Creation of a permanent establishment abroad
In international tax law, the concept of a “permanent establishment” constitutes a key nexus for the taxation of enterprises operating abroad. A permanent establishment in a foreign country exists where an enterprise has a fixed place of business through which it wholly or partly carries out its activities. The relevant criteria are the local element (a specific place), the temporal element (sufficient duration and disposal power), and the functional element (operational activity at that location).
Subcontractors resident in Austria
A general contractor performing activities related to railway construction and maintenance in its state of residence regularly engaged subcontractors for this purpose. One such subcontractor was an entrepreneur resident in Austria. The question arose as to whether this Austrian subcontractor, by carrying out activities in the foreign country (i.e. the general contractor’s state of residence), created a permanent establishment there.
Position of the Ministry of Finance
The decisive factor is the perspective of the subcontractor, as the assessment must be made on a taxpayer-specific basis. It must be examined whether the subcontractor, from its own standpoint, maintains a fixed place of business abroad. A close relationship with the general contractor alone is not sufficient for this purpose.
Although infrastructure such as railway tracks may, in principle, qualify as a location-specific facility, the necessary local nexus was lacking in the present case. The subcontractor did not operate permanently on a specific section of the railway network but was deployed sporadically and across varying sections. Assignments were typically short-term, often lasting only a few days, and were separated by longer interruptions.
Temporal component
The temporal criterion also argued against the existence of a permanent establishment in this case. As a rule, an activity is only regarded as sufficiently permanent if it is carried out over a longer period, for example twelve months in the case of construction activities.
Where a subcontractor performs multiple independent contracts and there is no artificial fragmentation of agreements, the time thresholds for the creation of a permanent establishment must be assessed separately. However, aggregation of periods is required where the individual (construction) projects form an economic and geographical unit.
In the present case, however, the assignments were independent of each other, concerned different sections of the railway network, and were based on separate contracts.
Conclusion
Accordingly, both the geographical nexus and the required permanence were lacking, meaning that no permanent establishment was created. The existence of a framework agreement between the general contractor and the subcontractor did not alter this conclusion.