Royal Bank of Canada v Commissioners for His Majesty's Revenue and Customs, [2025] UKSC 2

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 (the Buchan 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 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".

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 (at paras. 82, 88):

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. …

The idea that … a company, has a separate legal personality from its shareholders has been protected and reaffirmed from Salomon v A Salomon & Co Ltd [1897] AC 22 onwards.

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 agreeing in this regard with the analysis of Falk LJ, Lady Rose stated (at para. 105):

Falk LJ identified the limitation on the scope of the fifth limb of Article 6(2) as two-fold. She held that inherent in the concept of payments being "consideration for" the right to work is a requirement that the recipient of the payments must be the person who can confer on the payer the right to work the Buchan Field. That means that the recipient of the consideration must own an interest in the land in which the natural resources are found. Since neither Sulpetro nor RBC ever held an interest in the Buchan Field and neither was ever in a position to confer a right to work the minerals in the North Sea, the consideration they received cannot have been pursuant to a right to receive consideration for the right to work their land. Secondly, she held that it is 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. Payments made for the assignment or transfer of rights conferred on someone by the owner of the rights are not "consideration for" the right to work.

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

In connection with finding that a right to work an oil field of a UK subsidiary of a Canadian corporation was not a right of the Canadian corporation to work the field, Lady Rose stated (at para. 88):

The idea that an "artificial creation of the legislature", namely a company, has a separate legal personality from its shareholders has been protected and reaffirmed from Salomon v A Salomon & Co Ltd [1897] AC 22 onwards. It was essential, Lord Halsbury LC said in that landmark case, that "once the company is legally incorporated it must be treated like any other independent person with its rights and liabilities appropriate to itself". Generally speaking, the tax code is drafted and applied on the basis of legal rather than economic reality. Separate corporate entities within the same corporate group are taxed individually; a company's income and assets are not treated as "really" being those of its shareholder whether that shareholder is another corporate entity or an individual taxpayer. The tax code is drafted on the basis that a subsidiary of a corporate group may be and often is tax resident in a different jurisdiction from its shareholder. That is why the concept of the permanent establishment was created.

Before noting (at para. 110) that the OECD commentary on the wording of Art. 12 of the Model Convention supported a narrow view of the scope of immovable property in Art. 6, Lady Rose stated (at para. 109):

Article 12(4) [of the Canada-UK Treaty] defines "royalties" as any payment received "as a consideration for the use of, or the right to use, any copyright, patent, trade mark...". Para 8 of the Commentaries on Article 12 states that the Article includes both payments made under a licence and also payments made to compensate the owner for an infringement of the right. But it does not cover a payment that "whilst based on the number of times a right belonging to someone is used, are made to someone else who does not himself own the right or the right to use it". The Commentaries give as an example of the distinction being drawn a situation where an artist receives both a fee for performing and also, if the performance is recorded, a royalty for each sale of the recording. The performance fee would fall under Article 17 which deals with income of performers and athletes but royalties for each sale of the recording will fall within Article 12 where the artist is the holder of the copyright. But where the copyright in the sound recording belongs to a third party, the payments made under the contract fall under Articles 7 or 17 rather than under Article 12 even if the payments are contingent on the sale of the recordings. Further, the 2017 Commentaries make clear that where payments are made in exchange for an outright transfer of the rights, those payments do not fall within Article 12 because "the payment is not in consideration 'for the use of, or the right to use' that property and cannot therefore represent a royalty" (para 8.2). The payment will instead be a business profit within Article 7 or a capital gain within Article 13.

Before affirming the judgment of Falk LJ of the Court of Appeal, Lady Rose noted (at para. 48) in passing that:

It is convenient to mention at this point that at para 54 of the leading judgment in the Court of Appeal, Falk LJ raised a problem about locating the situs of the right to receive the consideration referred to in Article 6(2). It is straightforward to treat the location of the actual land or the rights in the land as being in the State of source but it is more difficult to locate the situs of rights to payments in consideration of the right to work. Generally speaking, she noted, the situs of a contractual obligation is the country in which it can be enforced. That might not be the same country as where the land is situated.