The Importance of Bilateral Investment Treaties When Structuring Foreign...

The Importance of Bilateral Investment Treaties When Structuring Foreign Investments

ACC International Legal Affairs Committee Legal Quick Hit: November 14, 2013 Presented by: Helena Sprenger Houthoff Buruma

!   Tax planning !   BIT- planning (Bilateral Investment Treaties)

Choosing Investment Structure

Bilateral Investment Treaties (BITs)

!   What is a BIT?

!   Treaty between two states !   Protects various investments against

expropriations and unfair harmful regulations (incl. equity, debt, IP rights, concessions)

!   Results in claim of individual company against “misbehaving” state

3

Bilateral Investment Treaties

0  

500  

1000  

1500  

2000  

2500  

3000  

           1990                2013  

!   First BIT in 1959 (initiative of World Bank)

Obligations under BITs

!  Fair and equitable treatment of investors, no discrimination

!  No expropriation without fair compensation (incl.

certain harmful regulations)

!  Free transfer of funds

Enforcement of BITs

! Neutral forum

!  Often ICSID arbitration based on Washington Convention (International Centre for Settlement of Investment Disputes)

Washington Convention

!   Initiative of the World Bank in 1965, establishing neutral arbitration forum

!   Currently 149 contracting States

!   All contracting States must recognize and enforce an ICSID award as if it were a final judgment of a court of that State

ICSID

! Currently 168 cases pending

Argentina (25) Venezuela (29)    

Important?

ExxonMobil –vs. Venezuela (similar case for ConocoPhillips)  

!   Multi Billion Investment of Mobil in Orinoco Oil Belt in Venezuela

!   After perceived increase in political risk restructuring based on NL – Venezuela BIT

Old Structure

Mobil  (Delaware)  

Mobil  CN  Holding    (Delaware)  

Mobil  Venezolana  Holding    

(Delaware)  

Mobil  CN  (Bahamas)  

Mobil  Venezolana  (Bahamas)  

Cerro Negro Association

La  Ceiba  AssociaCon  

New Structure (as of 2006)

Mobil  CN  Holding    (Delaware)  

Mobil  Venezolana  Holding    (Delaware)  

Mobil CN (Bahamas)

Mobil  Venezolana  (Bahamas)  

Mobil  (Delaware)  

Cerro  Negro  AssociaCon  

La  Ceiba  AssociaCon

Venezuela  Holdings  B.V.    (Netherlands)  

Mobil vs Venezuela

!   Expropriation, offer to pay book value

!   Mobil made claim under Dutch Kingdom BIT

!   ICSID Arbitration pending (multiple billion USD claim), lien on assets (gold) in UK

Mobil vs Venezuela cont’d

! Venezuela claimed that restructuring was abuse of BIT

In June 2010 Interim award on jurisdiction:

BIT-planning allowed. Forms no reason to deny jurisdiction, but no

protection against actions that already occurred before restructuring

Does It Work?

! (2003) CME Czech Republic BV vs

Czech Republic re television license: award > USD 375 Mio

! (2006) ADC vs Hungary re Budapest airport: award > USD 84 Mio

BIT Due diligence

! Which BITs are available in Host State?

! Not all BIT’s are created equal

! Which investments are protected?

! Does it apply to (sub)holding companies?

BITs in Effect

0  

10  

20  

30  

40  

50  

60  

70  

80  

90  U

S

CA

NA

DA

DU

TCH

KIN

GD

OM

CAY

MA

N IS

LAN

D

BER

MU

DA

Dutch Kingdom BITs

Curaçao

Netherlands

Aruba

St. Maarten

Dutch Kingdom BITs

 Albania,  Algeria,  ArgenCna,  Armenia,  Bahrain  (pending),    Bangladesh,  Belarus,  Belize,  Benin,  Bolivia  (contested),  Bosnia  and  Herzegovina,  Brazil  (pending),  Bulgaria,  Burkina  Faso,  Burundi  (pending),  Cambodia,  Cameroon,  Cape  Verde,  Czech  Republic,  Chile  (pending),  China,  Costa  Rica,  CroaCa,  Dominican  Republic,  Ecuador,  Egypt,  El  Salvador,  Eritrea  (pending),  Estonia,  Ethiopia,  Gambia,  Georgia,  Ghana,  Guatemala,  Honduras,  Hong  Kong,  Hungary,  India,  Indonesia,  Ivory  Coast,  Jamaica,  Jordan,  Kazakhstan,  Kenya,  Kuwait,  Laos,  Latvia,  Lebanon,  Lithuania,  Macao,  Macedonia,  Malawi,  Malaysia,  Mali,  Malta,  Mexico,  Moldavia,  Mongolia,  Montenegro,  Morocco,  Mozambique,  Namibia,  Nicaragua,  Nigeria,  Oman,  Pakistan,  Panama,  Paraguay,  Peru,  Philippines,  Poland,  Romania,  Russia,  Senegal,  Serbia,  Singapore,  Slovenia,  Slovakia,  Sri  Lanka,  South  Africa,  South  Korea,  Sudan,  Suriname,  Tajikistan,  Tanzania,  Thailand,  Tunisia,  Turkey,  Uganda,  Ukraine,  Uruguay,  Uzbekistan,  Venezuela  (terminated),  Vietnam,  Zambia  (pending),  Zimbabwe  

Choosing an Investment Vehicle

! Tax

! BIT ! Ultimate structure still needs to work from a

tax-perspective

Dutch Kingdom Entity?

! Extensive BIT treaty network (89) combined with beneficial tax treatment

! TAX (NL) •  No  withholding  tax  on  interest,  royalCes  •  No  CIT  on  div/cap  gains  received  from  subsidiaries  •  Upfront  tax  rulings  give  certainty  •  Bilateral  tax  treaCes  (100),  reduce  withholding  tax  on  dividends,  interest  and  royalCes  

! Tax Curacao •  No  withholding  tax,  0%  CIT  for  holdings    

Foreign Investor

Host State

Dutch Kingdom Entity

Tax-planning vehicle

Add additional layer for BIT-purposes?

! 65 BITs, including Netherlands, not including US and Canada

! Netherlands – India BIT: ! Offers UNCITRAL arbitration ! Very broad definition of investments ! Also covers (sub)holding companies

! NL – India Tax Treaty

India

! 13 BITs, including Netherlands, not including US and Canada

! NL – Nigeria BIT: ! offers ICSID arbitration ! very broad definition of investments ! covers sub-holding companies

! Nigeria – NL Tax Treaty

Nigeria

! 100 BITs, including Netherlands; not including US and Canada

! NL – China BIT: ! Very broad definition of investments ! Covers (sub)holding companies ! Offers access to ICSID or UNCITRAL

! NL – China Tax Treaty

China

US

Investment in CHINA

DUTCH ENTITY

HONG KONG ENTITY

CONCLUSION

! BIT Planning can be at least as important as tax planning!

! Consider changing investment structure if political risk increases

! Adding Dutch Kingdom entities to structure will often be preferred solution from a tax- and BIT- perspective

Questions?

Helena Sprenger Houthoff Buruma (Lex Mundi member firm for the Netherlands) 120 West 45th Street, 19th Floor New York, NY 10036 Tel: (212) 403-6705 h.sprenger@houthoff.com www.houthoff.com

Contact Information

Offices in Amsterdam, Rotterdam, New York, London and Brussels