RBC – UK Supreme Court finds that an oil and gas royalty was too remote from a land interest in the oil field to be immovable property under the Canada-U.K. Treaty

A Canadian corporation (“Sulpetro”), which had rights to direct the exploitation of, and to receive the proceeds from, a licence its U.K. subsidiary (“Sulpeto UK”) held in an offshore U.K. oil and gas field, sold its rights (and shares of the subsidiary) to a U.K. purchaser (BP) for consideration that included a royalty that became payable, based on production from the field, when the market price of oil exceeded US$20 per barrel. The taxpayer (RBC) received an assignment of this royalty following default by Sulpetro on a loan from RBC.

The principal issue was whether HMRC was permitted by Art. 6 of the Canada-U.K. Treaty to impose tax on the royalty payments received by RBC and, in particular, whether they fell within the portion of the definition of “immovable property” in Art. 6(2) (the “fifth limb”) that referred to "rights to variable or fixed payments as consideration for the working of, or the right to work, mineral deposits, sources and other natural resources".

Lady Rose first stated her agreement with the conclusion of the Court of Appeal (per Falk LJ) that the right to work the field was held by Sulpeto UK and not by Sulpeto, stating in this regard:

There is a legal difference between someone having a right to work natural resources and someone having a right to require another person to work those natural resources. Sulpetro has the latter but not the former. …

Lady Rose went on to find that even If the rights of the royalty payer (now, BP) had amounted to a right to work the field, nonetheless RBC's right to royalty payments from BP did not amount to a right to "consideration for" such right to work. In particular:

• It was inherent in the reference in the fifth limb to payments being "consideration for" the right to work that the royalty recipient (RBC) be a person who could confer on the royalty payer the right to work the oil field, whereas RBC never had such right because it never had an interest in the land in which the natural resources were found.
• Furthermore, it was only payments made in return for the first grant of the rights by the landowner that fall within the definition of "consideration for" the right to work, so that payments made for the assignment or transfer of rights conferred on someone by the owner of the rights were not "consideration for" the right to work.

Accordingly, HMRC did not have the right to tax the royalty payments.

Neal Armstrong. Summaries of Royal Bank of Canada v Commissioners for His Majesty's Revenue and Customs [2025] UKSC 2 under Treaties – Income Tax Conventions – Art. 6, Art. 12, General Concepts – Separate Existence, and ETA s. 217 – imported taxable supply - (c).