Fowler – English Court of Appeal finds that a domestic provision deeming employment income to be from trade rendered it business profits for Treaty purposes
A U.K. domestic income tax provision deemed the diving activities of a South African resident in the North Sea to be the carrying on of a U.K trade, notwithstanding that in fact he was an employee. The majority of the Court of Appeal of England and Wales found that this meant that his earnings were business profits for purposes of Art. 7 of the U.K-South Africa Treaty (rather than employment income under Art. 14) so that they escaped U.K. taxation (as he had no U.K. permanent establishment.)
Both Lord Justices in the majority treated the domestic deeming provision (which merely deemed the underlying activity to be a trading activity rather than explicitly deeming the resulting income to be “profits” of an enterprise) as having effect for Treaty purposes. However, each of the three Lord Justices had a different view of the scope of Art. 3(2) of the Treaty (which, in the standard OECD form, provided that any term not defined in the Treaty “shall, unless the context otherwise requires, have the meaning that it has …under the law of [the U.K.]”).
Baker LJ in his concurring reasons stated:
The term "employment" is not defined in the treaty and, under article 3(2), is ascribed the meaning that it has under UK tax law. Under that law … Mr Fowler is deemed not to be in employment but rather carrying on a trade.
Henderson LJ (also in the majority) stated:
My approach does not depend to any significant extent on the provisions of article 3(2) … however, I would accept … that the purpose of article 3(2) is to anchor the provisions of the treaty … to the domestic tax law of the Contracting State which is applying the treaty.
In the course of his dissenting reasons, Lewison LJ stated that Art. 3(2) permitted reference to the common law of England to determine the meaning of “employment,” and further stated:
I cannot extract from [a South African] case the general proposition that a word used in a double tax treaty to describe a particular source of income or gain necessarily encompasses a domestic deeming provision, particularly where the word in question is defined in domestic tax law … .
Neal Armstrong. Summary of Fowler v HM Revenue and Customs  EWCA Civ 2544 under Treaties – Income Tax Conventions – Art. 3(2).