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Dealing with International Tax in Construction Projects

Huge worldwide construction projects in most cases have many contractors, consultants and subcontractors from all over the world, with diverse legal theories. It may cause confusion through the construction process, due to misunderstanding of the contract.

Foreign companies intending to build permanent structures are taxed differently. Therefore, it is important that they should efficiently manage their projects to prevent unexpected taxes.  You might want to get acquainted with such laws as NHR status Portugal. Tax treaties define permanent structures as fixed business places.

To determine if a foreign company is building a foreign structure, these factors are considered:

If it is a common company in the country

The construction duration

Foreign companies are charged extra tax if their projects exceed six months according to land registry UK. Naturally, the whole construction process takes long and requires to be supervised daily, hence the need for an office or staff member close to the site. Such projects attract extra tax.

Impact of PE

Foreign companies that are charged PE have different taxation terms, along with their employees.

Business Income Tax

Profits for PE are taxed at 25%. This is either the deemed or actual profit. Actual profit is rarely used since it is hard to evaluate the real profits a PE makes. It is hard for tax authorities to conclude that the profits have been understated, from comparison with other projects.

Deemed profits are used more as they are easy to establish. Profit, in this case is determined using a stated profit rate, from its expenses and income. The rates are between 15 and 30%. This means the CIT rates fall between 3.75% and 7.5%, an amount lower than the usual withdrawal tax of 10% on the overall service fee. Rates for deemed profits are even negotiable within the law. 

Turnover Taxes

Foreign companies are charged VAT and business tax. Previously, the BT rate was 5%. From 01/01/2012, VAT of 6% will replace BT.

Local service recipients withhold VAT form foreign contractors, if the PE is charged on withholding terms on remitting payments to foreign contractors. If the recipient is a general VAT payer, he/she can subtract VAT from the output VAT charged on sales. The foreign company should have an agreement with the recipient that the construction fee is VAT exclusive, or else the withheld VAT act as the service fee.

IIT

This charge is incurred by those working onshore. There are no exemptions. The charge is determined proportionately, with the duration the foreign company works in a certain country.

How A PE Should File Taxes

The returns can be withheld or filed voluntarily. Voluntary return files are handled like local return files. The PE needs to have accurate and complete accounts, and they should file their returns regularly. If the PE does not voluntarily file tax returns, they can be withheld by the recipient of the service.

Withholding tax method is not use often because it burdens the foreign company in terms of compliance and it is more difficult for collection by tax authorities. Voluntary filing requires that the PE registers their tax temporarily with the authorities. Withholding taxes do not require registration.

Applying Tax Exemption If There Is No PE 

It is necessary that the company presents documents to tax authorities supporting their qualification for exemption; they cannot be exempted automatically.

Preventing PE double taxation

If a foreign company has already paid PE, it can claim tax credits or exemptions in their home countries, from the taxes paid abroad. Claiming procedures can be derived from the company’s home country’s law or double tax agreement.

Optimization of a Construction Project’s Tax Position 

There are many ways for optimization of a project’s tax position. They include:

Specification of the clause on tax indicated in the tax agreement. The duties of assistance of the recipient must be indicated, for use if the foreign company may require to be helped by the recipient in dealing with tax authorities.
   
Dividing the amount stated in the tax agreement between the activities done offshore and those done onshore. There should be a document which shows that the amounts were divided.
   
Monitoring the duration of onshore projects to avoid incurring PE tax charges.
   
Application for the appropriate tax exemption in case the foreign company’s project does not attract a PE tax charge.
   
Deciding on the more suitable method of charging CIT, whether on deemed or actual profits in case it is impossible to evade PE tax charges.
   
Negotiating with tax authorities with the aim of optimizing the PE charges, within the law.

In case there are plans to have other construction projects in the future, deciding n whether it is important to have a legal representative abroad to help with risk management, depending on the kind of services that are provided.



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