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CA Final · Direct Tax Laws & International Taxation · Overview of Model Tax Conventions

Meridian Components GmbH, a German company, has no fixed place in India. It sends its engineers to a customer's site in Pune to install machinery it sold. The installation project lasts 8 months. Both countries follow the OECD Model Convention and the India-Germany treaty has no special threshold for installation projects. Under the OECD Model Article 5(3), is a permanent establishment created in India by this project?

No PE is created. Under OECD Model Article 5(3), a building site or installation project becomes a permanent establishment only when it lasts more than twelve months. An 8-month project falls below that threshold. The six-month period belongs to the UN Model, which is not the model applied here.

  1. ANo, because a building site or installation project creates a PE only if it lasts more than 12 monthsCorrect
  2. BYes, because any installation project creates a PE from the first day
  3. CNo, because a PE requires a fixed office owned by the enterprise
  4. DYes, because a project lasting more than 6 months creates a PE under the OECD Model

Explanation

Article 5(3) of the OECD Model provides that a building site, construction or installation project constitutes a PE only if it lasts more than twelve months. The project here lasts 8 months, so no PE arises. The 6-month threshold appears in the UN Model, not the OECD Model, so the last option is wrong.

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