In recent years, the Mexican tax authority has strengthened its tax and collection practices, which in my opinion is very pertinent, provided that such practices are grounded in the legal framework.
However, it has been noted the denaturalisation of some legal concepts, such as permanent establishment (PE), gives cause to re-assess government charges to taxpayers, or to deny them tax refunds to which they are entitled.
According to our professional experience, it has been observed that the federal tax authorities sometimes consider that non-residents have a PE in our country, due to the entering into a commission agency agreement whereby Mexican residents provide services to such non-residents. For the purposes of having greater legal certainty in the execution of this kind of legal action, it is important to consider the following aspects:
1.Applicable law
The first aspect to analyse in this type of case is that the tax authority deems that a PE of a non-resident company should be analysed under domestic law.
“The first requirement for a PE is that a non-resident company has a fixed place of business in the country ”
Unfortunately, in these kind of cases, the Federal Supreme Court of Justice1 principle is no longer taken into consideration, which states that when a non-resident proves to reside for tax purposes in a country that is party to a treaty to avoid double taxation (treaties) in effect, in the first instance, the treaty should be deemed as the applicable law, since treaties are agreements hierarchically above the domestic law.
The above is important, since in Mexican law the concept of PE, particularly an independent agent, is broader compared to the one contained in the treaties.
2. Permanent establishment
Under Mexican law and the treaties, the first requirement for a PE is that a non-resident company has a fixed place of business in the country to carry out its business activities, either in whole or in part.
If there is not a fixed place of business, the second point to analyse consists of verifying whether the non-resident company acts in the country, through an independent agent, which means to confirm if such agent depends economically or legally on such non-resident.
2.1 Agent of independent status
Domestic law and treaties regulate in a very similar way the concept of the independent agent.
Thus, it is considered that a non-resident has a permanent establishment in the country, with respect to all the activities that the agent carries out for such non-resident, if the person customarily closes the agreements or continuously plays the main role leading to the closing thereof.
2.2 Independent agent
Domestic law considers that a non-resident has a permanent establishment in the country when doing business in the national territory through an individual or business entity acting as an independent agent, if such individual or entity does not act within the ordinary framework of their activity. For these purposes, it is deemed that an independent agent does not act within the ordinary framework of its activities, among others, when such an agent (1) acts subject to detailed instructions or the general control of a non-resident; or (2) carries out transactions with such nonresident using prices or considerations other than the ones that may have been used in arm’s-length transactions.
The treaties state that any non-resident doing business in the national territory through an individual or business entity acting as an independent agent will be considered to have a PE, if such an agent does not act within the ordinary framework of its activity and the consideration is other than the one that should have been used in arm’s-length transactions.
In some cases, the tax authorities have confused these concepts, since both state that at the time of being subject to detailed instructions, there is a fixed place of business which, based on their own nature, are mutually exclusive, since one case is the physical presence (fixed place of business) and the other does not require physical presence that necessarily involves the activity of a third party (an independent agent).
Also, the authorities have considered that anyone acting in the name and on behalf of a foreigner, automatically implies that such person is subject to detailed instructions or the general control of the foreigner. In this regard, it is important to take into account that as in any commission agency agreement, obligations are determined for each of the parties, which, based on their complexity, purpose and uniqueness, may be more or less detailed.
From a legal point of view, the obligations of the parties cannot be confused with detailed instructions, since obligations are the object or framework of an agreement being determined by both parties, whilst the instructions are a set of rules or warnings to satisfy along with the assumed obligations and are unilaterally given by the contracting party to the service provider.
It is important to make the distinction between obligations and instructions, through a clear wording of the agreements, which allows to prove this distinction and thus avoid confusion among the tax authorities.
Participation of the non-resident
The tax authorities have stated that non-resident companies may have a PE in Mexico just by having equity interest in a Mexican company.
The fact that a non-resident company has equity interest in a resident of our country does not imply that such a non-resident company has a subordinate relationship with the resident thereby creating a PE.
The commentaries on the Model Tax Convention on Income and On Equity of the Organisation for Economic Cooperation and Development state that the status of shareholder is not relevant to determine the dependence or independence of one company to another. Therefore, it is neither relevant nor an indication of a PE the fact that a non-resident has equity interest in a Mexican company.
Conclusion
The commercial nature of this type of agreement ensures that both parties maintain their independence and, therefore, contribute their own resources and are responsible for their own obligations, which means that there are no detailed instructions, much less a dependence due to the fact that a non-resident has equity interest in a Mexican resident.
In conclusion, although it is true that in any act or activity to be carried out, legal advice is necessary. Currently, it is essential that any agreement with non-residents be analysed by a lawyer specialising in tax matters, merely to avoid problems and tax contingencies.
1 For the purpose of this article, the Treaty with the United States of America will be considered.
