The Mexican Federal Tax Code provides that corporations are deemed residents in Mexico if the principal centre of administration or the effective place of management is located in Mexico. A specific definition of ‘tax resident’ in any tax treaty overrides domestic law definitions, provided the taxpayer is eligible to apply the treaty.
When a company ceases to be a Mexican resident in terms of the Mexican Federal Tax Code or any tax treaty, it is deemed to be liquidated for tax purposes. In such cases, a notification is required at least 15 days before the change, and the CIT return must be filed with the Mexican tax authorities within 15 working days following the date on which the change of tax residency takes place.
Permanent establishment (PE)
The Mexican Income Tax Law considers a PE to be any place in Mexico where business activities or services are carried out or rendered by non-residents, such as agencies, offices, mining exploration sites, or any other place of exploration, extraction, or exploitation of natural resources, regardless of the length of time involved.
Moreover, note that the 2020 Mexican Tax Reform introduces additional provisions to determine when a foreign resident has a PE in Mexico. In this regard, the threshold to trigger a PE when a foreign entity acts in Mexico through a dependent agent in those cases where it habitually concludes contracts on behalf of the non-resident is extended to also cover situations when the dependent agent habitually carries out the principal role leading to the conclusion of the contracts, and any of the following apply:
- the contracts are executed in the name of or on behalf of the non-resident;
- the contracts provide for the transfer of the rights or grant the temporary right to use property or imply transferring such temporary right; or
- the contracts commit the non-resident to provide a service.
Additionally, the 2020 Tax Reform introduces additional scenarios to consider when an independent agent could also trigger as a PE under the argument that it does not act within its ordinary framework of activities. In this sense, the 2020 Tax Reform adds that a Mexican resident acting exclusively or almost exclusively on behalf of non-Mexican resident related parties will be deemed to be an independent agent acting outside of its ordinary frame of activities.
A foreign insurance company could also be considered as having a PE when it engages in activities consisting of insuring risk or collecting premiums (with the exception of reinsurance activities) in Mexico through a party other than an independent agent.
Sites used for display, storage, or purchasing facilities; inventories imported in-bond to be processed by a third party; short-term construction services; and offices to carry out auxiliary or preliminary activities and information gathering or scientific research are not considered to create a PE in Mexico. Non-residents may also keep merchandise in bonded warehouses (including merchandise delivered for importation into Mexico) without being considered as having a PE. However, the 2020 Tax Reform introduced a provision stating that such exceptions would not be applicable when the foreign resident performs the aforementioned auxiliary of complimentary activities as par of a cohesive business operation which renders as a result an activity that do not preserves such character.
Based on the Hydrocarbons Law, foreign residents are deemed to have a PE when conducting certain oil and gas activities in Mexico for more than 30 days. This implies that the foreigner would need to satisfy all enrolment, compliance, documentation, withholding, and tax filing and payment obligations applicable to Mexican branches of foreign residents.
A non-resident is not considered to have a PE in Mexico as a result of the legal or economic relationships maintained with companies carrying out certain inventory processing activities (i.e. Maquiladoras) that process goods or merchandise maintained in Mexico by the non-resident by using assets provided by the non-resident or any related party, as long as certain requirements are met. The requirements include the conditions that the non-resident be resident in a tax treaty country and that the Maquiladora complies with the transfer pricing provisions (‘safe harbour’) to determine its tax profit, as provided in the Mexican Income Tax Law, or secure an advance pricing agreement (APA) negotiated with the Mexican tax authorities.
Maquila operations are generally defined as those with the following characteristics:
- Raw materials are supplied by a foreign resident (with which a Maquila contract is in place) and are temporarily imported to be processed, transformed, or repaired and are subsequently exported, including, for these purposes, virtual import-export operations.
- The Maquila is also permitted to import goods in accordance with the permanent importation regime. Additionally, local purchases are allowed, as long as such goods are consumed in production and/or exported with the temporarily-imported inventory.
- The processing, transformation, or repair of goods must be performed with temporarily-imported machinery and equipment (M&E) that is the property of the foreign principal. In this regard, the foreign principal must own at least 30% of such M&E. It is important to mention that this M&E may not have been previously owned by the Maquila or by any other Mexican-related party.
Parties resident abroad and engaged in Maquila operations through shelter Maquila companies may not be considered as creating a PE in Mexico when certain requirements are met and certain information is provided to the Mexican Tax Administration in relation to the gross revenues earned and income taxes paid by its non-Mexican-related party. Up to 2019, the PE protection is limited to four years after that period non-Mexican residents may opt to comply with their tax obligations as if they had a PE (instead of registering one) through the shelter Maquiladora for an additional four-year period subject to the compliance of certain requirements. However, under the 2020 Mexico Tax Reform, foreign residents would be subject to Tax in Mexico since the beginning of its operations with the shelter Maquiladora but will be able to continue complying such obligations through the shelter Maquiladora indefinitely (no need to register a PE) subject to certain requirements and new obligations incorporated for Maquiladoras.
It is important to note that per the transitory tax provisions included in the 2020 Tax Reform, foreign residents applying the shelter Maquiladora regime under the previous regime may continue to do so until the relevant time period expires, after which they would be subject to the 2020 shelter Maquiladora tax regime update.
A definition of PE in any tax treaty overrides domestic law definitions where the taxpayer is eligible to apply the corresponding tax treaty.