Article by: Jonathan Schwarz, first published on KluwerTaxBlog
Following the Supreme Court decision in Fowler v HMRC  UKSC 22, the UK First-tier Tribunal has considered another case where classification of a source of income for tax treaty purposes was in issue. This time the question was classification as business profit or income from immovable property in the Canada-UK double tax treaty.
In Royal Bank of Canada v HMRC  UKFTT 267 (TC), a Canadian bank loaned funds to a Canadian oil & gas company, to help fund the exploration and extraction of oil in the UK sector of the North Sea. At the time, licences for this activity were only issued to UK resident companies. The common practice at the time was for non-resident companies to enter into an “Illustrative Agreement” with a UK resident subsidiary licence holder. Under such agreements, the development and exploitation costs would be incurred by the non-resident parent company in return for the licence holder’s share of the oil won from licensed area.
The Canadian company was in financial difficulties and sold its interest in the oilfield to the BP group. The consideration for the sale included an entitlement to royalty payments contingent on production from the oil field linked to the excess of the market price of the oil above an agreed level.