Some investment treaties can protect investors from certain taxation measures despite tax carve-outs.
As we have written before, Nordic investors are not always aware that they may have significant rights against states based on treaties that these companies have not themselves signed – investment treaties. In brief, investment treaties are agreements between two or more states which guarantee certain protections for foreign investors investing in the host state.
A core function of investment treaties is to strengthen investment protection, which can be defined as the protection of investors’ rights. These rights typically provide protection against measures such as discrimination, state expropriation or nationalisation, and require fair and equal treatment. Investment treaties usually also include a dispute resolution clause that requires the parties to resolve any disputes which may arise through arbitration.
At times, a host state’s taxation measure may also be disputed under these treaties. While the right to tax is often considered a core attribute of state sovereignty, states may limit their taxation powers by concluding investment treaties which affect these powers. In the past, investors have challenged a range of taxation measures in arbitration, and some cases have led to significant awards.
The rise of tax disputes and tax carve-outs
During the past few decades, the number of investment disputes relating to taxation have been consistently on the rise. At the same time, states have increasingly included tax carve-outs in investment treaties to exclude tax measures from the scope of the treaties. However, many of the investment treaties which are currently in force do not contain such provisions.
Nevertheless, tax carve-outs seldom fully prevent tax-related claims. Treaties including a general carve-out may, for instance, include a provision explicitly allowing certain claims relating to taxation measures (“tax claw-back”), enabling investors to submit claims for alleged breaches of provisions relating to certain taxation measures. Further, tribunals may interpret tax-carve outs in a narrow sense, e.g. by applying a good faith requirement to determine if a measure qualifies as a taxation measure under the carve-out.
In that same vein, the recently imposed tariffs on international trade could also give rise to investment disputes, if the tariffs violate the protections granted to investors of certain nationalities under the relevant investment treaties.
Key takeaways for companies
Therefore, companies should be mindful of the protection granted to them under any relevant treaties between their home state and any state into which such company may have made an investment that is now being affected by adverse taxes, tariffs or other new developments which impact the value of the investments in question. It is worthwhile for any company who holds such investments to examine what these rights may be, and how such companies could exercise them.
Our team is happy to discuss any questions you may have regarding tax-related claims in investment treaty disputes.
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