View this email in your browser


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])
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] Arbitrators have tolerated—and scholars have mostly accepted—such “treaty shopping”.[2] 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] 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 tribunals;
  • 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 (round-tripping);
  • 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 arbitration;
  • 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 elements;
  • 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); and
  • expressly carve-out dispute-settlement issues from MFN clauses to prevent their extension to questions of jurisdiction and admissibility.[5] 
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.
* 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 series.
** 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] 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] With few exceptions, e.g., Prosper Weil in Tokios Tokelės v. Ukraine, based on a teleological interpretation of the ICSID Convention.
[3] “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] Comprehensive Economic and Trade Agreement (CETA), Article 8.1.
[5] 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].
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  
  • No. 257, Yong Liang, ‘Challenges for the EU-China BIT negotiations,’ July 29, 2019
  • No. 256, Evan Gabor and Karl P. Sauvant, ‘Incentivizing sustainable FDI: The Authorized Sustainable Investor,’ July 15, 2019
  • No. 255, Kinda Mohamadieh, “A legally binding instrument on business and human rights to advance accountability and access to justice,” July 1, 2019
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.” The 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 EnvironmentFor 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
(212) 854-0689
Fax: (212) 854-7946
Copyright © 2019 Columbia Center on Sustainable Investment (CCSI), All rights reserved.
[log in to unmask]

Our mailing address is:
Columbia Center on Sustainable Investment (CCSI)
Columbia Law School - Earth Institute, Columbia University
435 West 116th Street
New York, NY 10027

Add us to your address book

unsubscribe from this list    update subscription preferences 

Email Marketing Powered by Mailchimp


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] | t: @CCSI_Columbia

"Incentivizing sustainable FDI: The Authorized Sustainable Investor", "The potential value-added of a multilateral framework on investment facilitation for development", "Promoting sustainable FDI through international investment agreements", "Determining Quality FDI", "The State of the International Investment Law and Policy Regime", "Towards G20 Guiding Principles on Investment Facilitation for Sustainable Development", "Five Key Considerations for the WTO Investment-facilitation Discussions, Going Forward", "Arriving at Sustainable FDI Characteristics", "Putting FDI on the G20 Agenda", "International Investment Facilitation: By Whom and for What?", "Moving the G20's Investment Agenda Forward", "Sustainable FDI for Sustainable Development", "Towards an Investment Facilitation Framework: Why? What? When?", "Beware of FDI Statistics!", "Towards an Indicative List of FDI Sustainability Characteristics", and "The Evolving International Investment Law and Policy Regime: Ways Forward" are available at and

AIB-L is brought to you by the Academy of International Business.
For information:
To post message: [log in to unmask]
For assistance: [log in to unmask]
AIB-L is a moderated list.