Turkey: Nationality Of The Investor In International Investment Arbitration

1. Definition of "Nationality"

It would be appropriate to consider the definition of the foreign investor before proceeding to define the nationality of an investor. Investor, in general, can be defined as a person or organization that puts money into financial schemes, property or other means of investment with the expectation of achieving a profit. Accordingly, a foreign investor can be defined as a real person investor who is the national of home state, companies with legal entities established in accordance with the legislations or partnerships created by investors from different states to make large-scale investments aiming to invest in a foreign country in order to make a profit.

All investment treaties provide definitions of whom they consider to be investors; but in international law there are no common principles applicable to the determination of particular investors. While there are no general principles, there are certain common trends. Regarding all investment treaties, in general, it can be concluded that the decisive criterion in the definition of investor is the "nationality".

The right to have a nationality and the right not to be arbitrarily deprived of the nationality is one of the main human rights by the Universal Declaration of Human Rights.¹ The term "nationality" is a politico-legal term denoting membership of a state and it is distinguished from nationality as a historico-biological term denoting membership of a nation.² International Court of Justice defines nationality as "a legal bond having as its basis a social fact of attachment, a genuine connection of existence, interests and sentiments, together with existence of reciprocal rights and duties".³ In addition, European Convention on Nationality describes nationality as the legal bond between a person and a state and does not indicate the person's ethnic origin.⁴

2. Nationality Requirement in Investment Arbitration

Investment treaties include substantive provisions that provide protection to foreign investors and private foreign investments. In addition, these treaties provide the foreign investor with direct recourse to international arbitration. Determining the nationality of an investor plays an important role in international investment arbitration; because this nationality is crucial in deciding an individual's or juridical person's right to initiate arbitral proceedings against a state. Additionally, the nationality requirement generally prevents any national from seeking treaty protection against its own home state.

The jurisdictional requirement ratione personae depends on the determination of the investor's nationality, and possession of the nationality of the host state can be a barrier to becoming a party to arbitral proceedings against that state.⁵ The reason for the nationality requirement is obvious; individuals' nationality accord them a particular position in international law. Nationality gives individuals the benefit of the additional right or privilege to refer an investment dispute to international arbitration without having to rely on state for protection or intervention.

Both ICSID and other investment treaties require that the individual or private investor, who have the advantage of being able to use dispute settlement mechanisms thanks to investment treaties, must be a national of another contracting state. To illustrate, according to Article 25(1) of ICSID convention "The jurisdiction of the Centre shall extend to any legal dispute arising directly out of an investment, between a Contracting State (or any constituent subdivision or agency of a Contracting State designated to the Centre by that State) and a national of another Contracting State, which the parties to the dispute consent in writing to submit to the Centre." Based on this article, for the competence of ICSID, the dispute shall be between a contracting state and a national of another contracting state; this is the jurisdictional requirement ratione personae.

Additionally, Article 25(2)(a) of the Convention defines national of another contracting state as: "Any natural person who had the nationality of the Contracting State other than the State party to the dispute on the date on which the parties consented to submit such dispute to conciliation or arbitration as well as on the date on which the request was registered pursuant to paragraph (3) of Article 28 or paragraph (3) of Article 36, but does not include any person who on either date also had the nationality of the Contracting State party to the dispute." According to this article, investors are required to meet a positive and a negative nationality requirement. To satisfy the positive requirement, investors are required to be nationals of a contracting state. To satisfy the negative requirement, investors must not have the nationality of the host state.

3. Nationality of the Investor who is a Natural Person

For natural persons, investment agreements generally base nationality exclusively on the law of the state of claimed nationality.⁶ Although investment treaties are governed by international law, international law will refer back to national law for the purpose of determining nationality. For example, according to Article 1(2)(a) of the BIT between Hungary and Turkey the term investor shall mean "natural persons having the nationality of a Contracting Party in accordance with its laws". This approach was also recognized by the Hague Convention on Nationality in 1930 in Article 1, which states that "It is for each State to determine under its own law who are its nationals. This law shall be recognized by other States in so far as it is consistent with international conventions, international custom, and the principles of law generally recognized with regard to nationality."⁷

On the other hand, although the Hague Convention on Nationality refers that each state has the right to determine under its own law who are its nationals, the Convention also states that this law shall be consistent with international conventions, international custom, and the principles of law generally recognized with regard to nationality. This permits of some control of excessive attributions by states of their nationality, by depriving them of much of their international effect. In literature, it is expressed that "Such control is needed since, although the grant of nationality is for each State to decide for itself in accordance with its own laws, the consequences as against other States of this unilateral act occur on the international plane and are to be determined by international law." This issue causes the concept of "effective nationality" to be brought to the agenda.

4. Nationality of the Investor who is a Legal (Juridical) Person

The nationality of a juridical person is more complicated than a natural person's, as in today's highly globalized world, companies operate in ways that can make it very difficult to determine their nationality. A foreign investor may exercise control of a company through holding the equity shares in the company, through managerial control or by having the necessary voting power to affect the decision-making process in the investment. Additionally, most international investments are channeled through complex structures consisting of companies incorporated in different jurisdictions and owned by nationals of different countries. Layers of shareholders, both natural and juridical persons themselves, operating from and in different countries make the conventional situation of a company established under the laws of a particular country and having its center of operations in the same country, more of a rarity than a common situation.⁸

Although determining the nationality is not easy, it is particularly important for the purpose of bringing international claims for protecting the company's assets and activities abroad. For juridical persons, investment agreements generally base nationality on a test like, (a) the place of constitution of juridical person in accordance with the law in force in the country of origin; (b) the place of incorporation or where the registered office is of juridical person; (c) the country of the corporate seat, for example, where the headquarters or the place of administration is, or (d) less frequently, the country of control, to determine the nationality of a juridical person.

These listed criteria specified above can be used alone, in combination or as alternatives. But there is no single test used by all treaties to define the link required between a juridical person that is seeking protection under the treaty and the contracting state. In case law, tribunals in investment arbitration usually apply the test of incorporation or seat rather than control, when determining the nationality of a juridical person, unless the test of control is provided for in the investment agreement. Accordingly, it is the general practice in investment agreements to specifically define the objective criteria which make a juridical person a national or investor of a party for purposes of the agreement.

The ICSID Convention regulates the nationality requirements of juridical persons for the jurisdiction of the Centre. According to the Convention, a juridical person must be a national of a Contracting state other than the state party to the dispute; so, as natural persons, juridical persons are also required to meet a positive and a negative nationality requirement. To satisfy the positive requirement, juridical person investors are required to be nationals of a contracting state; to satisfy the negative requirement, they must not have the nationality of the host state.

The Convention does not directly define the concept of "juridical person", instead it defines the "national of another contracting state" for juridical persons; according to Article 25(2)(b) juridical persons will qualify as nationals of contracting states through their "place of incorporation" or "seat of business".

ICSID tribunals have consistently adopted the test of "place of incorporation" or "seat" in determining the nationality of a corporation, so the case law also reflects a reluctance to adopt the control test in defining the nationality of a juridical person outside the narrowly defined exception in Article 25(2)(b).

A corporation may also be shared by nationals of several states. In this case, if all possible nationalities link the juridical person to a contracting state then no problem will arise. The situation is more complicated if one of the possible nationalities of the corporation is a non-contracting state. Such a situation will not directly restrain the jurisdiction of the Centre, and the decisive test of "place of incorporation" or "seat" will be applied for determination of the nationality.

The purpose of the Convention is the settlement of investment disputes between states and foreign investors; but many host states require that foreign investors operate through locally incorporated companies, so the consequence of incorporating under the host state's law is that these companies have the nationality of the host state. A juridical person may, however, possess the host state's nationality and still qualify as a national of another contracting state under an exception contained in Article 25(2)(b) : "any juridical person which had the nationality of the Contracting State party to the dispute on that date and which, because of foreign control, the parties have agreed should be treated as a national of another Contracting State for the purposes of this Convention." In principle, such companies would be excluded from jurisdiction of the Convention since the Convention requires that the nationality of an investor should be that of a contracting state other than the state party to the dispute. However, through the drafting period, drafters of the Convention realized that an important portion of foreign investments could thus be excluded from the Centre's jurisdiction; so, they have included this provision among "national of another contracting state".

Article 25(2)(b) enables access to ICSID for foreign investors that operate through locally incorporated companies. For the application, the Convention requires two elements: First there must be an agreement with the host state that reflects its undertaking to treat the locally incorporated company as foreign. This agreement of consent can be in any mean as there are no formal requirements for such an agreement. For example, in case law, from the mere existence of an ICSID clause, tribunals have concluded that there is an agreement between parties to treat the locally incorporated company as a foreign national. Although such an agreement will carry much weight, it cannot create a nationality that does not exist, because of this reason, the existence of such an agreement will not prevent the tribunal from examining the compliance with nationality requirement. Secondly, as an addition to this requirement, the objective element of foreign control of the juridical person must be present. As expressed in the Vacuum Salt v. Ghana case, shareholding is one of the elements showing the foreign identity; but in addition to shareholding, indirect control, voting powers or managerial control were taken into account by ICSID tribunals.

With the emergence of "shell" and "mailbox" companies, investment agreements started to add new conditions in order to avoid granting protection to such companies. For example, the EU-Canada Comprehensive Economic and Trade Agreement (CETA) requires that an enterprise of a party shall have substantive or substantial business activities. On the other hand, recent decisions confirm that investments only indirectly owned by requisite nationals still satisfy the nationality requirements.

5. Critical Dates in Determination of the Nationality

Most of the investment treaties explicitly set out the critical dates on which an investor claiming treaty protection must possess the requisite nationality. Starting with ICSID Convention, which contains special regulations about the dates in determination of the nationality of an investor. According to Article 25(2)(a) of the Convention, the nationality requirements for a natural person have to be satisfied at two separate dates. An individual investor has to be a national of a contracting state at the time the parties' consent to submit to the Centre's jurisdiction, and also on the date the request for arbitration or conciliation is registered by the Centre. In addition, the individual investor must not be a national of the host state on these two dates. The individual investor's possession of other nationalities is irrelevant in the interim period between the date of consent and the date of registration. The Convention does not speak of a requirement for the investor to continuously hold its nationality between these two dates.

By contrast, the nationality requirement that the juridical person has to satisfy only applies on the date of consent; according to Article 25(2)(b) the juridical person must have the nationality of a contracting state rather than the host state only on the date the parties consented to submit to the Centre's jurisdiction. The double test, which is valid for natural persons, does not apply for juridical persons. Additionally, any change in the juridical persons' nationality, after the date of consent, will not affect the jurisdiction of the Centre, so there is no requirement of continuous nationality.

Although not written as clear as the ICSID Convention, other investment treaties often set out critical dates for nationality requirement as well. For example, according to Article 1(2) of the BIT between the Hungary and Turkey, the term investor shall mean "Any natural or legal person of one Contracting Party that has made an investment in the territory of the other Contracting Party". It can be concluded from this statement that, an investor invoking the relevant BIT as a foreign national is only eligible for treaty protection if it possessed the nationality on two critical dates. The first one is when the investment was being made, as the BIT clearly indicates that the investment must be made by a foreign investor; and the second is when the claim for treaty protection is submitted to arbitration.

This issue was also discussed in case law. In the Serafin Garcia Armas and Karina Garcia Gruber v. Venezuela case, the Garcias who are dual Spanish and Venezuelan nationals, acquired their shares in two companies in 2001, but their Spanish citizenships in 2003 and 2004. The alleged expropriation of the companies took place in 2010. The Garcias initiated UNCITRAL arbitration proceedings in October of 2012, relying on the Spain-Venezuela BIT.

In 2014 jurisdictional decision the Tribunal upheld jurisdiction over the dispute. In particular, the tribunal found that it was irrelevant whether or not Garcias had Spanish nationality when they invested; only their nationalities at the time of the alleged breach and at the time of the filing of the arbitration were relevant for jurisdictional purposes.

But, in 2017, the Paris Court of Appeal partially set aside the jurisdictional award, noting that the Tribunal had failed to examine the claimants' nationalities at the date of the investments. The remaining elements of the jurisdictional award remained intact. This decision was also overturned in 2019 by a ruling from the French Supreme Court, which held that the Court of Appeal had not drawn all the necessary legal consequences from its own reasoning.

Finally, in June 2020, Court of Appeal annulled the jurisdictional award in its entirety. The court found that the ordinary meaning of the underlying Spain-Venezuela BIT required that only investments made in one state by individuals who held the nationality of the other contracting state at the time of the investment could benefit from the treaty's protection.

Footnotes