Presence of a permanent establishment
To prevent internationally active companies from being required to pay tax in each country, various countries have defined mutual rules in double taxation treaties. The general principle of a double taxation treaty is that the State of residence is authorised to levy taxes unless there is a significant link in the State of employment. This link depends on the type of income and also differs per country.
In the case of construction work, this link is typically the duration of the construction site’s presence abroad. If a Belgian company’s foreign construction site exceeds this duration, the construction site will be considered a permanent establishment. The permitted duration for building and construction works depends on the country in which the Belgian company is active:
- + France: more than 6 months;
- +The Netherlands: more than 12 months;
- +Luxembourg: more than 6 months;
- +Germany: more than 9 months.
The State of employment may tax the profit made by the permanent establishment (construction site) on the basis of this link. This profit can subsequently be exempted in the corporate income tax return in Belgium.
In practice, the presence of a permanent establishment means that the Belgian company must register and file a tax return in that country. The Belgian company may additionally have a transfer pricing documentation obligation.
What about stoppage due to the coronavirus?
Given the current measures to combat the spread of the coronavirus, many construction sites are at a standstill or have been for some time. However, this standstill period must be included in the duration for the presence of a permanent establishment.
Presence of a salary split
In addition to tax repercussions for the company, a portion of the employees’ wages may also be taxable abroad. Here, too, it must be determined whether the presence is significant enough to result in taxability in the State of employment, based on links specified in the double taxation treaty.
Physical presence is the key link for employees. The second and third links are the employer’s registered office and the potential presence of a permanent establishment.
If a construction site is considered a permanent establishment, this also has repercussions for the country in which the employees’ wages are taxable.
Presence of administrative obligations
A number of formalities must also be taken care of, depending on the country in which the construction site is located. In Luxembourg, for example, the company must apply for a social badge.
In all circumstances, you must apply for an A1 certificate for employees. The A1 certificate enables employees to demonstrate that social security contributions are being paid in Belgium. Those who are unable to present this certificate may be fined.
Does your foreign construction site pass our risk test? Please contact your account manager or our specialists at email@example.com.
We base our advice on current legislation, interpretations and legal doctrine. This does not prevent the administration from being able to challenge it or to change existing interpretations.