Foreign investors should consider treaty protections when structuring their investments abroad | JD Supra

Investment Treaties and the Importance of Nationality Planning

Introduction

Several recent tribunals have ruled that nationality planning, including for investment funds, is a legitimate practice and not an abuse of process or a bar to jurisdiction. Nationality planning involves channeling investments through a country other than the investor’s home state for tax, corporate, or other purposes. It is an important consideration for investors, especially those in the North American region, as the protections for foreign investors under the North American Free Trade Agreement (NAFTA) have weakened under the United States-Mexico-Canada Agreement (USMCA). This article explores the concept of nationality planning and its significance for investors.

What are Investment Treaties and who qualifies for protection?

Investment Treaties are agreements that protect investors from one country (the home state) when they invest in another country (the host state). These treaties provide certain protections to investors and their investments, such as fair and equitable treatment, protection from expropriation, non-discrimination, and adherence to commitments and undertakings concerning investments. Most Investment Treaties cover a broad category of foreign investors, including individuals who are nationals of the home state and companies with the nationality of the home state. The nationality of a company is determined by its place of incorporation or other factors specified in the treaty.

Funds have successfully structured foreign investments and received compensation under investment treaties

Investment funds have successfully structured their investments to take advantage of investment treaty protections. In the case of Gramercy Funds Management LLC and Gramercy Peru Holdings LLC v. Republic of Peru, two U.S. investors restructured their investments to protect them from possible future disputes. The tribunal ruled that this restructuring was a legitimate form of investment planning and not an abuse of process. Similarly, hedge fund Elliott Associates successfully arbitrated a case against South Korea under the Korea-USA Free Trade Agreement (KORUS FTA). The tribunal rejected South Korea’s argument that Elliott Associates had structured its investment to gain treaty protections at a time when the dispute was foreseeable. These cases demonstrate the importance of timely restructuring to ensure investment treaty protections.

When is corporate restructuring impermissible?

While investors can restructure their investments to maximize investment treaty protections, there are limitations imposed by Investment Treaty tribunals. Restructuring investments to gain treaty benefits when a dispute with the host state is reasonably foreseeable may be deemed impermissible. Tribunals consider all relevant circumstances to determine whether a dispute existed or was reasonably foreseeable at the time of restructuring. It is advisable for investors to ensure strong investment treaty protections are in place before any disputes with the host state are reasonably foreseeable. Tribunals also differentiate between restructuring in advance of a future investment dispute and restructuring to bring a claim based on a pre-existing dispute. Investors should evaluate and adjust their corporate structure before a dispute becomes foreseeable.

Next steps

Corporate restructuring to ensure treaty protection is crucial for protecting foreign investments. Investment funds should seek legal counsel to carefully structure and restructure their investments to maximize treaty protections.

References

1. Elliott Associates v. Korea, paras. 498-501, https://files.lbr.cloud/public/2023-07/2018-51%20Award%20%28ENG%29_Redacted.pdf?VersionId=wg.22QsxCf079XGZs9eJNdWIhqelcplf
2. Gramercy v. Peru, para. 375
3. Orlando F. Cabrera C., The US-Mexico-Canada Agreement: the new gold standard to enforce investment treaty protection?, Perspectives on Topical Foreign Direct investment Issues, para. 2, (Jan. 13, 2020)
4. Weiss & Akhtar, U.S. International Investment Agreements (IIAs), Congressional Research Service, (Apr. 1, 2022), at 1, https://crsreports.congress.gov/product/pdf/IF/IF10052
5. M. Angeles Villarreal, U.S.-Mexico-Canada (USMCA) Trade Agreement, Congressional Research Service, (Jan. 11, 2023), at 2, https://crsreports.congress.gov/product/pdf/IF/IF10997

SDGs, Targets, and Indicators

1. Which SDGs are addressed or connected to the issues highlighted in the article?

• SDG 8: Decent Work and Economic Growth
• SDG 10: Reduced Inequalities
• SDG 16: Peace, Justice, and Strong Institutions

2. What specific targets under those SDGs can be identified based on the article’s content?

• SDG 8.9: By 2030, devise and implement policies to promote sustainable tourism that creates jobs and promotes local culture and products.
• SDG 10.3: Ensure equal opportunity and reduce inequalities of outcome, including by eliminating discriminatory laws, policies, and practices and promoting appropriate legislation, policies, and action in this regard.
• SDG 16.3: Promote the rule of law at the national and international levels and ensure equal access to justice for all.

3. Are there any indicators mentioned or implied in the article that can be used to measure progress towards the identified targets?

• Indicator for SDG 8.9: Number of jobs created in the tourism sector.
• Indicator for SDG 10.3: Number of discriminatory laws, policies, and practices eliminated.
• Indicator for SDG 16.3: Access to justice index.

Table: SDGs, Targets, and Indicators

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