The concept of “permanent establishment” is fundamental to understanding when a foreign company must comply with tax obligations in Mexico.
In general terms, a permanent establishment refers to any place of business where business activities are carried out or independent personal services are provided within the national territory.
This concept is regulated in Article 2 of the Income Tax Law (LISR) and has important implications for foreign residents operating in the country. Below, we explore in detail what is considered a permanent establishment and the specific criteria that determine its existence.
What is Considered a Permanent Establishment?
According to the LISR, a permanent establishment is considered to be any place of business where independent business activities or personal services are carried out partially or totally. Common examples of permanent establishments include:
- Branches
- Agencies
- Offices
- Factories
- Workshops
- Facilities
- Mines and quarries
- Any place of exploration, extraction or exploitation of natural resources
This means that even if a business does not have a fixed physical presence in Mexico, it can be considered a permanent establishment if it carries out relevant business activities in the country.
Permanent Establishment without a Physical Place of Business
A key aspect of Article 2 is that a physical location is not required for a foreign resident to be considered to have a permanent establishment in Mexico. If a foreign resident acts through a natural person or legal entity (other than an independent agent) that performs activities for the foreigner, a permanent establishment will be considered to exist if that person:
- Regularly concludes contracts or plays a leading role in their conclusion.
- Enters into contracts on behalf of the foreign resident or sells property rights or services that bind the foreigner.
Exceptions to Permanent Establishment
Not all business activities give rise to a permanent establishment. For example, if the activities are merely preparatory or auxiliary, such as the holding of goods for storage or display, or the use of a place of business for advertising or research activities, a permanent establishment is not considered to exist.
However, this exception does not apply if the auxiliary activities are combined with other functions in Mexico that are part of a cohesive business operation, since this could alter their preparatory character.
Construction Activities and Other Related Services
In the case of construction, demolition, installation, maintenance or assembly services on real property, a permanent establishment is considered to exist only if these activities last more than 183 calendar days in a twelve-month period. In addition, if these services are subcontracted, the days worked by the subcontractors are added to the total period to determine the duration of the activity.
Tax Implications for Foreign Companies
Income attributable to a permanent establishment in Mexico includes income derived from business activities, the provision of independent personal services, and the sale of goods or real estate, whether these are carried out directly by the foreign company's head office, by another establishment, or by the foreign resident itself. Companies must comply with their tax obligations in Mexico regarding this income.
Conclusion
Permanent establishment is a key concept for foreign residents operating in Mexico, as it defines when they are subject to taxes in the country. It is crucial for foreign companies to know these guidelines and evaluate their activities to avoid tax non-compliance. Understanding the rules and exceptions can help to properly manage tax obligations and avoid penalties.
If your company operates in Mexico and you have questions about whether the permanent establishment figure applies to you, consult with a tax specialist to ensure proper compliance with your tax obligations.
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