Investment treaties are agreements between two or more states that seek to promote and protect foreign investments. Typically, investment treaties afford protection to foreign investments made by an investor of one signatory state (“foreign investors”) into the territory of another signatory state (“host state”). Common examples of investment treaty protections include:

  • ‘Most-Favoured-Nation’ provisions, which ensure that investments made by foreign investors are treated no less favourably than domestic investors in a host state;
  • ‘Fair and Equitable Treatment’ provisions, which ensure that investments made by foreign investors are not subject to arbitrary or discriminatory treatment in a host state; and
  • ‘Full Protection and Security’ provisions, which ensure that investments made by foreign investors are provided adequate security against harm or interference in a host state.

Companies constituted under the laws of a signatory state to an investment treaty generally qualify as foreign investors, including indirect investors and minority shareholders. Accordingly, investors often interpose companies (constituted under the laws of signatory states to desirable investment treaties) within their investment structures to obtain the benefit of investment treaty protection for foreign investments (into other signatory states to the same investment treaties).

The ability to assert and enforce investment treaty rights through international arbitration can be a crucial recourse for foreign investors when other forms of dispute resolution are exhausted, unavailable or otherwise unappealing, particularly with respect to claims against a foreign government of a host state. However, in recent years host states have sought to limit the scope of indirect investors that qualify for investment treaty protection through the inclusion of ‘denial of benefits’ provisions.1

These provisions expressly prevent nationals of non-signatory states from indirectly obtaining investment treaty protection through the ownership or control of interposed holding, mailbox or shell companies constituted under the laws of signatory states, if those same companies lack “substantial business activities” in the host state.

It can therefore be of critical importance that companies interposed in investment structures for the purpose of obtaining investment treaty protection satisfy the threshold for “substantial business activities” (sometimes referred to as “substantial business operations”)2. International arbitration tribunals have regularly determined that it is the materiality, not the magnitude, of a company’s business activity that is decisive in determining what is “substantial”. The following factors have been held to be indicative of “substantial business activities” in investment treaty arbitration:

  • the payment of different types of taxes in the host state;
  • the payment of salaries in the host state;
  • leased office space in the host state;
  • permanent personnel in the host state;
  • company board meetings being located in the host state;
  • company directors residing in the host state;
  • evidence of a local auditor in the host state auditing the company’s accounts;
  • engagements with customers, vendors and service providers in the host state (for example, law firms);
  • purchases of local goods in the host state;
  • maintenance of bank accounts in the host state;
  • raising capital in the host state; and
  • face-to-face meetings with local investors and stockbrokers in the host state.

Accordingly, companies interposed within investment structures to obtain the benefit of investment treaty protection should seek to emulate as many of these indicative factors as possible. A failure to do so may leave foreign investors without recourse to investment treaty arbitration in the event of a dispute regarding their investment in a host state.

Case Study

In Red Eagle Exploration Limited v. Republic of Colombia, ICSID Case No. ARB/18/12 (28 February 2024), an ICSID tribunal rejected Colombia’s attempt to deny Red Eagle Exploration Limited investment treaty protection under the Free Trade Agreement between Canada and Colombia dated 21 November 2008 (the “FTA”).

Colombia was not permitted to exercise the denial of benefits provision contained in Article 814(2) of the FTA as the ICSID tribunal deemed Red Eagle Exploration Limited to have “substantial business activities” in Canada on the basis of the following factors:

  • incorporation/registration in Canada;
  • directors and officers being nationals or residents of Canada;
  • board/corporate meetings taking place in Canada;
  • being listed on the Toronto Stock Exchange;
  • renting office space in Vancouver, Canada;
  • engaging various professional services in Canada (including accounting and advisory services, legal services, and shareholder and investor activities, such as the listing fee for the Toronto Stock Exchange);
  • filing taxes in Canada;
  • having bank accounts in a Canadian bank;
  • having insurance in Canada; and
  • being subject to the British Columbia Securities Commission.

  1. See, for example, Article 19 of the ASEAN Comprehensive Investment Agreement 2009 (the “ACIA”) and Article 9.15 of the Comprehensive and Progressive Agreement for Trans-Pacific Partnership 2018). ↩︎
  2. See, for example, the ACIA. ↩︎