Treaty Shopping

A phenomenon originally known in the field of international tax matters,¹ treaty shopping (sometimes called treaty or nationality planning²) has also gained ground in investment arbitration. It is perceived as investors’ reaction to situations when the host State of their current or potential investment and the State of their nationality either do not have any investment protection treaty or have a treaty with only dissatisfying provisions. In either scenario, investors may seek to route their investment through a third State in order to secure (or shop) the most advantageous procedural or substantive protection of a treaty, usually by altering their nationality or by creating specific investment vehicles.³

Treaty shopping has been common in the context of corporate (re)structuring. However, natural persons can also resort to treaty shopping by changing their nationality or acquiring another one.

In the context of corporate restructuring, two methods are usually used:

1. the investor routes its investment by inserting a new legal entity incorporated in a third State within its corporate structure and transfers the control of its investment to this entity (direct method);⁴ or
2. the investment is channeled through an entity that is controlled or owned by a legal or judicial person having the nationality of a third State (indirect method).⁵

On rare occasions, treaty shopping can occur via a direct transfer of the right to bring a treaty claim before an arbitral tribunal to an entity or person possessing the nationality of a third State having a more favorable treaty with the host State.⁶

There are several factors that may encourage investors to practice treaty shopping:

1. The existence of treaties with provisions drafted in a broad and vague manner;
2. National legislations permitting easy establishment or incorporation of legal persons in their territory;
3. Absence of a concept of precedent (or stare decisis) in investment arbitration; etc.

One of the major critiques towards treaty shopping is that it violates the principle of reciprocity and State consent.⁷ Some States have denounced or terminated their investment treaties because of the risk of treaty shopping.⁸

Generally, in the case of no specific treaty limits, arbitral tribunals have considered that treaty shopping is not per se prohibited or illegitimate,⁹ unless it is done in bad faith, i.e., with the sole purpose to gain access to international arbitration when a dispute with the host State is already foreseeable,¹⁰ otherwise known as forum shopping.¹¹

Several limits to treaty shopping can be envisaged:

1. Explicit reference to “substantial business” or “real economic” activities in the treaty definition of investor/legal person;¹²
2. A denial of benefits clause;¹³
3. Theory of good faith and abuse of process;¹⁴ or
4. Nemo Dat Quod Non Habet principle.¹⁵