Knights Developments Limited v The Commissioners for HMRC

Income derived from immovable property under Article 6 is not confined to rent or income earned while the owner retains the land. A developer’s trading profits from acquiring, developing and selling land may fall within Article 6(1) where they have a direct and substantial connection with the property. Article 6(3) confirms particular applications of Article 6(1) without exhausting its scope, and Article 6(4) confirms that enterprise income may qualify.

Treaty text, read in the context of the agreement as a whole, governs the allocation of taxing rights. The Tribunal also expressed the obiter view that Article 13 concerns capital gains and does not cover trading profits merely because they arise on disposal.

Knights Developments Limited (KDL), a company resident in the Isle of Man, traded in acquiring, developing and selling land in the United Kingdom. The parties agreed that its profits were trading profits and income in nature under domestic law, and that KDL had no UK permanent establishment. HMRC issued closure notices assessing corporation tax for accounting periods from 2017 to 2021.

KDL appealed to the First-tier Tribunal, which transferred the appeals to the Upper Tribunal. KDL’s appeal was treated as the lead appeal for related companies. The central questions were whether the profits fell within the property-income provisions of the 1955 arrangements as amended in 2016 and the 2018 agreement, and, alternatively, whether they were gains from alienating immovable property.

1. The appeal was dismissed and the closure notices upheld. The profits fell within Article 6 of the arrangements, so the United Kingdom could tax them.

2. Article 6(1) states the operative rule. Its ordinary language is broad and requires a sufficient connection between the income and the immovable property. A trader who acquires land, improves it and sells it at a profit derives that profit from the property in a direct and substantial sense. Article 6(1) does not require the owner to retain the land when the profit is realised.

3. Article 6(3) confirms that income from direct use, letting or other forms of use falls within Article 6; it does not define the provision’s outer limits. Article 6(4) confirms that the rule applies to income from an enterprise. The text and structure therefore did not exclude KDL’s trading profits. The relevant provisions of the 1955 arrangements were materially equivalent, so the same interpretation applied to those periods.

4. The OECD Commentary, reservations, academic writing and foreign decisions formed part of the interpretive context but did not displace the treaty language. Royal Bank of Canada v HMRC concerned whether assigned contractual rights had a sufficient proprietary connection to land. Its requirement for a continuing interest addressed that connection; it did not establish that an owner’s profit must arise while ownership continues. The German decision arose under a materially different treaty. The Dutch decision offered limited support for a broad reading of use or exploitation but did not decide the issue before the Tribunal.

5. The Tribunal’s view on Article 13 was obiter because Article 6 disposed of the appeal. Article 7(4), the agreement’s distinction between income and capital gains, and the context otherwise required a capital-gains meaning for Article 13. It would not cover trading profits merely because they arose on disposal. The domestic usage of “gains” did not change that conclusion.

6. The Tribunal also stated obiter that, even if Article 6(3) imposed a limitation, KDL’s development activities would constitute use of the land. The land was actively employed, altered and commercially deployed to generate profit; sale was the culmination of that process.

1. Upper Tribunal (Tax and Chancery Chamber): Dismissed KDL’s appeal and upheld the closure notices.
2. First-tier Tribunal (Tax and Chancery): KDL’s appeals against the closure notices were transferred to the Upper Tribunal under Rule 28. No FTT merits decision is stated.