ANALYSIS OF PERMANENT ESTABLISHMENT PRIOR TO A COMPLEX CONSTRUCTION PROJECT ABROAD
CASE STUDY #3
Issue: Determining whether a project to build a desalination plant in Ghana can be considered as a permanent establishment for the French client, which would have significant tax consequences.
Legal issues: The client, a French multinational which markets water cycle management and sanitation services, is responding to an invitation to tender for the design and construction of a seawater desalination plant in Ghana. For this purpose, a key element is raised: to analyse whether the construction project can be qualified as a permanent establishment of the French client in Ghana, on the basis of local tax law, and taking into account the tax treaty established between Ghana and France.
This analysis is carried out in the light of the following three criteria: the duration of the physical presence on site, the specific definition in the tax treaty between France and Ghana concerning the installation or provision of supervisory activities in connection with the sale of equipment, and the extent of the powers of the project manager on site.
Challenge: In the context of this invitation to tender, the project duration will be 8 months, i.e. more than 6 months, which would therefore qualify as a permanent establishment under the tax treaty, and in accordance with the principle of territoriality.
In this project, there are several other types of risk of classification as a permanent establishment:
- Concerning the installation or provision of supervision activities in connection with the sale of equipment. If the compensation from installation and supervision services/activities exceeds 10% of the value free on board of the equipment/goods delivered by the customer for the construction project, a permanent establishment is established even if the project lasts less than 6 months. This may therefore be a key reason for qualifying as a permanent establishment.
- Concerning the scope of the local project manager's powers on site. The project manager does not have the power to sign a commercial contract and does not receive instructions to negotiate price, offer or demand. Nor does he or she take any action that is binding on the French company. Conclusion: the risk of permanent establishment for this reason is low.
- Concerning the existence of another physical presence of the client in Ghana. No other physical presence in Ghana (offices or other facilities) apart from the construction site. There should be little or no risk of permanent establishment for this reason.
Solutions: The tax consequences of the characterisation of permanent establishment are considered. The profits of the permanent establishment are determined on the basis of that part of the contract which is actually performed by the permanent establishment in the Contracting State. This comes back to the question of the profits attributable to the branch.
This form of analysis of permanent establishment has been replicated in some fifteen African countries (including Senegal, Ivory Coast, Cape Verde, Morocco, Tunisia, Burkina Faso, etc.) and applied to identical problems encountered by other foreign companies.
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