Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.
Principal Issues: Is paragraph 3 of Article 5 an exempting provision, a deeming provision or a stand-alone provision.
Position: A stand-alone provision.
Reasons: It is a specific rule for building sites and construction or installation projects.
February 24, 2011
Robert Thomson
Regional International Tax Advisor HEADQUARTERS
Burnaby-Fraser Tax Services Office A. Seidel, CMA
9737 King George Highway (613) 957-2058
5th Floor - Surrey Tower
Surrey BC V3T 5W6
2010-038790
Permanent Establishment
We are writing in response to your November 22, 2010 e-mail concerning the interpretation of paragraph 3 of Article 5 (the "Construction Paragraph") of the OECD Model Tax Convention (the "Model Convention").
Background
Paragraphs 1, 2 and 3 of Article 5 of the Model Convention pertain to establishing the existence of a "permanent establishment" ("PE"). These paragraphs state:
1. For the purposes of this Convention, the term "permanent establishment" means a fixed place of business through which the business of an enterprise is wholly or partly carried on.
2. The term "permanent establishment" includes especially:
(a) a place of management;
(b) a branch;
(c) an office;
(d) a factory;
(e) a workshop; and
(f) a mine, an oil or gas well, a quarry or any other place of extraction of natural resources.
3. A building site or construction or installation project constitutes a permanent establishment only if it lasts more than twelve months.
The "Basic Rule"
Paragraph 1 of Article 5 of the Model Convention will hereafter be referred to as the Basic Rule. As discussed in paragraph 2 of the OECD Commentary to Article 5 of the Model Convention, the Basic Rule imposes three basic conditions that must be met before a PE will exist:
1. There must be a "place of business", i.e. premises or in some instances, machinery or equipment;
2. The place of business must be "fixed", i.e. it is a distinct place with a certain degree of permanence; and
3. The business of the enterprise is carried on through this fixed place of business.
Issue
Is the Construction Paragraph an exempting provision, a deeming provision or a "stand alone" provision when determining the existence of a PE for a building site or construction or installation project (a "Site or Project")?
Taxpayer's View
The accepted view is that the Construction Paragraph is an exception to the Basic Rule. In other words, a Site or Project must first meet all of the requirements of the Basic Rule and then it must be established that the Site or Project existed for a period exceeding 12 months as required under the Construction Paragraph before a Site or Project can be considered to be a PE.
The Construction Paragraph states that a Site or Project "constitutes" a PE "only if" it lasts for more than 12 months. This wording could be interpreted as either excluding or requiring the application of the Basic Rule, but interpreting the Construction Paragraph as an exhaustive test better serves the paragraph's purpose. The Construction Paragraph largely duplicates the Basic Rule but tailors it to apply to Site or Project activities and it ensures that in defined circumstances a Site or Project will be subject to tax in the jurisdiction where that activity takes place. It is therefore our view that the Construction Paragraph provides a stand-alone test for determining whether a Site or Project constitutes a PE.
A Site or Project is by definition a "place of business" since there will be a location or possibly a series of locations where the construction or installation activity takes place. As the business of the non-resident will be construction or installation, the business of the enterprise will be carried on at the location of the Site or Project. The requirements from the Basic Rule that there be a place of business and that the business of the non-resident is carried on there are kept.
It is often difficult for a Site or Project to exhibit the degree of permanence needed in order to satisfy the requirement that the place of business be "fixed". A Site or Project may be temporary or may require relocation (installation of a pipeline) and as such could avoid qualifying as a PE under this requirement of the Basic Rule. In such case the Construction Paragraph acts as a deeming provision confirming the existence of a PE where there would be no PE under the Basic Rule. On the other hand, a Site or Project could satisfy all of the requirements of the Basic Rule, including the degree of permanence required by the Basic Rule, but only last for a period of 12 months or less. In such case, the construction paragraph acts as an exempting provision by refuting the existence of a PE that would otherwise exist under the Basic Rule. In sum, as stated above, it is our view that once the Construction Paragraph has been satisfied, a PE exists.
UN Model Convention
In our view, the corresponding paragraph in the UN Model Double Taxation Convention 2001 ("UN Model Convention") also supports our views.
Paragraph 3 of Article 5 of the UN Model Convention provides that the term "permanent establishment" also encompasses:
(a) a building site, a construction, assembly or installation project or supervisory activities in connection therewith, but only if such site, project or activities last more than six months;
(b) the furnishing of services, including consultancy services, by an enterprise through employees or other personnel engaged by the enterprise for such purpose, but only if activities of that nature continue (for the same project or a connected project) for a period or periods aggregating more than six months within any twelve-month period.
This paragraph differs from the Construction Paragraph in that it adds references to assembly projects, supervisory activities and the furnishing of services. The Commentary to Article 5 of the UN Model Convention states that paragraph 3 is meant to cover a broader range of activities than the Construction Paragraph. Paragraph 3(b) would be relatively meaningless if the "furnishing of services" qualifies as a PE in defined circumstances but it were also necessary for the services to satisfy paragraph 1 of Article 5 of the UN Model Convention (which is the same as the Basic Rule). It can therefore be inferred that the drafters of the UN Model Convention saw the Construction Paragraph and the corresponding paragraph in the UN Model Convention as both being stand-alone tests.
Conclusion
It is our view that the Construction Paragraph is a stand alone test for determining whether or not a Site or Project qualifies as a PE. Therefore, once the requirements of the Construction Paragraph have been satisfied, a PE exists and it is not necessary to separately consider whether the Basic Rule has been satisfied. Neither the Model Convention nor the UN Model Convention requires recourse to their respective paragraph 1 of Article 5 for a Site or Project to give rise to a PE.
We trust that these comments are of assistance. If you wish to discuss any of the above, please contact the writer.
for Director
International & Trusts Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
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