How an Evaluation on Permanent Establishment Can Help Maquilas to Mitigate Risks

Marco Antonio Reyes and Marco Antonio Ruiz , members of Andersen Tax & Legal in Mexico

In 2011, the government of Mexico added a section related to the Income Tax Law which specifies that residents abroad (non-residents), who have permanent establishment in the country (with respect to the revenue attributable to said permanent establishment), are required to pay income tax. It also indicates that any place where business activities or services are performed or provided by a resident abroad could be considered permanent establishment.

However, this change in the regulation implies a review in greater detail, regarding the impact on maquilas companies, should be conducted. This is due to the fact that the resident abroad is not considered to have a permanent establishment in Mexico as a result of the legal or economic relationships maintained with companies carrying out a Maquila Operation (inventory processing activities carried out by a maquila), as long as these companies comply with several tax and customs obligations. A Maquila Operation is the processing of goods maintained in Mexico by the resident abroad (foreign principal) and uses assets provided by the resident abroad or any related party, among other characteristics (requirements).

A detailed review of the risk on potential permanent establishments is suggested to ensure maquila companies are in compliance with the Income Tax Law. Andersen Tax & Legal in Mexico provides support to residents abroad and can help you and your organization to evaluate, among other aspects, the following:

  • Foreign Principal residence
  • Maquila Operation contracts
  • Importing raw materials and goods acquired in the domestic market
  • Inventory processing activity (machinery and equipment property requirement)
  • Revenues generated from the Maquila Operation