The Bona Fide Investor: Corporate Nationality and Treaty Shopping in Investment Treaty Law

<p>This thesis addresses the problem of treaty shopping in investment treaty law. It seeks to illustrate how the problem stems from, and can in part be resolved by, the concept and definition of corporate nationality. It explores whether, and if so how and what, limits ought to be placed on the manipulation of nationality for the purpose of gaining investment treaty protection, to enable a principled basis to utilise nationality to prescribe the extent of rights and obligations in investment treaties. The importance of nationality requirements in investment treaties cannot be overstated—the definition of “investor” in any treaty defines which entities are entitled to substantive protections contained in the treaty for the benefit of states and investors alike. Entities making an investment need to know whether, and if so how, they can structure their investment to achieve protection of applicable investment treaties. Investors who have suffered damage need to know whether they are entitled to make a claim. States need to appreciate the extent of their potential obligations. Many investment treaties define qualifying investors in a broad way that includes any entity incorporated in a contracting state. Putative investors, including those from third states, or nationals of the host state of the investment, seek to come within the relevant definition, often by insertion of an intermediary company incorporated in the desired home state into the ownership chain of the investment. This thesis challenges the view that fulfilment of formalities set out in an investment treaty is sufficient to qualify as an investor where there is no substance behind the corporate form. To some degree, states and investment treaty tribunals have tried to abrogate treaty shopping by manipulation of corporate nationality by reference to the international law concept of genuine connection with the claimant’s state of incorporation, or by way of imposition of criteria for nationality based on the nationality of the corporate entity’s controller or proof of substantial business activity in its state of incorporation. The majority of investment treaty tribunals, however, have eschewed efforts to imply a substantive test or check on the attribution of nationality beyond literal fulfillment of nationality criteria. This thesis promotes a purposive approach that requires fulfillment of express treaty criteria for nationality, but also subjects the claimant to a substantive economic reality check in which the inquiry is to determine the reason for existence of the corporate claimant in relation to the relevant investment. Such an approach is required by an interpretative methodology that gives equal weight to the four tenets of art 31(1) of the Vienna Convention: ordinary meaning, good faith, context and object and purpose. If a corporate entity exists primarily to procure treaty rights, then it is not a bona fide investor consistent with the object and purpose of investment treaty jurisdictional provisions, even if it complies with the ordinary meaning of the express formal nationality criteria. If, however, it meets any express criteria and has a genuine ulterior commercial reason to exist in the ownership structure of the investment, then it qualifies as an investor entitled to the protection of an investment treaty. The approach promoted by this thesis is derived from the treaty shopping antidote crafted by municipal courts assessing the bona fides of corporate applicants for tax relief under double tax treaties. In addition, the thesis analyses municipal law regarding piercing the corporate veil, the law of diplomatic protection, and analogous jurisdictional concepts in investment treaty law including the application of the principle of abuse of right, and identifies that underlying all these areas of inquiry is the central question of the purpose, or commercial reason to exist, of the relevant corporate entity. Finally, this thesis demonstrates how a substantive approach can be applied in a principled and reasonably certain way. The use of corporate structures by foreign investors to procure rights under favourable investment treaties (treaty shopping) threatens to undermine the legitimacy of international investment treaty arbitration. Simon Foote QC's research illustrates how the problem stems from the concept and interpretation of corporate nationality criteria at international law. It promotes a new way to distinguish bona fide foreign investors by looking to the commercial purpose of corporate entities in relation to the relevant investment. It illustrates how that approach derives from analogous concepts in international and municipal law and how it can be implemented by states and investment treaty tribunals.</p>

The Bona Fide Investor: Corporate Nationality and Treaty Shopping in Investment Treaty Law

<p>This thesis addresses the problem of treaty shopping in investment treaty law. It seeks to illustrate how the problem stems from, and can in part be resolved by, the concept and definition of corporate nationality. It explores whether, and if so how and what, limits ought to be placed on the manipulation of nationality for the purpose of gaining investment treaty protection, to enable a principled basis to utilise nationality to prescribe the extent of rights and obligations in investment treaties. The importance of nationality requirements in investment treaties cannot be overstated—the definition of “investor” in any treaty defines which entities are entitled to substantive protections contained in the treaty for the benefit of states and investors alike. Entities making an investment need to know whether, and if so how, they can structure their investment to achieve protection of applicable investment treaties. Investors who have suffered damage need to know whether they are entitled to make a claim. States need to appreciate the extent of their potential obligations. Many investment treaties define qualifying investors in a broad way that includes any entity incorporated in a contracting state. Putative investors, including those from third states, or nationals of the host state of the investment, seek to come within the relevant definition, often by insertion of an intermediary company incorporated in the desired home state into the ownership chain of the investment. This thesis challenges the view that fulfilment of formalities set out in an investment treaty is sufficient to qualify as an investor where there is no substance behind the corporate form. To some degree, states and investment treaty tribunals have tried to abrogate treaty shopping by manipulation of corporate nationality by reference to the international law concept of genuine connection with the claimant’s state of incorporation, or by way of imposition of criteria for nationality based on the nationality of the corporate entity’s controller or proof of substantial business activity in its state of incorporation. The majority of investment treaty tribunals, however, have eschewed efforts to imply a substantive test or check on the attribution of nationality beyond literal fulfillment of nationality criteria. This thesis promotes a purposive approach that requires fulfillment of express treaty criteria for nationality, but also subjects the claimant to a substantive economic reality check in which the inquiry is to determine the reason for existence of the corporate claimant in relation to the relevant investment. Such an approach is required by an interpretative methodology that gives equal weight to the four tenets of art 31(1) of the Vienna Convention: ordinary meaning, good faith, context and object and purpose. If a corporate entity exists primarily to procure treaty rights, then it is not a bona fide investor consistent with the object and purpose of investment treaty jurisdictional provisions, even if it complies with the ordinary meaning of the express formal nationality criteria. If, however, it meets any express criteria and has a genuine ulterior commercial reason to exist in the ownership structure of the investment, then it qualifies as an investor entitled to the protection of an investment treaty. The approach promoted by this thesis is derived from the treaty shopping antidote crafted by municipal courts assessing the bona fides of corporate applicants for tax relief under double tax treaties. In addition, the thesis analyses municipal law regarding piercing the corporate veil, the law of diplomatic protection, and analogous jurisdictional concepts in investment treaty law including the application of the principle of abuse of right, and identifies that underlying all these areas of inquiry is the central question of the purpose, or commercial reason to exist, of the relevant corporate entity. Finally, this thesis demonstrates how a substantive approach can be applied in a principled and reasonably certain way. The use of corporate structures by foreign investors to procure rights under favourable investment treaties (treaty shopping) threatens to undermine the legitimacy of international investment treaty arbitration. Simon Foote QC's research illustrates how the problem stems from the concept and interpretation of corporate nationality criteria at international law. It promotes a new way to distinguish bona fide foreign investors by looking to the commercial purpose of corporate entities in relation to the relevant investment. It illustrates how that approach derives from analogous concepts in international and municipal law and how it can be implemented by states and investment treaty tribunals.</p>

Tax Treaty Aggressiveness: Who is Undermining Taxing Rights in Africa?

Tax avoidance strategies by multinational companies rely heavily on tax treaties. Multinational companies can relocate financial activities across countries to ensure the applicability of the most beneficial tax treaties. This ‘treaty shopping’ can be particularly harmful to African countries, impairing their efforts for domestic resource mobilisation and achieving sustainable development goals. In this paper, we analyse the aggressiveness of tax treaties towards African countries – the extent to which signing tax treaties reduces the taxing rights of African governments. We find that treaties signed with France, Mauritius and the United Arab Emirates reduce withholding tax rates the most, while treaties signed with European countries – and, in particular, the United Kingdom and France – greatly limit other taxing rights, for example, by restricting the scope of permanent establishment definition.

Networked capital: indirect investment and BIT formation

Why do states participate in bilateral investment treaties (BITs)? In this article, I examine the role of indirect investment on BIT formation. Indirect investment flows are an important aspect of the global investment regime that are underexamined by research focused on direct flows only. Indirect flows play an important role in affecting incentives for BIT participation because firms channel investment through intermediary destinations to take advantage of existing BITs. I argue that governments are more likely to participate in BITs when states expect to access groups of capital exporting states through second order links. When selecting BIT partners, states evaluate expected indirect foreign direct investment (FDI) flows by considering characteristics of a potential partner's second order FDI partners. States are thus more likely to participate in BITs when expectations for indirect flows are high. I use a variety of analyses to demonstrate evidence in favor of my hypotheses. I find evidence that indirect flows affect the likelihood of BIT formation and increase dyadic FDI flows. This research provides a novel explanation for BIT formation and contributes to research on indirect capital flows, treaty shopping and BIT formation.

Changed Perspectives and Conflicting Treaty Obligations

The authors analyse the changed landscape of the EU BIT policy following the Achmea decision and the 2020 Termination Agreement, in particular, their relevance for candidate countries such as Serbia. The perceived risks strongly suggest that some action must be taken before the accession to avoid becoming caught between conflicting obligations under EU law and the BITs, as happened to respondent countries in the cases of Micula and Magyar Farming Company. The potential for conflicts exists in the case of Serbia as well because it already has an obligation to comply with EU law in areas such as competition and state aid law, which may cause it to inadvertently breach investors’ rights under the BITs. Various options that a candidate country can pursue to adjust its bilateral investment treaties to EU law standards are considered in search of the best approach. Difficulties that may be encountered due to the premature termination of sunset clauses and the retroactive termination of arbitration clauses in pending arbitrations lead the authors to conclude that certain adjustments to the course of action adopted within the EU are called for. The proposed action in the case of Serbia consists of consensually amending the 22 Serbia-EU member state BITs following a two-step procedure so that the sunset clauses are terminated at once, whereas the remaining provisions of the BITs are designated by the contracting parties to be terminated on the date of accession. To prevent treaty shopping, these amendments need to be accompanied by comprehensive reform of Serbia’s other BITs that contain overly broad definitions of investors and investments. Some alternative approaches are also taken into consideration, such as the replacement of ISDS with other forms of dispute resolution and the replacement of the Serbia-EU member state BITs with other types of agreements. The candidate countries are advised to adjust their pre-accession commitments, both procedural and substantive, in a timely manner with the incoming EU obligations. These inevitable adjustments should be pursued cautiously by candidate countries to minimise risks and maximise their bargaining power.