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13 June 2005
Audited Financial Statements
Partners' Meeting Approval
Consolidated Financial Statements
Mexican Generally Accepted Accounting Principles
Foreign investors sometimes enter the Mexican market through a Mexican limited liability company.(1) This form of company has become more common in the past few years since income derived from it is treated as derived from a partnership for US tax purposes. A limited liability partnership may be incorporated with not less than two and not more than 50 partners. Partners are liable only for payment of the amount of their participation in the limited liability company's capital stock.
The minimum capital of a limited liability company is approximately $270 and it must be divided into equity interests. In general, each partner may hold only one equity interest. A partner can hold more than one equity interest where there are various categories of partners and therefore equity interests may grant different rights. Equity interests are not deemed to be shares, and are not represented by stock or any other negotiable instrument. At least 50% of the capital stock must be paid in on the date of incorporation. Each Ps1 contributed grants one vote.
A limited liability company's financial statements, to the extent that they must be audited, may be subject to comments and sometimes qualifications by the auditors with respect to dividend distribution. In addition, distribution requires a prior resolution by the partners' meeting.
In addition to the approval of annual reports by its board of managers,(2) a limited liability company must have its financial statements audited by a certified public accountant if:
For the purposes of these thresholds, gross income does not include dividends received from subsidiaries. The Income Tax Law provides that revenues from dividends obtained from other Mexican companies in Mexico must not be accrued as taxable income.(3)
Under the Law on Mercantile Companies, partners' meetings must deal with the distribution of profits, among other matters. The partners' meeting is the supreme authority of a limited liability company. In general, its resolutions must be approved by the vote of partners holding at least 50% of the equity, except as otherwise set forth in the company bylaws. Amendments to the corporate purposes or any increase of the partners' obligations must be approved by unanimous consent.(4)
The Law on Mercantile Companies expressly provides that profits can be distributed only once the financial statements have been approved by the partners' meeting.(5) Thus, a limited liability company may distribute dividends only if its financial statements, even if consolidated, have been approved by its partners.
Mexican tax laws do not provide for a mandatory application of Mexican generally accepted accounting principles in connection with consolidation. In practice, Mexican companies prepare their annual accounts pursuant to such practices because Mexican accountants, as members of the Mexican Institute of Public Accountants, must apply them.
In Mexico, annual accounts are prepared pursuant to Mexican generally accepted accounting principles. Although these are constantly modified to conform to equivalent US and international principles, many are unique to Mexico. They have been prepared and adopted by the Mexican Institute of Public Accountants.(6)
In general, the application of the principles is not mandatory. However, application is mandatory for the following:
In addition, the regulations of the Income Tax Law provide that, for purposes of capital stock reduction, the value of the stock owned by the taxpayer shall be determined according to the principles. Furthermore, the amount of presumptive income must be determined by the competent authorities observing the principles.
For further information on this topic please contact Agustín Berdeja or Eduardo Michán at Berdeja y Asociados SC by telephone (+52 55 2591 1100) or by fax (+52 55 2591 1106) or by email (firstname.lastname@example.org or email@example.com).
(1) In Spanish, sociedad de responsabilidad limitada. A limited liability company may not trade its stock on the Mexican Stock Exchange - only corporations may operate on it. However, Mexican law is to be amended to broaden the scope of market players. Corporations are subject to a complex legal and administrative framework, which includes the Ruling for Securities Issuers and Other Market Players issued by the National Banking and Securities Commission.
(2) Article 172 of the Law on Mercantile Companies applies to corporations. Nevertheless, in practice limited liability companies adhere to the article due to the lack of specific provisions aimed at them.
(6) A new body, the Mexican Council
for Investigation and Development of Financial Information Rules (known as CINIF)
is authorized to adopt the Mexican general accepted accounting principles applicable
to accounts for the financial year commencing 2005. This new body comprises not only accountants, but also other organizations and governmental agencies.
(7) See Ruling for Issuers, Articles
78 to 81. Foreign issuers may alternatively have their financial statements
audited according to auditing rules issued by the International Assurance
and Auditing Practices Committee or the competent authority or body of
their home country.
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Agustín Berdeja Prieto