. 126

E. Challenges and Remedies ........................................................................................................................................................ 127

F. Conciliation Process ................................................................................................................................................................. 127

G. Dispute Resolution ................................................................................................................................................................... 127

H. Pemex ...................................................................................................................................................................................... 127

XX. INTELLECTUAL PROPERTY .............................................................................................................................................. 129

A. General ..................................................................................................................................................................................... 129

B. Copyright .................................................................................................................................................................................. 129

C. Trademarks .............................................................................................................................................................................. 130

D. Trade Names and Slogans ....................................................................................................................................................... 131

E. Patents ...................................................................................................................................................................................... 131

F. Trade Secrets ........................................................................................................................................................................... 132

G. Franchising and Transfer of Technology .................................................................................................................................. 132

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H. Enforcement ............................................................................................................................................................................. 132

XXI. IMMIGRATION ..................................................................................................................................................................... 134

A. Introduction ............................................................................................................................................................................... 134

B. Immigration Status .................................................................................................................................................................... 134 1. Tourist .................................................................................................................................................................................. 134 2. Working Visas for Non-Immigrant and for Immigrant ........................................................................................................... 134 3. Permanent Resident (Inmigrado) ......................................................................................................................................... 135

C. Working Visa Options ............................................................................................................................................................... 135

D. General Procedures for Securing Immigrant or Non-Immigrant Visas ..................................................................................... 136 1. Entrance Procedure ............................................................................................................................................................. 136 2. Change of Immigration Status or Characteristic .................................................................................................................. 137

E. Documentation Requirements .................................................................................................................................................. 137

F. Extension of Stay in Mexico ...................................................................................................................................................... 137

G. Right to Import Personal Property ............................................................................................................................................ 137

XXII. ENVIRONMENTAL LAWS ................................................................................................................................................... 138

A. Overview .................................................................................................................................................................................. 138

B. Authorities ................................................................................................................................................................................. 139

C. Areas of Exclusive Federal Jurisdiction .................................................................................................................................... 139

D. Environmental Impact ............................................................................................................................................................... 140

E. Air Pollution; the Sole Environmental License LAU .................................................................................................................. 141

F. Hazardous Waste ..................................................................................................................................................................... 142

G. Soil Contamination and Remediation ....................................................................................................................................... 143

H. Water ........................................................................................................................................................................................ 144

I. Environmental Audits and Voluntary Compliance ...................................................................................................................... 146

J. Sanctions .................................................................................................................................................................................. 147

XXIII. TELECOMMUNICATIONS ................................................................................................................................................... 150

A. General ..................................................................................................................................................................................... 150

B. Jurisdiction ................................................................................................................................................................................ 151

C. Radio-frequency Spectrum ....................................................................................................................................................... 151

D. Telecommunications Networks ................................................................................................................................................. 152

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E. Satellite Communications ......................................................................................................................................................... 152

F. Value Added Services ............................................................................................................................................................... 153

G. Re-sellers (comercializadoras) ................................................................................................................................................. 153

H. Dominant Carriers .................................................................................................................................................................... 154

I. Broadcasting Services ................................................................................................................................................................ 154

J. Foreign Investment Restrictions and Investment Mechanisms ................................................................................................. 154

K. Special Tax ............................................................................................................................................................................... 155

XXIV. REGULATED INDUSTRIES ................................................................................................................................................. 156

A. Ports ......................................................................................................................................................................................... 156 I. Authority……………………………………………………………………………………………….. ……………………………..156 II. Regulation ……………………………………………………………………………………………………………………………156 III. Foreign Investment …………………………………………………………………………………............................................157

B. Navigation .............................................................................................................................................................................. 157 I. Authority……………………………………………………………………………………………………………………….. ……..157 II. Regulation ……………………………………………………………………………………………………………………………157 III. Foreign Investment …………………………………………………………………………………............................................158

C. Railroads ................................................................................................................................................................................ 158 I. Authority……………………………………………………………………………………………….. ……………………………..159 II. Regulation ……………………………………………………………………………………………………………………………159 III. Foreign Investment …………………………………………………………………………………............................................159

D. Highways ............................................................................................................................................................................... 159 I. Authority……………………………………………………………………………………………….. ……………………………..159 II. Regulation ……………………………………………………………………………………………………………………………159 III. Foreign Investment …………………………………………………………………………………............................................160

E. Aviation .................................................................................................................................................................................. 160 I. Authority……………………………………………………………………………………………….. ……………………………..160 II. Regulation ……………………………………………………………………………………………………………………………160 III. Foreign Investment …………………………………………………………………………………............................................161

F. Airports ................................................................................................................................................................................... 161 I. Authority……………………………………………………………………………………………….. ……………………………...161 II. Regulation …………………………………………………………………………………………………………………………….161 III. Foreign Investment ………………………………………………………………………………….............................................161

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XXV. MINING ................................................................................................................................................................................. 162

A. General ..................................................................................................................................................................................... 162

B. Priority of Mining Activities ........................................................................................................................................................ 162

C. Agencies / Authority .................................................................................................................................................................. 163

D. Mining Concessions and Assignments ..................................................................................................................................... 163

E. The Mining Public Registry ....................................................................................................................................................... 166

F. Inspection, Monitoring and Sanctions ....................................................................................................................................... 166

XXVI. BANKRUPTCY ..................................................................................................................................................................... 168

A. Insolvency Proceedings ........................................................................................................................................................... 168

B. Causes for Declaration in Reorganization (Concurso Mercantil) .............................................................................................. 169

C. Procedure for the Declaration of Reorganization ...................................................................................................................... 169

D. Judgment Declaring Reorganization (Concurso Mercantil) ...................................................................................................... 170

E. Existing Contracts ..................................................................................................................................................................... 170

F. Acknowledgement of Credits .................................................................................................................................................... 170

G. Bankruptcy or Liquidation Proceedings (Quiebra) .................................................................................................................... 171

Acronyms Most Commonly Used ....................................................................................................................................................... 172

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Preface Whether driven by national policies or new technologies, laws and regulations will frequently change, and as lawyers and counsel a firm is required to respond to the needs of our clients. Since it was founded in 1948, Barrera, Siqueiros y Torres Landa, S.C. has been at the forefront in providing legal services with excellence to its clients. At all times, we have endeavored to be in a position not only to respond, but to be ahead and anticipate the needs of our clients. In the course of providing services, a multitude of areas have been addressed and legal specialties have arisen in the recent past. We have always attempted to be at the forefront of new legal developments around investment, technology, financial services and products, export and trade programs, privatizations, government procurement, telecommunications, e-commerce, labor, competition/antitrust, securitization and financial structures, and more recently, energy. Some areas have continuously evolved such as taxation with such speed and depth that keeping–up has been both a necessity and a challenge. In celebration of our sixtieth anniversary in 2008 we endeavored to prepare for our clients and friends a summary of Mexican laws affecting business. Many lawyers from the firm participated in the project, contributing with their knowledge and expertise. We have committed to keep the summary updated. Although we trust you will find this summary useful, the purpose of this publication is not to provide legal advise nor present a complete analysis of the issues covered. The authors that participated in the publication, as well as Barrera, Siqueiros y Torres Landa, S.C., are not responsible in any form for decision or actions taken based on the content of this summary.

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I. Essential Facts About Mexico A. Geographic and Historic Information • Name. Although the conventional short form is “Mexico”, the official name of the country is “United

Mexican States.”

• Population. Mexico’s population exceeds 112 million according to the 2010 census. The median age is 26 years. It is the most populous Spanish-speaking country in the world. The population of the metropolitan area of Mexico City alone is about 18 million, making it the largest urban concentration of people in the Western Hemisphere.

• Flag and Seal. The flag consists of three equal vertical bands of green (hoist side), white, and red. The seal—an eagle perched on a cactus holding a snake in its beak—is centered in the white band. The symbol on the seal comes from a legend at the time of the Aztecs. Guided by their god Huitzilopochtli, the Aztec people sought a place where an eagle landed on a prickly-pear cactus, eating a snake. After years of wandering, they found the sign on a small swampy island in Lake Texcoco. They named their new home Tenochtitlan (“Place of the Prickly Pear Cactus”) and built a city, now Mexico City, on the site in A.D. 1325.

• Area. Mexico is one of the largest countries in the hemisphere with an area of approximately 2 million square kilometers (1,972,500 square kilometers; 761,600 square miles).

• Summary historical background. Mexico was originally inhabited by a number of Amerindian civilizations, including the Olmecs, Mayas, Toltecs and Aztecs. Mexico came under Spanish rule for three centuries before finally claiming independence early in the 19th century on September 16, 1821. Contrary to popular belief abroad, independence was not on “Cinco de Mayo”. Shortly after independence, a plan for a constitutional monarchy failed and a republic was proclaimed in December 1822.

• In 1910, severe social and economic problems culminated in a revolution that lasted for ten years and gave rise to the 1917 Constitution.

Although recent financial troubles in México and abroad threw Mexico into its worst recession in over half a century, the nation continues to make a recovery. Ongoing economic and social concerns include low real wages, underemployment for a large segment of the population, inequitable income distribution, and few advancement opportunities for the largely Amerindian population in the impoverished southern states.

• Political Division. Mexico is a Federal Republic divided into 31 States and the Federal District (“Distrito Federal”). Mexico City is located precisely in the Federal District, although its metropolitan area extends into the neighboring State of Mexico. Guadalajara and Monterrey are two major industrial hubs. Other important cities include Tijuana, Ciudad Juárez, León, Querétaro, Puebla, Veracruz, Villahermosa and Mérida.

B. Key Economic Information

• In 2010, Mexico was the 12th largest economy in the world. It is an active member of the Organization for Economic Cooperation and Development (“OECD”) and the World Trade

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Organization (“WTO”). Likewise, Mexico has an important bilateral and multilateral trade network, including NAFTA, the European Union and the Asian Pacific Economic Council (“APEC”).

• Mexico shares 2,000 miles of U.S. border, thus putting it in a unique strategic position for increasing its trade with the greatest single national market in the world.

• Mexico has 7,000 miles of seashores that, as noted in the European Union Political, Cooperation and Free Trade Agreement, make it an ideal place to engage in trade regardless of the origin of materials or destination of finished products.

• Among the most prominent industries in the country are oil, tourism, mining, and automotive, textile, steel and electronics manufacturing.

• Expanding beyond its former export foundation in oil, Mexico has increased the size and variety of exports, which now even span sophisticated technical devices and services, including construction and financial services.

• Reliance on oil has substantially been reduced. The basis of the Mexican economy is primarily manufacturing, although the recent prices in the price of crude oil have provoked a greater share of the exports of this commodity.

• A large pool of Mexican companies participate in export-oriented activities. Foreign investors provide training and technology to upgrade Mexican companies and bring them up to international standards.

C. Federal Government • The Federal Government is composed of three branches—executive, legislative and judicial—each

with specific powers granted by the Constitution. • The President heads the Executive Branch and is assisted by 18 Secretaries or Ministers as well as

by the Attorney General (whose appointment requires the consent of the Senate). The President is both the Head of State and government. There is no Vice-President.

• A bicameral federal congress comprises the Legislative Branch and is divided into:

(a) The Senate, with 128 members who serve six--year terms (b) The House of Representatives (Cámara de Diputados), with 500 members is completely renewed each three-year term.

• The Mexican Supreme Court of Justice, comprised by 11 Justices, heads the Judiciary. After

nomination by the President and appointment by the Senate, Justices serve 15-year terms. Under the Supreme Court sit federal Circuit Courts (Collegiate and Unitary) and District Courts.

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II. Legal System A. General • International business people and foreign-owned corporations doing business in Mexico must directly

and indirectly deal with the Mexican legal system, even if they do not have a local physical presence. Businesses might encounter Mexico's system through an international contract—even one to be wholly performed outside of Mexico—if a Mexican company or individual is also a party. Such contracts may cover a wide variety of legal relationships, including distribution of products, the granting of franchises, or the transfer of technology.

• Accordingly, people and entities doing business in Mexico should have at least a general working knowledge of its legal system. International legal counsel with clients doing business in Mexico should have a more detailed knowledge of Mexican practices, laws and courts. All should understand that if they are to accomplish their objectives they must work within the system, not against it.

B. Civil Law and Comparison to Common Law • Mexico is a so-called “civil law” country, while some other countries such as the United States of

America, Canada, and England are “common law” countries. Unlike common law courts, Mexican courts do not follow “stare decisis” or precedent in the common-law sense. Furthermore, under the Mexican system there are no trials by jury.

• The origins of Mexico's legal system are both ancient and classical, based on the Greek, Roman, Spanish and French legal systems. Due to this background, our reliance in form over substance is usually over-estimated. Although the Mexican system shares more in common with other legal systems throughout the world—especially those in Latin America and continental Europe—than it does with the U.S. legal system, after NAFTA’s adoption, Mexico has modeled certain legislation after U.S. law and practices (antitrust and environmental, among others). Likewise, Mexico’s participation in the OECD and other international groups (e.g. the United Nations Commission on International Trade Law “UNCITRAL”) has led to the to implementation of business practices and legislation in accordance with international standards. Some examples of the above are the adoption of the UNCITRAL Model Laws on International Commercial Arbitration, Transnational Insolvency and Electronic Commerce.

C. Federal and State Legislation • The current Federal Constitution was enacted on February 5, 1917, and has undergone many

amendments since then to adjust to the changing realities of the country. The Constitution has been amended continuously, especially during the last 30 years, adapting to Mexico’s full democracy integration into the world trade arena.

• The Constitution outlines a system where most major areas—including commerce, natural resources, labor, mining, telecommunications, federal crimes and federal taxes—are reserved for regulation only by legislative action of the Federal Congress. Given that states may not implement laws in those areas, federal laws on such matters apply uniformly throughout the country. On the other hand,

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certain specific areas (education, health, environment, etc.) are subject to shared-authority among the federal, state and local level of government.

• States have their own Constitution, as well as their own civil and criminal codes for local matters. Likewise, States legislate on local operating permits and environmental matters that are not otherwise reserved for federal legislation. Municipalities issue zoning and land use regulations and levy real estate taxes.

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III. Judicial System A. Mexican Courts & Litigation 1. Federal Courts Mexican courts are divided between federal and state levels of government. The 11-Justice Mexican Supreme Court of Justice is the highest Court within our country. The Mexican Supreme Court sits either in bloc (Pleno) or as a 5-member Chamber. The First Chamber deals with civil and criminal issues while the Second Chamber deals with Administrative and Labor matters. One Justice is appointed among his/her peers as a 4-year President. The President of the Supreme Court also serves as President of the Federal Judiciary Council, which oversees and monitors ethical and administrative tasks of Federal Judges and Magistrates. The Mexican Supreme Court has reserved jurisdiction itself to the most important issues of constitutional law: (i) unconstitutionality of laws, regulations and treaties in those parts where there has not been a previous and clear precedent; (ii) direct interpretation of the Constitution; (iii) constitutional actions or controversies brought by other powers of the state (Legislative or Executive). Below the Supreme Court remain the Collegiate Circuit Courts, Unitary Circuit Courts and Federal District Courts. Federal courts mostly deal with amparo actions, federal crimes, commercial and bankruptcy cases and federal civil cases. Normally, federal courts have specialized subject matter jurisdiction but it is not uncommon that they cluster all those subject within themselves. The constitutional suit or “amparo proceedings” is the federal lawsuit commenced by a person (natural or legal entity) when there is a violation of rights by a governmental authority. Filing a constitutional action is a right of a person that is subject to high-technical scrutiny. The main principles of this action are: (i) it may only be asserted against acts of authorities; thus, (ii) it is an action of a person against abuse of governmental deeds in any of its spheres—Legislative, Judicial or Executive; local, state or federal; (iii) it is exceptional in nature and normally there has to be an exhaustion of ordinary means of challenge; (iv) the individual involved must provide evidence showing having been personal and directly “affected in its rights” or “expected rights.” Amparos deal with constitutional issues. The amparo proceedings may be “direct” or “indirect.” Collegiate Circuit Courts hear “direct amparos”. Direct amparos are filed against resolutions or judgments that end a jurisdictional (labor, administrative and civil) procedure. Direct amparos most closely resemble an ultimate challenge. On the other hand, District Courts hear “indirect amparos,” which result in a speedy trial. Judgments rendered by District Courts may be challenged through a federal appeal that will be heard by a Collegiate Circuit Court. Indirect amparos are highly technical and, basically, will be filed against (ii) direct violations of individual rights; (ii) final resolutions not rendered by labor, administrative and civil courts; (iii) irreparable harm caused in a judicial proceedings; and, (iv) acts or laws that have been applied for first time in detriment of the individual. The Federal Judiciary (through the Supreme Court and the Collegiate Circuit Courts) may create binding precedents known as “jurisprudence” (jurisprudencia). To create jurisprudence there must be five-non-interrupted cases resolved in the same sense. Likewise, jurisprudence is created when the Supreme Court resolves a “contradiction” held between two or more Collegiate Circuit Courts to settle for once and all the proper binding precedent. One of the most attractive features of the amparo is the possibility of obtaining a stay of proceedings or court injunction. In no other area of law is a “stay of proceedings” more widely used with more precedent created than in amparo proceedings. Thus, to be able to obtain an injunction or “suspension,” as called in Mexico, is normally the appeal for lawyers to file an amparo. Any litigation undertaken in Mexico, whether

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in the private or public sector, will inevitably expose the parties involved to an amparo—what it is and how it works. There has been a quite recent amendment to the Mexican Constitution related to amparo proceedings that will give rise to a new Amparo Law. The amendment is currently in the process of being approved by at least 17 States of the Federation before becoming effective. If approved, a new amparo law will be enacted with important amendments in the following topics: (i) standing; (ii) jurisdiction of the circuits to create legal precedents; (iii) modifications of the 5-precedent rule of binding precedents or jurisprudence; (i) to incorporate those human rights set forth in international treaties.

Mexico, particularly in its larger cities, is experiencing a trend of increasing judicial specialization: judges presiding over specific areas. In larger cities, where this trend is more apparent—such as Mexico City, Monterrey and Guadalajara—there are specialized courts for civil and commercial, labor, criminal, and administrative cases. Nevertheless, despite the shift towards specialization, all cities still have a multi-area judge or magistrate charged with resolving civil, commercial, criminal, labor, and administrative cases. Because multidisciplinary judges are responsible for presiding over such a broad swatch of cases, they often lack the comprehensive knowledge specifically necessary to be effective in any particularly specialized or highly regulated area. Furthermore, Federal District Courts also hear cases as trial courts in commercial and federal civil cases. Although commercial law is federal in nature, a constitutional provision authorizes dual-jurisdiction; i.e. that both local and federal courts can hear commercial cases. Consequently, it is very common for local courts to try the majority of such cases due to the fact that local courts outnumber federal courts and that federal courts are devoted primarily to amparo proceedings. When federal courts hear federal civil or commercial cases the Unitary Circuit Courts act as Court of Appeals. Finally, bankruptcy is another jurisdiction that Federal Courts have absorbed. Thus, trying a bankruptcy case (either as reorganization or bankruptcy) has to be filed before a federal court. 2. The Federal Judiciary Council (Consejo de la Judicatura Federal “FJC”) The FJC monitors performance of all members of the federal judiciary, except for the members of the Supreme Court of Justice, to ensure propriety and compliance with ethics standards. There are 7 members of the Council headed by the President of the Supreme Court of Justice. Unlike other countries, federal judges are not “elected” in Mexico but rather are appointed through a selection process conducted by the FJC. Being part of the full judiciary for an extensive amount of time typically serves both as a baseline qualification and manner to flag potential candidates. Low-salaries for the Federal Judiciary—a vital fact that informs one’s understanding or justifying corruption—is slowly becoming a reminiscence of the past. Currently, the Federal judiciary at all levels is well-paid. This fact overrides the possibility for a Judge to have alternative sources of income that are currently forbidden. Judges can participate in academic activities and lecturing as such. 3. State Courts State or local courts (i.e., courts within the Federal District) are usually devoted to civil and commercial cases and they specialize depending upon the subject matter: family, leases, wills, and normal civil and commercial cases. Depending upon the amount involved there are minor courts whose judgments are not subject to appeal.

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Local Courts’ Judgments are subject to appeals before the Superior Court of Justice of each state and the Federal District. Local/State Courts depend upon the government of each state. Since the budget of each state so varies, then, salaries of Judges do too. Likewise, appointments differ form state to state. Most of the states have a surveillance authority to monitor ethical and proper performance of Judges. 4. Court Clerks Federal or local judges have an extensive workload. It is not uncommon for a Judge to handle between 800 and 1000 dockets every year that could last from simple collection cases to very complex issues of law. Likewise, proceedings are largely written and, therefore, the “day in court” as known in other countries has not the same meaning in Mexico. Hearings are not normally presided by the Judge but rather by the Court Clerk or Secretary to record the appearances and arguments in a hearing or can certify as to the content of a docket. This flaw will change in the near future at least in the criminal area due to important amendments within the Mexican Constitution that makes compulsory for the Judge to be present in all hearings. Court clerks may prepare drafts of important rulings or the judgment itself. However, the content of the judgment is the Judge’s primary responsibility. This activity provides Court Clerks sufficient experience that serve them to escalate in the judiciary until such timing that they can be appointed as Judges. 5. District Attorneys Public prosecutors or District Attorneys (Ministerio Público) are relevant actors in criminal proceedings as shown below but they play certain role in bankruptcy, family, estate, and amparo proceedings. They speak for the general public. In reality, it is odd that public prosecutors take a leading role in those proceedings since they usually devote their time to criminal cases and their importance is underestimated in those areas outside such scope. 6. Administrative and Tax Courts Administrative and Tax Courts have become more important since there has been an important growth in governmental activity in all spheres: federal, state and local. Likewise, there has been an increasing trend to increase jurisdiction to administrative and tax courts in order to decrease the workload of the federal district courts. The Tax and Administrative Justice Court (Tribunal Federal de Justicia Fiscal y Administratíva “TFJFA”) is comprised of a Superior Chamber located in the Federal District and twenty-one Regional Chambers located within Mexico. The Tax and Administrative Court has jurisdiction to hear cases related to definitive resolutions rendered in administrative law and federal taxes and general ordinances different from regulations.

It is worth mentioning that most administrative authorities can serve as self-review authorities if the individual challenges the resolution so rendered through the review-recourse. After this challenge, the individual could normally file an action/challenge before the Tax and Administrative Court as set forth above. Likewise, most states have a State Administrative Court dealing or that deals with resolutions rendered by local/State authorities. B. Criminal Law • Criminal law in Mexico has both Federal and State nature depending certain features provided by

statute. Thus, there is a Federal Criminal Code and Criminal Codes for each of the thirty-one states and the Federal District. Notwithstanding, there are federal and state statutes that set forth criminal provisions although not inserted within the criminal code in such areas as tax, labor, trademark and

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copyrights laws. Likewise, there is the same number of Procedural Criminal Codes. State Criminal and Procedural Codes were mostly modeled after the Codes of the Federal District.

• Mexican criminal law follows international standards and protects rights under the Constitution such as: (i) there is no crime unless specifically provided by law “nullum crime sine lege penale”; (ii) a Court of law is the only body entitled to impose punishment; (iii) no retroactive application of criminal laws “ex-post facto laws”; (iv) the benefit for the accused to receive better conditions derived from ex post facto laws; (v) all persons are innocent unless proven guilty (guilty beyond “reasonable doubt”); (vi) in case of doubt, the accused must be acquitted/“in dubio pro reo”; (vii) possibility to obtain bail when no serious crimes are involved; (viii) the right of the accused to remain silent during the proceedings; (ix) the burden of proof falls under the public prosecutor; (x) the right to be put face-to-face (careo) before the persons that testify against the accused; (xi) the right to offer all pertinent evidence available; (xii) the right of the accused not to provide statements before the police and not to remain for more than 48 hours under the District Attorney’s detention except for organized crimes. This also encompasses an express prohibition and severe punishment of any torture or similar practice (xiii) the right to receive from a competent Court of Law an order for holding a criminal procedure (auto de vinculación a proceso) before a Judge or to be released –subject to further investigation-; (xiv) the right to have a defense counsel and if defendant refuses to appoint one, then the State will appoint a public defense attorney; and (xv) the right to be judged between four months and one year.

• Recently there was an important amendment to our Constitution to forbid the death penalty that was held for many years in our Constitution as a reminiscence of the past since neither the Federal nor the State Criminal Codes so implemented. Likewise, there is no life sentence as such. In the same context, Mexico has neither jury trials nor grand jury to make formal indictments.

• The Constitution provides that a person that is accused for committing a crime has the right to obtain bail, subject to there being no serious crime involved. Federal legislature has followed a different path from certain State Statutes. For example, the Federal Procedural Criminal Code sets forth a detailed and exhaustive list of crimes that are considered serious where no bail will be allowed. On the contrary, the Federal District Code of Criminal Procedural follows a simpler rule whereby if the sum of the minimum and maximum imprisonment punishment divided into two neither equals nor surpasses five years, then, bail is allowed (i.e. 3 to 9 years /2 = 6 years; therefore, the Judge will deny bail).

• Currently, the main parties within the criminal proceedings are the public prosecutor or District Attorney, the defense counsel (defending the accused) and the Judge. Public or state defense counsel are subject to workload and, unfortunately, time to defend effectively is minimal. Public prosecutors (Ministerio Público) play a key role in the criminal proceedings since they have a dual-role. Once a crime has occurred notice should be given to the Public Prosecutor that will act as an investigatory body and public faith authority. It has the authority to grant bail in those cases where no serious crimes are involved and the person is under the public prosecutor’s detention. The public prosecutor will have a group of policemen and investigators under his/her command. Once all investigations have been carried out (including depose witnesses, experts and sub-poena relevant persons), then, it will formally indict the accused person before a competent criminal Court. Once this indictment has occurred (ejercicio de la acción penal), a competent criminal court will issue an arrest warrant (orden de aprehensión), to detain the accused and put him/her before the trial-criminal court.

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• Mexican lawmakers have tried to modernize criminal law and have implemented several important amendments that tend to balance the rights of an accused person vis-a-vis the victim of a crime. Currently, the “victim of a crime” has the right to be informed, collaborate with the District Attorney in the proceedings, to offer evidence, to receive medical and psychological treatment and receive relief in the form of monetary compensation. In the same token, other important amendments are aimed to make federal criminal proceedings faster. As part of this speedy trial, there is a new emphasis in oral proceedings and the Judge’s intervention to ensure that rights of the accused are duly respected. Other States are reproducing this model in order to guarantee the respect to the rights to a fair trial and due process.

• Due to a recent constitutional amendment launched in mid 2008, the main features of criminal law will modify drastically to have a more accusatory (in contrast to inquisitive) and to favor orality rather than written proceedings.

C. General Comments about Litigation in Mexico

• Mexico is not per se a litigious society. Largely because litigation is quite expensive (even though courts do not charge filing fees), awarding damages and lost profits is not an easy endeavor, and there are no punitive damages; proceedings tend to be quite lengthy with a strong reliance on form rather than substance, and it is quite difficult to recover legal fees. Likewise, Mexican law provides a different source for trying cases: civil, commercial, administrative, criminal, etc. although trial practice has not reached the complexity and degree of specialization that other countries currently have. Thus, a civil trial-lawyer will cover family, monetary, real estate, estate, professional malpractice and related items. Commercial lawyers will encompass corporate litigation, bankruptcy, breach of contracts, collaterals foreclosures and alike. Notwithstanding, it is more common to find true specialists although they will also manage to handle other areas of law within certain degree of expertise. Thus, there are three main types of legal counsel: (i) general practitioners; (ii) small-litigation boutiques; and, (iii) one-stop or full-service law firms. Contingency fees are not uncommon and are mostly used for collection cases. Combined fix-rates are more used nowadays.

• However, there has been an increasing trend towards specialization and trying new cases. Legislative changes have created a new kind of State liability (direct and objective) in federal, state and local spheres. Unfortunately, it will only encompass “irregular administrative acts” and do not include acts or omissions of the legislative and judicial errors. Another area that has experienced certain potential is actions for minority protection that are not followed under labor but rather civil laws. Likewise, there is a strong support to introduce newer and more effective rules for “class actions”. Beware of the fact that most civil and commercial cases could end in a criminal court since they could be subject to certain strategy from one of the parties to press the other to settle. One common adage under Mexican law is “a bad settlement is better than a good litigation”.

• Litigation in Mexico differs from trying a case abroad. There are no jury-trials. Proceedings are written-based rather than holding the “day-in-court” as known in Anglo-Saxon countries. Pre-trial discovery is very limited and not even close to what the practice in other countries is. Rules of procedure are mostly considered a matter of public order, and, therefore, there is very little scope to modify the statutory rules. Preparing a complaint (or a response) is probably the most important activity during the proceedings since once filed it cannot be subject of subsequent modification or amendment, unless there has not been service of process to the other party (in the case of the complaint). The Court will not grant extensions to answer a pleading or otherwise since legal terms

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are mandatory. Cases are more written-based than oral, and therefore, it is important to write pleadings with clarity. There are no amended complaints or responses.

• Due to the fact that Mexican law has limited discovery and there are strict rules as to the filing of evidence and cross-examination and no prior deposition of witnesses, procedures therefore tend to follow more formal or legal defenses than important fact-disclosure. Among those formalities it is very frequent to challenge the authority of the attorney-in-fact appearing on behalf of one of the parties. In this token, powers of attorney coming from abroad are a common source of challenge and, therefore, it is important to pay special care when drafting them.

• Another important difference from trying cases in other countries is the fact that Courts will not award punitive, consequential or indirect damages. Mexican law follows a “direct-and-immediate-consequence”-of-the-breach test. This applies for both damages and lost profits. In practice, it is difficult to obtain multi-million dollar awards on damages unless there is a “liquidated damages clause” that will avoid proving the existence of damages and would rather be aimed to evidence the existence of the breach, and hence, the penalty application. Arbitration cases pose a little more damage-flexibility as to awarding damages but always subject to such “golden rule”.

• Litigation in Mexico is not an easy task. Mexico’s statutes still rely heavily on formalistic issues over the substance of the dispute. Judges are work loaded and the time to be devoted to the case is minimal. Thus, there is a huge task for trial-attorneys to call the attention of the Judges and Court Clerks to address the merits of the case in order not to have the case dismissed for formalistic issues that will serve for the “statistic” but not for judgment-quality. Legal costs are outdated. Trying cases outside of the big three cities becomes much more difficult for the lack of experience of the judiciary for certain complex business contracts or torts. Thus, having all these ingredients altogether make it difficult for a business person (and even to non-Mexican legal counsel), to understand the inner works of litigation in Mexico. In fairness we must say that the Judiciary is making its best efforts to improve facilities to dignify administration of justice, as in the case of the Federal District.

D. Arbitration • The complexities of a global world, and the difficulties present in convincing a foreign party to have a

forum choice-clause to Mexican courts, have led parties to choose arbitration to resolve disputes in commercial transactions. Mexico is an arbitration-oriented country that has modeled its Commercial Code to international standards (mainly the 1985 UNCITRAL Model Law. Mexico is a party to both the 1958 New York Convention for the Recognition and Enforcement of Foreign Arbitral Awards and the 1975-Inter-Amercian Convention on International Commercial Arbitration).

• International treaties ratified and adopted by Mexico, current legislation and an increasing and open-minded support of the Mexican Courts will have to provide a growing confidence that arbitration agreements and awards are to be recognized and enforced. There is an increasing consciousness that only in exceptional circumstances these will be either set-aside or their recognition and enforcement denied. Foreign judgments also can be indeed enforced although they follow different rules since there is no international treaty dealing with those issues as, by contrast, the 1958 New York Convention.

• There are several domestic and foreign organizations specialized in arbitration such as the Mexican Arbitration Center (Centro de Arbitraje de Mexico “CAM”), Mexican Chapter of the International

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Chamber of Commerce (“ICC”), and the Arbitration Commission of the National Chamber of Commerce – (Cámara Nacionál del Comercio “CANACO”) that have been very active in fostering arbitration in our country.

• There has been a quite recent amendment in January 2011 to foster and improve arbitration. The amendment’s scope extends to assistance of courts, referral to arbitration, provisional measures, setting aside proceedings and recognition and enforcement of arbitration awards, among other changes.

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IV. Important Positions to Know 1. Lawyer • Mexican lawyers normally course a five-year law school program. While studying or immediately after

graduating from law school, individuals usually work for a firm or government agency as a clerks or interns (pasante) until they write a thesis and pass an oral exam to become licensed (Abogado or Licenciado en Derecho). After passing the licensing exam (that may be administered by the law school attended), individuals are addressed as Licenciado, abbreviated as "Lic." when written before the attorney’s name. There are no independent bar exams, and the Ministry of Education grants the licenses (cédula profesional) to practice law.

• In Spanish “licenciado” is the first degree awarded at the university level; it corresponds to a bachelor’s degree. Although there are “licenciados” in numerous academic disciplines such as economics, history, and business, the title is generally identified with the law degree.

• Although teaching techniques are evolving, current teaching in law school is based on a modern version of the lecture method, which allows students to ask questions and engage in classroom discussion. Because case study is not part of the curriculum, the Socratic method is unknown, although there has been an increasing interest for such system and a new impetus for gathering a master degree-abroad and mainly in non-Spanish speaking countries. This is specially so in certain areas where oral skills and rhetoric are essential (such as criminal law and arbitration).

• Mexican lawyers are licensed to practice throughout Mexico, not in individual states. There is no integrated bar or requirement to join a bar association. Rather, bar associations in Mexico operate as voluntary associations. Thus, there is not a bar exam that has to be taken or admitted, but there is current discussion to that end. Therefore, the “disbarment” concept does not resemble to the US-English concept and rather has to be treated as a civil-criminal behavior. The Mexican Bar Association (Barra Mexicana de Abogados “BMA”) is the more serious and recognized bar association.

2. Public Notary • Public Notaries in Mexico are empowered by local governments with the authority to assert “publica

fides” upon the events they witness or as compulsory formality to certain legal acts.

• Becoming a Notary Public is a lengthy process although in some states this may vary. In Mexico City becoming a notary public implies an approval exam of his “peers” and members of the government. In other entities, upon invitation by the government, a lawyer who has apprenticed for a number of years with another Notary Public takes an exam and, if he passes, receives a governmental permit to practice.

• A number of documents and agreements need to be created or validated by a Notary Public in order to be fully enforceable in Mexico - mainly real estate ownership transfers, real estate guaranties, incorporations, powers of attorney and wills.

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• Notary Publics’ actions are documented through the issuance of public deeds. In most cases, a Notary Public will issue a first true copy of a public deed and thereafter as many certified copies as necessary. First transcripts are of utmost legal importance and normally should be recorded with the Public Registry to produce effects vis-á-vis third parties and be guarded carefully.

• In most of the Mexican territory Notary Public’s fees are subject to rates; however, within legal limits, fees may be negotiated on a case-by-case basis.

• Mexico allows commercial public brokers (corredores públicos) to serve as “notary publics” for commercial transactions (i.e., creation of commercial companies), appraisers, and mediators and arbitrators. This alternative for providing legal form to certain commercial transaction had a new impetus after NAFTA entered into effect. Notwithstanding, commercial public brokers have not been able to become a true alternative to notary publics yet and for certain true-nature transactions will not ever be (i.e. real-estate purchase, creation of regular mortgages, etc.).

3. Customs Broker • To the extent that companies involved in business in Mexico have some foreign trade operations, it is

important that those operations strictly comply with applicable rules on imports and exports.

• The customs broker is the person responsible for ensuring that the proper paper work and tariff classifications are used for products imported or exported by the company.

• Thorough analysis of rules of origin is key to avoiding mistakes that may cause additional duties, fees and possibly even fines to be charged in the future.

4. Accountants and Auditors

• Although this should not come as a surprise, it is important for companies to keep proper accounting books and records and to, inter alia, file tax returns in a timely matter. Under Mexican law accounting records must be kept for no less than five years for tax matters, and ten years in respect to that information of a commercial nature.

• As a general rule, a formal external audit of financial statements is voluntary; however, if a business exceeds certain thresholds of income or number of employees, such audit will become compulsory for tax purposes.

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V. Practical Differences about Doing Business A. Introduction Despite Mexico’s openness to trade and investment, it has its own unique traditions, culture, and way of doing business. Some differences have a tremendous impact on the day-to-day aspects of doing business with Mexico and inevitably give rise to certain clashes on the part of both the businessperson from abroad and his or her Mexican counterpart. At worst, these clashes mount to the point where otherwise-desirable ventures fall apart, at great cost to all participants. By recognizing and understanding the differences in conducting business in Mexico we can keep cross-cultural clashes to a minimum, and increase the chance of success. This chapter does not attempt to provide a complete answer to all cross-cultural issues that arise when persons from other countries do business in Mexico. Such a definitive work would require an extensive study and hundreds of pages. Rather, it provides an overview of some of the cultural differences that may be encountered and offers some simply suggestions to guide around some of the most common pitfalls.

B. Tips on Dealing with your Mexican Counterpart 1. Avoid Misunderstandings Misunderstandings between businessmen and women from abroad and their Mexican counterparts generally fall into two categories: substantive and incidental misunderstandings. A substantive misunderstanding arises when one party fails to agree on the general purpose of a joint activity or ignores the consensus that it reached. The classic and most extreme example occurs when one party acts to build a successful long-term enterprise out of the venture, while the other treats the investment as a vehicle for short-term profit. Substantive misunderstandings also typically occur when the parties fail to perform reasonable due diligence or fail to take the normal precautions that would prevail in a purely domestic commercial relationship. Surprising numbers of sophisticated business people tend to drop their guard when approached by a cultured foreigner speaking fluent English and promising great riches. Substantive misunderstandings generally can be avoided by realizing that doing business in Mexico poses the same risk, as does anywhere else, and acting accordingly. Incidental misunderstandings are far less significant, but much more likely to occur. Incidental misunderstandings generally flow from the different perspectives that each party brings to the relationship, and the fact that one party will be dealing in a foreign language. The best remedies tend to be time, flexibility, and seeing that key personnel in both countries have sufficient contact with their counterparts to become familiar with each other’s way of doing business. The comparatively nominal investment of bringing key Mexican personnel to one’s home office from time to time can pay handsome dividends, as can periodic travel in the other direction. As for language, the first step toward solving the problem is to recognize it exists. Many Mexican professionals speak English with such a high degree of fluency that persons from other countries, say the United States, lose sight of the fact that a language barrier, albeit a very slight one, exists. This oversight can be dangerous. While everyone may appear to be on the same level in a fast-paced discussion, all

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parties may not always understand certain points. As a result, parties sometimes leave the conversation with different understandings of what is to occur. There are at least two simple ways to minimize potential misunderstandings. First, before holding an important conversation (particularly where the conversation will occur by telephone), provide the participants in advance with a written outline of the points to be covered. This gives everyone an opportunity to think about the same issue – as opposed to figuring out what the issues are – when the conference begins. Second, following up with a written confirmation of the plan of action agreed upon, the advice given, etc. ensues that no miscommunication has occurred and that all parties are on the same page. 2. Learn the Local Business Schedule Although businesses in Mexico operate on a fairly standard schedule, it is one that is different from that followed in many other countries. The normal business day in Mexico City begins around 9:00 a.m. Lunch runs from 2:00 p.m. to 4:00 p.m. The day ends at 7:00 p.m. or later. Other cities within Mexico even closed their business during lunch time. Likewise, the “sense of responsiveness” may be quite relaxed in cities different from Mexico City, Monterrey and Guadalajara. Persons doing business in Mexico are well advised to obtain a Mexican calendar to prepare for differences in holidays observed; business tends to slow down significantly during the school holidays around Easter and Christmas. 3. Dress Appropriately Mexicans generally tend to dress formally and are well groomed. If you wish to make a good impression, it is important that you follow suit. This is particularly true at the outset of a relationship when each party is extremely attuned to the nonverbal signals given off by his or her potential partner. In Mexico, it generally is appropriate for men to wear suits to most events including informal, social gatherings. When in doubt, it is better to overdress. 4. Take the Time Necessary to Build Personal Relationships This point cannot be stressed enough. The businessperson who fails to establish solid personal relationships in Mexico typically also fails to establish successful business relationships. The business person from abroad usually is ready to get down to business without establishing a personal relationship with his or her counterpart. This approach is complemented by a devotion to extensive contracts that seek to cover every possible contingency and is facilitated by the comparative ease with which one can obtain information about companies in other jurisdictions such as the United States or Western Europe. Business in Mexico is less an objective in and of itself and more an extension of the businessperson’s life as a whole. The Mexican businessperson is uncomfortable doing business with someone with whom he or she does not also have a personal relationship. The Mexican will rely less on negotiating a contract the size of a phone book and more on a simple contract coupled with a personal relationship of trust within which problems can be resolved. Developing this trust can be somewhat difficult in light of the comparative dearth of information that is available about Mexican companies. In the end, a decision on risk may need to be taken and have faith that any problems that arise can be worked out amicably. Therefore, it is imperative that the non-Mexican business person takes the time at the outset of a relationship to get to know his or her counterpart personally. This requires showing a genuine interest in

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your counterparts and in the personal aspects of their lives, such as their families. A chance to visit a counterpart’s home, or to entertain in your own home, should not be missed. The value of personal relationships extends far beyond a particular transaction or piece of business. A relationship with one person will extend to that person’s circle of friends and business contacts. Thus, credibility established with a single person can expand itself exponentially, opening many doors for further ventures. Conversely, a bad relationship with a single businessperson can poison many other wells. A personal relationship provides more than just credibility and trust. It also provides access and a special willingness to help. This can be particularly important when you need to cut through delays or bureaucracy. The more people you know personally, the more circles of contacts you will have access to in times of need. Having explained the above, on the other side, please acknowledge that Mexican business people may tend to see business as a matter of personal friendship than mere and pure business. Thus, it is likely that at the end there could be some sort of abuse in either side of the table based on the personal affection rather than the objective and reasonable business. As a matter of fact, certain litigation held in Mexico is sometimes more personal than business based. 5. Be Polite Mexicans are extremely polite people. For example, it is considered generous to pick up a restaurant check or gracious to let some go through the door before you. It is therefore particularly important for the businessperson from abroad to recognize the need to be more gracious than usual. It is also appropriate for the businessperson to make an effort to speak some Spanish. Even if your Spanish is quite limited, it is polite to try. Just about any gesture of politeness will be well received so long as it is sincere. The emphasis on politeness in Mexico makes for a very pleasant existence, but can result in frustrations. The need to be polite, and a genuine desire to be helpful, may sometimes make it difficult for your counterpart to say “no” or “I don’t know” in as blunt a fashion as we are used to. Thus, the business person from abroad may feel an agreement has been reached when it has not or may experience uncertainty as to where he or she stands. This becomes less of a problem as one learns the culture and gets to know one’s counterparts. 6. Expect Generosity and Be Prepared to Reciprocate Most Mexicans are very generous people. You may be provided with a car and driver to show you around the area, or entertained lavishly. It is important that you show them the same courtesies that they extend to you when your Mexican counterpart makes a visit and you have the opportunity to serve as the host. 7. Understand the Importance of Meals and Other Social Events In keeping with the importance of personal relationships, meals and other social events play a prominent role in the process of doing business in Mexico. What better way to develop a personal relationship than to share leisurely meal, during which the parties can talk at length about the things in life that are most important.

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Lunch is the big meal of the day in Mexico and fills this function beautifully. While not as leisurely, the “power breakfast” has become quite popular as well. Dinners tend to occur late in the evening and are less popular for meeting business associates. Opportunities to share a meal or attend a social event with a business colleague should be sought out and will generally prove highly productive over the long run, even if business is never discussed. 8. Select the Appropriate Means of Communication Persons doing business in Mexico must learn to employ different means of communication than those they are used to in their home country. This difference is perhaps most pronounced in the role played by the postal service. In Mexico, the postal system is, quite rightly, regarded as inherently unreliable. Cross-town deliveries can take up to two weeks and international mailings may take longer. E-mail is probably simplest and most effective way to routinely communicate. For delivering documents, there are a number of good alternatives to the postal system when communicating with a Mexican firm. Federal Express, UPS, DHL and analogous courier companies all offer prompt and reliable service to and from Mexico. As with all international shipments, however, large packages sent via private courier services may be subject to inspection by customs. Finally, personal meetings are used as a vehicle for communication with greater frequency in Mexico than other places. If the subject is at all important, a personal meeting, even if it is just to deliver significant documents, may be appropriate. Remember, this is another way to strengthen your personal relationships. 9. Prepare for Uncertainty and Delay One of the most common frustrations expressed by persons from abroad doing business in Mexico is the difficulty in obtaining immediate and definitive answers from their Mexican counterparts. What they do not understand is that there are myriad reasons for the delays and uncertainties. The better that the business person understands the reasons for these delays and uncertainties the easier it will be to plan for them and lessen the attendant frustration. 10. Lack of Guidance Other countries may have a well-developed body of commercial laws and procedures that make it easy to obtain concrete guidance about what one can and cannot do in virtually any situation. By contrast, Mexico’s body of commercial laws and procedures may be far less specific. Thus, in Mexico, getting a concrete answer to a specific question may require obtaining an opinion from the appropriate bureaucrat. While the foreign businessperson cannot change this lack of guidance, he or she, through proper communication with his or her Mexican counterpart, can at least understand that the problem exists and gain a sense of comfort in knowing how it is being resolved. 11. Need for Bureaucratic Approval Many actions in Mexico require bureaucratic approval, creating yet another source of uncertainty and delay. Improvement is noticeable in the past years, however. For example, many applications are now deemed approved if they are not acted on within 45 working days. The best antidote to this problem is knowing what bureaucratic approvals are required. Budget the time necessary to accommodate the process and, where appropriate, to work through agents having the

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necessary personal relationships with the suitable officials to get the approval process handled as expeditiously as possible. Decisions in Mexico, whether governmental or in the private sector, often have to be made at higher levels than a businessperson may be accustomed to. 12. Develop Realistic Time Lines Foreigners doing business in Mexico often get frustrated because they do not have a good understanding of all the steps necessary to carry a plan into action. Sitting down with your Mexican counterparts or advisors prior to implementing a transaction and developing a comprehensive list of all of the major steps that must occur to put the plan into action can put the process into proper perspective. Once you have such a list, it is a simple matter to come up with realistic deadlines for the completion of each step. While certain steps may involve inherent uncertainties, such as obtaining bureaucratic approvals, at least you will know what is involved and will have budgeted realistically or potential delays. 13. Need for Regular Follow-Up If not watched over carefully, even the best-laid plans of action have a tendency to slip. This is particularly true in a culture such as Mexico’s where politeness makes it difficult to say no to someone’s request, even if it means deviating from the schedule assigned to a preexisting obligation. In order to make sure that your project will be completed on time, it is important to monitor the matter carefully. Whether the matter is as simple as getting your car repaired, or as complicated as carrying out a large transaction, you will be better served by checking on the status of the matter periodically, well before the actual deadline arrives. 14. Allow More Time Persons doing business in Mexico need to realize that things may take longer to accomplish than in other places. This is no reflection on your Mexican counterpart who, if you have selected him or her carefully, will be extremely capable and hard working. Rather, there are simply certain hurdles that must be overcome that may not exist abroad. The first hurdle to international business is that you will be dealing with two sets of holidays instead of one. Persons doing business in Mexico need to plan around the Mexican holidays. On those days, even if the professionals and business people are working, the bureaucrats whose approval you need probably will not be. A second hurdle is that official documents must be presented in Spanish, and time must be allowed for time-consuming translation. A third hurdle is the role occupied by the Notary Public (Notario Público) in Mexico. Unlike other countries such as the United States, where notary publics merely attest to the authenticity of a signature, in Mexico the Notary Public is a quasi-public official who plays a very substantive role. For many actions to have legal effect, the Notary Public must review the relevant documents and certify that they have been prepared in accordance with Mexican law, an additional step that adds processing time. These actions include the granting of powers of attorney, the formation of corporations, the purchase of real estate, to name a few. A fourth hurdle is the dense traffic that exists in some of Mexico’s larger cities, and Mexico City in particular. You must allow sufficient time to get to meetings. Most Mexican business people carry a

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mobile telephone so that travel time can be used productively. Many hotels and mobile telephone companies have rental services that provide visiting business people with the same capability. Finally, the foreign businessperson needs to be aware that meetings may not start or finish exactly as scheduled. It is important you arrive in a timely fashion. It you get caught in traffic, the polite thing to do is to call ahead by cellular telephone and notify your appointment of the delay. No matter what you do, the possibility still exists that the person you are scheduled to meet with will not be ready on time, particularly if the meeting is with a government official. Accept this gracefully and come prepared with a briefcase full of work to occupy you in the event of a delay.

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VI. Trade and Investment Treaties

A. Introduction • Perhaps no country in the world has signed more free trade agreements than Mexico. Free trade

agreements now cover over 90% of Mexico’s trade, and Mexico enjoys bilateral accords with 44 countries, including the two biggest markets in the world: the U.S. and the EU. All together, these countries make up a preferential market of about 850 million consumers. The Mexican Supreme Court has placed international treaties above federal laws but below the Constitution. Thus, rules provided under treaties have substantial relevance within the Mexican legal framework.

• The most publicized and commonly known free trade agreement is the North America Free Trade Agreement (NAFTA). Trade with the U.S. and Canada has tripled since the implementation of NAFTA in 1994. However, Mexico has also executed a Cooperation, Political and Free Trade Agreement with the European Community that came into effect on July 1, 2000, and another with Japan which became effective on April 1, 2005. Since October 2012, Mexico joined the Trans-Pacific Partnership (“TPP”), the most relevant and recent trade negotiations with the Asian-Pacific Region.

• According to recent official sources, Mexico's most significant export partners were the U.S. (78.6%), Canada (3.1%) and China (1.7%). Likewise, Mexico's most significant import partners were the U.S. (49.7%), China (14.9%), Japan (4.7%) and Korea (3.9%). (Source: Ministry of the Economy. www.economia.gob.mx/files/diagnostico_economia_mexicana.pdf.

• Mexico has a strategic network of free trade agreements with various countries in its region, including Peru, Chile, Colombia, Costa Rica, Nicaragua, El Salvador, Honduras, Uruguay and Guatemala.

• Bilateral Investment Treaties (BIT’s) have been executed with most capital exporting countries. B. Free Trade Agreements 1. General Overview The various free trade agreements entered into by Mexico give preferential access to more than one billion consumers located in North, Central and South America, as well as Japan, Europe and Israel.

A larger development of the Mexican manufacturing industry is expected, with great quality suppliers who are in a position to increase production chains and create more added value, as well as better paid jobs. Companies must carefully analyze the reach of these free trade agreements because of the great diversity of opportunities to gain access to the U.S., European, Japanese and other markets, as well as to evaluate the competition that could be increased in many sectors, with the corresponding need to adjust in light of new market circumstances. 2. Free Trade Agreements in Effect The free trade agreements currently in effect and the countries comprised in the same are the following:

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Agreement Contracting Party / Member Countries

Entry into Force

North American Free Trade Agreement

United States of America and Canada

January 1, 1994

Free Trade Agreement

Costa Rica

January 1, 1995

Free Trade Agreement

Colombia

October 2, 2011

Free Trade Agreement with Central America

Nicaragua, Honduras, El Salvador, Guatemala and Costa Rica

Nicaragua and El Salvador September 1, 2012 Honduras; January 1st , 2013

Free Trade Agreement

Chile

August 1, 1999

Free Trade Agreement

Uruguay

July 15, 2004

Free Trade Agreement with the Triangle of the North

El Salvador, Guatemala and Honduras

June 1, 2001

Political, Cooperation and Free Trade Agreement with the European Community

Austria, Belgium, Bulgaria, Cyprus, Czech Republic, Denmark, Estonia, Finland, France, Germany, Greece, Hungry, Ireland, Italy, Leetonia, Lithuania, Luxembourg, Malta, The Netherlands, Poland, Portugal, Rumania, Slovenia, Slovakia, Spain, Sweden, and United Kingdom

July 1, 2000 [Note: The agreement has become effective as other countries have acceded to the Union]

Free Trade Agreement with the European Free Trade Association

Island, Norway, Liechtenstein and Switzerland

July 1, 2001

Free Trade Agreement Israel July 1, 2000

Free Trade Agreement Japan April 1, 2005

Free Trade Agreement Peru February 1st, 2012

A Free Trade Agreement with Bolivia was in effect since 1995 and until June 2010. Thereafter an Economic Complement Agreement has been implemented. In addition, preferential customs treatment is granted to countries belonging to the Latin-American Development and Integration Association (“ALADI”), along with Cuba. Under the respective ALADI treaties, only customs benefits are granted to product imports from the member countries. On the other hand, negotiations for a free trade agreement with the members of Southern Common Market (Mercado Común del Sur “MERCOSUR”) (Uruguay, Argentina, Brazil and Paraguay) are currently being held, although a treaty with Uruguay is already in effect.

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3. Fundamental aspects of existing free trade agreements. Agreements in effect comprise a diversity of matters affecting trade in goods and services, as well as investment issues. Due to the fact that Mexico is a party to the World Trade Organization, it adopted regulations derived therefrom. These may be summarized as follows: (a) National treatment. Grant national treatment to imported goods, which means no less favorable

treatment than the most favorable treatment granted to similar goods or competitors of the country of production or commercialization.

(b) Elimination of customs tariffs. Elimination or reduction of customs tariffs on goods, and inability to be increased as of the date in which the agreements become in effect.

(c) Import Taxes/Duties. Restriction to adopt or maintain customs duties on goods that are exported and which are covered by the agreements.

(d) Origin of goods. The only way to achieve access to the benefits negotiated under the agreements on trade of goods is for such products to be considered as goods originating in one of the countries that is a party to the particular agreement. With the purpose of protecting Mexico and its commercial partners from being used as platforms for exporting goods of third countries by using the benefits of the agreements, the general criteria include the following: i) goods obtained completely or entirely in the area of one or more of the parties; ii) goods produced entirely in the area of one or more parties with original materials only; iii) goods produced entirely in the area of one or more of the parties, using non-original materials that would produce a change of their customs classification due to their sufficient transformation or that they additionally comply with certain regional content value, or iv) unassembled goods. Also, other criteria may be used to qualify the origin of a goods, such as de minimis, intermediate materials, accumulation, fungible goods, indirect materials, accessories, spare parts and tools, bottles and packing materials for retail sales, containers and crating materials for shipping. It is important to point out that as a protectionist measure, even though a certain good may be considered as original, it may lose such character and all the agreements’ benefits shall be denied to it when such good suffers any further processing or, in general, is involved in operations apart from unloading, reloading or any other that is necessary to maintain it in good condition and ready for transport in a country that is not part of the agreements.

(e) Certificate of origin and customs procedures. Certificates of origin, or similar instruments, are used to ensure that the goods are original. Depending on each agreement, the certificate of origin may be issued by an exporter or by the authorized government authority of the exporting country. There are exemptions for the importation of goods which value does not exceed certain amount. Prior to the issuance of a certificate, the exporter must make sure, and sometimes evidence, that the good is qualified as original. National laws establish severe sanctions for the application of the benefits of a treaty to goods that do not qualify as original, as well as criminal sanctions in the event of perjury regarding origin statements.

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To determine if a certain good is original, the importing country may request, through its corresponding customs authorities, to verify the origin of the good through mechanisms such as: i) requesting information related to the origin of the good to the corresponding authority of the exporting country, ii) sending questionnaires directed to certain exporter or producer; iii) requesting the exporting country to collect information, including the potential ability for the authorities to inspect the facilities used for production of the goods, iv) making direct visits to the exporter or producer in the other country. Authorities involved in an inspection are required to keep the information as confidential. They also have the obligation to protect such information any disclosure that may harm the competitive position of the persons that provide it. Regarding the review and appeal procedures geared towards the origin of goods, the treaties ensure access to an administrative review body, as well as a judicial or quasi-judicial review of the corresponding resolution. In Mexico, review and appeal procedures consist of a motion for reconsideration, the annulment procedure and, finally, the amparo procedure.

(f) Investment. Mexico grants foreign investors and their investments a no-less favorable treatment than the one granted to its own investors and investments. Nevertheless, the treaties establish certain sensitive economic activities over which investment is not allowed. Also, Mexico may not expropriate or nationalize investments made by foreign investors, whether directly or through measures that are similar to expropriation or nationalization, unless for public use, over non-discriminatory basis, subject to the legality principle, and through the payment of a fair market value compensation. Additionally, no special requirements may be imposed regarding the performance or operation of a given investment made by an investor. In the event of dispute with a foreign investor, the same may be submitted to a complaint or arbitral procedure.

(g) Public Sector Purchases. With respect to any measures regarding government purchases, Mexico provides all foreign goods, services and providers from other countries, a no-less favorable treatment than the one granted to its own goods, services and providers.

(h) Antitrust and Antidumping Policies. Collaboration among authorities to avoid unfair competition practices in benefit of companies and consumers of both countries. Provisions regarding non-discrimination, transparency in the application of laws and regulations, confidential information treatment, as well as technical cooperation among the corresponding authorities is also included.

(i) General Exceptions. Within the general exceptions for application of treaties, several activities regarding national security, taxes, payments and transfers and restrictions to protect the balance of payments are comprised. In regards to taxation, the agreements may not interfere with internal taxes that are not considered customs tariffs, except when a law is amended so as to impede investment by a foreigner.

4. Bilateral Investment Treaties Many Bilateral Investment Treaties (“BIT’s”) have been entered into by Mexico. As of mid 2011, the following BIT’s were in force:

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Country Entry into Force Switzerland March, 1996 Argentina July, 1998 The Netherlands October, 1999 France October, 2000 Finland August, 2000 Denmark September, 2000 Portugal September, 2000 Austria March, 2001 Germany February, 2001 Sweden July, 2001 Korea 2002 Greece September, 2002 Cuba March, 2002 Uruguay July, 2002 Italy December, 2002 Belgium-Luxemburg Union March, 2003 Czech Republic March, 2004 United States of America 2004 Iceland April, 2006 Panama December, 2006 United Kingdom July, 2007 Australia July, 2007 Trinidad and Tobago September, 2007 India February, 2008 Spain April, 2008* Peoples Republic of China June, 2009 Slovakia April, 2009 Belarus August, 2009 Singapore April, 2011

* Replaced a prior treaty of 1996 Source: Ministry of the Economy. www.economia.gob.mx

Notwithstanding certain differences that may exist from one to the other, the content of BIT treaties is by and large homogeneous, generally including two sections: (a) investment protection disciplines; and (b) dispute resolution mechanisms. These can be summarized as follows, although care should be given to differences that may be found within such treaties. (a) Investment Protection Disciplines

(i) Treatment. Establishing a treatment threshold is considered of fundamental importance. To do so, three different standards have been devised: minimum, national and most favored, as explained below.

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• National Treatment Mexico is required to accord investors and their investment a treatment no less favorable than that granted, in like circumstances, to investments of its own investors. Simply put, foreign investments may not be discriminated because of their origin. • Most Favored Nation Treatment This principle requires Mexico to confer foreign investors a treatment no less favorable than the most favorable treatment accorded to investments in like circumstances from any other country. • Minimum Standard of Treatment Mexico shall afford foreign investments and investors a fair and equitable treatment, in accordance with international law, including full protection and security.

(ii) Expropriation and Measures tantamount thereto. Expropriations, nationalizations and measures equivalent to the same are required to only take place provided the following requirements are met:

• For public purpose reasons; • On a non-discriminatory basis; • That due process be observed; and • Compensation be paid, which need be the fair market value of the investment.

(iii) Performance Requirements. Performance requirements are frequently forbidden. Generally,

performance requirements are economic conditions that directly influence the activities of a company. Mexico may not condition the receipt, or continued receipt, of an advantage or incentive to the meeting of any of the mentioned requirements. Examples of performance requirements are: (a) minimum levels of exportations of goods or services; (b) minimum level of domestic content; (c) purchasing, using or giving preference to domestic goods or services; (d) transferring technology; (e) imports or exports quotas/minimums; (f) restrictions of sales or goods or services; (g) conveyance of know-how; (h) exclusivity.

(iv) Transfers of Currency. Profits, dividends and any type of cash stemming from, or involving, the investment shall be freely transferable without delay, in hard currency. Nonetheless, certain exceptions have been envisaged, such as bankruptcy or insolvency proceedings, protection of creditors, criminal offenses, judgment satisfaction, and balance of payment measures.

(v) Senior Management and Board of Directors. The requirement that senior management positions be occupied by Mexican nationals is prohibited.

(b) Dispute Settlement Mechanisms

The described investment treaties network generally grant foreign investors the right to bring an action against the United Mexican States in the event a breach of the disciplines described above exists, or is believed to exist. Dispute resolution mechanism is through arbitration. A panel of private arbitrators will be established and its composition will be determined by the involved parties.

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The goal is ensuring an equal and non-discriminatory treatment between the foreign investor and the Host State, impartiality, in addition to due process.

Seeking redress is subject to fulfilling certain conditions:

(i) Prior negotiations: a notice that details the circumstances giving rise to the dispute must be

provided. To the best possible extent, parties are required to attempt to settle their differences amicably.

(ii) Cooling-off period: should no solution be obtained within a certain period (usually six months),

formal action may be brought. (iii) Local Remedies. Fork in the road: the need to exhaust local remedies is subject to varying

requirements. No general rule can be established, albeit the scenarios can be catalogued as: (a) provisions that require exhaustion; (b) treaties that require waiver of domestic remedies; (c) provisions that are indifferent to past claims, but impede future parallel proceedings; and (d) treaties that are silent.

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VII. Regulation of Foreign Investment A. Foreign Investment The Foreign Investment Law (Ley de Inversión Extranjera “FIL”) and its regulations define “foreign investment” as: • Participation by foreign investors (defined in turn as an individual or entity of any nationality other than

Mexican, and foreign entities with no legal standing) - in any percentage - in the capital stock of Mexican companies;

• Investments by Mexican companies in which foreign capital has a majority interest; or

• Participation by foreign investors in activities and acts contemplated in the FIL. Foreign investors may participate in any proportion in the capital of Mexican companies, acquire fixed assets, enter new fields of economic activity or manufacture new product lines, open and operate establishments, and expand or relocate existing establishments, except as otherwise provided in the FIL (as discussed below). B. Economic Activities that are Restricted under the FIL • Some strategic areas are reserved exclusively for the Mexican State, such as petroleum and other

hydrocarbons, electricity and postal service, among others;

• Foreigners exclusion clauses reserve exclusively to Mexicans or Mexican companies some economic activities and companies, such as gasoline retail sales, distribution of liquefied petroleum gas, radio broadcasting services, and other radio and television services other than cable television, among others. Such clause implies an express agreement or covenant forming an integral part of the corporate by-laws, setting forth that such cooperation shall not admit, directly or indirectly, foreign investors or corporations as partners or shareholders;

• Specific regulations of the FIL establish participation limits for foreign investment in some activities

and acquisitions, such as: cooperative companies for production (up to 10%), domestic air transportation, air taxi transportation and specialized air transportation (up to 25%), and insurance companies, bonding companies, and bonded warehouses (up to 49%), among many others. Foreign investment participation limits in the activities and companies mentioned may not be surpassed directly nor through trusts, contracts, partnerships or by-law agreements, pyramiding schemes or other mechanisms granting any control or higher participation than the one established. However, these limits could be surpassed just by neutral investment.

Additionally, a foreign investor must obtain the approval of the Foreign Investment Commission (Comisión Nacional de Inversiones Extranjeras “CNIE”) in order to participate in a percentage higher than 49% in some activities, such as: legal services, credit information companies, cellular telephony, insurance agencies, and construction of pipelines for the transportation of petroleum and products derived there from, among others.

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C. Investment by Foreign Corporations As provided by the FIL, a foreign company must obtain authorization from the Ministry of Economy (Secretaría de Economía “ME”) if it intends to engage in business on a regular basis in Mexico, such as by way of establishing a branch. The approval will be granted when the following requirements are met: • That the company proves that it is duly organized in accordance with the laws of its country;

• That its charter and other organizational documents are not contrary to Mexican public policy or law;

and

• That the company sets-up itself or maintains an office or branch in the Mexican Republic. In addition to satisfying the above, the foreign corporation must submit an application in writing, stating the general identification of the applicant and describing the economic activity it intends to carry out in the country. Companies incorporated in the United States of America, Canada, Chile, Costa Rica, Colombia, Nicaragua, El Salvador, Guatemala, Honduras, Uruguay, Japan and Peru, will not require to obtain said authorization and would only need to submit a letter notifying their domicile, evidence that the company it is duly organized in accordance with the laws of its jurisdiction, and that its charter and other organizational documents are not contrary to Mexican public policy. D. Neutral Investment Neutral investment (inversión neutra) is investment made in Mexican companies or in trusts authorized by the ME that is not taken into account in determining the percentage of foreign investment in the companies’ capital stock. The ME may authorize trustee institutions to issue neutral investment instruments that shall grant solely economic rights to their holders and, if applicable, limited corporate rights, but not voting rights in ordinary shareholder’s meetings. Investment in non-voting stock or with limited corporate rights is considered neutral, provided that authorizations from the ME and, when applicable, from the National Banking and Securities Commission (Comisión Nacional Bancaria y de Valores - “CNBV”) are granted. The Ministry shall also resolve upon the investment intended to be made by international financial development institutions in the capital stock companies. E. National Foreign Investment Registry The National Foreign Investment Registry (Registro Nacional de Inversión Extranjera - “RNIE”) has been created for statistical purposes in foreign investment, but specific information about investors and investments is not generally available to the public, except for the statistical data available through publications or the website of the Registry. However, significant statistical information is available in their website. The following must register with the RNIE:

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(i) Mexican companies in which there is participation, including through trusts, of: foreign

investment; Mexicans who have or acquire another nationality and who have their domicile outside Mexican territory; or neutral investment.

(ii) Those who regularly engage in business acts in Mexico (such as, for example, a branch

office), if they are: foreign individuals or companies; or Mexicans who have or acquire another nationality and who have their domicile outside Mexican territory; and

(iii) Trusts, shares or corporate equity interest in real estate or neutral investment whereby rights

shall be derived in favor of foreign investment or of Mexicans who have or acquire another nationality and who have their domicile outside Mexican territory.

Upon registration with the RNIE, periodic notices are required; failure will trigger fines. F. Acquisition of Real Estate This section will address generally the legal requirements for the acquisition of real property in Mexico by Mexican companies with foreign investment, and directly by non-Mexican individuals or companies. 1. Mexican Companies • Urban Real Estate: No restrictions exist for Mexican commercial companies seeking to acquire real

property of this nature, even if non-Mexican shareholders participate in the capital stock, whether in a minority or majority position.

• Rural Property: Article 27-IV of the Constitution states: "Corporations can own rural land, but only to the extent necessary for the fulfillment of the corporate purpose." In no event may these corporations acquire real property dedicated to agricultural, cattle or forest activities in an amount greater than an established threshold.

• Restricted Border and Coastal Zones: The area known as the restricted zone is a “belt” surrounding the territory of Mexico – 100 kilometers wide in the border regions and 50 kilometers wide along the coast.

In those cases, it will be deemed by Law that foreign shareholders agree to consider themselves nationals as regards that property, and also agree not to invoke the protection of their governments, under the penalty of forfeiting their property for the benefit of the Nation if they do so. Such agreements are referred to as “Calvo Clause”. Mexican Companies with a Calvo Clause included in their by-laws are authorized to acquire real properties located in the “restricted zone” as follows:

(i) For non-residential purposes, provided the corporation registers the acquisition with the SRE; or

(ii) For residential purposes, subject to the requirements that must be fulfilled by Foreigners (as

explained below).

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2. Mexican Corporations without Foreign Investment No restrictions exist for buying real property in Mexico even if located within the restricted zone, nor is a previous permit of the Ministry of Foreign Affairs (Secretaría de Relaciones Exteriores “SRE”) required. 3. Non-Mexican Individuals • The general rule is foreigners can acquire real property only if they agree to consider themselves

nationals vis-à-vis that property and agree not to invoke the protection of their governments, under the penalty of losing such property for the benefit of the Nation.

• Foreign citizens cannot by any means acquire real property within the “restricted zone”; however, they

can hold beneficiary rights in trusts established for the purpose of holding ownership of the real estate, subject to the SRE’s prior authorization (granted upon the party’s agreement to the Calvo Clause principles).

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VIII. Corporate Structures for Doing Business Selecting a corporate vehicle to carry out operations in Mexico is key to reaching the desired business results, including those related to taxes, and to avoid liability risks. An investor may wish to deal directly through a representative office or branch operation, or establish a new company in Mexico that shields him/her from liability (other than in extraordinary instances of fraud, including tax). Several alternatives for doing business in Mexico exist –a few of the basic and most utilized structures are presented below. A. Representative Office This structure allows carrying out certain limited activities towards doing business in Mexico, such as preparatory work for distribution of information and advertising materials, but will not permit the actual business operation where income is earned. In the case of several financial services (such as insurance or banks), their establishment is regulated under specific legislation and will require the prior approval from the relevant regulator. In other cases, notices or even a permit from the CNIE will be required. This option assumes that there will be no income sourced in Mexico, and hence no tax obligations, except for withholding taxes that could potentially arise in the event of salaries and benefits paid to local employees. Thus no permanent establishment for tax purposes will be triggered. B. Branch Office The concept of a branch (sucursal) of a corporation established outside of Mexico that performs business activities in the country is regulated by several bodies of law such as the Commerce Code (Código de Comercio “CC”), the General Law of Commercial Companies (Ley General de Sociedades Mercantiles “GLCC”) and the Foreign Investment Law. A prior authorization/clearance must be secured from the Ministry of the Economy and subsequent registration in the RPC. Under this structure the investor would be acting directly in Mexico, and not through a separate legal entity. The registration of a branch and not merely opening a "representative office" is an important difference insofar as the intended activity would be of an income generating nature. Hence, the investor could carry out actual business activities in furtherance to its corporate charter and purposes. Once authorized, the branch office may perform any business activity not otherwise limited to the Mexican State, to Mexican nationals or companies. To secure the approval and subsequent registration, the investor must file an application before the ME and meet the following requirements: (i) evidence that it is legally incorporated in its country of origin; (ii) prove that its corporate purpose and the terms of its charter do not contravene provisions of Mexican public policy; and (iii) confirm its petition to establish a local branch office. For tax purposes the branch operation would be deemed to create a "permanent establishment", and hence payment of taxes on the income attributable to the source, less deductions, must be paid.

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Although the biggest advantage of this alternative lies in the fact that it may be set-up without the need of forming a new company in Mexico, this may turn out in practice to be a time consuming option due to the nature of authorizations that must be secured. C. Partnership Venture (a.k.a. “Contractual Joint Venture”) Pursuant to the Participation Venture Contract (Asociación en Participación), there is one person (individual or legal entity) that will carry out transactions in its own name, but on behalf of and for the benefit of itself and one or more silent partners (asociados). This structure does not create a different legal entity, insofar as it is the lead partner (asociante) who will be conducting business vis-à-vis third parties in its own name. The obligations of the lead partner will include distributing the profits or losses among the silent partners, without losses exceeding the amount of contributions made. In exchange for a share of profits or losses the parties utilize this structure in those instances where a very specific project or business transaction, normally of short duration, requires contributions. Contractually, the parties may address issues as adoption of certain decisions relating to the project, time for the distribution of earnings, etc. In spite of its contractual nature, for tax purposes, the structure is treated as if it were a commercial entity and thus files tax returns independently of the parties to the contract. D. Corporate Presence The main advantage of the subsidiary is that as a general rule it "shields" the investor from any claim related to the activities undertaken in Mexico. A branch office may be better suited for a specific short term project, but the creation of a new entity will provide the investor a corporate presence in Mexico that will allow a long-term vehicle for expanding or simply continuing its operations in México. Two corporate structures are commonly utilized for non-publicly traded companies: the sociedad de responsabilidad limitada (SRL) and the sociedad anónima (SA). In certain instances, primarily when a joint venture relationship exists and more complicated corporate governance rules are warranted, a sociedad anónima promotora de inversión (SAPI) may be used. E. Limited Liability Company (Sociedad de Responsabilidad Limitada

“SRL”) In a limited liability company, the equity participants or partners’ liability is limited to the value of their contributions. SRL’s may have no less than 2 and not more than 50 members. Members of a SRL are not issued shares transferable by means of endorsement, although they may nonetheless transfer their equity holding. The SRL is designed primarily for joint venture relationships or closely held companies, where super majorities and restrictions on transfers of equity are desired. Under tax laws of certain jurisdictions (and this may be the case of the United States of America) this company may have a “pass-through” treatment that could bring certain tax benefits abroad. F. Stock Company (Sociedad Anónima “S.A.”) The SA is an entity having all the main characteristics and elements of a corporation, i.e.:

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• limited liability of shareholders (up to the amount to cover the par value of the shares of the outstanding capital stock);

• the shareholders’ meeting as the ultimate source of corporate power; • a board of directors in charge of the over-all management and operation; • corporate officers who handle the day-to-day operations; and • ownership of freely transferable shares.

Every SA must have a minimum of two shareholders and there is no limit to the number of shareholders they may have. The SAPI was introduced a few years ago into Mexican law, and affords the possibility of incorporating into its charter typical joint venture covenants. G. Variable Capital Companies (Capital Variable “CV”) All commercial companies may have the characteristic of adopting a variable capital status (and referenced as “C.V.”, such as “S.A. de C.V.”) which, simply put, allow the shareholders to increase or decrease capital in the variable portion without major formalities such as notarization and the requirement of registration in the RPC. H. Process for Incorporating a Mexican Company

1. Select Corporate Name To formally incorporate a Mexican company, a prior permit must be secured from the Ministry of Economy (Secretaría de Economía) authorizing the use of a precise corporate name. The purpose of this administrative measure is two fold: (i) on the one hand, formally accept the “Calvo Clause” (see Section on Regulation of Foreign Investment above), and (ii) avoid having companies within Mexico with identical or confusingly similar names.

2. Charter and By-laws The charter of incorporation and corporate by-laws (estatutos sociales) must include at least the following information:

• corporate purpose, name, duration and domicile; • manner in which each shareholder will pay his/her/its shares; • names, nationality and domicile of all shareholders; • amount of capital stock; • authority of the Board of Directors or Sole Administrator; • rules for distribution of profits and losses; • rules regarding the dissolution and liquidation; and • appointment of the Board of Directors, officers and Statutory Auditor (comisario).

3. Appearance before a Notary Public. Registration Once the foregoing permit is secured, the company is formed through the appearance of all shareholders (directly or through an attorney-in-fact) and the execution of the charter of incorporation and by-laws

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before a Notary Public (or a commercial broker). A formal incorporation instrument is then issued, same that will be filed for registration with the RPC of the corporate domicile.

4. Directors, Statutory Auditor and Officers Directors may or not be Mexican nationals; if not, they must enter Mexico to hold a meeting with the proper business visa. Business visas may be easily secured for directors for NAFTA and EU residents and other countries with which Mexico holds investment treaties. These are available normally upon entry. From other countries the process may be more complicated. Except for the case of regulated activities such as financial services, there is no limitation for the number of board members to be nationals and/or residents of Mexico, or even in the particular domicile of the company. It is common for the charter and by-laws to provide for the holding of unanimous consent resolutions of shareholders and directors, which would allow for the adoption of resolutions without the need of a physical meeting. A statutory auditor (comisario) must be appointed, which position is normally a representative from the firm of outside auditors.

5. Post Incorporation Registrations Several notices and filings must be secured in order to be in full standing. (a) Public Registry of Commerce (Registro Público del Comercio “RPC”) All commercial companies must be registered, as failure to do so will render all shareholders or management acting on behalf of the company jointly and severally responsible for the company’s operations. Subsequent events must be registered as well, such as fixed capital increases, appointment and removal of Board Members, legal representatives and attorneys in fact, any security interests over the company’s assets, liens, issuance of bonds or debentures, and bankruptcy proceedings, among others. The RPC is available for public consultation but in practice only excerpts of recorded documents are truly available. (b) Foreign Investments National Registry Information to be filed with the RNIE includes nationality of investors, amount of capital stock of the company and percentage owned by foreign investors, and amount of capital invested and participation owned by each foreign investor. Economic information regarding results of the company must be provided on an annual basis and depending on the specific quarterly performance, quarterly information may need to be submitted to the RNIE. Information filed with the RNIE is not public and is most used for statistical analysis of foreign investment performance in Mexico. (c) Federal Taxpayers’ Registry (Registro Federal de Contribuyentes - “RFC”) The RFC is one of the most important registrations to be secured by a newly created company. This RFC will allow the company to engage in operations and is required not only to pay taxes but also to open bank accounts, issue invoices, and secure other registrations.

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As part of its registration, the “electronic tax signature” (firma electronica or “FIEL”) must be secured in order to make electronic filings and payments. (d) Importers’ Registry Any company that engages in foreign trade transactions and seeks to import assets, goods, materials or supplies, will require an importer’s registration. This process may take several weeks to complete. (e) Business Information System The Mexican Business Information System (Sistema de Información Empresarial Mexicano ”SIEM”) is an information statistics system that intends to gather and process business information. While the registration and filing of information with the SIEM is mandatory, there is no current sanction for not registering with the SIEM. While the SIEM could become an important information database, which could help identify potential clients and suppliers in effect, Mexican business culture still resists to the sharing of information. This results in small updating activity.

6. Operating a Mexican Company (a) Shareholders’ Meetings. All shareholders’ meetings must be held within the corporate domicile of the company and must be legally called. At least one shareholders’ meeting is required to be held on a yearly basis within the first four months, which meeting is called to approve the annual financial statements of the company, distribution of earnings, appointment or ratification of board members and statutory auditor, and compensation to be paid to the latter. Provided the corresponding by-laws allow it, unanimous consent resolutions may be adopted in lieu of a shareholders meeting, provided such resolutions are confirmed in writing by all shareholders. (b) Board of Directors. Companies are managed either by a board of directors (board of managers in the case of Limited Liability Companies) or a sole manager. The board of directors is entrusted with executing the shareholders decisions and directing the activities of the company. The Board is vested with the necessary authority to fulfill the corporate purpose of the company and therefore holds the representation of the company. The board may appoint managers and other officers to handle day-to-day business. The appointment as a director is a personal appointment and therefore board members must perform their duties personally and may not be represented in any manner. Alternate directors may be nonetheless appointed as well. (c) Main obligations and liabilities of Directors. Mexican law requires board members to have duties of diligence and loyalty to the company. They must act in the best interest of the company, and not necessarily of the shareholder, even when these are

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members appointed by a minority group of shareholders as explained below. The concept of “fiduciary duty” has been incorporated from the Roman law notion of actions taken by a prudent businessman or family parent, but may differ from current regulation of such duty in other jurisdictions. The directors must abstain from participating in a decision in which they may have a personal interest. In case of breach thereof, they will be liable for any damages and losses caused to the company. Specific obligations and liabilities of Board members are included under corporate law. Amongst these:

(i) To remain in their office until their successors have been appointed and taken office. (ii) To ascertain the accuracy of shareholders’ contributions. (iii) To verify that all legal requirements are fulfilled before distributing dividends. (iv) To verify the existence of all accounting books and records, and prepare an annual report to the

Shareholders’ Meeting which will include:

§ A report from management, regarding the business of the corporation and the main policies used to prepare financial information.

§ A balance sheet and statements (i) showing the profits or losses of the corporation, and (ii) the financial changes in the company during the prior fiscal year, together with any notes deemed necessary to clarify the foregoing information.

The members of the Board will be jointly liable with those directors who preceded them if, when appointed, they become aware of irregularities and fail to notify them to the statutory auditor. This annual report must be submitted annually for approval of the Shareholders’ Meeting, within the first four months following the end of the fiscal period. (d) Surveillance. Stock corporations are required to appoint one or more statutory auditors or comisarios, whose function is to verify the correct operation of the company, undertake an internal audit of the company’s operations, documents, registries, entries, and other information in order to reasonably ensure that the financial information and management of the company is being conducted in accordance with the law and with the company’s internal policies. Statutory auditors must be called and attend any board of directors’ meeting (although they will not have a vote therein) and must also prepare an annual report addressed to the shareholders of the company in which report the statutory auditors render their opinion with regard to the correct management of the company. In addition, statutory auditors may call a shareholders’ meeting in those cases in which the Board refuses to do so at the request of shareholders that meet specific requirements. Statutory auditors shall be personally liable to the company for compliance of their obligations set forth by the law and the by-laws of the company. Unless otherwise required, statutory auditors need not guarantee the legal performance of their duties, shall abstain to act in those cases in which they have a conflict of interest, and shall be jointly liable with those preceding in case they detect any irregularities of prior statutory auditors and fail to disclose them to the shareholders.

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The limited liability companies may, at their option, include in their by-laws the right and/or obligation to appoint a statutory auditor or Surveillance Board, although this is not required. As a practical matter, statutory auditors accept to undertake such a position as long as their firms are also retained to perform annual audits for the companies. The reason behind this requirement is to be in a position to better comply with their duties.

7. Minority Rights in a Stock Corporation (SA) Minority shareholders in a stock corporation have certain statutory rights as follows:

(a) Calls to Meetings. Right to request from the board of directors that an ordinary or extraordinary stockholders' meeting be held to discuss certain matters of their interest (holders of at least 33% of the capital stock);

(b) Annual Ordinary Meetings. Right to request from the board of directors that an annual ordinary

stockholders' meeting be held to discuss the approval of financial statements and designation of members of the board when no such annual meeting has been held for two consecutive years (any shareholder);

(c) Deferral of Vote. Right to request that voting on a certain subject matter brought up in a

stockholders' meeting be postponed for up to three days, when such minority shareholders deem they are not sufficiently informed on the particular issue (33% of the capital stock present at the corresponding meeting);

(d) Claims against Directors. Right to request liability from the board of directors or management of

the company, as long as their claim is made on behalf and for the benefit of the company, and that the opposing shareholders did not vote in favor of releasing directors from liabilities in a stockholders' meeting, if any, which may have been held to resolve thereon (33% of the capital stock of the company);

(e) Opposition to Resolutions. Right to oppose resolutions contrary to the charter, by-laws or legal

provisions which are adopted at the shareholders' meetings, as long as the shareholders either did not attend such meeting or voted against the corresponding resolution (33% of the capital stock of the company, and 20% of the capital stock in the case of opposition to a spin-off). Resolutions determining liability of directors may not, however, be challenged other than in the case listed in paragraph (d) above;

(f) Withdrawal of Investment. Right to withdraw their investment, when such shareholders voted

against a shareholders' meeting resolving on a change of corporate purpose, nationality of the company, its transformation into a different type of company, spin-off, or in the case of shares corresponding to the variable portion of capital (any shareholder);

(g) Appointment of Directors. Right to appoint one director in the event the Board of Directors is

composed by three or more members (25% of the capital stock); and

(h) Appointment of Statutory Auditor (comisario). Right to appoint a statutory auditor (25% of the capital stock).

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Note that different forms of entities (e.g. publicly traded companies and SAPIs) may have different minority rights for its share or equity holders.

8. Conflict of Interest Shareholders of a Mexican corporation are specifically legally required to abstain from deliberation at a meeting which is to resolve an item in which they may have a conflict of interest. Directors are further required to: (i) disclose the conflict; (ii) abstain from deliberation; and (iii) abstain from voting on the subject. Failure to abstain from deliberation and/or voting may trigger liability to pay damages caused to the relevant corporation.

9. Distribution of Earnings and Payment of Dividends. Legal Reserve Once taxed at the corporate level, profits are distributable without additional taxation. The dividends, however, may only be paid based on a shareholders resolution approving a financial statement, which reflects the existence of profits. The only limitation existing for the distribution of profits is the legal reserve. This reserve consists on the creation of a contingency fund by way of separating 5% of the profits corresponding to each fiscal period, until it reaches 20% of the capital stock of the company. Directors are personally responsible for any dividend distributed that are not properly supported and fulfills all legal requirements.

10. Accounting Records and Book-keeping The Commerce Code provides that all business companies are required to maintain an adequate accounting system that at least:

• Allows for the proper identification of individual transactions and their characteristics and the corresponding support documents;

• Allows for the proper tracking of transactions in order to reach the accounting results; • Allows the creation of the financial statements; and • Allows for control and verification systems necessary to prevent the omission of entries.

All accounting records must be kept in Spanish, and all supporting documents must be kept for a period of 10 years. Likewise, companies are required to maintain the original correspondence pertaining to agreements reached. Companies are further required to keep and maintain four corporate books: (i) Shareholders’ Meetings minutes; (ii) Board of Directors’ Meetings minutes; (iii) Capital Variations (in the case of variable capital companies); and (iv) stock ledger or Shareholders’ Registry book.

11. Mergers and Spin-off (a) Merger A merger is the combination of two or more companies into an existing company or a new company created as a consequence of the merger. The surviving entity assumes all assets and liabilities of the

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merging entities. A merger requires both of a merger agreement between the merging entities and the corresponding corporate resolutions. A merger agreement along with a balance sheet must be submitted for approval of an Extraordinary Shareholders' Meeting of each company. The signed agreement along with the minutes of the Extraordinary Shareholders' Meetings of the companies are notarized, then published in an Official Daily, and registered with the RPC. The merger will become effective three months after the above registration is made. During that period any creditor may oppose the merger before a Court on the ground that its debt is jeopardized by that transaction. If a suit is filed, the merger will not become effective until the Court decides to dismiss the action. The deferred effectiveness rule can be overridden, and thus the merger may become effective immediately if one of the following three things happens: (i) all creditors grant their express written consent; (ii) all creditors are paid out; or (iii) a bank deposit is made to secure payment of all existing debts. As you may gather, it might be convenient to negotiate with creditors early in the process to allow for the merger to become effective immediately. As a result of the merger, all government agencies with which the merged companies had approvals from, registrations or any other obligation must be served notice of the merging entity becoming their successors. Among notices required, of special relevance are those to be submitted with tax authorities and the Foreign Investments National Registry. Under the Federal Labor Law (Ley Federal del Trabajo), as a consequence of the merger all employees of the merged company will become employees of the surviving entity, which will act as a substitute employer. All salaries, seniority, benefits, etc., which are received by the employees of the merged entity must be acknowledged and respected by the merging entity. There is no consent required on the part of the employees, who will be deemed duly transferred automatically, and the merging entity will become substitute employer. The merger is not taxed as long as (i) a merger notice is filed with the tax authorities; (ii) the surviving company performs the same activities of the merging entities for at least one year after the merger; and (ii) the suriving entity assumes the obligation to file the final tax returns of the disappearing entity. A merger is considered a concentration for antitrust purposes, and prior clearance from relevant authorities may be required (See section X below). (b) Spin-off A spin-off occurs when part of a company is separated to form a new entity. This separation includes assets, liabilities and capital stock. In order to effectuate a spin-off, an extraordinary shareholders’ meeting is required to approve the resolution. The corresponding resolution must contain:

(i) a description of the manner, terms, timing and mechanism under which the assets, liabilities and capital stock will be transferred;

(ii) a description identifying the specific assets, liabilities and capital stock that will correspond to each entity;

(iii) the financial statements of the spun-off company, for the last fiscal period, duly certified by external public accountants;

(iv) the determination on the obligations/liabilities assumed by each entity; and (v) the proposed by-laws for each entity.

These resolutions must be notarized, published in one of the major newspapers and registered with the RPC. Within a period of 45 days from registration, any shareholder or group representing at least 20% of

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the capital stock or any creditor with a legal interest may oppose the spin-off, which will be suspended until such time the Court decides on the merits of the case. During the three years following the spin-off if any of the new entities is unable to comply with the obligations vis-à-vis creditors that did not expressly approve the spin-off, the other new entities shall be jointly responsible for such obligations up to the amount of net worth that corresponded to each in the spin-off. If the spun-off company survives, it shall be responsible for all obligations of the new entities during such three-year period. Under the Federal Labor Law, as a consequence of the spin-off, the employees that are transferred to the new entity will become employees of such entity, which will act as a substitute employer. All salaries, seniority, benefits, etc., which are received by the employees of the spun-off entity must be acknowledged and respected by the new entity. There is no consent required on the part of the employees, who will be deemed duly transferred automatically, and the new entity will become substitute employer. The spin-off is not taxed as long as (i) the shareholders holding at least 51% of the voting stock of the companies are the same for a period of three years starting from the year prior to the spin-off becoming effective; and (ii) in the case the spun-off company disappears, one of the new entities assumes the obligation to file the final tax returns of the disappearing entity.

12. Dissolution and Liquidation of a Mexican Company Mexican companies are dissolved and then liquidated for the following reasons:

(a) Expiration of the term of their duration without being renewed or extended; (b) Impossibility of fulfilling the corporate purpose of the company, or accomplishing its purpose; (c) Agreement of the shareholders; (d) Because the company has less than the minimum shareholders; or (e) If losses exceed two thirds of the capital of the company;

An extraordinary shareholders’ meeting (in the case of a stock corporation) will be required to approve the dissolution and liquidation of a Mexican company. The corresponding resolution along with the appointment of liquidators must be notarized and recorded with the RPC. To carry out their duties, liquidators must: (i) conclude any pending transactions; (ii) collect any accounts receivable and discharge any amounts payable; (iii) sell any remaining assets; (iv) distribute among each shareholder the corresponding amounts due (prior approval of the corresponding distribution proposal); (v) prepare a final liquidation balance sheet to be approved by the shareholders which must be filed with the RPC; and (vi) secure cancellation of the registration with the RPC. The liquidators must maintain all liquidation information and documents for a period of 10 years after the liquidation is concluded.

13. Corporate Governance Issues Corporate Governance is defined by the Code of Best Corporate Practices (Código de Mejores Prácticas Corporativas) as “the system under which corporations are directed and controlled” and it implies a direct relationship among the administration of the corporation, its board, its shareholders, and any interested third parties. In Mexico, corporate governance is dealt with in two main bodies of law, the General Law of Commercial Companies GLCC and the Securities Market Law (“Ley del Mercado de Valores “LMV”). The Mexican traditional model provides that corporate governance will be the responsibility of one or more directors who may or may not be shareholders of the corporation. A board will be created in cases where

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there are two or more directors. Ownership of at least 25% of stock creates the right to appoint a director to serve in the corporation’s board (the ownership percentage is reduced to 10% in case of publicly traded companies and SAPI’s). Aside from adopting the general framework provided by the GLCC and the LMV, Mexico’s corporate control in private corporations is quite weak. Given that the concern for corporate governance has increased throughout the world and Mexico is no exception, since 1999 a group of leading Mexican business people (Consejo Coordinador Empresarial), supported by the Mexican Stock Exchange published the Code of Best Corporate Practices which provides a set of recommendations for corporate practices and governance. Although the provisions of this code are not mandatory, they provide valuable insight and a solid framework directed to improve corporate governance in Mexican entities. In November of 2006 the Code was updated with both the results obtained after six years of its creation and with the applicable international considerations that update and complement the original recommendations. According to the above Code a good corporate governance system will be that which includes:

• Equal treatment and protection of the interests of all shareholders. • The recognition of the existence of interested third parties with respect to the activities and

permanence of the corporation. • The issue and responsible provision of information; as well as transparency in administration. • Assurance of the existence of strategic guidelines for the corporation, and the effective

monitoring of the fiduciary duties of the administrators. • The proper identification and control of risks. • The existence of ethical and social principles. • The prevention of illegal activities and conflicts of interest. • The disclosure of illegal actions and protection of whistleblowers. • Compliance of the regulations applicable to corporations. • Give assurance and trust to investors and interested third parties over the honest and

responsible administration of the corporation’s business. Given the importance and growing concern for corporate governance in Mexico the above principles will be surely implemented by more corporations in Mexico in order to be competitive both with other Mexican corporations and abroad. A new Securities Market Law (Ley del Mercado de Valores – “LMV”) became effective since June of 2006. Notwithstanding the fact that it seemed to be a legal framework for listed Mexican corporations, it can now also be seen as a framework for non-listed companies that are open and willing to adopt corporate governance practices. The publication of the new LMV was a significant step in terms of corporate governance; this because it forced publicly traded companies to comply with corporate governance practices. In addition, it created 3 new kinds of corporations, (i) stock corporation that promotes private equity (Sociedad Anónima Promotora de Inversión “SAPI”), (ii) stock corporation that promotes equity through public trading (Sociedad Anónima Promotora de Inversión Bursatil “SAPIB”), and (iii) Publicly traded stock corporation (Sociedad Anónima Bursatil “SAB”). Besides bringing new possibilities for the operation and management of non-public corporations, the new LMV has taken an important step towards the enforceability of corporate governance provisions in Mexico.

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14. Publicly Traded Companies Publicly traded companies in Mexico are subject to the provisions of the LMV. The LMV states that any entities that are incorporated or adopt the SAPI modality, as well as any entities that obtain the registration of their shares or the negotiable instruments that represent their shares in the National Securities and Intermediaries Registry will be subject to its provisions. All publicly traded companies must be structured as a publicly traded stock corporation (SAB). Public offers of stock issued by companies in Mexico can be for initial subscription, for sale of shares or for the acquisition of shares. According to the CNBV or National Banking and Securities Commission (which is the entity in charge of supervising and controlling all activities that are carried out in the Mexican Stock Exchange) a “public offer” is an offer made in the territory of Mexico, whether or not with a defined price or compensation, through mass media communications and to an undetermined person to subscribe, sell or acquire securities. The types of offers that publicly traded companies can carry out in Mexico are:

• Primary: When the resources coming from a capital increase enter directly into the company. • Secondary: When the offer is carried out by one shareholder or group of shareholders that

receive the proceeds of said offer. • Mixed: When part of the resources obtained through the offer go to the company and another part

to the shareholders. • International: The offer of Mexican entities’ shares internationally, generally done through

American Depository Receipts (ADR´s). • Simultaneous: Offers done in Mexico and internationally at the same time. • Tender Offer: Offer carried out by an entity or by the publicly traded company itself to partially or

totally acquire its shares, generally with the goal of gaining control of the entity or de-listing it. • Exchange Offer: Offer carried out by an entity by means of which it offers to purchase the shares

of a specific publicly traded company conditioning said purchase to the subscription of the shares being sold.

In order for Mexican corporations to be considered as publicly traded companies, thus being able to issue public offers, or have their stock traded, they must comply with the following basic requirements:

• Be registered with the National Securities and Intermediaries Registry. • File a request form to the CNBV and the Mexican Stock Exchange Market through a brokerage

house, attaching the corresponding financial, economic and legal information. • Comply with the provisions of the Internal Regulations of the Mexican Stock Exchange. • Comply with the listing and maintenance applicable requirements. • Comply with the provisions of the LMV.

Some of the important concepts that publicly traded companies must comply with are the duties of: (i) diligence; (ii) loyalty; and (iii) care of directors and the CEO, which are part of Mexican governance practices and refer to acting in the best interest of the corporation and the shareholders, confidentiality, avoidance of conflicts of interest, equal treatment to shareholders, review of financial information, etc. all of which are applicable to board members and officers.

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IX. General Principles of Contract Law Under general principles of Mexican law, a contract or agreement is defined as a meeting of minds (acuerdo de voluntades) that creates, assigns, amends or terminates rights and obligations. The main principles of contract law are articulated in the civil codes for each State in Mexico, but also in federal statutes – namely, the Federal Civil Code (Código Civil Federal) and the Commercial Code. Though the state and federal rules are similar (but not identical, and distinctions exist), for simplicity, in the following pages we refer exclusively to provisions contained in the Federal Civil Code and the Commercial Code.

1. General Principles of Contract The following principles, common in several jurisdictions, are the main principles of Mexican contract law: 1. Freedom of Contract. Freedom of contract is the basic principle of all contract law in Mexico. According to the above Codes, the parties to an agreement may stipulate the terms and conditions of any agreement they wish to enter, provided only that they do not: (i) breach any public policy statute; (ii) waive a statutory right that according to the law may not be waived; (iii) stipulate a term that is contrary to good practices, or: (iv) affect third parties’ rights. Hence, contracting parties are bound in the manner and under the terms in which they appear to have undertaken their obligations. No particular formalities are required for the validity of an agreement except where the law specifies otherwise. 2. Mandatory Provisions. Certain types of agreements – such as purchases, leases, agency agreements, loans, contracts for professional services, and credit agreements – require mandatory provisions. Parties may not waive these provisions and the law will imply such provisions even if parties do not include them explicitly in their agreement. For certain kinds of agreements, the law also establishes a set of non-mandatory default rules; these rules establish so-called “natural clauses” that apply to agreements whenever parties omit to explicitly stipulate terms of a particular subject. For instance, if parties to an agreement fail to provide for a place for payment, as a general rule the payment must be made at the debtor’s address. Likewise, certain provisions can supplement the parties’ will if they fail to establish the term for the fulfillment of an obligation. Agreements may also include “accessory” or “accidental” clauses. Accessory clauses are those provisions that parties may, but are not required to, include in their agreement. The law will not imply these clauses if parties fail to include them in their agreements. 3. No Unilateral Determinations. The validity or fulfillment of an agreement may not be left to the unilateral criteria of one of the parties. Thus, for example, a party may not unilaterally declare an agreement void but, rather, needs to secure a judicial pronouncement. Likewise, performance of the agreement cannot be left to the discretion of one of the parties, as such will render the agreement null and void. 4. Restricted Application. As a general principle, an agreement is only effective between the parties privy to the engagement, or their successors and assignees; however, certain exceptions apply to this principle. For instance, a third-party beneficiary may enforce stipulations in his favor after he becomes aware of such stipulations. Likewise, if a party assumes an obligation on behalf of a third party, she must pay damages if the third party does not fulfill the obligation.

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Certain kinds of agreements, mainly those relating to the transfer of property or the creation of security interests, must be recorded in the Public Registry of Property, the RPC, or other public registries, in order to become effective vis-à-vis third parties. 5. Performance is Critical. Parties must use their best reasonable efforts to fulfill an agreement’s purpose, despite circumstances surrounding or hindering fulfillment. Thus, rebuc sic stantibus clauses or changed circumstances are not valid in Mexico except in certain jurisdictions such as the Federal District and for contracts that are not commercial in nature (see below); even if economic or political circumstances surrounding an agreement render its fulfillment more difficult than anticipated, the parties must fulfill the agreement. 6. Good Faith. Parties should at all times - at the time of creating, complying with and performing their obligations – act in good faith. Parties must perform the contract not only pursuant to specific obligations that a particular agreement reflects, but also with any others that according to good faith should also apply in the specific circumstances. Therefore, even in the absence of explicit terms, parties must act in good faith and do everything possible to ensure their own and the other parties’ compliance with their agreement. Parties should not create obstacles to performance or lead other parties into an error about the facts necessary for execution of the contract. 7. Acts of God / Force Majeure. As a general rule, parties to an agreement may stipulate that acts of God or force majeure will excuse untimely performance of their obligations. An act of God is any unavoidable natural disaster that makes the strict or timely compliance with an obligation impossible. A force majeure event is any unavoidable act of man that makes the strict or timely compliance with an obligation impossible. Nevertheless, the principle of good faith requires parties to do anything within their capacity to comply with the agreement if, and as soon as, the act of God or force majeure passes. 8. Non-regulated Agreements. Though specific regulations apply to certain kinds of agreements, other kinds of agreements lack a particularized legal framework including, for instance, distribution agreements and supply agreements. Such non-regulated agreements are governed by general rules applicable to all contracts, the parties’ stipulations, and in the absence of specific stipulations by provisions of any analogous regulated agreement. 9. Rebus Sic Stantibus. Certain states of Mexico, including the Federal District, have enacted into their Civil Codes principles of rebus sic stantibus (teoría de la imprevisión) where the courts are permitted to adjust the terms of a term contract, or declare rescission, in cases where extraordinary and unforeseen events have created the obligations of one the parties excessively burdensome. The principle was introduced in the Federal District in early 2010 with certain deficiencies.

2. Construction of a Contract The Civil Code provides a system for construction of agreements based in the parties’ intent. If the terms of the agreement are clear and there is no doubt as for the intention of the parties, then the clause must apply literally. Otherwise, this is, if the wording seems contrary to the evident intent, the intent will prevail over the wording. However, other principles apply:

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• If a clause permits more than one meaning, then the meaning most necessary for the agreement to be effective shall apply;

• Clauses shall be constructed together in order to give to those that appear doubtful a sense resulting from the collective construction;

• Words with different meanings shall have the one that best fits to the nature and purpose of the agreement;

• Course of trade and customs shall be considered for construction purposes; and

• If it is impossible to resolve the doubts with the above rules, if such doubts refer to accessory issues of the agreement and such agreement is gratuitous, then doubts shall be resolved in favor of the minor transfer of rights and interests. If it is not gratuitous, doubts shall be then resolved in favor of the better reciprocity of interests. If doubts pertain to the main purpose of the agreement and is not possible to know the intention of the parties, the agreement will be null and void.

3. Termination of an Agreement In the following section we will discuss the general principles for termination of agreements, with and without cause, which operate alongside causes for termination provided by the law and by agreement of contracting parties. 1. Termination without Cause Needless to say, the easiest and least costly way to terminate an agreement is by mutual consent of the parties. If mutual consent cannot be achieved, however, then the following principles must be considered. As a matter of freedom of contract, as well as custom and practices, parties are free to choose any time period for the duration of an agreement. They may choose a definite or indefinite term or time period, although the former is the norm. If the parties choose a definite term, as a general rule the agreement will be terminated by operation of law when the term expires. However, it is always advisable to state through a written instrument - notice to the other party, a termination agreement, or a release - that the term has expired. Even if an agreement’s term expires, some agreements may be tacitly renewed through the parties’ conduct and thus become indefinite-term agreements. If parties choose an indefinite term, they can - and arguably should - stipulate a procedure for terminating the agreement. In the absence of such a stipulation, a court will consider local customs and the purposes of the agreement to determine an appropriate termination method. Absent a specific legal provision to the contrary, according to accepted principles, the parties to an agreement are free to contractually stipulate that both of them or just one of them has authority to unilaterally terminate the contract without cause or reason (i.e. at the party’s sole discretion). If the parties do not stipulate a method for terminating the agreement, a party seeking termination must first investigate whether, according to the contract’s nature, there are legal provisions either authorizing or banning unilateral termination. For agreements without a fixed term or a method of termination, the

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unilateral renunciation of an agreement is supported by the general principle that sets forth that “nobody should be bound permanently.” In any case, unilateral termination must meet the following requirements:

• It must be done in good faith; • It must be done with prior notice to the other party; • It must not be done with the sole purpose of harming the other party; and • In some cases, the party terminating the agreement shall pay the expenses that the other

party incurred in performance of the agreement. For instance, if a customer terminates a supply agreement with a manufacturer, the customer shall pay for raw materials and workmanship that the manufacturer already used to meet the next product delivery.

The party responsible for termination shall be required to indemnify the harmed party if he does not satisfy the aforementioned conditions. Although Mexican law does not clearly address the required form of the termination notice, the notice should be: (i) in writing, and (ii) delivered in the presence of witnesses, a notary public or a public broker who has public faith and credit, in order to prove that the notification was delivered and received by the other party. 2. Termination with Cause / Breach The Civil Code establishes that if one party to an agreement breaches its obligations, the non-defaulting party may opt between: (i) suing for specific performance, and; (ii) rescinding the agreement. In both cases, the non-defaulting party can seek payment of damages and lost profits. The authority to rescind agreements springs from a “rescission clause” (pacto comisorio). There are two classes of rescission clauses:

(a) A tacit rescission clause, considered a natural clause of all agreements. Although parties may fail to explicitly include a rescission clause, the law always provides the authority to rescind due to a breach by the other party.

(b) An express rescission clause, present when a clause of an agreement manifests specific

consent of the parties regarding the right to rescind. In order to state a claim, however, and enforce the right guaranteed by Federal Civil Code, the non-defaulting party must be fully up-to-date in his compliance with the agreement at the time of the other party’s breach. Yet once the breach occurs, and so long as the non-defaulting party is in full compliance with his own obligations, the party need not continue performing under the agreement. 3. Judicial Enforcement of Rescission Clause In the case of a tacit rescission clause, it is not sufficient for the non-defaulting party to extra-judicially declare to the breaching party that it is rescinding the agreement. Rather, the judiciary must intervene in order for the non-defaulting party to terminate the agreement or sue for specific performance. With express rescission clauses, expressly agreed to by the parties, termination is ipso iure, without the court’s participation -though the extra-judicial capacity to rescind does not prejudice a party’s constitutional right to appear in court and challenge the action.

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4. Exception for Non-Performance Non-performance of an agreement by a plaintiff may be the basis for a defense and/or a counterclaim on behalf of the party from whom performance is sought.

(a) As an affirmative defense. A party may defend itself against a claim of breach by showing that the complaining party was itself in breach of its related obligations. Due to the nature of bilateral agreements, no party need perform its obligations unless the other party fulfills its reciprocal obligations.

B) As a counterclaim. Non-performance of an agreement may also be asserted as a counterclaim,

seeking (i) specific performance, or (ii) rescission. In both cases the affected party may claim damages and lost profits resulting from the breach.

4. Contractual Liability

A party affected by a breach of an agreement may seek, in addition to rescission or specific performance, damages and lost profits arising out of the other party’s breach. Damages and lost profits may also be awarded for delay in the fulfillment of an obligation. Furthermore, even on a nullified contract, a party may sue for damages if that nullity was caused by the other party’s willful misconduct or bad faith. Parties to an agreement may include clauses limiting or increasing damages available due to breach, unless otherwise provided by law. However, parties may not waive liability arising out of willful misconduct, fraud or deceit. Alternatively, parties may stipulate liquidated damages, conceived as a pre-calculation of actual damages arising out of a breach. Liquidated damages are in lieu of, not in addition to, awards for damages and lost profits. 1. Damages and Lost Profits Damages, as defined by the Federal Civil Code, are the loss or injury that affects the assets of the victim through a party’s failure to fulfill an obligation. Lost profits are the deprivation of any legal profit that should have been obtained were it not for the breach of an obligation. In order to be recovered, according to the Civil Code, damages and lost profits need to be a direct and immediate consequence of the breach or the wrongful act. The party seeking such damages and lost profits must prove that the only cause thereof was precisely the breach or wrongful act, and that a necessary connection existed between the act of the defendant and the resulting damages and lost profits suffered by the victim. In other words, the party seeking damages must prove that those damages would not have occurred “but for” the defendant’s wrongful act or for the breach. Hence, under Mexican law, nominal, consequential, incidental and punitive damages may not be awarded. 2. Moral Damages The Civil Code defines moral damages as the “damages that a person suffers in his feelings, sentiments, beliefs, status, honor, reputation, private life, configuration and physical aspects, or in the consideration of that person held by third parties.” Moral damages may be the basis of an independent action to damages and lost profits in a contractual or tort claim.

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The amount of damages is determined by a judge, considering: (a) the damaged rights; (b) the responsible party’s degree of responsibility; (c) the economic status of the responsible party and the victim; and (d) other circumstances of the case, when the reputation, honor or image of the victim has been damaged in any form. The judge may also order, as part of the redress and at the request of the victim, that a summary of the judgment be published in writing.

5. Election of Jurisdiction Based in the contracting freedom provided by the Civil Codes applicable to each State of Mexico and the Federal District, as well as by the Commercial Code, parties are able to subject an agreement to local courts or arbitration. Certain exceptions might apply in contracts with Governmental entities or legal acts other than agreements between private parties. Furthermore, the Commercial Code recognizes that parties might agree a conventional procedure applicable before Courts or through arbitration. Election of local courts or arbitration under agreements becomes then a matter of negotiation between parties based in facts proper of each transaction, such as costs, benefits of local courts vs. arbitration, value of the transaction, among others.

6. Submission to Local Courts In general, parties are able to subject an agreement to competent courts and laws. Courts may be federal or local depending on the civil or commercial nature of the transaction. If dealing with a commercial transaction, local courts may be competent to solve disputes since they share jurisdiction over commercial disputes with federal courts. (See the “Mexican Courts and Legislation” section).

7. Arbitration As commented above, based in the contracting freedom provided by the applicable Civil Codes, as well as the Commercial Code, parties are able in general to subject disputes under an agreement to arbitration. Parties can agree to ad hoc arbitration or may subject themselves to specific arbitration rules including those under the International Chamber of Commerce. Additionally, all arbitrations proceedings with a seat in Mexico, as well as the enforcement and recognition of awards in Mexico, are governed by the arbitration statute within the Commercial Code, which is inspired in the UNCITRAL Model Arbitration Law. Parties may validly agree on administered arbitration, and elect anyone of the rules of arbitration of the International Chamber of Commerce (ICC), American Arbitration Association (AAA), International Centre for Dispute Resolution (ICDR), London Court of International Arbitration (LCIA) or other institutions. Election of an arbitration clause might vary based in facts such as costs, benefits of local courts vs. arbitration, value of the transaction, search of a resolution issued by a collegiate body or with certain expertise or the search of a more flexible process, among others.

8. Confidentiality Agreements Confidentiality agreements are executed for protection of confidential information represented by industrial and commercial secrets. The Industrial Property Law (Ley de la Propiedad Industrial) defines an Industrial Secret as, “all information of industrial or commercial application that is kept by an individual

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or entity that is of a confidential nature, which has as its purpose to achieve or maintain an economic or competitive advantage over third parties in the performance of economic activities, and for which efficient methods and systems have been adopted in order to preserve confidentiality and restricted access”. That is, technical knowledge that is not registered as industrial property and which is used for the development of a valuable economic or industrial activity that is undisclosed or of confidential nature and maintained in documents, electronic and/or magnetic mediums (optical discs, microfilms or films) and other similar instruments. Information that is immaterial and abstract knowledge will not enjoy legal protection; nor will knowledge in the public domain, common knowledge in the trade, or that knowledge which must be divulged by law or judicial order. Notwithstanding the above, it should be considered that an authority is entitled to request information, subject to compliance of legal provisions. In order for a government authority to request confidential information or industrial secrets it must, among others, be expressly authorized under a law; the request must be limited to the matter protected by such law; and specify, in detail, is the nature of the requested information r. It must also duly ground the petition and fulfill the procedure provided for by the applicable law. Confidential information is protected by the federal and local criminal codes in addition to the Industrial Property Law. On the other hand, the Federal Labor Law (Ley Federal del Trabajo) deals with that information or industrial property issues derived from or linked to a labor relationship. Protection of confidential information requires not only the execution of confidentiality agreements, but the implementation of other means such as marking documents as confidential, execute non-compete agreements, among others.

9. Non-Compete Provisions Non-competition agreements or clauses are a becoming common practice, specially under a labor relationship with those individuals that have rendered services or may be under a labor relationship. These agreements limit the services and activities they might perform in the future in relation to third parties, looking forward to safe-keep, among others, information, technology, and “know how.” In this regard, it is commonly stated that non-compete provisions will only be enforceable during the time the work relationship is in force. Considering that the Federal Labor Law provides protection through justified termination causes, non-compete provisions are difficult to enforce after the termination of a labor relationship. Consequently, is advisable to link the non-competition clause with a confidentiality clause or agreement prohibiting the individual to disclose to a third party the confidential information or to use or compete with such information, technology and “know how” for a third party. Another important aspect to consider is antitrust law. Non-competition agreements may be deemed as a vertical restraint (relative monopolistic practice) under the Federal Law of Economic Competition (Ley Federal de Competencia Económica) if considered as agreements that tend to reduce or eliminate free competition and concurrence within the market. In order for such agreements not to be deemed as harmful to free competition and trade, these should have a solid business reason, (e.g., upon sale of a business) with a specific territorial coverage and term (usually recommended not to exceed five years).

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The Federal Competition Commission will analyze these clauses on a case-by-case basis given that, such agreements are entered into by economic agents occupying different steps of the production chain of a certain product or process (must not be competitors among themselves, otherwise might be considered an absolute monopolistic practice).

10. Asset vs. Stock Acquisitions Mergers and Acquisitions are an important part of Mexico’s business playground. Although over time Mexico has lost its competitiveness as an investors paradise, there is still a significant amount of deals with respect to Mexican entities that involve both Mexican and international investors. As in other jurisdictions, investors and companies that participate in deals to purchase and sell existing businesses work hard to structure all details in order to obtain the best results for both the selling and purchasing parties. A key aspect of all acquisition deals is whether to purchase the assets of the business or the stock of the business entity. An asset purchase involves the purchase of all or part of the company’s assets, including facilities, machinery, equipment, inventories, vehicles, intangible assets (trademarks), etc. A stock purchase involves the acquisition of the company’s stock only. There are several aspects to be considered when deciding whether to purchase assets or stock. The following is a brief list of general advantages and disadvantages to be considered.

• In an asset purchase the buyer is able to determine what liabilities it wishes to assume whereas in a stock transaction the company may have liabilities that are unknown to the buyer.

• In an asset purchase the buyer will not encounter any problems related to minority stockholders and rights of first refusal.

• Re-titling or registering assets in name of the buyer may be more complicated and burdensome when compared to corporate notations and requirements applicable to stock transactions.

• In an asset purchase, assets will be subject to value added tax (VAT) at a rate generally consisting of 15%.

• In a stock transaction the buyer can generally obtain sellers non-assignable contracts, permits, and licenses.

• A stock transaction may in general terms be simpler when encountering a small number of selling shareholders or even a large number that is willing to sell.

• Fewer formalities may be required in a stock transaction. Notwithstanding the advantages and disadvantages of either an asset or stock acquisition, it is important to note that the specific terms and conditions of each deal must always be analyzed in order to determine what the best option is.

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X. E-Commerce The rapid growth of internet-based transactions has driven Mexican lawmakers to design a legal framework that attempts to grant legal certainty to those transactions. As reference, the Organization for Economic Co-operation and Development (OECD), refers to an e-commerce transaction to the sale or purchase of goods or services, conducted over computer networks by methods specifically designed for the purpose of receiving or placing of orders. The goods or services are ordered by those methods, but the payment and the ultimate delivery of the goods or services do not have to be conducted online. An e-commerce transaction can be between enterprises, individuals, governments, and other public or private organizations. Orders made over the web, extranet or electronic data exchange is considered e-commerce transactions, while orders made by telephone calls, facsimile or manually typed e-mail are excluded from the concept. A. Applicable Laws and Jurisdiction The federal congress and the local congress of each state share authority to regulate electronic transactions. Hence, both local and federal laws may apply to an electronic transaction, depending on the nature of the transaction itself. When a transaction executed through electronic means is of a civil nature, then local congresses of each state will have regulatory authority over the transaction, and therefore local laws will apply. If however, the transaction has a commercial nature, the federal congress will have regulatory authority; thus federal laws will apply. Since most transactions executed through electronic means have a commercial nature, federal laws have greater impact, which also have evolved faster, than local laws. Further, courts that hear disputes arising from an electronic transaction may be federal or local, depending on the civil or commercial nature of the transaction. Even if dealing with a commercial transaction, local courts may be competent to solve the dispute since they share jurisdiction over commercial disputes with federal courts. B. E-Commerce Law Under Mexican law, the validity of an agreement depends upon formal requirements dictating the manner in which parties must express their consent and the terms of their contract. If an agreement lacks the form provided by law for such agreement, then the agreement may be legally voided. Thus, it is important to consider the degree to which Mexican law recognizes the validity of consent expressed through electronic means. Since the year 2000, a valid agreement may be formed and executed through electronic, optical, or other technological means. Since the two parties that use electronic means may not sign an agreement simultaneously, an agreement is formed when acceptance of an offer is received. A 2003 amendment to the Commercial Code includes provisions pertaining to electronic signatures and to the issuance and receipt of data messages, mirroring the United Nations Commission on International Trade Law (UNCITRAL) Model Law on Electronic Commerce of 2001. The main principles established by the amendment are:

• the equivalence between hand-written and electronic signatures; • the power of private parties in electronic transactions; • international compatibility; and

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• a technologically neutral approach. The Commercial Code provides a series of qualifications for an advanced or reliable electronic signature, which are to be attested by a certification service provider authorized by the Ministry of Economy. Both the electronic signatory and a relying party have obligations that can be summarized as follows: (a) Obligations of the Signatory:

• Fulfill the obligations derived from the use of an electronic signature, as agreements or commitments executed through electronic means are enforceable against their signatories;

• Act diligently and use reasonable means to ensure that its electronic signature is not used without

its authorization;

• Verify that all the representations made with regards a certification of its electronic signature are true and accurate; and

• Fulfill the obligations deriving from the unauthorized use of its electronic signature whenever the

author of such signature did not act diligently to impede the unauthorized use. (b) Obligations of the Relying Party:

• Verify the trustworthiness of the electronic signature whenever such signature is not certified; and

• Whenever a certification of the electronic signature is secured, verify that the certification—as well as any use restriction disclosed in the certification— is valid, in full force and effect.

Aside from authorizing the execution of transactions through electronic means, the 2003 amendments authorized commercial entities and individuals to file and store their information through electronic files or in data messages. C. On-line Consumer Protection The Consumer Protection Law (Ley Federal de Protección al Consumidor), establishes the obligations and requirements applicable for on-line suppliers of goods or services. Such obligations aim to protect customers from misrepresentations made by on-line suppliers regarding goods or services, and to protect customers´ personal data shared in the course of on-line purchases. On-line suppliers that request personal data from their customers while executing an electronic transaction may not use or share that information with third parties without the express consent of the customer, which consent needs to be through a privacy notice (see below). Likewise, suppliers need to use reasonable means to safeguard information secured from customers through a website or other electronic means, and shall disclose to customers the means used to protect their information. According to the Consumer Protection Law in order for the supplier to prevent misleading trade practices regarding the characteristics of the products, the supplier is required to comply with particular provisions regarding commercial information and publicity of the goods and services offered. The supplier must provide the consumer with all the information concerning the terms, conditions, costs, fees, and payments applicable for the goods and services offered by the provider.

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Also, the supplier shall respect the consumer´s decisions regarding the quantity and quality of products ordered, as well as the request it may receive from the consumer for not sending any advertising or commercial information. Finally, the supplier must avoid advertising or sale strategies that do not provide to the consumers clear and sufficient information about the goods or services offered, especially when the marketing practices may be directed to children or elderly, as these are considered as vulnerable population. D. Privacy Notice In Mexico, the protection of personal data is regulated by the Personal Data Federal Protection Law (Ley Federal de Protección de Datos Personales en Posesión de los Particulares) enacted since 2010. According to this Law, the data responsible shall disclose information concerning the existence and features of the treatment that will be given to personal data, through a privacy notice (aviso de privacidad). A privacy notice is a physical document, electronic or any other format generated by the responsible of the data that is made available to the data’s owner, prior to processing the relevant personal data. The privacy notice must be expressed in clear and understandable language, and with a structure and design that facilitates its understanding. The privacy notice must contain at least the following information: (i) the identity and address of the person that collects the data; (ii) the purposes of the data processing; (iii) the options and means offered by the responsible to limit the use or disclosure of the data; (iv) the means to exercise the rights of access, rectification, cancellation or opposition of the data; (v) where appropriate, the data transfers to be made; and (vi) the method and means by which the responsible shall notify data owners of changes to the privacy notice. When the responsible of the data uses mechanisms in remote or local means of electronic communication, optical or other technology, that allows to collect personal data automatically and simultaneously while the data owner makes contact with such mechanisms, at that time, through the privacy notice, the responsible of the data shall inform to the data owner about the use of these technologies, through which personal data is being obtained, and how this can be disabled. E. Electronic Invoices The Federal Tax Code allows for the issuance of electronic invoices, provided they secure a certification of advanced or reliable electronic signature and that such invoices show the digital seal authorized by the Tax Administration Service (Servicio de Administración Tributaria). F. Electronic Evidence in Judicial Proceedings Any e-commerce provision would be useless without provisions regarding the admission of electronic evidence in judicial proceedings. Hence, the Commercial Code expressly contemplates that data messages shall be admissible in court as evidence. In order to assess a fact proved through a data message, the judge or court must review and consider the reliability of the method used to create, communicate, store, or file that data message. The Federal Code of Civil Procedures provides that a data message may be submitted as evidence provided the judge or court assesses whether it is possible to ascertain the author of said message. The evidence-submitting party shall have the burden to prove the authorship of the message and that the message remains unaltered.

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G. Domain Name Registration A non-governmental entity called Akky, a division of NIC Mexico (www.nic.mx or www.akky.mx) is in charge of domain name registration under the Country Code Top-Level Domain (“CCTLD”) ¨.mx¨ This entity has its own procedural rules for registration. However, any trademark dispute related with a domain name will be resolved before and according to the rules of the WIPO Arbitration and Mediation Centre

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XI. Competition Law A. General Although the prohibition of monopolies and concentrations had been included in the Mexican Constitution and certain secondary laws for many years, it was not until the introduction of the Federal Law of Economic Competition (Ley Federal de Competencia Económica “LFCE”) in 1992 (in effect since June, 1993) that Mexico applied competition law and policy. The law was substantially amended in 2006. The LFCE was designed to implement general prohibitions on monopolies, concentrations and monopolistic practices included in Article 28 of the Mexican Constitution. To this end, the LFCE created the Federal Competition Commission (Comisión Federal de Competencia - “Cofeco”) to apply and monitor its provisions. The main objective of the LFCE is to promote economic efficiency and to protect competition and free market participation. In order to achieve these goals, the LFCE directs its attention to the behavior of economic agents, sanctioning monopolistic practices and other restraints of competition. In addition, the LFCE outlines a preventive policy for controlling and regulating economic concentrations and participating in certain public bids. The law applies to all economic agents. However, according to Article 28 of the Constitution, there are certain strategic sectors in which the State operates in an exclusive manner. These activities are not considered monopolies. These include the following: postal service, telegraph and radio telegraphy, oil and petrochemicals, radioactive minerals, nuclear energy, electricity, and issuance of currency by the Mexican Central Bank (Banco de Mexico - “Banxico”). A similar exception is granted to labor unions, and authors, artists and inventors as to their works. B. Specific Practices or Restraints The LFCE bans monopolies and those monopolistic practices that harm or impede competition in the production, process, distribution or marketing of goods or services. The LFCE distinguishes between “absolute” and “relative” monopolistic practices. 1. Absolute Monopolistic Practices (Horizontal Restraints) These are agreements between economic competitors that do not have an evident economic justification and thus are prohibited per se with severe economic sanctions imposed. The size of the market or of the agents participating is unimportant. The LFCE sets forth an exhaustive list of four types of absolute monopolistic practices. Absolute monopolistic practices are those agreements, covenants, arrangements or combinations among competitors that have as a purpose or effect any of the following:

(a) Price fixing. To fix, raise, arrange or manipulate the purchase or sale price of goods and services offered or demanded in the market, or exchange information with the same purpose or effect;

(b) Output restriction. To establish the obligation of producing, processing, distributing, marketing or

acquiring a restricted or limited volume of goods, or rendering a restricted or limited number, volume or frequency of services;

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(c) Division of markets. To divide, distribute, assign or impose portions or segments of a current or potential market of goods and services, through determined or determinable clients, suppliers, times or spaces; or

(d) Bid-rigging. To establish, arrange or coordinate bids.

Furthermore, the Regulations to the LFCE consider the following as presumptive evidence of the commission of absolute monopolistic practices:

• Instructions or recommendations issued by chambers of commerce with the purpose or effect of committing any of the prohibited practices noted above.

• Two or more competitors offering products at a price substantially lower or higher than the international reference price, except when the difference derives from the application of a tax provision or from transportation or distribution costs.

• Price parallelism. In the context of the above circumstances, the burden of proof lies on the defendant rather than on the prosecuting authority. 2. Relative Monopolistic Practices (Vertical Restraints) Relative monopolistic practices are also addressed under the LFCE, which generally occur among economic agents—such as producers and distributors—at different levels of the distribution chain. Boycotts – which may occur between competitors horizontally – are also considered relative monopolistic practices. The LFCE and its Regulations recognize that these practices may have legitimate competitive or anti-competitive effects, depending on their application. Thus the LFCE sets forth different criteria for analyzing whether a practice will be considered monopolistic. Thus, in the context of relative monopolistic practices, it is necessary to first evaluate two main criteria: the relevant market in which the practice takes place and whether the economic agent in question has substantial power in that market.

(a) Relevant Market. As in other jurisdictions, the relevant market is defined both geographically and in terms of a particular product or service. The definition of the market entails an economic analysis of the capacity to substitute goods or services, considering the costs of, as well as any legal or practical restrictions against, a consumer obtaining the good from other sources.

(b) Substantial Power. The law requires the analysis of the following elements to determine whether

an economic agent has substantial power in the relevant market: i) market share of the economic agent and of its competitors; ii) the power to unilaterally fix prices or restrict output of goods or services, without being effectively challenged by competition; iii) the existence of barriers to entry; iv) the access to supplies for components for the goods and services; and v) the recent competitive conduct of the economic agent in question.

A third element to be considered is the requirement that the practice refer to the goods or services that correspond to the relevant market. Once these elements have been met, it is necessary to determine that the conduct in question has the purpose or effect of unduly driving competitors out of the market, substantially impeding their access or

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establishing exclusive advantages in favor of one or more persons in the cases set forth in the LFCE. In other words, the practice in question needs to have an exclusionary effect. Specifically, the following as relative monopolistic practices identified:

• Vertical market division (exclusivity); • Resale price maintenance (including the imposition of other resale conditions); • Tying arrangements; • Transactions subject to the condition of not selling or using products of a third party; • Refusal to deal; • Boycotts; • Predatory pricing; • Discounts and incentives in exchange for exclusivity; • Cross-subsidies; • Price discrimination (including discrimination in other conditions); and • Increasing rivals costs, obstructing the productive process or reducing demand faced by

competitors. Notwithstanding the foregoing, relative monopolistic practices may have different effects on the market. Therefore, the LFCE provides that in the analysis of the conduct referred to in the LFCE as relative monopolistic practices, consideration shall be given to the efficiency gains resulting from such conduct, which may favorably affect competition. This process seems to be similar to the "rule of reason" analysis under U.S. law. C. Concentrations The LFCE seeks to protect the structure of the market through the regulation of mergers, referred to in the LFCE as concentrations. For purposes of the LFCE, concentrations include any merger, acquisition of control or other act whereby corporations, associations, shares, equity parts, trusts or assets in general are joined by- and among- competitors, suppliers, clients or any other economic agents. Cofeco may challenge concentrations that have the purpose or effect of lessening, damaging or impeding competition with respect to equal, similar or related goods or services. (a) Concentrations requiring prior notification.- The LFCE provides that there are certain concentrations that require notification of Cofeco, prior to their closing:

(i) Those transactions involving an act or a series of acts, regardless of the place of execution, amounting in Mexico the equivalent of 18 million times the minimum general wage in force for the Federal District or more. As of mid 2010 this amount is approximately MX$1,076 million pesos (approximately, US$91 million dollars).

(ii) Transactions involving an act or a series of acts with an accumulation of at least 35% of the assets or capital stock of an economic agent, whose assets in Mexico or annual sales originated in Mexico involve more than the equivalent to 18 million times the minimum general wage in force for the Federal District. This amount is the same as above.

(iii) Transactions involving an act or series of acts with an accumulation in Mexico of assets or capital

stock higher than 8.4 million times the minimum general wage in force for the Federal District (as of early 2008 this amount is approximately MX$502 million pesos - approximately US$42.4 million dollars), and the transaction involves the participation of two or more economic agents with assets or annual sales (worldwide), jointly or separately, of 48 million times the minimum

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general wage in force for the Federal District. As of mid-2010 this amount is approximately MX$2,871 million pesos (US$242 million dollars).

Except for the second part of paragraph (iii) above, the other thresholds would refer to the effects of the transaction in Mexico. The amounts in US dollars mentioned above may vary depending on the actual minimum wage in Mexico and the applicable rate of exchange. If any of the thresholds set forth above is reached, a prior notification of the transaction is required. Assuming that the transaction fails to reach the thresholds referred to above, this does not mean that the concentration is valid, but rather not subject to prior notice, and the Cofeco could still challenge it within the term of one year after it becomes effective. (b) Exceptions to the prior notification requirement. The Regulations to the LFCE provide that the following acts do not require prior notification to Cofeco:

(i) Legal acts on shares or equity parts of foreign companies, when the economic agents involved in such acts do not acquire the control of Mexican companies nor accumulate in Mexican territory shares, equity parts, participation in trusts or assets in general, in addition to those, directly or indirectly, possessed prior to the transaction; and

(ii) Transactions in which an economic agent holds, directly or indirectly, and has held for the last

three years, 98% of the shares or equity parts of the economic agents involved in the transaction. (c) Notification Process. Generally, the Cofeco notification process involves the following steps:

• Submission of a document to Cofeco along with the plan of the proposed concentration, broadly describing the transaction and the parties involved, and including financial statements for the last fiscal year, market shares (mainly for the Mexican component of the transaction), and other relevant information. To facilitate this process, Cofeco has issued a questionnaire outlining the information it requires for purposes of reviewing the competitive effects of the proposed transaction. The LFCE Regulations provide that the questionnaire’s economic information is not required when it is evident that the transaction poses no anti-competitive concern; this is known as a “simplified” filing.

• Cofeco may request additional information within 15 business days following the date the

notification is received.

• Within the 10 business days following the filing of the concentration notice, if Cofeco determines that it needs the full waiting period to review the transaction it must issue an order stating that the transaction should not be closed until receiving formal clearance. If this order is not issued, the economic agents are free to close the transaction “at their own risk.”

• Cofeco shall issue its resolution within 35 business days from the date of receipt of the

notification or the submission of the required additional information. If Cofeco has not issued a resolution at the end of this term, it shall be understood that Cofeco has tacitly approved the proposed transaction (afirmativa ficta). The period mentioned above may be extended in exceptional cases for another 40 business days. From our prior experience, it is safe to say that the normal process takes approximately four to six weeks.

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• If the parties prove that it is notorious that a concentration does not have as its purpose nor

its consequences to have the effect of diminishing, damaging or impeding competition, Cofeco shall resolve the filing within a term of 15 business days.

For purposes of analyzing the merits of a merger, Cofeco shall consider: (i) the relevant market or markets involved in the transaction; (ii) the market power of the parties involved and competitors in the relevant market and related markets; (iii) the degree of concentration through the use of the HHI and a “Dominance Index”; and (iv) efficiency gains derived from the transaction. (d) Consequences for failing to notify. In the event that parties to a transaction that requires reporting fail to file the required notification, Cofeco may:

• Order the suppression of the concentration; • Order divestitures; • Subject the transaction to certain conditions such as the transfer of certain assets, rights or

shares, licensing of a trademark or patent, elimination a line of production, or any other condition with the purpose of protecting competition;

• Impose fines. D. Privatizations, Publications and Opinions The LFCE requires Cofeco to determine the economic agents who may participate in privatizations, granting of concessions and permits, public auctions and bids, when so required by the nature thereof. The analysis followed by Cofeco in this context is similar to that used for concentrations. However, the basis of these privatizations, auctions or bids may follow specific rules, including rules about timing to resolve. Several statutes also require the prior opinion of Cofeco for the issuance of concessions or permits or even for the imposition of specific rules. Examples of these statutes include the Natural Gas Regulations and the Federal Telecommunications Law, among others. E. Private Actions Private parties may initiate civil actions if they establish during administrative proceedings that they have suffered damages for illegal monopolistic practices or concentrations. The Court may take into account the estimation of damages and lost profits made by Cofeco. F. Leniency Program and Settlement (a). Leniency. The LFCE sets forth a leniency program designed to encourage members of cartels to report the conduct to Cofeco in exchange for leniency. In order to qualify for a reduced fine, the applicant must (i) be the first one to approach Cofeco; (ii) fully cooperate with Cofeco; and (iii) end its participation in the cartel. The leniency afforded the applicant includes a reduced fine and no judicial or administrative prosecution action against the whistle-blower would proceed based on this resolution by Cofeco. Other agents not complying with the foregoing requirements may benefit from this program and obtain reduction in fines when they contribute elements to the investigation in addition to those previously held by Cofeco. Fine reductions are also available to those agents contributing additional elements in the investigation (second, third and fourth applicants).

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(b) Settlement. In addition, an economic agent that voluntarily acknowledges its liability before the rendering of Cofeco’s resolution will be fined only the rough equivalent of $5 USD (one minimum wage in the Federal District). The settlement/plea-bargaining process is only applicable for relative monopolistic practices and prohibited concentrations, although in practice Cofeco is also trying to settle cartel processes. This plea-bargaining does not preclude injured parties from filing extra-contractual (i.e., tort) claims in order to recoup lost profits and other damages – although such private claims are very difficult to assert under Mexican law. A party can only use this plea bargain right once every five years. G. Statute of Limitations The LFCE sets the statute of limitations for the prosecution of illegal acts at 5 years. H. Possible Amendments to Competition Regulation The Mexican Congress has been discussing amendments to the LFCE and the Federal Criminal Code with a view of strengthening the authority of Cofeco, mainly with respect to cartel investigations and thus improving the competition landscape as a way to foster the Mexican economy. The main issues under discussion in mid-2010 in Congress are the following:

1. Criminalization of cartels (absolute monopolistic practices) 2. Significant increase in fines 3. Surprise verification visits. (dawn raids) 4. Injunctions (i.e., suspension of practices during the process) 5. Joint dominance for assessment of relative monopolistic practices

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XII. Labor Issues A. General One of the most difficult aspects of doing business in Mexico is understanding Mexico’s labor environment, particularly when foreign companies are accustomed to doing business in a labor-law framework that is consistently different from—and sometimes even contradictory to—that in Mexico. Mexican labor laws have always been perceived as overprotective towards the working force, both from an individual and collective standpoint; Mexican unions, in particular, historically inspire concern and even fear in foreign companies. Nevertheless, the Mexican private sector, workers, and even some unions, have long understood that offering simple cures to foreign companies’ anxieties—such as by offering an inexpensive work force—is not enough to entice foreign investment. Therefore, although Mexican labor laws continue to be an obstacle, a common objective for many Mexicans involved in labor issues is to engineer a legal framework, with real and diverse alternatives that meet the needs of each company that decides to initiate operations in Mexico. Consequently—and as is true with many aspects of Mexico—the legal framework of labor is adapting to the increasingly globalized economy. B. Legal Framework The basic provisions regulating labor relationships generated in Mexico are found in the Federal Constitution. Article 5 of the Constitution establishes the right of any person to engage in any profession, industry, trade or work, as long as it is lawful. This right can only be limited by a court order when the right of a third party or of society is infringed, or by a government’s decision. This article is the basis, in certain cases, for the unenforceability, in Mexico, of covenants not to compete. Furthermore, Article 123 establishes the right of any person to a dignified and socially profitable work. This article consists of two sections: the first applying to all employees generally (Section A), and the second applying to employees rendering services to the federal and local governments (Section B). The provisions of Article 123 are implemented through the Federal Labor Law (Ley Federal del Trabajo – “LFT”), and diverse Regulations and Mexican Official Standards that derive from the LFT, which include provisions on such issues as hygiene and security in the workplace, training of employees, and authorizations for machinery usage, among others. In addition to the LFT, the Social Security Law (Ley del Seguro Social - “SSL”) and the Law of the Institute of the National Housing Fund for Workers (Instituto del Fondo Nacional para la Vivienda del Trabajador -“Infonavit”) contain diverse regulations pertaining to special topics in their respective fields.

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C. The Concept of the Employment Relationship The LFT defines an employment relation as the rendering of a personal subordinated service to another person in exchange for the payment of a salary. Thus, any person that renders a subordinated service to another, who in turn pays compensation, is considered an employee—regardless of the nature of the service performed. It also contemplates the possibility of intermediaries, persons who hire other persons to render their services to an employer. In such a scenario the intermediary and the actual employer are jointly and severally responsible for labor obligations related to the employee(s). Subcontracting (outsourcing) is regulated and if it is not properly structured and handled, the beneficiary could be considered the employer of the employees of contractor. Three conditions must be complied in the outsourcing structure: (i) that the totality of or similar activities to the ones performed on the working facility are not included; (ii) the existence of specialized nature of services, and (iii) these cannot include the same or similar duties to the ones performed by the rest of the employees hired by the contracting party. If such conditions are not complied with, the beneficiary will be considered employer for all legal effects, including social security obligations. The LFT considers directors, managers, officers and other persons that carry out supervisory or management activities for a company as their employer's representatives. The actions of such representatives bind the company in its relations with employees. According to the legal definition, however, such representatives are also, themselves, employees. Finally, the LFT categorizes workers into two groups: confidential employees and all others. Confidential employees are those who perform general activities of management, inspection, supervision and review of other employees. Workers are usually grouped in unions. 1. Regulation of employment through written agreements

The work relation is generally created through the execution of an employment agreement, any document whereby a person undertakes to render a personal subordinated service to another person in exchange for payment of a salary or wages.

In the event that an agreement is not made in writing, the employer is held responsible for that omission; the worker shall nevertheless have all the rights that stem from work rules and the services rendered to the employer.

2. Subjects of Employment

There are no specific requirements for—or limitations on—any individual or entity seeking to enter into a labor relationship as an employer. Employers must only meet the general standards for legal capacity under civil law. On the other hand, a person willing to provide services as an employee is prevented from doing so if: (i) he has not reached 14 years of age or (ii) he is between 14 and 16 years of age, but has not completed the obligatory level of education prescribed by law. Moreover, for individuals that fall in the latter class, prior parental authorization is required. The LFT permits anyone above 16 years of age to render services as an employee.

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3. Term of Employment

The LFT classifies the term of employment relationships as follows:

(a) For a specific task or service: what the nature of the relevant job or service demands for this type of relationship. After conclusion of the job or service, the employment relationship is also terminated.

(b) For a fixed term: what the nature of the relevant work or service demands or in situations of

employment substitution (e.g. temporary replacement when another employee is temporarily disabled to perform services).

(c) For an indefinite term: for those relationships that do not have express agreements as to their

term, and as a general rule, the employment agreement is understood as lasting for an indefinite term. In this kind of contract, a trial period or initial training can be included.

(d) For a season: for those relationships that require services to be rendered only in some part of

the year.

(e) Foreign Employees: Mexican employers may hire foreign employees. However, Section 7 of the LFT maintains that the ratio of Mexican to foreign employees must be no lower than nine to one; in other words, Mexican nationals must constitute at least 90% of the work-force of every business established in Mexico. There are two exceptions to the rule, however. First, foreign technicians or professionals may be exempted if there are no Mexican nationals with the expertise required to perform the relevant service. Finally, high-ranking management of Mexican entities are exempted at all times.

4. Employer Substitution Corporate mergers and employer substitution do not affect employment relationships. The surviving entity or new employer inherits the contractual obligations of the former employer. From a labor and social security standpoint, the former employer is jointly and severally liable with the new employer for the rights and obligations created before the employer substitution for a period of six months from the effective date of substitution. D. Minimum Terms and Conditions for Rendering Services Mexico’s labor laws also establish the minimum benefits that employees are entitled to receive as a consequence of their services rendered to an employer. Although any employer may grant higher or additional benefits than those established by law, employee benefits must at least include the following: 1. Salary. Base Salary & Integrated Salary The LFT defines ”salary” as the compensation that an employer must provide to any employee for the personal and/or subordinated services the employee renders. Salary payments may be arranged by time, specific work, commission, fixed price, unit of time, or in any other way permitted by law. This kind of salary is commonly referred to as the “base salary.”

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If the payment is agreed in respect to an hourly basis, the number of hours cannot exceed the maximum daily shift and the employee’s income in a day will not be less than the amount equivalent to the daily minimum wage in force in the place and time of the services rendered. Beyond simple “base salary,” the LFT also defines “integrated salary,” which is the measure considered for purposes of calculating any severance payment to which an employee may be entitled at the time a working relationship is terminated. Integrated salary takes into account aggregate daily wages, gratuity, commissions or fees, housing contributions, fringe benefits and any other non-wage benefits tendered to the employee as compensation for services rendered. As for the amount that any employee must receive for services rendered, the LFT provides: ”For equal services, performed under an equal position, working schedule and efficiency conditions, an equal salary should be paid.” Although criticized, the LFT maintains among its provisions a "minimum wage," defined as the minimum amount in cash or currency that a worker must receive for services rendered within a working day. To a large extent, the minimum wage has been established as a reference, and only a small percentage of individuals would actually earn such amount. A National Commission, with representation from the government, workers and employers, annually meets to establish minimum wages. 2. Working Hours The LFT establishes that working hours should not exceed eight hours for the day shift (between 6:00 A.M. and 8:00 P.M.), seven hours for the night shift (between 8:00 P.M. and 6:00 A.M.), and seven and one half hours for the mixed shift (including hours from both the day and night shift, provided that the night hours do not exceed three and one half hours). For every working day, employees must be granted a leisure period of at least 30 minutes, during which they may have a meal or rest. Additionally, for each six working days, an employee shall have one day of rest each week, for which he must receive full payment of his daily wage. Work shifts should at no time exceed the limits set forth by law. Any amount of time exceeding the limits set for ordinary working shifts must be recorded as extra time. The LFT permits only three hours of extra time per working shift and said extra time may not be performed on more than three working days a week. Salary received for extra time is paid at twice the rate paid for normal hours. Overtime in excess of three hours a day, three times a week must be paid at three times the wage rate for normal hours. Additionally, employees who render services on a Sunday as an ordinary workday (i.e., workers who render services from Wednesday of one week until Monday of the following one, and who have Tuesday as their weekly day off) have the right to receive payment of a 25% premium in addition to their normal salary for Sunday. Similarly, employees who work on their day off must receive, in addition to their normal salary, a premium of two times such amount. 3. Vacations and legal holidays Mexican law requires that workers with more than a year of service receive a paid vacation period of at least six working days. Vacation periods are increased by two days for each subsequent complete year of service. After the fourth year of service, vacation periods are increased by two days for each five years of service.

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The LFT expressly prohibits the payment of unused vacation days. This means that a worker should not receive any compensation if he/she decides not to use his/her vacation period in exchange for remuneration. Workers do have the right to a 25% premium in addition to their salary for work during the relevant vacation period. A total of eight obligatory holidays are recognized in the LFT. Employers often grant more days to their employees than those set forth by law, especially if a collective bargaining agreement is in place at the workplace. 4. Christmas bonus All employees who render services in Mexico are entitled to a yearly Christmas bonus equal to at least 15 days of their base salary. This bonus must be paid before the 20th of December of each year. 5. Profit sharing Employees have the right to participate in the profits that their company may earn in any given year. Currently, the National Commission for the Employee’s Profit Sharing Participation requires that 10% of a company’s taxable income be distributed as profits to the employees. 6. Contractual benefits Notwithstanding the minimum benefits established by the LFT, employers usually grant higher or additional benefits. Common additional benefits include medical and life insurance, savings funds, food stamps, performance bonuses and the use of a company car. Usually, the individual labor agreement that each employee enters into upon being hired reflects these additional benefits. E. Collective Labor Relationships In order to participate in collective bargaining activities, a worker must be affiliated with a labor union. Unions are the only entities authorized to enter into collective agreements with employers on behalf of their members. Unions are also responsible for monitoring due observance of the “Contrato-Ley,” the special agreement between a group of workers’ unions and a group of employers. 1. Unions The LFT defines “union” as an association of workers or employers for the purpose of studying, improving and defending their respective interests. Every worker is free to decide whether to join a union. Nevertheless, this right is commonly superseded by exclusion and separation clauses, which ordinarily appear in all collective agreements. “Exclusion” clauses require a worker to join the union before the employer hires him/her. “Separation” clauses oblige an employer to fire, without any further obligation, any employee who has been previously expelled from the union. There are different kinds of unions, created in several forms. Mainly they can be classified, according to the nature of their members, as guild unions, entity unions, industry unions, conglomerated industry unions and unions encompassing different activities. Unions must have at least 20 members if they are worker unions and three members if they are employer unions. All unions must register with the Ministry of Labor or the corresponding Local Conciliation and Arbitration Board. Registration before either authority depends on the activity or line of business in which the

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employer engages. Registration may be denied if the intended union does not: (i) present a legal or feasible purpose; (ii) reach the minimum number of members required by law; or (iii) include required documents with its application. Unions have as their main goal the protection of the collective and individual interests of their member workers. Unions may not deal with religious matters or perform commercial activities for profit. Though Unions have historically played a very important role in the political environment of Mexico, they have been increasingly losing influence in recent years. Unions can associate in larger organizations, such as federations and confederations, which must also register with the above-mentioned authorities and satisfy similar registration requirements. Only a two-thirds vote of members or the lapsing of a term of duration stipulated in its by-laws can dissolve a union. Registration is canceled by dissolution or if the union does not maintain or follow necessary legal requirements. 2. Collective Bargaining Agreement As defined in Mexican law, a collective bargaining agreement (contrato colectivo de trabajo) is an agreement between one or several unions of workers and one or several employers (or one or several unions of employers), with the purpose of establishing the conditions under which work must be rendered in one or more enterprises or working establishments. Even if a company or enterprise can function without a collective bargaining agreement in place, it must execute such an agreement if requested to do so by its unionized workers. In such a scenario, the contents of the agreement will apply to all unionizable employees rendering their services at the relevant enterprise or establishment, even if not all those employees are members of the Union that executed the agreement. The document must be in writing and be submitted to the competent Conciliation and Arbitration Board (Junta de Conciliación y Arbitraje) for review and approval in order to be binding and enforceable. Moreover, the agreement may never contain provisions for working conditions or benefits below the minimum standards established by the LFT. The collective bargaining agreement, by default, applies to both unionized workers and confidential employees. Generally, however, agreements include a specific clause or provision establishing that the collective bargaining agreement is not applicable to confidential employees. Collective bargaining agreements are subject to an annual revision as to their salary schedules and a bi-annual revision as to their total contents. The Union must request such reviews, respectively, 30 days and 60 days in advance of the agreement’s expiration date. If the review is not requested in a timely fashion and the right to strike is not exercised, the CBA is automatically extended for a period of time equal to its original duration. 3. "Contrato-Ley" According to the LFT, a “Contrato-Ley” is an agreement entered into by one or several unions of workers and one or several employers (or unions of employers), with the purpose of establishing conditions under which work must be performed in a particular industry branch in one or several states, economic zones, or in the whole Mexican territory.

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Unions that represent at least two-thirds of the unionized workers of any industrial branch may ask for the execution of said type of agreement. If the competent authority considers the “Contrato-Ley” convenient and beneficial, it will notify the corresponding Unions of workers and the employers that can be affected, requesting their presence at a convention where the agreement will be discussed. As with collective bargaining agreements, “Contrato-Ley” agreements may include provisions excluding Union non-members from the benefits of the agreement. 4. Internal Working Regulations Internal Working Regulations are mandatory provisions for workers and employers regarding work conditions in the enterprise or establishment; they typically include provisions relating to the hours at which employees start, suspend and finish their working schedules, the days and places for payment, leave of absence policies, etc. A joint commission of worker and employer representatives must discuss and prepare such regulations. If no union exists in the company (or for staff employees not represented therein), workers choose their own representatives. In order for the regulations to be effective and enforceable, the Joint Commission must submit them to the appropriate Conciliation and Arbitration Board, which must approve of the regulations’ contents. Furthermore, copies of the regulations must be distributed to the workers and placed in visible places on the company’s premises. It is mandatory for employers to have Internal Working Regulations in place. Such Regulations usually help to protect employers’ interests, often establishing circumstances under which the employer may sanction or fire its employees. F. Health and Welfare of Employees at Work Sites Both the Constitution and the LFT require employers to comply with legal standards for workplace hygiene and security, as well as to adopt adequate means of preventing accidents when employees use machines, work instruments or other work-related materials. Employers are required to maintain at all times basic medicines and supplies in order to provide emergency assistance in case of an accident. The employer must also visibly display the conditions that are conducive to the employees’ health and welfare at the work site. Employers must also cooperate with employees to organize a Joint Commission for Health and Hygiene, composed of an equal number of persons representing management and workers. The Commission should monitor compliance with relevant legal provisions, investigate the causes of accidents and illness in the workplace, and scrutinize proposed means for preventing said accidents and illnesses. After registering with the proper labor authority, these Commissions are required to file monthly reports concerning the general health and hygiene of the workplace. Employers are primarily responsible for work-related accidents and illnesses, and must therefore provide appropriate compensation for each accident or illness resulting in an employee’s death or causing a temporary or permanent disability that prevents the employee from working. This obligation is substituted by registration in the Mexican Social Security Institute (Instituto Mexicano del Seguro Social – “IMSS”).

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G. Labor Conflicts in Mexico Conciliation and Arbitration Boards resolve all individual and collective disputes arising from labor relationships between employer and employee or between an employer and a union. The Labor Boards sit at both the federal and local level. Federal Boards are supervised by the Ministry of Labor (Secretaría del Trabajo y Previsión Social “STPS”), while local Boards are under the authority of local state governments. Both the federal and local Labor Boards in general, as well as the Special Boards, consist of three members: a government representative (the "President of the Board"), an employer representative (appointed by companies engaged in the same industrial activity comprised by the Special Labor Board), and a workers’ representative (elected by workers through the Union). All three are competent in the industrial branch comprised by the Special Labor Board. H. Individual Conflicts After receipt of a claim containing the allegations of one or more workers, the Special Labor Board sets the date and time for a first hearing. This first hearing includes the stages of conciliation, claims and defenses. During the hearing, the authority (the competent Labor Board) encourages the employer and the worker to reach a settlement to solve the relevant labor conflict. This agreement usually consists of compensation; the employer delivers a certain amount to the worker in order for the latter to withdraw the complaint. Such compensation usually takes the form of a certain percentage of the severance payment for the dismissal (with or without cause) of the worker. In the event that no agreement is reached, the hearing moves through the stages of claim and objections; the worker may ratify, modify or expand upon the allegations in his initial claim and the employer may present a written response to the claim. The parties then proceed to offer evidence in support of their allegations. A different hearing will take place in the following days in order to surrender evidences by both parties in support of their allegations. The following types of evidence are admissible in a labor proceeding: testimony of the plaintiff and defendant; documentary evidence (public or private documents); third party testimony; expert witnesses; presumptive evidence; records of proceedings; photographs; and any other media that may be contributed by scientific research. After acceptance of the evidence, the parties have a limited time to present closing arguments, in which they review their actions, allegations and defenses in the suit. The record of the proceedings is turned over to the Board after the hearing. The Board issues a preliminary judgment, which must be approved by at least two of the three members of the Board. If approved, the preliminary judgment becomes the decision of an arbitrator; the members of the Board must sign it and send it to each of the parties. Thereafter, the parties have a fifteen-day term to file an amparo proceeding if either feels that the Board lacked sufficient grounds for its judgment.

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I. Collective conflicts There are mainly two types of collective conflicts: lockouts- instituted by employers, and strikes- instituted by employees or unions. 1. The Lockout: The lockout consists of temporary work suspension by decision of an employer. The LFT sets forth that such suspension is not attributable to the employer if it is due to: acts of God or force majeure not attributable to the employer; lack of raw material not attributable to the employer; a production surplus with respect to economic and market conditions; a temporary and obvious lack of profitability; or a lack of proceeds for the normal operation of the business. An employer must notify the competent Arbitration and Conciliation Board about the lockout and the causes thereof; if the Board approves of the lockout, the compensation payable to the workers shall be fixed. An unjustified suspension of work by an employer shall be construed as an unjustified termination of the labor relationship, with consequences as discussed below. 2. The Strike. A strike is a temporary suspension of work carried out by a group of workers. To call a strike, the union that executed the collective bargaining agreement must send a Strike Notice (emplazamiento) to the employer, laying out the Union’s demands and expressing intent to strike if such demands are not met. The notice must indicate the goal of the strike and the exact date and time when work activities will be suspended. The union must also file a copy of the Notice with the competent Conciliation and Arbitration Board. The strike notice must be filed at least six days before the date and time for the suspension of activities (ten days before, in the case of public services). Once the strike notice has been filed with the employer, the employer is considered the depositary of the workplace. Any and all actions against the assets of the workplace must be suspended; no attachment, repossession, eviction or other such action can proceed. Within 48 hours following receipt of the notice, the employer must file a written answer with the Conciliation and Arbitration Board. Before the strike can develop, the Board conducts a “conciliation hearing”, seeking a settlement between the involved parties. This hearing may be rescheduled only once. Likewise, before the suspension of activities, the Board will establish the minimum number of employees that must continue working to perform services that, if suspended, would compromise the safety or well-being of the workplace, machinery, equipment or raw materials, or impede renewal of activities when the strike ends. In the event the strike workers refuse to perform these services, the employer may use different workers. J. Termination of Employment Termination of employment must be considered separately with regards to two types of labor relationships: individual and collective. 1. Individual Labor Relationships An employer and employee may, at any time, jointly and voluntarily end their labor relationship. In the case of a bilateral agreement to terminate, the employee is entitled to receive payment of all unpaid benefits and, if he/she has been working for over fifteen years, to a seniority premium. When the termination takes place, the employee should sign a resignation letter and a full receipt (finiquito) reflecting the payment of all owed amounts by the employer.

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The LFT also contemplates that either the employee or employer might terminate the relationship unilaterally without incurring any liability, provided a justified cause exists. Employers may legitimately rescind agreements with their employees for different limited causes. The employer must submit a written notice to the employee being terminated, indicating the date and the cause of termination. Such notice must be given to the employee at the moment of the termination or the employer has five working days to notify the respective Conciliation and Arbitration Board, filing a brief indicating that the employee has been terminated with cause and including the last registered address of the employee such that the Labor Board can directly notify him of the rescission of the agreement. Lack of notice to an employee renders the firing of the employee unjustified. The employer has one month to terminate an employee from the date on which the termination cause is known. Likewise, the employee has different causes for which the employee may terminate the working relationship without liability. In this case as well, the employee has one month from the date on which he knows of the separation cause to terminate the relationship. In the event that an employer terminates the working relationship without cause, the employee that has been terminated without cause has the right to reinstatement or receive a severance payment consisting of three months of integrated salary, in addition to owed salaries from the date of termination and up to a twelve month period. If the legal proceeding has not concluded in twelve months, a 2% monthly interest of fifteen months of salary should be added. In limited cases, the Board may not order reinstatement—as when an employee has less than one month of work left; when the employee is in direct and permanent contact with the employer; and in the case of staff employees, domestic servants and temporary workers. In the event that a worker requests reinstatement and the employer refuses, that worker shall receive, in addition to a severance package, 20 days of salary for each year of service rendered. Whether a termination is with or without cause, terminated employees have the right to receive a seniority premium of twelve days of salary for each year of services rendered, with a legal cap in the calculation of the salary equivalent to two times the minimum wage in force at the place and time of termination. All terminated employees also have the right to receive unpaid salary up to the termination date, unpaid vacations and vacation premiums, and unpaid Christmas bonuses. 2. Collective Labor Relationships When, as a consequence of the closure of a company or a definitive reduction of its activities, working relationships must be terminated, employees have the right to receive a severance payment consisting of 3 months of integrated salary, in addition to a seniority premium. However, if the termination is a result of the introduction of new machinery or processes, the employer must first obtain the authorization of the Conciliation and Arbitration Board and then provide fired employees with a severance payment of 4 months of integrated salary, plus 20 days of salary per year of services rendered, along with the seniority premium. It is important to note that, unlike in other countries, no unemployment insurance exists in Mexico.

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K. Social Security System Mexico has a fairly comprehensive social security system, managed by the Mexican Social Security Institute (IMSS). The IMSS works to guarantee workers’ health, medical care, and pensions, and to provide social services necessary to protect the well-being of individuals who render a personal and subordinate service to an employer. This IMSS sits at the foundation of the Social Security Law which, according to its own regulations, provides public benefits and protects employees in five different areas of insurance benefits: workers‘ compensation; illness and maternity insurance; disability and life insurance; retirement and old age pensions; and day care centers and social benefits. Funding for the IMSS comes from fees that employers must pay on behalf of their workers. The employer-employee installments required for all five IMSS programs are calculated as a percentage of a base salary for quotation (“Base Salary”), which includes all benefits received by the employee with respect to his services rendered (with the exceptions and under the limits established by Article 27 of the law). The employer is required to determine, retain and pay the employer-employee installments on a monthly or bi-monthly basis. There is a cap of twenty five times the minimum wage in effect in Mexico City for the salary to be considered for the payment of Social Security fees. The main components of the insurance program provided under Social Security are:

(a) Work Risk Insurance (Worker’s compensation). The employer exclusively covers installments for this program. Fees are calculated as a percentage of employees’ base salary that varies depending on the inherent risks of the work performed, ranging from 0.50% to 15% of the base salary of the total number of workers that render services to the employer.

(b) Illness and Maternity. Joint employee-employer installment payments finance insurance for

costs of illness and maternity. The government also contributes to the program. The employer shall pay, for each registered employee, a daily contribution equivalent to 13.9%

of the minimum daily wage in place at Mexico City and if the base salary of any employee exceeds three times the minimum daily wage for such city, in addition to the contribution referred in this paragraph, the employer must pay a contribution equivalent to 6% of the difference between the base salary and three times such minimum daily wage.

Fringe benefits of illness and maternity are based on a total contribution of 1% of the base

salary, and the employer will pay 70% of such contribution

(c) Disability and Life Insurance. The employer must contribute 1.75% of base salary.

(d) Retirement and Old Age Insurance. Premiums, covered jointly by the employer and employee, are calculated as follows:

• Retirement: The employer shall contribute an amount equivalent to 2% of base salary. • Old Age and Early Retirement: The employer must cover 3.150% of base salary.

Resources for this insurance are held in individualized employee accounts, administered by

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private entities known as Administrators of Retirement Funds (Administradora de Fondos de Retiro - “Afore”).

(e) Nursery and Social Benefits. This insurance is completely financed by the employer’s

contributions, through the payment of an amount equivalent to 1% of base salary. L. Low Cost Housing Fund The Mexican government’s housing program – Infonavit, grants low-interest credit and loans to Mexican employees for the purposes of acquiring, constructing and remodeling housing. Mandatory employer contributions of 5% of employees’ base salaries fund the program. When Infonavit extends a loan to any employee, her employer is under the obligation to appropriately discount her salary and transfer the money to the Infonavit fund in order to make the payments on that loan.

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XIII. Taxation Three taxes will be addressed below: (i) income, (ii) value added, and (iii) single rate business tax. In addition, some other issues related to taxation are examined. A. Income Tax

1. Subjects of the Tax The principles under which the Mexican Income Tax Law (Ley del Impuesto Sobre la Renta – “LISR”) will determine whether or not there is an obligation to pay income taxes in Mexico will be based upon:

a) Residency; b) Existence of a permanent establishment in Mexico; and c) Source of income.

a). Residency Individuals and corporate entities residing in Mexico are obligated to pay income tax with respect to all income earned, regardless the source of income from which they arise, under a concept of worldwide income. b). Permanent Establishment Individuals and corporate entities that undertake a business activity through a place of business in the country will be subject to income taxes. The basis of the tax shall be determined considering income attributable to the permanent establishment, less allowed deductions, i.e., linked with the entrepreneurial activities, incurred within Mexican territory or abroad, as long as deductions requirement are met. c). Source of Income Individuals and corporate entities residing abroad will be subject with respect to income arising from income which source is located in México. This concept is further examined below. As detailed below, Mexico has executed an extensive list of treaties with other nations to avoid double taxation and to prevent tax evasion, which have as a consequence that residents abroad, upon compliance with the requisites under the relevant treaty will have a right to the benefits contained therein. Since Mexico is a member of the OECD (Organization for Economic Co-operation and Development), it follows the model tax treaty of such agency, as well as the comments to the model, which are a source of interpretation and construction of tax treaties executed by Mexico.

2. Residency for Tax Purposes Since residents in Mexico shall pay income tax over their income, regardless of the location of the source of income, it is important to define the concept of residency. The following shall be deemed to be residents for tax purposes:

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(a) Individuals, if they have established their home residence within Mexico. However, those who have their residence abroad shall also be deemed residents in Mexico, when they have in Mexico their “center of vital interests”, i.e., a subjective relationship or economic relationship within Mexico.

(b) In the case of corporate entities, they shall be deemed to be residents when they have

established within Mexico their business’ principal management, or the effective center of management.

If a corporate entity resident of Mexico were to change its tax residence to another country, a liquidation for tax purposes will be deemed to exist and relevant income tax be paid as if an arms’ length sale of assets would have occurred, taking into account the assets which were previously subject to the operation in Mexico.

3. Permanent Establishment In accordance with the LISR, a permanent establishment shall be deemed to exist when business activities are carried out, whether in part or totally, or independent personal services are rendered within Mexico, such as a branch, agency, office, manufacturing facility, workshop, mine, or any other place of extraction, exploration or exploitation of natural resources. Furthermore, permanent establishment shall be deemed to exist when the foreign resident acts in Mexico through an agent that does not meet the requirements to be an independent agent. In addition, a permanent establishment would be deemed to exist in Mexico in those cases where beneficiaries of trusts established abroad undertake activities within Mexico for a business trust.

4. Determination of the Tax and Rate The tax shall be 30% over taxable income in the case of corporate entities. The taxable income shall be determined by deducting from accruable income for the period all authorized deductions. In addition, the statutory profit sharing to employees (see section XII.D.5 above) and the unamortized losses for prior years shall be reduced. For individuals, there is a scale where 30%, is the highest rate, although a salary credit (essentially a subsidy) may apply in accordance with the provisions under the law. Even though the tax is determined by tax years or fiscal periods (coinciding with the calendar year), there is an obligation to make provisional tax payments.

5. Offset or Credit of the Tax Residents in Mexico may offset the income tax which has been effectively paid abroad against the tax that is payable locally, as long as these are income for which payment of tax is due under the LISR. Likewise, taxes paid abroad by Mexican residents on dividends or distributable earnings that have been earned by resident abroad will be credited. Crediting is made pro rata to the amount of the tax paid, with a limit, which may not exceed the amount that will result under the tax rate on income earned abroad. Specific rules exist in the event of spin-offs, for tax consolidation in the event of corporate groups, and with respect to individuals carrying out business activities abroad.

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6. Taxable Income

Corporate entities residing in Mexico, including partnerships, shall accrue all of their income earned in cash, in kind and/or in services or credit. Companies residing abroad with a permanent establishment in Mexico, shall be required to accrue all of the income attributable to such establishment. As an exception to the general rule, the following shall not be deemed to be accruable income: income received on account of increase of capital, contributions made by shareholders to offset losses, premium earned on the issuance of stock, or through the use of the participation at the fair value in stock, as well as that arising from the revaluation of assets and capital, and income for dividend or earnings earned from other corporate entities established in Mexico. In the case of residents abroad with a permanent establishment, the amounts received by headquarters or other related establishment abroad will not be deemed to be taxable income. Tax laws and regulations also provide specific events which shall need to be deemed to be accrued the income, in other cases where a gain shall need to be treated as such for tax purposes. Likewise, tax authorities shall have the right to presume accruable income that is to be accrued, whether as a consequence of construction, permanent improvements in real estate, payments received on recovery of credit which was previously deducted as uncollectible, earnings from loss recoveries on insurance and bonds, or amounts to recover expenses received from third parties, interest earned and annual inflation adjustment. With respect to inflationary earnings, it is relevant to mention that the actual reduction in the value of debt shall be treated as income. Determination of the earnings shall be calculated on a monthly basis pursuant to the Price Index published by the Central Bank (Banco de Mexico). Earnings shall also be accruable in cases of payment in kind, sale of fixed assets or land, securities, and that which is earned as a consequence of a merger or spin-off, reduction of capital or liquidation of commercial entities. Amounts received in cash, either Mexican or foreign currency, that represent loans, future capital increases, or capital increases that exceed the equivalent of US$46,000 approximately will need to be notified to tax authorities under the penalty of being deemed to be taxable income. In the case of sale of securities, the LISR outlines a procedure to determine the profit earned in the sale, distinguishing that which has been earned for periods in excess of more or less than 12 months. Profit shall be determined by reducing the average cost of the securities sold from the total income earned on the sale. This average cost is determined dividing the original amount of the investment, adjusted by inflation, and dividing it by the number of shares held by the taxpayer on the date of sale. The LISR provides a procedure to determine the original amount of the investment, as well as concepts to be added or reduced to the determine calculation. In the event of restructuring of companies incorporated in Mexico belonging to the same group of interest, tax authorities may authorize the taxpayer to sell shares at the “adjusted tax value”, which would imply that no taxable income is earned on the transfer stock until an unrelated party sale is made.

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Reduction of Capital. The income distributed to shareholders upon a reduction of capital shall be deemed to be distributable profit. The applicable tax shall be assessed on the company making the reduction. To determine the tax to be paid, the following shall need to be defined: • Net Tax Profit Account (Cuenta de Utilidad Fiscal Neta – “CUFIN”). This account is composed of

profits that have already been subject to and paid corporate income tax. If the reimbursement is made with a charge to such account, there will be no tax payable. Otherwise, the profit shall be determined and taxes paid thereon.

• Adjusted Paid-in Capital Account (Cuenta de Capital de Aportación Actualizado - “CUCA”). The

Income Tax Law requires corporate entities to regularly keep an update of this account, through which inflation adjustments are recognized on contributions made by the shareholders. No tax will be paid if capital distributed is accounted for the CUFIN or CUCA.

The reduction of capital will imply for tax purposes a reimbursement of contributions or capital to the relevant shareholder, whether or not share certificates are cancelled.

7. Timing of Accruable Income The LISR provides the moment on which the income shall need to be accrued, depending on the activity or operation. In most cases, income shall be accrued prior to or simultaneous to the moment in which the compensation is actually collected, except in those cases dealing with rendering of independent services. In the case of sale of goods or rendering of non-personal services, income is accrued at the time the invoice is issued, when the goods or services are physically delivered or sent, or collected or when the price or compensation is due, in full or in part, even though these are not advances. However, in the case of personal independent services, the income will be accruable when the price or compensation agreed is actually collected. In dealing with financial leases and term sales, taxpayers are granted the option to accrue the total amount of the compensation in one single fiscal period, or only that part of the price actually collected, although once a taxpayer elects the option, it shall need to maintain such option for at least five years.

8. Allowed Deductions All those expenses and investments that are indispensable for undertaking the activity of the taxpayer during the fiscal period in which they are made will be allowed. Among the most relevant: a). Requirements for a deduction

The indispensable requisites to carry out any deduction are the following:

- To be strictly indispensable. - To be covered by documentation meeting formal requirements established under law. - To be duly registered in the accounting books and records, and apply to a single charge. - When required under law, to comply with obligations in connection with withholding and

payment of taxes to third parties. b). Cost of Sales

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Purchases of goods for transformation made by the taxpayer shall be deductible upon subsequent sale. This cost system attempts to avoid companies to acquire excess inventory with the purpose simply of taking the deduction.

c). Investment and Depreciation

Investments (in fixed assets, cost and deferred charges, as well as pre-operative expenses) shall be deductible in such percentage as may be established under law, which will vary depending on each type of investment. In some cases, the LISR allows the taxpayer to accelerate the depreciation on the acquisition of new assets.

d). Non-Deductible expenses and deduction limits

There are certain expenses that are not deductible, or which may be limited to compliance of certain specific requirements. As an example of these:

i. Payments of income tax made that correspond to third parties. ii. Penalties, indemnifications for damages, and contractual penalties. iii. Interest arising from loans or from the acquisition of government securities, as well as for

negotiable instruments or loans, when the loan or the acquisition was made through individuals or non-profit entities.

iv. Allowances for employment-related expenses. v. Goodwill. vi. Losses on account of force majeure, and act of God or the sale of goods.

Other limits to the amounts of a deduction are the following: e). Sale of Stock

Deduction of losses on account of the sale of shares may not exceed the amount of the profit earned by taxpayer during the period, or during the five periods after the sale of the security.

f). “Thin capitalization”

The LISR provides for limitations deductibility of interests arising from excessive indebtedness of taxpayers, primarily with related entities residing abroad, with the purpose that these operate simply with reasonable debt margins from a financial and tax standpoint.

The limitation of the deductibility is made taking as a reference a comparison among the capital with debt, and if the proportion exceeds 3 to 1, then interest arising therefrom will not be deemed deductible.

This is not applicable to financial services entities, provided they meet the applicable capitalization rules applicable, nor to those taxpayers which might have a special ruling on transfer pricing. To determine the annual average of debt to exceed three times capital-debt, those debts that arise from credits subject to distribution of profit or dividends, reduction of capital, sale of assets, contracting new credit, or transferring control shall be included. This is also the case in those instances where the creditor is allowed to restrict application of the loaned funds.

g). Technical assistance and royalties

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It will be necessary to evidence before tax authorities that that person who provides technical assistance has its own technical elements for such purpose; that the services provided directly and not through third parties (except in those cases where payments are being made to residents in Mexico); and that the technology is actually received, and not only the possibility of obtaining it.

9. Net Operating Losses Tax losses will exist when the amount of authorized deductions exceed the amount of taxable income. Tax losses incurred in one particular fiscal period may reduce the taxable profit for the following ten (10) fiscal periods, it is fully amortized. In the event that the taxpayer fails to carry forward its tax loss from previous years, even though the taxpayer could have done so, the taxpayer will forfeit the right to do so in subsequent years, for up the amount that could have been deducted. NOL’s are also subject to inflation adjustment from the date it was originally incurred until the date it is used to amortize taxable income. As a general rule, the right to amortize NOL’s corresponds exclusively to the taxpayer that incurred such loss, and may not be transferred, even as a consequence of a merger.

10. Tax Consolidation Corporate taxpayers that belong to the same group of interest may present a consolidated tax return. In order to take advantage of this regime, certain tax requisites will need to be met. Entities that belong to the same group will need to identify the controlling entity in those that are controlled. A controlling company (sociedad controladora) will need to be an entity resident in Mexico for tax purposes, which owns more than 50% of the voting stock of one or more entities that are controlled, directly or indirectly, and in no case 50% of the voting stock of the controlled entities may be owned by one or more entities, unless such companies reside in a jurisdiction with which Mexico has a broad agreement for the exchange of information. The advantages of this regime is to apply immediately in a single period in which they are generated tax losses of one of the entities to off-set the profits earned by the others, thereby optimizing cash flow, and deferring taxes (for six tax years) on dividends paid among entities in the group which are not subject to the benefit of CUFIN, and being perceived as a single group by tax authorities. The controlling entity will need to determine the consolidated tax result, file annual tax returns within the term of tax consolidation, and meet the obligation to file audited tax returns. Controlled company: those in which more than 50% of their voting shares are owned, directly or indirectly, or both by a controlling entity. Requisites for consolidation

a) The controlling entity will need to have a written approval by each of the controlled entities, b) A request shall need to be submitted to SHCP, c) The controlled and controlling entities will need to have their financial statements audited by a

registered accounting firm for the fiscal period during which they consolidate, d) They shall need to include within the tax consolidation regime all of the companies which

qualify as controlled entities.

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Although the controlling and controlled results of each company shall need to be taken into account individually, a single tax return shall need to be presented for the group. The following entities may not consolidate

(i) Corporate entities that are non-taxpayers. (ii) Financial service entities (banks, insurance companies, bonding companies, brokers,

currency exchange, etc.). (iii) Entities residing abroad. (iv) Entities that are in process of liquidation. (v) Non-commercial entities. (vi) Those subject to simplified tax regimes (e.g., some transportation entities). (vii) Partnerships.

Once the option is exercised, the controlling company shall continue to pay income taxes on the consolidated tax results for a period of no less than five (5) years as from the date the option was exercised, or until the SHCP authorizes to cease. Special rules exist to add or remove one of the entities and tax consequences arising therefrom.

11. Regime Applicable to Dividends Distributed Dividends, which are not paid out of a CUFIN account (that which has already been subject to tax), shall be subject to the payment of a tax at a rate of 30%, after applying a factor yearly determined. The tax is payable by the entity distributing the profit; not by the recipient.

12. Income Tax Applicable to Resident Individuals Individuals resident in Mexico are obligated to pay income tax on the income they receive worldwide, regardless of whether the source of income is located. The law provides for nine chapters addressing income that may be earned from carrying out activities. Particular rules exist for the timing of accrual of income, tax rates, withholding, authorized deductions, need to file provisional tax payments, and annual returns. The following categories for income are contemplated:

§ Salaries and the rendering of personal subordinated service § Business and professional activities § Sale of goods § Purchase of goods § Interest § Prizes § Dividends § Other income

An annual tax return will need to be filed by the individual between the months of February and April of the year following that in which income has been received. Tax rates are progressive and are capped at 30%.

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13. Non-Resident Taxation Residents abroad without a permanent establishment in Mexico, or even if they have one, but receive income that is not attributable to such establishment, will need to pay taxes on such income which it is deemed to have a source in Mexico. Tax is normally paid through a withholding to be made by the person making the payments, and will be required to apply the relevant rate and pay either at the time the income is due, or at the time it is paid, whichever is first. The following are among the most common commercial practices carried out by residents in Mexico with residents from abroad: a). Salaries and income received from a subordinated personal service; in this case, it is deemed

that the source of income is located in Mexico when the services are rendered within its territory. An exception is granted for the initial $10,000 dollars (approximately), and thereafter a rate of 15% and 30% depending on the amount. However, if an entity or individual resident pays the salary abroad, the employees are exempted for tax purposes when their stay is no longer than 183 consecutive days, during a period of twelve months.

b). Professional services. In this case, the individuals are subject to a 25% tax rate. However, if a

foreign resident pays the fees, the exemption would apply when the stay is no longer than 183 consecutive days during a twelve-month period.

c). Grant of temporary use of real estate. In this case the source of income will be deemed to exist

when the real estate is located within the territory of Mexico. The tax rate shall be 25% over the total amount of the income, without deduction.

d). Sale of real estate. In this case the withholding rate is also 25% over the amount of the price.

However, if the seller appoints a representative in Mexico to calculate the profit earned and file the relevant returns, the tax will be assessed on the net income, and not the gross income.

e). Sale of shares and other securities. A source of income will be deemed to exist in Mexico when

the issuer of the stock is a resident corporation, or when the book value of such shares or securities relates directly or indirectly to more than 50% in real estate or other immovable property located in Mexico. In this case, the LISR provides for two options to determine the tax: (i) apply a rate of 25% over the total price, without deduction (gross income), or (ii) apply a 30% rate over the profit (net income) earned.

In order to elect for payment based on a net profit basis, a representative shall need to be appointed who will be entrusted with calculating the tax through a registered public accountant and filing relevant tax returns.

Sales of stock carried out through the Mexican Stock Exchange will be subject to a 5% flat tax, to be withheld by the relevant broker, although an option exists to pay the tax at 20% rate over the net income.

In dealing with restructuring of economic groups, a deferral in the payment of the tax on a gain on the sale of stock may be made until such time as the securities are sold to a third unrelated party. A prior ruling is required for this purpose.

When a tax treaty executed with Mexico applies, and the gains earned on the sale of shares as a consequence of corporate restructuring are not taxed, the benefit will be granted through a

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petition to receive a reimbursement of the tax if the requirements under the Law and Regulation are not met.

e). Dividends

Under the LISR, corporate profits are taxed just once, at the corporate level at the 30% rate in all cases. The after-tax profits are recorded at a special tax account named “Net Profits Account” [Cuenta de Utilidad Fiscal Neta] (CUFIN), so that when those profits are distributed to the shareholders and therefore are taken from that account, no further tax arises, regardless of the residence of the shareholders.

f). Interest paid by the Government

Interest received by residents abroad from loans granted to the federal government or the Central Bank (Banco de Mexico) or securities issued by these entities that are placed abroad among public investor will be tax exempt, provided the effective beneficiaries are residents abroad. When it is not possible to identify the effective beneficiary of interest arising from such securities, brokers will not be required to make any withholding nonetheless.

g). Financial transactions

Likewise, Residents abroad shall not be required to pay income tax on profit earned from debt financial transactions when these are referred to be Mexican prime rate (TIIE) or securities issued by the federal government, the Central Bank (Banco de Mexico) or any other entity as may be determined from time to time by the SAT, provided these are placed among the public investor at large through relevant stock markets and such residents abroad are the effective beneficiaries.

h). Interest to non-resident banks

Foreign banks who are registered with the SHCP shall be subject to a flat withholding rate of 4.9% on the total interest, provided they are the effective beneficiaries thereof, and they reside in a jurisdiction with which Mexico has executed a tax treaty to avoid double taxation.

i). Royalties

In dealing with royalties for technical assistance or advertising, it is deemed that a source of income is located in Mexico when the goods or rights for which royalties or technical assistance are paid are taken advantage of within Mexico, or when the royalties, the technical assistance or advertising is made by a resident in Mexico or by a resident abroad with a permanent establishment in Mexico. In these cases, the top tax rate is 30% over the total income without deductions.

j). Premium paid to reinsurers

In the case of premium paid or ceded to reinsurers, a source of income is located in Mexico when these are paid by a resident of Mexico, or by a foreign resident with a permanent establishment in Mexico. Tax rate is 2% to be withheld by the person making payments.

14. Tax Representative

When an option exists to appoint a tax representative resident in Mexico in order to take advantage of an option to pay tax on the profit rather than the total compensation, the tax representative shall need to be a

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tax resident (or non-resident with a permanent establishment in Mexico), and shall need to maintain at the disposal of tax authorities all documentation relating to the transaction evidencing payment of the tax for five years as from the date in which the tax return was presented.

15. Tax Treaties Residents abroad without a permanent establishment in Mexico may apply the benefits contained in different tax treaties to avoid double taxation entered into by Mexico, provided the relevant provisions of the treaty are met, and other obligations contained under the LISR and Regulation are complied with respect to registration, filling of reports and appointment of tax representative. The main benefits contained in the treaties are with respect to applicable rates that are lower than those otherwise provided under the LISR or a tax exempt. Multiple international treaties have been entered into by Mexico. Those in force as of 2013 are the following:

Australia Austria Bahrein Barbados Belgium Brazil Canada Chile China Czech Republic Denmark Ecuador Finland France Germany Greece Hungary India Indonesia Ireland Island Israel Italy Japan

Korea Lettonia Lithuania Luxemburg Netherlands New Zealand Norway Panama Poland Portugal Rumania Russia Singapore Slovakia South Africa Spain Sweden Switzerland The Netherlands United Kingdom United States of America Uruguay Ukraine

Tax rates and treatment will vary depending on the relevant treaty, reservations and specific agreements. Construction or interpretation of treaties will be made through the OECD Model Tax Convention on Income and on Capital Commentaries.

16. Agreements Regarding Exchange of Information. Mexico has executed 12 Agreements on the Exchange of Fiscal Information, applicable in 2013. Among those in negotiation or pending, are the Agreements with Aruba, Gibraltar (Gibraltar’s signature is missing), Marshall Islands, British Virgin Isles, Liechtenstein, Monaco, Saint Lucia, Turks and Caicos, and Vanuatu.)

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Agreements with an effective date starting on 2012 and 2013 are the following:

Belize Cayman Islands Cook Islands Costa Rica Guernsey Islands Isle of Man Jersey Islands Samoa

17. Controlled Foreign Company Residents in Mexico or non-resident(s) with a permanent establishment in Mexico shall be subject to taxes for income earned abroad when the income is earned in a preferential tax jurisdiction, whether these are received directly, or through legal entities in which they directly or indirectly participate in their capital stock. Income which will be subject to the tax is that received in cash, goods, services or credit, and these are not subject abroad or are subject to a rate which is less than 75% of the tax rate which would otherwise be due and payable in Mexico. Income which shall need to be accrued for these purposes will be due even though these are not actually received by the resident of Mexico, unless the persons who received do not have an effective control of management of the relevant entities subject to the preferential tax regimes, in which case they will pay the tax until it is received. Income subject to this regime shall need to be determined each calendar year, and shall be accrued to the rest of income of the taxpayer. A rate of 30% shall be assessed on the taxable income.

18. Related party Transactions; Transfer Pricing Corporate entities that enter into transactions with related parties resident abroad must determine their accruable income and authorized deductions considering that the price and other compensation for these transactions is equal to what they would have paid to independent parties on a arm’s length basis. In this sense, two or more entities are deemed to be related parties when:

a) One of them participates, directly or indirectly, in the management, control or capital or other means;

b) A person or group of persons participates, directly or indirectly, in the management, control or capital of such entities;

c) Transactions among residents in Mexico and entities located abroad residing in preferential tax regimes, are deemed to be transactions among related parties that do not meet the arm’s length principle.

The methods provided under the LISR are essentially the same as those that are recommended by the OECD. Certainly, these methods are based in comparable use and analysis. In order to determine if one transaction can be comparable to another, several factors will need to be taken into account such as: (i)

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characteristics of the transaction, (ii) functions, risks and assets used, (iii) contractual provisions, (iv) economic circumstances, and (v) commercial strategies. Others may apply. If it is not possible to secure information on comparables by reason of confidentiality, or simply because such information is not available, then a reasonable effort needs to be made in order to evidence that the price agreed is within “market”. Even in this case, “comparable” transactions will need to be examined in light of factors mentioned above, and the corresponding adjustments made. To determine compensation that independent parties would utilize in comparable transactions, an economic study shall need to be made. Such study would need to follow one of the methods expressly recognized under law. Mention should be made to the fact that the “Better Method Rule” (Regla del Mejor Método) shall apply in accordance with the terms of the LISR, which provides:

(i) Non-controlled comparable price; (ii) Re-sale price; (iii) Cost-plus; (iv) Method examining earnings arising from specific controlled transactions. Such methods

are: Profit Sharing method, Residual profit partition, and Transactional Margins for Transaction Profit.

If the taxpayer wishes to have legal certainty with respect to the method to be utilized in its transactions with related parties, it may request an Advance Pricing Agreement (Acuerdo Anticipado sobre Precios de Transferencia) from Mexican tax authorities. There are certain penalties under the Federal Tax Code that may be imposed during the course of an audit when taxpayer, in his annual tax return, were to report earnings or losses that do not reflect market prices in the transactions carried out during the fiscal year. In order to determine prices and compensation for transactions carried out with related parties, companies shall need to utilize, in first instance, the non-controlled comparable prices method, and may only use the other methods when the non-controlled method is inappropriate for determining the transactions were conducted at market prices, in accordance with the Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations.

19. Mutual Administrative Assistance on Fiscal Matters On the 27th of August 2012, in the Mexican Federation’s Official Journal, a “Proclaiming Decree regarding the Mutual Administrative Assistance on Fiscal Matters Agreement” was published, prepared in Strasburg on the 25th of January nineteen ninety eight, with an effective date starting from the 1st of September 2012. The aforementioned Agreement, along with its reservations and interpretative declarations was executed in order to increase assistance between tax authorities (administrative assistance) of the Countries that are Members of the European Council and the countries that are Members of the Organisation for Economic Co-operation and Development (OECD) as Mexico, in order to battle the circumvention and avoidance of tax on an international level. The Agreement does not limit, nor is limited by the international agreements previously executed by Mexico; the agreement is a multilateral instrument of mutual assistance between the Countries that are members of the OECD.

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The purpose of the Agreement is the mutual administrative assistance on tax matters, includes: Information exchange (including simultaneous tax audits and participation in foreign audits) and Assistance in collections (including the provision of precautionary measures; and the notice or service of documents). The comprised taxes for Mexico are:

(i). Federal Income Tax and the Single Rate Business Tax (IETU). (ii). Value Added Tax. (iii). Special Tax on Production and Services.

20. USA/ MEXICO FATCA (Foreign Account Tax Compliance Act).

The Agreement, was negotiated over a period of two years and was signed on November 19, 2012 in the City of Washington, DC by the Ministry of Finance and Public Credit and the Treasury Department of the United States of America, the aforementioned has not been published in the Federal Official Gazette, signed in both English and Spanish languages and both texts being equally authentic, in force as from January 1st 2013. With the signing of this Agreement, Mexico ranks among the countries with the best practices in information sharing by the OECD and by the G20. The Agreement is meant for purposes of exchaging banking and financial information in order to verify the compliance with the tax obligations of the respective taxpayers. The exchange of information is annual and automatic, i.e. there is no application required for its acquisition. The information must be exchanged within nine (9) months following the end of the calendar year for the relevant year. Notwithstanding the foregoing, any information that relates to the year 2013 will be exchanged no later than September 30, 2015. B. SINGLE RATE BUSINESS TAX (“IETU”)

1. General Overview The Single Rate Business Tax (Impuesto Empresarial a Tasa Única - “IETU”), has been in force since January 1st 2008. The tax will be paid on the exceeding amount between the Income Tax (ISR) and the IETU determined by the taxpayer. The IETU is a direct tax and on a uniform rate. The base of this tax is: “the remnant flow of a company used to compensate the production factors, deducting only the expenses for the gathering of capital including machinery, equipment, land and buildings, as well as inventory.” The nature of the IETU is that of a minimum contribution regarding the total ISR, explaining why the taxpayer will pay either the IETU or the ISR amount, whichever is higher. It is important to point out that the law refers to the Value Added Law in order to define some concepts and what should be understood as alienation of goods, rendering of personal independent services and granting of temporal use of goods.

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The IETU was designed to broaden the taxpayer’s base, avoid tax evasion and elusion, limit the deductions and reduce special regimens. Therefore, the Asset Tax ceased to be in force as of 2008, due to the fact that the IETU took over.

2. Tax Elements a). Elements

(i). Subjects. Individuals and entities with residence in Mexico are subject to the IETU for their income regardless of its source. Residents abroad are subject to the tax when they have a permanent establishment within the country, regarding the income attributable to such establishment.

(ii). Purpose. The object of the tax is constituted by the income effectively received from the

alienation of goods, rendering of personal independent services and the granting of the temporal use of goods that are attributable to the production factors.

(iii). Base. The tax base will be determined by deducting from the taxable income only those

limited deductions authorized by the law.

(iv). Rate. The tax rate will be of 17.5% applied on the tax base.

(v). Payment. The IETU is an annual contribution; however the taxpayer is obliged to make provisional payments in account of the annual tax.

b). Income

The income considered for the IETU is that effectively received by the taxpayer from the taxed activities. When the compensation charged for the alienation of goods, rendering of personal independent services and granting of temporary use of goods, is in kind, the law states that the income received will be the market or appraisal value of the goods or services received.

c). Deductions

The deductions allowed by the IETU law consist in those expenses made by the taxpayer for the acquisition of goods, personal independent services or the temporary use of goods, linked to the activities taxed by the law, or related to the administration, production, marketing or distribution of goods and services that trigger the tax. In the same manner, taxes paid in Mexico will be deductible, except for the IETU, Income Tax, Value Added Tax, Special Tax on Products and Services, Tax on Cash Deposits, as well as social security. However the IETU law provides that the Value Added Tax and the Special Tax on Products and Services can be deducted when the taxpayer cannot credit these taxes. It is important to point out that the IETU law does not consider salaries paid as a deductible concept; however, as it will be analyzed below, the law grants the possibility of crediting such amounts in a proportion related to the tax rate.

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Finally, the interest from loans will not be deductible from the tax’s base; the same applies for royalties paid to a related party abroad for the granting of use of goods, notwithstanding the fact that such payments may consist of a necessary expense to fulfill the main purpose of the entity, due to the fact that such concepts are not part of the object of the law. This particular issue has been deemed in legal analysis as unconstitutional and has been challenged before Mexican federal courts. A final decision is still pending. Please keep in mind that on a strict interpretation of the law, the payments made for services as well as technical assistance are considered part of the object of the law and as such they will be deductible from the tax base.

d). Crediting

(i). Tax Credit. The IETU Law grants a tax credit derived from the difference that may present when the authorized deductions are in fact higher than the recognized income.

(ii). Payroll Credit. Considering payroll is not a deductible concept, a credit is given to the

taxpayer for the salaries paid that were the base for determining each of its employees Income Tax and social security. The credit will be calculated by applying a 0.175 factor to the sum of the taxable income perceived as salary and the social security granted.

Again, the use of a factor to calculate the offsetting has been deemed to be by some as unconstitutional, taking into account that there is no justification for limiting the credit when the expense is absolutely necessary for the activities of the taxpayer. Legal challenges have been filed before Mexican courts, but final resolution is pending.

In addition, it is important to point out that the transitory provisions of the IETU Law prohibit the crediting of allowances set for such concepts before January 1, 2008, that will be paid after said date. This way, every allowance created in 2007 with the intention of covering labor expenses (such as bonuses).

(iii). Credit on own Income Tax. In the same manner, a credit equivalent to the income tax

effectively paid is granted to the taxpayer.

In addition, the Income tax can be credited for dividends when the payment was made in the same fiscal year. The effectively paid tax for such concept in 2006 and 2007 can be credited against the IETU in 2008 if it was not credited before.

C. Value Added Tax (“IVA”) Value Added Tax (Impuesto al Valor Agregado - “IVA” or “VAT”) is a tax assessed on consumption, and it is an indirect tax in the sense that the taxpayer carrying out the activities contemplated under law is the one who causes the tax, although the tax is transferred to the next consumer of goods and/or services and so forth until it reaches the final consumer who is ultimately responsible for the tax.

1. General Characteristics of the VAT This tax is calculated on a cash-flow basis, i.e., those transactions or activities that are assessed with the tax will be subject at the time compensation is effectively collected. This distinguishes VAT from income tax, where income is accrued.

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The VAT Law permits crediting of the tax paid by the company against that which the same entity generates, in such manner, as only the net amount shall be paid. In the event the tax paid were to be larger than the amount collected, then the company may credit, offset or even request a return of such excess. One the characteristics of this indirect tax is that the taxpayer must expressly and by separate form transfer the tax to those persons that acquire their goods, or services that are subject thereto. A transfer is deemed to exist at the time the taxpayer subject to the tax collects it from the final consumer. The taxpayer that transfers and collects the tax shall be required to make payments of the net amount, normally during the calendar month following that in which the amount was collected.

2. VAT Rates As a general rule, activities assessed with VAT shall be subject to a rate of 16%; however, it is possible to apply a reduced rate of 11% when transactions or services are carried out by residents along the border regions of México (i.e., border with the United States of America and with Guatemala and Belize), as well as certain other specified territories of México, provided physical delivery of the goods, or services rendered is carried out within said region. Other activities or services are subject to a 0% rate, or may be VAT exempt. The difference between the 0% rate and the exemption of the tax lies in that transactions subject to a 0% rate allow the crediting of VAT paid, whereas this benefit is not available in exempt transactions.

3. Taxed Transactions Pursuant to the VAT Law, the following activities are subject to the tax, provided they are carried out within the territory of México:

§ Sale of goods, § Rendering of independent personal services, § Temporary use of assets (e.g., lease of goods), and § Importation of goods or services.

a). Sale of Goods Any transfer of ownership (of goods or rights) will trigger the value added tax at the applicable rate. Certain transactions are exempted, however, such as the sale of land, books, newspaper and magazines, used furniture, stock and other securities, as well as sales made to residents outside of México pursuant to a program under the maquiladora decree or certain auto parts manufacturers that import or export goods in accordance with specific custom rules. The sale of goods deposited in a strategic duty free warehouse will also be exempted. Sales are deemed to be made within México if the goods are inside of the territory of México at the time delivery is made to purchaser. In the case of intangible assets (such as, for example, royalties), the transfer is deemed to be made within the territory of México when the seller and purchaser both reside within. It is deemed that the sale is made at the time compensation is collected. The tax determination is based on the agreed-upon price or compensation that is charged to, or collected from, the purchaser, in addition to the applicable taxes, duties, interests, and penalties. b). Services

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The rendering of services is deemed to be any obligation to perform that is made by one person for the benefit of another, including advances, transportation of goods or persons, insurance, bonding, agency, commissions, mediation, representation consignment and distribution, technical assistance and transfer of technology, as well as obligations to deliver, to abstain from performing or to allow that are made by one person to the benefit of another. Some services are exempted from the payment of the tax. Among the most relevant: commissions and other compensation paid by a borrower to a creditor as a consequence of mortgage loans, commissions paid for retirement fund administrators, services that are free, and public land transportation (except railroad) among others. It is deemed that a service is rendered within México when such is carried out, in full or in part, by a resident in the country. In dealing with international air transport, it is deemed that only 25% of the service is rendered within México. An obligation exists to pay the tax at the moment that compensation is effectively collected, except in the case of interest; in this case, it is payable when interest is due. To determine the tax, the total amount of compensation agreed shall be considered, together with any amounts that are charged or collected from that who receives the service, such as taxes, duties, expenses, reimbursements, interests, penalties and others. c). Importation of Goods or Services An importation is deemed to exist upon introduction of goods into the territory of México, the acquisition by residents in the country of intangible goods sold by non-residents, the temporary use within México of intangible assets provided by non-residents, or the use of tangible assets when physical delivery is made abroad, or the taking advantage of any of services that have been previously mentioned, when these are provided by non-residents. An importation is deemed to have been made:

(i). At the time the importer delivers the import manifest for processing. (ii). The temporary importation becomes permanent. (iii). When compensation is effectively collected, in those cases of acquisition of goods by

residents of México of intangible goods from non-residents, and the taking advantage within México of services rendered abroad.

Imports that are exempted of the VAT, include those sales/imports that are not closed, are temporary, are returns of goods temporarily exported, or are in transit, as well as those that are introduced into a duty free bonded warehouse. Imports of household goods and vehicles will be permitted in accordance with customs regulations, provided requirements are met as provided by SHCP. To determine the tax in dealing with tangible goods the value used for purposes of the general import tax shall be utilized, but added with such tax, as well as all others that are due as a consequence of the importation. In the case of importation of tangible goods, payment will be made jointly with import duties. In those cases of goods for which import duties are not payable, taxpayers shall pay the VAT upon importation. d). Export of Goods or Services

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Taxpayers may apply the 0% VAT rate, when the transfer of goods or the rendering of services are exported. It will be deemed that an export takes place in those instances where there is a sale of tangible or intangible goods carried out by a resident of México to a resident abroad, the temporary use abroad of intangible goods provided by residents of México, taking advantage of services rendered abroad by residents of México on account of technical assistance, services related thereto and information with respect to industrial commercial or scientific experience, as well as maquila transactions, advertising, commissions, agencies, insurance or reinsurance, and financing transactions, among others.

4. Persons Required to Withhold the Tax An obligation is set for certain persons to withhold the tax that is transferred, and subsequently to pay this tax. Those under include persons who acquire tangible goods, or use them temporarily, or sell or grant residents abroad a service without a permanent establishment entities which receive personal independent services or use temporarily goods, or services provided by individuals, or which may acquire goods to be used as a material in the industrial activities, the services rendered by agent, when the latter are individuals. The person who withholds the tax shall be jointly liable for the payment; will withhold at the time the compensation or price is paid, and will be required to deliver tax during the following calendar month on which the withholding is made.

5. Obligations of Taxpayers The obligations include maintaining accounting records in accordance with the provisions of the Federal Tax Code, and to separate transactions for which the tax is payable. Likewise, an obligation exists to issue invoices that include the Value Added Tax expressly and separately identified to those who acquire goods, or use them temporarily, or receive services, stating whether compensation is paid in full or in installments. When activities are carried out with the public in general, the tax will need to be included as a single unit with the total price for the goods or services offered.

6. Filing of the Corresponding Tax Return There will need to be monthly returns filed with tax authorities identifying information in connection with payment, withholding, crediting and transfer.

7. Crediting of the Tax The VAT tax is creditable in the amount that has been transferred to the taxpayer. Sales and expenses will need to be registered when they are exempt and those subject to VAT, since only VAT on paid amounts will be able to be credited, pro rata to the taxable vis-à-vis total sales. VAT accrued as a consequence of exempted purchases will not be able to be credited, and will be part of cost of goods.

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D. Cash Deposit Tax

This tax is triggered when monthly bank cash deposits exceed MXP $15,000.00 (aprox. $1,000.00 USD). All cash deposits in the same financial institution carried out within the same month must be considered to determine whether the aforementioned threshold is exceeded. The tax is calculated and withhold directly by financial institutions by applying the 3% to the total amount of the qualified deposits. This tax may be offset against taxpayer’s Income Tax. E. Other Issues

1. Obligation to Register with the Federal Taxpayers’ Registry Companies and individuals that are required to file returns from time to time, or that are required to issue invoices for the transactions they carry out will need to apply for registration with the Federal Taxpayers’ Registry of the Ministry of Finance and Public Credit (Registro Federal de Contribuyentes – “RFC”). This will be secured in the tax office corresponding to the domicile. As part of registration, the “electronic signature” will need to be secured in order to make electronic filings of tax reforms and information, as well as payments. Individuals and non-resident companies without a permanent establishment in Mexico may request their registry providing the relevant registration number in their country of residence, although such registration will not enable them to recover taxes. Mexican companies shareholders, whether or not they are nationals or tax residents of Mexico, will also need to be registered in the Federal Taxpayers’ Registry, except for member of the not-for-profit legal entities as well as persons who acquired the shares trough recognized markets or markets with high trading volumes and whose shares are considered to be placed among the general investing public.

2. Supporting documentation.

Federal Tax Code (“FTC”) establishes general tax rules for taxpayers regarding the requirements that its supporting documentation must fulfill for tax purposes. In this sense, paragraph one of article 29 of the FTC establishes that “when tax laws set forth the obligation of issuing supporting documentation of the acts or activities carried out or by income received by the taxpayers, the latter shall issue digital invoices through the Tax Administration Service's webpage. The persons who acquire the goods, temporarily use and enjoy the goods, or use the services shall request the relevant digital tax invoice.” In addition to the requirements provided in article 29 of the FTC, said supporting documentations must meet the requirements indicated in Article 29-A of the FTC, and such requirements, among others, are as follows:

(i). The issuer's RFC and the tax regime he is subject to according to the LISR. In the case of taxpayers who have more than one parlor or establishment, the domicile of the parlor or establishment where the digital tax invoice is issued shall be indicated.

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(ii). The digital invoice number and the SAT's digital stamp, as well as the digital stamp of the taxpayer issuing the same.

(iii). Issuance date and place. (iv). The RFC of the person to whom the invoice is issued. (v). Value per unit, expressed in numbers. (vi). The unit value must be indicated in numbers (vii).The total amount in numbers or letters (viii).The number and date of the customs document, in the case of the first sale of imported

merchandise. Taxpayers must also comply with the following obligations:

(i). To hold a valid advanced electronic signature certificate. (ii). To request and obtain from the SAT, a certificate for use of digital stamps. (iii). To forward to the SAT the relevant invoice, prior to its issuance, so that the SAT may:

a) Verify compliance of the requirements set forth in Article 29-A of the FTC; b) Assign a number to the digital tax invoice; and c) Include the SAT’s digital stamp.

The SAT may authorize suppliers of services of digital tax invoice certification to carry out the verification, number assignment and inclusion of digital stamp. It shall be considered that taxpayers who issue supporting documentation shall include taxes expressly and separately in each document (invoice), including the applicable tax rate. Digital tax invoices as well as the electronic files and records must thus be part of the taxpayer’s accounting record. It is important to mention that, taxpayers who deduct or credit for tax purposes, based on digital tax invoices, including printouts thereof, may verify their authenticity by checking at the SAT's webpage, whether the number of the relevant digital tax invoice was authorized to the issuer thereof, and whether the certificate of digital stamp was in force and registered with the SAT at the moment of issuance.

3. Profit Sharing Employees (other than a Chief Executive Officer), whether or not they are Mexicans, are statutorily entitled to a portion of the employer’s profits. The rate of profit sharing is determined every ten years by a National Profit Sharing Commission consisting of workers’ representatives, employers and the Government. The rate of the profit sharing is currently 10% of the employer’s taxable income as defined by the LISR. It is important to point out that newly incorporated companies are exempt from the profit sharing payment during the first year of operations. Taxpayers are able to reduce from their income tax base the Profit Sharing.

4. Audits

Mexican tax authorities may review any tax returns or the failure to make such filings, and regularly do so. Certain taxpayers whose taxable income or their number of employees exceed certain threshold are required to submit a tax return certified by a registered independent accountant. When a tax audit is to be commenced against these taxpayers, normally the tax audit will commence with the working papers of the

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accountant.

5. Late Payment Penalties In the event of failure to pay taxes when due, the relevant amount will need to be adjusted as per inflation and, in addition, a interest will be assessed over the inflation-adjusted amount. In addition, fines may be assessed in an amount that may vary between 55% to 75% of the adjusted amount. The tax authorities in those cases may reduce fines where there is a voluntary payment prior to the conclusion of an audit process.

6. Statute of Limitations Under the FTC, the right of tax authorities to collect unpaid taxes, or to audit returns will lapse after five years from the date the tax should have been paid, or the relevant payment was made. Under certain circumstances, statute of limitations will be ten years instead of five, such as when the relevant taxpayer has failed to obtain Federal Taxpayers’ Registration, failed to maintain accounting books and records or failed to advise address change.

7. State Taxes The federal government assesses most taxes, and these may be subject to coordination covenants for collection among the federal and state governments. However, states are allowed to collect essentially real estate property taxes, real property transfer taxes and, increasingly, a payroll tax. In some jurisdictions there may be a local tax on games and raffles. States do not have the right to assess and collect taxes on income, and sales or value added tax is assessed exclusively by the federal government, although the Federal Government makes transfers to the states.

8. Payroll Tax The Federal District and most state governments will assess a tax based on the total payroll of employers established within a particular jurisdiction. The percentage will normally approximate 2%.

9. Real Estate Transfer Tax This is assessed on the transfer of real property, whether such transfer occurs, inter alia, by reason of a sale, donation, merger, liquidation, or inheritance. The tax will be assessed on both the value of land and any constructions built thereon. The tax rates range between 2% and 4.8% of the appraised value of the property or the transaction price, whichever is higher. Although the seller and acquirer of the property are jointly liable for the payment of the tax, typically the purchaser or acquirer of the land or rights agrees to pay the entire tax.

10. Excise Taxes The federal government assesses different taxes on products that include not only alcoholic beverages and tobacco products, but also gasoline and other oil derivatives.

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XIV. Customs A. Background The Customs Law (Ley Aduanera) and the Foreign Trade Law (Ley de Comercio Exterior – “FTL”) are the primary statutes governing the import and export of goods. Depending on the type of goods there may be additional requisites in special laws or regulations. Customs Law provides the proceedings regarding foreign trade, such as the entry, exit, custody, storage, handling or holding of merchandises. The Foreign Trade Law, on the other hand, provides the proceedings that are carried out before the import of merchandises, especially regarding the compliance of non-tariff regulations and restrictions. B. Clearance of Goods Clearance of goods means all the actions and formal procedures related to the entry and departure of merchandises to and from national territory that are meant to be executed by the custom authorities, the importers or exporters and their custom brokers. The most important actions in clearance of goods are: to submit them before custom authorities with a customs manifest (pedimento), to activate the mechanism of automatic selection and the customs inspection, and finally the disposition the goods. The main steps to reach such disposition are: Once goods arrive into territory of Mexico they can remain temporarily deposited inside a tax or bonded warehouse, while the decision about the custom regime is taken. Importers and exporters of goods must then file a customs manifest before the customs authorities that shall include several attachments such as the commercial invoice of the merchandise, documents evidencing compliance of non-tariff regulations and restrictions (such as capacities, permits, Official Mexican Standards, etc.), as well as those that allow the identification, review and control of goods, and documents regarding their origin, either to obtain the benefits of free trade agreements or to prove that merchandises are not originating from a country subject to anti-dumping or countervailing duties. As of mid 2012, Mexican Customs migrated to a Digital Office for the submission of all customs related documents including the abovementioned. However, even though now filed online the importer or exporter of record must still keep a physical copy of said documents in their files. In order to be able to import goods, it is necessary to register before the General Customs Administration to secure an “Importers’ Registry” (Padrón de Importadores). Many rules and special treatment provisions may apply to ease or restrict the importation of goods. Dealing with counsel or a freight forwarder or customs broker is recommended. C. Tariff considerations, Regulation Measures and Non-tariff Restrictions The Ministry of the Economy issues from time to time regulations and non-tariff restrictions in order to address entry of products as well as to comply international conventions or treaties signed by Mexico, to

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avoid dumping, as well as to protect national safety, public health, phytosanitary measures and the environment. This may imply securing prior permits, confirm compliance with Mexican official standards, and payment of countervailing duties to avoid dumping practices. Import or export taxes are normally assessed considering the customs value of goods. In most importations, customs value is based on the price that was paid or that should have been paid for goods, according to the commercial invoice, and it is called settlement value. If other expenses caused during the importation increase such value, it would become a Cost, Insurance and Freight (CIF) base. D. Customs Regimes The Customs Law provides the following primary regimes, although the other more specialized options may exist (such as, for example, in transit, for repair, under tax bonded warehouse, etc.): 1. Definitive. Whether import of foreign goods for permanence in national territory, after paying the foreign trade and antidumping duties (if any) and complying with non-tariff regulations and restrictions. In addition, they may deal with exports of merchandises; in these cases they are rarely subject to duties. 2. Temporary. These are allowed when:

• Imports to be returned abroad in the same condition: Allows the entry of goods for limited permanence for a specific purpose, to be subsequently returned to a foreign country in the same condition within the legal terms.

• Imports shall be made for processing, transformation or repair. Allows the temporary importation of components in order to be manufactured or assembled to be returned abroad within the authorized term by IMMEX companies.

E. Customs Violations and Fines Custom regulations provide for severe fines for those who obtain illegal benefits from free trade agreements or any regime that concedes tax and custom tariff benefits. Aside from the precautionary attachment or confiscation of goods in favor of the federal treasury, Customs Law provides that fines may be assessed from 130% and up to 150% of the omitted taxes, or 70% of the commercial value of such merchandises. Most custom violations are considered as contraband or tax fraud crimes as defined by the Federal Tax Code (Código Fiscal de la Federación). F. Customs Brokers and Attorneys Foreign trade operations must be performed through the assistance of a customs broker (agente aduanal), except when the value is not significant or international passengers carry out the importation. A customs broker is authorized by the Ministry of Finance and Public Credit, under a personal and non-transferable license. Such broker has several liabilities regarding the clearance of goods, including those arising from breach of in a customs proceeding.

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G. Dumping 1. Mexican Legal Framework The Foreign Trade Law and its Regulations set forth the rules governing, among others, measures against unfair international trade practices (dumping and subsidies). The rules adopted by Mexico in the FTL and its Regulations are consistent with the most important international trade treaties entered by Mexico with other countries, more generally the World Trade Organization (WTO) and other more particular the North American Free Trade Agreement (NAFTA) and the trade treaty entered with the European Community (EC). The agency of the Mexican government entrusted with anti-dumping investigations is the Unit of International Trade Practices of the Ministry of Economy (Unidad de Prácticas Comerciales Internacionales, also known as “UPCI”). 2. What is Dumping Practice? Dumping is an unfair trade practice whereby, for a certain period of time, the manufacturing industry of an exporting country consistently exports products to the market of an importing country at a price lower than the “normal value” of such products. “Normal Value” may be any one of the three following concepts:

(i) The price used for sales in the domestic market by the industry of the exporting country to sell the same product that is exported to Mexico;

(ii) The price used by the industry of the exporting country to sell the same product that is

exported to Mexico, but to a third country market; and (iii) The reconstructed value of the product, which is basically the unit cost of production of

the industry of the exporting country plus a market-consistent profit margin. The selection of any of the three “Normal Value” options (which is determined by the viability of each option), takes into account the following considerations: (x) whether or not the price is under ordinary commercial conditions - i.e., whether or not prices are at or under cost; and (y) even if the prices are under normal commercial conditions, sales must be of at least a certain percentage of the total sales of the product by the exporting industry so that they evidence the price used under normal circumstances by such exporting country. Thus, if option (i) is not viable, then option (ii) is looked at and if not available either, then option (iii) is used. If “Normal Value” is lower than, even to or higher than by no more than 2%, in comparison with the export price to Mexico, there will be no finding of dumping. If “Normal Value” is higher than the export price to Mexico by more than 2%, then there will be a finding of dumping. The dumping practice must be “consistent”. Usually, a period of investigation of a dumping practice is between 6 to 18 months. Finally, when the exporting country is one with a “centralized” economy (versus a “market” economy), then the Normal Value cannot be determined considering the information of the exporting country. In its place, the Normal Value would be determined from the pricing information on the same product but from a third surrogate country.

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Usually the third surrogate country selection is a battle between the Mexican petitioners and the exporters who defend their cause during the investigation. Although the FTL establishes criteria for the determination of the third surrogate country (same levels between the centralized economy country and the surrogate country of production, availability of materials, cost of production and other economic factors), the Mexican petitioner usually looks for a surrogate country where the product under investigation has a high domestic price, whereas the exporter looks for a country where the domestic price/export price to a third country/reconstructed value is low, but still has sound market conditions. The Mexican petitioner has the upper hand in the battle because it must propose the third surrogate country with its petition for initiation of the investigation. If the UPCI initiated the investigation, then the exporter has the uphill battle of challenging a selection that has already been accepted by the UPCI and make the argument to convince the UPCI that there is another better option. The determination of third surrogate country becomes a highly important issue, as it will materially influence the calculation of the dumping margin. 3. Standing to Petition an Anti-dumping Investigation When the dumping practice carried out by the industry of an exporting country causes “injury” to the Mexican industry that manufactures the same product, then the Mexican industry may request the initiation of an anti-dumping investigation to the UPCI. The UPCI may initiate an anti-dumping investigation ex-officio (i.e., without the need for the request of the industry of the importing country), if the UPCI becomes aware of strong indications of the possible existence of the dumping practice and the injury caused to the Mexican industry of a certain product. The Mexican petitioner(s) must be “representative” of the Mexican industry that is being affected by the dumping practice. By “representative” the FTL establishes that the Mexican petitioner(s) must represent at least 25% of the total domestic production in Mexico of the product under investigation. 4. Injury Injury is the actual adverse effect, o threat of adverse effect, caused to an industry for different reasons. In the case of a dumping investigation, injury is the actual or threat of adverse effect caused by the importation of products with dumping prices. Injury could also be considered the undermining or delay in the creation of a domestic industry caused by the importation of products with dumping prices. The injury related information that shall be gathered with respect to the Mexican industry and the relevant market is the following:

• Total sales of the Mexican petitioner in the Mexican market;

• Total sales of the Mexican petitioner to export markets;

• Growth patterns of the Mexican petitioner (production capacity, labor force, participation in the “national apparent consumption”);

• Level of inventories kept by the Mexican petitioner;

• Growth of the “national apparent consumption”;

• Survey of preference of supply from industries that use the product under investigation;

• Trends on the cost of production factors of the product under investigation;

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• Trends of pricing of the products under investigation in Mexico, for products manufactured domestically and for products imported from other countries;

• Analysis of profits generated by the Mexican petitioner for sales of the product under

investigation;

• Trends of the industries that use the product under investigation in Mexico; and

• Trends of growth of infrastructure in Mexico that relates to the industry of the product under investigation.

5. Course of the Investigation The phases of an anti-dumping investigation are:

(i) Filing and review of the petition (or review of market circumstances in case of an ex-officio investigation);

(ii) If the petition is accepted by the UPCI, publication of the initial resolution in the Federal

Official Daily; (iii) First discovery period, which is normally of 30 business days after publication of the Initial

Resolution. During this period the parties that are interested in participating in the investigation may file arguments and evidence supporting their respective case. The presentation of arguments and evidence must be consistent with the questionnaires that the UPCI distributes;

(iv) Publication of the preliminary resolution, where the UPCI may resolve (i) to continue with

the investigation imposing provisional anti-dumping duties; (ii) to continue with the investigation without imposing duties; or (iii) closing the investigation if the record shows that there is not dumping or injury.

(v) If the investigation continues, after the publication of the preliminary resolution there is a

second discovery period, which constitutes a second opportunity for the parties to file additional arguments or evidence, or even a second opportunity for parties that have not appeared in the investigation to do so by filing a response to the official UPCI questionnaire.

(vi) Verification of the information filed by parties. In this period the UPCI appoints verification

teams that will conduct in situ review of the information filed by the parties (which is basically a review of the accounting and sales information). The party who receives a verification visit has the right to file comments to the events and actions taken by the verification team.

(vii) Public hearing, which is an opportunity for the parties to express oral arguments and

rebut those of the other parties. It is also an opportunity for the UPCI to direct questions to the parties seeking for clarification of the information that is in the record of the investigation.

(viii) Filing of final arguments, which is an opportunity that the parties have to present the

summons of the investigation.

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(ix) Publication of the final resolution, where the UPCI will present the ruling on the merits of the investigation.

During the course of the investigation the UPCI may request the parties filing of additional evidence, documents or information or the response to any question that the UPCI may have that is relevant and particular to the investigation. Although the FTL establishes terms for each phase of the investigation (like the days the UPCI has to accept or reject a petition of initiation of an investigation, or the term to public the preliminary and final resolutions), the UPCI consistently fails to observe this terms. Usually an anti-dumping investigation takes between 12-16 months to complete. 6. Anti-dumping or Countervailing Duties If the UPCI finds after the course of the anti-dumping investigation that there is dumping and injury to the Mexican industry, then the UPCI will establish the anti-dumping or countervailing duty, which intent will be to equalize the export price to Mexico of the investigated exporting country. The rate of the duty will be, normally, the dumping margin found by the UPCI after review of all evidence filed by the parties that participated in the investigation. There are rare occasions where the UPCI establishes an anti-dumping duty lower than the dumping margin, if found that the lower duty will equalize the conditions of the market and it is not necessary to impose a higher duty. However, if proven that any alleged injury suffered by the Mexican petitioner(s) was not caused by the exports to Mexico under dumping conditions, or if proven that there was no injury or just normal adjustments of the conditions of the relevant market, then the UPCI will not impose anti-dumping duties. If after the publication of the Initial Resolution and the presentation by the importers and exporters of their defense response, the UPCI finds that there is dumping and a injury o threat of injury that is causing material adverse effects on the Mexican industry, then the UPCI has the authority to establish preliminary anti-dumping duties. The preliminary anti-dumping duties would be assessed with the publication of the preliminary resolution. From the publication of the preliminary resolution until the completion of the investigation (with the publication of the final resolution), the importers have the option of taking the risk of not paying the anti-dumping duty when importing the incumbent products subject to investigation, this if they and the exporters feel like the preliminary duty will be either reduced or eliminated at the end of the investigation. In this case, however, the importers do have the obligation to secure payment by the granting of guaranties or liens. If the preliminary duties are eliminated at the end of the investigation, then the guaranty or lien will be cancelled. If the preliminary duty is converted into a final anti-dumping duty, then the Customs Administration will collect the duties (plus surcharges) or foreclose on the guaranty or lien. 7. Appeals After the completion of an anti-dumping duty, the party affected by the decision of the UPCI has the right to appeal. The first instance of appeal, which is mandatory, shall be before the UPCI. The affected party cannot skip this instance of appeal, as this is a mandate of the FTL. Usually this results in the UPCI confirming its decision (there is only one documented case where the UPCI went back and revoked its decision). The second instance of appeal would be before the Federal Tribunal of Tax and Administrative Justice and the third would be the amparo lawsuit. The amparo is the constitutional lawsuit, where one party claims that its constitutional rights were violated by the rulings of the UPCI or the Tribunal.

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However, when the anti-dumping investigation involves a product being imported to Mexico where the origin is a country with whom Mexico has a trade treaty (like the NAFTA, with the United States of America and Canada), then there is an alternative to the appeal process. Instead of going through the internal justice system, the affected parties have the right to request the initiation of a multi-national Panel review. In the case of the NAFTA, the Panel review is established in Chapter XIX thereof. If the incumbent party selects this alternative appeal option, then such party is prevented from pursuing an appeal before the internal justice system. The Panel is comprised by five members, three from one country and two from the other one (disregarding the country where the decision was entered; instead, each country takes its turn to have three members in the Panel, then the other and so on). The Panel’s decision is not subject to further review. 8. Review of Anti-Dumping Duties The UPCI may review, on an annual basis, whether or not to continue with the same rate of anti-dumping duty. In other words, after an annual review the UPCI may determine to (i) eliminate an existing anti-dumping duty; (ii) continue with the same rate; or (iii) increase or decrease the existing rate. The annual review may be initiated as the result of a petition filed by an interested party (an exporter, importer or the Mexican industry) or ex officio, in the latter case if the UPCI becomes aware of circumstances that call for the initiation of an annual review, even if no petition was filed by an interested party. Once an anti-dumping duty has been in place for five years, the UPCI will publish a notice in the Federal Official Daily calling to any interested party to come forward and declare if the anti-dumping duty should remain in force. If no interested party approaches the UPCI to declare that the anti-dumping duty should remain, then the UPCI shall move to declare the cancellation of the anti-dumping duty. Obviously, the notice is directed basically to the Mexican industry. If the Mexican industry makes the declaration that the anti-dumping duty should remain in force, the UPCI will initiate a procedure known as the “sunset review”, to examine whether or not the circumstances that support the anti-dumping duty still linger. The annual review and the sunset review follow the same procedural rules as a normal anti-dumping investigation.

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XV. Maquiladora (In-bond assembly plants) and Export Programs A. Overview of Export Programs Since the early 80’s, Mexico has focused on a free market economy, and the globalization of markets has been the best way to reach it. Within this opening mechanism of the national market, export development programs have played a very important role. In such programs, the Mexican government provides administrative and economical support, and offers exemptions of taxes and customs duties for the exportation of merchandises and services, although without subsiding the exportation directly in order to avoid causing international unfair competition. Most of the programs for export promotion that formerly existed, were merged into the IMMEX program (also known as Maquila). The operation and benefits of the Maquila program is described below. B. Maquiladoras 1. Overview

(a) The maquila industry is one of the main sources of foreign currency in the country. In the cities where such industry prevails, it represents the base of infrastructure. Besides, it is a very important source of national retailers for inputs and services.

Maquila industry and its exportation programs are ruled in the Executive Decree for the Promotion of the Manufacturing, Maquila and Export Service Industry that was published in the Federal Official Daily of November 13, 2006, (hereinafter the “Maquila Decree”). The latest relevant amendments to the Maquila Decree were published in the Federal Official Daily of December 24, 2010.

Although the Maquila and Pitex programs were different when created, with time they converged as to their benefits. As a consequence, the Maquila Decree abrogated the Executive Decree that Establishes Temporary Import Programs to Manufacture Export Goods, known as the “Pitex Program”. With the entry into effect of the Maquila Decree, the Pitex programs are considered as Maquila, also known as “IMMEX” programs. Likewise, as a result of the latest amendments to the Maquila Decree, the ALTEX and ECEX Decrees that granted several benefits for major exporters and importers were merged into one unique Decree, the Maquila Decree, in order to facilitate the administration and overseeing of a sole benefits scheme.

There are several tax and custom benefits for maquila industry, specially regarding the temporary importation of merchandises that are meant to be transformed, manufactured or repaired, as well as for the render of services related to those activities.

(b) Legal entities resident in national territory may request the Ministry of Economy an authorization

for using a maquila exportation program, from the moment they are established. In such

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request, the company must chose one of the following maquila modalities according to its own business needs.

(i) Company holding, when a single program integrates the manufacturing operations of a

certified company1 named holding and of one or more subsidiary companies; (ii) Industrial, when an industrial manufacturing or transformation industrial process of certain

merchandise destined to exportation is performed; (iii) Services, when certain services are rendered to export merchandise or certain export

services are rendered, only for the development of the activities determined by the Ministry of Economy and by the Ministry of Finance and Public Credit (Secretaría de Hacienda y Crédito Público), for example repair, inspection, testing, warehousing, distribution, design of products, and recycling of wastes, among others;

Activities such as labeling and packing of merchandise, among others, formerly

considered as services activities will nor be treated as industrial manufacturing or transformation industrial process activities for tax purposes, specifically those related to permanent establishment of the foreign resident.

(iv) Shelter, when one or several foreign companies facilitate the technology and the

productive material, without directly operating the Maquila Program; and (v) Intervention, when a certified company that does not have the facilities to perform

productive processes, carries out the manufacturing operations through third parties registered in its program.

There is also an additional operation called “sub-maquila”, which is understood as complementary industrial process that is directly related to the operation of a maquila program, although it is performed by a third person (different to the holder of the maquila program) that needs to be registered in the relevant maquila program. The maquila companies are also authorized to transfer imported merchandise on a temporary basis to other companies with a maquila program for the carrying out of an export sub-manufacturing process.

(c) Maquila companies must deliver an annual report to the Ministry of Economy and the Tax

Administration Service (Servicio de Administración Tributaria “SAT”) regarding the foreign trade transactions that were carried out, under their authorized program. Failure to submit such reports within the relevant terms shall cause the authority to suspend temporary imports until such omission is cured. If on the last business day of the month of August the company has not yet filed the report, the Maquila Program shall be finally cancelled as from September 1st of the respective year.

(d) The programs will be in force as long as the permit-holder complies with all the

corresponding legal requirements. Therefore, only the Ministry of the Economy is allowed to cancel a program (even if the tax authorities requested it), in the event there is a breach of the authorized programs, tax or customs provisions.

1 Authorization granted by the Customs Administration to major importers.

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2. Special Customs Treatment Maquila companies may import those goods that are necessary for the manufacturing process of merchandises (inputs and assets), under a temporary basis, with the possibility to be exempted of importation taxes or with reduced importation taxes, or to defer payment thereof, as long as they honor the legal terms for the temporary importation. By the end of the legal term of temporary importation, merchandises shall: (i) be returned to the foreign country, (ii) be returned as parts of a final product that results from the maquila process, or (iii) be imported into Mexico under a definitive basis. The terms for the legal stay in Mexico of merchandises imported under a temporarily basis are the following:

• Up to eighteen months, for fuels, lubricants, and other materials to be consumed in the process of production of merchandise for export, raw materials, parts or components the entirely of which is intended to become part of merchandise for export, package and packaging; labels and brochures.

• Up to two years, for containers and house trailers. • For as long as the maquila program is in force, regarding machinery, tools, instruments and

general equipment. • Up to twelve months, for merchandise listed in Exhibits II and III of the Maquila Decree. Such

exhibits include products such as powder milk, corn, milk products and several textile products, among others.

• Up to six months, for merchandise listed in Exhibit III of the Maquila Decree, when imported by

a maquila company authorized under the service modality. • Up to nine months, for merchandise listed in Exhibit I TER of the Maquila Decree. Such exhibit

mainly includes several steel industry inputs and raw materials. This type of goods may only be imported under a service modality Maquila Program by certified companies.

• Up to six months, for merchandise listed in Exhibit I BIS of the Maquila Decree. Such exhibit

includes sugar and sugar related products. This type of goods may not be imported under a service modality Maquila Program.

The legal stay terms referred to above for merchandise listed in Exhibits I BIS, I TER, II and III of the Maquila Decree are not applicable for certified companies, which are allowed to import such merchandise for the general term of eighteen months. Merchandise listed in Exhibit 1 of the Maquila Decree (e.g. Non-denaturalized ethylic alcohol with a volumetric alcoholic grade over 80% vol., ethylic alcohol and denaturalized eau-de-vie of any graduation, ethylic alcohol, alcoholic beverages of more than 14 degrees without exceeding 23 centesimal degrees Gay-Lussac at a 15ºC temperature, in clay, china or glass services, and pawnbroker articles) may not be imported under a maquila program. The importation of merchandises is taxed, among others, with the general importation tax. Until the end of year 2000, the merchandises temporarily imported that were dedicated to a manufacture process, were

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automatically exempted from the general importation tax. However, the legal provisions from several trade agreements that are currently in force in Mexico obligated to eliminate such exemption. However, in certain cases and depending of the particular type of good, its importation may be exempted for the payment of importation duties or even some other taxes may be credited. It is, therefore, necessary to pay the general importation tax for machinery and equipment. In this regard, the Maquila Decree further clarifies that in imports performed under a maquila program no payment of foreign trade taxes shall be made for the following cases:

(a) In the temporary imports of fuels, lubricants, and other materials to be consumed in the process of production of merchandise for export, raw materials, parts or components the entirely of which is intended to become part of merchandise for export, package and packaging; labels and brochures, when considered originating goods under the terms of a Free Trade Agreement of which Mexico is a party;

(b) In the temporary import of trailer containers and boxes; (c) In the temporary import of fabric entirely formed and cut in the United States of America to be

incorporated into textile and dress goods in Mexico and to be exported to the United States of America, as well as in the temporary import of raw materials for the manufacturing of such textile and dress goods, to be exported to the United States of America;

(d) In the temporary import of goods that are considered as originating from countries non-

members of the North America Free Trade Agreement, which are incorporated into the goods listed in Appendix 6.B of such Treaty and to be exported to the United States of America or Canada;

(e) In the temporary import of fabric imported to the United States of America, cut in such country

or in Mexico, to be incorporated into clothes in Mexico or similar manufacturing operations of textile and dress goods established by the United States of America or Canada, to be exported to the United States of America or Canada, as well as in the temporary import of supplies for the manufacturing of such textile and dress goods, to be exported to the United States of America or Canada;

(f) In the temporary import of merchandise to be exported or returned in the same condition as it

was imported; (g) In the temporary import of merchandise that is considered originating from the United States of

America or Canada, which are only submitted to repair or alteration processes and are subsequently exported or returned to any of such countries, or the spare parts that are imported on a temporary basis to carry out such processes; and

(h) In the temporary import of sugar used to manufacture merchandise classified in the tariff

schedule of the General Import and Export Tax Law under number HTS 22.05 and items 1704.10, 2202.10 and 2208.70, which are subsequently exported to Switzerland or Liechtenstein.

Nevertheless, in order to diminish the effect of such duty, the Mexican government issued Sectorial Programs (Programas Sectoriales “PROSEC”), which allow either the exemption of taxes, or the obligation to pay it at an average rate of 5%. For such purposes, it is necessary to request an

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authorization before the corresponding authorities, and to import merchandises that are exclusively dedicated to the manufacture of final products authorized. 3. Process to Establish a Maquiladora The Maquila Industry Decree contemplates several documental requirements that must be complied and submitted in order to obtain the authorization of a maquila program. Also, there are other ongoing requirements, the most important of which is that the maquila company must perform on an annual basis certain sales abroad for more than $500,000.00 US Dollars, or its equivalent in Mexican currency, or else, invoice exports at least for 10% of its total invoicing. In order to secure a Maquila Program an Advanced Electronic Signature certificate and an active RFC must be obtained, and the tax and other domiciles where operations are performed under the Maquila Program must be also registered and be active before the RFC. Regarding application requirements for authorization of a maquila program, as of the latest amendments, it is now necessary to include in the application general information of the shareholders or partners of the company and/or legal representative, as well as to inform the Ministry of Economy of any changes of shareholders, partners and/or legal representatives. Likewise, the companies that request authorization of a maquila program service modality, will now, in addition to proving legal possession of the facility or premise, have to detail the investment program which should contain information regarding the premises where the manufacturing process will take place, including the description of the investments in real estate, movable property, machinery and equipment, location blueprints, photographs and blueprints of the installations in the premises, as well as the number of personnel hired directly or indirectly, estimated or total value of import operations, and volume or estimated value of production or of the service. For purposes of granting the authorization the Ministry of Economy will now carry out two inspection or verification visits to the company’s premises. If the company holds only the premises, the program will be authorized for a pre-operation period of 3 months and the company will only be able to import machinery and equipment. Once said term elapses, or else, if requested by the holder of the authorization, a second inspection visit to verify that the machinery and equipment imported has been installed will be carried out. After the second inspection visit has been performed, the company will be authorized to import raw materials and inputs. The machinery and equipment imported must be owned by the foreign resident and may not be owned by the company that carries out the maquila operation or by another related party resident in Mexico. A third party with whom the foreign resident has a commercial relationship for manufacture may own the machinery and equipment. Additionally, the foreign resident with whom the company that carries out the maquila operation has signed the maquila agreement should own at least 30% of the machinery and equipment used by the company to carry out the maquila operation. Said restriction was not a requirement pursuant to the former Decree. Upon notifying the authorization of a Maquila Program, the Ministry of Economy shall electronically transfer the data that will allow an identification of the company to the Customs Bureau for its automatic registration before the General Importers’ Register. The entities to whom a maquila program is authorized shall have, among others, the following obligations: (i) the imported merchandise must be kept at the domicile registered in the maquila program, and (ii) an

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automatic inventory control shall be kept with minimum information provided for in Annex 24 of the General Customs Rules. It is important to mention that failure to keep an inventory control or to update the same is a cause for cancellation of the program. 4. Maquiladora Sales to the Domestic Market Years ago, the maquila companies were bound to export a certain percentage of their annual production. Said minimum percentage no longer exists, and maquila companies may dedicate their entire production to national market. To do so, these companies have to change their merchandise’s custom regime from a temporary to a definitive basis, by paying the corresponding taxes. 5. Transfer or Sale of Merchandise Perhaps one of the greatest advantages of maquila is the possibility to avoid the importation tax, regarding the sale or the simple physical transference of imported merchandises. Additionally, these operations may have a special treatment for value added tax. In this sense, any good imported under a temporary basis may be transferred to a third party with a maquila program, either to finish the transformation, manufacture or repair process, or to return such merchandises, as long as they have an exportation manifest under the name of the person who makes the transfer and an importation manifest under the name of the person who receives them. In accordance with the General Customs Rules issued by the Tax Ministry, the transfer of merchandise is more strictly regulated as a result of the latest amendments to the Maquila Decree. Additional documentation is required to evidence that the transfer was in fact carried out and the legal stay term has been limited to fewer months. With the aforementioned process, in most of the cases there is no obligation to pay the general importation tax, since the goods will be considered as indirectly exported at the time that they are transferred to an entity with an export program through virtual means. In this regard, maquila program allows the sale and the transfer of merchandise to third parties allowing chains of production, whether among related parties or not. It is important to mention that for such purposes, there is no need for the maquila company to own the goods that will be imported, therefore a non resident may remain the owner of the goods at all times. 6. Value Added Tax (Impuesto al Valor Agregado) Taxation of the maquila operations is as follows:

(a) Importations. The general rate for the importation of merchandises is 16%. Nevertheless, if a maquila program covers temporary importations, the importation will be exempt, as long as the merchandise does not exceed the authorized term of permanence in the country. If the importation regime of the merchandises is changed from a temporary basis to a definitive, the tax rate of 16% shall be paid at the moment the change is done.

(b) Services. Rendering maquila services is subject to the value added tax.

Those services rendered by a Mexican resident as maquila and sub-maquila operations on behalf of non-residents (to be benefited exclusively in another country) are considered as exported services, and therefore the applicable rate for value added tax is 0%. In order to

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consider that the benefits are taken advantage in a foreign country, the merchandise subject of the services must be physically exported.

(c) Sale of temporarily imported merchandises. One of the main advantages of the maquila regime

is the possibility to be exempted from value added tax, or to apply a 0% rate with a different tax effect to the exempted rate. In this regard, although the exempted rate and the 0% tax rate are different and have distinct effects for crediting purposes, both have the same effect on cash flow.

The tax will be exempted on sales of merchandises that were imported under a temporary basis between foreign residents, from foreign residents to a maquila company and in the event of sales between maquila companies.

The 0% rate of the value added tax (that allows crediting other VAT paid, or reimbursement thereof is applicable to the transfer of goods in the following events:

• Sales among foreign residents of goods imported under a temporary basis by a maquila

company if the physical delivery is made in Mexico to another maquila, automotive industry, or auto-transportation manufacturing company for its importation to a tax warehouse.

• Sales by foreign residents of imported goods under a temporary basis to a maquila,

automotive industry, or auto-transportation manufacturing company for its importation to a tax warehouse.

• Sales by maquila companies to foreign residents regarding goods imported under a

temporary basis with physical delivery in Mexico to another maquila, automotive industry, or auto-transportation manufacturing company for its importation to a tax warehouse.

(d) Sale of national or permanently imported goods.- In the event Mexican residents who do not

have a program for exportation development sell goods to a maquila company for its manufacturing process, they will be deemed as suppliers of the maquila industry, therefore the goods they sell may be considered as indirectly exported.

In this case, the Mexican resident who sells the goods, is considered as a supplier of the maquila industry, and may credit the value added tax, therefore the tax effect of the transaction is null. This option may be used also in the event of a national supplier selling merchandise to a foreign resident under instructions to deliver physically the goods to a maquila company within Mexico. 7. Transfer pricing in the Maquiladora Industry (a) General Overview The general principle is that market value is used in commercial relationships between parties that are not subordinated to each other. However, it is recognized that if the parties are deemed related and bound to each other, they can enter into transactions based on additional elements. Therefore, tax authorities may determine the taxable income and authorized deductions of taxpayers by determining the price or the amount of consideration of transactions executed among related parties, taking in consideration for such purpose those used by the independent parties in similar transactions.

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Since January 1, 2000, the Income Tax Law (Ley del Impuesto Sobre la Renta) considered that the legal and economical relationships held by foreign entities and maquila corporations may be deemed as constituting a permanent establishment in Mexico. (b) Permanent Establishment The creation of a permanent establishment implies the obligation of a maquila company to pay an income tax in Mexico derived from its own activities, and of the foreign resident to pay such tax in Mexico over the income attributable to its permanent establishment. However, the permanent establishment will not be deemed if the maquila complies with the applicable transfer pricing rules. It is important to mention that article 33 of the Decree was amended, effective as of January 1st, 20011, to define what is understood by the term “maquila operation” for purposes of the Income Tax Law in connection with the ownership of fix assets and inputs used in carrying out the maquila operation. Said amendment has important implications with respect to permanent establishment in the country and compliance with transfer pricing. Notwithstanding the foregoing, the above is not applicable to companies whose programs were authorized before December 31st, 2009, and who have complied with their income tax obligations pursuant to article 216-Bis of the Income Tax Law, that is, related to transfer pricing. Therefore, possible implications for maquila operations shall be analyzed on a case-by-case basis. (c) Alternatives for the compliance with transfer pricing The Income Tax Law establishes three options that are only applicable to a maquila company to comply with transfer pricing rules. These alternatives are: (i) having documentation that evidences the compliance therewith, (ii) obtaining a particular resolution related to the price methodology used in transactions with related parties or the advance price agreement (“APA”), or (iii) declaring a minimum taxable profit (mechanism know as “safe harbor”). Such options shall be elected pursuant to relevant situation of the business maintained by each company. The aforementioned options consist on the following:

(i). Evidencing Documentation. Maintain such documents that evidence that the transactions are being executed at market prices (arm’s length basis), evidencing that the income and deduction amounts executed with related parties result from adding the following amounts: (i) apply the methods provided under law in order to determine that the transactions are executed at market prices, and pursuant to the provisions of the “Transfer Pricing Guidelines for Multinational Corporations and Tax Administrations”, approved by the Organization for Economic Cooperation and Economic Development (OECD), without considering the assets which are not property of the taxpayer and (ii) an amount equivalent to 1% of the net value in books of the foreign resident regarding the machinery and equipment which use is lent to a maquila corporation in conditions different to the lease and with considerations adjusted to market prices.

Likewise, compliance can be met if the corporation has documentation that evidences that the transactions are executed at market prices, applying for such purposes the “transactional margins operation’s profit” method, considering the profitability of the machinery and equipment used in the maquila operations which are owned by the foreign resident.

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(ii) Advanced Price Agreement (“APA”). The maquiladora might request tax authorities a specific ruling regarding the methodology used for prices in transactions executed among related parties, confirming that the corporation complies with transfer pricing.

The main advantage of such resolutions consists in that they can be effective in the fiscal year in which are requested, the preceding, and the following three fiscal years. Their effectiveness could be even longer if they are derived from an amicable proceeding pursuant to the provisions a treaty to avoid double taxation.

(iii) Safe Harbor. The maquiladora shall obtain a minimum tax profitability representing at least

the higher amount resulting from the following:

• 6.9% over the total amount of the assets used in the operations of a maquila company during the fiscal year, including those which are property of Mexican residents for tax purposes, foreign residents or any of their related parties, even if they have been granted in temporary use or enjoyment.

• 6.5% over the total amount of the operation costs and expenses incurred by the maquila company, determined pursuant to generally accepted accounting principles, and also including the cost and expenses incurred by foreign residents, except those pointed out by the Income Tax Law.

In order to apply the safe harbor option, maquiladoras shall file before tax authorities a notice stating that the taxable profit of the fiscal year represented at least an amount in excess of that mentioned. (d) Other tax benefits Through an Executive Order granting several tax incentives, partial exemption of income tax to maquiladoras may be available by calculating the total amount of the assets used in its operations (excluding the value of inventories).

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XVI. Securities A. General As a consequence of the significant proportion of unbanked population in Mexico, supplier credit in Mexico is still the primary source of financing for small and medium size businesses; however, an increasing number of companies have started to access capital and debt markets. Regulatory agencies have imposed higher corporate governance standards and facilitating easier ways for both domestic and foreign companies to access the market. Securities, issuers and stock exchanges in Mexico fall under federal jurisdiction; moreover, they are regulated, registered and authorized by the Ministry of Finance and Public Credit, the Bank of Mexico, and the CNBV. The Stock Market Law of 2006 and certain Rulings (Circulares), mainly the General Ruling for Issuers (Disposiciones de Carácter General Aplicables a las Emisoras de Valores y a Otros Participantes del Mercado de Valores) issued by the CNBV contain the main provisions applicable to securities and issuers. B. Mexican Stock Exchange Stock exchanges in Mexico are incorporated as private corporations with previous approval of the SHCP. Currently, one stock exchange operates for the trading of securities—the Mexican Stock Exchange (Bolsa Mexicana de Valores “BMV”)—and one operates for the trading of futures and options—the Mexican Derivatives Exchange (Mercado Mexicano de Derivados “Mexder”). The BMV is a public company in Mexico and controls the Mexder. Securities may be listed in different sections of the BMV (stock and equity; mutual funds; government bonds; debt; warrants; CKDES [a special structured instrument]; and FIBRAS [similar to REITS]) or in the International Quotation System (Sistema Internacional de Cotizaciones), where foreign securities already traded in an international recognized market may be listed and traded by certain investors in Mexico. Securities listed with the BMV are traded electronically through a system known as BMV-Sentra Capitales. Issuers must file all relevant information with the BMV through an electronic system known as Emisnet. C. Securities/Public Offers Mexican laws classify securities, regardless of their nature (i.e. equity or debt), as those titles offered in a massive way to the general public, granting their ownership, credit or a stake of the issuer. Securities offerings are considered public when the offer is conducted through mass means of communication or to an unidentified general public. The Stock Market Law provides certain safe-harbors as to when an offering is not considered public (e.g., sale to institutional investors). As later described, if an issuer intends to make a public offer, it must secure approval of the CNBV and record its securities. Equity maybe issued either as stock or as convertible debentures. Stock issued as equity may vary depending on whether any corporate rights (voting rights) are included therein, and whether such stock is quoted directly or through the use of depositary instruments (normally called Ordinary Participation Certificates, Certificados de Participación Ordinarios - “CPO’s”) and commonly used in regulated industries where foreign investment is limited). Debt may be represented in bills, bonds, notes, securities certificates, federal governmental development paper, or Federal Treasury certificates.

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Recently, regulations were issued to permit the offering of a new instrument called CKD designed for private equity funds to raise capital or to securitize “whole business”. D. Approval and Registration of a Public Offer Before offering securities to the general public in Mexico, issuers must obtain approval from the MSE and the CNBV, and record the securities with the National Securities Registry (“Registro Nacional de Valores”) of the CNBV. Finally, before trading, securities’ certificates (i.e. shares, notes, bonds) must be physically deposited with a depositary institution known as S.D. INDEVAL, S.A. de C.V. (“Indeval”). The recording and approval process for foreign issuers is almost identical to that for Mexican issuers. Additionally, issuers must enter into underwriting agreements with a broker-dealer (“financial sponsor”). The latter will be responsible for reviewing and analyzing the issuer’s business and activities information filed with the CNBV, as well as in some issuances depending on the security, for coordinating and ensuring that the issuance is rated by one of the authorized rating agencies (Moody’s, Standard & Poor’s, etc.). Issuers must apply simultaneously to register securities before the CNBV and to list them with the BMV. After filing, the issuer shall receive a written notice from the BMV containing general comments on the information that accompanied the application. Later, and once all observations have been addressed, a general favorable opinion issued by the BMV will be given to the issuer. The issuer must then file that opinion before the CNBV; the CNBV will likewise make comments, and after the issuer addresses those comments, grant its authorization. This authorization shall then be filed before the BMV in order to get the securities registered and listed. Finally, a prospectus for the placement of securities—containing, generally, financial, administrative, economic, accounting, and legal information about the issuer and the securities to be offered—will be issued to potential purchasers. The documents commonly required for the application include current by-laws of the issuer, powers of attorney of the legal representative, a draft of a shareholders’ meeting resolving on the amendment of by-laws to adopt special provisions applicable to issuers, a draft of the certificate to be registered, certified financial statements for the last three fiscal years, certifications from an outside auditor and legal counsel, favorable opinions from the relevant stock market, a report on the issuer’s compliance with the Code of Best Corporate Practices, a draft of the underwriting agreement and a draft of the public offer notice and of the prospectus. Furthermore, if the offering comprises debt, the issuer must accompany a credit rating from an authorized rating agency, identify amortization terms (early and natural expiration), interest rates and terms of payment, place of payment of interest and principal, and premiums, if any. In our experience, the process can take up to six months, depending on the complexity of the securities and the thoroughness with which the relevant requirements are satisfied. Part of the process usually involves informal meetings between the issuer, the underwriter and the CNBV, with the purpose of answering inquires, submitting additional documents, covering all relevant aspects of the process and ensuring an efficient review upon filing for authorization. It is a typical requirement that CNBV authorizes the issuance and record the securities in the NSR, in order for the issuer to begin the steps leading to a formal public offer in Mexico. As a general rule, no filings before the SHCP or the Central Bank (Banco de Mexico) are necessary. Nevertheless, depending on the kind of securities and the significance of the intended quotation, the CNBV may request the opinion of such entities once an application has been filed. Banco Mexico has the power to issue regulations and impose sanctions against financial and securities intermediaries in order to protect monetary policies, the proper development of the financial system, and the public interest.

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To summarize, the filing process includes the following steps:

• Filing of applications with the BMV and the CNBV; • Securing rating from rating agency in some cases; • Registration of the securities before the National Securities Registry and public offering

authorization issued by the CNBV; • Obtaining a favorable opinion from the BMV; • Registration of the securities with the BMV; and • Depositing of the securities certificates with Indeval.

E. Listing with the International Quotation System of the BMV Securities issued abroad may be listed. This System is a mechanism provided by the LMV for quoting securities that have not been publicly offered in Mexico and that have not been registered before the CNBV, but which are listed in foreign stock markets recognized by the CNBV or securities issued by private foreign entities recognized by CNBV. The acquisition of securities through this System is only available to institutional and qualified investors, as well as to foreign individuals and corporations. Physical holding of the stock certificates shall not necessarily be held in Mexico, as Indeval may enter into agreements with foreign securities depository firms or banks, with respect to the custody of securities certificates. Securities are listed as common stock, not as depositary receipts. The following is a brief summary of the requirements for listing securities on the International Quotation System:

• An underwriting agreement between the issuer and a Financial Sponsor. • A Financial Sponsor, which files application to list recognized foreign securities with the BMV,

along with general and financial information of the issuer, information about the securities to be listed, as well as information regarding the operation of the foreign stock market in which the securities are listed.

• The BMV prepares a technical report in order to determine if listing the securities is viable. • The result of BMV’s report is sent to the CNBV, Indeval and the Financial Sponsor. • Once the authorization for listing has been granted by the BMV, the Financial Sponsor has 20

business days to request the listing of the securities in the Electronic Negotiation System of the BMV. Pursuant to the Financial Sponsor’s request, such term may be extended, one time, for an additional 20 business days.

• Two business days prior to listing of the securities, the BMV publicizes the names of the

Financial Sponsor and the issuer, as well as the main characteristics of the securities to be listed.

• Having satisfied the requirements, the securities are then listed.

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Financial Sponsors must furnish to the BMV financial, economic, accounting, legal and management information of the issuer, as well as relevant information that may have an impact on the valuation of the issuer and pricing of the securities. Such information must be reported at the same time and at the same intervals with which it is reported in the foreign stock market where the issuer is listed. The BMV makes such information, along with the characteristics of the securities listed available to all investors. F. Ongoing Reporting Obligations and other Relevant Information Issuers of registered securities must make quarterly and annual reports to the CNBV and the BMV. Such reports include financial, economic, accounting, management and legal information (such as shareholders resolutions, restructurings and other important planned events). The applicable reporting obligations may vary depending on the type of issuer and security involved. Further obligations are imposed on holders of securities who reach certain ownership thresholds. Holders acquiring 10% or more of an issuer’s equity must notify the CNBV and the BMV of the purchase in order for such entities to disclose the transaction. Any acquisition in excess of 30% of an issuer’s equity automatically obligates the potential purchaser to issue a tender offer to purchase for the remaining outstanding stock. The issuer must disclose immediately to the public all relevant information that may impact the valuation and pricing of its securities. However, specific exceptions allow issuers to maintain appropriate levels of accuracy and objectivity in their disclosure of events. Insiders are subject to blackout periods and information disclosures. All relevant information must be immediately disclosed to the BMV through an electronic system know as Emisnet. G. Minority Rights As part of the public offer approval and recording process, issuers commonly must amend their by-laws in order to provide for minority rights, as required by the LMV. Such rights lower the percentages established in the General Law of Commercial Companies for minority shareholders to be entitled to the following: Minorities representing at least 10% of the capital stock may:

§ Appoint at least one member of the Board or its corresponding alternate. This right is granted regardless of the stock having limited or full voting rights;

§ Request the Board of Directors or the Statutory Auditor to call a General Shareholders’ Meeting; § Delay voting on any matter on which they consider themselves not to be fully informed. Such

right may be exercised only a single consecutive time for the same matter.

Minorities representing at least 20% of the capital stock are entitled to file for judicial opposition to the resolutions adopted by a Shareholders’ Meeting and obtain an injunction against the resolution as long as:

§ Their claim is filed within fifteen days following the Meeting;

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§ If the claimants appeared before the Meeting, they voted against adopting the opposed resolutions; and

§ Their claim accurately reflects and explains a violation to the by-laws or legal precept.

H. Underwriting Agreements Issuers and Financial Sponsors commonly execute underwriting agreements for the placement of securities, through either:

§ Firm commitment, under which an underwriter purchases up front the securities offered and sells them in the open market; or

§ Best effort commitment, under which an underwriter is not obliged to purchase any specific

amount of securities, but has an option to purchase up to a specific number of securities, to the extent the underwriter is able to place such securities through its best efforts.

Generally, these agreements include general boilerplate clauses. Force majeure, success fees and over-allotment options are permitted under Mexican law. Fees and green shoes are freely negotiated on a case-by-case basis.

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XVII. Banking A. General Mexico’s banking and financial system has evolved due to a number of changes in Mexico’s financial situation that have taken place during the last two decades. Since the first Credit Institutions Law (Ley de Instituciónes de Crédito - “LIC”) was issued in 1990, a number of different legal regimes have governed banks and financial institutions. Economic circumstances and the country’s needs have also changed during that time, causing adjustments to the applicable laws and regulations. During the 1940’s and until 1976, the banking system consisted of a number of banks that provided limited specialized services. Amendments to the banking laws in the 1970’s introduced the concepts of Financial Groups and Multiple Banking Institutions, allowing individual banks to provide a variety of banking and financial services to their clients. In 1982, the Mexican government expropriated all banks, although ownership of banks was re-privatized in 1990. Five years after the privatization of the banking industry, Mexico suffered a major economic crisis due to political instability and capital flights. Three years thereafter, in 1998, the major Mexican banks were failing and the Mexican government had to bail them out through a trust named Fondo Bancario de Protección al Ahorro known as FOBAPROA. At that time, the rules for deposit insurance were unclear and the bailout caused political turmoil and criticism. Shortly thereafter, new rules for deposit insurance were issued in December 1998 and a deposit insurance institution was created under the name Instituto para la Protección del Ahorro Bancario (“IPAB”). However, the financial crisis and bail out was accompanied with an overhaul of the financial laws to strengthen banking regulation during the following years, including changes to the capitalization rules and credit classification rules. Moreover, laws and regulations to protect the consumers of financial services were issued and a national agency for the protection of financial users was formed at the end of 1998, namely CONDUSEF. Also, since 1993 with NAFTA becoming effective, foreign investors have been permitted to take an increased role in the Mexican banking and financial system. As a matter of fact, currently, foreign financial entities, principally those from the United States and Spain, control almost all commercial banks in Mexico. As a result of the strengthened financial regulation and the lessons learned, Mexican banks have been able to deal with the most recent international crisis without major issues and are well capitalized – even better than their home offices located in developed countries that are undergoing a deep crisis. However, improvements to financial regulation also resulted from the recommendations of the G20 summit that discussed the financial crisis. Some of these improvements are related to the reorganization of banks. Other improvements, which are yet to be implemented, are the adoption of Basle III rules on capitalization. As we will discuss further below, the CNBV has already drafted an amendment to the regulations to adopt Basle III, but such amendment has not been published yet. Currently, the President and the Secretary of the Ministry of Finance and Public Credit have announced that they will pass a bill to Congress for a new overhaul banking and financial laws in order to, among other topics, foster credit. The text of the bill is not public yet. The Mexican banking system is regulated by authorities and agencies that protect the interests of the general public, banking and non-banking financial agents.

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B. Authorities 1. Bank of Mexico The Bank of Mexico (Banco de Mexico - “Banxico”) is the Central Bank of the Mexican government, granted autonomy through the 1994 amendments to the Constitution and governed by the Bank of Mexico Law (Ley del Banco de Mexico). The primary activities of Banxico consist of: directing monetary policy and controlling inflation; financing the federal government; minting coins and issuing bills; and regulating intermediation and financial services. Banxico accomplishes these tasks in part by establishing required characteristics for financial transactions (e.g. mandatory rates, terms and interest). Banxico issues general provisions or Regulations (Circulares), which are applicable to financial institutions, issuers of securities, intermediaries and the general public. Banxico has authority to sanction those entities or individuals that do not comply with such Regulations. Banxico regulates certain aspects of banks as they relate to the payment systems and with derivatives, among other aspects. Banxico’s central administration consists of a Government Board composed of a Governor (appointed by the Federal Executive Branch) and four Sub-Governors. 2. Ministry of Finance and Public Credit The SHCP is a Ministry of the Federal Public Administration which in addition to its “natural function” of taxing authority, evaluates, surveys, promotes and organizes financial services rendered by banking and non-banking agents. Through its separate agencies, including the CNBV and the Insurance and Bonds National Commission (Comisión Nacional de Seguros y Fianzas “CNSF”), the SHCP evaluates and surveys banks, bonding and insurance companies, brokerage houses and all other entities within the financial system. The SHCP has the authority to issue rules to develop provisions of the LIC, which is the main body of law governing Credit Institutions and their transactions. One of the main functions of the SHCP is to issue money-laundering rules. 3. National Banking and Securities Commission The Comisión Nacional Bancaria y de Valores or CNBV is a decentralized agency of the SHCP, and is charged with issuance licenses, inspecting and surveying all financial activities, transactions and entities; it also acts as an enforcement body for those entities under its surveillance. All financial activities are mainly coordinated and regulated by the CNBV; as such it can be considered the most important government agency for such matters. Authorizations to undertake banking and other regulated financial activities in Mexico will commonly have to be filed with, among others, SHCP, Banxico, and the CNBV but the authorization is issues by the CNBV. Additionally, the CNBV issues Rules or Circulares that financial entities, securities issuers and intermediaries are required to follow.

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C. Protection of the Interests of the Public 1. National Commission for the Protection and Defense of Users of Financial Services This Commission (Comisión Nacional para la Protección y Defensa de los Usuarios de los Servicios Financieros “CONDUSEF”) is a decentralized agency of the federal government governed by the Law for the Protection and Defense of Financial Services Users. The main function of CONDUSEF is to regulate contracts entered by financial entities with the public at large and conciliation and arbitration proceedings that may be initiated by users adversely affected by financial services provided by credit institutions and, in general, by entities forming part of the financial sector in Mexico. Likewise, the CONDUSEF promotes financial culture; it provides counsel and other legal services for users of financial services that cannot afford a lawyer to enforce their corresponding claims; also, it maintains the Registry of Financial Services Providers. 2. Institute for the Protection of Bank Savings The IPAB is a decentralized agency of the federal government governed by the Protection of Bank Savings Law (Ley de Protección al Ahorro Bancario). IPAB develops bank savings protection programs for Mexican banks, provides financial support to banking institutions when required, insures savers’ deposits up to a certain amount, and acts as liquidator in event of a bank’s bankruptcy. The coverage granted to each affected depositor in the event of a bank’s bankruptcy is limited. 3. Credit Information Entities Credit Information Entities (Sociedades de Información Crediticia) are private companies, considered auxiliary credit organizations, governed by the Law for Regulation of Credit Information Companies (Ley para Regular las Sociedades de Información Crediticia). These companies render services related to compilation, management and delivery of information regarding individual and corporate credit records and regarding the credit operations executed by such individuals with financial and other commercial entities. Although Credit Information Companies are not credit institutions, they are regulated by provisions similar to those that govern credit institutions and other financial agents. D. Financial Agents The primary agents are private banks, most of which are now controlled by non-Mexican financial institutions. 1. Commercial Banks Commercial banks – known as multiple banking institutions (instituciones de banca múltiple) are governed under the LIC, and licensed to operate by the CNBV under favorable opinion from Banxico. Commercial banks are authorized to render banking and credit services on a nationwide (federal) basis under Mexican law. Banking and credit services comprise the ability to: (i) receive deposits; (ii) receive loans and credits; (iii) grant loans and credits; (iv) issue credit cards; (v) issue securities; and (vi) act as trustees.

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The most common transactions involve credit, lines of credit, unsecured loans, working capital and fixed asset loans, as well as mortgage loans and financial leases. Acquisition of more than 5% (five percent) of the capital stock of a commercial bank requires authorization of the SHCP and the CNBV. Transfer or acquisition of 2% (two percent) or more of the capital stock requires notice to the agency. 2. Affiliates of Foreign Financial Entities Affiliates of foreign financial entities or (instituciones de banca múltiple filiales) are similar to commercial banks, except that they are owned or controlled by a foreign financial entity incorporated in a country with which Mexico has entered an international treaty that provides for the existence of such a financial entity. Most of the foreign commercial banks currently operating in Mexico are recognized thereunder. 3. Development Banks Development Banks are decentralized agencies of the federal government known as national credit companies (Sociedades Nacionales de Crédito), that may perform credit operations in the same way as commercial banks. However, their purpose is to render services for the development of specific segments of the national economy—promoting, for instance, foreign commerce or the development of public works. 4. Non-Banking Financial Agents Special Purpose Financial Entities (Sociedades Financieras de Objeto Limitado, “Sofoles”) or “non-bank banks” are companies that, although not considered credit institutions, are authorized to perform certain banking services, securing funds from- and allocating them among- the general public with a specific niche or industry sector. These entities are an exception to the rule that enables only credit institutions to render banking services. The incorporation and operation of Sofoles must be authorized by the SHCP. The current LIC does not contemplate Sofoles anymore and the existing Sofoles are required to disappear (either by conversion to a bank or to a multiple purpose financial entity) by July 2013. Multiple Purpose Financial Entities (sociedades financieras de objeto multiple or Sofomes), are financial entities that like the Sofoles are not authorized to secure funds through reception of deposits from the general public, are authorized to grant credits through the granting of credit and other activities such as the execution of leasing agreements and issuance of securities. Also, their scope is not limited, as in the case of Sofoles. Precisely because of the lack of limitation on the sector or industry to which Sofomes may grant credit, their use has become more popular, and a number of Sofoles are required to convert into Sofomes. These entities may be regulated or non-regulated, and in the case of the latter, they are not subject to regulation of the government financial authorities, although their activities may be supervised by CONDUSEF. An advantage of Sofomes over Sofoles is that the former may act as trustees (along with banks, and other certain financial institutions) in trusts set to guaranty obligations – such as loan transactions. Likewise, they can enter into factoring and financial leasing transactions, representing a clear advantage vis-á-vis other specialized financial entities. Other non-banking financial agents within the Mexican financial system are leasing companies, factoring companies, pension fund management companies, public bond warehouses and currency exchange houses.

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Lately, it has become interesting the participation of Popular Financial Institutions (Sociedades Financieras Populares - Sofipos) in the financial services market. Alike banks, Sofipos are permitted to take sight and time deposits, and operate very much like a small, regional bank. Sofipos are divided/assigned four different levels depending on their amount of capitalization and value assets, and each level permits them to engage in a variety of services and more complex transactions. Sofipos are subject to the supervision of the CNBV and are subject to the auxiliary supervision of Federations, which assist CNBV and serves as an initial filter of the activities carried by Sofipos.

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XVIII. Secured Transactions A. Principles Applicable to Security Interests Mexican law provides different alternatives for granting security interests. The decision to use of one or more of the schemes should be taken on a case-by-case basis, depending on amounts, assets and structure, among others. These guarantees are regulated under different legal bodies, among others, the Federal Civil Code and those Civil Codes for each State, the Commercial Code and the General Law for Negotiable Instruments and Credit Transactions (Ley General de Títulos y Operaciones de Crédito - “Negotiable Instruments Law”). Currently, the President and the Secretary of the Ministry of Finance and Public Credit have announced that they will pass a bill to Congress for a new overhaul banking and financial laws in order to, among other topics, foster credit. The text of the bill is not public yet. We expect the bill will include amendments to the Negotiable Instruments Law. B. Personal Property Personal property (i.e., those movable assets or intangibles not considered as real property), may be subject to the following most common guarantees. 1. Personal Guarantee (Fianza) Guarantor (or guarantors if more than one) responds for debtor’s obligations in case of breach or default. Personal guarantees can have different characteristics or derive from different sources, such as a joint obligation, with no cost, with cost, judicial, by law, or private. Other limitations or agreements can be included. Termination can occur, among others, by release, termination of the obligation or term. Guarantor can be also backed by other personal guarantee. It is common to find that personal guarantees are granted through surety or performance bonds issued by bonding institutions that are licensed and regulated by the federal government for such purposes. Such institutions grant the respective policy to debtor giving creditor certain comfort of the solvency. 2. Pledge Debtor or a third party creates a guarantee to secure the performance of an obligation and its priority payment right delivering movable assets subject of transfer. A pledge is subject to the Civil Code when it is created on an object that is not a commercial asset or not involved in acts of commerce. In such case, the pledge shall be agreed in writing and requires the delivery of the asset. In order to be effective against third parties, the pledge must be recorded before the Public Registry of Property. If the guarantee involves acts of commerce or is created on commercial assets, the pledge will be then subject to the Negotiable Instruments Law. In general, the Negotiable Instruments Law provides that commercial pledges are created and perfected, among other, by delivery of the collateral to the creditor (including bearer negotiable instruments); endorsement of negotiable instruments and entries in the records of the issuer; delivery to the creditor of the document where the credit is evidenced; deposit of the collateral with a third party; delivery or endorsing the documents representing the goods subject matter of the pledge; issuance or endorsement

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of a pledge bond; and record of chattel mortgage agreements in the Sole Registry of Security Interests over Personal Property (Registro Único de Garantías Mobiliarias – “RUG”). The Pledge may or may not involve transfer of possession. In the first case, the possession of the pledged asset is transferred to creditor; who will keep and conserve the asset. If parties agree to grant a pledge without transfer of possession, guarantor will then keep such asset, but will be effective before third parties once recorded before the RUG. Nonetheless, recording pledges that involve transfer of possession is as well required for it to be effective, among others, vis-à-vis the taxing authorities. In case of breach or default of the guaranteed obligations, creditor under the pledge will be entitled to foreclose the guarantee requesting from the judge the sale of the pledged asset at public auction. If the asset cannot be sold, it can be adjudicated to creditor in accordance to the law. The pledge can be sold in an extrajudicial manner if the parties agreed to do so. The RUG is a very recently created section of the Public Registry of Commerce. This registration is to be made electronically through the internet, it may be done directly by creditors and it is free. The creation of the RUG was a special measure adopted by the Government to foster credit in Mexico by facilitating the creation of security interests. 3. Trust Agreements Assets can be transferred into trust for guarantee or security purposes. The settlor contributes assets or contractual rights to the trustee in order to guarantee in favor of the beneficiary. Trustees may be banks or other financial services entities licensed for such purpose. In case of breach or default of the guaranteed obligations, trust agreements may show a great advantage since they are permitted to provide for ad hoc rules for foreclosure, granting the beneficiary the right to order the trustee to foreclose on the collateral without the need of filing a request before Courts. These trust agreements should as well be recorded in the Public Registry of the Property (where real estate is involved) and in the RUG for them to be effective vis-á-vis third parties. It should be noted that in certain States of Mexico, registration is required for the agreement to even become effective as between the parties. 4. Chattel Mortgage These contracts (créditos de habilitación o avío and refaccionario) allow the grantor of the credit to receive a specific security on assets purchased with the proceeds of the loan. The main difference between the two kinds of chattel mortgage will be the type of assets that will be acquired by the debtor using the respective loan. In one case they deal primarily with the acquisition of liquid assets, while in the second case with fixed assets. Among others requirements, the contract must express the purpose of the credit operation, the use of the loan proceeds and the manner in which the beneficiary will dispose of the credit. It should describe the secured goods, should be ratified before a Notary Public and in order to be effective against third parties must be recorded before the RUG.

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C. Mortgage of Real Property Debtor or a third party creates a security interest through real assets. Usually a mortgage is executed over real estate or fixed assets or movable goods deemed as real property (e.g., ships). Under the mortgage, guarantor maintains the possession of the asset. Mortgage agreements shall be executed before a Notary Public and in order to be effective before third parties, shall be recorded before the Public Registry of Property. In cases of special types of assets, such as ships or aircraft, the relevant agreement will be subject to registration at the proper registry. The mortgage extends to the asset’s natural accessories, improvements, movable objects permanently attached to the asset and that cannot be separated without decreasing the value thereof, the buildings constructed over the mortgaged land. Mexican law permits the “industrial mortgage” in which an industrial plant, including real estate, construction and specifically designated equipment, as well as that equipment which is permanently incorporated into the structure would be covered as part of the collateral. Whether or not an industrial mortgage can be created only in favor of banks (since it is governed under Credit Institutions Law) and not in favor of other third parties is still under debate. Although, according to Mexican law, if a debtor fails to pay the debt due to its insolvency, all creditors may file a claim so as to force the debtor to carry out the payment of its obligations, debts secured by a mortgage, can be handled through separate legal procedures since the credit is secured by a specific asset independently of the solvency or insolvency of the debtor. Although, this will apply only to the amount that the asset’s value covers. In case of breach of default by debtor under the guaranteed obligations, creditor can foreclose the mortgage through a special mortgage proceeding or through an ordinary process if so elected by creditor. Real property can be subject to a trust agreement executed for guarantee purposes as well.

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XIX. Government Procurement A. General Scope According to the Mexican Constitution, the government must seek the best price, financing, quality and opportunity conditions on subjects such as acquisitions, leasing and transfer of any kinds of goods, or provision of services, as well as construction’s contracting. There are several legal procedures enabling the Mexican State to keep and guaranty the proper functioning of institutions and satisfy the citizen’s demands and public services. Competitive bidding is the most common procedure, while restricted invitation and direct award are exceptions. Legislation regarding contracting with the State for any acquisition of goods or services is the Leasing, Acquisitions and Public Sector Services Law (Ley de Adquisiciones, Arrendamientos, y Servicios del Sector Público “LAPSS”), while public works are subject to the Government Construction and Related Services Law (Ley de Obras Públicas). Both laws have their respective Regulations. B. Contracting Procedures 1. Competitive Bidding This is the most common procedure. It consists of a regime directed to the selection of the private party among a group of bidders responding to a public invitation, who could grant the best terms for the State in order to obtain all the benefits that allow justice and equity under the principles of concurrence, equality, competence and transparency. (a) National and International Bids Both public works and acquisition legislation provide that competitive bidding will be national when only Mexican citizens are allowed to participate; the goods to be acquired are produced in Mexico and have 50% of national content at least. International competitive bids, on the other hand, allow either Mexican or foreign citizen to participate and the goods to be acquired could be either Mexican or foreign sourced. International competitive biddings can only take place when:

• Its obligatory according to international agreements.

• When there’s no offer from national suppliers of goods and services in the required quantity and quality according to a state’s market survey or when it’s convenient in terms of price.

• When there is no response to a national competitive bidding or none of them fulfill the

requirements.

• For external-credit financed contracting given to the federal government or his third-party guarantee.

In this kind of bids, the Ministry of Economy will publish in the Federal Official Daily (Diario Oficial de la Federación) the cases in which participants must declare that the prices they’re proposing are not quoted

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under conditions of international trade disloyal practices on their modality of prices or subsidies discrimination. On the other hand, the Mexican State could deny foreigners participation in international bids when there is no agreement celebrated with their country of origin and that country doesn’t have an equal treatment to Mexican bidders or goods and services providers. (b) Bidding procedures Competitive bidding procedure starts with an invitation that is simultaneously published in the Federal Official Daily, a national circulation newspaper and a local newspaper from the relevant state where the goods will be used, the service provided or the construction executed. Bid’s rules prepared by the Mexican State agencies will be open to anyone interested. These will contain all the requirements and conditions, necessary for the appropriate goods and service’s provision or construction executing. In this way, any interested party who satisfies the requirements will have the right to make its proposal before the inviting authority. On competitive bids, submittal of proposals is made through a written document that contains the technical and economic proposals, the last one must include a seriousness of offer guarantee or performance bond. All this delivered in a sealed closed envelope. In this sense, anyone participating at the bids or executing a government procurement agreements, must provide three guarantees (normally by way of a surety bond) in order to guaranty:

• Seriousness of the bid proposal or offer, to ensure that the agreement will be executed if the bid results the winner.

• The correct application of the advance payments received.

• Proper performance of the contract.

Once the participant’s propositions are evaluated by the agency, the contract must be awarded to the bidder that fulfills the conditions established at the bid’s rules, the legal, technical and economic requirements and that guarantees his obligation’s proper performance. If there are two or more propositions that totally fulfill the authority’s requirements, the agreement will be made with the lowest price offer, or the bidder who received more percentage points, depending on the awarding criteria. Recent amendments to the LAPSS allow for subsequent discounts once the sealed envelopes are opened, in order to allow a last round of proposals thus allowing the state to secure even better economic conditions. 2. Restricted Invitation and Direct Award As an exemption to the general rule of the competitive bidding, the Mexican government agency can agree to contract for acquisitions, leases, services and government construction through a restricted invitation process (made to at least three parties) or through direct award when, among others:

• The agreement can only be executed with certain person in cases like works of art, intellectual property, patents, etc.

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• When the economy, social order, public services, health, security or environment of certain region or zone in the country could be altered or may in danger.

• When two competitive bids are deemed deserted or the proposals received were insolvent.

• When justified reasons exist for the acquisition or lease of certain goods under trademark.

C. Execution of a Procurement Contract Once the contracting procedure has concluded, the winners or those who have been directly award, have the obligation to formalize the contract within twenty days following the resolution’s notification (for acquisitions or services provision), and within the following thirty days (for construction contracts). According to procurement laws, rights and obligations emerging from contracts may not be assigned in full or in part in favor of third parties, except for the account receivable rights, and in this event only with the authority’s previous authorization. If the contractor to whom the agreement is awarded is not able to execute the work and subcontracts someone else with the authority’s previous authorization, the contractor will nonetheless remain solely responsible. In the case of government construction works, three types of agreements are recognized depending on the contracting price formula:

(i) On the basis of unit prices, in which case the total amount of the payment or compensation that shall be paid to the contractor will be made on the basis of work concepts and prices.

(ii) On lump-sum price, in which case a total fixed price shall be paid to the contractor for the totally

finished work executed. (iii) Mixed, when part of the work is on unit prices and other part on lump-sum basis.

D. Sanctions Bidders breaching any legal provision related to any contracting procedure may be fined by the Public Function Ministry (Secretaría de la Función Pública – “SFP”), and may be temporarily banned from participating in any government contracting procedure in anyone of the following cases:

• When bidders, without justification, do not execute an agreement already awarded by the authority.

• When the contract’s obligations are not performed for reasons attributable to the bidders that cause serious damages and lost profits, as well as when the private party supplies goods and services of different specifications than those agreed.

• When bidders give false information or act with fraud or bad faith in any contracting procedure.

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E. Challenges and Remedies Interested parties may challenge governmental actions before the SFP that are contrary to applicable law or bid rules, such as, for example, defects on the evaluation and award of a contract. F. Conciliation Process Contractors or suppliers have the right to request a conciliation procedure before the SFP in case of breach of the contract’s terms and conditions by the relevant authority. Once the complaint is received, a conciliation hearing will take place. The SFP will determine the controversial points and will invite the parties to settle, considering the facts declared by the interested and the authority. If the parties reach settlement, its terms will be binding and its performance can be required by judicial means. If not, the rights of the parties remain open to be pursued in court. G. Dispute Resolution As of 2009, procurement laws allow the inclusion of arbitration clauses in long-term service and public works contracts. Arbitration will not proceed regarding administrative rescission or early termination of the contract. H. Pemex In light of the enactment of the Pemex Law and its corresponding Administrative Procurement Provisions, as of 2010 Pemex’s procurement regime for acquisitions, leasing, works and services for substantive activities of productive nature is not subject to general procurement laws, and therefore the general procedure described in this chapter. The main objective of this special regime was for substantive activities of productive nature, as well as petrochemicals other than basics to be ruled by provisions out of the scope of the LAPSS Law, and the Public Works and Related Services Law; the foregoing with the purpose that public procurement for such activities (limited to those specific areas) be more efficient and consistent with their economic and operative nature, thus granting Pemex and its Subsidiary Entities more flexibility for procurement procedures as well as contracting and performance thereunder. For more information in connection with the new Pemex procurement regime, please refer to the Energy section.

I. Anti-Corruption measures in Public Procurement The recently enacted Anti-Corruption Law is an effort by the Mexican government not only to address an existing corruption problem, but also to implement several international treaties that Mexico has ratified in connection with said matter. These provisions seek to be a deterrent and establish harsh sanctions on individuals and legal entities for their misconduct incurred in federal public procurements. Likewise, the Antic-Corruption Law punishes Mexican nationals for their misconduct while conducting business transactions abroad. The Anti-Corruption Law provides for a detailed description of administrative offenses that encompass major corrupt practices that have been identified in the field of public procurement, such as:

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(i) Promise, offer, or give money or gifts to a public servant or a third party in exchange for

the public servant doing, or refrain from doing something that is related to his/her duties or the duties.

(ii) Acting in a way that implies, or has the purpose or effect, of getting a benefit or advantage that is improper with regards to public contracting of a federal nature.

(iii) Acts or omissions that have the purpose or effect of evading the requirements or rules with regards to public procurement of a federal nature, or which feign the satisfaction of these requirements.

(iv) Intervening under one-self´s name, but in the interest of some other person(s) that are not allowed to participate in public contracting, with the objective that this person, or persons, obtain, in full or partially, the benefits derived from such contract.

(v) Require, without having the right to do so, a public servant to give, subscribe, grant, destroy, or deliver a document or good, with the objective of getting a benefit or advantage for himself/herself or a third party.

(vi) Promote or uses influence, economic or political power, real or fictitious, on a public servant with the purpose of obtaining benefit or advantage.

(vii) Submit false or altered documents or information with the purpose of gaining benefit or advantage.

Before imposing a sanction, the SFP will undertake an investigation procedure to detect the relevant misconduct and will issue a statement of objections giving the opportunity to the alleged offender to raise arguments and present evidence. Sanctions can range from fines equivalent to 1000 to 50,000 minimum wages in force in the Federal District (USD$4,500 to USD$220,000 in the case of individuals) and 10,000 to 2,000,000 minimum wages in force in the Federal District (USD$45,000 to USD$8,850,000 Dollars in the case of legal entities) that could be even increased in an additional 35%, in addition to the possibility of temporary debarment from public procurement (3 months to 8 and 10 years, respectively).

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XX. Intellectual Property A. General Intellectual Property encompasses all distinctive signs, such as trademarks, slogans, trade names, as well as inventions such as patents, utility models and industrial designs and models, and copyright and related rights. The protection of intellectual property rights in Mexico has increased as a result of the execution of different international treaties and of the country’s participation in international organizations such as the Agreement on Trade-Related Aspects of Intellectual Property Rights including Trade in Counterfeit Goods (Acuerdo Sobre los Aspectos de los Derechos de Propiedad Intelectual Relacionados con el Comercio “TRIPS”) and World Intellectual Property Organization (Organización Mundial de la Propiedad Intelectual “WIPO”). Moreover, the protection of intellectual property rights was one of the main subjects discussed during NAFTA’s (North America Free Trade Agreement) negotiations; that agreement includes a specific chapter (XVII) describing the minimum intellectual property protection that each country must provide. This section will provide a brief summary of the scope of protection granted in Mexico regarding each of the rights noted above as Intellectual Property rights, including some practical matters to be considered when enforcing such rights. B. Copyright The Federal Copyright Law (Ley Federal del Derecho de Autor - “LFDA”) is the statute that sets forth the rules for protection of copyright, related rights and reserve of rights. As provided by the Berne Convention, of which Mexico and most countries are a party, the protection of a copyrighted work is not dependent upon registration or any formal requirements but rather from its creation; however, any agreement or document related to copyrights’ transfer or license must be registered before the Registry of the National Copyrights Institute (Instituto Nacional del Derecho de Autor - “Indautor”) in order to be enforceable vis-à-vis third parties. All works are entitled to two separate copyright protection: (i) economic rights and (ii) moral rights. Economic rights, also known as exploitation rights, include the right to use and exploit the work in any form or by any means. The right to collect money derived from the use of any work may be transferred at any time provided such transfer agreement is executed through compensation on onerous manner and does not exceed the maximum 15-year term provided by law. The law states that the assignment could be for a longer time depending on the investment, although the latter is not defined. As an exception, some specific works, such as software, may be assigned or licensed for a longer term. The “moral rights” attached to a work refer to the personal rights which may not be waived or transferred, that are granted to its original author. These rights include the right to claim authorship (and be named every time the work is displayed) and the right to object to modifications or other derogatory action that would be prejudicial to the author’s honor or reputation. By defining the author of a copyrighted work as “the individual who creates a work,” the LFDA restricts original ownership of any work to an individual. Accordingly, no entity or corporation may hold moral rights, and the name of an individual must be noted as the original creator every time a work is displayed or exploited. The protection provided by the LFDA is granted during the lifetime of the original creator’s (author’s) and for a 100 year term counted as from the author’s death; when different authors have

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contributed to the creation of the work, the 100 year term begins on the date of death of the last living contributor. Mexican copyright law also protects performer’s rights and other related rights or neighboring rights (derechos conexos) granted on behalf of performers, producers, editors and radio stations; such protection is valid for a 75 year period beginning on the date of performance or creation of the produced work. The reserve of rights is the exclusive right granted on behalf of its holder, to use and exploit: (i) the name of a periodical publication; (ii) periodical broadcasts; (iii) characters; (iv) artistic names and (v) advertisement promotions. C. Trademarks The Industrial Property Law (Ley de la Propiedad Industrial “LPI”) and its regulations and the Mexican Institute of Industrial Property (Instituto Mexicano de la Propiedad Industrial – “IMPI”) are, respectively, the statutes and the authority granting and protecting trademark rights in Mexico. A trademark is any “visible sign distinguishing products and services from others of the same kind in the market”; such visible signs must be registered in Mexico in order to achieve trademark and exclusivity rights within Mexico. Mexican trademark registrations are federal in nature; therefore, the rights granted extend to the whole territory. Since trademarks are granted to distinguish a specific type of product or service only from other products or services in the same market, such products and services are catalogued in different classes. Such classes are modeled in Mexico after those defined in the Nice Convention, which is followed in most of the countries where trademarks are protected in accordance with the standards of the Paris Convention. A trademark will be granted only when IMPI has verified that the registration requirements of the LPI have been fulfilled. One of the key requirements is that the trademark must not be likely to confuse the consumer about the services or products protected and its origin. The LPI provides that the priority date of any trademark filed in another country that is part of the Paris Convention will also be considered the Mexican priority date if the foreign trademark is filed in Mexico within six months of the filing date in its country of origin. The LPI does not require “intent to use” or “prior use” of a trademark for registration purposes. However, if three consecutive years elapse without a registered trademark being used, and unless IMPI judges that a justified cause for such delay exists, a third party may contest the registration and have it cancelled. The registration of a trademark grants its holder the right of exclusive use thereof. In order to maintain such exclusivity, the holder or the registered licensee(s) must use the trademark within the Mexican territory as registered or amended, provided that its distinctive character remains unchanged. A trademark registration is valid for a ten-year renewable term, beginning on the date when the registration application was filed. Trademarks in Mexico are also protected as from its date of first use in commerce in Mexico, provided such use is claimed in the application. If contested, the holder would need to evidence the date of first use. There is no opposition process against a pending application whilst its registration period. Thus, the registration process is only between the applicant and IMPI. If a third party believes that his/her rights are

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jeopardized with the trademark, then it will be necessary to challenge the registration once it has been granted. The protection of trademarks in Mexico has increased as a result of the execution of the Madrid Protocol for the International Registration of Trademarks (Protocolo Concerniente al Arreglo de Madrid Relativo al Registro Internacional de Marcas). Mexico adopted the Madrid Protocol on November 19, 2012; however, this Protocol was published in the Official Gazette (Diario Oficial de la Federación) until February 8, 2013. In such publication, it was established that the Madrid Protocol entered into effect on February 19, 2013 Thanks to the international procedural mechanism, the Madrid Protocol offers a trademark owner the possibility to have his trademark protected in several countries by simply filing one application directly with his own national or regional trademark office. An international trademark so registered is equivalent to an application or a registration of the same trademark carried out directly in each of the countries designated by the applicant. If the trademark office of a designated country does not refuse protection within a specified period, the protection of the trademark is the same as if that office had registered it. The Madrid Protocol also simplifies greatly the subsequent management of the trademark, since it is possible to record subsequent changes or to renew the registration through a single procedural step. D. Trade Names and Slogans Trade names and slogans are other kind of distinctive signs protected by the LPI. Although a company’s name or trade name are protected without registration with the IMPI, holders should publish a notice in the Industrial Property Daily in order to evidence the use of such name and create a bona fide presumption of use. The trade name protection extends throughout the geographical zone where the company’s effective customers are located. A slogan is a certain phrase or phrases that publicly advertises any product, service, or industrial or commercial establishment in order to distinguish it from others of its kind. The exclusive right to use a certain slogan may be obtained through registration before the IMPI, which will use the product and service classifications and other registration rules contained in the Nice Convention, the LPI and its regulations. A slogan registration is valid for a renewable ten-year term counted as from the date the corresponding application was filed. E. Patents According to the LPI, an invention must fulfill all of the following requirements in order to be subject of patent protection: (i) the invention must be new; (ii) the invention must be created as the result of an inventive activity; and (iii) the invention must be subject to industrial application. Mexican patents are granted by the IMPI, who will perform the formal and novelty examinations. When approved, a patent is granted for a twenty-year term counted as from the date the application was filed. Patents are not subject to renewal nor can be extended. The exclusivity right granted by a patent covers all Mexican territory. Only those patents granted by IMPI will be enforceable in Mexico; however, the LPI provides a priority right to such applications previously

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filed in a country that is party of the Paris Convention that are filed in Mexico within twelve months following their original application. Mexico is a member of the Patent Cooperation Treaty; thus, applications can be filed in Mexico up to 32 months following the international application without negatively affecting the novelty requirement. An application in these cases will be governed by the Treaty’s provisions rather than by the LPI provisions in Mexico. F. Trade Secrets A trade secret is any information fulfilling the following requirements:

• The information must be subject to industrial or commercial use or application by a certain entity or individual;

• It must be kept confidential and contained in documents or another similar electronic or magnetic device (verbally transmitted information is not protected);

• It must constitute a competitive or economic advantage over competitors; • The titleholder must have taken sufficient measures to protect the information’s confidentiality;

and • The information must refer to the nature or characteristics of the titleholder’s production or

distribution methods or other similar commercial or economic information. Even though trade secrets do not require registration (for confidentiality reasons) they are protected by the LPI, and their violation constitutes a crime. G. Franchising and Transfer of Technology The LPI recognizes the existence of franchises as the transfer of technical knowledge along with a trademark license. The franchisee can be required to produce and distribute the products or services in a uniform manner and according to the franchisor’s operation methods, maintaining the quality, image and prestige of the associated trademark. There is no additional formality required for the franchising of a trademark except for the franchisor’s obligation to provide, prior to the execution of the agreement, sufficient information as to the financial terms of the agreement. H. Enforcement Intellectual property rights may be protected by means of administrative, civil and criminal procedures, including border measures. Copyright and related disputes may be resolved through an amicable proceeding held before the National Copyrights Institute, whose officers will appear as mediators and help parties reach a settlement. This procedure is not mandatory and, even when the parties have submitted to it, parties are entitled to bring further claims before administrative, civil or criminal authorities. Industrial property and copyright related provisions include extensive lists of the conduct and actions, such as unauthorized use of any of the rights protected, that may be considered tortuous or intentional infringement, depending on the nature of the conduct.

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Administrative procedures must be raised before IMPI, which can order and carry out protective measures in cases of infringement, and may even seizure infringing products or impose economic sanctions against infringing parties. Criminal actions will be prosecuted in accordance with corresponding criminal procedures. It is important to point out that most intellectual property crimes are considered major felonies; accordingly, the prosecuted individual shall not be entitled to bail during trial. Although customs is duly empowered to carry out border measures, there is a good coordination between Customs, the Attorney’s General Office and IMPI to enforce border measures, a program that has been very successful in Mexico during the last years.

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XXI. Immigration A. Introduction On January 29, 2010 was published in the Federation's Official Journal (Diario Oficial de la Federación “DOF”) the new Criteria and Procedures Manual of the National Immigration Institute which came into force on April 30. This manual brought many changes to all processes and systems of the National Immigration Institute (“Insituto Nacional de Migración” INM, the agency that applies immigration laws and regulations), and it allows a more flexible and efficient service for users, and its main objective is to improve the quality of immigration procedures for foreigners visitors. With the new manual, foreigners can apply some procedures to enter Mexico, whether for work, study or to be integrated with their families, in a more easy and simple way, since it has reduced the paperwork and requirements. Some criteria have been established and consistent so that users receive homogenized attention in all the Institute Offices. B. Immigration Status 1. Tourist “Tourist” status is a category of Non-Immigrant that enters Mexico for recreational, cultural or sporting activities that will not be remunerated. The Tourist may stay in Mexico up to 180 days. There are three groups of nationalities: (i) those who only require a valid passport to enter Mexico as a Tourist, (ii) those who require a valid passport and also a visa issued by a Mexican Consulate and posted in the Tourist’s passport and (iii) those who, in addition to the valid passport and visa, require the authorization of the National Immigration Institute, prior to their trip to Mexico. However, under new Criteria and Procedures Manual of the National Immigration Institute enacted in 2010, those who have tourist visa issued by the United States of America may enter Mexico, and remain legally for six months without the need for a previous visa. 2. Working Visas for Non-Immigrant and for Immigrant There are two initial immigration status for foreigners who wish to work in Mexico: Non Immigrant Visitor (FM3) and Immigrant (FM2).

1. Non-Immigrant Visitor (No Inmigrante Visitante): foreigners who enter the country on a temporary basis to work for a company based in Mexico.

1. 2. Immigrant (Inmigrante): foreigners who come to Mexico with the purpose of staying on a

more permanent basis and that ultimately may receive the permanent residence status (“Inmigrado). The INM has established as “official criteria” that foreign citizens wishing to permanently reside in the country must stay under a Non-Immigrant Visitor status (FM3) for a period of at least 2 to 3 years before applying for Immigrant status (FM2). However, under some circumstances, a foreign national may apply directly for an FM2 visa: (i) if the foreign national is married to a Mexican national; (ii) if the foreign national has children that are Mexican nationals by birth; or (iii) if the foreign national has a kin relationship y blood or though their Mexican national spouses (e.g. that of mothers-in-law and sons-in-law).

Non-Immigrants Visitors and Immigrants, upon their entry, are allowed to stay in Mexico for an initial one-year period. Thereafter, they may extend their stay in Mexico for up to four consecutive one-year renewals, which results in a total stay of five years. Certain requirements must be met when filling each

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renewal, doing so within established deadlines and verifying that the conditions under which the foreign national entered the country prevail. Once Non-Immigrants Visitors complete the five-year term, they must either: (i) leave the country; (ii) apply for new FM3 status: or (iii) change their immigration status to that of Immigrant. On the other hand, at the end of five years of residence, an Immigrant may: (i) apply for permanent residence (“Inmigrado” status), provided certain conditions are met; or (ii) if the conditions to apply for permanent residence are not met or the application is denied by the INM, then the Immigrant may apply for a new FM2 status. The family dependants of FM3 Non-Immigrant Visitors and FM2 Immigrants may receive the authorization to join Visitor or Immigrant to Mexico bearing the same visa. The family dependants may not engage in a remunerated activity unless previously authorized by the INM. 3. Permanent Resident (Inmigrado) As mentioned above, once an Immigrant has spent five years in Mexico with the FM2, the Immigrant (and his family) may apply for permanent residence (“Inmigrado” status). The granting of the Inmigrado status is discretionary and not automatic. Statutorily speaking there are only two requirements: (i) the five year period holding the FM2, and (ii) Not exceed a period of 18 months, whether or not successive, out of Mexico during the five year period holding the FM2. In some cases, the INM may allow that foreigners remain a longer period, subject to a fine. The INM will also look at other issues while examining the application to become an Inmigrado, such as the nationality, the behavior of the applicant and the type of activities carried out during the five-year period holding the FM2. Once the Inmigrado status is granted, the beneficiary will have the right to engage in any lawful activity without the previous authorization of the INM (a notice to the Registry shall suffice). The Inmigrado status allows the beneficiary to leave and come back to Mexico with no further formalities. However, the Inmigrado status may be cancelled if the beneficiary stays out of Mexico during a period of three consecutive years or an intermittent period of five years during a ten-year span. C. Working Visa Options 1. Business Visitors Under the Regulations to the General Population Law and considering some administrative arrangements around Business Visitors, International Commitments on Mexican bilateral and multilateral Treaties, the immigration authorities will document like a Non-immigrant Business Visitor all the persons located on the following assumptions:

• Business Visitors. Persons that plan to perform a business activity related to research, design, farming, manufacture, production, marketing, sales, distribution, post-sale services and other general services.

• Merchants and Investors. Persons who intend to exchange goods or services, or establish,

develop, manage or render advisory or technical services to oversee an investment that the person or his employer has made or is planning to make.

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• Transfer of Personnel. Persons employed by a company in the U.S. or Canada who carry out general managerial or executive functions or who have special knowledge for a company or its subsidiaries or affiliates that are established within Mexico.

• Professionals. Persons who intend to carry out a profession among the sixty professional

activities listed under NAFTA. Some activities are subject to limitations on the number of entrants and authorizations to be annually evaluated, based upon mutual consultation among the three NAFTA member countries. Mexico requires that these individuals obtain an official certification of their profession from the Ministry of Public Education.

• Business Visitor. Persons whose visit to Mexico has the purpose of negotiating or executing

commercial contracts, verify the fulfillment of such contracts, analyze investment alternatives or make a direct investment in Mexico.

• Board Members. Persons that visit Mexico to attend Board of Directors meetings of companies

established in Mexico. • Technicians. Persons whose visit to Mexico has the purpose of providing specialized services

previously agreed or contemplated in a transfer of technology agreement, in a purchase agreement for machinery or equipment, in a technical training agreement or any other similar type of arrangement with a company organized in Mexico.

• Transfer of Personnel. Persons that are employees of a company established abroad and who

are assigned to a Mexican affiliate to carry out management or advisory functions, the assignment resulting from the specialized knowledge of the Business Visitor in the activities of the Mexican affiliate.

In case the activity to be performed by the Business Visitor will be paid or it will be longer than 180 days, then will be documented like an Investor's Business Person or in the form corresponding to activity that the foreigner intends to develop. ABTC Scheme The scheme of the Travel Card for Business Visitor of the Asia-Pacific Economic Cooperation Forum the ABTC (Business Travel Card) allows its holder to enter and handle business in the participating economies without the need to apply for another immigration process. The ABTC scheme applies to citizens from participating economies seeking to enter to conduct business in any of the countries. D. General Procedures for Securing Immigrant or Non-Immigrant Visas 1. Entrance Procedure A Mexican Consulate overseas issues a visa based on the authorization previously issued by the INM. Specific documents, indicating the actual work activities to be performed in Mexico, must be submitted with the entrance application. Once the INM issues the authorization for a visa, a fax copy and mail order will be sent to all Mexican Consulates in the world so that the foreigner may secure the new visa. Most Consulates take an average of two working days to issue the immigration documents. The foreigner holding an immigration approval are documented for entry Mexico with the FMM, this way only proves their legal immigration stay for 30 days from its entry and within that term it must be

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exchanged by the Non-Immigrant (FM3) or Immigrant (FM2) form, and it can be filed in any INM Regional Delegation in Mexico. 2. Change of Immigration Status or Characteristic A foreigner who has entered Mexico with a specific immigration status must follow a particular procedure upon seeking to secure a visa to perform different activities or to reside permanently in Mexico. The most common changes are: from FMM to Non-Immigrant or to Immigrant. E. Documentation Requirements In general, all of the noted immigration clearance procedures require filing certain documentation with the INM. The most commonly required documents include a Valid Passport and a sponsorship letter (for some business visas) issued by a Mexican company. F. Extension of Stay in Mexico Work visas for non-immigrant and immigrants are issued for one-year periods, but can be extended by yearly renewals. After five years, the latter can apply to become permanent residents. G. Right to Import Personal Property All Immigrants and some Non-Immigrants are entitled to import into the country, duty-free, all items constituting their household goods. An authorized Custom’s Broker (Agente Aduanal) must handle the clearing process for the goods upon their entry into Mexico. In cases of imports by Immigrants the entry is permanent, while in the case of Non-Immigrants they must return at the end of the stay.

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XXII. Environmental Laws A. Overview Environmental compliance is Mexico is a recent development. Mexico’s core statute, the General Law of Ecological Balance and Environmental Protection (Ley General del Equilibrio Ecológico y la Protección al Ambiente; the “Environment Law”) was passed by the Federal Congress and promulgated in 1988. The Environment Law was the answer of the Mexican government to claims from other countries that argued that Mexico was a country where environmental protection was virtually non-existent. Four administrations later enforcement of environmental laws in Mexico is still growing, just as Mexican companies and industries are going through the adjustment of complying with environmental protection rules and obligations. The Environment Law provides for separation of jurisdiction on environmental matters. As we will discuss with further detail, there are aspects of environmental protection that are reserved for federal statutes and agencies and others that are reserved to state (or even municipal) jurisdiction. Therefore, both at the federal and state level Congresses passed legislation to create new environmental enforcement agencies. Likewise, state Congresses enacted state laws that were crafted to mirror the principles adopted by the Environment Law. We will further explain how the division of jurisdiction is determined. After the promulgation of the Environment Law the federal government published a series of Regulations (Reglamentos) that complemented the essential rules established by the Environment Law in different areas of environmental compliance. Therefore, separate sets of Regulations were adopted to cover areas like environmental impact, hazardous waste and air emissions at the federal jurisdiction level. In addition to the legal framework comprised by the Environment Law and its Regulations, Mexico adopted official norms (Normas Oficiales Mexicanas; “NOM’s”) to establish the technical standards that are used as thresholds in order to determine whether or not environmental protection and compliance are observed. There are also other more recent statutes like the National Waters Law and the General Law for the Prevention and Comprehensive Management of Waste (Ley General para la Prevención y Gestión Integral de los Residuos; the “Waste Law”) and their respective Regulations. These focus more specifically in aspects related to waste handling to prevent water and soil contamination. Environmental statutes in Mexico are focused on, among others: (i) preventing air, soil and water contamination; (ii) setting the requirements that industries must meet on environmental impact; (iii) allowing industries to submit voluntarily to auditing procedures in order to confirm their level of compliance; (iv) establishing the conditions for the use of water and the discharge of wastewater; and (v) establishing the sanctions that shall be imposed in case of lack of compliance. Mexico’s enforcement system is not yet as sophisticated as other more developed countries, but the legal principles are already established therein. Therefore, it is just a matter of development of the environmental protection culture amongst Mexican industries as well as entities and individuals. This task should be strengthened by more devoted efforts from the government (federal, state and even municipal) to foster investment in environmental protection.

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B. Authorities The adoption of environmental statutes resulted in the creation of new enforcement agencies. The federal Congress passed amendments to the Organic Law of the Federal Public Administration (Ley Orgánica de la Administración Pública Federal) to create a new Ministry that would be in charge of environmental protection. The new Department of Urban Development and Ecology (Secretaría de Desarrollo Urbano y Ecología; “SEDUE”) was the first Ministry of the Federal Government entrusted with full authority to enforce the new Environment Law. Eventually SEDUE became the Department of Social Development (Secretaría de Desarrollo Social; “SEDESOL”), which for a few years remained as the federal agency in charge of conducting environmental policy. In 1994 new amendments to the Organic Law of the Federal Public Administration took away from SEDESOL the jurisdiction on federal environmental matters and placed it in the newly created Ministry of the Environment, Natural Resources and Fisheries (Secretaría de Medio Ambiente, Recursos Naturales y Pesca; “SEMARNAP”), which just a few years later, due to further amendments to the Organic Law of the Federal Public Administration the jurisdiction on fisheries from SEMARNAP was taken away and adopted its current name, Ministry of the Environment and Natural Resources (Secretaría de Medio Ambiente y Recursos Naturales; “SEMARNAT”). In the beginning both policy-making and enforcement were placed in SEDUE’s jurisdiction. However, in 1992 changes to the laws and regulations governing SEDUE (then already SEDESOL) divided the jurisdiction on environmental matters in two: (i) policy-making was left with SEDESOL (now with SEMARNAT); and (ii) enforcement authority was placed in the jurisdiction of a new agency known as the Federal Prosecutor for Environmental Protection (Procuraduría Federal de Protección al Ambiente, “PROFEPA”). Legally speaking, PROFEPA is part of SEMARNAT as an agency within SEMARNAT’s authority. However, PROFEPA keeps technical and operational autonomy. At the state level within Mexico events unraveled in the same way as in the federal level. The newly adopted state environmental statutes and regulations called for the creation of state environmental agencies in Mexico’s states and the Federal District (Mexico City). Most of state environmental agencies (usually named Secretaría del Medio Ambiente; Department of the Environment) keep both policy-making and enforcement authority under their jurisdiction, with certain exceptions, such as the case of the states of Jalisco and Guanajuato, which have separated agencies similar to the structure at the federal level. In certain cases, the Municipalities (counties) maintain environmental agencies that are in charge of local compliance matters, such as solid waste management and wastewater discharges (when wastewater is discharged to the municipal sewer system). C. Areas of Exclusive Federal Jurisdiction As mentioned above, jurisdiction is divided between federal, state and municipal agencies. There are areas that are left to federal jurisdiction exclusively. These areas are mainly: (i) environmental impact of certain industries; (ii) air emissions of certain industries; (iii) generation, handling, transportation and confinement of hazardous waste; (iv) soil contamination and remediation related to hazardous waste and substances; and (v) water rights and wastewater discharges, when the water sources are of federal jurisdiction and when the wastewater is discharged to sources or bodies of federal jurisdiction, respectively. The distribution of jurisdiction is determined by Environment Law and is operatively regulated by different statutes.

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D. Environmental Impact When a private party or a governmental agency plans to conduct the construction of a project or perform certain activities that may alter the conditions of the environment, then such private party or governmental agency must file an environmental impact statement before the competent environmental agency for it to determine the feasibility of undertaking such activities considering their impact on the environment. The Environment Law is clear as to which are the areas or industries where the jurisdiction on environmental impact is federal. In connection with the above, it establishes that an environmental impact statement authorization from SEMARNAT is necessary when the construction project or industrial activity that may cause an alteration to the environment is related to one of the following works or activities:

§ Construction of federal highways and roads; oil, gas and coal ducts or poliducts; hydraulic works;

§ Oil, petrochemical, chemical, metal, paper, sugar, cement and electrical industries;

§ Exploration, exploitation and benefit of mineral resources and substances reserved to the

federal government in terms of the Mining Law (Ley Minera) and the Law Regulating Article 27 of the Constitution on Nuclear Matters (Ley Reglamentaria del Artículo 27 Constitucional en Materia Nuclear);

§ Facilities for the treatment, confinement and destruction of hazardous waste and radioactive

waste;

§ Rain forest and wildlife preservation projects;

§ Change of forestry land use on forest, rain forest and desert areas;

§ Industrial parks where the undertaking of high risk activities are foreseen;

§ Real estate or housing developments affecting coastal ecosystems;

§ Wetlands, mangroves, lagoons, rivers, lakes or water bodies connected with the sea, as well as their coasts or federal zones;

§ Federal natural protected areas;

§ Fishery, aquatic or agricultural-cattling that may endanger the preservation of one or more

species or that may damage the ecosystems; and

§ Works or activities of federal jurisdiction that may cause severe or permanent alteration to the environment or damages that may affect public health the ecosystems or that may surpass the limits and conditions set forth in applicable environmental laws.

The Regulations of the Environment Law on Environmental Impact (Reglamento de la Ley General del Equilibrio Ecológico y la Protección al Ambiente en Materia de Evaluación del Impacto Ambiental) contain a detailed list of each of the works and activities related to each of the ones described above that are also subject to the submission of an environmental impact statement for SEMARNAT’s approval. Any other construction, project or industrial activity not contained in the list above and the aforementioned Regulations will be subject, for purposes of environmental impact, to the jurisdiction of the state agency.

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The evaluation of environmental impact is the procedure whereby SEMARNAT or the competent state agency examines the environmental impact statement submitted by the relevant interested party and authorizes, authorizes conditionally or rejects the construction project or industrial activity that is the subject matter of evaluation. During the evaluation process, SEMARNAT or the state agency have the authority to request additional information to resolve accordingly. The usual outcome of the environmental impact evaluation is the issuance of an environmental impact authorization of the relevant project or activity, which is normally subject to the compliance of certain conditions imposed by SEMARNAT or the state agency. The conditions are established to make sure that the interested party’s project or activity will not adversely affect or alter the environment or, when the alteration is to some extent significant, to establish the obligation to conduct remediation or reclamation activities once the project is ended in order to balance the conditions of the environment. After the end of the project subject matter of the environmental impact statement or the remediation or reclamation activities ordered by SEMARNAT or the state agency, the applicant is normally required to file evidence of compliance with the conditions established in the environmental impact authorization. Usually with this filing, when submitted to SEMARNAT because of the federal nature of the project, PROFEPA also has to be informed/copied. In general terms, SEMARNAT and PROFEPA study the compliance report and, if complete, they generally issue a “release letter” in favor of the interested party. E. Air Pollution; the Sole Environmental License LAU This is another area of environmental concern that has multiple jurisdictions, federal, state and municipal, and the Environment Law is also the source of distribution of authority. The Environmental Law establishes that industries of federal jurisdiction that represent fixed sources of air emissions shall secure a “license” from SEMARNAT to operate. The Regulations of the Environment Law on Prevention and Control of Contamination to the Atmosphere (Reglamento de la Ley General del Equilibrio Ecológico y la Protección al Ambiente en Materia de Prevención y Control de la Contaminación de la Atmósfera) list in article 17-Bis the industries that fall within federal jurisdiction. The industry classification includes all the following types of industrial activities of federal jurisdiction:

§ Oil and petrochemicals; § Manufacturing of chemical products in general; § Manufacturing of paint and ink; § Metal; § Automobile; § Paper and cellullose; § Cement and lime based products; § Asbestos; § Glass; § Electric generation; and § Treatment of hazardous waste.

Each of these classifications includes more detailed types of industrial activities, as set forth in the aforementioned Regulations. For any industry or activity not listed therein, the jurisdiction falls in the state agency. With respect to the “license” that either SEMARNAT or the state agency must grant to operate fixed sources of air pollutants, originally this license was known as the “Functioning License”. With the publication in April, 1997 by SEMARNAP of the Decree establishing mechanisms to secure the Sole

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Environmental License (Licencia Ambiental Única; “LAU”), SEMARNAT implemented a process whereby one sole license (the LAU) would encompass the authorization/registration for the interested party in different areas such as environmental impact, fixed sources of air emissions and generation/treatment of hazardous waste. The LAU encompasses, in just one process, the comprehensive evaluation of the environmental procedures that any industry must undertake before SEMARNAT. The LAU issued by SEMARNAT is for those industries and activities of federal jurisdiction (with respect to environmental impact and fixed sources of air emissions) and for any industry that generates hazardous waste (since generation of hazardous waste is a matter of federal jurisdiction). However, if the relevant industry’s sole area of federal jurisdiction is the generation of hazardous waste, then such industry may only apply for the registration as a generator of hazardous waste, and will not require to secure a federal LAU. The LAU may be issued to new industries, to industries that secured originally a Functioning License (this is called “Re-Licensing”) or to industries that have operated historically without a Functioning License or a LAU (this is called “Regularization”). The LAU is issued per industrial facility, not per interested party or applicant. In other words, if the interested party operates two or more industrial facilities of federal jurisdiction   in different locations, it would have to obtain as many LAUs as industrial facilities of federal jurisdiction such party  operates. With respect to the air emissions information, the relevant items included in a LAU are:

§ Name of the Licensee; § Location of the industrial facility that is subject to the license; § Description of the manufactured product, manufacturing equipment and manufacturing

process; § Schedule of production activities (production shifts when the manufacturing equipment is in

use); § Levels of production; and § Type and levels of air emissions.

The LAU must be revised in case the industrial activities within the relevant facility change or such facility changes of address. Likewise, the LAU must be revised in case of change of corporate name, production increase, manufacturing process, or expansion of the facility. Annual updates to the LAU are made through the filing of an annual report of air emissions known as Annual Operating Card (Cédula de Operación Anual; “COA”). There are states that have incorporated the use of their own kind of LAU (these include the Federal District, where Mexico City is located, among others). Other states have maintained the name of the “Functioning License”. In the Federal District the LAU encompasses the regulation of air emissions of state jurisdiction, the generation of solid waste (non-hazardous) and wastewater discharges to the sewer system, among others. F. Hazardous Waste Regulation of hazardous waste is one of the main areas of environmental concern that are of federal jurisdiction. However, the Waste Law grants jurisdiction to the State agencies to verify micro-generators of hazardous waste (in general terms, micro generators are considered those industries that generate hazardous waste in low quantities). The basic criteria to determine what is considered or constitutes “hazardous waste” is two-fold. First, there are materials that are considered hazardous per se. These materials are listed in a NOM. If not

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listed as hazardous material, such material may still be considered as “hazardous” if it surpasses any of the thresholds of corrosiveness, reactivity, explosiveness, toxicity, flammability and biological infectiousness set forth in the relevant NOM (what is called the “CRETIB” test). The generation, handling and management of non-hazardous waste is monitored and enforced by state or municipal agencies. There are two kinds of non-hazardous waste: special management waste and solid waste. Originally the generation, handling, transportation, confinement and elimination of hazardous waste was set forth by the Environment Law and the Regulations of the Environment Law on Hazardous Waste (Reglamento de la Ley General del Equilibrio Ecológico y la Protección al Ambiente en Materia de Residuos Peligrosos). However, the federal government and Congress agreed that this area was a priority and should have its own set of statutes. Therefore, Congress passed the act and the federal government published the Waste Law. The Waste Law was enacted in October, 2003, but did not become effective until January 1, 2004. SEMARNAT took three years (until November, 2006) to publish the Regulations of the Waste Law. The purposes of the Waste Law and its Regulations are, among others, to: (a) establish the conditions and obligations that generators of hazardous waste must meet and comply with respect to temporary storage and ultimate confinement of hazardous waste; (b) list the requirements that must be met by companies that are engaged in the transportation, confinement and elimination of hazardous waste and description of the process to obtain the license to operate such activities; and (c) for the first time since the inception of the environmental legal framework in Mexico, provide the rules to determine the liability on soil contamination and the assignment of the obligation to remediate such contamination (this is the subject of discussion of the next section). The main obligations that a generator of hazardous waste must comply with are to:

1. File an application to secure a LAU, which application must describe the types of hazardous waste generated or to apply for the registration as a generator of hazardous waste, in case no other environmental procedures of federal jurisdiction are required;

2. Depending on the quantities of hazardous waste generated, maintain a warehouse for

their temporary storage (which must not exceed 6 months), which must comply with the specifications established in the Waste Law, its Regulations and the applicable NOM’s (among the most important conditions are the fixing of trenches to prevent spills to other areas and the correct signaling);

3. Place hazardous waste in drums or other appropriate means of containment; 4. Deliver the drums or other containment means containing hazardous waste to a

SEMARNAT-licensed freight contractor, who shall deliver it to a SEMARNAT-licensed confinement site; and

5. Fill-in the forms that evidence proper delivery of hazardous waste and file the reports on

hazardous waste management with SEMARNAT each year (as part of the COA). When the conditions of the generation of hazardous waste change from what was originally filed with SEMARNAT, the generator must request a revision of the LAU or the registration as a generator of hazardous waste, as applicable. G. Soil Contamination and Remediation Soil contamination and site remediation are two areas covered by the Waste Law and its Regulations.

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Liability on soil contamination was sort of a “grey area”, as there was no specific method in the Environment Law and its Regulations on Hazardous Waste for the assignment of liability on soil contamination. The manner in which procedures related to soil contamination usually used to work were based on the criteria or premise of PROFEPA holding as liable the possessor of the contaminated property or site, regardless of the party that caused contamination. The Waste Law has incorporated definitive criteria on how to assign liability related to soil contamination. Under article 68 of the Waste Law, the party who causes contamination of a site is liable for its remediation. Notwithstanding, the Waste Law still contains, to a certain extent, the criteria that PROPEPA implemented prior to the enactment of the Waste Law. Therefore, article 70 of the Waste Law establishes that owners or possessors of private real estate properties affected with contaminated soil are jointly and severally liable for its remediation, regardless of the actions they may have against the contaminating party. If the owner or possessor, who did not contaminate, were to carry out the remedial actions, then such owner or possessor would have the right to obtain redress from the actual contaminating party. The difference from the past “non-written rule” is that there is now a joint and several concept of liability whereas in the past PROFEPA would just fine whoever was in possession of the contaminated site regardless of the party who actually contaminated. Before remediation actions are implemented, the party intending to start a remediation project at a contaminated site must prepare a remediation plan and submit it for authorization before SEMARNAT. The remediation plan should include interim and final target dates with a thorough description of the status of the contamination, the technology and methods that shall be implemented in order to reach minimum levels of soil contamination and the final conditions that the site will have at the termination of the remedial actions. The remediation plan should be prepared and implemented by a SEMARNAT-licensed environmental consultant. Once the plan is filed for SEMARNAT’s review, and if complete, SEMARNAT will issue an authorization of the plan and grant a term for its completion (such term shall be taken from the suggested schedule included in the plan). Once the plan is completed, the interested party must file a notice of termination of the plan with a final report on the actions taken, the results of the plan and the current status of the site. The report must be filed with PROFEPA (not SEMARNAT), as it will be PROFEPA’s inspectors who will visit the site to verify the accuracy of the final report. If PROFEPA verifies that the conditions of the site are as described in the final report and that every condition established by SEMARNAT in the remediation authorization were met, then PROFEPA will report back to SEMARNAT and consequently the interested party will receive a “release letter” whereby the site is declared in compliance with applicable NOM’s. Finally, one big step taken towards achieving remediation compliance was the inclusion of article 71 of the Waste Law, which sets forth the obligation of the seller of a contaminated site to disclose the contamination conditions of the relevant site to the prospective buyer. Moreover, article 71 establishes the requirement of securing the authorization from SEMARNAT for the transfer of the contaminated site subject to its remediation. Therefore, once submitting the application for such authorization the interested parties must also submit the remediation plan and go through the process described in the foregoing paragraph. The remediation does not need to be completed to perfect the transfer of property of the contaminated site, however what is required is to submit the application and eventually secure the authorization. However, the party who would be responsible for the remediation (be it the seller or the buyer) must complete the relevant remediation works, otherwise such party would be subject to sanctions. H. Water The National Waters Law (Ley de Aguas Nacionales; “LAN”) establishes that the water sources of federal jurisdiction are those listed in the fifth paragraph of article 27 of the Mexican Constitution, upon which the Mexican nation holds property. These sources are basically marine waters within Mexican jurisdiction,

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rivers, lakes, creeks, lagoons and underground water (with certain exceptions where the source may be considered private property). Under this law, private parties may receive concession rights to use and exploit water from sources of federal jurisdiction. The granting of water rights is within the jurisdiction of the National Waters Commission (Comisión Nacional del Agua; “CNA”). The CNA is past of SEMARNAT as an agency within SEMARNAT’s authority. However, the CAN keeps its independence of action. In order to obtain the rights to use and exploit water from federal sources the interested party must first file an application before the CNA. The application must contain the following information:

§ Name and address of the interested party; § Hydrological basin, aquifer (if applicable), hydrological region, municipality and location of the

water source; § Location of the requested extraction point; § Volume of water required by the interested party; § Initial use of the water (industrial, agricultural, domestic, fish harvesting, etc.); § Wastewater discharge point, including quality and quantity conditions; § Project of works to be performed or the characteristics of the existing works for the extraction

and benefit of water, as well as the works required for wastewater discharges, including treatment of wastewater and the process and measures for water reuse (if applicable) and restoration of the water resource; in addition, the economical and environmental cost of the projected works (the last one according to the provisions of the Environment Law) must also be filed; and

§ Term of the concession requested (in a range between five and thirty years). The requesting party must comply with certain requirements and also with the filing of other technical and legal documents required by the LAN as part of the relevant application. Such requirements and documents are:

1. Documents evidencing the property or possession of the real estate in which the extraction of water will be performed, as well as the documents evidencing the property or possession of the surface where the water will be used (in case it is different to the real estate in which the extraction of water will be performed);

2. Document evidencing the creation of the required easements; 3. Environmental impact statement, when required in accordance to the Environment Law; 4. Project of the works to be performed or the characteristics of the existing works for the

extraction, benefit and discharge of the requested water; 5. Technical report with the corresponding maps, containing the description and

characteristics of the works to be performed, for the exploitation, use and benefit of the requested water, as well as the disposal and treatment of the resulting wastewater and other measures to prevent contamination of the receiving bodies, with the purpose to comply with the LAN;

6. Technical documents supporting the application regarding required consumption volume, the initial use of the water and the conditions of quantity and quality of the corresponding wastewater discharges; and

7. Map containing the location of the property, including reference points that allow its location and the location of the site in which the extraction of national water will be performed; including discharge points.

Once a concession to use and exploit water from sources of federal jurisdiction is granted by the CNA, the holder of such concession will have, among other obligations, to pay federal duties on a quarterly and

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annual basis, taking into consideration the fees set forth in the Federal Duties Law (Ley Federal de Derechos; “FDL”). Industries that generate wastewater must secure also a permit to discharge effluents. The permit is granted by the CNA when the wastewater is discharged to a source of federal jurisdiction, which includes using treated wastewater for irrigation purposes (due to the risk of permeating to underground water deposits, which are considered sources of federal jurisdiction). When the wastewater is discharged to the municipal sewer system, then the discharge permit is granted by the local water authority. Each discharge permit will include the minimum conditions and contaminant levels that the wastewater must meet before being discharged. Usually these conditions and levels are incorporated from the thresholds established in the respective NOM’s (there is a NOM establishing the thresholds for discharges to federal sources and another NOM that sets forth the thresholds for waste water that is discharged to the sewer system). When the discharges of wastewater cannot meet the conditions and minimum levels set forth in the respective NOM (even after cleansing treatment), then the relevant generator could request the competent authority the approval of particular discharge conditions. Such conditions would be based on the standards established in the NOM’s, allowing the relevant generator not to meet a certain standard up to the fixed level that is closer to the NOM threshold that the generator could meet. The allowance of a particular discharge condition could be granted temporarily with proper technical support, where the competent authority would establish a term to the relevant generator to meet the standards established in the NOM’s. When wastewater discharges do not meet the applicable thresholds or maximum permissible levels, the holder of the discharge permit will have, among other obligations, to pay federal duties taking into consideration the fees set forth in the FDL. Finally, hydraulic works within water sources of federal jurisdiction require prior authorization from the CNA, and, also, occupation of adjacent lands to such water sources (federal zones) require prior obtainment of a concession from the CNA. I. Environmental Audits and Voluntary Compliance New Regulations of the Environment Law on Voluntary Compliance and Environmental Audit (Reglamento de la Ley General de Equilibrio Ecológico y la Protección al Ambiente en Materia de Autorregulación y Auditorías Ambientales) were enacted and published in the Official Gazette of the Federation on April 29, 2010, which replaced the past Regulations of the Environment Law on Voluntary Compliance and Environmental Audit published on 2000. Environmental audit is a policy instrument whereby PROFEPA fosters the voluntary correction/compliance of industries. Through the environmental audits industries implement a testing and analysis method of their operations focusing on the causes of pollution to the environment and the risk/adverse effects that may result from such operations. The environmental audit also serves the purpose of reviewing the level of compliance of environmental obligations set forth in the different federal, state and municipal statutes, as well as the applicable NOM’s. Finally, the environmental audit is also useful to determine the observance of international standards and good engineering and environmental practices. Industries that successfully conclude the environmental audit and prove an optimum level of compliance receive a “certificate” from PROFEPA. There are different types of “certificates” depending on the activity carried out. The types of “certificates” are: (i) Certificate of Clean Industry (applicable to industrial works and activities); (ii) Certificate of Touristic Environmental Quality (applicable to activities and services of the

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touristic branch); and (iii) Certificate of Environmental Quality (applicable to such activities not comprehended in the aforementioned certificates). The phases of an environmental audit are in general terms the following:

1. Planning: In this phase the audited industry must select an environmental auditor licensed by PROFEPA. The environmental auditor, once selected and appointed, will prepare an “Audit Plan”. The Audit Plan is the document that contains the auditing method to be developed. Once the Audit Plan is completed and approved by the audited industry, it must file the Audit Plan as well as an incorporation notice before PROFEPA for registration.

2. Execution: During this phase the environmental auditor will verify, quantify and evaluate

the activities and processes of the audited industry and that may have an impact on the concepts of environmental concern: environmental impact and risk; air pollution; soil contamination; hazardous waste generation; water use and waste water discharge, noise, etc. The environmental auditor will also review and analyze the energy installations of the audited industry to determine the risk exposure. Finally, the environmental auditor will evaluate the internal organization of the audited industry to assess whether or not such organization has the necessary staff devoted to environmental compliance. Once the environmental audit is completed, the environmental auditor must deliver to the audited industry an “action plan” containing the measures, steps, works and actions that the audited industry must undertake to meet the compliance standards necessary to obtain the relevant certificate.

3. Post-Audit: PROFEPA and the audited industry will subscribe an agreement whereby

both parties establish the measures and actions to be taken by the audited as contained in the action plan proposed by the environmental auditor. The agreement will also include the calendar and schedule that the audited industry must observe and the expected date of completion. After completion of the measures and actions by the audited industry the environmental auditor must prepare a final report on the completion, which must be filed with PROFEPA together with the notice of completion.

If PROFEPA does not make any observation to the notice of completion and the final report prepared by the environmental auditor in a term of 30 business days after the date of filing thereof, then PROFEPA will grant the relevant certificate. J. Sanctions Sanctions vary depending on the governing statute, the level of non-compliance and the repetition of infractions. At the federal level, the Environment Law, the Waste Law and the LAN establish their own set of sanctions. In addition to sanctions, PROFEPA or the state environmental agencies will impose measures aimed to correct any infraction to the environmental statutes. The state environmental statutes tend to follow the principles set forth in the Environment Law for the establishment of sanctions and the criteria used for the imposition thereof. The Environmental Law sets forth the following sanctions:

§ Fine equivalent to 20 to 50,000 times the applicable daily minimum wage in the Federal District;

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§ Temporary, partial or total closure of the relevant facility when: (a) the infractor fails to comply with the terms and conditions established by SEMARNAT or PROFEPA when imposing corrective or urgent measures; (b) in the event of repeated offenses causing material negative effects to the environment: or (c) there is a repeated disobedience (in three or more occasions) to the compliance of a corrective measure imposed by SEMARNAT or PROFEPA;

§ Administrative arrest up to 36 hours;

§ The seizure of instruments, specimens, products or by-products related to the infractions in

connection with forestry resources, flora or fauna, among others; and/or

§ The suspension or cancellation of the corresponding concessions, licenses, permits or authorizations.

After an order to correct an infraction is issued by PROFEPA the infractor must implement the steps to correct it within the term established for such purposes by such authority or it may impose daily fines in addition to the original fines imposed until the corrective measures are implemented. Likewise, a fine may be doubled in case of repetition of the original infraction. The criteria principles that PROFEPA uses upon determining a sanction are:

§ The seriousness of the infraction, considering the damages that may be caused against public health; the generation of ecological unbalance; the adverse effects on natural resources and biodiversity; the level of non-compliance with the standards and limits established in the NOM’s;

§ The economic conditions of the infractor;

§ The repetition of the infraction, if it is the case;

§ The intention or negligence of the infractor or the omission that leads to the infraction; and

§ The benefit directly obtained by the infractor as a result of the infractions committed.

The Waste Law establishes the same sanctions set forth in the Environment Law, with the addition of remediation of a contaminated site. The Waste Law also incorporates the principles of daily fines in case of non-compliance of corrective measures and the doubling of fines in case of repetition of the original infraction. With respect to infractions in terms of the LAN, the most common ones are the exploitation of water volume in less or higher quantities than the volume granted by the CNA, to provide to third parties the use of water granted in concession without prior authorization of the CNA, the exploitation of water volume without a valid concession and the discharge of wastewater without permit or without meeting the standards of the NOM’s. In case of exploitation of a volume in less quantity than the volume granted by the CNA for two consecutive years, the CNA may cancel the volume that was not exploited (unless the water rights holder can raise one of the exception scenarios established in the LAN). In case of exploitation of volumes above the quantity granted by the CNA it would result in a fine between 5,001 and 20,000 times the minimum daily wage in the Federal District and, in case of repetition, the cancellation of the concession. The discharge of wastewater without permit or without meeting the standards of the NOM’s or those contained in the corresponding permit issued by the CNA would result in the same penalty.

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There are other infractions set forth in the LAN that, depending on the type of infraction, could be subject to fines that range between 1,000 and 20,000 times the minimum daily wage in the Federal District. The CNA may also sanction with the cancellation of the concession for water exploitation or the permit to discharge wastewater. The state environmental statutes tend to follow the same example of the federal laws in connection with the sanctions and the criteria to determine them.

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XXIII. Telecommunications A. Constitutional Reform On June 11, 2013 was published in the Federal Official Gazette a bill of Decree to reform and add diverse provisions of the Political Constitution of the United Mexican States mainly in telecommunications and economic competition matters. Such decree can be divided into two categories: (i) amendments to articles 6, 7, 27, 28, 73, 78, 94 and 105 of the Constitution, and (ii) guidelines contained in eighteen transitory articles which provide the implementation of several actions within different terms. The most relevant provisions of the constitutional amendments are the following: (i) establishing as a human right the access to information and communications technologies, and broadcasting and telecommunications services including broadband and Internet; (ii) the creation of the Federal Institute of Telecommunications (Instituto Federal de Telecomunicaciones - “IFETEL”) as a constitutional autonomous entity, with legal existence and own patrimony, and which will be the authority in charge of all broadcasting and telecommunications matters, and (iii) the creation of judges and Courts specialized in broadcasting, telecommunications and economic competition matters, appointed by the Federal Judiciary Council (Consejo de la Judicatura Federal). IFETEL will replace the Federal Telecommunications Commission (Comisión Federal de Telecomunicaciones - “Cofetel”) and the principal improvements of IFETEL are the follwoing: constitutional autonomy; management of its own patrimony and budget; independence of resolutions, including its own statute and general provisions; public deliberations; powers to directly grant/revoke concessions; exclusive powers in economic competition matters regarding the broadcasting and telecommunications sectors; legitimation for constitutional disputes and content regulation (except electoral). However, the acts of IFETEL could only be challenged via indirect “amparo” and could not be stayed through injunctions. In relation to the guidelines contained in the transitory articles, the main provisions are summarized as follows: (i) The Federal Congress must amend the regulatory framework according to the reform (180

calendar days after the publication of the same), including the issuance of a convergent law to regulate telecommunications and broadcasting together.

(ii) Direct foreign investment is now permitted as follows: a) telecommunications and satellite communications up to 100%, and b) broadcasting up to 49% subject to reciprocity from the country of the ultimate investor.

(iii) The transition to digital terrestrial television (“DTT”) must finish on December 31, 2015 (as originally stated) and the Deputies should grant the necessary budget.

(iv) Must offer and must carry obligations will apply on a free basis, subject to: a) the must carry obligation is applicable to DTH operators if they cover 50% or more of Mexico, and b) the gratuity of both obligations do not apply x) to concessionaires with substantial or preponderant power, and y) when IFETEL determines the existence of competition in broadcasting and telecommunications markets.

(v) IFETEL must issue (180 calendar days after its conformation) the bidding rules for two new television networks with national coverage.

(vi) IFETEL must determine (180 calendar days after its conformation) the existence of economic agents who hold a market share greater than 50% of users, subscribers, audience, traffic or installed capacity (“preponderant agents”), in order to: a) impose measures to avoid affecting free competition (including unbundling of its essential facilities); b) issue general guidelines to allow

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them the provision of additional services, and c) issue measures to enable the unbundling of the local network of the preponderant agent.

(vii) The Executive Power and IFETEL shall secure the installation (2014-2018) of a shared telecommunications network for wholesale services, which will use at least 90 MHz of the 700 MHz band.

According to the transitory articles of the reform, while: (i) IFETEL is incorporated, Cofetel will continue with its activities, and (ii) the new regulatory framework is published, Cofetel shall resolve in accordance with the reform and the current regulatory framework, as long as the latter is not inconsistent with the former. Thus, since the new regulation has not been published, the following sections refer to the current laws and regulations, which should be applied in accordance with the reform. B. General The Federal Telecommunications Law (Ley Federal de Telecomunicaciones – “FTL”) was enacted in 1995, and sought to increase and diversify the services available to the general public by regulating three primary areas: (i) radio-frequency spectrum; (ii) public telecommunications networks and (iii) via satellite communication. The FTL also governs telecommunications services rendered by third parties, by using public telecommunications networks. (i.e., value added telecommunications services and resellers of telecommunications services). In 2006, the FTL was amended for the first time, in order to: (i) include as telecommunications services the broadcasting services and (ii) improve the powers and organization of the Cofetel. In parallel, the Broadcasting Law (Ley Federal de Radio y Televisión) was also amended to be consistent with the FTL and to introduce some new rules regarding the bidding process of broadcasting licenses. However, some amendments were declared unconstitutional in 2007. In addition, there are several administrative rules issued by the Ministry of Communications and Transportation (Secretaría de Comunicaciónes y Transportes - “SCT”) and the Cofetel dealing with the implementation of the principles outlined in the FTL and the provision of telecommunication services. C. Jurisdiction The ability to regulate telecommunications activities is exclusively reserved to the Federation, under the Mexican Federal Constitution. On the other hand, the activities referred with the construction and installation of telecommunication networks are governed by local regulation. D. Radio-frequency Spectrum 1. Definition of Radioelectric spectrum. The radioelectric spectrum has been defined by the FTL as the space that permits the propagation of electromagnetic waves without artificial guidance whose frequency bands are conventionally fixed under the 3,000 Gigaherts. Legally speaking, the radioelectric spectrum is considered to be an asset of the public domain, which, in light of its legal nature, may be licensed by the State in favor of private individuals or entities for their use and exploitation. 2. Exploitation of the radio-frequency spectrum. The radio-frequency spectrum can only be exploited by the private sector upon obtaining a concession title to that effect. The FTL has divided the radio frequency spectrum as follows:

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(a) Free spectrum. Can be used freely by any individual or entity, without further authorization from the government.

(b) Official spectrum. Is reserved for the exclusive use of the federal, state or local government.

Frequency bands within this category are granted through a direct award process. (c) Experimental spectrum. Is exploited by private entities and individuals interested in determining

the technical and economic feasibility of developing technologies for scientific purposes or for temporary equipment testing, by obtaining a license (concesión) from the SCT.

(d) Reserved spectrum. This spectrum is composed of frequency bands which are not assigned or

awarded by the SCT; and (e) Specific use spectrum. This is certainly the most important category of frequency bands of the

radio-frequency spectrum, as it allows the private sector to commercialize telecommunications services. To this effect, a specific bidding procedure must be followed in order to obtain the corresponding license.

E. Telecommunications Networks 1. Definition of telecommunications networks. Public and private networks. Telecommunications networks are defined by the FTL as systems comprised of transmission means such as channels or circuits using frequency bands, satellite links, wiring, electric transmission means networks or other transmission means and, if applicable, centrals, switching devices or any necessary equipment. Telecommunications networks may be private or public. The only difference between them is that private telecommunications networks do not commercialize the services they can provide, while public telecommunications networks do. This seemingly small distinction means the difference between non-regulation and regulation. Through a public telecommunications network, the concessionaire will be able to provide all technically feasible telecom services. 2. Securing licenses to install, operate and exploit a telecommunications network. Contrary to the regulation of specific use spectrum, petitioners for a concession to install, operate and “exploit” a public telecommunications network do not need to undergo a bidding process. Rather they have to submit an application to obtain a concession title before the SCT. Moreover, petitioners have to prove that they have the necessary technical and financial ability to properly provide the telecomm services they intend to exploit, according to their corresponding business plans. These concession titles will be granted for a period of up to 30 years and may be renewed for identical periods of time. F. Satellite Communications 1. General A concession is required for any of the following:

• Occupy geostationary orbits and satellite orbits assigned to Mexico and exploit their associated frequency bands; and

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• Exploit the signal emission and reception rights associated to foreign satellite systems covering and that can render services within Mexican territory.

2. Geoestationary and satellite orbits assigned to Mexico. Concession titles to occupy geoestationary and satellite orbits assigned to Mexico and exploit its associated rights, will be granted under a public bid process identical to the upward bidding process. The Federal Government will be entitled to compensation for such concession. These concession titles will be granted for a period of up to 20 years and may be renewed for identical periods of time. 3. Foreign satellite systems. The authority will grant concession titles over the signal emission and reception rights of frequency bands associated to foreign satellite systems that cover and may provide telecommunications systems within the Mexican Republic, provided that Mexico has signed the corresponding treaties and protocols with the country in which the signal is originated and such treaties contemplate reciprocity for Mexican satellites. Mexico has entered into international treaties, including but not limited to NAFTA. Such treaties contemplate reciprocity and basically provide that each country shall be entitled to grant concession titles with respect to the frequency bands associated to foreign satellite systems, pursuant to their applicable regulations. Moreover, they are only granted with respect to those services covered in the corresponding protocols. 4. Permits. The possibility exists of securing the corresponding permit solely in regard to the installation, operation and exploitation of earth stations that transmit signals (not those receiving signals). G. Value Added Services Value added services have been defined by the FTL as those services which (i) employ a public telecommunication network; (ii) which effect the format, content, code, protocol, storage or similar aspects of the information transmitted by any user; and (iii) market to users additional, different or restructured information or which involve interaction with stored information. A particular registration issued by Cofetel must be secured in order to provide value added services, such as the following: email, videotext, teletext, remote access to data bases, audiotext, remote processing of data and electronic interchange of data. H. Re-sellers (comercializadoras) These are persons that, without owning or having means of transmission, provide telecommunications services through the use of capacity of other existing concessionaires. A permit is required to operate as such and the same shall be granted according to the corresponding Regulations. The company or individual shall be a Mexican national as per the terms of the Foreign Investment Law. Unless a formal authorization from the authority is obtained, concessionaires are not allowed to participate, directly or indirectly, in the capital stock of telecommunications commercial agencies.

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Previously, there were only two re-seller permits granted by the authority: (i) public telephony services and (ii) long distance services. Nowadays, the authority grants permits for the commercialization of all telecommunications services, even though there are no specific regulations. I. Dominant Carriers The FTL provides a series of rules for dominant carriers in any particular market and reserves the right of Cofetel to issue rules to the dominant carrier should the Mexican antitrust commission determine that a particular carrier is indeed a dominant carrier. To date, no such rules have been effectively enacted against the incumbent or other dominant carriers. J. Broadcasting Services The Broadcasting Law provides the terms and conditions for the bidding of new licenses and for the provision of broadcasting services. It also regulates other programming, advertising operational issues and content restrictions. K. Foreign Investment Restrictions and Investment Mechanisms Foreign investment in the telecomm sector where the granting of a concession title is required, was generally restricted and it was forbidden in the broadcasting sector (except neutral investment). With the reform, the direct foreign investment is permitted up to 100% in telecommunications and satellite communications. In broadcasting, foreign investment is now permitted up to 49% subject to reciprocity from the country of the ultimate investor. Mexican entities incorporated under Mexican law will be considered as foreign entities for foreign investment purposes when control of such entity lies in the hands of foreign investors. Control can be held either through stock ownership (i.e., more than 51% of the capital stock with full voting rights), or through the ability to run the board of directors or similar management organizations, or through other mechanisms which give majority control to foreign entities. Although the foreign investment limitation is currently only applicable to the broadcasting sector, the Foreign Investment Law (Ley de Inversión Extranjera – “FIL”) contemplates other mechanisms that can allow higher net percentages of participation of foreign capital through (i) neutral investment, and (ii) pyramiding.

• Neutral investment. According to the FIL, there are two basic neutral investment mechanisms: (i) the issuance of Series “N” shares which will have the limited voting rights authorized for such purpose by the Commission; and (ii) neutral trusts likewise authorized by the Commission.

This has allowed the entry of foreign capital into the sector without compromising the control of the company which lays at all times in the hands of Mexicans.

• Pyramiding. Foreign investment limitations can also be countered through indirect investment

or “pyramiding”. Before 1996, indirect foreign investment was specifically prohibited in areas subject to foreign investment limitations such as the telecomm sector. Now, foreign investors can indirectly invest in the concessionaire, through a participation in the capital stock of their Mexican partners. Again, although foreign investment at that level cannot surpass the 49%

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limitation set forth by the FIL, it still provides an additional mechanism to inject resources to the concessionaire (from a net standpoint) even up to 99.9%, without loosing the 49% (foreign) 51% (national) proportion required by the FIL and the LFT.

L. Special Tax The provision in Mexico of the telecommunications services through public telecommunications networks is taxed at a 3% rate. The following services are excluded: rural; telephony; public telephony; interconnection and internet.

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XXIV. Regulated Industries In the nineties, several industries in Mexico were privatized and, although investment liberalized, they continue to be regulated. This section highlights some of the most important sectors that could be of interest to an investor, which may not already beexpressly contemplated in other sections of this document. It is expected that these industries will increase activities and opportunities within the following years, particularly through the recent (2012) Public-Private Partnerships Law (Ley de Asociaciones Público-Privadas). Please note that the description of each area is very general in order to provide a broad scope of the regulatory framework applicable to the same. A. Ports The Law on Ports (Ley de Puertos) was published in 1993 and regulates the construction, use, utilization, exploitation, operation and administration of ports, terminals, marinas and port installations, as well as the provisions of port services in Mexico, all of which are subject to the federal jurisdiction. I. Authority The authority is the Executive branch of government through the SCT, which, among others, is entrusted with the granting and revoking or suspending, concessions, permits and authorizations for exploitation, use and utilization of public goods within ports, terminals, marinas and port installations, such as construction and provisions of port services. Depending on the subject, other authorities may participate in regulating the activities performed in the ports. II. Regulation Ports and terminals are classified as follows: (i) considering its navigation in a) height (altura) if it receives national and international navigation or b) coastal if deals only with national navigation, and (ii) considering their installations and services in a) commercial, b) industrial, c) fisheries, and d) touristic. In addition, ports, terminals and marinas can be classified depending on its use: (i) public, and (ii) private. A concession is required for integral port administrations (Administradoras Portuarias Integrales –“API”), which can only be granted to Mexican commercial corporations (including commercial corporations held by the federal government or a local government). Outside the areas subject to the concession of an integral port administration, is the following is required: (i) a concession for public goods that will require the construction, operation and exploitation of terminals, marinas and port installations, and (ii) a permit to provide port services. The concession and permit can be granted only to Mexican individual or entities. Such previous activities can be performed within the scope subject to the concession of an integral port administration through partial assignment of rights or provision of services. Also, a permit is required to build and use other installations outside ports, terminals and marinas. Finally, an authorization is needed to perform maritime works and dredging activities. The concessions will be granted through public tenders and the term cannot be for more than 50 years (renewable one time for the same term as originally granted), taking into account the characteristics of the projects and the amount of the investment. However, concessions can be directly assigned in case of artificial marinas and terminals for private use to the owners of the lands adjacent to the federal zone. The permits and authorizations previously referred are granted upon request and are subject to certain requirements.

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All concessions, permits and authorizations are subject to the economic competition provisions provided in the corresponding law and regulations. III. Foreign Investment Foreign investment is limited to 49% in respect to: i) integral port administrations (API), and ii) inland navigation pilotage port services. On the other hand, the CNIE may authorize a larger percentage of foreign participation above 49% in port services to vessels performing inland activities. B. Navigation The current Navigation and Maritimee Commerce Law (Ley de Navegación y Comercio Marítimo - Navigation Law) was enacted in 2006. The new Navigation Law regulates the general communication means through water (including the sea, the economic exclusive zone, rivers, lakes, canals, …), the navigation and the services provided thereat, the Mexican merchant marine, as well as the acts, facts and goods related to the marine commerce. All the foregoing activities are subject to federal jurisdiction. However the military vessels and naval devices are out of the scope of this law. Mexican ships and vessels have to comply with national legislation even if they are sailing on waters outside the Mexican jurisdiction, notwithstanding the foreign legislation applicable. Likewise, foreign ships and vessels have to comply with national legislation when sailing on waters under Mexican jurisdiction. I. Authority The maritime authority is the President, through the SCT, the captains of the Mexican merchant vessels and the corresponding Mexican consul authorized in the foreign port or place in which the vessel is located. Among other powers, the SCT is in charge of regulating the sector, including but not limited to granting concessions, permits, authorizations and registrations as provided in the Navigation Law. II. Regulation Vessels and naval devices are considered Mexican if registered and flagged before a port authority, prior verification of the security of the vessel or device and the dismissal of the flag of the country of origin, according the a certain specific procedure and compliance of other specific requirements. All Mexican vessels and naval devices and other related and relevant acts (e.g., mortgages) will be registered before the National Maritime Public Registry (in charge of the SCT) and the original registration document (with indefinite term) shall be kept on board. In order to act as a Mexican shipping company, it is required to (i) be a Mexican individual or entity, (ii) have an address in Mexico, (iii) be registered before the National Maritime Public Registry, and (iv) own or hold one or more vessels with a total tonnage of at least 500 gross tons (unless the vessels are for interior navigation to provide transportation, fishing or tourism activities). Also, the Navigation Law regulates the figure of shipping agent, which shall be authorized to act as such prior fulfillment of the same requirements as (i), (ii) and (iii) before, and evidence a representation or commission agreement with the shipping company. Notwithstanding the international treaties, the operation and exploitation of vessels for interior navigation or coastal shipping is reserved to Mexican shipping companies with Mexican vessels, unless in case of touristic, sport and entertainment activities, as well as for the construction and maintenance of ports and

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dredging activities, in which cases it can be made by Mexican or foreign shipping companies using Mexican or foreign vessels, subject to the existence of reciprocity with the corresponding foreign country, but procuring to grant priority to Mexican companies. If there are no Mexican vessels available in equal technical conditions, or in cases of public interest, the SCT may grant temporary permits (for a term no more than 3 months, renewable for no more than 7 occasions) for coastal shipping activities considering the following preference through a bidding process: (i) Mexican shipping company with a foreign vessel under a lease of bareboat charter agreement, and (ii) Mexican shipping company with a foreign vessel under any kind of charter agreement. After the completion of the referred bidding process, it is possible to grant a permit for a new procedure that may include foreign shipping companies with foreign vessels. Mexican and foreign shipping companies using vessels for interior navigation and coastal activities shall require a permit for the provision of different services such as: transportation of passengers, touristic cruises, aquatic tourism (small vessels for recreational or sport activities), security, rescue and assistance, tow and maneuvers (except there is an agreement with the port authority), and dredging (foreign vessels). No permit is required for the following services: transportation of goods and towing, fishing (except for foreign vessels), dredging (Mexican vessels) and the use of specialized vessels for construction of civil or naval or port infrastructure, as well as those assisting research, extraction and exploitation of hydrocarbons. For the SCT to grant a permit for the provision of the referred services, the applicant shall comply with the applicable economic competition provisions and technical specifications and provisions established by specific NOMS. If the SCT does not issue a resolution within ten workdays, it will be considered that the permit has been effectively granted, and the applicant could request from the SCT the evidence of such granting (afirmativa ficta). In addition, the Navigation Law regulates different matters and activities such as: the kinds of agreements for the use of vessels, the risks and accidents in navigation, liabilities, insurance, transactions, sanctions among other issues. III. Foreign Investment Foreign investment is limited to 49% regarding shipping companies that commercially exploit inland and coastal shipping (except touristic cruises, dredgers and naval devices for the construction, conservation and operation of ports). On the other hand, the CNIE shall authorize a larger percent of foreign participation than 49% in shipping companies that exclusively exploit vessels of height traffic. C. Railroads The Mexican Regulatory Railroad Service Law (Ley Reglamentaria del Servicio Ferroviario -Railroad Service Law) was enacted in 1995 and regulates the construction, operation, exploitation, conservation, and maintenance of railways that are general communication means (railroads that communicate two or more states in Mexico; all or part of the route that is within the 100km along the borders and 50km along the coasts –with certain exemptions-; and railroads that connect with some of the foregoing railroads as long as provide services to the public and the lines cross the border with other country), as well as the public railroad transport service and auxiliary services, all of which are subject to the federal jurisdiction. The railroad service is a priority economic activity and the State shall govern its development in the way that free competition is guaranteed between all means of transportation.

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I. Authority The authority is the President, through the SCT, which, among others, is in charge of granting concessions, permits and authorizations as provided in the Railroad Service Law. II. Regulation It is required a concession: i) for the construction, operation and exploitation of railways (although concessionaires can contract third parties for the construction, conservation and maintenance of the rail track, but in any case the concessionaire will be the responsible before the SCT), or ii) to provide the public service of railroad transportation (passengers and cargo). The railroads will always be under the public domain of the Federal Government. Concessions will be granted to Mexican entities through public bidding process. Concessions will have a maximum validity term of 50 years, and could be renewable in one or more occasions for a term not exceeding 50 years. Also, the SCT is able to grant direct assignments (concessions) to States, Municipalities and Federal Governmental entities without the need to following a bidding process. A permit is required for the following activities: (i) provide auxiliary services; (ii) build access, crossings and marginal installations in the rights of way of the railways (excluding spurs); (iii) installation of advertising in the right of way, and (iv) build and operate bridges over railways. III. Foreign Investment Foreign investment is limited to 49% of companies holding a railroad concession, although the CNIE may grant an authorization for a greater percentage of foreign investment. D. Highways The Roads, Bridges and Federal Transportation Law (Ley de Caminos, Puentes y Autotransporte Federal) was enacted in 1993 and regulates the construction, operation, exploitation, conservation and maintenance of highways or roads (those that communicate with a road in another country; those communicating two or more States in Mexico and those built by the Federal Government) and bridges (national and international) considered as general communication means, as well as the federal transport, auxiliary and transit services that operate through them, all of which are subject to the federal jurisdiction. I. Authority The authority is the SCT and among other faculties it will be in charge of granting concessions and permits as provided in the law. It is necessary to take into account that other administrative authorities could be involved in the process of granting a concession, permit or other activities, depending in each case. II. Regulation Concessions are required to build, operate, exploit, conserve and maintain federal roads and bridges, and could only be granted through public tenders, to Mexicans individuals or companies. Such concessions will have a maximum valid term of 30 years, renewable for the same original term.

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Permits will be granted by the SCT, to develop the following activities: (i) operation and exploitation of federal transportation services of cargo, passengers and tourism; (ii) installation of inland cargo terminals and verification units; (iii) drag, rescue and vehicle deposit services; (iv) parcel and courier services; (v) building, operation and exploitation of passenger terminals; (vi) building of accesses, crossings and marginal installations for rights of way of the federal highways; (vii) establishment of hotels (except under roads subject to concessions); (viii) installation of advertisements; (ix) building, modification or extension of rights of way constructions; (x) building and operation of private bridges over general communication means, and (xi) private passengers and cargo transport. The aforementioned permits will be granted to Mexicans individuals or companies in an undefined term with exception of the permits granted to install advertisements, which will be subject to the terms established on the relative regulation. III. Foreign Investment Only Mexican individuals or entities without foreign investment in their capital may provide terrestrial (ground) transportation to passengers, tourism and cargo (excluding parcels and courier services). E. Aviation The Civil Aviation Law (Ley de Aviación Civil – Aviation Law) was published on 1995 and regulates the use, exploitation or utilization of the aerial space located above the national territory regarding the provision and development of the civil and State air transport. The aerial space located above the national territory is a general communications mean and is subject to the dominium of the State and to the federal jurisdiction. I. Authority The authority is the President, through the SCT, which, among others, is in charge of granting and revoking or suspending, concessions, permits and authorizations as provided in the Aviation Law. The SCT will exercise the aviation authority through the General Civil Aviation Bureau in all airports, heliports and aerodromes in general. II. Regulation A concession is required to provide the public service of national air transport on a regular basis (itineraries, frequency of flights and schedules) and such concessionaires may hold an authorization to provide international regular services. Such concession can only be granted to Mexican entities for a maximum period of 30 years, renewable in one or more occasions. A permit is needed to provide the following air transport services: (i) national non-regular (cargo and taxi) by Mexican entities; (ii) international regular by foreign entities, subject to the provision of international treatis; (iii) international non-regular (Mexican and foreign entities), and (iv) commercial private (Mexican or foreign individuals or entities). Such permits will be granted in an undefined term, and will have to satisfy diverse requirements provided by the Regulations of the Aviation Law. Also, a permit would be necessary for the establishment of aeronautical workshops and training centers, and it could be granted to Mexican or foreign persons or companies.

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III. Foreign Investment Foreign investment is limited to 25% regarding: (i) national air transportation; (ii) air taxi transportation, and (iii) specialized air transportation. F. Airports The Airports Law (Ley de Aeropuertos) was enacted on 1995 and regulates the construction, administration, operation and exploitation of civil aerodromes, which are an integral part of general communications means, all of which are subject to the federal jurisdiction. I. Authority The airport authority is the SCT and, among other faculties, it will be in charge of granting concessions and permits as provided in the law. The SCT will be in charge of the Mexican Aviation Registry in which the main acts regarding aerodromes shall be filed. II. Regulation Concessions are required to administrate, operate, exploit and, if needed, build airports (civil aerodrome for public services) and will be granted only to Mexican corporations through public tenders. Only airports are allowed to provide services to airplanes of regular transportation services. The SCT may directly assign concessions to (i) permissionaires of civil aerodromes that want to transform to airports; (ii) concessionaires that require a complementary airport, and (iii) to entities part or controlled by the federal, state or municipal government, in each case, subject to the fulfillment of certain requirements. Such concessions will have a maximum valid term of 50 years, renewable in one or more occasions. The SCT may grant permits to Mexican individuals or entities for the administration, operation, exploitation and, if needed, the construction of civil aerodromes different than airports: aerodromes for private services or aerodromes for general services (non regular air transportations services). The latter permits will be granted only to Mexican corporations. The term of the permits will not be longer than 30 years. III. Foreign Investment Foreign investment is limited to 49% regarding concessionaires or permissionaires of public service aerodromes, but the CNIE may authorize a larger percent of foreign participation than 49%.

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XXV. Mining A. General The Mining Law (Ley Minera “MIL”) regulates the exploration, exploitation and refining of all minerals or substances from veins, mantles, masses or beds that constitute deposits or substances different from the basic components of the land. The Mining Law requires private parties to obtain a concession from the government in order to engage in mining activities. Such concessions are issued to private parties applying with respect to areas not otherwise covered by existing concessions. Mining concessions are freely transferable between private parties, though transfers must be recorded pursuant to the Mining Law. The portion of the MIL that lists minerals subject to concession was amended to include not only known minerals, precious stones, metals and similar components, but now, also chemical elements extracted from minerals, as well as from industrial-use minerals. Clay extracted from underground sources, all mineral coal varieties, and certain products of salt mines are also subject to concessions, regulated by the MIL. The following minerals, among others, are not covered by the MIL:

• Petroleum and solid, liquid or gaseous hydrocarbons (which are regulated by the Petroleum Law and Regulations);

• Radioactive minerals;

• Salt from certain types of formations; and

• Construction materials.

B. Priority of Mining Activities Mining activities take preference over all other uses of land, except certain agricultural uses. Thus, the holder of a mining concession can request the Ministry of Economy (Secretaría de Economía) to issue a declaration of temporary or subservient occupation, or even expropriate land, in order to facilitate mining activities. Whenever the rights of “ejidos” or agricultural communities are affected, the Agricultural Laws take precedence over the MIL. In resolving petitions filed by holders of mining concessions, the ME holds hearings and considers technical evidence. Compensation awarded to land-owners in this process is determined by values set by the National Goods Appraisal Commission (Comisión de Avalúos de Bienes Nacionales). The ME carries out all expropriations. When the ME rules in favor of expropriation or temporary or subservient occupation, that ruling can be reversed for several reasons, including but not limited to initial or subsequent failure to use the land.

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C. Agencies / Authority The General Mining Bureau (Dirección General de Minas “DGM”) is the government agency in charge of all mining matters, including but not limited to: (a) reviewing, processing and ruling on applications for the issuance of mining concessions; (b) managing, coordinating and handling the operation of the Mining Public Registry (where all acts concerning issuance and transfer of, and agreements pertaining to, mining concessions are recorded); (c) reviewing and approving requests for extensions of mining concessions; (d) reviewing the activities of all mining concessionaires to ensure performance of their obligations; (e) coordinating the application of mining activities with government agencies at all levels of government; (f) applying sanctions to those parties violating provisions of the MIL; (g) issuing technical opinions in mining matters; and (h) reviewing and applying all other procedures and mechanisms provided for by the MIL that are not otherwise reserved to the Mexican Geological Service (Servicio Geológico Mexicano “SGM”) The SGM is a public decentralized body, the main function of which is to generate and acquire public information on geology, geophysics, geochemistry and mining in Mexico. The SGM also investigates, develops and adapts new technologies for the use of mineral resources, providing technical support and service to small and medium-sized mining industries, the social sector, as well as for federal, state and municipal governments. It also provides expert consultation services to the ME in matters related to the mining sector. The SGM forms part of the National Council for Protected Natural Reservoirs (Consejo Nacional de Áreas Naturales Protegidas), thus allowing decisions regarding environmental issues connected with mining activities to have a more solid scientific base. The following are some of the functions of the SGM: (i) procuring contracts for work to be performed in mining lots protected by mining assignments issued in its favor; (ii) signing contracts with private individuals or corporate entities, public or private institutions, whether national or foreign, with the purpose of lending its services to external clients; and (iii) providing technical assistance in matters of land-use planning, by contributing to studies necessary for said purpose. D. Mining Concessions and Assignments Mining concessions can be granted in favor of Mexican companies, citizens, ejidos, agricultural communes and indigenous communities. Indigenous communities have the following rights, among others: (i) the right to be concessionaires; (ii) preference in the assigning of bids and in simultaneous applications that affect their territories; and, should it be the case, (iii) the right to equate their budget proposal to the best one presented by another competitor, with preference given to the former over the latter. Mining assignments are those granted to government agencies to perform activities that, in the case of private parties, are subject to the issuance of a mining concession. Previously, the MIL distinguished between concessions for exploration and concessions for exploitation activities; currently, it recognizes just one type of concession that allows its holder to perform both types of activities (and even smeltering operations). Departing from past practice, the ML also currently provides that a concession automatically encompasses all minerals or substances governed thereby. Concessions can be granted only to those legally entitled parties that file applications with the ME for "open land" that is located within Mexico. Land not considered open includes land: (a) in mineral reserves; (b) covered by existing concessions and assignments; and (c) in areas covered by pending applications for concessions and assignments. Generally, a Mexican company can hold a concession if it meets the following requirements:

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• Its purpose is the exploration or exploitation of substances or minerals governed by law; • Its domicile is in the Mexican Republic; and • It is incorporated pursuant to applicable Mexican law.

Foreign investment in Mexican mining companies is not restricted. Foreign individuals and entities may even obtain mining concessions, provided they obtain a permit from the SRE whereby they agree to waive the protection of their home country governments in case of any conflict with respect to their interests in Mexico. Concessions for exploration and exploitation of open land are granted to the first applicant in time. In the case of Mexican marine zones, submarine extensions of islands, keys and reefs, the ocean floor, the subsurface of exclusive economic zones, assignments that are cancelled, and mineral reserve zones that are divested, the mining concession will be granted to the person who offers the best technical and economic conditions in response to a request for bids issued by the ME. Mining concessions are granted for a 50-year period from the date of their registration, and can be extended for an additional 50 years upon application within the 5 years at the end of the original term. The principal rights, among others, granted through a concession are as follows:

• Engage in exploration and exploitation activities; • Dispose of mineral products obtained by exploration and exploitation; • Obtain the possibility for using the earth located under the mineral lot; • Obtain the expropriation, or temporary or subservient possession, of the land necessary to

conduct mining activities; • Use water near the mines for mining activities; and • Obtain preferential rights to waters in the mine for use in matters other than mining activities.

The transfer of a concession or of rights arising thereunder takes effect upon its recording in the Mining Public Registry. The transferee is subject to all obligations arising from the concession or the transferred rights. It is possible to obtain from the ME a report on the status of a concession, noting the obligations that have been met to date. Until title to the concession transferred is recorded, the original holder remains liable for the performance of all obligations under the concession even though the holder may have contractually agreed to transfer rights under the concession to a third party. Any transfer is void if the transferee lacks the legal capacity to hold any of the transferred rights. The principal obligations of the holder of a mining concession, among others, are to:

• Engage in exploration and exploitation activities; • Pay taxes on the minerals; • Adhere to Mexican Official Norms applicable to safety and environmental protection; • Maintain the reinforcements necessary for the mine's safety; • Permit inspections by the ME; and • Submit a geological-mining report to the ME.

The holders of mining concessions are subject to a mining tax only at the federal level; states and municipalities where mining activities occur cannot impose additional taxes. Federal taxes are calculated

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in accordance with the Federal Duties Law, and depend upon the size of the lands covered by the concession. A concession holder can affect its tax obligation by increasing or reducing the boundaries of the concession with the express approval of the ME. All concession holders must designate a legally authorized engineer who will be responsible for mining safety. In the case of coal mines, this obligation applies to all operations involving over nine workers; in all other cases, it applies to operations involving over 49 workers. Concessions granted by the Ministry are void under any of the following circumstances:

• The concession is used to explore for or to exploit substances not governed by the MIL; • The concessionaire lacks the legal capacity to hold a concession; or • The concession covers restricted land.

A mining concession is cancelled, among others, in any of the following cases:

• By expiration of its term; • By abandonment; • By the commission of any infraction described in the mining safety rules; or • By virtue of a judicial decree.

In every case of an allegedly void or cancelled concession, the ME will hear the interested party and issue a final decision in accordance with its powers granted in the law. Refining operations are not subject to the approval of the ME. However, refiners must:

• Notify the ME of the start of their operations; • Comply with all the Mexican Official Norms related to mining procedures and environmental

protection; and • Process ore for small and medium sized mining companies and for the public sector in an amount

of up to fifteen percent of the refiner's installed capacity, if the installed refining capacity exceeds one hundred tons per 24 hours.

Refiners are not required to process minerals for small or medium sized mining companies or for the public sector if:

• The referred substances are incompatible with the system of refining that is in place; • The refiner has already processed its required fifteen percent; or • The lots of minerals weigh less than ten tons.

The provisions of the MIL are in the nature of a public policy and are thus entitled to preference when in conflict with the interests of third parties. Nonetheless, the right to engage in mining activities may be suspended when those activities threaten to kill or injure miners or others, or to cause unjustifiable damage to public or private property. Any conflict between the mining activities of the concessionaire and the rights of third parties will be resolved by the ME after consultation with relevant municipal, state and federal authorities.

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E. The Mining Public Registry The ME also directs and operates the Mining Public Registry (Registro Público de Minería). The following acts and contracts, among others, must be recorded:

(a) Titles to mining concessions, extensions of the same, and declarations of void or cancelled concessions;

(b) Titles to mineral assignments and declarations of void or cancelled titles; (c) Decrees establishing or divesting mineral reserves; (d) Rulings granting or rejecting the temporary or subservient occupation of land; and (e) Rulings issued by either courts or administrative agencies that affect mineral concessions or

rights arising thereunder. In any matter relating to a concession, the parties must submit a certificate issued by the MPR relating to all of the listed matters and any others that must be recorded. Maps maintained by the ME through the Mining Cartography show the location and boundaries of areas subject to existing concessions, assignments and mineral reserves, as well as pending applications for concessions and assignments. Such land is unavailable for new mining concessions or assignments. F. Inspection, Monitoring and Sanctions The ME may conduct any kind of inspections necessary to confirm that the rules and provisions of the Mining Law are being followed. Violations of the law can be sanctioned through either cancellation of the mining concession or imposition of fines, or both. The cancellation of mining concessions will occur in the following cases, among others:

• If substances other than those covered by the law are being exploited;

• If the required mining activities are not performed or substantiated;

• If the mining tax is not paid;

• If the Service’s discovery fee (if applicable) is not paid; and

• In the case of assignments in petroleum-bearing areas, for not following the conditions imposed by the Mexican state oil company (Petróleos Mexicanos)

Certain specified violations are punishable by a fine in the amount of ten to two thousand times the current daily minimum wage in effect for the Federal District. Such violations include, among others:

• Extracting minerals or substances governed by the MIL without the appropriate concession; • Preventing mining activities without a legal cause;

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• Avoiding or obstructing the ME inspections; • Failing to inform the ME of the identity of the mine's safety manager; and • Failing to notify the ME of the commencement of refining operations.

The imposition of sanctions under the MIL does not protect the violator from civil, commercial, criminal or other sanctions under different laws. The most important criminal sanctions that could apply are those under offenses considered to be against the national economy. A five-year statute of limitations applies to violations to the MIL, beyond which the ME cannot impose sanctions. Where the violation is of a continuing nature, however, the period of limitations does not begin to run until the offensive conduct ceases. Resolutions issued by the ME may be appealed pursuant to procedures established by the Federal Law of Administrative Procedures (Ley Federal de Procedimiento Administrativo). There is a growing concern about environmental duties of mining companies and thus there are nationwide inspection programs by federal and state agencies.

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XXVI. Bankruptcy

A. Insolvency Proceedings The Mexican Bankruptcy Law (Ley de Concursos Mercantiles) of 2000 seeks to provide legal certainty by setting forth timeframes and means of challenge in order to avoid dilatory tactics that were used under prior legislation. Commercial insolvency proceedings (concurso mercantil) have two different (and generally successive) stages, regardless of the person filing the request: (i) conciliation; and (ii) bankruptcy or liquidation (quiebra). Conciliation or reorganization is aimed to reach an agreement with recognized creditors in order to preserve the company, while bankruptcy seeks its liquidation. The general features of commercial insolvency proceedings are briefly summarized as follows: (i) Recognized creditors are only those so acknowledged by the Bankruptcy Court; (ii) It provides for the creation of the Federal Institute of Specialists in Commercial Insolvency

Proceedings as a body entrusted to the appointment of the inspector (visitador), conciliator (conciliador), and receiver (síndico) who play a key responsibility in the inspection and surveillance of the failing company. Interveners (interventores) are the monitoring professionals appointed by creditors in charge of safeguarding creditors’ interests and surveillance the performance of the conciliator, receiver and commercial entity;

(iii) Small commercial enterprises can only be voluntary petitioners (but not involuntary subjects) of the Bankruptcy Law;

(iv) Reorganization proceedings for holding companies will be joined with the controlled entities, although each shall have separate files;

(v) Branches (sucursales) of foreign legal entities might be declared bankrupt; however, such declaration will only include those rights and assets (with respect to matured obligations) located in the Mexican territory and in connection with debts carried on with those branches.

The Institute of Specialists in Commercial Insolvency Proceedings is an independent body that depends hierarchically from the Federal Judicial Council (Consejo de la Judicatura Federal). Its main functions are: (i) creating the rules for appointments, and appoint and revoke inspectors, conciliators and receivers, while maintaining a registry of such persons; (ii) monitoring the service provided for inspectors, conciliators and receivers; (iii) approving the formats to submit claims for acknowledgment of debts, etc. The Inspector is appointed by the Institute, and will verify the existence of causes of commercial insolvencies. The Conciliator is also appointed by the Institute, which will be in charge of the surveillance of the commercial entity during the conciliation proceedings, besides any other important functions, such as the reception and analysis of claims for acknowledgment of credits. The Receiver, also appointed by the Institute, represents the entity during the liquidation stage (quiebra), and will monitor the performance of the conciliator during the conciliation stage of the proceedings. In general terms, inspectors, conciliators and receivers must have relevant experience in accounting, financial or legal fields, and being independent from the judiciary and the parties.

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B. Causes for Declaration in Reorganization (Concurso Mercantil) The principal cause for a declaration in reorganization is the general non-compliance of the commercial entity with its payment obligations. Generally speaking, the commercial entity, any creditor or the Federal District Attorney will have locus standi to file for the reorganization of the commercial entity. Although any creditor may file a petition for the bankruptcy of a commercial entity, the reorganization will only be declared if there is non-compliance with obligations towards two or more different creditors that represent 35% or more of all debts of the commercial entity or the commercial entity does not have sufficient assets to cover 80% of the payable obligations. The Bankruptcy Law provides for a non-exhaustive list of situations where the existence of general non-compliance of obligations is presumed, as follows: (i) no existence or insufficiency of assets to attach; (ii) non-compliance with payment obligations to two or more different creditors; (iii) hiding or becoming absent without leaving some legal representative of the company; (iv) in the same circumstances as above, the closing of the premises of the company; (v) to make fraudulent or ruinous practices to stop complying with its obligations; (vi) non-compliance with the terms of a previous agreement in the terms of the Bankruptcy Law; (vii) any other analogous case.

C. Procedure for the Declaration of Reorganization As stated before, unless debtor requests directly the declaration of liquidation or bankruptcy (quiebra), the conciliation stage of the proceedings will have to be exhausted. These conciliation proceedings are aimed to reach a final agreement with recognized creditors in order to guarantee the survival of the commercial entity and avoid its liquidation. The conciliation stage of the insolvency proceedings seeks to provide legal certainty to the parties and provide an expeditious venue in order to avoid dilatory tactics that were pernicious in the past. The main features of the conciliation or reorganization proceedings are summarized as follows: • No defense raised by the parties will stay the proceedings, therefore, any defense will be resolved

along with the merits of the case. • The commercial entity may petition its declaration in reorganization and submit, inter alia: (i)

financial statements; (ii) a statement summarizing the reasons to explain the status of non-compliance with its obligations; (iii) list of creditors (identifying names, amounts, securities, liens and encumbrances, etc.); (iv) an inventory of all real property and movable goods, negotiable instruments, rights or any other assets that can be identified; and (v) a list of the judicial proceedings in which the entity is a party.

• Any creditor of the commercial entity or the District Attorney can file the complaint asking for the declaration of bankruptcy or liquidation (quiebra).

• The Judge will admit the petition if there is not an evident cause for its immediate dismissal. An inspector will be appointed by the Institute, whose main task will consist on practicing a verification search to the commercial entity to ascertain whether the hypotheses for insolvency proceedings are complied and to suggest the Judge to grant provisional measures. The inspector must render a report for the Judge within the 15 calendar days following to the verification search.

• The Court within the term of 5-business days thereafter will render a reasoned Judgment declaring or denying the reorganization or concurso mercantil.

• The conciliation stage will last for 185 calendar days. The conciliator or recognized creditors representing two thirds of the total amount of the recognized credits may request an extension of an additional 90 calendar-day term, but the conciliation proceedings cannot exceed 360 days.

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D. Judgment Declaring Reorganization (Concurso Mercantil) The key elements to be contained in are: list of creditors and amounts owed, appointment of a conciliator, order to the commercial entity to make available its books and relevant documents and the instruction to assist both the conciliator and receiver. Likewise, (i) order the insolvent entity to suspend the payment of any obligation created prior to the declaration of reorganization, unless these are necessary for the ordinary management, (ii) order to stay any pending enforcement proceedings, and (iii) provide a notice to creditors and invite them to submit their petition for acknowledgment of credits. Starting from the issuance of the judgment declaring reorganization and until the end of the conciliation stage, no enforcement proceedings can be initiated against the commercial entity, except some debts related to labor matters. All actions commenced by or against the commercial entity before the declaration in concurso mercantil related to monetary rights will not be joined to the insolvency proceedings. During the conciliation stage, the insolvent entity will continue with management (although the conciliator will monitor the performance), unless the conciliator requests the Judge for his/her removal.

E. Existing Contracts As regards existing contracts executed prior to the date the entity was declared in reorganization, the terms therein established will remain in effect, except as otherwise set forth in the Bankruptcy Law. However, any contractual term that may aggravate the condition of the entity given its state in reorganization will be considered as null and void. Likewise, starting from the date of judgment:

(i) Capital and ancillary obligations of credits arranged in Mexican currency, without a security in rem

will stop generating interests and will be converted into UDI’s. (ii) Capital and ancillary obligations of credits arranged in foreign legal currency, without a security in

rem, regardless the place where the obligation was created, will stop generating interest and will be converted into Mexican currency, and into UDI’s.

(iii) Credits with a security in rem, regardless the fact that they were originally arranged to be paid in Mexico or abroad, will be maintained in the currency or unity created and will only cause ordinary interest provided therein, up to the value of the goods secured.

(iv) Agreements pending to be executed will be fulfilled by the entity, unless the conciliator opposes for safeguarding the interests of the bankrupt entity’s assets.

F. Acknowledgement of Credits

The conciliator has the task of submitting to the Judge a provisional list of credits within 30 calendar days following the last publication of the judgment (and subsequently a definitive list), although his/her main task is to seek a settlement agreement among the entity and its recognized creditors. This agreement must consider the payment of credits with privileges (securities and privileges), rights in rem (i.e. mortgage, pledge, etc.) or special privileges of the parties who have not subscribed the agreement. The agreement must be subscribed by the entity in reorganization and its creditors representing more than 50% of (i) the total common recognized creditors; (ii) the amount acknowledged to those creditors with rights in rem or special privileges.

Recognized creditors with rights in rem who have not subscribed the agreement may continue with the enforcement of their respective security interests. However, the approval of the agreement will end the concurso mercantil proceedings.

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G. Bankruptcy or Liquidation Proceedings (Quiebra) The commercial entity will be declared in liquidation (quiebra) in the following cases: (i) It was so requested by the entity in reorganization; (ii) the term for reaching an agreement and its extensions has expired; and (iii) the conciliator so requests it and the Judge so approves it. The relevant judgment declaring the company bankrupt shall contain inter alia the following: (i) an order to suspend all activities by the insolvent entity; (ii) a prohibition to creditors to make payments, unless the authorized by the receiver; and (iii) the order to record the judgment in the Public Registry of Commerce. The management of the entity will be removed, and the receiver will take over with the most ample dominion authority in that regard, since its functions include the sale of assets at public auction. There are three criminal federal offenses provided under the Bankruptcy Law that merits imprisonment terms: (i) intentional actions aimed to aggravate the non-compliance of obligations, for example, the alteration, destruction or falsification of the accounting records of the commercial entity; (ii) failure to deliver to the Judge the information so requested; and (iii) petition for the acknowledgement of a non-existing or simulated credit. Credit institutions, auxiliary credit institutions and companies that receive concessions from the government have special rules for bankruptcies. Finally, the Bankruptcy Law provides for rules of cooperation in international proceedings, tending to have transparency and clear rules dealing with issues related to international insolvency.

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Acronyms Most Commonly Used

Reference

Meaning

Spanish Meaning

AFORE Administrators of Retirement Funds Administradora de Fondos de Retiro ALADI Latin-American Development and

Integration Association

ALTEX High exporting companies Empresas Altamente Exportadoras APA Advanced Price Agreement BANXICO Mexican Central Bank Banco de México BMV Mexican Stock Exchange Bolsa Mexicana de Valores CAM Mexican Arbitration Center Centro de Arbitraje de México CANACO National Chamber of Commerce Cámara Nacional del Comercio CC Commercial Code Código de Comercio CCF Federal Civil Code Código Civil Federal CFC Federal Judiciary Council Consejo de la Judicatura Federal CFE Federal Electricity Commission Comisión Federal de Electricidad CFF Federal Tax Code Código Fiscal de la Federación CNA National Water Commission Comisión Nacional del Agua CNBV National Banking and Securities

Commission Comisión Nacional Bancaria y de Valores

CNIE Foreign Investment Commission Comisión Nacional de Inversiones Extranjeras

COA Annual Emissions Report Cédula de Operación Anual. COFECO Federal Competition Commission Comisión Federal de Competencia COFETEL Federal Telecommunications Commission Comisión Federal de Telecomunicaciones CONDUSEF National Commission for the Protection

and Defense of Financial Services Users Comisión Nacional para la Protección y Defensa de los Usuarios de los Servicios Financieros

CPO’s Ordinary Participation Certificates Certificados de Participación Ordinarios CUCA Adjusted Paid-in Capital Account Cuenta de Capital de Aportación

Actualizado - CUFIN Net Tax Profit Account Cuenta de Utilidad Fiscal Neta ECEX Foreign trade companies Empresas de Comercio Exterior Environmental Law

General Law of Ecological Balance and Environmental Protection

Ley General del Equilibrio Ecológico y la Protección al Ambiente

FIL Foreign Investment Law Ley de Inversión Extranjera FTL Federal Telecommunications Law Ley Federal de Telecomunicaciones Hazardous Waste Law

General Law for the Prevention and Integral Process of Residues

Ley General para la Prevención y Gestión Integral de los Residuos

ICC MEX Mexican Chapter of the International Chamber of Commerce Arbitration

IETU Flat Rate Tax Impuesto Empresarial a Tasa Única IMPI Mexican Institute of Industrial Property Instituto Mexicano de la Propiedad

Industrial IMSS Mexican Social Security Institute Instituto Mexicano del Seguro Social INDAUTOR Registry of the National Copyrights

Institute Instituto Nacional del Derecho de Autor

INDEVAL Securities Depository S.D. INDEVAL, S.A. de C.V. INFONAVIT Institute of the National Housing Fund for

Workers Instituto del Fondo Nacional para la Vivienda del Trabajador

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INM National Institute Instituto Nacional de Migración IPAB Institute for the Protection of Bank Savings Instituto para la Protección al Ahorro

Bancario ITL Income Tax Law Ley del Impuesto Sobre la Renta IVA Value Added Tax Impuesto al Valor Agregado LA Customs Law Ley Aduanera LAN National Waters Law Ley de Aguas Nacionales LAPSS Law on Public Sector Acquisitions, Leases

and Related Services Ley de Adquisiciones, Arrendamientos y Servicios del Sector Público

LAU Environmental License Licencia Ambiental Unica LCE Foreign Trade Law Ley de Comercio Exterior LFCE Federal Law of Economic Competition Ley Federal de Competencia Económica LFDA Federal Copyright Law Ley Federal del Derecho de Autor LFPC Federal Consumer Protection Law Ley Federal de Protección al Consumidor LFRT Broadcasting Law Ley Federal de Radio y Televisión LFT Federal Labor Law Ley Federal del Trabajo LGSM General Law of Commercial Companies Ley General de Sociedades Mercantiles LGTOC General Law for Negotiable Instruments

and Credit Transactions Ley General de Títulos y Operaciones de Crédito

LIC Credit Institutions Law Ley de Instituciones de Crédito LMV Securities Market Law Ley del Mercado de Valores LOAPF Organic Law of the Federal Public

Administration Ley Orgánica de la Administración Pública Federal

LOP Public Works and Related Services Law Ley de Obras Públicas y Servicios Relacionados con las Mismas

LPI Industrial Property Law Ley de la Propiedad Industrial Maquila Decree

Executive Decree for the Promotion of the Manufacturing, Maquila and Export Service Industry

Programa de Importación Temporal para Producir Artículos de Exportación

MERCOSUR South American Common Market Mercado Común del Sur Mexder Mexican Options Exchange Mercado Mexicano de Derivados MIL Mining Law Ley Minera NAFTA North America Free Trade Agreement Tratado de Libre Comercio de Norte

América NOM’s Mexican Official Standards Normas Oficiales Mexicanas OECD Organization for Economic Cooperation

and Development

PEMEX Petróleos Mexicanos PEP Pemex Exploración y Producción PGPB Pemex Gas y Petroquímica Básica PITEX Temporary basis importation program to

manufacture items for exportation Programa de Importación Temporal para Producir Artículos de Exportación

PROFEPA Federal Office of Environmental Protection Procuraduría Federal de Protección al Ambiente

PROSEC Sectorial Programs Programas Sectoriales RFC Federal Taxpayers’ Registry Registro Federal de Contribuyentes RNIE National Foreign Investment Registry Registro Nacional de Inversión Extranjera RNV National Securities Registry Registro Nacional de Valores RPC Public Registry of Commerce Registro Público del Comercio SA Stock Corporation Sociedad Anónima SAP Publicly traded limited liability corporation Sociedad Anónima Bursátil

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SAPI Limited liability corporation that promotes equity investment

Sociedad Anónima Promotora de Inversión

SCT Ministry of Communications and Transportation

Secretaría de Comunicaciones y Transportes

SE Ministry of Economy Secretaría de Economía SE Ministry of Energy Secretaría de Energía SEMARNAT Ministry of the Environment and Natural

Resources Secretaría del Medio Ambiente y Recursos Naturales

SFP Public Function Ministry Secretaría de la Función Pública SIEM Mexican Business Information System Sistema de Información Empresarial

Mexicano Sofoles Special Purpose Financial Entities Sociedades Financieras de Objeto

Limitado SRL Limited Liability Company Sociedad de Responsabilidad Limitada SSL Social Security Law Ley del Seguro Social STPS Ministry of Labor Secretaría del Trabajo y Previsión Social TFJFA Tax and Administrative Justice Court Tribunal Federal de Justicia Fiscal y

Administrativa TRIP’’s Treaty on trade-related aspects of

intellectual property rights Acuerdo Sobre los Aspectos de los Derechos de Propiedad Intelectual Relacionados con el Comercio

UPCI Unit of International Trade Practices Unidad de Prácticas Comerciales Internacionales,,

WIPO World Intellectual Property Organization Organización Mundial de la Propiedad Intelectual

Editorial Note Doing Business in Mexico is a publication of Barrera, Siqueiros y Torres Landa, S.C. © Copyright. All Rights Reserved. México 2011. Title certificate in process. The reproduction in part of this publication is authorized only when said reproduction is without modifications, and provided the original source is credited in said reproduction. This publication is edited in English. Responsible editor: Eduardo Siqueiros T.