UNIVERSITY OF AMSTERDAM
AMSTERDAM, THE NETHERLANDS
“A house is not a home, exploring the effectiveness of substantial business activity in international investment law”
SBA requirements, a house on sandy or hard rock?
LL.M. THESIS
International and European Law: Trade and Investment
Under the supervision of
Prof. dr. S.W.B. Schill
BAKKER, P.J.I. 11968621
i.
Abstract
In recent decennia, there has been a growth in anti-treaty shopping regulation that has been included in the provision of new BITs or model BITs. One of the instruments that have been implemented by parties is the addition of substantial business activities requirements to either a Denial of Benefits clause or on the definition of the investor.
This thesis evaluates the SBA requirements in investment law from a tax law perspective. In tax law, there has been a shift from ‘form’ to ‘substance’. Form relates to the legal
incorporation of an entity in a state’s jurisdiction while substance focuses on the activities that an entity employs in a jurisdiction. The requirements of substance relate to the SBA
requirement that has been adopted in multiple investment treaties.
In order to provide a framework for the SBA requirement in IIAs, this thesis will explore the rational for parties to implement requirements that go beyond the legal form of the entity and why states have chosen to implement in specific SBA requirements. Consequently, the application of this requirement by parties and tribunals will be discussed and analyzed within the framework of what parties want to achieve. The last chapter examines the application in investment law to the application in tax law and distillates what can make SBA requirements in IIAs more effective.
In recent decennia there has been a growth in anti-treaty shopping regulation that has been included in the provisions of new BITs or model BITs. One of the instruments that have been implemented by parties is the addition of substantial business activities requirements to either a Denial of Benefits clause or to the definition of the investor.
This thesis evaluates the SBA requirements in investment law and makes a comparison from a tax law perspective. In tax law, there has been a shift from ‘form’ to ‘substance’. Form relates to the legal incorporation of an entity in a state’s jurisdiction while substance focuses on the activities that an entity employs in a jurisdiction. The requirements of substance in tax law relate to the SBA requirements that have been added to multiple investment treaties.
To provide a framework for the SBA requirement in IIAs, this thesis will explore the rational for parties to implement requirements that go beyond the legal form of the entity and examine the rationale of states to implement in specific SBA requirements. Consequently, the application of this requirement by parties and tribunals will be discussed and analyzed within the framework of what parties want to achieve. The last chapter examines the application in investment law to the application in tax law and distillates what can make SBA requirements in IIAs more effective.
ii.
List of Abbreviations
BITs Bilateral Investment Treaties
DTTs Double Taxation Treaties
DoB Denial of Benefits
ECT European Charter Treaty
EU European Union
FDI Foreign Direct Investment
ICJ International Court of Justice
IIA International Investment Agreement
ISDS Investor-State Dispute Settlement
MLI Multilateral Instrument
NTL National Tax Legislation
OECD Organization for Economic Cooperation and Development
SBA Substantial Business Activities
UN United Nations
UNCTAD United Nations Conference on Trade and Development
iii. Table of Contents
I. ABSTRACT ... 2
II. LIST OF ABBREVIATIONS ... 3
III. TABLE OF CONTENTS ... 4
INTRODUCTION ... FOUT! BLADWIJZER NIET GEDEFINIEERD. CHAPTER 1: WHAT EXPLAINS THE EXISTENCE AND RATIONALE OF SBA REQUIREMENTS? ... 11
1. WHAT PRESSURE DO PARTIES HAVE TO LIMIT TREATY SHOPPING? ... 12
(A) Prisoners dilemma on IIAs ... 12
(B) Civil society on IIAs ... 15
2. WHY DOES RECIPROCITY MATTER? ... 16
3. WHAT EXPLAINS THE GROWTH OF SPECIFIC SBA REQUIREMENTS AS AN INSTRUMENT TO LIMIT TREATY SHOPPING? ... 19
4. DEFINING THE EFFECTIVENESS OF SBA REQUIREMENTS ... 21
CHAPTER 2: IS ADDING SBA REQUIREMENTS AN EFFECTIVE INSTRUMENT IN LIMITING TREATY SHOPPING? ... 24
1. A LACK OF A SIGNIFICANT AMOUNT OF CASES ... 24
(A) New requirements ... 24
(B) Double DoB test ... 25
2. THE CRITERIA PROVIDED IN INVESTMENT ARBITRATION REGARDING SBA REQUIREMENTS ... 26
(A) Arguments of parties in investment arbitration ... 26
(B) Arguments of tribunals in investment arbitration ... 27
3. ANALYZING THE EFFECTIVENESS OF THE SBA REQUIREMENT ... 30
(A) The extensive scope of criterion ... 30
(B) Evaluating the conduct of tribunals ... 31
(C) Sub Conclusion ... 34
CHAPTER 3: A TAX COMPARISON ... 37
1. SIMILARITY OF TAX AND INVESTMENT LAW ... 37
(A) A tax and investment law comparison ... 37
(B) The distinction between tax law and investment law regime ... 38
(C) Can we compare the SBA requirements? ... 39
2. SUBSTANCE REQUIREMENT IN TAX LAW AS A FRAMEWORK FOR SBA ... 40
(A) Substance in domestic legislation ... 41
(B) Substance in Double taxation treaties ... 44
CONCLUSION ... FOUT! BLADWIJZER NIET GEDEFINIEERD. BIBLIOGRAPHY ... 52
Introduction
In international investment law, most cases brought to tribunals involve a breach of a substantive condition in a Bilateral Investment Treaty (BIT) between the host state, the state in which the company has the investment and the home state in which the company is incorporated. The United Nations Conference on Trade and Development defines BITs as ‘a
legally binding agreement between two countries that establishes reciprocal protection and promotion of investments in both countries’1. Bringing a claim under a BITs’ protective clauses
requires that the claimant is considered an investor as laid down in the investment treaty2. For
the tribunal to administer the case, the claimant has to fulfill all jurisdictional prerequisites set out in the investment treaty.3
This first phase, the procedural part of an arbitration proceeding under an international investment treaty, shall be the focus of this thesis. The conditions provided to be designated as an investor under the treaty can be broad, whereby making it easy for investors to have access to the protective norms in the treaty, and can be narrow, in which case the jurisdiction of a tribunal is limited to investors that meet a more extensive scope of requirements. UNCTAD research shows that there is a tendency in the last decennia of states to narrow the scope by setting additional requirements for investors.4 One approach to narrow a treaties’ scope of
protection is to include substantial business activity (SBA) requirements.5 This can either be
done through the implementation of an SBA requirement in the definition of the investor or by adding an SBA requirement to a Denial of Benefits (DoB) clause.6 The number of treaties
containing an SBA requirement in the definition of the investor has increased7 from 16% of the
treaties concluded between 1962 and 2011 to 30% on the treaties concluded between 2012 and
1 UNCTAD (2009)
2 In ICSID also as defined in article 25 ICSID convention
3 Nelson Goh, ‘The Assignment of Investment Treaty Claims: Mapping the Principles’ (2019) 10 Journal of
International dispute settlement 28
4 UNCTAD ‘World Investor Report: Investor Nationality: policy challenges’ (2016) 174
5 Fai de Swart, ‘The Use of Mailbox Companies in International Investment Protection’ (2015) 12(1) European
Company Law 23 And Jorun Baumgartner, ‘treaty Shopping in International Investment Law’ (1d ed, Oxfort U.
Press 2015) 250
6 R R. Dolzer & C. Scheuer, Principles of international Investment Law 232 (2d ed, Oxford U. Press 2012) 7 Mark Feldman, ‘Setting Limits on Corporate Nationality Planning in Investment Treaty Arbitration’ (2012)
2014.8 DoB clauses in BITs that contain the condition of SBA have grown from 5% between
1926 and 2011 to 55% between 2012 and 2015.9
Source: UNCTAD ‘World Investor Report: Investor Nationality: policy challenges’ (2016) 174
An example of this development can be discerned concerning the Dutch model BIT. While the Dutch model BIT of 2004 is regarded as having a broad scope10, the new 2018 Dutch model
BIT has reviewed its investor definition to a more narrow scope. While an investor in the 2004 Dutch model BIT was defined as ‘a legal person constituted under the law of that Contracting
Party’11, the 2018 Dutch model BIT raised the bar for investors by defining an investor as ‘any
legal person constituted under the law of that Contracting Party and having substantial business activities in the territory of that Contracting Party’12. Yet this development is not
limited to the Dutch model BIT. A similar shift can be observed in the new CETA, the Indian model BIT, the German model BIT, the 2011 Japan-Colombia BIT, and the 2009 ASEAN-China Investment Agreement.13
Examining the influence of SBA requirements on the legal status of investors is relevant since about one-third of the investments brought to tribunals are structured through a subsidiary14 and
8 UNCTAD (n 174) 9 Idem.
10 Nelson Goh, ‘The Assignment of Investment Treaty Claims: Mapping the Principles’ (2019) 10 Journal of
International dispute settlement 36
11 Dutch model BIT (2004), available at https://www.internetconsultatie.nl/investeringsakkoorden accessed 12
December 2019
12 Dutch model BIT (2018), available at https://www.internetconsultatie.nl/investeringsakkoorden accessed 12
December 2019
13 Jorun Baumgartner, ‘treaty Shopping in International Investment Law’ 1d ed, OUP 2015 251 14 UNCTAD (n 171)
around 25% of these companies have limited operations15 in the home state.16 Therefore adding
SBA requirements can have a major impact on the legal position of the investors involved17 as
it touches directly upon the level of protection foreign investments enjoy. However, SBA requirements can be difficult to assess for investors as there is no exact definition provided in many treaties.
While some BITs clarify the meaning of the SBA condition, like the China-Hong Kong, SAR CEPA (2003) and the China-Macao, SAR CEPA (2004)18, the vast majority of BITs and MITs
leave the interpretation of the clause to tribunals. Two recent cases in which tribunals (both ICSID) have to a certain extent defined the definition of the SBA requirement 19 are Pac Rim
v. El Salvador (2012) and Masdar v. Spain (2018).20
The tribunal in Pacific Rim sets a bar of activities which a tribunal may ascertain to assess whether a claimant reaches the threshold of the SBA requirement, in this case, the requirement set out in the Dominican Republic-Central America Free trade Agreement (CAFTA)21. The
tribunal states that in assessing the amount of activity, a tribunal may pierce the corporate veil and evaluate certain criteria (of in this case a holding company) such as “owing to all or
15 Defined by UNCTAD as companies with fewer than 10 employees or with zero assets where employee
numbers are not available
16 UNCTAD (n 171)
17 Blackstone-De Brauw ‘New Model BIT to Replace 79 existing Dutch Bilateral Investment Treaties’
https://www.debrauw.com/newsletter/new-model-treaty-to-replace-79-existing-dutch-bilateral-investment-treaties/ accessed 8 February 2020
18 UNCTAD (n 180)
19 Jurisdiction is most often denied regard the working time of invocation of the DoB clause, less on the
requirements for attaining the SBA requirement, see: Plama Consortium Limited v. Republic of Bulgaria, Waste
Management, Inc. v. United Mexican States, Hulley Enterprises Limited (Cyprus) v. The Russian Federation, Generation Ukraine, Inc. v. Ukraine
20 Lindsey Gastrell and Paul-Jean Le Cannu, ‘Procedural Requirements of ‘Denial-of-Benefits’ Clauses in
Investment Treaties: A Review of Arbitral Decisions’ (2015) 30(1) ICSID review 79
21 Pac Rim Cayman LLC v. El Salvador, ICSID Case No. ARB/09/12. Para 4.72 (1 June 2012)
Pac. Rim . El Sal ador
Pac. Rim (Canada)
Pac. Rim Ca man LLC*
(USA) El Sal ador
* no emplo ees, no office space, no board of directors, no ta es in USA, no tangible propert
CAFTA O nership
Masdar . Spain
O nership
ECT
* Office space and t o boards of directors (Both pro ided b Vistra compan staff)
Director a1, a2 (UAE)
Masdar*
substantially all of the shares in one or more subsidiary companies which will employ personnel and produce goods or services to third parties. The commercial purpose of a holding company is to own shares in its group of companies, with attendant benefits to control, taxation, and risk management for the holding company’s group of companies. It will usually have a board of directors, board minutes, a continuous physical presence, and a bank account”22. The tribunal
provides a list of characteristics to assess while at the same time not setting a minimum standard or threshold. In Masdar v. Spain, the SBA requirement as set out in the Energy Charter Treaty23
(ECT) is assessed and the tribunal takes the position that the SBA requirement is attained. The holding company ‘Masdar’ reached the SBA requirement by employing two directors and renting office space this was done by a company specialized in providing ‘Economic Substance services & solutions’24. While the tribunal pierced the corporate veil, the condition was met
because the firm had some activities, the fact that Masdar only has this activity to reach the threshold did not influence attaining the SBA requirement. A question that thus surfaces is whether the incentives of states in adding these requirements are attained if (1) the definition is left open to the tribunal and (2) if attaining the SBA requirement becomes a legalistic issue, to a certain degree a mailbox company+, instead of real business activity that contributes to the welfare of the home state.
This research aims to evaluate the effectiveness of SBA requirements as an instrument of states to limit illegitimate treaty shopping and to research possible instruments by which the goals of states would be reached more effectively. This thesis will therefore examine:
RQ what is the rationale and effectiveness of including substantial business activity
requirements in international investment treaties on limiting treaty shopping? To test the effectiveness, this paper first evaluates the rationale and purpose of anti-treaty shopping regulations and evaluates how to interpret the SBA requirement. Following article 31 of the VCLT, this paper will assess and interpret the SBA requirement by evaluating the ordinary meaning, context, and will do so in light of its object and purpose.25 Consequently, an
emphasis will be put on what the involved actors tried to attain by the including SBA
22 Pac Rim Cayman LLC v. El Salvador, ICSID Case No. ARB/09/12. Para 4.72 (1 June 2012) 23 Energy Charter Treaty (signed 17 December 1994, entered into force 16 April 1998) art 17 (ECT) 24 Vistra, speciality sevices : https://www.vistra.com/economic-substance
requirement and why there has been an increase in the inclusion of these in recently concluded treaties. Albeit states are the principal actors, they are not uniform but rather a pluriform actor made up and influenced by international organizations and civil society. The influence of these actors will as a consequence be discussed in conjunction with the intent of the state.
SQ1 What rationale do states have by adding SBA requirements?
The following research focusses if the intent as researched in SQ1 is attained through the
inclusion of SBA requirements.
SQ2 Is the inclusion of an SBA requirement an effective instrument in limiting
illegitimate treaty shopping?
Concluding, this thesis will examine potential methods to raise the effectiveness of SBA requirements set out by parties to investment treaties. The main focus will be a comparative analysis of the effectiveness of ‘SBA requirements’ in IIAs with ‘substance’ in international (DTT) and national tax legislation (NTL), since there is overlap in the goals that both systems try to attain, mainly to limit the abusive use a treaty regime by mailbox companies. In the analysis to raise effectiveness, other fields will be analyzed as well, in particular international relations and international political economy. Hence the third sub-question is:
SQ3 What tax law methods can be employed to raise, lege feranda, the
effectiveness of SBA requirements?
This research aims first, to help states in their development of a robust investment regime with the broad support of different actors within the state, thereby raising the legitimacy of the investment system as a whole and second, provide clarity for investors regarding the legal status of protection concerning their foreign investment. The legal sources will inter alia include decisions of arbitral tribunals, interviews with fiscal analysts, literature, newspapers, and documents of international organizations.
Chapter 1: What explains the existence and rationale of SBA requirements?
The earliest investment treaties contained a broad approach to the definition of the investor. Most treaties only required an investor to be incorporated in one of the states being a party to the investment agreement. More recent IIAs have shown to limit the definition of the investor by adding additional requirements to the incorporation in the host state. Recent cases starting from 2010 have shown that approximately one-third of the claims were initiated by entities that were mere holding corporations with a parent company not being part of the treaty regime under which it made the claim.26 Of this one third (see above) 25% of the claims brought under an
IIA hold no substantial business activity according to UNCTAD report 2016.27
Parties to treaties have adopted regulations to limit the scope of the investor, one of these instruments is the inclusion of SBA requirements. The share of BITs containing SBA requirements has almost doubled from 16% before 2011 to 30% of the treaties conducted between 2012 and 2014. The number of treaties with an SBA requirement to DoB clauses have even 11 folded from 5% before 2011 to 55% between 2012 and 2014.28 Hence parties to IIAs
increasingly move from a broad definition of the investor to a narrower scope of the investor in recent treaties. Additionally, recent cases show a negative view of treaty shopping by other states. Bolivia in Aguas del Tunari v Bolivia contended that the Dutch company was a ‘mere shell’ to gain access to arbitration under ICSID.29 The number of cases in which the nationality
was vague is part of the rationale for withdrawal from ICSID for by Bolivia.30 Likewise,
multiple energy companies have brought claims to arbitration under the Dutch-Venezuela BIT with several being inherently from the US (Exxon-Mobil) or Italy (ENI). Since 2010 Venezuela, Bolivia, Indonesia, and South Africa have terminated their BITs with the Netherlands while expressly referring to treaty shopping concerns.31
Hence, while it is clear that the purpose of the parties is to limit treaty shopping, this chapter investigates the rationale for parties to limit treaty shopping and for what type of treaty shopping it is effective to add SBA requirements.
26 UNCTAD ‘World Investor Report: Investor Nationality: policy challenges’ (2016) 171 27 the definition of the SBA used to make this analysis is not given.
28 UNCTAD ‘World Investor Report: Investor Nationality: policy challenges’ (2016) 174
29 Luke Eric Peterson, ‘Tribunal split in Bechtel-Bolivia case over corporate nationality of investor’ (2005)
institute of sustainable development
30 Dilek Aykut, ‘What to do When Foreign Direct Investment is Not Direct of Foreign: FDI Round Tripping’
(2017) World bank working paper number 8046
1. What pressure do parties have to limit treaty shopping?
Following article 31 VLCT, an international law scholar should examine the intent actors. This thesis advances the opinion of Susan Franck32 that international law perceives the state as a
uniform actor and tends to focus less on description and positivism while scholars in international relations are committed to evaluating actual claims about the behavior of international actors.33 It is my conviction that this influence from international relations is also
of value in the international investment context, because of the dynamics between the state and private sector and the complex playing field in which parties operate.
In the research for the raison d’être of anti-treaty shopping regulations, this thesis will focus on two critiques. One is exemplified by the prisoner's dilemma and the other on the influence of civil society.
(A) Prisoners dilemma on IIAs
The first rationale for states to limit treaty shopping is to escape a one-sided prisoner's dilemma.34 The prisoner’s dilemma is a frequently used descriptive analogy illustrating the
conduct of parties that while being in a competitive relationship with each other can both gain by working together instead of competing with each other.
In the prisoner’s dilemma, there are two actors A & B that were involved in criminal behavior. They are both caught and are put into different cells. If both remain silent, they will have to spend 1 year in prison. If they both betray the other, they will serve 8 years each. If A betrays B and B remains silent, B will have to serve 10 years in prison. The ideal outcome for both parties will be to cooperate. Accordingly, both will spend 1 year in prison, the Pareto optimum. Because there is no communication and no trust the most likely situation will be that they will not cooperate and consequently will have to serve 8 years in prison, the Nash equilibrium.
32 Susan Franck, ‘Empiricism and International law: insights for investment treaty dispute resolution’ (2008)
opinion juris 777
33 Susan Franck, ‘Empiricism and International law: insights for investment treaty dispute resolution’ (2008)
opinion juris 777
34 Julie Roin, ‘Rethinking Tax Treaties in a Strategic World with disparate Tax systems’ (1995) 81 Va L Rev
This prisoner’s dilemma can be applied to the interaction between states conducting international investment agreements. IIA’s have the potential to facilitate cooperation to end up at the Pareto optimum. Usually, the state consists of domestic actors (A1) willing to invest in other countries but lacking the security to make such an investment, because when the investment is made the actor may end up losing the invested capital by actions of state B which results in absolute gains for state B while substantially depriving an entity of state A (A1). Diverting from the prisoner’s dilemma the gain of both state A and state B is not the limitation
of punishment but the increase of welfare.
B remains silent (cooperates) B betrays A (defects) A remains
silent (cooperates)
A: 8 welfare B: 8 welfare
A: -10 welfare (e.g. loss of investment for A1) B: 10 welfare A betrays B
(defects)
A: 10 welfare
B: -10 welfare (e.g. loss of investment for B1)
A: 0 welfare B: 0 welfare
The layout of schedule from the Slides of Prof. Dr. R.D. Andeweg, 2015, Introduction political science, Leiden University
Hence there is collusion between the actors' A and B, one providing foreign direct investment flows and the other providing protection to the investment. The Pareto optimum is achieved through the above-mentioned reciprocity between state A and state B. If an investor from state C can de jure take the form of an investor from state A, state C effectively escapes the prisoner's dilemma with negative effects for state B which must accept claims from state C without its subjects (B1) having the same rights in state C illustrated by the following example. The relation between states B and C is therefore effectively a one-sided prisoner’s dilemma for state B.
There is a BIT between the Netherlands and Israel (NL-IL). A Russian investor structures its investments through the Netherlands to gain access to the NL-IL BIT. The sole purpose of the company’s restructuring is to gain access to the BIT while having its effective operations in Russia. While IL companies can bring claims to NL and NL companies can bring claims to IL, there is no reciprocal relationship between IL and Russia by which IL companies can bring claims to Russia or vice versa. Russia will therefore always be
located in the Pareto optimum circumventing to be put in the position of potentially losing welfare. The ultimate winner, in this case, is de facto the Russian company which had the protection of its investments without any reciprocity with either NL or IL. NL is also a winner in this case because the Russian company is now de jure a Dutch firm. It will be unable to bring claims against NL. Resulting in the following relationship between RU and IL:
Hence a broad definition of the investor in the BIT between states A & B in combination with the complexity of corporate structures and the ease to register as a legal person in many legal systems can lead to a situation in which actual coverage is much larger than expected.35
While both parties to the treaty have the same definition of the investor, the investors will use the broad definition of the treaty to structure their investment through an investment exporting state (home state). Logically the host state that is receiving the FDI will bear the highest degree of negative effects because it is limited in its regulatory power. This has mostly been done through western states such as the Netherlands, as shown by the recent critique and consequent withdrawal of Venezuela of eight BITs with conventionally capital-exporting countries (U.S., U.K, Germany, France, The Netherlands, Canada, China).36 The critique is that the aim of IIA’s
is to encourage foreign investments between the parties of the treaty and not to extend legal rights and privileges to corporate owners of assets through restructuring.37 Some scholars38 and
FDI receiving states hold that the rationale for IIAs is undermined by the broad definition.39
35 UNCTAD REPORT 2016, p. 31
36 Gus van Harten, ‘Five Justification for Investment Treaties: A Critical Discussion’ (2010), trade, law &
development, vol. 2, No. 1
37 Gus van Harten, ‘Five Justification for Investment Treaties: A Critical Discussion’ (2010), trade, law &
development, vol. 2, No. 1 p. 29
38 Stephan W. Schill, ‘enhancing international investment law’s legitimacy: Conceptual and Methodological
Foundations of a New Public Law Approach’.(2011) 52 Va J Int’l L 95-96
39 Gus van Harten, ‘Five Justification for Investment Treaties: A Critical Discussion’ (2010), trade, law &
development, vol. 2, No. 1 p. 29
IL remains silent (cooperates) IL betrays RU (defects) RU remains
silent (cooperates)
RU: 8 welfare IL: 8 welfare
RU: -10 welfare (e.g. loss of investment for A1)
IL: 10 welfare RU betrays
IL (defects)
RU: 10 welfare
IL: -10 welfare (e.g. loss of investment for IL1)
RU: 0 welfare IL: 0 welfare
The one-sided prisoner’s dilemma to capital importing parties results in pressure on investment exporting countries to change existing treaty definitions.
(B) Civil society on IIAs
Internally there is pressure on states from the civil society which increasingly views the investment regime as the enemy of the state.40 The legitimacy of the international investment
regime has been debated since the 1990s, generally from anti-globalization movements.41 The
debate has shifted from a critique on substantive protections and the effect on state sovereignty to jurisdictional debates on the investors' right to bring claims against states.42
The beginning of the last decennia marked a further shift in policy as civil society was mobilized; Firstly, as mentioned, Tokios Tokeles shocked civil society groups as it revealed the power of investors to use the system to their advantage as an instrument against their state. Secondly, the Vattenfall v. Germany case under the ECT in 2012 generated a sizable critique when, the already vocal civil society on the opposition of nuclear power, condemned the Swedish multinational when it brought an investment treaty claim against the German government regarding a nuclear phase-out.43 Thirdly the TTIP brought ISDS to the forefront of
attention with large civil society groups starting campaigns against the ISDS provisions contained in investment treaties.44 Together these marked a growth in the public interest and
negative public perception on investment treaty arbitration and consequently a change in policy. In my view, the critique of the civil society falls in this broader framework of an increasingly counter neo-liberal tendency and a return to the sovereignty of the state which is seen in tax legislation and IIAs.45 In the creation of an attractive tax climate, this is seen as robbing states
40 Daniel Behn, 'Legitimacy, Evolution, and Growth in Investment Treaty Arbitration: Empirically Evaluating the
State-of-the-Art' (2015) 46 Geo J Int'l L 365
41Idem. 42 Idem.
43 Jonathan Bonnitcha, Lauge Skovgaard Poulson, Michael Waibel ‘The Political Economy of the Investment
Treat Regime’. (2017) UOP
44 Jonathan Bonnitcha, Lauge Skovgaard Poulson, Michael Waibel ‘The Political Economy of the Investment
Treat Regime’. (2017) UOP 203
45 Paul Robert Gilbert, ‘Sovereignty and tragedy in contemporary critiques of investor state dispute settlement’
from tax income, and likewise, critique on investment dispute arbitration is conceived as robbing states of sovereignty over its investors and legislation.
In this section, the incentives for states to change investment policies have been discusses. It concluded a shift from a more multinational investment regime to an increasing focus on reciprocity and consequently state sovereignty in recent history. The next section will discuss the different views on reciprocity and which view fits mostly the recent trend of an increase of SBA requirements.
2. Why does reciprocity matter?
As concluded in the previous subchapter, the fundamental critique for actors is the lack of reciprocity. The necessity of reciprocity and therefore the existence of illegitimate treaty shopping (other than due to timeliness) is disputed in international investment law.
The basis of international investment law has been bilateral investment treaties, but there has been a shift towards a more multilateral investment regime in which through different instruments investors are protected in a very broad range of states.46 One of the instrument that
contribute to this more multilateral investment regime is the possibility for the investor to seek the best protection through treaty shopping.47 I agree with Stephan Schill that “States have
difficulties in limiting the effect of investment treaties to a specific bilateral relationship. The reasons for this are twofold. First, BITs regularly rely on a broad notion of investment that does not only cover assets in the host State directly owned by an investor. Instead, they also grant protection to the shareholding of foreign investors in a corporate entity that holds assets in the host State. Secondly, BITs not only protect investments by natural persons, but also extend to investments by corporate investors.”48 I conclude that one can look through two
different narratives to the debate whether this lack of reciprocity in the modern investment regime is problematic. I define these as the consequential and categorical narrative.49
(A) Consequential narrative (Investor centered)
46 Stephan Schill, ‘The Multilaterization of International Investment Law’ 1ed CUP 2009 47 Idem. 198
48 Stephan Schill, ‘The Multilaterization of International Investment Law’ 1ed CUP 2009 199 49 Based on moral theories of consequential vs. categorical moralism
The consequential narrative has as a fundamental basis that the purpose of investment law is to increase foreign investment. Hence, if this goal is attained then the route is of lesser importance. The consequence is that if an investor is de facto a third state national, the lack of reciprocity is not important, because the result is no different than when it is de facto a national of a contracting party.
Within this narrative the position that the investment regime in developing into a multilateral order50 is positive because it results in good protection for the investor. Hence, the SBA
requirement would limit treaty shopping and causes a shift in the divergence to the multilateral investment protection system to a return to a more bilateral centered system.
Following this narrative, the inclusion of SBA requirements is negative for multilateral investment protection. Because, the inclusion limits the protection for investors. Without SBA requirements “corporate structures can change their nationality quickly and at little
cost by either migrating to another jurisdiction, or by setting up a corporate
vehicle there.”51 The inclusion of this requirement can, if effective, make this maneuver more
difficult. This can result in the following negative effects.
Additionally, limiting treaty shopping could effectively result in a denial of justice because it excludes remedies.52 The investor has the right to choose a treaty regime that is most beneficial
to its investment which can result in access to the jurisdiction of a forum. This structuring could increase the right of access to justice as protected under international law.53
Through the limitation of treaty shopping and by focusing on reciprocity, the consequence may be that the investor will have less access to justice.
lastely, the SBA requirement is negative for FDI because the most effective distribution of capital is hindered by the limitation of corporate structuring. This can result in an investor not investing.
50 Stephan Schill, ‘The Multilaterization of International Investment Law’ 1ed CUP 2009 51 Idem. 199
52 Jorun Baumgartner, ‘treaty Shopping in International Investment Law’ 1d ed, OUP 2015 37 53 Idem. 48
Concluding, his narrative holds that structuring an investment through a state with a beneficial international investment treaty regime increases foreign investment because the investor would otherwise, in some cases, not invest. Additionally, the investor can choose a treaty in which its investment is best protected consequently gaining access to legal remedies for the investor. The consequence is thus an increase in investment flows, better protection for the investor against policies of the state that negatively impact its investment, and in many cases more or better legal remedies to seek justice. The inclusion of SBA requirements thus limits the ultimate goal, that is the increase in foreign investment while additionally limiting the protection of investors.
(B) Categorical narrative (state-centered)
The position held in this paper is the categorical narrative. The focus is that while an increase in foreign investment is the main goal of the investment regime, there are considerations of geopolitics, sovereignty, and equal standing that can make the ultimate foreign investment legitimate or illegitimate.54 The basis for this narrative lies in the balance between private and
public interest and economic growth and other strategic interests. While Stephan Schill holds that “Similarly, access and exit from the BIT regime resembles a multilateral treaty regime
[….]. Instead, exit from international investment protection is only possible if a host State terminates all of its investment treaties as investors can always bring their investment under the protection of a different BIT simply by restructuring through a corporate intermediary covered by a different BIT.”55. The categorical narrative holds that a move back to bilateralism
in international investment law can also occur through the inclusion of SBA requirements, which make IIAs more reciprocal.
Thus, while investment law is designed to limit the politicization of disputes, still political considerations play a major role in the development of the system and the provisions of BITs. Some of the consideration for parties to add SBA-requirements, therefor moving to a more bilateral investment regime can occur because:
54 Fabrizio Di Benedetto, reciprocity in international trade and investment law and the establishment of an
European Committee on Foreign investment (October 1, 2017)
55 Stephan Schill, ‘The Multilateralization of International Investment Law: The Emergence of a Mulilateral
System of Investment Protection on the Basis of Bilateral Treaties’ Society of International Economic Law
Firstly, when the only requirement is form and not substance the current investment regime becomes effectively a multilateral system but only for the investor. The investor can easily switch nationality which suits its investment and preferred forum to settle the dispute. This can create an unequal playing field for the host state and consequently legal inequality before the dispute starts.
Secondly, in the case where an economic union decides to stop intra-union investment arbitration, this can be circumvented by incorporation in another legal regime. In the case of the EU after the Achmea judgment, de facto EU entities can easily channel their investment through a non-EU member and circumvent regional regulation.
Thirdly, in the last years, there has been an increase in protection measures taken to limit, not increase, investment from some states. As exemplified by the legislation by multiple states during the COVID-19 pandemic to limit investment flows from certain countries.56 I.e. the EU
limiting investment from China. Hence, states may only want to increase investment if their investors are likewise protected in the other state. In my opinion, this rationale is crucial for previously developing countries, which now increasingly invest in, protectionist developed countries.
Concluding, based on the increase of the SBA requirements and the concluded internal and external pressure on states, it is my opinion that although the international investment regime has, as stated by Stephan Schill, increased in a multilateral direction, states are increasingly moving back to a more bilateral based system. The SBA requirement returns to a sense of reciprocity and gives states more power to make specific regulation that suits their interests. With a substance requirement and not the sole form requirement, reciprocity and country-specific legislation are reactivated.
3. What explains the growth of specific SBA requirements as an instrument to limit treaty shopping?
A state has a broad range of options from which it can choose to either increase sovereignty and reciprocity or increase legal certainty and protection for the investor. While the first IIAs
generally included only an incorporation requirement, more recent treaties have included definitions to exclude de facto foreign investors from taking advantage of its provisions.57
Because an estimated one-third of ISDS claims are brought by entities that are owned by a parent in a non-party state, parties have a significant interest and pressure as evaluated in the previous section to limit treaty shopping.
Treaty shopping can take different forms. First, there can be a situation of indirect ownership where an investor is effectively controlled by a non-state party and the investor has structured its investment through the state party to the IIA. This form of treaty shopping can only be established when a tribunal to pierces the corporate veil and evaluates the corporate structure of the firm. Second, an investor can use time-sensitive restructuring in which it can gain access to a treaty that best protects its interest in light of starting an arbitration.58 The cases in Plama
v. Bulgaria and Phillip Morris Asia v. Australia have shown that tribunals have taken a
restrictive position on this type of treaty shopping even when the IIA does not contain additional requirements for the investor. Lastly and most importantly for this research, mailbox companies are often used as a vehicle to enable treaty shopping. SBA requirements are specially designed to limit the use of investment agreements by mailbox companies. It is often included in a DoB clause in which case it becomes relevant when it is activated by the state party or as a condition to gain access to the protective treaty provisions.59 The SBA requirement is specifically created
as an obstacle for mailbox companies to gain access to an IIA. Other instruments include the ‘seat approach’ or ‘the place of management’ in which a tribunal can exclude jurisdiction if the seat of the corporate structure is not in the home state of the IAA under which it brings a claim.60
57 Matthew Skinner, Cameron Miles, Sam Luttrel, Access and advantage in investor-state arbitration: the law and
practice of treaty shopping’ (2010) The Journal of World Energy Law & Business, volume 3, Issue 3
58 UNCTAD REPORT 2016. 175 59 Idem. 178/179
This chapter has shown why states are increasingly adding requirements to investment agreements not only on the substantial protections but increasingly on jurisdictional requirements including treaty shopping. Adding SBA requirements in an instrument that states use in limiting treaty shopping through mailbox companies and to a certain extent indirect ownership/roundtripping. The effectiveness of SBA requirements on these objectives is discussed in the next chapter.
4. Defining the effectiveness of SBA requirements
Though, as stated by Dolzer and Scheuer, ‘nationality planning or treaty shopping is not illegal or unethical as such’61 still, the previous subchapters have shown that states increasingly
include anti-treaty shopping requirements in newly formed IIAs consequently it is the position of this paper that for parties to IIAs there exists a threshold in which treaty shopping becomes abusive.62 However the line between legitimate and abusive nationality planning is hard to
conclude, and limited literature is available on abstract or concrete conditions for treaty shopping to be abusive.63
For the analysis of the effectiveness, the determination of a threshold for abusive treaty shopping is crucial. The assumption of this paper, as concluded in the previous subchapter, is that the cornerstone of the current international investment regime is returning to reciprocity. Following the categorical narrative, the state enquires a degree of reciprocity between parties, as well as between the investor and the home state. The lack of reciprocity can thus amount to illegitimate treaty shopping. The lack of reciprocity can occur on two different levels: either there is a lack of reciprocity concerning the third (non-party) state and the parties to the IIA, as explained in the prisoner’s dilemma or there is a lack of reciprocity between the investor and the state parties to the IIA.
61 R R. Dolzer & C. Scheuer, Principles of international Investment Law 52 (2d ed, Oxford U. Press 2012) 62 Jorun Baumgartner, ‘treaty Shopping in International Investment Law’ 1d ed, OUP 2015 22
Firstly, there is a lack of reciprocity between the non-party state and the host state, as discussed through the prisoner’s dilemma. In this situation, the investor, which is de facto an investor of a non-party state will benefit from the investment treaty between contracting parties. Hence, the third state entity is free-riding on the treaty IIA between two other states without the third state having to limit sovereignty. This reciprocity can, to a certain degree be limited by the SBA requirement because attaining nationality for legal persons is made more difficult. Consequently, the first goal is to limit free-riding by de facto non-party nationals of states with no reciprocal relationship with the host state.
Secondly, the lack of reciprocity occurs in the relation between the investor and the home state. The home state grants nationality and through its investment regime, it gives rights to an investor by making it a partial international law subject.64 Without substantial business
activities from the side of the investor, the contracting states limit sovereignty to entities that do not create any benefit (income, employment, etc.) for the state. Hence, the second goal is to limit the benefits of an IIA to entities that have as their sole objective to secure the investment with no further connection to the home state, designated as ‘special purpose vehicles’.
Concluding, the rationale of the SBA requirement is to bring greater reciprocity between the investor and the home state and between the two contracting states. The next chapter will examine the stance of parties in arbitrations and tribunals regarding the SBA requirement and whether the current implementation of the requirement is effective in limiting (1)free-riding of
de facto non-state actors and (2) benefits for entities designed as special purpose vehicles.
64 Jorun Baumgartner, ‘treaty Shopping in International Investment Law’ 1d ed, OUP 2015. 9
Home state Host state Non-part state no reciproci reciproci Home state Host state investor B T
De facto non-part investor
nvestment
B T
lack of SBA in home state
No reciprocit
s the incorporation a special purpose vehicle?
YES NO
Leglitimate treat
shopping Does is have it have a reciprocal relationship th home state?
NO YES
Legitimate treat shopping
Chapter 2: Is adding SBA requirements an effective instrument in limiting treaty shopping?
As concluded in the previous chapter there is pressure on the state to include SBA requirements in BITs. This chapter will deal with whether the addition of SBA requirements results in a limitation of illegitimate treaty shopping, mainly a limitation of free-riding of de facto non-state actors and limitation of benefits for entities designed as special purpose vehicles. To test the effectiveness this paper analyses cases in which SBA requirements were a judicial hurdle or were discussed by parties. The first paragraph will discuss the reasons why there is a lack of a significant amount of jurisprudence. The second paragraph will focus on what criteria are evaluated in the assessment of the SBA requirements. Concluding, the last paragraph will analyse whether the cases show that SBA requirements are effective instruments in limiting treaty shopping.
1. A lack of a significant amount of cases
This research has found 13 cases in which tribunals have defined SBA requirements beyond the threshold of mere mentioning that an investor meets the SBA threshold without evaluating the reason why, with only 3 cases where the tribunal gave a reasoning. There are different reasons why the number of cases is not significant.
(A) New requirements
As mentioned, the number of BITs concluded with SBA requirements has grown from 16% before 2011 to 30% between 2011 and 2014.65 The effects of this increase will materialize in
the coming decennia as more investment arbitrations will be conducted under treaties containing an SBA clause. E.g. most recent treaties with SBA requirements in the definition of the investor are now pending.66 Additionally, after the Eurogas v. Slovakia67 arbitration under
the 2010 Slovakia-Canada BIT, the most recent award under an IIA with an SBA clause is under the Libya-Turkey BIT of 2009. Hence the cases in which an SBA-clause is taken into consideration are still limited.
65 UNCTAD (n 174)
66 Colombia-Swiss BIT (2006), Mexico-UK BIT (2006), Guatamala-IL BIT (2006) 67 EuroGas Inc. and Belmont Resources Inc. v. Slovak Republic, ICSID ARB/14/14
(B) Double DoB test
In many cases, the SBA requirements are construed under a Denial of Benefits clause. This creates two challenges. Firstly, there is a discussion about the timeliness of the activation of a DoB clause by the host state. The debate is on whether the clause should be activated in retrospect or prospect. Tribunals have often decided that parties should enact the DoB clause at the moment that the investor invests, thus prospective.68 Hence if a party has not done this the
tribunal does not evaluate the provisions in the DoB clause such as the SBA requirements. In some of these prospective cases, the parties and tribunals did discuss the SBA requirement but did so incomprehensive. E.g. the tribunal in NextEra Energy v. Spain maintained “The Tribunal
notes that although there has not been a significant jurisprudence on the question of “substantial business activities,” the tribunals that have found such activities to exist have been prepared to do so on the basis of a relatively small number of activities both in terms of quantity and quality.”69 While further stating that it “does not have to decide whether Claimants’
business activities in the Netherlands were substantial.”70 Because the respondent did not
exercise (in prospect) this right under the DoB clause.
Secondly, the cases in which the tribunal used a retrospective analysis of the clause were evaluated in the framework of a DoB clause. The general structure of such a clause is a two-tier provision hence both conditions need to be met before the clause is enacted. A typical and often used article in this matter is article 17(1) of the ECT.
Each Contracting Party reserves the right to deny the advantages of this Part to:
(1) a legal entity if citizens or nationals of a third state own or control such entity and if that entity has no substantial business activities in the Area of the Contracting Party in which it is organized;
68 Jorun Baumgartner, ‘treaty Shopping in International Investment Law’ 1d ed, OUP 2015 119
69 NextEra Energy Global Holdings B.V. and NextEra Energy Spain Holdings B.V. v. Kingdom of Spain, ICSID
Case No. ARB/14/11. para 260 (12 March 2019)
70 NextEra Energy Global Holdings B.V. and NextEra Energy Spain Holdings B.V. v. Kingdom of Spain, ICSID
The two-tier test involves firstly a control test ‘a legal entity if citizens or nationals of a third
state own or control such entity’71 and secondly the SBA requirement ‘if that entity has no
substantial business activities in the Area of the contracting party in which it is organized72’.
Because this article is construed as a cumulative test the tribunal will not apply the treaty provision if one condition is not met. Tribunals have taken the approach to evaluating the first requirement of control and if this is not attained, they did not consider the SBA requirements. As a consequence, they did not provide a definition of this requirement.73
2. The criteria provided in investment arbitration regarding SBA requirements
Due to the limited number of cases in which tribunals have defined the SBA requirements this paragraph will firstly assess the arguments brought by one of the parties to an arbitration and secondly evaluate the response of the tribunal in cases where the tribunal gave substantive reasoning on the evaluation of the arguments.
(A) Arguments of parties in investment arbitration
I’ve analysed the thirteen cases of which the information is publicly available74 where the SBA
requirements are included either in a DoB clause or in the definition of the investor and in which the respondent brought arguments based on a lack of SBA in the home country of the claimant. As shown by the schedule the arguments employed share some overlap with most cases referring to office space, employees, taxes, and a bank account and interestingly some considering the board of directors’ meetings.
71 article 17(1) ECT 72 Article 17(1) ECT
73 Plama v. Bulgaria, terra raf trans traiding v. Kazachstan, Khan recources v. Mongolia, Italba corp. V.
Uruguay,
Based on the cases75
(B) Arguments of tribunals in investment arbitration
On the actual assessment of the SBA requirements, only a few tribunals have assessed the conditions. The most notable cases are the AMTO case and the Pacific Rim case. In further cases, notably Bridgestone v. Panama76 and NextEra v. Spain77, the tribunals as well as the
parties refer to the conditions as laid out in the cases AMTO v. Ukraine78 and Pacific Rim v.
Ecuador79 but did not analyse the requirements as put forward by the parties either because the
arbitration is still pending or because it was not relevant in light of the other conditions in the DoB clause. There are however three cases, besides AMTO and Pacific Rim in which the tribunal did evaluate the SBA requirements, notably in Masdar v. Spain80, Guaracachi America
v. Bolivia81, and 9REN v. Spain82.
For the analysis of arbitral awards in which a tribunal has taken a stance on the criteria relevant for the SBA requirements, the framework that I will use the AMTO and Pacific Rim case
75 limited liability company Amto v. Ukraine, Generation Ukraine, Inc. v. Ukraine, Petrobart Limited v. the
Kyrgyz Republic, Tokios Tokelés v. Ukraine, st. Marys VCNA, LCC v. minister of international trade and attorney general of Canada, Guaracachi America, Inc. and Rurelex PLC v. The Plurinational state of Bolivia, EuroGas GmbH v. Slovak Republic, Bridgestone Licensing Services, Inc. v. Republic of Panama, NextEra Energy Global Holdings B.V. and NextEra Energy Spain Holdings B.V. v. Kingdom of Spain, 9REN holding S.a.r.l v. Kingdom of Spain, Ulysseas, Inc. v. The Republic of Ecuador, Pac Rim Cayman v. Republic of El Salvador, Masdar Solar & Wind cooperatief U.A. v. Kingdom of Spain
76 Bridgestone Licensing Services, Inc. v. Republic of Panama, ICSID case No. ARB/16/34 claimants’ response
on expedited objections (24 July 2017)
77 NextEra Energy Spain Holdings B.V. v. Kingdom of Spain, ICSID case No. ARB/14/11 decision on
jurisdiction, Liability and Quantum Principles (12 March 2019)
78 Limited Liability Company AMTO v. Ukraine, SCC Case No. 080/2005. para 69 (26 March 2008) 79 Pac Rim Cayman LLC v. El Salvador, ICSID Case No. ARB/09/12 (1 June 2012)
80 Masdar Solar & Wind cooperative U.A. v. Kingdom of Spain, ICSID Case No. ARB/14/1 (16 May 2018) 81 Guaracachi America, Inc. and Rurelex PLC v. The plurinational State of Bolvia, UNCITRAL case PCA No.
2011-17, Respondents reply on jurisdiction (Spanish) Para. 144 (26 November 2012)
82 9REN Holding S.a.r.l. v. Kingdom of Spain, ICSID Case No. ARB/15/15 para. 182 (31 May 2019)
AMT O Gen. Ukrain e Petro bart Tokio s Toke les St. Ma rys Guara cachi
Eurogas Birdg estone NextEr a 9REN Ulysse as Pacif ic Rim Masd ar Office space x x x x x x x Employees x x x x x x x x x x
Specific number of employees x x x (2) x (1) x
Bank account x x
Taxes x x x x
Advisors from host-state x x
Catalogue of materials x
Financial statements x
Annual meetings x
Board of directors x x x x x x
Location of directors meeting x x
equity injections X
administrative costs 37.000 EU
corporate secriatary costs 87.000 EU
because in multiple arbitrations tribunals and parties have used these cases as a frame of reference in their arguments. They have thus been used as reference points to argue either that the SBA requirement is reached or that the SBA-requirement is not reached. In AMTO the investor is considered to have reached the threshold of having enough business activity, while in Pacific Rim the parent reaches the SBA requirement, the holding company doesn’t, where the investor is considering a mailbox firm not reaching the SBA threshold.
The first analysis comes from Masdar v. Spain83. In this case, the respondent (Spain) objects to
the jurisdiction of the tribunal on the basis of the DoB clause and states that
“[H]undreds of companies are being represented. It has no workers at all there; they simply have two members on the board of directors that give them fiduciary services. They [...] submit
[...] only shortened annual accounts. They didn’t even submit the full accounts in 2014 [...] they
have [...] gone to the [UAE] in order to find a [law] firm to defend them [and not to The
Netherlands] [...] They are simply a mailbox, a shell company, set up for mere convenience and [which] carries out no substantial business activity in The Netherlands.”84
Masdar is a holding company with two of the four board members being nationals of the home state (the Netherlands), board meetings being held in the home state, and with a bank account. It however has no fulltime or otherwise employees in the Netherlands while it has an office space under the control of a trust company. The claimant argues that “substantial should be
construed in a qualitative sense as meaning business activities of substance. Claimant drew attention drew attention to the decision of the tribunal in AMTO, which held that the decisive factor was not the materiality of the business in question”85 Though it does not have a large
amount of activities, it is relevant to the amount of activities employed. The tribunal supports
83 Masdar Solar & Wind cooperative U.A. v. Kingdom of Spain, ICSID Case No. ARB/14/1 (16 May 2018) 84 Idem. para 206 85 Idem. Para 223 AMTO (H di g c a ) (H di g cPacific Ri a ) h ld ha e a en eache SBA ffice ace fill ime em l ee bank ela i n a e cial ec i ie
the AMTO position and maintains that the claimant has substantial business activities in the home state.86
In the case Guaracachi America v. Bolivia87 the claimant held that “the proper interpretation
of the term “substantial business activities” should accord with the Parties’ desire to stimulate the flow of private capital and promote economic development.”88 In addition, it argued as
mention in AMTO that substantial does not relate to size. The tribunal held that the investor (GAI) did not meet the SBA requirements as stated in the DoB clause. Though the fact pattern is similar to the Masdar case the business activities at the time of arbitration were severally diminished since 2003 with no evidence of board meetings and office space since 2003, seven years before the start of the arbitration.89 Hence the tribunal took an approach based on how
active the investor still was in the ‘home state’.
Lastly in 9REN v. Spain, the respondent (Spain) held that 9REN that incorporation in Luxemburg was “simply a national flag of convenience. The claimant has no substantial
business activities in the area of the contracting state where it was organized”90. The Claimant
86 Masdar Solar & Wind cooperative U.A. v. Kingdom of Spain, ICSID Case No. ARB/14/1. para 254 (16 May
2018)
87 Guaracachi America, Inc. and Rurelex PLC v. The plurinational State of Bolvia, UNCITRAL case PCA No.
2011-17, Respondents reply on jurisdiction (Spanish) Para. 144 (26 November 2012)
88 Guaracachi America, Inc. and Rurelex PLC v. The plurinational State of Bolvia, UNCITRAL case PCA No.
2011-17, claimant counter memorial on jurisdiction (Spanish) Para. 60 (26 oktober 2012)
89 Idem. Para. 144
90 9REN Holding S.a.r.l. v. Kingdom of Spain, ICSID Case No. ARB/15/15 para. 177 (31 May 2019) AMTO
(H d c a ) (H dPac f c R c a )
2/4 boa d membe boa d mee ing
bank acco n office ace MASDAR (H d c a ) AMTO (H d g c a ) Pac f c R (H d g c a ) Office ace a a ha eh de ee i g b a d ee i g e ec ed ffice ( af e 2003) GA (H d g c a )
responded that is had substantial activities since “9REN has leased office space and has
maintained at least one locally-based employee in Luxembourg since July 2009. 9REN Holding has also maintained bank accounts there, since incorporation, with ING Luxembourg. All of the major decisions about the companies’ investments and their operations are made there. 9REN Holding currently has six managers that serve on the board of directors, three of whom permanently reside in Luxembourg, two of whom reside in London, and one of who resides in Italy.”91 Again the claimant mentioned AMTO to conclude that size of form didn’t matter, but
the size of substance did. The facts point to the same conditions as for the claimant in Masdar Spain but with at least one employee in the office located in Luxemburg.
3. Analysing the effectiveness of the SBA requirement
The analysis of the results in the previous paragraph falls into two different categories: (1) the divergence in the arguments which are used by parties in the arbitration and (2) the analysis of tribunals.
(A) The extensive scope of criterion
The scope of reasoning by parties is broad with even the most recent cases introducing new arguments as seen in Eurogas (2017), NextEra (2019), and 9REN (2019) where parties have introduced equity injections, administrative costs, and corporate secretariat costs. The analysis does provide some core criteria that point in the direction of a threshold that needs to be attained namely an office space92 and some employees93. Thus, while the definition of the investor has
been narrowed by the inclusion of the SBA requirements, the range is still broad.
91 9REN Holding S.a.r.l. v. Kingdom of Spain, ICSID Case No. ARB/15/15 para. 180 (31 May 2019) 92 AMTO, Petrobart, St. Marys, Guaracachi, NextEra, 9REN, Pacific RIm
93 AMTO, Generation Ukraine, Petrobart, St. Marys, Guaracachi, bridgestone, NextEra, 9REN, Ulysseas, Pacific
Rim AMTO (H d c a ) (H dPac c R c a ) ffice ace e ee (1) ba acc 3/6 di ec e ide h e a e ee i g f b a d 9REN (H d c a )
(B) Evaluating the conduct of tribunals
As evaluated the arguments of parties to arbitration still encompass a broad range of activities, while in cases in which tribunals analysed the requirement the list becomes smaller. There are two findings in the analysis of the tribunal. Firstly, that all the cases that tribunals evaluated are holding companies, and secondly, that the threshold for substantial seems to be easily attainable.
i. Special analysis for holding companies as special purpose vehicles
As seen in the cases these all involve holding companies. A holding company is as the name implies, a company that holds and controls stock.94 The holding companies are usually used to
protect intellectual property, to limit the risk for the shareholder of the companies, or tax optimization purposes.
It’s subsidiary companies usually produce real economic value. These holding companies are thus the most obvious candidate to be used as a special purpose vehicle for treaty shopping since it requires in principle only the incorporation in a jurisdiction and the transfer of capital through the holding.95 Consequently, usually, these investors are most influenced by
anti-treaty-shopping provisions in bilateral investment treaties and especially anti-mailbox provisions because an entity that is only holding shares does not require extensive hard assets thus making it easy to move easily between legislatures.
Hence analysed, while the scope is broad there seems to be a minimum agreement that there is are several employees and the existence of office space. The former being mentioned in 11 of the 15 cases and the latter in 8 of the 15 cases.
In Masdar v. Spain the lack of employees and the fact that the office was maintained by a trust office does not seem to preclude the jurisdiction of the tribunal. Additionally, in 9REN v. Spain
94 Sandra Feldman, ‘Using a Holding Company – Operating Company Structure to Help Mitigate Risk’ (2019)
Wolterkluwer https://ct.wolterskluwer.com/resource-center/articles/leveraging-a-holding-company-to-mitigate-risk
95 Lucas Vanhonneaeke, ‘Shareholder claims for reflective Loss in International Investment Law’ Cambridge
