Companies interested in manufacturing in Mexico have two main options for their operations. They can operate on a standalone basis or use a shelter service company. When explaining these two different structures to clients, we typically use a hotel analogy. The standalone is like a condo and the shelter company is like an all-inclusive. We can help you evaluate which structure is best based on your company size, needs, complexity and other important considerations.
Here are a few important items to consider before selecting a standalone vs. shelter company.
Shelter companies have the advantage of offering a quick start to operations since the entity is already established. In comparison, using a standalone company requires the incorporation of an entity and startup phase considerations such as permits and legal paperwork which can add more time to the process.
For companies ‘testing’ the market with local production, the shelter option is more cost-effective, and offers an easy way out in case the projects in Mexico don’t last on a long-term basis. However, operating as a standalone is the more affordable route for many small to medium-sized manufacturers establishing in Mexico for more than three years. Based on recent projects and industry statistics, shelter operations with more than 10 employees tend to decrease their costs when converting to a standalone legal structure, and can typically save between 20% to 50%.
Value Added Tax (VAT)
Shelter companies typically work under an IMMEX program, which is the Spanish acronym for the Manufacturing, Maquila and Export Services Industries Program. This enables foreign companies to operate in Mexico under a preferential, low-tax cost structure and a VAT certification. Under a shelter company, the machinery and equipment are imported on a temporary basis and companies are not required to pay the 16% VAT.
On a standalone basis, if the main items produced in Mexico are going to be exported out of the country, the standalone company must apply for a VAT certification to reduce a cashflow impact of 16% of the commercial import value. The VAT certification process could take about 6-12 months.
Potential Government Incentives
Local governments offer programs to promote foreign direct investment. Having a standalone operation provides companies with the possibility of obtaining government incentives, including payroll tax exemption, training and recruiting assistance.
Retaining talent under a shelter program could be a challenge because employees are affiliated to the shelter company payroll and typically don’t have the same perks as a full-time direct hire employee. There also tends to be less job security because the individual is not part of the actual company.
To retain talent, many Mexican companies have implemented additional benefits beyond those required by law such as flexible work hours and the ability to work from home. According to recent studies, the cost of replacing an individual within an organization could be 50% to 60% of the individual’s annual salary.
Under a shelter company, the customer of the foreign entity has to be the importer of record for all sales. Since the shelter company usually has the supplier code, there is not a direct link between you and your customer. Depending on the industry, this could make it challenging to expand and grow your business.
By incorporating your Mexican entity, the standalone company would be directly positioning its brand through an independent vehicle that is leading the operation, both for contractual and commercial relationships. This is very important for businesses interested in expanding their footprint in Mexico.
We have successfully supported clients under both standalone and shelter structures. Choosing the best option for your business depends on many factors including your company size and unique needs. Contact us today to learn more. We look forward to speaking with you soon.