As a global network of bilateral trade and investment agreements has grown up to protect foreign investments, lawyers are increasingly encouraging foreign investors to make sure that they are sheltered under the canopy of one of these agreements so as to minimise political risk. Experts point to the rise of so-called ‘nationality planning’ – whereby foreign investors seek out the most favourable home base from which they can make their international investments.

Audley Sheppard, a partner at Clifford Chance in London, points to the multi-billion dollar Dabhol power project in India as a case study in the benefits of this new form of corporate structuring.


The major Dabhol project partners – GE, Bechtel and Enron – were all US multinationals, but they invested in India through Mauritian and Dutch subsidiaries. When disputes later arose between the Indian government and the US project partners over electricity costs, the latter were able to invoke the protections of investment treaties that India had in place with Mauritius and the Netherlands. Thanks to these treaties, the foreign subsidiaries of these US firms could mount international arbitrations against India, ultimately securing a negotiated settlement.

Mr Sheppard, who represented financial institutions involved in the Dabhol deal, stresses that there is no investment treaty between the US and India. He says that the US project partners would have been left “high and dry” if they had failed to make their investments through jurisdictions that have investment protection treaties in place with India.

Mr Sheppard says that arbitration experts fully recognise the value of nationality planning – so that investments fall under a treaty which offers international arbitration as an alternative to local courts. He adds, however, that there is still a need to educate project lawyers who work at the front end of corporate deals.

John Boscariol, a trade and investment lawyer at Canadian firm McCarthy Tetrault, agrees that further work needs to be done in this regard. In most major law firms, there remains “a bit of an information deficit” when it comes to knowledge of trade and investment agreements, he says. His colleagues are organising internal workshops and briefings in an effort to raise the profile of trade and investment agreements, and the need to structure investments so that they fall under the terms of one or another of these agreements, he says.

Seal of approval

Lawyers say that it is helpful that the practice of nationality planning has received a seal of approval from several arbitration tribunals that have been called on to resolve disputes between investors and their host countries. In October of last year, an arbitration tribunal at the World Bank awarded a pair of Cypriot companies more than $75m in an expropriation dispute with the government of Hungary.

Hungary had objected to the tribunal’s jurisdiction over the dispute, arguing that the Cypriot companies were mere “shell” companies that had been incorporated in Cyprus by Canadian business interests, with an eye to investing onwards into Hungary. The Hungarian government argued that the Cyprus-Hungary investment treaty should not be open to Canadians (or other foreigners) wishing to wrap themselves in the Cypriot flag.

The tribunal disagreed with Hungary, however, and placed great weight on the capacious wording of the Cyprus-Hungary investment treaty. Under the treaty, anyone who incorporates a company in Cyprus is considered a Cypriot national for purposes of the treaty’s protection. Accordingly, the two Cypriot companies were entitled to bring an international arbitration against Hungary under the treaty, even if Canadian business interests ultimately lay behind those Cypriot companies.

Perfectly legitimate

Professor Christoph Schreuer, a leading expert at the University of Vienna, says that the tribunal’s ruling confirms that nationality planning is “perfectly legitimate” where a treaty has been drafted – as many are – in the loose fashion of the Cyprus-Hungary investment treaty. He says that it is within the power of governments to close treaty loopholes, for example, by imposing more stringent requirements for investors to qualify as nationals under the treaty. In the meantime, however, he expects investors to continue to incorporate in third countries to make their foreign investments under cover of the best available legal protections.

Others view the practice of nationality planning as more invidious. George von Mehren, a partner at US law firm Squires, Sanders, Dempsey, is one. He points to cases in which businesses have incorporated outside their home country and then made investments back into it. Such round-tripping may be for tax-planning purposes, but it may also arise out of a desire to transform domestic investments into foreign investments so that they enjoy international treaty protections. Mr von Mehren, who often represents sovereign states in international arbitrations, questions whether investment treaties were intended to protect such round-tripping activity.

He acknowledges that many treaties are drafted so loosely that an Argentine businessman might be able to incorporate a vehicle outside of his country, and then re-invest in Argentina, in the process benefiting from the international law protections offered by the Argentine government to foreign investors. However, he says that arbitration tribunals should draw the line at this type of round-tripping activity.

Even if treaties are drafted loosely enough that they can be read in a manner that endorses round-tripping, arbitrators called on to resolve disputes should use restraint, says Mr von Mehren. In particular, he says, many countries sign such treaties with other countries in the hope that new capital will flow between the two, not so that domestic businesses can dress themselves up as foreigners and re-invest in their own country with greater legal protections.

The debate over round-tripping came to a head in 2004 when a World Bank arbitration tribunal issued a divided (two-to-one) ruling in a dispute in which a Lithuanian company was granted permission to pursue an arbitration against Ukraine. What was unusual about the Lithuanian company was that it had been created by Ukrainian business interests and was used as a vehicle for re-investing in the Ukrainian publishing industry.

The Ukrainian government had objected strenuously that its investment treaty with Lithuania was not intended to cover Ukrainian-owned business interests operating in Ukraine, even if those interests had gone to the trouble of incorporating an intermediary company in Lithuania. A majority of the tribunal dismissed Ukraine’s jurisdictional objections, paving the way for the (Ukrainian-owned) Lithuanian company to have its dispute with the Ukrainian government heard on its merits.

Nevertheless, the dissenting arbitrator in the case issued a scathing opinion, in which he warned that the majority’s approach threatened to undermine the “integrity” of the World Bank venue used to resolve foreign investment disputes. The dissenter, professor Prosper Weil of the University of Paris, argued that the World Bank arbitration venue was created for the resolution of disputes between “genuine” foreigners and their host states – not as a means for nationals of a given country to detour around local courts by cloaking themselves in the guise of foreigners eligible for international arbitration.

Mr Schreuer has some sympathy for such arguments. However, he says that the majority was correct in its handling of the Ukraine dispute. More generally, he says that many investment treaties are drafted so broadly that investors will continue to adopt whichever corporate nationality affords them the greatest international protection.

If there were a single multilateral treaty that protected foreign investment, rather than a patchy collection of hundreds of bilateral treaties, the question of nationality would recede from view, says Mr Schreuer. All investors would receive baseline protections under such a multilateral treaty, without having to engage in the shell game of nationality planning, he says.

Location shopping

However, such a multilateral treaty has been consistently shot down when it has come up for discussion in international forums such as the World Trade Organization or the Organisation for Economic Co-operation and Development. As a consequence, astute lawyers are likely to continue to advise foreign investors that they should shop around for the best country through which to make their international investments.

Those countries with vast networks of open-ended bilateral protection treaties could find themselves ever more in demand as “portals” through which foreign investments detour en route to their final destinations.

Luke Peterson writes the In Dispute column for fDi magazine.