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7.2.1.1 Basic Rationale: Freedom of Investment (Art. 4)

Rules for International Investment are basically contained in the Foreign Investment Law (Ley de Inversión Extranjera; LIE) and in the pertaining regulation (Reglamento de la Ley de Inversión Extranjera y del Registro Nacional de Inversiones Extranjeras). This legal framework applies to all investments by foreigners, regardless of the amount of the equity, or to investment by Mexican companies if at least one of them has foreign capital majority. Moreover, it applies to the participation of foreign investors in certain activities described by the law.

The general rationale of the LIE is that foreign capital may participate without quanti- tative restrictions in business operations. However, the LIE also contains certain limitations and sectoral exclusions set out below.

7.2.1.2 Activities Reserved to the State (Art. 5)

The LIE prohibits the participation of any private capital – whether national or foreign – in the following sectors, which are an exclusive domain of the state:

• Petroleum and other fuels • Basic petrochemical industries

• Electricity and the generation of nuclear power • Radioactive minerals

• Telegraph, Radiotelegraph and Postal Services • Emission of money

• Control, supervision and oversight of ports, airports and heliports • Other activities mentioned in applicable laws

7.2.1.3 Activities Reserved to Mexicans Only (Art. 6)

Moreover, capital participation in the following sectors is currently possible for Mexicans and Mexican companies with a foreigner exclusion clause only (Art. 6 LIE). Foreigners may, however, participate in these sectors through neutral investment under certain circumstances (see Box 7.1):

• National ground transport of passengers, tourists and cargo, except parcel and courier services. However, these restrictions are gradually being lifted: Currently, foreign participation is permitted up to 51%. From 1 January 2004 onwards, participation up to 100% will be possible.

• Retail sale of gas and distribution of liquid petroleum gas

• Transmission of radio and televisions programs other than cable television • Credit unions

• Development banking institutions as specified in the applicable laws

• The provision of professional and technical services if specified by the applicable laws

Box 7.1: Neutral Investment

Despite the specific limitations to foreign investment as outlined in this chapter, the foreign investment law permits so-called ”neutral investments”. These are defined as investments made in Mexican companies or authorised trusts. They do not represent a percentage of foreign investment in the capital stock of Mexican companies. Neutral investments such as participation certificates are usually issued by authorised Mexican banking institutions (trustees). While they convey certain economic rights to the holder, they do not provide full voting rights.

7.2.1.4 Activities with Limitations on Foreign Capital (Art. 7 and 8)

In some sectors, foreign capital participation is limited to certain amounts (Art. 7 LIE). Neutral investment, however, may be an option to increase participation beyond these limits (see Box 7.1). Sectors with a limit on foreign capital participation are:

• Max. 10%: Production co-operatives

• Max. 25%: National air transport, air taxi and specialised air transport services • Max. 49%: Corporations controlling financial groups, multiple bank institutions,

exchange houses, insurance institutions, trusts, foreign exchange services, general depository warehouses, financial leasing corporations, financial factoring institutions, financial corporations with limited scope according to Art. 103 sec. IV of the law on credit institutions, societies under Art. 12bis of the Stockmarket Law (Ley del Mercado de Valores), corporations running investment

corporations, retirement fund administration, production and trade of certain ex- plosives and arms, printing and publications of periodicals for exclusive

distribution on the national market, ”T” series shares of corporations owning land which is used for agricultural, cattle breeding or forestry purposes, fishing in freshwater, coastal waters and waters in the exclusive economic zone (other than fish farming), integral port administration, piloting services in ports according to the specific legal provisions, certain maritime transport services, delivery of fuels and lubricants for ships, planes and railway equipment, certain concessionaries in the telecommunications sector according to Art. 11 and 12 of the Federal Law on Telecommunications (Ley Federal de Telecomunicaciones) • According to Art. 8 LIE, participation of foreign capital which exceeds 49% is

only possible with a special permit from the National Commission on Foreign In- vestment (Comisión Nacional de Inversiones Extranjeras; see Section 7.7.3) in the following sectors: Certain port services, certain maritime shipping services, administration of airport terminals, certain private education services, legal services, credit information services, securities rating agencies, insurance agents, cellular telephony, construction of pipelines for oil and its derivates, oil and gas drilling, construction and operation of railroad services

In all other cases, a permit from the National Commission on Foreign Investment for a participation of more than 49% is required only if the total value of a corporation’s assets exceeds a limit which is set annually by the Commission, regardless of the industry concerned. This limit is currently 712’395’000 MXP (equivalent to 75 mn USD

Box 7.2: Restrictions on Land Ownership for Foreigners

Land ownership restrictions apply to foreigners in the so-called restricted zones, consisting of a strip of 100 km along national borders and 50 km along mari- time coasts. Foreign companies may, however, be granted the right to purchase real estate in these zones with a permission of the Ministry of Foreign Affairs (Secretaría de Relaciones Exteriores; SRE; http://www.sre.gob.mx;
11.4) as long as it is not used for residential purposes but for commerce, industry or tourism. If foreigners wish to purchase real estate in the restricted zones for residential purposes, they may do so only through a trust fund held by an authorised financial institution. It has a duration of 50 years and is renewable under certain circumstances.

Information on sources on FDI is contained in the info block at the end of Section 7.7.3.