What are the challenges for foreign startups to establish themselves in Mexico?

This article was translated from our Spanish edition using AI technologies. Errors may exist due to this process.

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The arrival of foreign startups in Mexico meant a radical change both for the ecosystem of these companies and for users, who were able to access a range of products and services different from what they were used to.

Per Lööv vía Unsplash

However, the operation of these businesses was very controversial, because while some considered that they could give dynamism to the sector; For others, the lack of regulation by national laws placed them at an advantage compared to Mexican startups, especially in terms of tax collection.

Everything changed with the fiscal regulation of digital services, in which Mexico became a pioneer in Latin America, but these changes have implied some challenges for foreign startups operating in the country.

“With the implementation of the reform to the VAT Law, which came into force on June 1, so that the services of these platforms are taxed at 16%, foreign companies operating in Mexico must comply with the payment of the corresponding contributions and, if they do not do so, they could be subject to fines or even blocking by the Tax Administration Service (SAT) ”, said Víctor Aguirre López, founding partner of the firm BlackBox Startup Law , specialized in give advice to startups in Mexico.

Regarding digital taxes, the SAT affirmed that national or foreign technological platforms “will have the obligation to withhold both the Income Tax (ISR) and the Value Added Tax (VAT) to individuals who sell goods or provide services including accommodation services, as well as reporting these withholdings to the SAT, no later than the 17th of the month following the one in which the payment was made ”.

Why start in Mexico?

According to the study The Entrepreneurship Migration Phenomenon to Mexico by Endeavor Review, Mexico City is the capital of national startups and 31% of those that operate in that entity are foreign, in addition to having created at least 9 thousand 800 jobs and raised $ 1.72 billion of capital.

The same study details that for 14% of foreign entrepreneurs, regulation is a major obstacle, since the country has an „old-school system, in which you have to go through many offices and paperwork.“

However, for the BlackBox Lawyer, although there are challenges for foreign startups, there are also great advantages, since Mexico is an extremely attractive country both due to the size of the market, its proximity to the United States and because, for many businesses, it is the door entry to Latin America.

What are the challenges?

According to BlackBox, the main challenges for foreign startups are:

  1. Tax residence. The biggest challenge for these companies to be able to operate in Mexico is that they need to have a tax address. Many times foreign digital companies manage the sale of products from their country of origin and use international shipments to get them to the national territory. However, the tax domicile requirement implies that, although they operate entirely online, they must have an office in Mexico.
  2. Legal representative. Having a legal representative is another of the great challenges for foreign startups in Mexico, since this person must be a Mexican taxpayer.
  3. Firm electronics. They also need to have a valid electronic signature, otherwise they will not be able to operate in Mexico, which adds to the legal difficulty for them to function in national territory.

According to Attorney Victor Aguirre, the foregoing implies that foreign startups, in addition to having the requested documents and requirements, need market studies, a business strategy, as well as having contacts in Mexico, as well as cultural knowledge to understand how it works. the market and how they can retain users. In this way, the requirements to be successful in a territory that is otherwise fertile and friendly for startups and novel ideas accumulate.

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