Author

Mr Antonio Gordillo Fernández de Villavicencio

International Arbitration Associate - Dechert LLP

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Nationality planning

(The author is grateful to Sarada Nateshan for her assistance with the research needed to complete this work.)

I. Definition

1.

In international investment law, nationality planning refers to the practice by which an investor channels its investment through a country other than the investor’s home State in order to gain access to the more favourable standards of protection available for investors of such third country vis-à-vis the intended host State. Nationality planning is to be contrasted with so-called Treaty Shopping.

2.

In the context of tax law, corporate planning (known as tax planning) has historically been common among corporations operating internationally. Nationality planning for investment protection purposes is a more recent trend. In fact, prudent companies often frame their investments combining both tax and investment law considerations. For instance, many investments are made through Dutch subsidiaries (typically constituted for tax reasons) in order to benefit from the wide spectrum of investment treaties concluded by the Netherlands.1

II. Is nationality planning permitted? If so, when?

A. Nationality planning in international regulations

3.

Typically, international investment treaties do not prohibit nationality planning. Many simply establish soft nationality requirements to qualify as an investor which could be interpreted, in principle, as a tacit permission for nationality planning. Indeed, several international treaties simply require that a company be incorporated in a State party to benefit from the protections granted under such treaty.2

4.

However, some treaties include limits to nationality planning in practice. They do so, for instance, (i) by narrowing down the definition of investor or (ii) by allowing States to deny benefits to companies owned or controlled by nationals of third States and/or which do not have substantial commercial activity in their State of registration.3

B. Nationality planning in case law

5.

Arbitral tribunals have consistently refused to categorically reject nationality planning, recognizing that “international investors can of course structure upstream their investments […] in a manner that best fits their need for international protection”.4 They have nevertheless set limits to such structuring (i.e., nationality planning) based on considerations such as “the timing of the purported investment, the timing of the claim, the substance of the transaction, the true nature of the operation, and the degree of foreseeability of the governmental action at the time of restructuring”.5

C. Situations in which arbitral tribunals have accepted nationality planning

6.

Tribunals have accepted nationality planning in situations where:

  • The company was established under the laws of the host State and there were no further requirements under the Bilateral Investment Treaty (BIT).6
  • The restructuring served purposes other than just benefiting from a given investment treaty, such as enhancing a company’s ability to obtain financing.7 
  • The company invested substantial sums of money in the host State after the restructuring had occurred.8
  • The restructuring occurred at a time when there was no pre-existing or foreseeable dispute.9 However, the extent of foreseeability required may differ: some tribunals require the dispute to be foreseeable “as a very high probability and not merely as a possible controversy”,10 while others consider a dispute to be foreseeable “when there is a reasonable prospect […] that a measure which may give rise to a treaty claim will materialize”.11 

D. Situations in which arbitral tribunals have denied protection to nationality planning

7.

Tribunals have declined jurisdiction over claims raised by nationality planners or declared such claims inadmissible in situations where:

  • The restructuring was made solely for the purpose of initiating a specific dispute12 (for instance, because it was made at a point in time when “all the damages claimed by [the alleged investor] had already occurred”).13
  • The registration of the company in the given State was alone “insufficient to satisfy the requirement of ‘having the permanent seat’ set out in” the relevant BIT and the company therefore did not meet all the conditions to qualify as an “investment” under the BIT.14
  • The restructuring was made after the signing of the contract while the nationality to be taken into account was the one at the contract date.15 
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