Neutral Investment: A mechanism little used by foreign companies in Mexico

Neutral investment is a mechanism that allows participation in the capital stock of Mexican entities. It provides a way to bypass some of the restrictions on foreign ownership in certain areas of the market. However, there are some conditions to the practice, so make sure you understand if it could benefit you. Neutral investment doesn’t suit every situation, but is extremely useful in some cases.

The legal framework for foreign investment (whose regulatory axis is the Foreign Investment Law) contemplates restricted, reserved and regulated economic activities. The first of these being exclusively in charge of the Mexican State, the second for the exclusive exercise by Mexicans or Mexican companies that do not admit foreigners, and the latter subject to percentage limits of foreign investment participation ranging from 10% to 49%.

Only operations with 49% of foreign investment may increase to 100% of the percentage of participation in the capital stock of Mexican companies. This is of course subject to authorization by the National Commission of Foreign Investment (CNIE), which is the Mexican government agency in charge of authorizations, registrations and administrative processes corresponding to foreign investment in Mexico.

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It should also be clarified that the procedure to obtain authorization from the CNIE takes about two and a half months. Said authorization is also subject to the resolution in favor or against the investment project submitted.

Against this backdrop, what about those regulated activities with percentage limits of 10% to 25% where the CNIE cannot authorize a higher percentage of foreign investment participation? How can you avoid going through such a long authorization procedure that the waiting time to get a response from the government interferes with your business plan schedule?

Are you a foreign investor who wishes to participate with your capital stock in one of the regulated activities with a limit percentage of participation? Two words and a concept will be very useful to carry out your investment purposes successfully: Neutral Investment. The Neutral Investment is a figure that although it is explicitly stated in Mexican law, it has been little explored and exploited.

What is neutral investment?

In addition to the confusing definition provided by Mexican law, neutral investment is a mechanism that allows participation in the capital stock of Mexican entities. It has the particular characteristic that such investment is not classed as either a foreign investment or a Mexican investment, and therefore becomes an investment without nationality.

Being an investment that lacks nationality, it is a resource of participation in the capital stock of Mexican entities that allows the percentage limits imposed on the activities mentioned in the Foreign Investment Law as subject to specific regulation to be exceeded. This investment takes the form of shares, partnership interests or investment instruments issued by a fiduciary, formally subscribed by persons with full legal capacity.

In spite of the great attractiveness that seems to be a way to legally exceed the limits of foreign investment, keep in mind that to be able to use this mechanism it is necessary to have a Mexican partner. This can be an individual or a legal entity. In addition to the above, consider that the neutral investment confers limited rights.

In the case of corporations, for example, the holders of the neutral shares are limited to voting in extraordinary meetings, except for those whose purpose is to make decisions on the increase or decrease of capital stock, and in the case of amendments to the bylaws in order to change, suspend or eliminate rights or limitations of the neutral shares, in which case they may participate. In order for you to be able to occupy the neutral investment, it is possible to do so directly or through a trust, with the prior authorization of the Ministry of Economy.

Biz Latin Hub can help you with neutral investment

Are you interested in making a neutral investment in order to keep the highest percentage of participation in a Mexican entity with special regulation? At Biz Latin Hub, our multilingual team of company formation specialists has extensive experience in supporting foreign executives when working in Mexico.

We offer a complete set of services for your business needs, such as legal, accounting, and recruitment support. You can rely on us as your main contact for entering and doing business in Mexico or any of the other 17 markets in Latin America and the Caribbean where we operate.

If you need more information on expanding into Mexico or elsewhere in the region, please contact us.