Changes in Regulations: Subcontracting Services for Mexican Entities

Mexico has made effective certain labor legislation initially introduced in the fall of 2020. The new law, active as of April 24, 2021, alters the historical practice of labor subcontracting frequently employed  by multinational organizations operating within Mexico.

The main characteristic of the new law is a prohibition upon the hiring of outsourced services—defined as providing or making workers available for the benefit of another legal entity (“the beneficiary”). Despite certain mechanisms within the law to continue to permit contractors to provide specialized services as long as such services are not part of the beneficiary’s corporate purpose or economic activity, the new rules do not include any special exceptions specific to any slice of the economy.   Thus, there is no special treatment or flexibility for the maquiladora industry.

A maquiladora is a factory operating in Mexico, owned by a foreign parent company, and exporting its products to the country of the parent company. In other words, a maquiladora could be a Mexican-domiciled operating subsidiary of a U.S. parent with exports to the U.S.  Such factories and all other employers in Mexico are required by law to pay an amount equal to 10 percent of their taxable income to their employees in a profit-sharing arrangement. However, the profit-sharing payment does not apply to employers’ subcontractors.

It has been common for some employers to establish a certain subcontracting arrangement to avoid Mexico’s 10 percent profit-sharing law. For example, a U.S. company with a Mexican operating subsidiary would establish another entity whose sole purpose would be to lease workers to the operating entity as subcontractors. The resulting structure is then a legal method of circumventing the 10 percent profit-sharing law. The new legislation targets and outlaws this very arrangement of outsourced services.

Under the new law, all employers currently utilizing outsourced services are required to add subcontractors to their payroll pursuant to the terms established in the new labor legislation. The legislation provides employers only ninety (90) days—the period ends July 23, 2021—to restructure and become compliant under the new rules. Thereafter, all businesses are subject to inspection and non-compliant employers will face fines, penalties, the disallowance of certain tax deductions, and even imprisonment depending upon the severity of the infringement.

Here is a link to an article published by Moore Orozco Medina, a member of the Moore Global network to which Elliott Davis belongs.

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If you have any questions about how the new law impacts your operations in Mexico, please contact us.

The information provided in this communication is of a general nature and should not be considered professional advice. You should not act upon the information provided without obtaining specific professional advice. The information above is subject to change.