US Investors Can Take Advantage of International Treaties to Structure Foreign Investments
Investors typically consider structuring their foreign investments through jurisdictions that maximize their tax benefits. But US investors also should consider corporate structures that take advantage of investment treaties granting access to international investment law protection and international arbitration, particularly in higher risk countries.
What are international investment agreements (IIAs)?
IIAs are international treaties between two or more countries. They protect investors from one country (the investor’s home country) from unlawful interference with their investments in the other country (the host country).
The main purpose of these treaties is to mitigate political and legal risks associated with investing abroad by giving the investor the possibility to sue countries before impartial international arbitration tribunals.
IIAs could take the form of a bilateral investment treaty (BIT) between two countries, or they could be part of wider free trade agreement, such as Chapter 14 of the United States-Mexico-Canada Agreement (USMCA) or Chapter 11 of the North American Free Trade Agreement (NAFTA).
Investment treaty protections and the dispute settlement mechanisms they contain are only available to qualifying investors and investments.
When should investors do investment treaty planning?
Under international investment law, you can structure a transaction to take advantage of investment protections. Ideally, this is considered prior to an investment being made. However, you also can restructure to take advantage of treaty protections for ongoing investments, although generally only before a dispute with the host country has arisen. Advance planning is key.
When foreign governments have mistreated similarly situated investors or have taken some worrying first steps in the path toward unfair and arbitrary interference, it is time to consider structuring, if your company has not already done so.
It almost goes without saying that adverse country regulation is not limited to developing economies and should be pursued comprehensively. Developed economies with a sophisticated regulatory apparatus have even greater power to regulate. For example, dozens of cases have been brought against Spain and Italy for changing feed-in tariffs in the solar energy industry.
How can investors make the most of treaty protections?
Treaty protection is available to nationals of the country. In the case of companies, nationality is often established by the place of incorporation. Protections vary from treaty to treaty, and some treaties limit the applicability of protections to require actual physical presence in the jurisdiction or lack certain substantive protections that other treaties afford.
Investments can often be “structured” by incorporating companies in a jurisdiction that provides protections. Sometimes, this can be done simply by interposing a holding company at any level of the corporate ownership structure.
The first step is to check whether your home country (for example, the US) has any investment agreement with the country where you want to invest – and that the agreement is in force.
If there is no such treaty, you should identify other jurisdictions that have treaty agreements with the country where you want to invest, and where you have or could have subsidiaries through which the investment could be made. For example, let’s assume that an investor is a national of country A with a subsidiary company in country B, and they wish to invest in country C. If there are not investment agreements in place between country A and country B, but there is an investment agreement between countries B and C, then the investor could structure their investment in country C through their subsidiary in country B to obtain investment protections.
Finally, investments could be structured through new companies to take advantage of treaty protections, but you must take care, as some treaties contain provisions excluding protection for “shell companies” that have been incorporated only to obtain investment treaty benefits.
Where are good locations to incorporate holding companies?
Some jurisdictions, such as the Netherlands, the British Virgin Islands, Jersey and the Isle of Man, combine tax advantages with a robust network of investment treaty protection. However, these are not the only jurisdictions that you should consider – your preferred jurisdiction will depend on a range of commercial and legal factors.
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