Royal Bank of Canada v Commissioners for His Majesty’s Revenue and Customs [2025] UKSC 2 (12 February 2025)

Royal Bank of Canada received payments linked to North Sea oil extraction under an assignment from Sulpetro. HMRC sought to tax these payments under the UK/Canada Double Taxation Convention as income from immovable property. The Supreme Court held the payments did not constitute 'consideration for the right to work' natural resources within Article 6(2), dismissing HMRC's appeal.

Facts

Sulpetro Ltd, a Canadian company, established a UK subsidiary (Sulpetro UK) which held a licence to exploit 12.7% of the Buchan Field in the North Sea. Under an ‘Illustrative Agreement’, Sulpetro provided all funding and expertise whilst receiving all oil extracted. In 1986, BP acquired Sulpetro UK’s shares and Sulpetro’s rights under the Illustrative Agreement. In return, BP agreed to make variable payments to Sulpetro calculated by reference to oil prices and volumes (‘the Payments’). After Sulpetro’s receivership in 1987, the right to receive the Payments was assigned to Royal Bank of Canada (RBC), which had made substantial loans to Sulpetro.

The Dispute

HMRC issued discovery assessments seeking to tax the Payments received by RBC for the accounting periods 2008-2015. HMRC relied on Article 6 of the UK/Canada Double Taxation Convention, arguing the Payments were ‘rights to variable payments as consideration for the working of, or the right to work, natural resources’ and thus taxable in the UK as income from immovable property. RBC contended the Payments fell outside Article 6(2).

Issues

Three principal issues arose:

1. Did the rights Sulpetro acquired under the Illustrative Agreement amount to a ‘right to work’ the Buchan Field within Article 6(2)?

2. If so, were the Payments ‘consideration for’ those rights?

3. If Article 6(2) applied, did section 1313 of the Corporation Tax Act 2009 impose a charge to tax on the Payments?

Judgment

The Majority Decision

Lady Rose (with whom Lord Lloyd-Jones, Lord Hamblen and Lord Leggatt agreed) dismissed HMRC’s appeal. The majority held that Sulpetro did not acquire the ‘right to work’ the Buchan Field under the Illustrative Agreement. The licence was always held by Sulpetro UK, which remained responsible for discharging all obligations to the Secretary of State. There is a legal difference between having a right to work natural resources and having a right to require another person to work those resources.

Lady Rose rejected HMRC’s argument that the economic reality should prevail over legal form. The court could not ignore the separate legal personality of Sulpetro UK, which was essential to the structure required by the UK Government. The Illustrative Agreement was designed to ensure UK licensing requirements were met whilst allowing overseas investment, and this legal structure could not simply be disregarded.

On Issue 2, the majority held that even if Sulpetro had acquired a right to work, the Payments would still fall outside Article 6(2). The coherent structure of Articles 6, 13 and 27A, particularly the bespoke provisions in Article 13(4) and (5) addressing hydrocarbon-related activities, supported a narrower construction of the fifth limb of Article 6(2).

On Issue 3 (obiter), Lady Rose held that if the Payments had fallen within Article 6(2), they would have been taxable under section 1313 of the Corporation Tax Act 2009 as profits from rights to the benefit of assets produced by exploitation activities.

The Dissent

Lord Briggs dissented. He considered that taking a realistic view of the transaction, Sulpetro was working the Buchan Field by virtue of bearing all risks and rewards, making all decisions, and receiving all extracted material through its wholly owned subsidiary. The Payments were plainly consideration for BP’s acquisition of the right to work. Lord Briggs would have allowed the appeal and restored the decisions of the First-tier and Upper Tribunals.

Implications

This decision clarifies the scope of Article 6(2) of the UK/Canada Double Taxation Convention regarding taxation of payments connected to natural resource exploitation. It confirms that legal form generally prevails in tax matters over economic substance, and that separate corporate personalities within a group cannot simply be disregarded when applying treaty provisions. The judgment provides guidance on the interpretation of similar provisions in other double taxation treaties based on the OECD Model Tax Convention. It also affirms that the allocation of taxing rights under such treaties is essentially a zero-sum game between Contracting States, with no underlying presumption favouring either jurisdiction.

Verdict: Appeal dismissed. The Payments made by BP to RBC did not fall within Article 6(2) of the UK/Canada Double Taxation Convention as they were not consideration for the right to work natural resources. The UK therefore had no right to tax the Payments under the Convention.

Source: Royal Bank of Canada v Commissioners for His Majesty’s Revenue and Customs [2025] UKSC 2 (12 February 2025)