The Express Answer Service (EAS) of the Austrian Ministry of Finance (MoF) offers taxpayers the opportunity to post questions of interpretation regarding international tax matters to the MoF. In 2018, one question dealt with the influence of trial runs on the 12-month term in Article 5(3) of a double taxation agreement (DTA). Another question dealt with the issue of subcontracting total projects.
Trial runs and the 12-month term (EAS 3407)
In this case a German company was commissioned to provide construction and assembly works in Austria. The operational plant was provisionally accepted by the customer, with final acceptance some months later after trial runs and minor improvements were finished. Hence, the question was whether the provisional or the final acceptance of the plant was relevant for the end of the 12-month term of Article 5(3) in the DTA between Austria and Germany.
Based on MN 55 of the commentary to Article 5 OECD-MC, trial runs are generally included in the 12-month period during which the construction site exists. However, based on the principle of the OECD commentary that a construction site ceases to exist when the work is completed or permanently abandoned, the Austrian MoF is of the opinion that a trial run can be included in this 12-month period only if:
- the unfinished plant is left in an orderly condition, or
- defects have been rectified so as to guarantee the full operability of the plant, or
- the trial run is essential for the operability of the plant.
A trial run performed after the on-site work is finished is therefore not relevant for calculating the 12-month term. This also applies for the removal of minor defects, repair work during the warranty period, and other services provided after on-site work has been completed. The formal act of a final acceptance can be an indicator for the end of the PE term, but it will only be relevant if it corresponds with the actual end of the works on-site.
Subcontracting of entire projects (EAS 3405)
In the relevant case, an Italian company (ITco) subcontracted the execution of an Austrian project to its Italian subsidiary (SUBco). The project lasted well beyond 12 months: the question was whether a PE would be triggered for ITco, even though it had subcontracted the project.
According to the MoF, the existence of a PE of ITco depends on whether ITco is able to dispose of the Austrian construction site. This would, for example, be the case if ITco has legal possession of the site, controls access to and use of the construction site, and has overall responsibility for what happens at the site (see also MN 54 of the commentary on Article 5 OECD-MC). In such cases employees of ITco would typically be present to perform supervisory activities. We would generally assume that the general contractor (ITco) is in charge of the total project, and hence liable to the customer for the correct delivery of the order placed.
If in fact the total project is delegated to SUBco, and hence ITco cannot dispose of the construction site, the existence of a PE of ITco would be questionable. However, we would have to question the economic purpose of introducing ITco as a general contractor, if no functions remain with ITco.