Tax residence and fiscal domicilei Corporate residence
Incorporated persons that have established 'the principal administration of the business or their effective seat of direction' in Mexico are deemed tax residents in the country. Problems with such residency rules have been known to arise from time to time, for example when a company incorporated abroad has its board integrated by Mexican residents and no proof can be obtained about the board acting outside of Mexico.
DTA double taxation rules may deny any DTA benefits to the dual-resident corporation or subject a case to the mutual agreement procedure.ii Branch or permanent establishment
Mexico follows traditional OECD PE rules in the legislative design, therefore PE taxation of business income or professional service income can arise from the following, general hypothesis:
- when a place of business is found in the country through which entrepreneurial activities or professional services are performed;
- when the non-resident has an agent, different from an independent agent, who has powers to enter into contracts in the name of or on behalf of the non-resident attending to the carrying on of the non-resident's activities in the country; and
- when the non-resident habitually acts through an independent agent that is not acting within the ordinary framework of his or her activities.
Specific rules refer to:
- PEs arising for insurance companies when collecting premiums or insuring against risk within the national territory through an agent that is not an independent agent (excluding reinsurance);
- trusts with entrepreneurial activities, for the settlor or beneficiary carrying on the activities through the trust; and
- services relative to construction works, demolition, installation, maintenance or erections on real estate, or for projection, inspection or supervision activities related to the same, when the activity lasts longer than 183 calendar days, whether consecutive or not, within a 12-month period.
The MITL enumerates cases considered places of business; cases where an independent agent is not considered to act within the ordinary course of their business; and cases where no PE is deemed to arise - for example, places of business to store or exhibit goods, or to procure goods for the non-resident, or through which auxiliary or preparatory activities are performed.
As a general rule, income attributable to the PE includes that deriving from the carrying on of the business activities. The sale of goods or real estate within the national territory by the central office or another PE of the person shall also be attributable to the PE. Income obtained by the central office, in the proportion in which the PE contributed to the expenses necessary to obtain the income, shall likewise be attributable to the PE.
Flow of after-tax profits from the PE to the taxpayer abroad is subject to the 10 per cent dividend tax. To identify the nature of the cash flow, a PE will also have both an after-tax net profit account (CUFIN), further commented on below, and a capital allotment account; the presumption is that the last cash flows out are capital reimbursements.
Additionally, a special case of PE is established in the Hydrocarbons Revenue Law to the effect that a PE arises when a non-resident carries out oil and gas activities referred to by such law in national territory or within Mexico's exclusive economic zone for a period of more than 30 days in a 12-month period.DTA modifiers
Regarding scenarios where no PEs arise, Mexico's DTAs typically include the case of a place of business solely engaging in the delivery of goods for the account of the non-resident, an exemption case not provided for by the MITL. Usually contained in the DTAs is the standard OECD rule considering that no income can be attributable to the mere purchase of goods.
Likewise, Mexico's DTAs usually contain the rule of determining the taxable income of the PE as if it were a separate independent entity operating at arm's length.
A few DTAs follow some aspects of the UN Model Double Taxation Convention (i.e., those with India and Hong Kong) and will allow a continuing presence in a source country to render services to be constitutive of a PE. However, it is questionable whether this premise for a PE can be derived from the MITL's own PE rules to start with, although the tax authorities have taken up such positions on a number of occasions in the past.Case of maquiladoras
Under both the MITL and the DTA with the United States, when an agent different from an independent agent transforms an inventory of goods owned by the non-resident utilising assets also owned by the non-resident, a PE is deemed to arise. Specifically, the PE is deemed to exist when the economic and legal conditions existing in the relationship between the two parties is different to that which would be carried out by two independent parties.
Safe harbour rules exist in the MITL according to which even in these cases no PE shall be deemed to arise if either of the following two requisites are met: that the taxable profit be at least 6.5 per cent of costs and expenses, or 6.9 per cent of the value of most assets used to carry on the activity; and that an advanced pricing agreement be obtained from the tax authorities regarding the maquiladora's consideration.
Up to 2013, a third safe harbour provision existed, but has been suppressed as of 2014: it involved the parties stipulating their mutual consideration at arm's-length values, as supported through transfer pricing information.
Among other requirements and restrictions, the current safe harbour rules also require that at least 30 per cent of the assets used be owned by the non-resident or a related party, and that the maquiladora obtain its income exclusively from the transformation of the non-resident's inventory.