Covered “investors”

International investment treaties apply only to covered investment made by investors meeting the nationality requirements under such treaties. In order to have standing to invoke the protection of an intended investment treaty, a potential claimant must meet the treaty’s definition of “investors”, i.e., possess the nationality of a contracting state other than the host state. ⁴⁶

The definition of “investors” in investment treaties generally addresses both natural persons (individuals) and juridical persons (companies). In the case of natural persons, most treaties require natural persons to have the nationality of a contracting state in accordance with the laws of such state, leaving the choice of nationality test with the domestic laws of each contracting state.

Definiing the nationality of juridical persons, however, is more complicated. There is no unified test to determine the nationality of corporations and the contracting states can freely define the bond of nationality required between a corporation seeking protection under the treaty and the contracting state under whose treaty the corporation asks for protection.⁴⁷ Investment treaties have usually used one or several combined tests, such as the place of incorporation, the seat or siège social, the place

44 They include the China-Thailand BIT, the China-Romania BIT and the China-Turkmenistan BIT.

45 See infra chapter 3.3.

46 Rachel Thorn & Jennifer Doucleff, Disregarding the Corporate Veil and Denial of Benefits Clauses: Testing Treaty Language and the Concept of “Investor”, in Michael Waibel, Asha Kaushal, Kyo-Hwa Chung & Claire Balchin (eds.), The Backlash against Investment Arbitration: Perceptions and Reality, Kluwer Law International, 2010, pp. 5-6.

47 The nationality tests of corporations for the purpose of diplomatic protection do not apply in the field of investment treaties. As Sinclair pointed out, “cultural, economic and political factors will influence which test a particular State will prefer to apply…. No question arises as to the validity of these choices, nor is it appropriate to identify a general rule in the abstract because different States legitimately take different approaches to qualification for protection.” See A. C. Sinclair, The Substance of Nationality Requirement in Investment Treaty Arbitration, ICSID Review-Foreign Investment Law Journal, Vol. 20, No. 2, 2005, p.367.

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of substantial business activities or the place of control, to determine the link of nationality between the corporation investor and the contracting state. Most investment treaties typically adopt a liberal incorporation test requiring covered investors only to be incorporated in one of the contracting states. Besides the incorporation test, the seat test is also frequently used by several civil law countries as the criterion in investment treaties to determine nationality of a corporate investor.

The control test, though found in some recent investment treaties, is rarely used and is normally combined with the incorporation test to broaden or narrow the scope of covered investors.

Under the incorporation test, a corporation has the nationality of the state under whose law the corporation was incorporated. Article 1(1)(d) of the China-United Kingdom BIT, for instance, defines “company” as “corporations, firms or associations incorporated or constituted under the law in force” in any part of the contracting states.

The advantage of using the incorporation test is its clarity and simplicity of application, as it is not difficult to identify the state under whose law a corporation is incorporated. But the incorporation test may appear to be unfavorable to the contracting state as well if an incorporated company has no substantial business activities in such state. ⁴⁸ Any company incorporated in the contracting state may satisfy the nationality requirement and can be recognized as covered investor in an investment treaty regardless of whether the company is controlled by foreign nationals and/or whether the company has substantial business activities in the contracting state.

The seat test, bestowing nationality to a company having its seat in the contracting state, also carries the disadvantage of ambiguity of the term “seat” leading to potential abuses by investors. For example, the term “investor” in Article 1(2) of the China-Germany BIT means any juridical person as well as any commercial or other company or association with or without legal personality having its seat in the territory of Germany, or economic entities, including companies, corporations, associations, partnerships and other organizations, incorporated and constituted under the laws and regulations of and with their seats in China. While adopting different tests of nationality for China and Germany, the China-Germany BIT has not further defined the exact meaning of seat. The term “seat” could mean the seat of main business or the seat of management, but also could mean just the registered place

48 UNCTAD, Scope and Definition: A Sequel, UNCTAD Series on Issues in International Investment Agreements II, United Nations publication, 2011, p. 82.

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which generally overlaps with the incorporation test. ⁴⁹ It is quite common that a company can be established in the territory of state A, have its seat of management in state B and run its main business in state C in the world of commerce. ⁵⁰

To address the potential abuses by corporate investors under the incorporation test and the seat test, a number of investment treaties additionally require that a covered corporation need to have substantial business activities and/or have the seat of management in the contracting state. Article 4(1) of the United Kingdom-Philippines BIT, for instance, defines the term “company” of a Contracting Party as a corporation, partnership or other association, incorporated or constituted and actually doing business under the laws in force in any part of the territory of that Contracting Party wherein a place of effective management is situated.

Also, it was only recently that the control test or a combined test of control and incorporation was used in some investment treaties. The control test can be used for two opposite purposes. Firstly, it can be used to expand the scope of covered investors in investment treaties. An example can be found in the Netherlands-Bulgaria BIT using the control test to cover a juridical person constituted in a third state. The

“nationals” of this BIT covers both legal persons constituted under the law of one of the Contracting Parties and legal persons not constituted under the law of that Contracting Party but controlled directly or indirectly by nationals of that Contracting Party. Secondly, it is also possible to restrict the scope of covered investors using the control test in investment treaties. The term “enterprise of the other Party” in Article 72(h) of the Japan-Singapore FTA means any enterprise duly constituted or otherwise organized under applicable law of the other Party, except an enterprise owned or controlled by persons of non-Parties and not engaging in substantive business operations in the territory of the other Party. This article expressly excludes enterprises owned or controlled by third state nationals and thus provides a rather limited definition of investor. There is thus no room for a shell company controlled by nationals of non-contracting states to take advantage of the benefits of the Japan-Singapore FTA.

It follows that investment treaty practice in respect of the test of nationality of corporations is quite divergent. There exists no international obligation for a state to

49 International Law Association German Branch, The Determination of Nationality of Investors under Investment Protection Treaties, 2011, pp. 28-31.

50 OECD, International Investment Law: Understanding Concepts and Tracking Innovations, OECD Publishing, 2008, p. 18.

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provide treaty protection for a particular investor and thus the contracting states may choose any single test or combined test of nationality in determining the scope of covered investors for treaty protection. However, a vast majority of investment treaties prefer a liberal test of incorporation, which leaves open the possibility of treaty shopping by investors of non-contracting states or even of the host state through the commonly used technique of nationality planning. ⁵¹