Whilst strategic tax advice is by now an integral part of any international investment transaction, strategic nationality planning, so as to maximise investment protections with effective access to investor-state dispute settlement (ISDS), still very much remains the exception to the rule.
However, given the current volatile global economic climate, the value of investment protection treaties should not be underestimated. Investment risks across all industries is on the rise, both in emerging markets and the developed world, and particularly in the European Union.
By structuring investments carefully, international investors (whether in the context of cross-border mergers and acquisitions, greenfield investors or otherwise) can often avail themselves of substantive investment protections and access to ISDS that may otherwise not be available to them.
International investment agreements
Investment protections can be found in a wide variety of international treaties and agreements, including bilateral investment treaties (BITs) and multilateral investment treaties (MITs). BITs provide qualifying investors with certain minimum protections in respect of their investments in a state with which the investors’ home state has concluded a BIT. MITs (such as the North American Free Trade Agreement and the Energy Charter Treaty) apply similarly between multiple states.
A key feature of most BITs and MITs is that they give qualifying investors the right to bring a direct claim against the offending state, usually by way of international arbitration in a neutral forum rather than before the state’s domestic courts.
Qualifying for investment protections
Whether or not an investor may avail itself of investment protections depends on the specific terms of the applicable treaty. Generally speaking, a claimant will need to demonstrate that it is a qualifying “investor” holding a qualifying “investment” within the terms of the treaty.
Investment treaties use a number of different approaches to define qualifying corporate investor. These are most commonly based on the relevant investor’s place of incorporation. However, certain treaties define “investor” more narrowly, for example requiring a company to carry out substantial business activities in its treaty “home state” in order to qualify as an investor.
Most treaties define the term “investment” very broadly, for example as “every kind of asset” or “every kind of investment” and generally include movable and immovable property, shares (whether held directly or indirectly, including minority shareholdings), intellectual property (IP) rights, debt instruments and other claims to money.
Substantive investment protections
More investment treaties contain a broad suite of investment protections. These include:
- Protections against expropriation.
- A guarantee of fair and equitable treatment.
- Full protection and security.
- A prohibition of discriminatory treatment.
In practical terms, these standards of protection have been applied in a wide variety of circumstances. Contrary to popular belief, investment protections are not only engaged in extreme cases such as expropriations/nationalisations; they apply equally in many other circumstances. For example, a growing number of investment disputes relate to changes of the host state’s regulatory environment, unfair tax assessments or penalties, the revocation of licences or permits, or the cancellation or breach of contracts by states. In this context, it is important to note that the state’s obligations extend to actions by state organs or agencies, such as regulators, ministries, local authorities, licensing authorities or the police.
Investment (re)structuring
BIT planning, like tax planning, should be carried out at the outset of a transaction when the investment is made, whether a greenfield project or a (commercial) acquisition. However, even where an investor is not currently covered under a favourable investment treaty, it may not be too late to take remedial steps to restructure an existing investment in order to gain treaty protections.
As a general rule, it is permissible to structure a transaction in a way so as to take advantage of international investment agreements concluded by the relevant host state. However, some arbitral tribunals have declined jurisdiction where an investment was restructured at a time when a dispute had already arisen or was sufficiently foreseeable by the investor, holding that such late restructurings amount to impermissible treaty shopping. Timely BIT planning is therefore essential.
Even where the ultimate investor’s home state does not have a BIT with the relevant host state, structuring an investment to take advantage of treaty protections can often be achieved by simply introducing a suitable investment vehicle into the corporate structure. In fact, according to recent statistics, approximately one third of recent investment claims were filed by claimant entities that are ultimately owned by a parent in a third country (not party to the treaty on which the claim is based).
In this context, the Netherlands, which maintains one of the most extensive and investor-friendly BIT networks in the world, has established itself as one of the key jurisdictions for the purposes of strategic investment (re)structurings. As Dutch investment vehicles are already used regularly for tax reasons, structuring investments, so as to maximise treaty protections, can often be achieved without compromising the tax efficiency of an investment.
Finally, investors should be aware that the existing system of investment protections and ISDS has become a topic of great public interest and scrutiny, and there have been many calls for reform both at a European and global level. As such, it is important that investors keep their plans (and investment structures) under review in light of the ever changing BIT landscape.
Conclusion
Strategic nationality planning so as to maximise investment protections is an important and cost effective mechanism for mitigating investment risk, wherever in the world an investment is being made, and irrespective of whether a transaction involves an obvious sovereign element at the outset (such as a contract with a state or state entity), or is a simple merger and acquisition deal.
In an ideal world, BIT planning should be carried out at the outset of a transaction and monitored subsequently in light of the fast-changing BIT landscape. However, even where an investment does not currently enjoy investment protections, it may not be too late to take remedial steps to restructure an existing investment in order to gain treaty protections.
