Plant-construction in China

With reference to your inquiry of 13 June, 2000 the following response is given under the Ministry's Express Answering Service (EAS):

If an Austrian plant-constructor has entered into a contract with a Chinese customer for the construction of an electric arc furnace and a single slab continuous casting machine and the construction period exceeds 6 months then a permanent establishment has been created on the territory of China; as a result, Chinese taxing rights accrue to the extent as such taxing rights are chargeable on profits attributable to such permanent establishment (Article 5 para. 3 in conjunction with Article 7 of the Austro-Chinese Double Taxation Convention/DTC). According to Article 24 subpara. b of the DTC Austria is obliged to exempt that part of the profits from its tax.

The allocation of profits to the Chinese permanent establishment has to be made in accordance with the provisions of Article 7 of the tax treaty: these provisions require the application of the "arm's length principle" according to which functional analysis has to be carried out. Therefore, in a first step, it has to be ascertained which functions are actually performed by the Austrian head office an...