Uzbekistan: Aggregation verses construction

published on 6 August 2024 | reading time approx. 3 minutes

Construction or assembly work is considered a permanent establishment if it exceeds a certain duration. In most double taxation agreements, this duration is set at twelve months. Accordingly, if a construction or assembly project lasts longer than twelve months, it is considered a permanent establishment and is therefore subject to taxation in the country in which it is carried out.

The question of the aggregation of different construction and assembly projects within the framework of Art. 5 para. 3 of the DTA is carefully dealt with in the commentary by Vogel/Lehner, 7th edition. Here are the main points concerning the aggregation and the timing of the consideration: Aggregation of construction work and assembly. Various construction and assembly projects are added together if they are economically or geographically related (BFH BStBI.II 1999, 694: DBA Switzerland 1971/1978). This means that projects that have a close geographical or functional connection to each other can be regarded as a single project.

In cases where there is no economic and geographical unit (DTA Belgium/Netherlands; Gordon/Peressada/Hester, JIntTax 2009, 33(39)), the individual construction or assembly work must be considered as the basis for calculating the time limit. This means that each construction or assembly activity is considered independently and is combined cumulatively to determine the permanent establishment period.

If there is no economic or spatial unity between different construction projects, each project is considered separately. The duration of each individual project is examined independently to determine whether the 12-month deadline has been met.

The total duration of the construction and assembly projects is considered cumulatively. This means that the periods of several projects are added together in order to reach the 12-month period that is decisive for recognition as a permanent establishment. Temporary interruptions to construction or assembly work do not generally interrupt the cumulative consideration. If the work is continued after an interruption, the interruption periods are often included (High Court of Delhi, No. 143/2013 v. 29.1.2016: DBA India/United Arab Emirates). The aggregation begins with the start date of the first project. The start date is the date on which the actual construction or assembly work begins, not the date of contract signing or planning. The duration of the projects is continuously monitored. If it turns out that several projects are closely related and together last more than 12 months, a permanent establishment is recognized from the date on which the cumulative duration exceeds 12 months.

A permanent establishment can also be established retrospectively. If it is recognized over time that several projects are economically or geographically (BMF v 24.12.1999, BStBI.I 1999, 1076 Tz.4.3.5) related and the total duration exceeds 12 months, a permanent establishment is recognized retroactively.

Exemplary application

Case study 1

A company carries out three construction projects in the same district. Each project lasts 5 months. As the projects are closely geographically related and the total duration is 15 months, one permanent establishment is recognized.

Case study 2

A company carries out construction projects in different cities in the same country. Each project lasts 4 months, but the projects have no functional connection to each other. In this case, there is no aggregation as there is no economic or geographical connection.

The exact determination of whether and when to aggregate different construction and assembly work depends on the specific circumstances of each individual case. The Vogel/Lehner commentary provides a detailed analysis and practical guidance to enable these decisions to be made on a sound basis. The aim is to ensure that all significant construction and assembly activities carried out in a contracting state are taxed appropriately and that double taxation is avoided.

An economic unit could exist if the projects are functionally linked, for example if they serve the same end purpose or are part of a larger overall project. A territorial unit could exist if the projects are carried out in close proximity to each other so that they can be regarded as part of a coherent construction project.

Examples for clarification

Case 1: No economic and geographical unit

A construction company carries out three separate construction projects in different cities in a country. Each project lasts 5 months. As the projects are neither economically nor geographically connected, each project is considered separately. None of the projects reaches the 12-month period, so no permanent establishment is created.

Case 2: Existence of an economic unit, but no geographical proximity

A company carries out various construction projects in the same country, all of which are part of a larger infrastructure program. Although the projects are geographically separate, they serve the same economic purpose. In this case, the projects could be regarded as an economic unit and the time limits could be cumulated.

Case 3: Spatial proximity without economic connection

A company carries out several construction projects in the same district, but the projects are independent of each other and serve different customers. Despite the geographical proximity, there is no economic connection. In this case, each project is considered separately.

The provision that, in the absence of an economic and geographical unit, individual construction or assembly work is to be taken into account serves to clarify and simplify the calculation of the time limit. This prevents independent, unrelated projects from being artificially added together to reach the permanent establishment deadline. This regulation ensures that only those activities that establish a significant presence and economic activity in the relevant contracting state due to their duration and connection are taken into account for taxation.

This clarification is particularly relevant for companies that work in several regions or on different projects in order to determine when a taxable permanent establishment exists. The separate consideration simplifies the tax treatment and avoids misunderstandings or unjustified tax burdens.