Setting Up A Business: Permanent Establishment

Mexican Branch

Another possibility for a foreign company is to operate through branch offices in Mexico. As foreign companies are legally recognized in Mexico, they retain their liability characteristics from abroad. However, to carry out business operations, such branches must be approved by the National Commission of Foreign Investments and the Ministry of Foreign Relations and be registered at the Public Registry of Commerce.

For tax purposes, the foreign company will receive the same treatment as a permanent establishment in Mexico (see Doing Business With Mexico) and will pay taxes on the income generated from such branch offices at the normal corporate tax rate of 35%. However, the foreign company should be careful to avoid the possibility of having the income generated by the foreign company outside of Mexico to become attributable to the operations in Mexico. This possibility is due to the "force of attraction" rules contained in Mexico's tax legislation, which will sometimes require a taxpayer to include in his taxable income, income generated from abroad.

Association in Participation

The Association in Participation (Asociación en Participación or AP) is another common form of doing business in Mexico. Generally, an AP is an agreement in which one or more partners (asociados) give goods or services to a managing partner (asociante) in exchange for a right to participate in the profits of a commercial operation which is controlled by such managing partner.

For commercial purposes, the Association in Participation is not a separate legal entity. However, for tax purposes it is a separate entity and requires registration.

Joint Venture Agreement

Generally, a joint venture agreement is an association of persons (individuals or legal entities) for a limited period of time in which such persons jointly undertake a specific business enterprise. Although a joint venture agreement is sometimes mistakenly categorized only as an AP, a joint venture agreement can take many other forms. A joint venture agreement can take any form in which the parties agree to develop their business and agree to provide their respective services and capital contributions or resources to the by-laws of a new independent company. The exact type of business venture undertaken determines the liability and tax treatment of such agreement.

This text was provided by Santistevan Abogados S.C.

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