Internationalization represents a considerable business opportunity for any company. Mexico is undoubtedly the preferred destination for Spaniards who are considering expanding the borders of their business to new markets. Mexico is endorsed by more than 4,000 Spanish companies from all kinds of sectors: BBVA, Iberdrola, Freixenet… large multinationals and reference entities, but it is also a very interesting destination for SMEs that choose this destination to internationalize their business for the first time in the form of a branch or subsidiary in Mexico.
Do I need to establish my subsidiary or branch in Mexico?
Once the relevant market studies have been carried out and the final decision has been made to create a company in Mexico and establish itself in the new country, it is time to decide how your business will be constituted and what type of legal formula is the most appropriate for your project in Mexico. There are multiple options for opening a business abroad: branches, subsidiaries, permanent establishment, etc.
The legal forms mentioned above are valid if you want to create a multinational and control the international presence by having a presence in the country of destination. Throughout the article, we will give details about companies willing to establish themselves either through a branch or a subsidiary in Mexico. To generate economic relations as an exporter, it is possible to internationalize only the marketing activity. For this type of companies do not need to have an established presence in the country of destination.
There are several legal and tax differences between the different formulas, which means that opening a branch in Mexico or creating a subsidiary in Mexico is not the same economically. Below, we analyze and detail the characteristics and main differences of each type of company.
Mexico Branch
According to the LIE (Mexican Foreign Investment Law), a branch is a foreign company that is established with the intention of generating commerce in the Mexican Republic. Mexican Republic. Branches (considered representative offices of a parent company with income) must only carry out activities authorized to foreigners according to the LIE.
It is a secondary establishment that does not have its own legal personality, since all branches of the same company share object with the parent company. A branch produces the territorial dispersion of the company and its activity as a result of business expansion. The main intention of a branch is to cover a wider range of markets and obtain new customers.
A branch in Mexico of a Spanish company has its own autonomy, in that it is assigned an operational director that does not affect the company’s unit (which subordinates the subsidiary in terms of guidelines to be followed). The branch does have its own independent facilities, as well as its own client portfolio, and must maintain its activity in a continuous and independent manner.
What does it mean to have a branch in Mexico?
Branches are administrative divisions of a central entity, created either by a corporation, a sole proprietorship or another type of company.
Regarding taxation, in most countries the parent company will include the profits of the branch in its tax base (deducting the local tax already paid in the country of the branch), as well as deducting possible losses. The assets and liabilities and the operations carried out in Mexico will have their own accounting. It is necessary that the central company, domiciled in Spain, also presents its accounts according to the national legislation of the Mexican registry.
Subsidiary in Mexico
A subsidiary is an independent company, a corporation created with economic contributions from a central company. The subsidiary in Mexico must follow the rules of Mexico for all purposes. It is understood that a subsidiary is a resident in the country of destination for all purposes. A subsidiary has its own legal personality and differentiated from the parent company, this means total legal autonomy, capital and bylaws.
The Mexican Foreign Income Law allows a company to be formed in Mexico with the desired percentage of Spanish capital (up to 100%). In the event that more than 51% of the capital comes from the parent company in Spain, it will be considered a subsidiary (affiliate). It is important to take into account that in some cases this law (LIE) restricts certain economic activities for these subsidiaries with foreign participation.
Decisions made in the subsidiary do not affect the parent company in Spain, which is not responsible for the actions of the Mexican subsidiary.
What does it mean to have a subsidiary in Mexico?
The subsidiaries will be subject to Mexican tax laws, paying their own taxes. In addition, in the distribution of stock dividends, tax payments will be made in the state of residence (in this case, Mexico). As it is legally treated as an independent company, it is not possible to offset losses between the parent company and the subsidiary.
The subsidiary in Mexico is considered an independent commercial company and is endowed with real legal autonomy, which means independence and disassociation from the possible obligations with creditors of the parent company, since the obligations affect it directly and are not the responsibility of the Mexican subsidiary.
Payments made to the parent company for royalties, interest or commissions are deductible in the subsidiary. It is also important to note that there are double taxation agreements, international treaties that include measures specially designed to prevent a person, company or asset from being taxed twice in different countries.
The team of lawyers in Mexico of Delvy offers soft landing services for those Spanish entrepreneurs who want to expand their borders and land in the Mexican market. You can contact us through our contact form, through our email or call us at (+34) 93 518 53 85.
