What is the Right Nationality for Investment Treaty Protection

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What is the Right Nationality for Investment
Treaty Protection?

• Alejandro A. Escobar
• Swiss Invest Forum Conference
• on Investment Treaty Protection
• Zurich, 7 March 2008

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Introduction

• Nationality is the link that allows States to
  exercise certain rights against other States
• It may allow foreign persons, including
  investors, to derive rights from States under
  international law
• In investment treaties each State will define who
  are its nationals, companies or investors
• There is usually a distinction between natural
  persons (i.e. physical individuals) and juridical
  persons (i.e. companies and corporations)
• When and how is this important three examples

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Example 1 Inadvertent appropriate nationality

• A US petrochemicals company invests in Venezuela
• Fearing expropriation, it sees that there is no
  investment treaty between the U.S. and Venezuela
  and prepares for the (expensive) worst case
  scenario
• But ... it has invested through a Swiss
  subsidiary for tax efficiency
• It realizes that both its Swiss holding company
  and the majority owned offshore investment
  vehicle are eligible to claim for eventual
  expropriation as Swiss investors under the
  Switzerland-Venezuela BIT

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Example 2 Inadvertent lack of nationality

• A foreign businessman has an investment dispute
  with the United Arab Emirates for a Dubai project
• The businessman invokes Italian nationality to
  take the UAE to arbitration under the Italy-UAE
  BIT
• He had lost his Italian nationality by becoming
  Canadian and then applied to regain Italian
  nationality
• But ... he discovers that, despite his Italian
  passport and nationality certificates, he had not
  in fact met all the requirements to become an
  Italian national
• The tribunal declines jurisdiction, adding that
  it would have had jurisdiction if only the
  businessman had invested through a company
  constituted in Italy

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Example 3 Deliberate planning of nationality

• A European technology business develops a product
  with far-reaching potential for oil and gas
  production efficiency
• It invests in an expanding independent petroleum
  company with world-wide projects
• It deliberately structures its investment to
  ensure it has treaty protection against
  expropriation that can be enforced through
  international arbitration
• It finds it easier to qualify as an investor
  under some treaties than under others

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Nationality Rules regarding Natural Persons

• Nationality is determined by national law,
  subject to treaties, customary international law
  and general principles concerning nationality
• Principle of effectiveness requires a "genuine
  link" for international recognition of
  nationality
• For dual nationals against one of their own
  States, the "predominant" nationality prevails
• ICSID Convention Article 25(2)(a) held to exclude
  predominant nationality test jurisdiction
  excluded
• Some treaties (e.g. ECT) apply to permanent
  residents who are not nationals

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Nationality Rules regarding Juridical Persons

• National law does not always have express rules
  on corporate nationality
• Investment treaties almost always do, sometimes
  with multiple criteria
• State under whose law the juridical person is
  constituted or duly organized
• State where the juridical person has corporate
  seat
• Possible substance requirements in treaties
• "real" or "substantial" economic activities
• denial of benefits
• Nationality of those who control or effectively
  control

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When must appropriate nationality exist?

• Classic rule nationality must exist continuously
  from the time of injury until the time of
  official claim
• Additional requirement investor may not acquire
  nationality of respondent State before settlement
• Does this apply to investment treaty arbitration?
• Specific rules of ICSID Convention Art. 25 (2)
• Natural persons time of consent and time of
  registration of Request for Arbitration (plus
  negative nationality requirement)
• Juridical persons time of consent (and diluted
  negative test)
• Do the ICSID Convention provisions override any
  general international law continuity requirement?

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Some Consequences of These Rules

• Does international law allow for treaty-shopping
  through conveniently placed corporate entities?
• Is treaty-shopping objectionable?
• What could States do to prevent it?
• Does international law allow for multiple and
  parallel investment treaty claims?
• Does most-favoured-nation treatment apply to
  grant the most favourable definition of
  nationality?

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Conclusions

• If you are an overseas investor
• Check your existing treaty entitlements before
  you invest
• If none exist, check if treaty entitlements can
  be achieved by investing through a third State
• If relevant, check which is the most favourable
  set of investment treaty entitlements for the
  host State
• Make your treaty entitlements part of your
  business plan
• If you are the host State government
• Be careful how (all) treaty entitlements are
  drafted
• Use them wisely as part of your investment
  promotion policies

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