REUTERS | Radu Sigheti

Intra-EU BITs: time to reconsider European investment structures?

The EU’s quest to reshape European investment policy and dispute settlement is well documented, and has been the subject of much debate. One key element of that strategy is to eradicate bilateral investment treaties (BITs) concluded amongst EU member states – so-called “intra-EU BITs” (as opposed to BITs between EU member states and non-member states, so-called “extra-EU BITs”, which also fall within the EU’s competence but are subject to a different regime).

The EU views intra-EU BITs as redundant, in contravention of EU law and a cause of legal uncertainty for cross-border investors. On this basis, the EU has intervened in numerous intra-EU BIT disputes, challenging the relevant tribunal’s jurisdiction and, where necessary, seeking to prevent the enforcement of awards issued in such disputes. So far, the EU’s attempts to derail intra-EU BIT proceeding have proven relatively fruitless, with several tribunals and local courts rejecting the EU’s arguments. However, in January this year, the English court stayed further enforcement proceedings of the International Centre for Settlement of Investment Disputes (ICSID) award in Micula v Romania, pending determination by the Court of Justice of the European Union (ECJ) of whether execution and payment of the award may amount to unlawful state aid. At the same time, based on a question raised by the Slovak Federal Court of Justice in the Eureko v Slovak Republic case, the ECJ is also considering the broader question of whether intra-EU BITs are compatible with EU law. A decision is expected later this year or possibly next year.

In parallel, the EU has been actively pursuing its stated goal of eradicating intra-EU BITs. In this respect, in June 2015, the EU initiated infringement proceedings against Austria, the Netherlands, Romania, Slovakia and Sweden, and commenced an “administrative dialogue” with the remaining 21 member states that still have intra-EU BITs in place. Initially, the EU’s calls to terminate intra-EU BITs did not meet with wider interest from EU member states. Until recently, only three EU member states (the Czech Republic, Ireland and Italy) decided to terminate all or at least some of their Intra-EU BITs. However, it appears that the EU’s push against intra-EU BITs is finally gaining momentum. In February 2016, Poland announced that it was considering terminating its intra-EU BITs. In April 2016, Austria, Finland, France, Germany and the Netherlands proposed an EU-wide agreement to replace existing intra-EU BITs. In May 2016, it was reported that Denmark was proposing the mutual termination of its intra-EU BITs. Most recently, in March this year, it was reported that Romania is set to enact a law terminating all of its existing intra-EU BITs.

It therefore seems like the EU’s efforts to reshape European investment policy, and in doing so eradicating intra-EU BITs, is starting to bear fruit. So what does that mean for existing and future investors?

Ultimately, much will depend on the process of how existing intra-EU BITs are terminated or phased out. Where a state seeks to terminate a BIT unilaterally, it will have to comply with the BIT’s provisions as to its termination. In this respect, some BITs provide that no notice of termination may be given until expiry of the BIT’s initial term (sometimes set at 10 or even 30 years). Similarly, states will have to comply with the BIT’s notice period. On this basis, many BITs would remain in force for a number of months after the notice of termination is given. Furthermore, most BITs contain “sunset clauses”, which provide for the continued application of investment protections for existing investments for many years after the BIT’s termination (often 10 or even 20 years).

However, the story is different where both state parties to the BIT mutually agree to terminate the BIT. In doing so, the state parties may agree first to amend the BIT, removing any lingering protections (such as sunset clauses), and then terminate the amended BIT with immediate effect. Given the diverging political and economic interests amongst the wide range of EU member states, it is unlikely that such a coordinated approach will occur on a widespread basis. However, there have been a few instances where states actually agreed to proceed on that basis and removed the BIT’s sunset clause before terminating the BIT by agreement (for example, Denmark and the Czech Republic in 2011).

Whether or not such modification/removal of a BIT’s sunset clause and subsequent termination is ultimately legal, or whether it may violate investors’ rights and legitimate expectations, is a point of contention that has not yet been tested.

Ultimately, given the increasing push to terminate or phase out intra-EU BITs, and the EU’s continued intervention at all stages of the dispute resolution process relating to such BITs, prospective and existing investors would be well advised to evaluate their current position and consider alternative investment structures if necessary. For many investors, this will also mean having to reassess their investment structure from a tax perspective, with many European investments currently being held via Dutch or Luxembourg holding entities that, thus far, have often been the preferred choice from both tax and BIT perspectives.

With Brexit now well underway, the UK (soon no longer an EU member state) may well end up being an attractive gateway for (re)structuring European investments. Investors should watch this space in the wider context of the ongoing intra-EU BIT debate.

Kirkland & Ellis Philipp Kurek

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