Internal Revenue Service
Revenue Ruling

TaxLinks.com   sm

 Rev. Rul. 77-45

1977-1 C.B. 413

Tax Treaties

IRS Headnote

Canadian corporation; permanent establishment. A Canadian consulting engineering corporation engaged in the planning and design of a manufacturing plant in the U.S. for a U.S. client and performing the preponderance of its services in Canada is not maintaining a permanent establishment in the U.S., under Article I of the U.S.-Canada Income Tax Convention and Protocol, by virtue of the presence, in work space provided by the client at the construction site of the plant, of its employees who inspect contractor work performance and quality of materials, make minor changes in plans, check contractor billings, keep account of job progress, and prepare reports for the home office.

Full Text

Rev. Rul. 77-45

Advice has been requested whether a Canadian corporation that performs engineering services in the United States is subject to Federal income tax with respect to such activities in accordance with the provisions of the United States-Canada Income Tax Convention and Protocol, T.D. 5206, 1943 C.B. 526, under the circumstances described below.

M, a corporation organized under the laws of Canada, is a consulting engineering firm engaged in the planning and design of manufacturing plants. M contracted to plan and design a plant located in the United States. The preponderance of M's services on the plant is accomplished in Canada, including significant modifications of design resulting from re-evaluation of on-site conditions. Although the plant is constructed by a general contractor under contract with M's United States client, M has employees at the United States construction site who inspect contractor work performance and the quality of materials, make minor changes in plans and specifications, check contractor billings, keep account of job progress, and prepare reports for the home office.

The on-site employees of M are not authorized to make major decisions that would affect basic plan design or result in significant departures from the construction contract. These employees are under the supervision of and in continual contact with higher level project managers in Canada.

The on-site employees work in a construction shed or an area inside a warehouse or workshop provided by the client who also provides office furniture and equipment. Neither the work space nor furniture and equipment is the subject of separately bargained for consideration by M.

M has only one project in progress in the United States during the taxable year, and the duration of the project will not exceed 1 year.

Article I of the Convention provides that industrial and commercial profits of enterprises of the contracting States are mutually exempted from taxation, except in respect of such profits allocable to a permanent establishment.

Section 3(f) of the Protocol to the Convention states, that:

The term "permanent establishment" includes branches, mines, and oil wells, farms, timber lands, plantations, factories, workshops, warehouses, offices, agencies, and other fixed places of business of an enterprise but does not include a subsidiary corporation. * * *

When an enterprise of one of the contracting States carries on business in the other contracting State through an employee or agent established there, who has general authority to contract for his employer or principal or has a stock of merchandise from which he regularly fills orders which he receives, such enterprise shall be deemed to have a permanent establishment in the latter State.

The fact that an enterprise of one of the contracting States has business dealings in the other contracting State through a commission agent, broker, or other independent agent or maintains therein an office used solely for the purchase of merchandise shall not be held to mean that such enterprise has a permanent establishment in the latter State.

The specific question is whether M has a permanent establishment in the United States within the meaning of section 3(f) of the Protocol to the Convention.

The definition of "permanent establishment" in section 3(f) of the Protocol does not specifically include a construction site. It is the view of the Internal Revenue Service that, in the absence of specific treaty language to the contrary, a construction site of any significant duration is generally considered to constitute a permanent establishment even if a treaty's permanent establishment article is silent as to such site. It is also the view of the Service that planning and supervision carried on by a building contractor are part of the activity allocable to its construction site permanent establishment. Planning and supervision of construction work do not of themselves, however, make a construction site a construction site of the enterprise that plans and supervises construction. Thus, since M's activities are restricted to supervision and planning, whether they constitute a permanent establishment must be considered without regard to determinations applicable to construction sites.

In the instant case, the activities of M and its employees consist primarily of planning and supervision of the construction activities. M's employees in the United States are not authorized to make major decisions concerning basic plan design. In addition, M's employees use a building and furniture provided by M's client without separately bargained for consideration; and the duration of the project will not exceed 1 year. Thus, the presence and activities of M's employees do not constitute the maintenance of a permanent establishment by M in the United States within the meaning of section 3(f) of the Protocol to the Convention.

Accordingly, M is not subject to Federal income tax with respect to income attributable to engineering services performed by its employees at the construction site in the United States pursuant to Article I of the Convention.