RBC – English Court of Appeal finds that an oil and gas royalty is not income from immovable property under the Canada-U.K. Treaty where the recipient never had any interest in the oil field

A Canadian corporation (“Sulpetro”), which had rights to direct and receive the proceeds from a licence its U.K. subsidiary (“SUKL”) held in an offshore U.K. oil and gas field, sold its rights (and shares of the subsidiary) to a U.K. purchaser 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 from the receiver for Sulpetro following default by Sulpetro on a secured loan made by RBC in the course of its Canadian banking business.

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". Before allowing RBC’s appeal, Falk LJ stated that “the better interpretation of the fifth limb is that it is confined to rights to payments held by a person who has some form of continuing interest in the land in question to which the rights can be attributed.” In this regard, she stated:

[C]learer words would be needed to establish that a right of a personal nature, held by a person who has no link to the physical land in question, and comprising a chose in action owed by a person who might also have no link to the State in which the land is situated, falls within Article 6(1).

She concluded:

… RBC does not hold, and indeed has never held, an interest in the Buchan field. It cannot therefore be taxed under the fifth limb.

Neal Armstrong. Summaries of Royal Bank of Canada v Commissioners for His Majesty's Revenue and Customs [2023] EWCA Civ 695 under Treaties – Income Tax Conventions – Art. 6, Art. 12.