5. Business Presence Issues
A permanent establishment is a tax fiction, as it does not correspond with a company duly incorporated for legal effects in a country. Instead, it consists of a figure acquiring a variety of tax obligations, whether formally or substantially to comply with tax obligations established by the Mexican legislation. In other words, permanent establishment is the term used for tax effects, as ‘branch’ commercially speaking.
In this respect, generally, permanent establishments in Mexico are bound to pay ISR (at a rate of 30% over earned profit) applicable to the establishment’s attributable income. Consequently, it must comply with the tax obligations applicable to Mexican corporations, such as being registered in the RFC, carrying out company bookkeeping, issuing invoices, which meet specific requirements (electronic and authorized by the tax authorities), among others.
Further on the aforementioned analysis, article 2 of the ISR Law provides the definition of permanent establishment as follows:
“[…] Any place of business in which commercial activities are performed, whether totally or partially, or in which independent personal services are rendered. It shall be understood as permanent establishment, among others, the branches, agencies, offi-ces, factories, workshops, facilities, mines, quarries or any other place of exploration, extraction or exploitation of natural resources.
Notwithstanding the preceding paragraph, when a non-resident acts in the country through a natural or legal person, other than an independent agent, the non-resi-dent will be considered to have a permanent establishment in the country, in rela-tion to all the activities performed by such natural or legal person for the non-resi-dent, even when not having [the non-resident] a place of business for the provision of services within the national territory, if such person exercises powers to execute contracts in the name or on behalf of the non-resident to conduct its activities in the country, which are not mentioned in article 3 of this Law.”
As can be observed from reading the previous paragraphs, a permanent establishment is a place of business in which commercial activities take place, or in which independent personal services are rendered; or by cases in which the foreign entity acts through an independent agent in the country, to whom it has granted certain powers of attorney.