As indicated in prior communications, the Mexican tax reform that entered into force in January 1, 2014 narrowed the concept of maquiladoras for income tax purposes. Under the new definition, maquiladoras income must come exclusively from its maquila services to shield them from creating a permanent establishment for their principals, specifically prohibiting them from selling any inventory or manufactured products in Mexico.

Transitory provisions deferred the enforcement of the reform through September 30, 2014. Thus, considering that the deferred term for implementation of the revised maquiladora activities ends today, we would like to remind you that as of October 1, 2014 your maquiladora operations must be very careful not to be involved in sales of inventory or manufactured products to non-maquiladora entities in Mexico.

Failure to comply with such provisions could trigger the risk of creating a permanent establishment in Mexico for the foreign principal, since the maquila companies will not be entitled to apply the safe harbor rules for such purposes.

It is worth mentioning that maquila companies will continue to be allowed to perform several activities that can be construed as maquila activities, such as the provision of personnel services to its related parties; leasing of movable and real property; selling waste & shrinkage of material used in its productive activities; sale of movable assets (excluding inventory and manufactured products) and real property; interests; and any other income related to its productive activity, provided these are different from the ones obtained from the sale and distribution of finished products for its further resale.

If you need any further assistance for the analysis and review of your current structure and the application of the abovementioned rules, please do not hesitate to contact us as soon as possible.

Originally published September 30, 2014

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.