Investors seek to set up their investment ownership and corporate structure in the most efficient manner in various regards, including available investment treaty protection, both substantive and procedural (structuring). Subsequently, the initial structure may have to be reorganized to optimize treaty protection (restructuring).1
While the structuring of investments to maximize treaty protection is generally accepted as lawful and consistent with the purposes of investment treaties,2 the permissibility and lawfulness of restructuring depends on the circumstances of the case, particularly the timing and the means of restructuring.
Unless expressly provided otherwise, treaties do not apply retroactively.3 Consequently, restructurings aimed at benefitting from a later treaty will be permissible if the breach occurs after the treaty’s entry into force and the completion of restructuring4 or, in the case of a continuous breach that has started before the treaty’s entry into force and continues thereafter, after the dispute has crystallized5 and the restructuring has been completed.
The nationality of the investor is the primary criterion for the choice of a treaty. Treaty definitions of investor based on a pure incorporation test, found in most investment treaties, are preferred to more rigid options, cumulating incorporation with real business activity, corporate seat or other tests determining the centre of the investor’s economic activity. See further Jurisdiction ratione personae. The structure of the investor will determine the choice of the treaty, as different entities in the various layers of the corporate structure may be designated as the protected (in)direct investor.6
The restructuring may raise the question of the existence of a protected investment.7 Although under most treaty definitions, investment covers any kind of asset, more stringent requirements have been included in certain treaties8 and developed in arbitral practice, subjecting the existence of a protected investment to a test determining the investor’s real economic activity and contribution, beyond mere formal ownership of shares.9 See further Definition of investment.
A denial of benefits clause allows the host State to exclude investors owned or controlled by non-protected investors from treaty protection.10 As such clauses are not necessarily11 deemed only prospective,12 they must be taken into account in the (re)structuring.
To the extent restructuring of an investment includes assignment of a claim, such assignment is not generally permissible between a non-protected and a protected investor (nemo potiorem potest transferre quam ipse habet).13 In order to preserve standing to bring or to continue a claim, the assignment should take place between protected investors defined as such under the same treaty.14 Restructuring through a transfer of the investment will also entail an assignment of claims,15 including if the investors are protected under different treaties.16
The lawfulness of a structuring or restructuring is often assessed from the good faith / abuse of process angle, taking into account the timing and the means of (re)structuring.17 In essence, tribunals seek to determine whether the (re)structuring is done for legitimate economic or business purposes18 or is solely aimed at taking advantage of the benefits under a treaty.19 In practice, the outcome of such determination is highly dependent on the facts of the case.20 For example, the timing of a restructuring may also be considered abusive, to the extent that it is performed in order to take advantage of an existing or prospective treaty after the dispute has arisen or at a time when the dispute was foreseeable.21 See further Nationality planning.
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