Connected Projects Test

Commercial Coherence

Evaluation of the relationship between different contracts focuses on whether they form a single business purpose for the foreign enterprise. Under the connected projects test, the tax bureau looks at whether the services provided are interdependent or if one contract is a necessary precursor to the next. If the contracts are signed with the same domestic client or related parties within a short period, they are highly likely to be seen as connected.

The existence of a single master agreement that governs several sub-contracts is a strong indicator of commercial unity. Even if the technical skills required for each phase differ, the project is treated as one if the overall objective is the same. This approach prevents firms from claiming that each specific task is an independent project.

The goal is to capture the full scope of the foreign entity’s commercial engagement.

Geographic Proximity

Physical location provides another metric for determining if separate activities should be bundled together for tax purposes. The connected projects test considers whether the work is performed at the same building site, installation project, or assembly location. If a foreign contractor moves from one part of a large industrial park to another to perform similar work for the same group, the clock for permanent establishment continues to run.

Only when the projects are truly independent and located in different administrative regions might they be considered separate. However, even then, the commercial link can override the geographic distance if the projects are managed as a single unit. The tax authorities use project maps and site logs to track the movement of personnel between different areas.

This ensures that the physical presence is measured accurately across the entire project footprint.

Aggregation Mechanism

Procedural rules for summing the days spent on different phases of a project are strictly enforced during a tax audit. When the connected projects test is triggered, the tax bureau counts every day from the start of the first contract to the end of the last one, including the gaps between them if the gaps are short. This often leads to a foreign entity exceeding the six-month threshold much earlier than expected.

The burden is on the enterprise to prove that the projects are distinct and unrelated if they wish to avoid aggregation. This requires providing detailed documentation, such as separate bidding processes, different project teams, and independent financial accounting for each contract. If the evidence is insufficient, the bureau will issue a tax assessment based on the combined duration.

This can result in significant back taxes and interest for the entire period of the project. The policy encourages foreign firms to be transparent about the total length of their planned activities. This also affects the individual income tax of the foreign employees, as their days are also aggregated across the connected projects.

The tax bureau shares information between different districts to catch instances of contract splitting that span multiple jurisdictions. This coordination makes it difficult to hide the total scale of a project from the revenue authorities. Proper planning requires a holistic view of all contracts signed in the country.

Failure to account for the aggregation rules is a common cause of unexpected tax liabilities. The final assessment can include penalties if the bureau finds a deliberate attempt to circumvent the rules.