Corporate tax obligations in Mexico materialize when enterprises form permanent establishments.
Many businesses conduct activities in both Mexico and the US, as a result they are concerned as regards the matter of corporate income tax obligations that are mandated by each of the respective governments. In the early 1990s, the governments of Mexico and the US signed a mutual agreement to avoid double taxation and to clarify this issue. The following should not be construed as tax advice, but does provide a general overview that will provide the reader with the basic knowledge to begin to understand corporate tax obligations in Mexico.
What Constitutes a Permanent Establishment?
For tax purposes, it is important to establish what constitutes a “permanent establishment.” This is the case because of the fact that tax obligations predicated on activities conducted through said establishments can be properly identified. A permanent establishment is defined within the convention between the US and Mexico as a fixed place of business through which the business of an enterprise is wholly or partly carried on. This especially applies to business branches, offices, factories, mines, wells, etc.
What this definition does not include is:
- Facilities used only for storage, display, or delivery of company goods.
- Stockpiles for goods used only for processing by another enterprise.
- A fixed business location used only for purchasing or collecting information on goods.
- A fixed business location used only for the purposes of advertising, scientific research, loan activities, or other activities that are auxiliary or preparatory.
- A fixed business location used only for a combination of any of the above mentioned activities, as long as they are auxiliary or preparatory.
If an employee or officer of an enterprise acts in one country on the behalf of an enterprise in another, the officer and enterprise in the first country are generally said to have a permanent establishment in that first country. However, simply doing business in Mexico and the US is not sufficient in and of itself to constitute a permanent establishment in both countries. As a result a company’s corporate tax obligations in Mexico should be made clear.
What profits are eligible for taxation given the nature of corporate tax obligations in Mexico?
If a company conducts business in both countries, the profits are eligible for taxation only in the home country unless a permanent establishment is maintained in the other country. And even if one is established, only those profits arising from the activities of that foreign permanent establishment may be taxed in that country. Each permanent establishment in their respective countries is responsible for its own profits. This is as though it were an independent business.
Regarding expense deductions, each permanent establishment may likewise count expenses incurred directly by each establishment, and no payments between establishments of the same enterprise may be counted as an expense. This applies in the case of such things as, but not limited to:
In effect, business operations in each country are only responsible for those profits and expenses they incur, via permanent establishments, on their own respective sides of the border. Understanding this is the basis for understanding the basics of corporate tax obligations in Mexico.