The Legal Reality of “Testing the Market” in Mexico

Manuel Mansilla Moya
2 days ago
7 min read

What foreign companies must understand before hiring, selling, or manufacturing in Mexico

“Let’s just test the market in Mexico.”

It sounds disciplined. Controlled. Reversible.

For many U.S., European, and Asian companies evaluating expansion or nearshoring, the plan is straightforward:

Hire one person
Explore suppliers
Generate initial revenue
Avoid incorporating until scale justifies it

The strategy makes commercial sense.

The legal assumption behind it often does not.

Under Mexican law, “testing the market” is not a recognized legal phase. There is no informal operating window and no automatic exemption for exploratory activity.

Tax, labor, and regulatory consequences are triggered by the functions performed in Mexico, the degree of nexus created, and whether activities meet the statutory thresholds for permanent establishment — not by how expansion is labeled internally.

This is where early legal structuring makes a measurable difference.

Top view of managers analyzing documents.

What Companies Usually Mean by “Testing the Market”

When foreign companies refer to testing the Mexican market, it usually involves one of the following models:

A) Hiring Through an Employer of Record (EOR) in Mexico

A foreign entity hires a sales representative or engineer through an Employer of Record (EOR) to avoid forming a subsidiary or branch.

The assumption: no Mexican entity or branch means no Mexican tax presence.

The reality: payroll compliance and permanent establishment analysis are separate legal questions.

An EOR may handle:

Employment contracts
Payroll withholding
Social security registration

But it does not determine whether the foreign company itself has created a taxable presence in Mexico.

That depends on the nature of the employee’s functions.

B) Engaging Independent Contractors

Local consultants may be retained to:

Develop business opportunities
Identify suppliers
Support logistics
Assist with regulatory matters

The assumption: contractor status minimizes exposure.

Under Mexican Federal Labor Law (LFT), classification depends on subordination, meaning direction, control, and integration into the business — not contractual language.

If subordination exists, labor liability may arise regardless of the agreement’s title.

Additionally, from a tax perspective, contractor status does not prevent dependent agent analysis if the individual effectively represents and binds the foreign enterprise.

C) Selling Cross-Border Into Mexico

Products are invoiced from abroad. Revenue is collected offshore. Inventory may be stored in Mexico through third-party logistics providers.

The assumption: foreign invoicing limits Mexican exposure.

Cross-border sales alone do not automatically create permanent establishment.

However, exposure may arise where:

A fixed place of business exists in Mexico through which business is carried out;
A dependent agent habitually concludes contracts on behalf of the foreign enterprise; or
Under applicable tax treaties, a person habitually plays the principal role leading to contract conclusion and contracts are routinely approved without material modification.

Functional substance governs.

D) Beginning Manufacturing Under Shelter or Contract Structures

Common in nearshoring strategies.

Foreign companies may leverage Mexican operators, particularly under IMMEX shelter programs, to begin production without immediately incorporating locally.

In a compliant shelter IMMEX structure:

The shelter company holds the IMMEX authorization.
The shelter typically acts as employer of record.
Operational and customs compliance obligations are assumed by the shelter entity.

Mexican Income Tax Law provides mechanisms that may limit permanent establishment exposure for foreign residents operating under shelter arrangements, provided statutory requirements are met. These may include compliance with safe harbor profitability thresholds or an Advance Pricing Agreement (APA), as well as adherence to shelter-specific rules, including applicable time limitations.

Protection is conditional, not automatic.

Permanent establishment analysis depends on:

Whether facilities are at the disposal of the foreign enterprise
Allocation of entrepreneurial risk
Transfer pricing compliance
Degree of operational control
Functional characterization of the arrangement

A standard contract manufacturing structure does not automatically benefit from shelter-specific protections and must be analyzed independently.

Manufacturing often increases exposure because it typically involves a fixed place of business and core revenue-generating activity.

Substance governs.

The Core Legal Question

The relevant question is not:

“Have you incorporated in Mexico?”

It is:

“What business functions are being performed in Mexico on behalf of the foreign enterprise?”

Under Mexican Income Tax Law, permanent establishment arises when statutory nexus thresholds are met. Corporate formalities alone do not determine exposure.

Permanent Establishment in Mexico: Where Risk Actually Arises

Under Mexican Income Tax Law, a permanent establishment may arise when a foreign resident:

Has a fixed place of business in Mexico through which activities are wholly or partially carried out;
Operates through a dependent agent with authority to conclude contracts;
Or, under applicable treaties, operates through a person who habitually plays the principal role in contract conclusion.

The analysis typically focuses on:

Physical presence and permanence
Disposal of premises
Nature of activities (core vs. preparatory or auxiliary)
Degree of authority exercised in Mexico

Titles matter less than functional conduct.

Inventory and Warehousing

Inventory stored in Mexico does not automatically create permanent establishment.

Risk increases when:

The foreign company has effective disposal or control over facilities;
The warehouse functions as a stable place of business;
Inventory is integrated into sustained local commercial operations;
Local personnel manage fulfillment as part of core business functions.

Third-party logistics arrangements must be analyzed case-by-case.

Control, permanence, and integration into revenue generation are decisive factors.

Labor Law Considerations

Mexico’s Federal Labor Law is protective and formal.

Key considerations:

Employee classification depends on subordination.
The 2021 labor reform prohibits subcontracting of personnel performing core business activities.
Specialized services are permitted only if registered under REPSE and outside the beneficiary’s corporate purpose and primary economic activity.
Statutory termination formulas apply.

If a foreign company is deemed to have a permanent establishment and taxable income is attributed to it, employees assigned to that PE may be entitled to statutory profit sharing (PTU) calculated on the Mexican taxable base.

Labor exposure is structured — but must be assessed early.

Immigration and On-the-Ground Activity

Executive visits alone do not create permanent establishment.

However, performing productive or managerial activities inconsistent with immigration status may create separate compliance risks.

Immigration and tax analyses are legally distinct.

Operational consistency is essential.

The Soft Landing Strategy — Legally Framed

A soft landing is a commercial strategy.

It does not suspend:

Permanent establishment rules
Labor compliance
Regulatory obligations

Its effectiveness depends on functional limitation of authority, risk allocation, and compliance discipline.

It is not a legal exemption.

Are You Testing — Or Already Operating?

Key internal questions:

Are contracts being concluded or effectively shaped in Mexico?
Is recurring revenue generated locally?
Is inventory stored or managed in Mexico?
Do representatives exercise authority beyond preparatory functions?
Are production decisions or operational management occurring in Mexico?

If several apply, functional presence may already exist.

Intent does not determine exposure.

Statutory thresholds do.

A Structured Approach to Market Entry

Prudent expansion typically includes:

Pre-revenue permanent establishment analysis
Defined authority limits for local representatives
Labor structure validation under outsourcing reform
Transfer pricing review (where relevant)
Regulatory mapping aligned with operational functions
Defined incorporation thresholds

Incorporation is not always required at the outset.

Alignment between structure and substance is.

Most structural issues are preventable early. They become materially more complex once revenue and personnel accumulate.

Conclusion

Before hiring, generating revenue, storing inventory, or initiating manufacturing in Mexico, companies should evaluate whether their current structure aligns with Mexican tax and labor thresholds.

A structured diagnostic typically reviews:

Functional activities performed in Mexico
Contract authority and negotiation patterns
Inventory and warehousing arrangements
Manufacturing and IMMEX structures
Labor classification exposure
Transfer pricing alignment

Organizations planning operational activity in Mexico may request an initial assessment with our firm to determine whether current or contemplated activities remain preparatory — or already constitute taxable presence under Mexican law.

Frequently Asked Questions

Can I hire employees in Mexico without forming a company?

Yes. A foreign company may hire through an Employer of Record in Mexico. However, if the employee habitually concludes contracts or plays a decisive role in revenue-generating activities, permanent establishment risk may arise despite the absence of a local subsidiary.

Does an Employer of Record in Mexico eliminate permanent establishment risk?

No. An Employer of Record addresses payroll and employment compliance. Permanent establishment in Mexico is determined by the nature and substance of business activities performed locally.

What triggers permanent establishment in Mexico?

Permanent establishment may arise when a foreign company has a fixed place of business in Mexico, operates through a dependent agent who habitually concludes contracts, or conducts manufacturing or operational activities through facilities at its disposal.

Does storing inventory in Mexico automatically create tax presence?

Not automatically. However, if the foreign company has disposal power over warehouse facilities or integrates inventory into sustained local sales operations, permanent establishment risk increases.

Does manufacturing in Mexico create tax exposure?

Manufacturing activities significantly increase the likelihood of permanent establishment, particularly when production control, inventory ownership, or supervisory authority is attributed to the foreign entity. Properly structured shelter arrangements may mitigate this risk.

Is there a grace period before a foreign company must incorporate in Mexico?

No. Mexican tax exposure is activity-based, not time-based. Permanent establishment can arise once functional thresholds are met.

Does a soft landing strategy eliminate legal risk?

No. A soft landing reduces initial operational commitment but does not override tax, labor, or regulatory obligations. Its effectiveness depends entirely on how it is structured.