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The importance of timely structuring of investments

The recently published award in the Philipp Morris v Australia case concerning Australia’s plain packaging of cigarettes legislation contains important indications as the conditions for the timely structuring of investments in order to be able to initiate investment arbitration proceedings.

Background of the case

Philip Morris International (PMI), a company incorporated in New York, produces cigarettes and owns several subsidiaries and affiliates globally (“PMI Group”), including Philip Morris Asia Limited (the Claimant in this case) which has its Asia regional headquarters in Hong Kong. The Claimant is the sole shareholder of the holding company Philip Morris (Australia) Limited (PM Australia), which in turn is the sole shareholder of Philip Morris Limited (PML), a trading company incorporated in Australia which operates PMI Group’s tobacco product sales in Australia under license from Philip Morris companies in Switzerland and the United States. Until February 2011, PM Australia and PML were owned by a Swiss company which is part of the PMI group of companies.

In December 2007, then Prime Minister Kevin Rudd launched a National Preventative Health Taskforce, which conducted various consultations and investigations on preventative health programs and strategies, including further regulation of the tobacco industry by way of mandating plain packaging of tobacco products. PMI Group and PML participated in the consultation process and expressed their opposition to the planned plain packaging measures.

In April 2010, then Prime Minister Rudd announced the Government’s intention to introduce mandated plain packaging of tobacco products by 1 July 2012.

From late 2010 to early 2011, PMI Group undertook a restructuring process which took into account the political risk it was facing in various countries in respect of a number of new regulations relating to plain packaging of tobacco products. More specifically, on 23 February 2011, the Claimant formally acquired PM Australia and PML, which meant that Philip Morris Asia Limited became the owner of its Australian subsidiary.

On 21 November 2011, that is 8 months after the restructuring of the PMI Group, the Tobacco Plain Packaging Bill was enacted.

On the same day, the Claimant served its Notice of Arbitration to Australia (the Respondent), submitting the dispute to international arbitration pursuant to the bilateral investment treaty (BIT) between Hong Kong and Australia.

On 17 December 2015, the Arbitral Tribunal issued its Award on Jurisdiction and Admissibility, which was only recently made publicly available.

The decision of the Arbitral Tribunal

 At this stage of the proceedings the Arbitral Tribunal (consisting of Prof. Karl-Heinz Böckstiegel (President), Prof. Gabrielle Kaufmann-Kohler and Prof. Donald M. McRae) had to decide whether or not the dispute is at all admissible, before being allowed to proceed further. In particular, the question had to be addressed whether or not the claim was brought “after” the dispute “arose”. In other words, whether or not the restructuring took place after the dispute arose and thus constituted an abuse of the BIT and therefore should be dismissed entirely.

Normally, one would argue that the cutoff date would be the date on which the disputed law entered into force, i.e., 21 November 2011. Since the Claimant obtained full ownership some 8 months prior to that, it would appear that the restructuring clearly took place months before the dispute “arose” and therefore should be admitted.

However, as will be discussed below in more detail, the Arbitral Tribunal decided otherwise.

The Arbitral Tribunal started by distinguishing between the ratione temporis argument and the abuse of rights argument. The Arbitral Tribunal relied heavily on the Levy and Gremcitel v. Peru tribunal’s analysis in this regard, which found that even if a tribunal has jurisdiction ratione temporis, it may be precluded from exercising its jurisdiction, if the acquisition is abusive. Endorsing the approach in Gremcitel, the Arbitral Tribunal found “whenever the cause of action is based on a treaty breach, the test for a ratione temporis objection is whether a claimant made a protected investment before the moment when the alleged breach occurred,” and “the critical date is when the State adopts the disputed measure.”

In the present case, it was the date of enactment of the Tobacco Plain Packaging Act 2011, as before that moment Claimant’s rights could not be affected. The Arbitral Tribunal observed that the dispute normally follows the alleged breach and arises when an aggrieved investor “positively opposes” the measures adopted or any claim of the other party that derives from them. Accordingly, the Arbitral Tribunal concluded that the requirements for its jurisdiction ratione temporis were met.

The Arbitral Tribunal then moved on to the abuse of rights argument. It found that it is clear, and recognized by earlier decisions that the threshold for finding an abusive initiation of an investment claim is high. It is equally accepted that the notion of abuse does not imply a showing of bad faith. Referring to several other arbitral awards, the Arbitral Tribunal agreed that the mere fact of restructuring an investment to obtain BIT benefits is not per se illegitimate. However, and at the same time, the Arbitral Tribunal recognized that it may amount to an abuse of process to restructure an investment to obtain BIT benefits in respect of a foreseeable dispute.

More specifically, the Arbitral Tribunal considered that the legal tests on abuse of right revolve around the concept of foreseeability, with a standard resting between the two extremes of “a very high probability and not merely a possible controversy”.

The Arbitral Tribunal was of the opinion that a dispute is foreseeable when there is a reasonable prospect, as stated by the Tidewater tribunal, that a measure which may give rise to a treaty claim will materialize.

The Arbitral Tribunal went on to juxtapose the developments occurring at the corporate level within the PMI Group of companies and events arising at the political level within the Australian Government.

The Arbitral Tribunal concluded that it was clear that the dispute was about rights and not merely about policy. By 29 April 2010, when Prime Minister Rudd and Health Minister Roxon unequivocally announced the Government’s intention to introduce the plain packaging measures, there was no uncertainty about the Government’s intentions at that point. Accordingly, the Arbitral Tribunal concluded that there was at least a reasonable prospect that legislation equivalent to the Plain Packaging Measures would eventually be enacted, which would trigger a dispute.

The Arbitral Tribunal continued by observing that the length of time it takes to legislate is not a decisive factor, due to the characteristics of a democratic system. This does not make the outcome any less foreseeable. The Arbitral Tribunal also noted that the Australian Government never withdrew from its position, announced in April 2010, despite a change of political leaders and a change to a minority government. What became uncertain, the Arbitral Tribunal found, was not whether the Government intended to introduce plain packaging, but whether the Government could maintain a majority or would be replaced. If this were treated as a basis for saying that there was no reasonable prospect of a dispute, it would create one rule for majority governments and another for minority governments, which would create difficulties for States whose electoral processes can result in minority governments.

Consequently, the Arbitral Tribunal concluded that at the time of restructuring, the dispute that materialized subsequently was foreseeable to Claimant.

In the Arbitral Tribunal’s view, it would not normally be an abuse of right to bring a BIT claim in the wake of a corporate restructuring, if the restructuring was justified independently of the possibility of bringing such a claim. However, the Arbitral Tribunal concluded that the Claimant was not able to prove that tax or other business reasons were determinative for the restructuring, and found that the main and determinative, if not the sole, reason for the restructuring was the intention to bring a claim under the BIT.

Consequently, the Arbitral Tribunal concluded that the initiation of the arbitration constituted an abuse of rights, that the claims raised in the arbitration were inadmissible and that it was precluded from exercising its jurisdiction over the dispute.

The main take away from this case

While the conclusions of the Arbitral Tribunal are strictly related to the provisions contained in the Hong Kong-Australia BIT, which may differ from other BIT texts, they nevertheless represent an important indication.

The fact that the Arbitral Tribunal did not simply take the date of entering into force of a legislative act as the cutoff date but rather took the start of the legislative process, which may or may not lead to the eventual adoption a particular act, is a troubling development because it introduces a high level of uncertainty as to when a restructuring may be considered legal and when abusive. The use of vague terms such as the “intentions of a Government” or the “concept of foreseeability” make it unreasonably difficult for an investor to assess the situation correctly, particularly in countries with largely unpredictable governments and governmentalinstitutions (e.g. the Czech Republic, where last year thousands of renewable energy  investors found themselves in a state of limbo about the subsidies for 2016).

This is especially true since Governments change all the time and so do their intentions and policy objectives. Consequently, by applying these criteria the cutoff date becomes a moving target, which is difficult to hit by the investor.

Clearly, it would be much more preferable and create more legal predictability, if the date of enactment of a legislative act or the date of adoption of an administrative measure (such as the issuance of a license) would be used as the cutoff date.

But since that is apparently not the case anymore, it is even more important for the investor to fully and irrefutably document the reasons for the restructuring decision and the exact timing of it.

This is of particular importance in order to prove that the restructuring was made well before any dispute arose and that it was not done for the sole or main purpose of initiating investment arbitration proceedings.

GIP AG is at your disposable to advice you on how to restructure in order to obtain the most optimal BIT protection.

 

 

 

India wants to replace 47 BITs with a new BIT model

It has recently been reported that India has notified 47 countries with which it has concluded bilateral investment treaties (BITs) that those BITs will not be renewed, but rather should be replaced with its new model BIT text. This new model BIT text was adopted by the Indian government last year. Although, the specific countries are not named, the report claims that also some European countries are among them. The main aim of the new model BIT text is to exclude the possibility for foreign investors to use investor-state dispute settlement by requiring foreign investors to first exhaust all local judicial and administrative remedies before being allowed to use international arbitration (Art. 14.3). Considering the fact that the Indian judicial and administrative system is one of the slowest one in the world, this in effect boils down to a denial of access to international arbitration and thus to a denial of a fair, independent and speedy resolution of the dispute. Another aim of the “reform” contained in the new model BIT text is that any claims of foreign investors concerning tax measures are explicitly fully excluded (Art. 2(3)(iv)). This is a direct consequence of India’s retroactive imposition of huge tax bills on foreign companies (such as in the on-going Vodafone v. India case), which in turn have initiated investment arbitration proceedings against India in order to obtain compensation.

In short, with these new BITs India intends to increase its policy space, while at the same time reduce its risk of exposure of receiving claims by foreign investors. It remains to be seen whether or not the other countries will accept India’s new model BIT. Either way, foreign investor should take these developments as a serious sign that their investments in India are endangered. Consequently, foreign investors should seize now the window of opportunity to restructure their investments in order to maintain the most optimal BIT protection.

GIP AG is ready to assist you on how to obtain the best BIT protection.

What Brexit means for investment treaties

Much is being said about Brexit in the past days. But what would a potential Brexit mean for investment protection in the EU?

The main advantage of Brexit would be that the post-Brexit UK could maintain its 100+ bilateral investment treaties (BITs) with the current dispute arbitration rules in place. This also applies to the so-called intra-EU BITs. From an investor-perspective this would be a re-assuring development. Moreover, arbitration disputes would take place without the interferences of the European Commission and the European Court of Justice, which are arguably biased against investors.

Moreover, as far as the proposed reforms for an investment court system (ICS) are concerned, the post-Brexit UK will not necessarily have to adopt them. In fact, there has never been much enthusiasm for this ICS from the UK in the first place. Again, this would be another important re-assuring factor for investors who would maintain access to the current system of international arbitration, which is a tested and well-functioning system that is appreciated by investors around the world.

So, in conclusion, there are some potentially positive effects of Brexit for investors. Generally, the UK BITs provide a high level of investment protection, which would continue to be available to investors also in the future.

The final nail hammered into the coffin of intra-EU BITs

A recently published “non-paper” by France, Germany, The Netherlands, Austria and Finland represents the final nail hammered into the coffin of intra-EU BITs.

In this non-paper these Member States explicitly announce that they wish to immediately (i.e. without the sunset clause) terminate all existing intra-EU BITs by way of a multilateral international agreement among all Member States.

These Member States argue that intra-EU BITs and access to international arbitration are incompatible with EU law – adopting the position of the European Commission, which it has espoused in many intra-EU investment disputes.

Consequently, European investors can only turn to the domestic courts of the Member States for investment protection and obtaining compensation for damages.

Fortunately, the non-paper notes that the judicial system of many Member States is dysfunctioning. As an alternative, the non-paper proposes the use of mediation to resolve investment disputes. Recognizing that mediation is non-binding and non-enforceable, the non-paper talks about establishing a “binding and enforceable settlement mechanism”. Various ideas are floated how such a “binding and enforceable settlement mechanism” could look like, ranging from giving jurisdiction to the Court of Justice of the EU to the Permanent Court of Arbitration (PCA). However, it is clear that this will entail complicated legal discussions, which will last for many years, if it ever will be implemented.

In addition, it was recently reported that Demark has proposed to the other EU Member States to mutually terminate the existing bilateral investment treaties (intra-EU BITs) between them.

Denmark currently has nine intra-EU BITs in force, namely, with Poland, Hungary, Latvia, Lithuania, Estonia, Hungary, Croatia, Slovenia and Slovakia.

Denmark has indicated two reasons for this move. Firstly, it wants to avoid an infringement procedure by the European Commission, which are currently pending against five other Member States (The Netherlands, Sweden, Romania, Austria and Slovakia). Secondly, the Danish Government is of the view that these BITs are not very often used by Danish investors and therefore have become obsolete.

According to the report, Denmark received broadly “favourable” responses from the majority of its treaty counter-parties. More specifically, Slovenia and Estonia, have signalled to Denmark that there is agreement in principle for mutual termination, which is currently effectuated.

However, termination as such – normally – does not end the protection of existing investments, since the so-called “sunset clause” contained in the BITs provides for continued protection for 10 years or even longer.

But in 2011 Denmark and the Czech Republic worked around this problem by first removing the sunset clause and then terminate the modified BIT. In this way, the termination of the revised BIT immediately removed any protection – even for existing investments.

Indeed, this has been the preferred solution, which the European Commission has been pushing all Member States to adopt.

Moreover, as we have reported in our last newsletter, also Poland surprised the world when it announced last February that it intends to terminate all its 60 BITs. Subsequently, it was clarified that it actually intends to terminate only its intra-EU BITs. Whether Poland is indeed going to do that remains to be seen.

In addition, last year the European Commission has brought infringement procedures against 5 Member States because of their intra-EU BITs. If the Court of Justice of the EU (CJEU) would decide against the Member States, the end of intra-EU BITs is nearing quickly.

Taking all these developments together, it must be concluded that the push by the European Commission to eliminate intra-EU BITs is finally showing some results. In particular, since it appears for the first time officially that the large capital exporting countries such as the Netherlands, Germany and France are ready to give up their intra-EU BITs.

Consequently, it is now certain that intra-EU BITs will be gone within the next 18-24 months.

The broader question, though, is: what does this mean for European investors being expropriated or otherwise are confronted with measures, which result in compensable damages?

If the intra-EU BITs are gone, these investors can only turn to domestic courts. However, as is well-known, in many EU Member States the judicial system is malfunctioning, slow and often riddled by corruption and political pressure. Accordingly, domestic courts are simply no equivalent to international arbitration. In addition, the protection standards in domestic law and EU law are much lower than those contained in the BITs.

In short, European investors will be left with very little protection. Consequently, European investors are well advised to act now and to look for alternatives, such as restructuring their investments outside the EU, for example via Switzerland, thereby enjoying the benefits of Swiss BITs.

GIP AG stands ready to offer its expertise to help investors obtain and maintain optimal BIT protection from Swiss BITs.

Intra-EU BITs before the Court of Justice of the EU

 

As we have reported previously, the European Commission and several EU Member States have been consistently trying to escape their legal obligations of the bilateral investment treaties (BITs), which have been concluded between Member States (intra-EU BITs). The Achema (Eureko) v. Slovakia investment dispute is the most recent case, which has been referred by the German court to the Court of Justice of the EU (CJEU) for a decision.

The background of the case

In 2008 Dutch insurer Eureko (later renamed Achmea) brought an investment treaty claim against Slovakia based on the Netherlands-Slovakia BIT. Eureko complained against the re-nationalisation of the Slovak health system, which caused the indirect expropriation of Eureko’s health insurance business in Slovakia.

In 2010 the arbitral tribunal accepted its jurisdiction and proceeded with the decision in the merits. Already during the jurisdiction phase, Slovakia – actively supported by the European Commission – argued that the BIT between the Netherlands and Slovakia has been superseded by the accession of Slovakia to the EU in 2004. Indeed, Slovakia and the European Commission argued that the BITs is violating EU law and therefore cannot be relied upon any longer by European investors. The arbitral tribunal – following the arguments of the Netherlands which intervened as well – rejected the arguments of Slovakia and the European Commission.

In 2012, the arbitral tribunal concluded that Slovakia indeed violated its obligations under the BIT and ordered it to pay €22 million plus interest to Eureko.

However, that has not been the end of the story.

Slovakia – again actively supported by the European Commission – tried to challenge the jurisdiction of the arbitral tribunal before the ordinary courts in Frankfurt, Germany, which was selected as the seat for this arbitration. However, the Frankfurt Regional Court rejected the annulment claim by Slovakia, which in turn appealed against that judgment to the Federal Supreme Court (Bundesgerichtshof, BGH) in Karlsruhe.

In a recently published decision, the BGH decided to stay the proceedings and ask three preliminary questions regarding the compatibility of investment arbitration and intra-EU BITs with EU law to the CJEU.

The preliminary ruling questions

While the BGH expressly indicates in its request for preliminary questions that it is not very much convinced by Slovakia’s arguments and that it supports the judgment of the lower Frankfurt court, it nevertheless considers it necessary to ask these questions to the CJEU because the CJEU has so far not ruled precisely on the compatibility of investment arbitration and intra-EU BITs with EU law.

The questions of the BGH focus on three provisions of the Treaty on the Function of the EU (TFEU).

The first question – and main question – concerns Art. 344 TFEU, which provides that all disputes between Member States must be exclusively brought before the CJEU.

While the wording of this provision clearly only mentions disputes between Member States, Slovakia and the European Commission have been trying to expand the scope of Art. 344 TFEU by claiming that it also applies to disputes between investors and Member States. The Frankfurt court, following the largely accepted view in the legal literature, clearly rejected this interpretation. The BGH, while fully supporting the reasoning of the Frankfurt court, nevertheless considers it necessary to ask the CJEU whether Art. 344 TFEU prohibits the use of investment arbitration rules as contained in intra-EU BITs, which have been concluded before the Member State concerned acceded to the EU but where the dispute was initiated after its accession.

Only if the first question is to be answered negatively, the BGH asks the CJEU to answer the second question, which focuses on Art. 267 TFEU.

Art. 267 TFEU deals with the issue of ensuring uniformity and consistency of the interpretation and application of EU law through the co-operation between domestic courts of the Member States and the CJEU.

In short, the principle is that domestic courts are required to interpret and apply EU law as interpreted by the CJEU, but when domestic courts have doubts they should ask preliminary questions – as the BGH did in this case – to the CJEU for guidance. In this way, the uniformity and consistency of EU law can be ensured throughout the EU. The problem is that the CJEU does not consider arbitral tribunals as proper “courts” in the context of Art. 267 TFEU and therefore arbitral tribunals cannot ask the CJEU preliminary questions. This “lack of standing” of arbitral tribunal has been used as an argument by Slovakia and the European Commission for claiming that arbitral tribunals can interpret, apply or even negate EU law as they see fit – without any control by the CJEU. This in turn would cause fragmentation of EU law. However, this argument is not convincing since domestic courts are involved in the recognition and enforcement phase of arbitral awards. In this phase, domestic courts can – and indeed in the view of the BGH are obliged – to check whether an award violates the ordre public of a Member States, which also includes EU law. Accordingly, domestic courts of the Member States can ensure that arbitral awards are not in violation of EU law.

Indeed, the BGH views this mechanism as sufficient and therefore sees no reason that Art. 267 TFEU would stand in the way of using an arbitral tribunal for resolving a dispute between an investor and a Member State. Nonetheless, the BGH requests the CJEU to clarify this matter.

Only if the first and second questions are answered negatively, the BGH wishes to receive an answer on the third question, which concerns Art. 18 TFEU. Art. 18 TFEU is the general non-discrimination provision in EU law, which prohibits any discrimination based on nationality. Slovakia and the European Commission have been arguing that a BIT grants the right to use investment arbitration only to the nationals of the states, which have concluded the BIT – in our case Dutch and Slovak investors. This BIT grants them a privileged position compared to for example an Irish investor, who has no access to the Netherlands-Slovak BIT. This – so the argument goes – constitutes a discrimination among EU investors, which is prohibited by Art. 18 TFEU.

The BGH does not deny that this could be perceived as a discrimination. However, the BGH agrees with the solution which has been put forward by many investment law experts, namely, that the definition of “nationals” in intra-EU BITs simply should be interpreted broadly by covering all EU investors. In other words, all EU investors should be considered as falling within the scope of the Dutch-Slovak BIT (in fact, within the scope of all intra-EU BITs), so that all EU investors are treated equally. Consequently, all intra-EU BITs would be open to all EU investors. This broad interpretation can simply be employed by the arbitral tribunals ex officio, since Art. 18 TFEU applies also to all intra-EU BITs. Therefore, no treaty changes are necessary. The implicit question of the BGH is thus, whether or not the CJEU shares its view that this solution is sufficient to remove any doubts as to a potential violation of Art. 18 TFEU.

The wider context

This case must be seen in the wider context of the increasing efforts of the European Commission and some Member States to eradicate intra-EU BITs and investment arbitration within the EU.

In fact, this is the third case now pending before the CJEU. The first one is the Micula case, in which the European Commission has prohibited Romania to pay out a US $250 million ICSID award because that would be considered illegal new state aid. This case is currently pending before the General Court of the EU, which could be appealed to the CJEU.

The second case is the infringement procedures initiated by the European Commission against 5 Member States (the Netherlands, Romania, Austria, Sweden and Slovakia). In these proceedings the European Commission argues that intra-EU BITs are generally in violation of EU law and therefore should be terminated immediately.

All these cases should be decided within the next 18-24 months.

While the outcome of those cases cannot be predicted with certainty, it seems that the CJEU will side with the European Commission and thus declare intra-EU BITs to be in violation of EU law.

Finally, as we report in the other article of this newsletter, several EU Member States have indicated or even taken steps to terminate their intra-EU BITs.

Whether or not this will be the case, investors should use the current window of opportunity to secure their existing and future investments by structuring their investments outside the EU. With its 130 BITs, including with most Central and Eastern European Member States, Switzerland is an excellent option for maintaining maximum investment protection.

GIP AG stands ready to advise you on how to option optimal investment protection via Switzerland.

 

Summary: Will the ICS proposal of the European Commission eliminate investment treaty arbitration in Europe and beyond?

On 26 April 2016 Dr. Nikos Lavranos held a lecture at the Prague University, Law Faculty on the question:  Will the ICS proposal of the European Commission eliminate investment treaty arbitration in Europe and beyond?

Nikos Lavranos started off his lecture by asking why States have concluded more than 3,000 bilateral investment treaties (BITs) worldwide. To answer that question he goes back to 1778 when the US concluded its first Friendship, Commerce and Navigation (FCN) treaty with France.

He explained that already these early FCN treaties were aiming at promoting trade by promoting the traders going abroad. In particular, already at that time the prohibition against expropriation and non-discrimination were fundamental elements of those treaties. However, the FCN treaties only contained State-State dispute resolution. This was changed by the BITs which introduced investor-State dispute resolution. The message thus is that the protection of property, non-discrimination and dispute resolution have been generally accepted for centuries by States.

He the moved on to explain how investor-State dispute resolution nowadays works. He focussed in particular on the importance of party autonomy and finality. Both elements are vitally important for both investors and States.

He then turned to the proposal of the European Commission to establish an international court system (ICS), which would replace the existing investor-State arbitration system. Having explained the shortages of the ICS proposal, he concludes that there is a real risk that the ICS will be a pro-State biased institution.

His main conclusion is that the ICS system may look advantageous for States at first sight, but at the end, it will not address the root of the many investment disputes, which is the lack of Rule of Law, the lack of functioning courts and administration, the lack of transparency and the widespread corruption in most countries – even in Europe.

So, while the ICS proposal may please the critics of the current investor-State dispute settlement and the States, it will not promote investments and thus will not contribute to economic growth.

To find out more, please contact us at info@globalinvestmentprotection.com

Invitation: Nikos Lavranos to lecture in Prague

The head of our legal team, Nikos Lavranos, will be holding a lecture on

“Will the ICS (Investment Court System) Proposal of the Commission Eliminate Investment Arbitration in Europe and Beyond?

Date: 26 April 2016, 5 p.m.
Place: Faculty of law, Charles University, Prague, Czech Republic
Address: Nám. Curieových 7, Pradgue 1, room 117

For more information, contact us.

Poland threatens wind energy producers

In late February of this year, the Polish Government submitted a draft wind energy law to the Polish Parliament, which would significantly threaten existing and new investments in the wind energy production.

The draft law introduces the following elements:

  • a requirement to place wind farms at a distance of at least ten times the turbine height — roughly 1.5 to 2.0 kilometres — away from houses and protected natural areas. This distance requirement is about 3-4 times more than the current situation in Poland which requires wind turbines to be placed at about 0.5 kilometres away from houses. Additionally, the construction of wind farms would only be allowed in areas designated for that purpose in local zoning plans, which are often lacking.
  • an increase of the property tax burden for wind farm investors, applying a 2% annual tax on the investment value of the entire turbine. That tax previously only applied to the investment value of the tower and foundation. In practical terms, this would mean that a single 3MW turbine costing about €4 million could be taxed at around €80,000 a year.
  • a requirement to renew operating permits every two years and to get permission even for repairs and maintenance.
  • an obligation for wind farm developers and operators to pay potentially significant fees to technical authorities for their permitting services. Additionally, the law also foresees fines and even jail sentences of up to two years for failure to get the necessary approvals.

The Polish Government intends to modify the current framework for auctions by which a fixed tariff is set to be assigned to renewable energy projects. That system had been initially scheduled to replace a green certificate mechanism on 1 January 2016, but the Government has postponed the switchover to the middle of this year – a delay which creates legal uncertainty for investors.

On a more general level, if this law would enter force, it would have devastating effects for achieving the climate targets agreed in Paris as well as for investments and jobs in this sector.

It should be noted that Poland had the EU’s second-highest number of wind-power installations in 2015, with developers installing 1.26 gigawatts of new capacity. The country now has 5.1 gigawatts of installed wind capacity. In 2015, investments in the wind energy sector were €26.4 billion, a 40% increase compared to 2014. In other words, Poland is emerging as a leader for wind power in Europe.

But this proposal is even more misguided considering the fact that Poland is obliged by the Paris climate deal and by EU law to produce 15% of its electricity from renewable energy sources by 2020, up from around 11% today.

Moreover, Poland’s wind industry supports more than 8,000 jobs and generates some €140 million in revenue each year – both, which are seriously put into danger.

In sum, this proposed law would have very severe consequences for investors, because it will be very hard to find projects that satisfy the minimum distance requirement. Consequently, wind energy investments will become more difficult and returns will be significantly reduced. Finally, legal certainty and predictability of the regulatory framework would be essentially erased, which will scare off investors.

Poland’s new government has shown repeatedly, that it is eager to push through legislation based not on facts or reason, but on irresponsible subjective opinions. Polish environment minister Jan Szysko said that “wind farms (…) destroy the landscape, are alien to Poland’s cultural heritage and harmful to natural reserves.” His colleague, foreign minister Witold Waszczykowski told the German tabloid Bild, his government “only wants to cure our country of a few illnesses”, such as: “a world made up of cyclists and vegetarians, who only use renewable energy”.

In combination with the government’s pro-coal approach investors should expect more harassing measures against renewable energy investors and foreign investors in general.

Global Investment Protection (GIP) AG is a specialised consultancy firm, which stands ready to advice on how to protect your investments in Poland in the best possible way.

Poland wants to scrap Investment Protection

A couple of weeks ago the Polish Government announced that it wants to cancel all of its 60 Bilateral Investment Treaties (BITs). Subsequently, the Government stated that its intention is first and foremost focussed on the BITs it has concluded with the other EU Member States (the so-called intra-EU BITs). Poland has concluded intra-EU BITs with almost all other EU Member States (except with Ireland, Italy and Malta).

Deputy Treasury Minister Mikolaj Wild stated that as a member of the EU since 2004, Poland has “reached a level of democracy which guarantees that its courts are free from political influence and where foreign investors don’t need such “privileges” such as the BITs”. Moreover, he claimed that the BITs drive up legal costs and are used to put “pressure” on the Government regarding economic issues. More specifically, Deputy Prime Minister Mateusz Morawiecki – correctly – mentioned BITs as a legal risk in discussions by the Government on forcing banks to convert their foreign currency-denominated loans, which could cost the industry billions of Polish Zloty. Most of Poland’s banking assets are owned by foreign lenders, including Banco Santander SA, Commerzbank AG and Banco Comercial Portugues SA.

Poland is currently involved in 11 investment treaty arbitration cases with claims totalling as much as 9 billion Zloty ($2.3 billion).

However, it should be stressed that the termination of these treaties will not come into effect immediately, as most of the BITs contain long periods of continued guaranteed of investment protection (sunset clauses) after they are cancelled. For example, the BIT between Poland and Germany has a 20 years sunset clause, while the BITs with France and The Netherlands guarantee investment protection for an additional 15 years. However Poland has also announced that it would seek to reduce or even cancel the “sunset clauses”, although it remains to be seen whether the other Contracting States would agree to that.

Nonetheless, the intention of the Polish Government is clear: no investment protection any longer for foreign investors. Indeed and as we have reported previously, such a step would also fit the efforts of the European Commission to force the EU Member States to terminate their BITs. Accordingly, investors must take appropriate measures before making new investments in Poland as well as consider restructuring existing investments.

Global Investment Protection (GIP) AG stands ready to advise investors for obtaining the most optimal level of investment protection.

Tax terrorism and investment treaties

A recently published overview by anti-investment arbitration NGOs provides a very illustrative summary of the tax terrorism which States increasingly apply against foreign investors with the aim of easily collecting money or otherwise expropriate the investor.

The Yukos v. Russia case in which Yukos was awarded US $50 billion for the expropriation caused by Russian tax measures is probably the best-known example.

Indeed, tax terrorism by which States use taxation as a tool to expropriate foreign investors is a widespread disease. Often, sudden extreme tax hikes are combined with retroactive effect – as has been the case in the solar energy disputes against for example Spain, Italy, the Czech Republic and Slovakia.

The recent developments in the on-going Vodafone v. India dispute illustrates the full impact of the tax terrorism.

 

Vodafone Group entered India in 2007 through a subsidiary based in the Netherlands, which acquired Hutchison Telecommunications International Ltd’s (HTIL) stake in Hutchison Essar Ltd (HEL) – the joint venture that held and operated telecom licences in India. This agreement gave Vodafone control over 67% of HEL and extinguished Hong Kong-based Hutchison’s rights of control in India, a deal that cost the world’s largest telecom company US $11.2 billion at the time.

The applicable Indian tax law at that time did only apply to purchases of assets of Indian companies based in India, but not to transactions of Indian assets outside India.

Nonetheless, the Indian tax authorities imposed a US $2.5 billion tax bill on Vodafone.

But in January 2012, the Indian Supreme Court passed the judgement in favour of Vodafone, saying that the Indian Income tax department had “no jurisdiction” to levy tax on overseas transaction between companies incorporated outside India.

Subsequently, the Indian Government changed its Income Tax Act retrospectively and made sure that any company, in similar circumstances, is not able to avoid taxes. In May 2012, Indian authorities confirmed that they were going to charge Vodafone about US $4.5 billion in tax and fines.

As a consequence thereof, in 2014 Vodafone started investment arbitration proceedings against India based on the Netherlands-India BIT. Currently, the arbitral tribunal is still being composed after India’s first choice of arbitrator – former Chief Justice of India R.C. Lahoti – declined his appointment.

However, when Prime Minister Modi came to power in May 2014, he advertised himself as a pro-investment man, who would liberalise foreign investment rules and stop harassing foreign investors. Thus, there was hope that the Vodafone dispute could simply be put to rest, in particular after the Indian Supreme Court clearly decided that the tax laws at that time could not be applied to Vodafone’s purchase of Hutchison.

Indeed, in another case related to the Hutchison purchase, Vodafone has prevailed in a US $690 million tax case before the Bombay High Court, marking the latest in a series of victories for international companies against the country’s revenue authorities.

Despite all its defeats before Indian courts, in early February 2016, Anil Sant, deputy commissioner of income tax, reminded Vodafone International Holdings BV Dutch to pay its tax dues. According to that letter, any overdue amounts, even from overseas companies, may be recovered “from any assets of the non-resident which are, or may at any time come, within India”. In other words, if Vodafone fails to pay the US $4.5 billion, its assets in India will be expropriated.

Apart from the fact that this letter is again an attempt to intimidate a foreign investor to pay taxes, which it simply is not obliged to pay, the timing of it is very interesting. Rather than awaiting the outcome of the investment arbitration dispute, India tries to force a “solution” of the matter.

It remains to be seen, how this dispute will evolve. But one thing is clear: States are increasingly using their tax powers to extract money from foreign investors in an easy way.

As the Yukos case and this one illustrate, investment treaties provide a last resort to fight tax terrorism of States.

GIP AG is a specialised consultancy firm, which stands ready to advice any investor on how to obtain the most optimal investment protection.