Royal Bank of Canada v The Commissioners for HMRC

Under article 6(2) of the UK/Canada Double Tax Convention, a right to payments as consideration for working natural resources is immovable property only where its holder has a continuing interest in the relevant land to which that right can be attributed.

A contractual right acquired by a person who has never held such an interest does not qualify merely because the payments depend on oil production or prices. Income must be from immovable property; a merely economic or contractual connection is insufficient. Article 13 likewise applies only where the resident deriving the gain alienated the relevant asset. The legal distinction between a licence-holder’s right to work a field and another person’s rights to direct operations and receive the oil must be respected.

Royal Bank of Canada acquired from the receiver of Sulpetro Limited a contractual right to payments linked to production and oil prices at the Buchan field in the UK sector of the continental shelf. HMRC assessed the receipts to corporation tax as profits of a deemed UK ring-fence trade.

The First-tier Tribunal and the Upper Tribunal held that the payments fell within section 1313(2)(b) of the Corporation Tax Act 2009 and article 6(2) of the UK/Canada Double Tax Convention. The Upper Tribunal’s decision was reported as [2022] UKUT 00045 (TCC).

The appeal concerned whether the payment right constituted immovable property under article 6, whether Sulpetro had possessed a right to work the oil field, and whether section 1313 applied. HMRC also relied on articles 6(1) and 13 as alternative bases for UK taxation.

1. Appeal allowed. Article 6(2) of the UK/Canada Double Tax Convention had to be construed by reference to its ordinary contextual meaning, object and purpose, the Treaty as a whole, its equally authoritative French text and the persuasive reasoning of the OECD Commentary.

2. The fifth limb of article 6(2), concerning rights to payments as consideration for working or the right to work natural resources, is confined to payment rights held by a person with a continuing interest in the relevant land to which those rights can be attributed. It can therefore include a landowner’s right arising under a grant, or a corresponding right acquired with the land. It does not extend to a purely personal contractual right held by someone with no interest in the land.

   This construction provides the necessary legal connection between the payment right and the situs of the land. It is also consistent with the French term concession, the OECD Commentary’s treatment of similar wording concerning royalties, and the coherent allocation of taxing rights under articles 13 and 27A. HMRC’s wider construction would create tension with the specially drafted provisions governing offshore activities and disposals of hydrocarbon-related rights.

3. RBC had never held an interest in the Buchan field. It had acquired only a contractual right to payments calculated by reference to oil sale proceeds. It therefore could not be taxed under the fifth limb of article 6(2).

4. Article 13 did not provide an alternative basis for taxation. The payments were receipts of RBC’s banking trade, rather than capital gains, and RBC had never held or alienated an asset within article 13(1), (4) or (5). The natural meaning of article 13 requires the resident deriving the gain to be the alienator.

5. The payments were not otherwise income from immovable property under article 6(1). Income must be derived from immovable property, rather than merely connected with it. Here the source was the contractual payment right, and the calculation depended on sale proceeds from extracted oil, which was movable property.

6. Sulpetro’s powers to fund and direct the work and to receive the oil did not amount to a right to work the field. That right belonged to the licence-holder, SUKL. The legal structure could not be disregarded in favour of a broader concept of economic reality.

7. The court declined to determine the scope of section 1313 of the Corporation Tax Act 2009. It nevertheless questioned whether an interest in a proportion of oil sale proceeds was properly described as the benefit of the oil itself. The Upper Tribunal’s decision and the assessments were set aside. Nugee and Asplin LJJ agreed with Falk LJ.

1. Court of Appeal (Civil Division): Allowed RBC’s appeal on Grounds 1 and 2, rejected both grounds in HMRC’s Respondents’ Notice, set aside the Upper Tribunal’s decision and directed that the assessments be set aside: [2023] EWCA Civ 695.
2. Upper Tribunal (Tax and Chancery Chamber): Dismissed RBC’s appeal and upheld the conclusion that the payments were taxable under article 6(2) of the UK/Canada Double Tax Convention and section 1313(2)(b) of the Corporation Tax Act 2009: [2022] UKUT 00045 (TCC).
3. First-tier Tribunal: Rejected RBC’s challenges to the assessments and held that the Treaty and domestic charging provision applied. No citation is stated in the judgment.