A nonresident company with a permanent establishment in Mexico is liable for Mexican corporate income tax at 34% on the income (after deducting allowable expenses) attributable to that permanent establishment and for final withholding taxes on the gross amount of any other income that the company receives from Mexican sources. Attributable income is basically income that results from the business activity carried out by the Mexican permanent establishment; income from goods and personal and real property sold in Mexico by the home office or by any permanent establishments in other countries; and income obtained by the headquarters or any establishments abroad, in the proportion that the permanent establishment has participated in the expenses incurred to obtain the income.
Any place in which business activities are conducted, including a branch or office, is considered a permanent establishment. In addition, a foreign company is considered to have a permanent establishment in Mexico if it carries out activities in the country through any person that concludes contracts in the company's name, that has a stock of goods or merchandise out of which deliveries are made on the company's behalf, that assumes risks on account of the foreign company, that acts according to the specific instructions of the foreign company, that carries out activities that should be performed by the foreign company and that would not normally be performed by the person acting independently, or that is remunerated irrespective of the results of the activities carried out. However, a nonresident is not deemed to have a permanent establishment in Mexico if it can prove that operations were carried out on arm's-length terms through a person that does not exercise any authority.
A new concept, fixed base, applies from 1992. A fixed base is equivalent to a permanent establishment and is subject to the same tax treatment but refers to income earned from fees and independent professional services provided in Mexico by nonresidents. A fixed base is any place at which independent professional services or independent personal services of, for example, a scientific, literary, artistic, or educational nature are provided.
A foreign associate in a joint venture that operates through a Mexican place of business is considered to have a permanent establishment. A permanent establishment also exists when construction, installation, maintenance, and similar services, or related inspection or supervision activities, extend for more than 183 days in a twelve-month period.
A nonresident company without a permanent establishment or fixed base in Mexico is liable for tax on Mexican-source income only, usually collected by withholding (see "WITHHOLDING TAXES").
Branches of foreign companies and other Mexican permanent establishments or fixed bases of companies resident abroad may deduct expenses relating to their activities in Mexico, whether such expenses are incurred in Mexico or abroad, even when those deductions are prorated with the foreign head office or other foreign establishments of the nonresident company, provided that established requirements are met. In particular, payments by a Mexican permanent establishment to its foreign main office or other foreign establishments of the nonresident company are not deductible, even in the case of royalties, fees, commissions, or interest. The only exceptions to this rule are payments for the purchase of merchandise or fixed assets.
Profits and capital repayments remitted in cash or in kind from the Mexican permanent establishment or fixed base of a foreign company to its head office or to a foreign permanent establishment are considered dividend income when they are not paid from the balance of the net tax profit account or the capital remittance account kept by the paying entity. The permanent establishment or the fixed base must, in these circumstances, pay tax at 34% on the result of multiplying the amount of the profits or remittances that exceeds the balance by a factor of 1.515. Thus, no tax is payable if profits or remittances do not exceed the balances in the accounts.
The balances of the capital remittance and net tax profit accounts are adjusted for inflation at the end of each year (without including the net tax profits in that year) by applying the inflation adjustment factor for the period from the month of the last adjustment up to the last month of the year in question. If remittances are either made or received during the course of a year, the balances of the accounts are adjusted by applying the factor for the period from the month of the last adjustment up to the month in which a payment was either made or received.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
For further information contact Deirdre Silberstein, Deloitte & Touche, Washington on +1 202 955 4000 or enter a text search 'Deloitte & Touche' and 'Business Monitor'.
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