Agency and Distribution Arrangements in Mexico

By Margaret M. Gatti, Esquire
(Article appeared in the 1996 North American Trade Guide)
All Rights Reserved

U.S. companies interested in selling their products to the Mexican market have at least eight different options under Mexican law as to how they can organize their Mexican sales efforts. These options are distinguishable from one another in that some require a physical presence in Mexico, whereas others do not. Options which are based on a physical presence include a representative office, a branch, a partnership and a corporation (joint venture corporation or wholly owned corporation). Options which are not based on a physical presence include a distributor, a sales agent and a sales employee.

In determining the most appropriate sales organization for the Mexican market, U.S. companies should consider their needs and the needs of their Mexican customers, as well as how the various sales organization options are impacted by Mexican income tax law, US income tax law and Mexican labor law, as these laws can have a considerable impact on the cost of the sales organization chosen.

The sales organizations of choice for most U.S. companies that sell into Mexico are the distributor and the sales agent. Following is a brief discussion of each of these two sales options.

Distributor

Description: A Mexican distributor (distribuidor) purchases goods from a U.S. seller at discounted prices and resells the purchased goods to buyers within a defined market or territory. By using a Mexican distributor to sell products into Mexico, a U.S. seller gains the opportunity to reach a broad market in Mexico without encountering the risk of diverse Mexican buyers. That risk is instead assumed by the Mexican distributor who resells the U.S. company's products to the local market.

Set-up and operation of a Mexican distributor arrangement: There are no provisions in Mexico's Civil or Commercial Code that prescribe the terms of a distributor relationship. Consequently, the terms of a distribution relationship between a Mexican distributor and a U.S. seller must be established by means of a contractual agreement between the parties. As with any commercial contract in Mexico, the parties are free to set their own terms, provided that such terms do not contravene any applicable law or any public policy. There is no general requirement for public registration of a Mexican distributor or of a distribution agreement. A Mexican distributor is not in a fiduciary relationship with the U.S. seller and cannot bind the U.S. seller or cause the U.S. seller to incur any liabilities. The distributor must, however, limit his actions to conform with the terms and conditions that have been specified in the distribution agreement. Distribution arrangements in Mexico can be exclusive or non-exclusive and the parties are free to choose the term of the distribution arrangement. A distributor is generally not entitled to indemnification by the U.S. company upon termination of a distribution arrangement, unless otherwise specified in the distribution agreement or unless a Mexican court determines that an unjustifiable action by the U.S. company caused the Mexican distributor to suffer a hardship.

Impact of Mexican Income Tax Law: A properly structured distributor arrangement will not give rise to any Mexican income tax consequences for a U.S. seller. This is because such an arrangement is not considered to be a taxable presence (permanent establishment) in Mexico.

Impact of US Tax Income Law: All income earned by a US seller as a result of a Mexican distributor arrangement will be subject to US tax on a current basis.

Impact of Mexican Labor Law: A properly structured distribution arrangement will not expose a U.S. seller to Mexican labor law. This is because a Mexican distributor is not considered to be an employee of the U.S. seller.

Sales Agent

Description: There are different types of sales agents in Mexico, but the standard and most useful type of agent for selling U.S. products into Mexico is the general commission agent (comisionista). A general commission agent sells goods on behalf of a U.S. seller and earns a sales commission based on sales made. Unlike a distributor, a general commission agent does not take title to the U.S. seller's goods and does not undertake Mexican buyers' payment risk. That risk is instead assumed by the U.S. seller whose products are sold direct to the local market.

Set-up and operation of a Mexican sales agent arrangement: Mexican sales agency arrangements are subject to the statutory framework set out in the Mexican Commercial Code (Articles 273 et. seq.) and to the supplementary rules governing attorney-in-fact (mandatorios) set out in the Civil Code (Articles 2546 et. seq.). These statutes notwithstanding, the terms of a sales agency relationship between a Mexican sales agent and a U.S. seller are generally established by means of a contractual agreement between the parties. The sales agent agreement prescribes the limits of the sales agent's authority. Mexican sales agents have a certain degree of autonomy in determining how best to execute the responsibilities they have been granted in their sales agency agreements, but Mexican sales agents may not, under any circumstance, act beyond the authority granted to them by U.S. sellers. A failure in this respect will relieve the U.S. seller from responsibility for the actions of the Mexican sales agent and instead render the sales agent liable to any affected third party. Unlike a Mexican distributor, a Mexican sales agent is a fiduciary of the U.S. seller and has a general duty of loyalty to the U.S. seller. A Mexican sales agent can contract either in his own name or in the name of the U.S. seller. There is no general requirement for public registration of a Mexican sales agent or of a sales agent agreement. Sales agent arrangements in Mexico can be exclusive or non-exclusive and the parties are free to choose the term of the sales agency arrangement. A sales agent is generally not entitled to indemnification by the U.S. company upon termination of a sales agency arrangement, unless otherwise specified in the distribution agreement or unless a Mexican court determines that an unjustifiable action by the U.S. company has caused the Mexican distributor to suffer a hardship. A sales agent does, however, have the right to recover expenses or other damages caused by an unexpected agency termination.

Impact of Mexican Income Tax Law: A sales agent arrangement may give rise to Mexican income tax consequences for a U.S. seller, if a Mexican sales agent acts on behalf of the U.S. seller on a regular or continuous basis. This is because such an arrangement would be considered a taxable presence, i.e. a "permanent establishment" in Mexico.

Impact of US Tax Income Law: All income earned by a US seller as a result of a Mexican sales agent arrangement will be subject to US tax on a current basis. To the extent that a US seller's taxable income includes income which has been subject to the imposition of Mexican income tax, the US taxpayer will be permitted to apply foreign tax credits and thereby offset his US tax liability.

Impact of Mexican Labor Law: A properly structured sales agency arrangement will not expose a U.S. seller to Mexican labor law, unless the Mexican sales agent is considered to be a dependent sales agent as opposed to an independent sales agent.