Chapter INTM264800

Published date09 April 2016
Record NumberINTM264800
Article 5(3) – treaty provision

The OECD Model Treaty Article 5 includes specific provisions in paragraph 3 that a building site or construction or installation project constitutes a treaty permanent establishment only where it lasts more than 12 months (see below).

The OECD member states have made this type of activity the subject of a specific rule because of the frequency with which it caused difficulties of interpretation. The building site or construction or installation project would need to meet all the conditions set out in the Article in order for it to constitute a permanent establishment and not just the twelve month test, see INTM264300. And, for clarity in the model treaty, 12 months’ duration has been taken to be a sufficient indication that the activity is a fixed place of business permanent establishment. Of course particular treaties may vary from the model in this respect and indeed different durations are included in many of the UK’s treaties all of which can be referred to in full at .

CTA 2010/S1142(2)(h) – domestic provision

The UK domestic charging provisions contained within CTA10/S1141(2)(h) define permanent establishment (see INTM264300) in a way that specifically includes all building sites or construction or installation projects without duration qualification. Although initially this may appear inconsistent you should remember that the treaty provisions will override the domestic legislation. In that way, any duration specified in any applicable treaty within which the site will become a permanent establishment will be the duration that applies.

The OECD Commentary provides detailed guidance on Paragraph 3. Some important points are summarised below:

1.‘Building site or construction or installation project’

This covers:

  • Construction of buildings
  • Construction of roads, bridges or canals
  • Renovation (involving more than mere maintenance or redecoration) of buildings, roads or canals
  • Laying of pipelines and excavating and dredging

Additionally, the term ‘installation project’ is not restricted to an installation related to a construction project; it also includes the installation of new equipment, such as a complex machine, in an existing building or outdoors. On-site planning and supervision of the erection of a building are also covered by the provisions of Article 5(3).

  1. Single unit

A building site or project is regarded as a single unit even if it is based on several contracts, provided it forms a coherent whole commercially and geographically. However, a building site will still form a single unit, for the purposes of determining whether a permanent establishment exists, even if the orders have been placed by several persons (e.g. for a row of houses).

The OECD Commentary recognises that certain construction or installation projects may mean that a contractor’s activity has to be relocated as the project progresses, for example construction of roads or the assembly of a substantial structure such as an offshore platform that requires assembly at various locations within a country. The activities performed at each particular spot are part of a single project and that project must be regarded as a whole in determining whether a permanent establishment exists.

  1. Twelve month test

As stated above Article 5(3) expressly states that a building site or construction/installation project constitutes a permanent establishment only if it lasts more than 12 months. If this time condition is not met then it cannot constitute a permanent establishment even if there is, for instance, an office or workshop, within the meaning of Article 5(2), contained within the site.


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