business taxation

Building sites abroad and the notion of permanent establishment


When a French company works on an assembly construction site in Luxembourg, is that company responsible for paying taxes in Luxembourg?
When a Luxembourg company works on a construction site in France, is that company responsible for paying taxes in France?
The answers to these questions can be found in article 2.3 of the tax treaty signed between France and Luxembourg which deals with the notion of permanent establishment.

This article states that the profits of a company pertaining to a particular country cannot be taxed in another country unless it has a permanent establishment there.

The notion of permanent establishment is defined in the OECD Model Tax Convention as a fixed place of business in which the company carries out all or part of its activities.

The OECD convention gives a non-exhaustive list of examples of permanent establishment such as place of management, branch, office, factory, workshop or a building site where the construction takes longer than 12 months1. This last point is of particular interest. 

1- Duration: a building site where the construction does not exceed 6 months (which is the case of the France-Luxembourg treaty, for example) does not constitute a permanent establishment even if the building site includes an office or workshop. Nevertheless, if an office or workshop is used for several building sites, it may be considered a permanent establishment if the activities carried out there go beyond preparations or auxiliary work2.

The 6 month period begins when the preparatory activities are launched in the country where the construction is carried out (for example, setting up a design office) and can extend over several calendar years.

This 6 month period must be assessed project by project. If an entrepreneur is involved in several building projects, each with a duration of fewer than 6 months, even if the total duration of the work exceeds 6 months, permanent establishment does not exist. This condition applies if there is no commercial or geographic link that can be established between the projects. 

2- Type of project: a 'construction or assembly site' can mean the construction of a building, street, bridge, earthworks or drainage. If these projects are carried out by the company itself, the activities of supervising and organizing form an integral part of permanent establishment.

An activity carried out abroad which is not a construction or assembly site, in other words, which cannot be considered a building site, even if it lasts longer than 6 months, is not a permanent establishment unless there is a fixed place of business (no matter the duration of the company's presence).

An example is if a French IT company works in a Luxembourg bank to completely redesign its computer system. Even if they work for longer than 6 months, it does not constitute a permanent establishment.


Table comparing the timelines to permanent establishment for a construction or assembly site in different countries:


France – Luxembourg tax treaty6 months
Switzerland – Luxembourg tax treaty12 months
Bulgaria – Luxembourg tax treaty6 months
Luxembourg – Romania tax treaty9 months
Luxembourg – Canada tax treaty12 months



1 Note the abbreviated duration in numerous Luxembourg tax treaties. For example: 6 months with France and Bulgaria and 9 months with Romania.
Article 5-3 of the OECD Model Tax Convention.