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*Columbia FDI Perspectives*
Perspectives on topical foreign direct investment issues
No. 258  August 12, 2019
Editor-in-Chief: Karl P. Sauvant ([log in to unmask])
Managing Editor: Alexa Busser ([log in to unmask])
*How to limit treaty-shopping*
* <#m_3613671312529330344__edn1>
Carlo de Stefano** <#m_3613671312529330344__edn2>

Under the vast majority of international investment agreements (IIAs), mere
incorporation, including through “letter-box” arrangements, is a sufficient
criterion for determining the nationality of companies. Investors can,
therefore, incorporate in countries that have IIAs favorable to them and
invest from there in other countries (including their home
countries—“round-tripping”) to obtain treaty protection.[1]
<#m_3613671312529330344__edn3> Arbitrators have tolerated—and scholars have
mostly accepted—such “treaty shopping”.[2] <#m_3613671312529330344__edn4>
It has been justified by the legal certainty provided by the incorporation
test and a strict constructionist interpretation of treaty definitions for
the purpose of establishing arbitral jurisdiction. Furthermore, tribunals
seem to think that the primary function of investment protection is to
promote capital inflows, irrespective of their foreign source or their
origin from a contracting state of the relevant IIA (round-tripping).

While incorporation through regional headquarters may be justified by
organizational and strategic considerations, using “letter-box” (or
“shell”) companies and round-tripping[3] <#m_3613671312529330344__edn5> may
be criticized as undesirable, for the following reasons:

   - legal formalities should not prevail over the economic reality
   underlying the corporate structure of investors;
   - the aggregate balancing between the protections and obligations
   embodied in applicable IIAs should not be altered;
   - the fabrication of treaty-based jurisdiction not consented to (and not
   reasonably envisaged) by the contracting parties should not be upheld by
   - opportunistic behavior, such as free riding or moral hazard where the
   costs of establishment are minimal, should be prevented;
   - the truly foreign character of investments should be preserved
   - the unreasonable discrepancy with the treatment of other domestic
   investors should not be permitted (round-tripping);
   - the ensuing possibility of legal arbitrage among the applicable IIAs
   may engender even more unpredictability concerning the basis of consent to
   - the untenable disparity with the treatment of natural persons should
   not be accepted. Under the vast majority of IIAs, the nationality of
   individuals is determined upon reference to the law of the country whose
   citizenship is claimed, and the requirements are usually stricter than the
   formal test of incorporation.

Broadly construed, treaty shopping may also refer to the import of more
favorable dispute-settlement clauses via most-favored-nation (MFN)
treatment. This is controversial when pertaining to the jurisdiction of
arbitral tribunals (e.g., as to the availability of arbitral institutions,
such as ICSID or UNCITRAL, which may not be expressly named in
dispute-settlement clauses) or to the admissibility of claims (e.g., as to
waivers of mandatory pre-arbitration procedural requirements pursuant to
applicable IIAs). While the distinction between substantive and
dispute-settlement provisions for the purposes of MFN treatment is not
posited under customary international law, tribunals remain divided, which
is one more source of unpredictability regarding issues of jurisdiction
and/or admissibility.

Such interpretative issues should preferably be solved by governments in
the negotiation or revision of their IIAs.

Governments intending to limit treaty shopping can pursue various avenues
when drafting agreements.  They should:

   - demand “substantial presence”, i.e., substantive business activities
   in the home country; for example, the term “investor” could refer to “an
   enterprise of a Party” meaning “an enterprise that is constituted or
   organised under the laws of that Party and has substantial business
   activities in the territory of that Party”;[4]
   - require that control is effective, based on, for instance, managerial
   - stipulate mandatory denial-of-benefits clauses, empowering host
   countries to withdraw treaty advantages if investors do not conduct
   substantial economic activity in the home country or are owned/controlled
   by legal persons of third countries or the host country (round-tripping);
   - expressly carve-out dispute-settlement issues from MFN clauses to
   prevent their extension to questions of jurisdiction and admissibility.
   [5] <#m_3613671312529330344__edn7>

These are investment treaty provisions available to governments willing to
put an end (or at least to contain) treaty shopping. Doing so would also
foster the legitimacy of investor-state dispute settlement based on IIAs
through the advancement of legal security and predictability.

* <#m_3613671312529330344__ednref1> *The Columbia FDI Perspectives are a
forum for public debate. The views expressed by the author(s) do not
reflect the opinions of CCSI or Columbia University or our partners and
supporters. Columbia FDI Perspectives (ISSN 2158-3579) is a peer-reviewed
** <#m_3613671312529330344__ednref2> Carlo de Stefano (
[log in to unmask]) is Postdoctoral Fellow at Roma Tre University,
Rome. The author is thankful to Jorun Baumgartner, Jeswald Salacuse and
Felix Steffex for their helpful peer reviews.
[1] <#m_3613671312529330344__ednref3> Julian Chaisse, “The treaty shopping
practice: Corporate structuring and restructuring to gain access to
investment treaties and arbitration,” *Hastings Business Law Journal*,
vol. 11 (2015), p. 228: “treaty shopping [is] the process of routing an
investment so as to gain access to an IIA where one did not previously
exist or to gain access to more favorable IIA protection.”
[2] <#m_3613671312529330344__ednref4> With few exceptions, e.g., Prosper
Weil in *Tokios Tokelės v. Ukraine*, based on a teleological interpretation
of the ICSID Convention.
[3] <#m_3613671312529330344__ednref5> “Round-tripping” is one of the most
objectionable forms of treaty shopping as it conflicts with the principle
of diversity of nationality for the access to international jurisdiction.
[4] <#m_3613671312529330344__ednref6> Comprehensive Economic and Trade
Agreement (CETA), Article 8.1.
[5] <#m_3613671312529330344__ednref7> See, the 2018 Netherlands Model BIT
(the Netherlands have traditionally been a home country for “letter-box”
companies), the EU-Vietnam Investment Protection Agreement and Chapter 8 of
the CETA.
*The material in this Perspective may be reprinted if accompanied by the
following acknowledgment: “Carlo de Stefano, ‘How to limit
treaty-shopping,’ Columbia FDI Perspectives, No. 258, August 12, 2019.
Reprinted with permission from the Columbia Center on Sustainable
Investment (** <>**).” A
copy should kindly be sent to the Columbia Center on Sustainable Investment
at **[log in to unmask]* <[log in to unmask]>*.*

For further information, including information regarding submission to the
*Perspectives*, please contact: Columbia Center on Sustainable Investment,
Alexa Busser, [log in to unmask]

*Most recent Columbia FDI Perspectives*

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*All previous FDI Perspectives are available at
<>**. *

*Other relevant CCSI news and announcements*

   - *On September 25, 2019*, CCSI, will host its 14th Annual Columbia
   International Investment Conference: “Aligning Corporations with the
   Sustainable Development Goals.”
   conference aims to clearly define SDG-aligned corporate activity in order
   to bring coherence and rigor to SDG measurement, reporting, and tools,
   helping to avoid the divergence and incoherence that has undermined the
   usefulness of ESG criteria and tools to date. *For more information, and
   to register, please see our website here
   - *On September 25, 2019*, CCSI, the UN Sustainable Development
   Solutions Network (SDSN), and Le Club des Juristes, with support from
   Iberdrola and under the guidance of Prof. Jeffrey Sachs, Special Advisor to
   the UN Secretary-General on the SDGs, and Laurent Fabius, President of the
   Constitutional Council of the French Republic, will host a conference to
   discuss the Global Pact for the Environment
   . *For more information, and to register, please see our website here
   - *On September 27, 2019*, CCSI, the Sabin Center for Climate Change
   Law, Landesa, and Wake Forest Law School will be hosting a day-long
   conference on the intersection between land use, the climate crisis and
   clean energy transition, and human rights. *For more information, and to
   register, please see our website here

Karl P. Sauvant, Ph.D.
Resident Senior Fellow
Columbia Center on Sustainable Investment
Columbia Law School - Earth Institute
Ph: (212) 854-0689
Fax: (212) 854-7946
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*Karl P. Sauvant, PhD*

*Resident Senior Fellow*
*Columbia Center on Sustainable Investment*
Columbia Law School - The Earth Institute, Columbia University
435 West 116th St., Rm. JGH 825, New York, NY 10027
| p: (212) 854 0689 | cell: (646) 724 5600 e: [log in to unmask]
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