Mexico strengthens nearshoring with fiscal incentives, strategic location, and infrastructure growth

The pandemic accelerated this shift to nearshoring as firms sought alternatives to reliance on Asia and offshoring-related disruptions. In December 2024, President Claudia Sheinbaum extended fiscal incentives, including tax benefits for export industries, lower Income Tax and VAT rates in border regions, and fuel tax reductions to stabilize costs. These measures aim to boost investment, strengthen economic stability, and attract multinational corporations. With supply chain resilience now a priority, Mexico is solidifying its position as a nearshoring leader.

What is nearshoring and why do companies use this strategy?

Nearshoring is a strategy that many companies have adopted to move their commercial or manufacturing activities to countries closer to the company or the target market to reduce costs and take advantage of geographical proximity.

Where does nearshoring come from?

Nearshoring originates from offshoring, which involves relocating production to distant countries to reduce costs through outsourcing. The need for nearshoring arose due to supply chain disruptions caused by the COVID-19 pandemic. Long distances and time differences between continents triggered logistical issues, making companies reconsider their sourcing strategies. Another significant factor in the rise of nearshoring is the ongoing trade war between the United States and China, which began in 2021. This situation has led Mexico to gain a prominent position in U.S. imports and to develop nearshoring as a key economic strategy.

What role does Mexico play?

Due to Mexico's strategic location, legislative model, the Free Trade Agreement between the United States, Mexico, and Canada (“USMCA”), geographic proximity to the U.S., low labor costs, secure and agile supply chains, and the expansion of the automotive industry, the country has positioned itself as a key player in nearshoring. This allows Mexico to gain greater relevance in the logistical development of the North American market.

The advantages of nearshoring in Mexico for the U.S.

The main advantages of nearshoring in Mexico include a shorter supply chain, faster and less complex logistics, the ability to use various transportation modes beyond maritime shipping, proximity to customers and suppliers within the same time zones, and the modernization of industrial machinery and infrastructure. The modernization efforts in Mexico are being expedited to maintain its attractiveness for North American investors. Industrial plants and workshops are upgrading their machinery to meet the demands of competitive industries such as automotive, aerospace, and electronics.

Government incentives for nearshoring in Mexico

To further boost nearshoring, the Mexican government has implemented fiscal incentives to attract foreign investment and facilitate business operations. A significant milestone in this effort is the Decree published in the Official Gazette of the Federation (DOF) on December 24, 2024, signed by President Claudia Sheinbaum Pardo, which extends the validity of various fiscal incentives aimed at promoting investment, improving business competitiveness, strengthening border regions, and protecting household economies from fuel costs.

Foreign Trade Incentives for the Export Industry

1. IMMEX Program

The IMMEX Program or Maquiladoras, is an export promotion program issued by the Ministry of Economy, which grants diverse fiscal, administrative and operational incentives, and seeks to generate and incentivize foreign investment in Mexico. Aims to carry out manufacturing, transformation, and repair activities. It allows the temporary importation of raw materials and machinery supplied by a foreign resident, and it relieves the payment of the import duties triggered by the introduction of goods in Mexico.

Moreover, under this promotion program a foreign company can outsource manufacturing services through a shelter company, which is a well-established and non-related party of the overseas supplier, which allows foreign manufacturers to set up a maquiladora without establishing and incorporating in Mexico. Mexican shelter companies find the strategic location for its facilities, holds the appropriate equipment, apply for, secure all necessary import, and export permits, and manage any other necessary regulatory or tax paperwork.

2. VAT Certification

Since 2014, the temporary importations are subject to the payment of Value Added Tax (VAT) at 16%. The VAT Certification is a benefit available to companies with an authorized IMMEX Program, as well as to companies holding an authorization as a Bonded Warehouse for the Automotive Industry. This is a customs regime created to grant tax and customs benefits to the vehicle assembly industry. With this regime the beneficiary reliefs or avoids the payment of the corresponding VAT for temporary importations of goods used in its manufacturing or repairing processes that will eventually be exported during the established legal terms.

VAT certification is a key step for companies interested in conducting foreign trade operations, due to the cost saving that entails the relief of VAT payment that would otherwise be triggered by the temporary import of goods. Therefore, this incentivizes the possibility to increase operations in Mexico.

3. PROSEC Program

The PROSEC is an authorization issued by the Ministry of Economy to encourage the development of certain key economic sectors in the country, such as automotive and auto parts, electrical, electronics, furniture, toys, footwear, mining and metallurgy, capital goods, photography, agricultural machinery, various industries, chemicals, iron and steel, pharmaceutical chemicals, medicines and medical equipment, transport, paper and cardboard, wood, leather, textiles and clothing, amongst others.

In general terms, a PROSEC holder is able to import raw materials on a definitive or temporary basis at preferential tariffs to produce goods in its authorized sector, without being obliged to use them for export, and they may therefore be commercialized on national territory.

4. 8th Rule

The 8th Rule is a Permit of the Ministry of Economy used in conjunction with the PROSEC Program to import raw materials for certain sectors, as well as equipment and machinery for the production of finished goods. The main benefits are to apply tariff preferences and reduce the administrative costs of tariff classification, as well as reducing the risks of incorrect customs tariff classification.

5. Mexico's network of Free Trade Agreements

Free Trade Agreements (FTAs) are international instruments used by the member countries to grant each other tariff preferences and mutual trade facilities, without being obliged to extend them to the rest of the countries. In most cases, FTAs include investment protection procedures and policies, as well as dispute settlement mechanisms. They are significant bilateral or multilateral agreements aimed at regulating international trade between the signatory parties.

Mexico currently has 13 FTAs in force.  This international legal framework grants Mexico a unique position to access markets of around 50 countries at preferential rates, making it highly competitive in the world. Mexico has FTAs with Colombia; Chile; Israel; the European Union; jointly with Iceland, Liechtenstein, Norway and Switzerland; Uruguay; Japan; Peru; Central America; Panama; the member countries of the Pacific Alliance (Colombia, Chile and Peru) and with the member countries of the CPTPP whose members currently are Australia, Canada, Japan, Mexico, New Zealand and Singapore.

Undoubtedly, Mexico's most important FTA is the USMCA due to the intimate commercial relationship and balance between the USA and Mexico, as well as for the current benefits to avoid the IEEPA Tariffs imposed by the USA, if evidenced that the goods are USMCA originated.

Fiscal Incentives for the Export Industry

The decree extends fiscal incentives for the export industry, allowing companies to immediately deduct investments in new fixed assets, such as machinery and equipment, while also granting additional deductions for workforce training expenses. These measures are designed to encourage companies to modernize their production lines, improve operational efficiency, and maintain Mexico's competitiveness in global markets. Additionally, these fiscal benefits attract multinational corporations seeking cost-efficient manufacturing alternatives close to the United States.

Incentives for the Northern Border Region

Tax reductions for businesses operating in the northern border region have been renewed, ensuring favorable conditions for enterprises that rely on cross-border trade. The decree expands the list of municipalities eligible for these benefits, incorporating San Quintín and San Felipe (both in the State of Baja California) to reflect administrative and demographic shifts. The lower tax rates for Income Tax (ISR) and Value-Added Tax (IVA) make this region particularly attractive for businesses seeking to optimize operational costs while maintaining accessibility to U.S. markets. Additionally, infrastructure improvements in customs operations and transportation networks facilitate smoother cross-border trade, increasing efficiency for manufacturers and logistics providers.

Incentives for the Southern Border Region

To counter economic disparities and migration-related challenges, fiscal incentives for the southern border region have been extended until 2025. This region, which shares a border with Guatemala, faces higher levels of poverty compared to other parts of Mexico. By reducing Income Tax and VAT rates, the Mexican government aims to foster economic activity, create jobs, and provide businesses with financial relief. The incentives also play a crucial role in mitigating migration-related tensions by promoting sustainable economic development in the area.

Fuel Incentives for Economic Stability

One of the key components of the decree is the extension of fuel tax incentives. Excise Tax (IEPS) reductions on gasoline, diesel, and non-fossil fuels will remain valid until December 2025. These measures help stabilize fuel prices, preventing abrupt cost increases that could impact transportation and logistics expenses. By maintaining fuel affordability, businesses in logistics, manufacturing, and retail can continue operating with predictable cost structures, ensuring competitive pricing and supply chain reliability. Additionally, in the Southern Border, specific fiscal incentives have been implemented for fuel stations in municipalities along the southern border. These incentives help narrow the price gap between Mexican and Guatemalan fuel markets, preventing an exodus of consumers seeking lower fuel prices in neighboring countries.

Conclusion

The nearshoring strategy has gained momentum as a response to global supply chain disruptions and geopolitical tensions. Mexico has become an attractive destination for foreign investment due to its strategic advantages, such as proximity to the U.S., competitive labor costs, and trade agreements. The Mexican government has taken proactive steps to reinforce this trend by extending fiscal incentives that facilitate business operations and promote industrial growth.

Next steps

With extended tax benefits for export industries, specialized incentives for northern and southern border regions, and fuel tax reductions, Mexico is positioning itself as a prime destination for companies seeking nearshoring opportunities. As this trend continues to evolve, businesses will benefit from ongoing support and policies designed to enhance competitiveness and economic development. If you are considering nearshoring opportunities in Mexico, Hogan Lovells would be delighted to advise you on all related matters.

Authored by Dominguez de P. Angel and Medina L. Fernando.