Introduction

In 2013, the OECD/ G20 Action Plan on Base Erosion and Profit Shifting (BEPS) called for a review of the definition of “permanent establishment” (PE) to prevent the use of certain common tax avoidance strategies. One such tax avoidance technique was splitting-up of contracts for avoidance of construction PE. The OECD Commentary on Art. 5 of the OECD Model Convention noted:

“18. … The twelve month threshold has given rise to abuses; it has sometimes been found that enterprises (mainly contractors or subcontractors working on the continental shelf or engaged in activities connected with the exploration and exploitation of the continental shelf) divided their contracts up into several parts, each covering a period less than twelve months and attributed to a different company which was, however, owned by the same group. Apart from the fact that such abuses may, depending on the circumstances, fall under the application of legislative or judicial anti-avoidance rules, countries concerned with this issue can adopt solutions in the framework of bilateral negotiations.”