Mexico

Julián Garza C and Michell Nader S

Nader, Hayaux y Goebel SC

  1. 1.What are the most common forms of bank financing in your jurisdiction?

    The most common forms of bank financing include unsecured lending, secured financing, structured finance (including securitisation transactions), syndicated loans, capital and operation leasing and factoring. Both Mexican and foreign banks can conduct lending activities in Mexico through a variety of forms and subject to specific regulations and limitations.

  2. 2.Are any governmental or central bank registrations or approvals required for foreign lenders to lend to borrowers in your jurisdiction?

    No. Foreign lenders are not required to be specifically registered with, or approved by, governmental authorities in order to conduct lending activities in Mexico. There are, however, certain registrations or filings required for foreign lenders to achieve a preferential tax treatment on interest payments.

    For example, to achieve a 4.9 per cent withholding tax rate on interest payments on bank loans, the bank must:

    • be registered as a foreign financial institution before the Ministry of Finance and Public Credit; and

    • issue notices regarding such withholding to the Ministry of Finance and Public Credit and the National Banking and Securities Commission.

      • Similarly, subject to certain exceptions, to achieve a 4.9 per cent withholding tax rate on interest payments of debt securities issued by a Mexican issuer and placed with foreign holders, the following conditions apply:

    • the securities should be placed through bank or broker dealers in a country with which Mexico maintains a tax treaty for the avoidance of double taxation, such as the US, Luxembourg or Ireland; and

    • filings with the National Banking and Securities Commission and the Tax Administration must be completed.

    Also, for example, payments of interest made by the issuer with respect to the securities to non-Mexican pension or retirement funds may be exempt from Mexican withholding taxes, provided that any such fund is, among other conditions:

    • the effective beneficiary of such payments of interest;

    • duly incorporated pursuant to the laws of its country of origin;

    • exempt from income tax in such country; and

    • duly registered at the Registry of Foreign Banks, Financing Entities, Pension and Retirement Funds, and Investment Funds.

  3. 3.Are there any foreign exchange provisions restricting, or governmental or central bank registrations or approvals required for, the remittance of funds abroad or in a foreign currency?

    No, there are no governmental registrations or approvals required for the remittance of funds abroad or in a foreign currency.

  4. 4.Are there any governmental or central bank registrations or approvals required for the prepayment of loans either domestically or abroad?

    No, there are no governmental or central bank registrations or approvals for such purpose.

  5. 5.Are any mandatory governmental or central bank deposits required to be made from loan proceeds?

    No.

  6. 6.Describe any governmental measures that may be taken to declare a moratorium on the loan obligations of private companies.

    None, other than by Act of Congress.

  7. 7.Describe any environmental liabilities and any other areas of lender liability that may be imposed as a result of the activities of borrowers.

    There is no statutory lender liability in Mexico. Lender liability may only arise from wrongdoings by a lender. We are not aware of any binding precedent where a lender has been held liable for any wrongdoings. Nevertheless, a lender may assume the environmental liabilities of borrowers by taking ownership and/or possession of contaminated assets. At such point, the lender will be considered to be jointly and severally liable under Mexican environmental law.

  8. 8.Are interest payments or loan fees subject to a withholding tax?

    Yes, in the case of interest payments to non-residents, withholding tax rates range from 4.9 per cent to 40 per cent, depending on the beneficial owner of the interest. Lower withholding tax rates may be available to tax residents in countries with which Mexico has entered into a tax treaty to avoid double taxation. Moreover, interest payments carried out to export-import banks may not be subject to any withholding, provided that the conditions set forth by the relevant tax treaty are complied with.

  9. 9.What other taxes or mandatory fees, for example, transaction, registration, or documentary fees, apply to loan transactions?

    In principle, Value Added Tax may apply to interest payments. However, interest payments made to Mexican financial institutions are exempt from such tax.

  10. 10.Are there different taxes applicable to loans repayable to lenders in your jurisdiction and loans repayable to lenders in a foreign jurisdiction?

    No. In both cases income tax is the only tax levied on interest payments carried out by or to financial institutions. Please note, however, that interest payments may be subject to different withholding tax rates depending on the tax residency of the beneficial owner (see question 8 above).

  11. 11.Is your country party to any double taxation treaties that reduce taxes payable by borrowers in respect of loan payments abroad?

    Yes. Mexico has enacted more than 40 double tax treaties and is in the process of negotiating more. As mentioned above, such tax treaties may reduce the withholding tax applicable in accordance with the Mexican domestic tax legislation. Please note that the 4.9 per cent withholding tax rate provided for by the Mexican legislation only applies to interest paid to financial institutions resident for tax purposes in a treaty country, in addition to registration requirements with the Mexican Ministry of Finance.

  12. 12.Do any financing structures receive favourable tax treatment, such as prepayments of exports?

    As a general rule, favourable tax treatment is only granted to:

    • interest derived from loans granted to the federal government, the central bank or derived from bonds issued by them;

    • interest derived from loans granted under preferential conditions (three or more years for repayment), payable to foreign development financial institutions;

    • interest derived from loans granted by foreign development financial institutions to non-profit organisations; and

    • interest derived from securities issued by the federal government or the central bank, provided that the beneficial owner of the interest is a non-resident for tax purposes. Also, interest payments made to export-import banks granting or guaranteeing loans may not be subject to any withholding, provided that the conditions set forth by the relevant tax treaty are complied with.

  13. 13.Describe any limitations on the ability of lenders to charge default interest under loan agreements.

    There are no specific limitations. There may be though general or practical limitations stemming from usury statutes and market conditions that may limit the amount of the rate; as well as from tax considerations, particularly in the case of transactions among related parties.

  14. 14.Describe any restrictions that may apply to the choice of law, for example, whether a choice of New York or English law will be recognised and enforced in your jurisdiction.

    There are no specific restrictions applicable to loan documents. The choice of foreign law should be recognised and enforced provided that security documents should not otherwise be subject to Mexican law.

  15. 15.Describe generally the requirements for the enforceability of a foreign judgment in your jurisdiction in respect of an outstanding loan.

    A judgment rendered by a foreign court, pursuant to a legal action instituted before such court in connection with an outstanding loan, would be enforceable against the borrower in the competent courts of Mexico, provided, that:

    • such judgment is obtained in compliance with the legal requirements of the jurisdiction of the court rendering such judgment and in compliance with all legal requirements of the respective transaction documents;

    • such judgment is strictly for the payment of a certain sum of money, based on an in personam (as opposed to an in rem) action;

    • the judge or court rendering the judgment was competent to hear and judge on the subject matter of the case in accordance with accepted principles of international law that are compatible with Mexican law;

    • service of process is made personally on the defendant or on its duly appointed process agent;

    • such judgment does not contravene Mexican law, public policy of Mexico, international treaties or agreements binding upon Mexico or generally accepted principles of international law;

    • the applicable procedure under the laws of Mexico, with respect to the enforcement of foreign judgments (including the issuance of a letter rogatory by the competent authority of such jurisdiction requesting enforcement of such judgment and the certification of such judgment as authentic by the corresponding authorities of such jurisdiction in accordance with the laws thereof), is complied with;

    • the action in respect of which such judgment is rendered is not the subject matter of a lawsuit among the same parties, pending before a Mexican court;

    • such judgment is final in the jurisdiction where obtained;

    • the judgment fulfils the necessary requirements to be considered authentic; and

    • the courts of such jurisdiction recognise the principles of reciprocity in connection with the enforcement of Mexican judgments in such jurisdiction.

    Service of process by mail does not constitute personal service of process under Mexican law and, since such service of process is considered to be a basic procedural requirement, if for purposes of proceedings outside Mexico, service of process is made by mail, a final judgment based on such process would not be enforced by the courts of Mexico.

  16. 16.Upon the closing of a loan, what procedural requirements should be observed to ensure that a loan agreement is enforceable in your jurisdiction?

    Loan and collateral documents must comply with Mexican legal formalities required for their enforceability and perfection in Mexico. Enforceability of obligations before a Mexican court may seldom be contingent on the authority of the borrower and its representatives to assume such obligations pursuant to any provisions of relevant by-laws, corporate authorisations and powers of attorney, which are also subject to formalities that must be complied with to avoid difficulties in the enforcement process. Loan obligations are usually documented in pagarés (notes). The documentary formalities applicable to pagarés are very strict and failure to meet them may lead a court to disregard such instruments’ procedural advantages (see question 21 ).

    With regard to collateral documents, certain security instruments, including mortgages, pledgor-in-possession pledge agreements and guaranty trusts on real estate assets, are required to be formalised before a Mexican notary public and registered with the corresponding Mexican public registry. A lien on other assets may require additional formalities; for example, registration with intellectual property registries if such lien is created on certain intellectual property rights.

  17. 17.Does a loan agreement in English need to be translated and locally registered to be enforceable in your jurisdiction?

    Generally, no. As mentioned in our response to question 16, certain collateral instruments may be subject to registration and additional formalities (see also question 19 below).

  18. 18.Must a foreign bank be registered in your jurisdiction to enforce any rights under the applicable loan documentation?

    No.

  19. 19.Are foreign lenders treated any differently than local lenders in enforcing loan documentation in the courts of your jurisdiction?

    No. Please note, however, that:

    • In the event that any legal proceedings are brought in the courts of Mexico with respect to any transaction document prepared in English, a Spanish translation of such documents required in such proceedings prepared by a court-approved translator would have to be approved by the court after the defendant had been given an opportunity to be heard with respect to the accuracy of the translation, and proceedings would thereafter be based upon the translated documents; and

    • In the event that proceedings are brought in Mexico seeking performance of the obligations of the borrower in Mexico, pursuant to Mexican Monetary Law, the borrower may discharge its respective obligations by paying any sums due in a currency other than Mexican currency, in Mexican currency at the rate of exchange prevailing in Mexico and fixed and published by the Banco de México in the Official Gazette of the Federation of Mexico on the date preceding the date of payment.

  20. 20.Is consideration required for the enforceability of a contractual obligation or guarantee?

    Not necessarily; however, a guarantee without consideration may be voided if it is deemed a fraudulent conveyance.

  21. 21.To enforce a loan in your jurisdiction, need the loan be evidenced by a promissory note or other form of título executivo?

    No; however, documenting a loan with a promissory note (pagaré) would provide a foreign or Mexican lender “executive action” which carries certain procedural advantages including the right to attach assets of the debtor upon service of process being made. Note that Mexican banks also have “executive actions” through other type of documents.

  22. 22.To enforce a guarantee (aval) in your jurisdiction, is it necessary that the guarantee be evidenced by a guarantee agreement or other form of título executivo?

    The best manner to document a guarantee on a promissory note (pagaré) is to have the guarantor sign the promissory note ‘por aval’.

  23. 23.Are there any restrictions on loans to multiple borrowers or guarantees in respect of a loan to an affiliated entity?

    There are no restrictions on loans to multiple borrowers. There are also no restrictions on guarantees in respect of a loan to an affiliated party; however, as a general rule, the guarantor should receive a consideration or benefit from the loan to its affiliated party to avoid a challenge on the validity or enforceability of the guarantee.

  24. 24.Can a party grant a secured or unsecured guarantee in respect of a loan to an unaffiliated third party?

    Yes, but if there is no consideration therefor the guarantee may be voided.

  25. 25.Is there a distinction between the granting of a security interest and the perfection of a security interest?

    Yes. A security is granted at the time when it is created by contract or otherwise. In a number of cases (but not in all cases), Mexican law requires that either:

    • the security interest be registered, or

    • the collateral be delivered to the secured party or a depositary, and it is such registration or delivery that perfects the security interest and makes it enforceable against third parties.

  26. 26.What is the most common form of granting and perfecting a security interest in moveable assets?

    • The ‘traditional pledge’ (prenda) where the collateral is delivered to the secured party or a depositary and, for certain working capital loans, the pledgor may hold the collateral;

    • The ‘pledge with debtor in possession’ (prenda sin transmisión de posesión); or

    • The Guaranty Trust (fideicomiso de garantía) where the collateral is actually transferred to a trustee (see answer to question 30 regarding Guaranty Trust).

  27. 27.What is the most common form of granting and perfecting a security interest in real estate?

    Through a real estate mortgage (hipoteca) or a guaranty trust.

  28. 28.What is the most common form of granting and perfecting a security interest in receivables and accounts?

    Through a pledge with debtor in possession or a guaranty trust.

  29. 29.Does your jurisdiction recognise the transfer of assets to a trust for the benefit of a lender as a means of granting a security interest in such assets?

    Yes; through the guaranty trust. In such cases the collateral is owned by the trustee.

  30. 30.Does your jurisdiction recognise the fiduciary transfer of assets (such as an alienação fiduciária) to a lender as a means of granting a security interest in such assets?

    Pursuant to a guaranty trust a borrower may transfer to a trustee (namely, a Mexican banking institution) ownership of certain assets. The trustee will hold ownership of such assets for the primary benefit of the corresponding lender which would be appointed as a beneficiary of the guaranty trust.

    Among several advantages afforded by the guaranty trust, it permits:

    • borrowers to continue to use the collateral and maintain regular business activities; and

    • parties to the guaranty trust to contractually establish their own tailor-made rules of foreclosure, including (within reasonable due process confines) out-of-court foreclosure. Such foreclosure procedure permits transfer of collateral to a lender subject to compliance with applicable legal requirements.

  31. 31.Are there any types of asset that cannot be pledged as collateral under the laws of your jurisdiction?

    Any moveable asset that may be transferred can be pledged.

  32. 32.Please describe any other relevant legal considerations in connection with loans to borrowers in your jurisdiction.

    There are a number of additional Mexican legal considerations in connection with loans to borrowers, the relevance of which varies from one case to another. Each transaction must be analysed considering a variety of factors, including parties involved, available collateral, tax, regulatory and bankruptcy considerations. The enforceability of the terms of certain transaction documents may for example be limited by bankruptcy, insolvency, concurso mercantil or other laws relating to creditors’ rights generally. Also, in considering available enforcement options it must be considered that remedies may not be cumulative or exercised concurrently.

    Please note that new regulations (some of them still pending governmental approval) intend to strengthen capitalisation rules applicable to Mexican banks, including regarding the manner in which such banks should account for lending transactions with certain related entities in light of capitalisation requirements. As a consequence, Mexican banks could have to comply with higher capitalisation requirements if they enter into transactions with relevant related parties.

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