Companies with global operations and commercial activities often require personnel to have responsibilities or mentorship in different countries where subsidiaries are located. Having a foreign individual working for a company based in Mexico (the subsidiary) has several tax, labor, immigration and corporate implications that need to be addressed in accordance to the specific needs of the company. The legal structure to be implemented should be determined on a case-by-case basis, and is primarily governed by the agreement between the foreign entity and the individual that will render the services abroad, considering the term during which such services will be provided.
The purpose of this article is to encompass the top ten considerations when assigning an expatriate employee to Mexico from the tax, immigration, corporate and labor perspectives.
1. Tax Residence
Mexican tax laws consider an individual to be a "Mexican resident" when: 1) the individual's home is located in Mexican territory; or 2) when the individual's home is abroad, but the main activity center is in Mexico. For these purposes, the main activity center means: i) when 50% of the total income (on a yearly basis) derives from activities performed in Mexico; or ii) when the primary center of professional activities is in Mexico.
It is important to remark that considering the above-mentioned requirements and depending on the activities to be performed by the expat, the line between resident and non-resident is very thin.
The main implication in determining the tax residence of the assigned employee, is whether the employee will have to pay taxes in Mexico as a resident, or as a foreign individual with a source of income located in Mexico. An employee considered a Mexican resident will be obliged to pay taxes in Mexico. Additionally, employees who do not have a tax residence may still pay taxes in Mexico due to the rule of the source of income.
2. The Source of Income rule
This rule establishes that when services are rendered in Mexico, income will be considered as a source of income located in Mexico, and therefore the expat will be responsible for the payment of taxes and, if applicable, for filing tax returns.
Some exceptions may apply to this rule. The first one is when the employee's yearly salary does not exceed $125,900.00 pesos. The second one is when the employee does not stay in Mexican territory for more than 183 days (consecutive or not) in a period of 12 months.
3. Permanent Establishment in Mexico
The main risk for the foreign company when assigning an employee to Mexico is the creation of a permanent establishment through the execution of the activities by the expat. In order to avoid this, the following is required: 1) if the employee is not an independent agent, s/he shall refrain to exercise powers of attorney on behalf of the foreign company, to enter into agreements in order to conduct the foreign company's activities in Mexico; or 2) if the employee is an independent agent, s/he shall refrain to act outside the normal scope of the ordinary activities. Non-ordinary activities include, among others; having stock of goods and merchandise in order to make deliveries on behalf of the foreign company, assume risks for the foreign company, act under detailed instructions from the foreign company, conduct activities that correspond to the foreign company and not to the agent's own activities, receive compensation regardless of the result of the activities, and conduct transactions with the foreign company using consideration amounts or prices other than those that would have been agreed by independent parties in comparable transactions.
It is important to mention that when using the mirror payroll scheme, and companies execute a secondment agreement, the risk to create a permanent establishment is very low. However, if the company decides for another scheme, different than the mirror payroll one, there is a potential risk to create a permanent establishment, and therefore companies shall comply with points 1 or 2 mentioned above.
4. Obligations before Mexican Authorities
The main tax obligation in the assignment of employees is the payment of the corresponding income tax. As previously mentioned, when the employee is considered a tax resident and companies choose the mirror payroll scheme, then the paying company is obliged to withhold and pay, on behalf of the employee, the income tax to the Tax Authority.
When the employee falls under the rule of the source of income, then the employee, as a non-resident, is directly responsible for the payment of taxes and filing tax returns typically within 15 days from the day the income is received. In addition, a representative in charge of filing tax returns could be appointed by the employee. It is recommended to appoint a person, preferably an accountant, that works for the company that receives the assignment.
5. Secondment Agreement
When assigning an employee to Mexico, it is very common and highly advisable for the foreign and the Mexican companies to execute a secondment agreement. In such agreement, the parties will establish the terms and conditions of the assignment, as well as the rights and obligations of each. Normally, the parties use the following structure: i) the Mexican entity invoices expenses related to the assigned employee, and the foreign company reimburses such expenses; ii) the Mexican entity pays to the assigned employee the corresponding salary and labor benefits; and iii) the Mexican entity withholds and pays the corresponding taxes on behalf of the assigned employee.
6. Immigration Obligations
For immigration purposes the first step is to determine whether the employee's country of origin is considered as a limited nationality by immigration authorities. If such is the case, then the visa request must be followed overseas. Non-limited nationalities include most of North and South American countries, and members of the Schengen Area.
Regardless of the employee's nationality, if legal residence is pursued, then the Mexican entity should be listed as the employer and sponsor in the immigration application. An immigration application is not necessary when the stay in the country will not exceed 180 days (considering the employee's country of origin is not deemed limited).
7. Individual Employment Agreement
One of the major concerns of foreign entities are liabilities derived from labor procedures. As previously mentioned, under the mirror payroll scenario the Mexican entity is in charge of paying all labor and social welfare contributions. Additionally, it will be necessary to execute an individual employment agreement with the assigned employee, in order to properly document the employment relationship.
8. Potential employment relationship with foreign entities
Regarding the rule of source of income, it is important to mention that the fact of having a foreign employee assigned to work in Mexico, even on a temporary basis, but without properly complying with Mexican labor requirements, could presume an employment relationship with all legal entities involved, including foreign entities. This, in the understanding that technically speaking, the employee will actually be working in Mexico, but the Mexican entity would not be paying the corresponding labor and employment obligations. Additionally, labor authorities may impose fines to the Mexican entity derived from the irregular employment relationship. For this reason, it is highly recommended to have the employment relationship with the assigned employee very well documented.
9. Social Security Liabilities
As mentioned before, under the common payroll mirror scheme, the Mexican entity is obliged to cover all social security liabilities, however having an employee coming to work to Mexico under the rule of source of income, could represent liabilities before the Mexican Institute of Social Security (IMSS, for its acronym in Spanish) and other labor and employment authorities. This is motivated by the fact that the expat will actually be working by the Mexican entity, but employer's obligations will not be fulfilled under Mexican labor laws. Additionally, under this rule, there is a potential risk that the employee could be tempted to pursue legal actions against the companies overseas instead of limiting the responsibility to a Mexican entity.
10. Outsourcing matters
Outsourcing is yet a new topic at the Mexican jurisdiction. This legal figure was recently established at the labor and employment reform of 2012. Even though it could represent a very attractive path for many companies in order to set aside the employment responsibility, truth is that recently there have been many criteria from both tax and labor perspectives; that are complicating very much the implementation of these type of schemes, managing a quite significant risk in terms of social security, profit sharing and fringe benefits. With these criteria in force, it is strongly advisable to avoid hiring these types of employees through outsourcing or insourcing strategies; in the understanding that in case of litigation, said trial will be automatically classified as a high risk one, based in the compensation package and immigration situation of the expat employee.
After defining the most important considerations when assigning an employee to Mexico as an expatriate, we can conclude that, it is important to take into consideration the tax, labor and immigration obligations involved in this type of assignments, and to design and support the pretended structure in the most efficient and detailed way, to make sure that both companies and the individual comply with Mexican laws and regulations. As previously mentioned, these often need to be analyzed on a case-by-case basis.