Feeds:
Posts
Comments

Posts Tagged ‘Dutch Entities’

side-img_umbrella-264x214Dutch bilateral investment protection treaties (BITs) make investments in politically unstable jurisdictions less risky and therefore more attractive. In the event of a deprivation of your investment, you have access to international arbitration and enforceable compensation, if you have directly or indirectly structured the investment through a Dutch entity.

It is widely accepted that every board of directors must have regard and a responsibility to determine the nature and extent of the strategic risk it is willing to take in achieving strategic objectives. To fulfill this responsibility, every board of directors must maintain sound risk management. Seeking maximum investment protection is crucial for reducing the corporate risk of your company.

INTRODUCTION

In recent times, the politics and the changes in policies around the globe has levied much focus on Dutch companies which are seen to be set up solely for tax purposes. It is a well-known fact that the Netherlands provides a favorable and politically stable onshore environment to significantly reduce corporate tax leakage. Less well-known, but potentially even more important, is that the Netherlands has established an extensive network of BITs with almost 100 countries that protect investments that are made in politically challenging countries.

The recent turmoil surrounding Russia has made foreign based investors holding assets and investments in Russia edgy fearing deprivation of investments or unfair tax treatment. As we will discuss in this article, the Dutch-Russia BIT in force since 1991 offers a cost-efficient and easy solution to insulate foreign investor assets in Russia from political risk, including inter alia nationalization and tax discrimination against foreign investors.

HOW BITS WORK?

BITs are international agreements entered between two sovereign states to protect investments made by investors from one contracting state in the territory of the other contracting state. Dutch BITs are known to provide the “gold standard” for BITs in the world and are considered to offer the best protection for foreign investment. They generally include the following substantive obligations from each contracting state towards investors from the other contracting state:

  • Fair and equitable treatment
  • Protection from expropriation without compensation
  • Protection from treatment less favourable that that offered to other foreigners or their own nationals
  • Provision of full protection and security to investments

Which investments are covered by a BIT depends on the definition of investment in a particular BIT. Typically, Dutch BITs provide a wide definition of “investments” by covering all kinds of investments such as shares, bonds, movable and immovable properties.

To avail protection, investors must have the nationality of the state signatory to qualify. For example, subsidiaries of US investors locally incorporated in the Netherlands generally can invoke the applicable Dutch BIT. Consequently, protection from a Dutch BIT can usually be realized by interposing a Dutch intermediate holding company between the US parent and the investment or subsidiary. Dutch entities are easy to maintain and cost-efficient with limited financial disclosure obligations. In principle, there are no substance requirements such as maintaining a physical presence in the Netherlands to qualify under Dutch BITs. Moreover, Dutch BITs typically contain a clause whereby existing investments continue to be protected for a certain period of time even if one of the signatory states decides to terminate the BIT.

ENFORCEMENT THROUGH INTERNATIONAL ARBITRATION

In the event of a breach of the BIT, investors have direct access to international arbitration leading to a judgment that is directly enforceable against a sovereign state. To initiate arbitration proceedings, the deprived investor is not dependent of the cooperation of the involved signatory state. Often, initiating proceedings will make the state in breach receptive to settling the arisen dispute.

LEADING EXAMPLES

There are a number of cases involving Netherlands BITs, which confirm the bias towards deprived investors and have led to significant and diverse levels of compensation for such investors.

Recent high profile examples include the well-publicized Yukos case against Russia in which the shareholders were awarded compensation in excess of USD 50bn, the Conoco-Phillips award against Venezuela and the multiple Argentinean sovereign debt default cases.

WHAT ARE THE STEPS THAT I MUST TAKE TO QUALIFY FOR MAXIMUM PROTECTION OF MY INVESTMENT?

Amend your existing corporate structure to include Dutch entities that provide access to the Dutch BIT. Dutch entities that are set up to utilize BIT does need to meet substance requirements; however, it is required if you plan on using the entity for tax purposes as well.

We can assist you with the following steps to be taken:

  • Confirmation of no negative tax consequences by interposing Dutch entities
  • Audit and accounting services
  • Legal confirmation that your investment falls within the scope of NL-Russia BIT
  • Annual tax filings and tax compliance
  • Annual BIT compliance assessment of structure
  • Legal advice regarding all aspects of arbitration proceedings

CONCLUSION

Dutch BITs provide the global “gold standard” for investment protection and have a wide definition of “investment” and “investor,” in addition to providing an extensive network of almost 100 treaties including emerging economies. Without Dutch BITs and the level of protection offered, investments into certain jurisdictions would not be possible. Interposing a Dutch intermediate holding company for your Russian assets and investments will safeguard your investment against political risk and will assist your board of directors in its obligation to maintain adequate risk controls.

GUEST BLOGGER: Corney Versteden, LLM, Senior Tax Partner, HLB Van Daal & Partners

Read Full Post »