Shielding Investments: The Role of Corporate Restructuring

BITs offer several benefits:

First, BITs provide comprehensive guarantees of treatment for investors in accordance with international law. These guarantees offer investors a series of substantive protections.

The extent of substantive protections depends on the respective BIT. Common substantive protections include:

• Protection against Expropriation: This protects investors against direct expropriation (e.g. the taking of an investor's property) as well as indirect expropriation (e.g. regulatory measures that interfere with an investor's property rights).
• Right to Fair and Equitable Treatment: This imposes specific duties on host States, including the duty to protect an investor's legitimate expectations (e.g. an investor's reliance on the stability and predictability of the regulatory environment in the host State) or the protection against discriminatory treatment (e.g. targeting an investment specifically as a foreign investment).
• National and Most-Favoured Nation Treatment: Investments shall enjoy treatment not less favourable than that accorded to nationals of the host State, or of any third State.

Second, BITs provide investors with procedural protection. BITs commonly set out a mechanism for the resolution of disputes arising with respect to investments between a host State and an investor of the other State, enabling an investor to enforce BIT rights against a host State via international arbitration before an international arbitral tribunal.

The international arbitral tribunal has the power to order a host State to compensate an investor for losses by way of an award. Awards of international arbitral tribunals can, depending on the relevant arbitration rules, be enforced almost worldwide based on the ICSID Convention 1965 or the New York Convention 1958. 

Different Protection for Intra-EU and Extra-EU Investments

Intra-EU investments are not protected in the same way as extra-EU investments under extra-EU BITs. In 2020, 23 EU Member States signed an agreement terminating almost 130 intra-EU BITs. With minor exceptions, intra-EU investments no longer enjoy protection under a BIT.

The position is different for extra-EU investors. Extra-EU BITs (i.e., BITs concluded between an EU Member State and a non-EU Member State) are still in force and protect extra-EU investments.

To illustrate, except in specific scenarios, an Austrian investor who made an investment in Romania no longer enjoys protection under the Austria-Romania BIT. In contrast, a Swiss investor who made an investment in Romania enjoys protection under the Switzerland-Romania BIT. This is because Switzerland has concluded BITs with many EU Member States. These BITs qualify as extra-EU BITs. A Swiss investor thus enjoys better legal protection than the EU investor.

Corporate Restructuring

To benefit from protection mechanisms under an extra-EU BIT, companies with intra-EU investments may consider to (re-)structure their investments. In the investment context, corporate restructuring typically means setting up companies in specific States to benefit from better protection offered by a BIT. Companies may consider investing through a third State that has concluded a BIT with an EU host State to gain access to the procedural and substantive protection mechanisms of an extra-EU BIT.

Here, the timing as well as the circumstances of the restructuring may affect the lawfulness of the restructuring. International arbitral tribunals may consider a corporate restructuring undertaken solely in response to a pending dispute to be abusive.

Thus, subject to the terms of the Switzerland-Romania BIT, an Austrian investor who has invested in Romania could restructure its investment and channel its investments in Romania via Switzerland. In case of a dispute with the Romanian State, the Swiss company could rely on the legal framework established by the Switzerland-Romania BIT.

Conclusion

BITs are vital for protecting investments by providing a stable legal framework containing substantive protections and dispute resolution mechanisms. Despite the recent termination of intra-EU BITs, which has diminished protection for intra-EU investments, extra-EU BITs continue to offer strong protection mechanisms, inviting companies to restructure their investments to benefit from these protections.

authors: Sebastian Lukic, Sabine Supper