CYIL vol. 10 (2019)

CYIL 10 ȍ2019Ȏ IN SEARCH OF THE PERFECT DENIAL OF BENEFITS CLAUSE Encouraging foreign investment into the territory of the host state has long been perceived as the primary justification of investment agreements. 3 The flow of foreign capital into the host state economy is the benefit that states expect in exchange for voluntary limitation of their sovereign powers, which manifests itself most starkly in the consent to be subject to arbitration by investment tribunals that are granted the power to review certain state acts. If we return to the presented example, the question is obvious: how does the investment of WCV benefit to the Czech economy if the only capital that is “brought” is already in the hands of a Czech national? Why should the Czech Republic face an investment arbitration claim whose amount reaches 1 billion Czech crowns in exchange for no contribution to its economy? The described situation is a typical example of treaty shopping, a strategically planned change of corporate structure of the companies in order to gain benefits of an investment treaty that would otherwise not be accessible to the investor. It is relatively easy to “treaty shop” for legal persons, because the mere fact of incorporation in a foreign jurisdiction usually suffices to gain the status of the protected investor and to utilise the benefits of local investment treaties. One of the means to prevent treaty shopping is to adopt the denial of benefits clause into investment treaties. In Dolzer’s and Schreuer’s understanding, “ [u] nder such a clause the states reserve the right to deny the benefits of the treaty to a company that does not have an economic connection to the state on whose nationality it relies. The economic connection would consist in control by nationals of the state of nationality or in substantial business activities in that state.” 4 However, the deficiencies in wording of the denial of benefits clauses render them useless in some cases. Based on an analysis of the problems encountered when applying the clauses, this paper will examine investment treaties concluded in the last five years with one simple question in mind: have the states tried to tackle the ambiguous questions and have they adjusted their drafting practices accordingly? 1. Denial of benefits clauses Denial of benefits clauses may be very powerful tools in the hands of host states, once they are well drafted and the procedure for their application is properly followed. An objection based on the denial of benefit clause has indeed led tribunals to dismiss their jurisdiction in cases brought by purpose letterbox companies, for instance by the Pac Rim or Rurelec tribunals. Notwithstanding, not even one tenth of the concluded international investment agreements (“ IIAs ”) contain such provision. 5 The typical denial of benefits clause in an investment treaty might be construed as follows: “Each Party reserves the right to deny to any company the advantages of this Treaty if nationals of any third country control such company and, in the case of a company of the other Party, that company has no substantial business activities in the territory of the other Party or is controlled by 3 VAN HARTEN, G. Five Justifications for Investment Treaties: A Critical Discussion. In: Trade, Law and Development 2.1 , 2010. p. 19-58, p. 28. 4 DOLZER, R.; SCHREUER, Ch. Principles of international investment law . Second edition. Oxford, United Kingdom: Oxford University Press, 2012. ISBN 978-0199651795. p. 55. 5 215 out of 2571 mapped treaties according to the selected search on https://investmentpolicyhub.unctad.org/.

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