5. Business Presence Issues

A permanent establishment (PE) is a tax concept, not a corporate one. It refers to situations in which a foreign entity is considered to have a taxable presence in Mexico, even though it has not incorporated a company or formal branch under Mexican law.

Under Article 2 of the Income Tax Law (Ley del ISR), a PE may arise in two main scenarios:

1. Fixed place of business: When the foreign entity carries out commercial activities or renders services through a place in Mexico such as an office, branch, agency, factory, warehouse, or extraction site.
2. Dependent agent rule: Even without a physical location, a PE may exist when the foreign company acts through a person in Mexico (individual or legal entity) who:
   • Is not an independent agent, and
   • Has authority to habitually conclude agreements on behalf of the foreign entity.

In either case, the foreign company is deemed to have a PE in Mexico and becomes subject to Mexican income tax on income attributable to that PE.

If a PE is triggered, the foreign company must:

• Register with the Mexican tax authority (RFC);
• Pay income tax at the corporate rate of 30% on net taxable income attributable to the PE;
• Maintain local accounting records;
• Issue electronic tax invoices (CFDIs) for Mexican-sourced income;
• Comply with transfer pricing and reporting obligations, as applicable.

In effect, a PE is treated similarly to a Mexican corporation for tax purposes, even if no legal entity has been formally created.