Amendments to outsourcing rules and mandatory profit sharing

On 23 April 2021, amendments to the Federal Labor Law and ancillary provisions of the Tax Code, Income Tax Law and Value Added Tax Law, among others, were published in the Official Federal Gazzete (Diario Oficial de la Federación) to regulate outsourcing and mandatory profit sharing.

This landmark legislation will imply a major change in employee-employer relationships in Mexico, as it closes a loop that permitted subcontracting structures to avoid payment of social security benefits to employees and improper tax deductions, and caps mandatory profit sharing to employees.

These amendments have become effective as Monday, 26 April 2021, except for amendments to tax regulations (Tax Code, Income Tax Law and Value Added Tax Law) which become effective on August 1st, 2021 and specific regulation for the registration of outsourcing companies which will become effective after the issuance of ancillary regulation the Ministry of Labor.

Corporate employers in Mexico should consider these key aspects:

1.Labor and Social Security considerations

(a) Subcontracting of personnel (outsourcing and insourcing) is generally prohibited, except for specialized services, which may continue to be subcontracted.

(b) Subcontracting of specialized services or the execution of specialized projects is permitted, provided that such services are not included within the corporate purpose or core business of the entity that receives the services. This will also be applicable to services or projects between entities of the same corporate group.

(c) Providers of outsourced specialized services must be registered and authorized by the Ministry of Labor and Social Security. The authorization must be renewed on a three-year basis and such outsourcing company must be up to date with its tax and social security obligations. The Ministry of Labor and Social Security will issue outsourcing regulations for registration within 30 days and outsourcing companies will have a 90- day period after the publication of such rules to obtain registration.

(d) Mandatory profit sharing to employees will be capped up to, the greater of: (i) three months of salary; or (ii) the average of the mandatory profit sharing received by employees within the last three years.

(e) Employer substitution must be a consequence of an asset transfer. The foregoing will become effective 90 days after the publication of the bill.

2.Tax considerations
Outsourcing in violation of these new prohibitions will no longer be deductible for tax purposes. Subcontracting of specialized services will continue to be tax-deductible provided that the outsourcing company is registered in accordance with new outsourcing regulations.

3.Breach of new outsourcing rules
Beneficiaries of outsourcing services or projects will be jointly liable for unpaid tax contributions of outsourced services, even if the outsourcing companies are duly authorized by the Ministry of Labor and Social Security. Corporate Employers will need to put appropriate attention to this. Further, simulation of “specialized services” and other illegal outsourcing of employees will be considered as qualified tax fraud. Other penalties for breach of these rules will apply, including monetary sanctions per the Federal Labor Law and tax regulations.

Recommendations
All companies operating in Mexico (even if they were not previously involved in outsourcing/insourcing schemes) should review their contractual relationships with employees, clients and suppliers and the corporate purpose of their operating and services companies. Particular emphasis should be put on the following:

(a) Legal analysis of the impacts of the amendments in your operations, including corporate structure of your company, labor, customs, tax and real estate related issues. Special attention should be put to corporate purposes of the company in the bylaws (broad corporate purposes, which is usually the standard, should be narrowed to the actual core business of the company).

(a) Legal analysis of your existing agreements with services providers, clients, vendors and suppliers, to confirm that the provision of services, if any, complies with new outsourcing regulation.

(b) Change of employment structure, either by an employer substitution, (in which the operating company becomes employer) or through a reverse-merger or merger of the operating company and the services company (for insourcing structures).

(c) Immigration matters
For any questions or comments regarding the foregoing, please contact:

Fernando Eraña
T: 55 50620054
ferana@pcga.mx

Eduardo Montenegro
T: 55 50015410
emontenegro@pcga.mx