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HMRC internal manual

International Manual

Non-residents trading in the UK: permanent establishment: domestic and treaty law: Industry focus 2: building site or construction or installation project

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.

However, if the office or workshop is used for say a number of construction projects and assuming all conditions of the Article have been met, it will constitute a permanent establishment in its own right even if none of the projects involve a building site or construction or installation project that lasts more than twelve months.

  • The key features of the twelve month test are:
  • Applies to each individual site or project.
  • Excludes time previously spent by the contractor on other sites or projects which are totally unconnected with it.
  • A site exists from the date on which the contractor begins his work, including any preparatory work, in the country where the construction etc. is to be established, for example the installation of a planning office for the construction.
  • The site continues to exist until the work is completed or permanently abandoned.
  • Temporary discontinuation, seasonal (e.g. bad weather) or other temporary (e.g. labour shortage) interruptions should be ignored.
  • The period spent by a subcontractor working on the building site must be considered as being time spent by the general contractor on the building project.
  • For a fiscally transparent partnership the test is applied at the level of the partnership regardless of the time spent on the site by an individual partner.
  1. Twelve month test and partnerships

In the case of fiscally transparent partnerships, the twelve month test is applied at the level of the partnership as concerns its own activities. If the period of time spent on the site by the partners and the employees of the partnership exceeds twelve months, the enterprise carried on through the partnership will be considered to have a permanent establishment. Each partner will thus be considered to have a permanent establishment for purposes of the taxation of his share of the business profits derived by the partnership regardless of the time spent by that partner on the site.

This example illustrates how paragraph 3 is applied when there are partners resident in different states to which different time thresholds apply: A is a resident of State A, and B a resident of State B. They are partners in a partnership established in State B which carries on its construction activities on a construction site situated in State C that lasts 10 months. The tax treaty between States A and C has a 12 month time threshold for a construction site PE, but that between State B and State C has a 6 months’ time threshold. The time threshold of each treaty is applied at the level of the partnership but only with respect to each partner’s share of the profits covered by that treaty; State C will have the right to tax the share of the profits of the partnership attributable to the partner who is a resident of State B, as the 6 month threshold is clearly exceeded, but will not have the right to tax the share attributable to the partner who is a resident of State A because the 12 month threshold in the tax treaty between States A and C was not reached. This results from the fact that whilst the provisions of paragraph 3 of each treaty are applied at the level of the same enterprise (i.e. the partnership), the outcome differs with respect to the different shares of the profits of the partnership depending on the time-threshold of the treaty that applies to each share.

  1. Additional work on a construction site:

A site exists until the work is abandoned, this means:

  • A period of testing by the contractor/subcontractor of the building or its facilities should be included in the period during which the site exists. 
  • The delivery of the building/facilities to the client will usually bring an end to the PE provided the contractor/subcontractors are no longer required to complete construction on the site after its delivery.
  • Any repair work, post construction, which is a consequence of any guarantee would not normally be included in the original construction period.
  • But depending on the circumstances any subsequent work (including work done under a guarantee) performed on the site may need to be considered as constituting a distinct permanent establishment.

Practical difficulties

What is considered a single project or site may be open to abuse; for example, as a way of getting around the twelve month test enterprises may divide their contracts up into several parts, each covering a period less than twelve months and attributed to different group companies.  If it appears that a single site or project has been fragmented to avoid being a permanent establishment it is important that consideration is given to the tendering process to obtain information such as the key parties involved, decisions made and by whom. (The G20 BEPS project has proposed tax treaty remedies to tackle this kind of abuse.)   

In looking at whether a building site or installation project or construction project constitutes a permanent establishment the following list contains some suggested items that a case owner may wish to consider including in an information request.  Please note this list is neither exhaustive nor definitive:

  • a chronological list of exactly what has happened and who made the key decisions.
  • land registry and planning permission documentation.
  • details concerning the financing arrangements and source of capital.
  • identify the decision making structure and/or governance.
  • details of all the key individuals and their respective roles.
  • details of visits made by directors and key staff of the non-resident enterprise.
  • details of the tendering process (see above). 

UK’s views:

Use of Channel Island and Isle of Man companies for location of developers

UK’s Treaties with Guernsey, Jersey, and Isle of Man (hereafter referred to as ‘Island treaties’) have no reference to building or construction sites in their definition of a permanent establishment. The Jersey Treaty is silent, for example, and, for a fixed place of business permanent establishment, simply states that permanent establishment means “a branch, management or other fixed place of business”.

Advisors may assert that the lack of a specific reference to a building site in these Treaties means that a building site in the UK cannot be a permanent establishment. Indeed, a significant amount of tax planning takes place on that assumption and many construction and property development sites in the UK will be owned by non-resident companies. As the Treaty also states that the industrial or commercial profits of a Jersey enterprise shall not be subject to UK tax unless the enterprise is engaged in a trade or business in the UK through a UK permanent establishment, it is necessary for there to be a UK permanent establishment so that the profits come within the charge to UK CT.

HMRC does not agree that the Island Treaties’ silence on construction sites means they are not a fixed place of business permanent establishment per those Treaties.

The starting point in your consideration of whether there is a permanent establishment is domestic legislation and the definition of permanent establishment in S1141 CTA 2010 which explicitly includes a building site. Thus under UK domestic law, a building site is a permanent establishment. It is also worth noting that UK domestic law does not contain the 12-month test present in most Treaties.

Double Taxation Treaties can vary or even remove the charge to tax under domestic law but cannot impose a charge to tax. For example, most Treaties with the 12-month test for building site would remove the charge to tax under domestic law for building sites of less than 12-months duration.

The Island Treaties provide that the UK may tax the business profits attributable to a UK permanent establishment of the non-resident, so the key question is whether the Island Treaties remove HMRC’s right to tax the profits arising to the non-resident from a trade carried on through the building site.

HMRC believes that the absence of a specific reference to building sites does not restrict the UK’s right to tax the profits of a building site as a fixed place of business under the Treaty. The Island Treaties are silent in many areas in their definition of permanent establishments but HMRC believes they, like any treaty, have to be applied in a contemporary business environment and take account of business and technological developments since the Treaty was signed.

These old treaties are generic in their definition of permanent establishments and do not attempt to define in detail what is meant by fixed place of business. Subsequent treaties, the OECD Commentary, UK, and domestic legislation have sought to clarify what is meant by a fixed place of business by providing specific examples in illustration. The examples (factories, workshops and mines) are not intended to be an exhaustive list, but merely help clarify the definition.

It is also worth considering why a paragraph was included in later Treaties which imposes a time limit in order for a building site to constitute a permanent establishment. This was not to introduce the concept of a building site being a permanent establishment but to reflect the special character of building sites which by their very nature are temporary - it in no way implies that a building site would not otherwise be considered a fixed place of business. The Model Treaty restriction to a site that lasts longer than 12 months is intended to exclude small projects that would otherwise be caught - i.e. it limits the source state to taxing only those enterprises that have a real and fixed presence in the state.

Main contractor who subcontracts all aspects of a contract:

Although this particular point can be applicable to situations beyond the scope of Article 5(3) (see INTM264300) we can illustrate by using the example of a construction site. 

The presence of subcontractors on a site is counted as the presence of the main contractor for the purposes of the twelve month time test (see above).  This applies even if the non-resident contractor has no employees itself on site provided the construction site is at the disposal of the main contractor during this time.  This requires possession of the site, controlling access to and use of the site, and overall responsibility for what happens at that location during that period.

Specific exclusion of immovable property from Article 5(4) subparagraphs (a)/(b):

It might be argued that Article 5(4)(b) is in point and the developer does not have a permanent establishment because a house constitutes a ‘stock of goods or merchandise’, something the developer trades “with” rather than “through”. The UK’s view is that houses or other buildings that are constructed do not constitute ‘a stock of goods or merchandise’ for the purposes of Article 5(4) because they are not movable. The developer’s trade is still conducted through the place where the houses are built.

Principle Purpose Test (‘PPT’)

BEPS Report Action 6: Preventing the Granting of Treaty Benefits in Inappropriate Circumstances (one of the 15 Action items considered as part of The OECD/G20 Base Erosion and Profit Shifting project) recommended the PPT as a strategy in tackling treaty abuse including treaty shopping.  The PPT is a general anti-abuse rule which will deny treaty benefits if that is one of the principal purposes of the transaction or arrangement unless it can be established, having regard to all the relevant facts and circumstances, that granting these benefits would be in accordance with the object and purpose of the provisions of the treaty.  The UK has chosen to adopt the PPT as part of the BEPS treaty - related measures.

Paragraph 182 of The Commentary to Article 29 (Entitlement To Benefits) of the OECD Model Tax Convention (following the 2017 update) sets out a number of examples illustrating how the PPT would work; more specifically example J sets out the application of the PPT to contract  - splitting within the construction industry.  The full text of example J is reproduced below:

‘Example J: RCO is a company resident of State R.  It has successfully submitted a bid for the construction of a power plant for SCO, an independent company resident of State S.  That construction project is expected to last 22 months.  During the negotiation of the contract, the project is divided into two different contracts, each lasting 11 months.  The first contract is concluded with RCO and the second contract is concluded with SUBCO, a recently incorporated wholly-owned subsidiary of RCO resident of State R.  At the request of SCO, which wanted to ensure that RCO would be contractually liable for the performance of the two contracts, the contractual arrangements are such that RCO is jointly and severally liable with SUBCO for the performance of SUBCO’s contractual obligations under the SUBCO-SCO contract.

In this example, in the absence of other facts and circumstances showing otherwise, it would be reasonable to conclude that one of the principle purposes for the conclusion of the separate contract under which SUBCO agreed to perform part of the construction project was for RCO and SUBCO to each obtain the benefit of the rule in paragraph 3 of Article 5 of the State R-State S tax convention.  Granting the benefit of that rule in these circumstances would be contrary to the object and purpose of that paragraph as the time limitation of that paragraph would otherwise be meaningless.’