Tax Treaty Series

ITQ T-

022

November 22, 2019

Question

XCO is a company resident in country X. It decided that it would have a concrete container constructed at its premises in country X. The construction would be in 3 sequential phases: (1) construction of the basement; (2) construction of the walls; and (3) construction of the roof.

YCO is a construction company resident in country Y. YCO entered into a contract with XCO for the phase 1 construction, which took 2 months to complete.

Another construction company (unrelated to YCO) performed the phase 2 construction, which commenced at the end of phase 1. Phase 2 took 4 months to complete.

Towards the end of phase 2, YCO entered into a contract with XCO for the phase 3 construction. Phase 3 commenced at the end of phase 2, and it took 8 months to complete.

In each of the 3 phases, there was no interruption in the construction activities.

The X/Y double tax treaty is identical to the 2014 OECD model treaty, and the MLI does not cover it.

Does YCO have a PE in country X, under Art. 5 of the X/Y treaty, in regard to its construction activities at XCO’s premises?

Answer

Apart from the time condition, YCO would satisfy the conditions in Art. 5(1).

In regard to the time condition, Art. 5(3) sets out a special rule: "A building site or construction or installation project constitutes a permanent establishment only if it lasts more than twelve months." The facts indicate a building site or construction project.

The total time for the site or project is 14 months. However, YCO participated only in Phases 1 (2 months) and 3 (8 months), which aggregate to 10 months.

There are two issues: (i) is each phase a separate site or project?; and (ii) (if the 3 phases are a single site or project), are the 4 months of Phase 2 counted in regard to YCO – in other words, should only YCO's participation in the project be counted or alternatively is Phase 2 a temporary interruption (during which the time continues to run) from YCO's viewpoint?

Although the OECD Comm. on Art. 5(3) discusses both of these issues, it does not provide definitive guidance to apply to these facts.

These facts are based on a 2019 decision of the Swedish Supreme Administrative Court (No. 4135-18).

According to the Court:

Each phase is not a separate site or project
Only YCO’s participation in the project is counted; and Phase 2 is not a "temporary interruption", as it does not fall within the instances of "temporary interruptions" described in para. 55 of the OECD Comm. Thus, from YCO's viewpoint, the site or project lasts for 10 months, and it is therefore not a PE.

This case is discussed in Jerome Monsenego, "The Construction PE and Temporary Interruptions: Questions Based on a Swedish Case", Tax Notes Today International (November 21, 2019) (subscription service).

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