The Netherlands: A Gateway to ‘Treaty Shopping’ for Investment Protection

Many transnational companies choose the Netherlands as a base for their global trade and investment operations, at least partly because of the country’s favourable tax regime that facilitates corporate tax avoidance strategies. A new report by SOMO highlights the, until now, unexplored role that Dutch investment protection policies play in the establishment decisions of multinational corporations.

Going Dutch on investment protection

The Netherlands maintains one of the most generous networks of BITs in the world. Characteristic of Dutch BITs, some 95 of which are currently in force, is the use of overly wide legal phrasing and definitions. Dutch BITs ignore recent and growing insights that far-reaching investment protection invites ‘treaty shopping,’ – i.e. routing investments through third countries to acquire the protection of investment treaties that investors would not, otherwise, have in their home state jurisdiction. Where other countries have begun reviewing and updating their BITs, the Netherlands continues to pride themselves on their generous investment protections, which are vaguely phrased and ill-defined. The Netherlands even strongly advocates in the EU that their standards become the yardstick for the European Union’s future common investment policy. The Dutch government holds that its establishment incentives help enhance its business climate and attract foreign investors which provide a substantial impetus for economic growth and employment in the Netherlands.

However, SOMO’s new report raises concerns over the fact that Dutch corporate tax and investment policy has contributed to attracting some 20,000 mailbox companies. While these shell companies have primarily incorporated in the Netherlands to take advantage of tax avoidance opportunities, many have also taken advantage of the broad investment protections offered by Dutch BITs to sue not only third countries, but on occasion even their own home countries under the investor-to-state dispute settlement clauses. This perverse use of the Dutch BIT network is not considered a problem by the Dutch government. Indeed, in a 2011 parliamentary debate on BITs and free trade agreements, the Dutch trade secretary, Mr. Henk Bleker, confirmed that the provisions of the Dutch BITs are meant to apply to each and every investor registered in the Netherlands, including mere mailbox companies.[3]

Dutch arbitration cases reviewed

We researched the 41 known investment arbitration cases launched under Dutch BITs. Reflecting the extensive Dutch BIT network, the 41 cases account for a full 10 percent of the roughly 400 known investment cases world-wide. Such cases are mostly conducted behind closed doors. Information on rulings is only rarely made public, and cases may exist which have never come to public light.[4]

Our research shows that the majority (29) of the investors that have sought arbitration under a Dutch investment treaty are foreign (i.e. the ultimate or controlling parent is not based in the Netherlands), while 25 of these claimants are indeed shell companies that appear to have set up shop in the jurisdiction of the Netherlands with the sole objective of availing themselves of the generous Dutch tax breaks and investment protections. The Dutch BIT definitions set very limited requirements for ‘nationals’ and ‘investors.’ This makes setting up ‘special purpose vehicles’ by third parties with the express purpose of using Dutch BIT protections to sue sovereign states a walk in the park. According to SOMO’s research, the investor-to-state dispute settlement mechanisms incorporated in Dutch BITs have already led to claims of over US$100 billion from multinational corporations suing host country governments for alleged damages to the profitability of their investments. Awards can run into hundreds of millions of dollars and thus seriously impact public budgets.

A high-risk game

SOMO notes that such crippling awards magnify the looming threat of companies contesting new legislation – even when clearly brought in for legitimate public policy purposes – and risks leading to what is known as ‘regulatory chill.’ Developing countries with their more limited budgets are particularly vulnerable, but, in the face of the growing power of transnational corporations, even developed nations cannot continue to consider themselves immune. Indeed, developed countries, including the Netherlands and other EU member states, are increasingly destinations for outward investment from emerging economies such as India, China and Brazil. While the Netherlands continues to beat the drum for ‘high levels of investment protection’ through broad and vaguely defined investor guarantees, there seems to be little to no awareness that these provisions can also be turned against the country itself. That the Netherlands has so far not been at the receiving end of an investment arbitration case does not guarantee that the country will be spared such claims in the future.

Imbalances ignored

Since the 1990s, a growing perception of the imbalances in international investment law between the interests of investment and investors on the one hand and the regulatory power of host states and non-economic (public) policy objectives on the other, has prompted the development of a new generation of investment protection agreements. These BITs tend to address a range of issues beyond strictly economic concerns, to include, among others, the protection of health, safety, the environment and the promotion of internationally recognised labour rights. They include much narrower and precise definitions of investment, in order to prevent abusive practices in which assets are covered that are not intended by the parties involved, as well as more transparent investor-to-state dispute settlement procedures. This new approach gained momentum when major capital-exporting countries such as the United States and Canada began being sued by foreign investors under their own investment agreements. The risks associated with BIT protection and investment claims have prompted South Africa to review all its BITs, while Brazil, the largest recipient of foreign direct investment in South America, has never entered into a BIT.

The increased attention to the risks associated with BITs that safeguard investment protections but fail to mention the responsibility of governments to also protect the public interest has largely bypassed the Netherlands. The country further rejects all responsibility for the adverse impacts of the treaty shopping practices facilitated by its broad-based BITs approach.

Although the Netherlands adopted a new Model BIT in 2004, the template does not include any attempts at narrowing down the definition of investment, but continues to rely on a broad and asset-based criterion. Nor does the model demand substantial presence of investors in the country in order to qualify for investment protection. There is little to no mention of investor obligations and the wording on sustainable development and social and environmental protections is confined to the preamble, which is non- binding. The Dutch model BIT thus protects investments irrespective of whether they are significant, lasting, contribute to the host country’s economic development or are made in accordance with the host country’s laws. With only a handful of exceptions, virtually all BITs concluded by the Netherlands follow this broad-based approach.

In the EU, where the 2009 Lisbon Treaty requires the development of a common European investment policy, the Netherlands has proved itself averse to any rebalancing of investor rights and obligations. At the European level, as an active member of the so-called Friends of Investment group, the Netherlands has helped push through mandates for the negotiation by the European Commission of investment chapters in EU FTAs that continue to uphold the ‘highest possible level of investment protection’ [5]– ignoring the wish of the European Parliament which has requested that new EU investment agreements also address investor obligations, such as compliance with human rights and anti-corruption standards.

Tribunals: ‘tied to treaties’

Some arbitration tribunals have shown concern over treaty shopping and the dangers that investment claims can pose to public policy space.[6] At the same time, however, they have conceded that while BITs are being used in a way that may be perceived as morally doubtful, they also consider themselves bound by the wide definitions that the signatories to BITs have agreed to.

In the case of Saluka Investment BV v. the Czech Republic the tribunal expressed “some sympathy for the argument that a company which has no real connection with a State party to a BIT, and which is in reality a mere shell company controlled by another company which is not constituted under the laws of that State, should not be entitled to invoke the provisions of that treaty.” The tribunal worried that “Such a possibility lends itself to abuses of the arbitral procedure, and to practices of ‘treaty shopping’ which can share many of the disadvantages of the widely criticized practice of ‘forum shopping’.”[7] Nonetheless, the tribunal remained of the opinion that the provisions of the treaty should guide its decision, and that it could not impose a narrower definition of “investor” than that which the state parties to the agreement had concluded.[8]

In Mobil v. Venezuela – a dispute that centred on the nationalisation of oil and gas projects by the state of Venezuela – the tribunal noted that Mobil restructured its investments through the Netherlands with the sole purpose of gaining access to ICSID arbitration[9] to contest Venezuela’s new energy policy through the Netherlands-Venezuela BIT.[10] The tribunal concluded that this was “a perfectly legitimate goal as far as it concerned future disputes.”[11] However, the tribunal took exception to this approach with regard to pre-existing disputes, stating that “to restructure investments only in order to gain jurisdiction under a BIT for such disputes would constitute […] an abusive manipulation of the system of international investment protection under the ICSID Convention and the BITs.”[12]

Push for policy change

The analysis of the Dutch BIT cases underlines that a rebalancing of the investment protection framework is urgently required. Based on the findings from our research, we would recommend, among other things, a substantial narrowing of legal phrasing and definitions. We would like to see enhanced recognition, not only in the Netherlands, but among all EU member states, that investor-state dispute settlement based on broad-based BIT definitions can pose a danger to policy space and the safeguarding of public goods and interests, and that this constitutes a risk no longer limited to developing countries, but, increasingly for the developed world.

Concretely, this would require the Netherlands to narrow the definitions of “investor” and “investment” used its BIT texts. Legal wording that extends protections to indirectly controlled investors and speculative forms of investment should be avoided. In recognition of the problems associated with treaty shopping, Dutch BITs would benefit from the incorporation of a denial of benefits clause, which allows contracting parties to deny treaty protection to companies that are controlled by investors of an entity that is not party to the treaty, and that have no substantial business activity in the territory of the party under whose laws they are constituted.

Meanwhile, signatories to Dutch BITs need to be aware that investors from around the globe can sue them through Dutch BITs. Even if a state has not negotiated an investment treaty with, say, the United States, a US investors can still sue them by structuring their investment through a country that does. It also means that if a state has negotiated treaties that safeguard policy space and public interests alongside a Dutch treaty, investors, by channelling the investment through the Netherlands, can sue the state under that BIT instead of the BITs concluded with their ‘actual’ home state.

Our report hopes to provide policy-makers in the Netherlands and the EU with new insights into why it is imperative that they review their investment protection frameworks – not just from a moral responsibility towards the host countries that are destinations for their outward investors, but also from a more self-interested perspective. For the Netherlands, the economic gains from the presence of mailbox companies are very limited, while allowing such companies to benefit from Dutch treaties could stress relations with host states sued by these companies. In addition, developed countries like the Netherlands would be highly unwise to assume that they will never have to face financially debilitating arbitration cases, even if they have to date never been at the receiving end of an investment claim. They are vulnerable under the BITs clauses they themselves have negotiated in a different time, but which, in our rapidly changing global context, lay them open to investment claims from emerging economic powers such as China and India that are increasingly engaging in outward investment.

Indeed, sometimes the threat comes from even closer to home. Perhaps the case of Swedish energy giant Vattenfall, which is threatening to file a billion-euro law suit with ICSID against the German government over its political decision to withdraw from nuclear energy,[13] will open policymakers’ eyes. Meanwhile, we hope to provide additional ammunition to help fuel the pressing debate of what should become the norm for the EU’s future common investment policy.

Authors: Roos van Os is a researcher at the Centre for Research on Multinational Corporations (SOMO). Roeline Knottnerus is an independent trade and investment policy consultant for civil society organisations.

[1] F. Weyzig and M. van Dijk, The Global Problem of Tax Havens: The Case of the Netherlands, SOMO, January 2007. At: https://somo.nl/publications-en/Publication_3464/

[2]R. van Os and R. Knottnerus, ‘Dutch Bilateral Investment Treaties – A gateway to ‘treaty shopping’ for investment protection by multinational companies’, October 2011. Available at: https://somo.nl/publications-en/Publication_3708

[3] Verslag van een algemeen overleg. Vastgesteld 24 mei 201: <https://zoek.officielebekendmakingen.nl/kst-2150102062.html?zoekcriteria=%3Fzkt%3DEenvoudig%26vrt%3D171&resultIndex=10&sorttype=1&sortorder=4> Accessed 24 June 2011.

[4] As the number of investment protection agreements began to increase, so did the number of arbitrations. According to UNCTAD figures, the number of investor-to-state disputes grew from 6 known cases in 1995 to 390 by the end of 2010. UNCTAD, Latest Developments in investor-state dispute settlement (2011) IIA Issue Note, No. 1.

[5] See the text of the negotiating mandates Text of the Mandates approved by the General Affairs Council for investment protection chapters in free trade agreements of the EU with Canada, India and Singapore, www. http://www.s2bnetwork.org/themes/eu-investment-policy/eu-documents/text-of-the-mandates.html

[6] It must be noted that tribunals differ widely in their opinions. Based on their case rulings, perceptions are that even though on occasion they may take a more progressive stance, on the whole they tend to look for the most expansive interpretations of BIT provisions.

[7] Saluka Investments B.V. v. the Czech Republic, UNCITRAL Partial Award, 17 March 2006, paras. 240-241

[8] Ibid.

[9] ICSID is an autonomous international institution established under the Convention on the Settlement of Investment Disputes between States and Nationals of Other States (the ICSID or the Washington Convention) with over one hundred and forty member States. ICSID is considered to be the leading international arbitration institution devoted to investor-State dispute settlement.

[10] Mobil Corporation, Venezuela Holdings B.V.; Mobil Cerro Negro Holdings, Ltd.; Mobil Venezolana de Petróleos Holdings, Inc.; Mobil Cerro Negro, Ltd.; and Mobil Venezolana de Petróleos, Inc. v. Bolivarian Republic of Venezuela, Decision on Jurisdiction, 10 June 2010, ICSID Case No. ARB/07/27, para. 190.

[11]Para 204 and see also M. Skinner, C.A. Miles and S. Luttrell, “Access and advantage in investor-state arbitration: The law and practice of treaty shopping” (2010) 3 JWELB 260

[12]Para 205

[13] ‘Vattenfall vs. Germany – Nuclear Phase-Out Faces Billion-Euro Lawsuit’, Der Spiegel Online, 2 November 2011. At: http://www.spiegel.de/international/germany/0,1518,795466,00.html (accessed: 23 November 2011).