News & Insights

International Investment Agreements (IIAs): Protecting Investments from Nationalization

International Investment Agreements (IIAs) are pivotal tools for protecting investments in politically unstable or autocratic countries. These agreements, such as Bilateral Investment Treaties (BITs) and International Investment Agreements (IAAs), offer the security of international arbitration in case of nationalization or expropriation.

In General

Foreign Investments in politically unstable countries or those with autocratic political systems can pose a number of risks, including nationalization or expropriation risk. Investors can mitigate these risks through bi-lateral or multilateral treaties which provide for international arbitration in case of nationalization or expropriation.

These agreements typically take the form of Bilateral Investment Treaties (BITs) and International Investment Agreements (IAAs). More recently, investment protections have been included in broader Free Trade Agreements (FTAs). There are also multilateral agreements which offer similar investment protection, such as the US Mexico Canada Agreement (USMCA), which is the successor agreement to the North American Free Trade Agreement (NAFTA), the Transpacific Partnership Agreement (TPA), the ASEAN Comprehensive Investment Agreement, the Energy Charter Treaty, etc.

Expropriation or Nationalization

These investment agreements typically provide that a State may not nationalize or expropriate investments, directly or indirectly, or take measures equivalent thereto, except for a public purpose, on a non-discriminatory basis, in accordance with due process of law, and must compensate the Investor at the fair market value of the investment immediately before the expropriation.

International Arbitration

One of the principal benefits of these investment agreements is that they provide investors with recourse to international arbitration in a neutral forum outside of the host State, where a fair trial may not be possible. These investment agreements typically allow investor claims to be brought under the ICSID Convention, under the UNCITRAL Rules, or other arbitral rules.

Selecting the Jurisdiction

Prior to making investments in countries where there is a risk of nationalization or expropriation, investors should consider the available international investment agreements with the host State, as well as the body of relevant jurisprudence.

Jurisdictions with extensive networks of investment agreements include the Luxembourg, the Netherlands, Spain, Switzerland, the United Kingdom, and the United States. These jurisdictions also have broad networks of Double Tax Treaties, which may be useful where investments are made in jurisdictions that impose withholding tax on distributions of dividends, interest payments, etc. Ideally, the holding company should benefit from both an investment agreement and a Double Tax Treaty.

Qualified Investor

Depending on the terms of the investment agreement in question, the Claimant seeking protection under the investment agreement must satisfy the definition of “Investor” in the investment agreement, and will have the burden of proof. This may be a simple matter of showing that the Investor is a natural person resident in a contracting State or a corporation incorporated in a contracting State. Some agreements define an Investor as an Enterprise, which in turn may include corporations, partnerships, joint ventures, associations, trusts, foundations, etc., that are incorporated or organized under the laws of the contracting State. However, some investment agreements include, in the definition of Investor or Enterprise, the requirement to carry on “substantial business activities” in a contracting State, which operates as a quasi-Denial of Benefits clause.

The term Investment is typically broadly defined to include any type of asset, including equity or debt investments, etc., or contractual rights, which must be “owned or controlled” directly or indirectly by the Investor.

Denial of Benefits Clauses

Many investment agreements, especially the more modern ones, contain Denial of Benefits (DOB) clauses, the equivalent of anti-abuse rules, which typically deny protection to Investors under certain circumstances. Generally, the party seeking to invoke DOB clauses and deny benefits to an Investor has the burden of proof. The language of these DOB clauses can vary significantly, depending on the type of investment agreement. Arbitration tribunals have typically construed DOB clauses narrowly, and have not sought to introduce restrictions not agreed to by the contracting States, or to introduce DOB clauses into investment agreements where none exist.

The Denial of Benefits clauses in many modern agreements require two conditions: that there are no “substantial business activities” in the Investor’s place of incorporation, which essentially an anti-treaty shopping mechanism aimed at disqualifying shell companies; and, that the Investor is “owned or controlled” by nationals of a non-Party or the host State, designed to prevent non-Nationals of a contracting State from benefiting from investment protection under the agreement. Both conditions must be satisfied. These terms may not necessarily be defined in investment agreements.

The Use of Trusts

Properly constituted and administered discretionary trusts may be useful in establishing that the Investor is “ownership or control” by a National of a contracting State. Arbitration tribunals have held that where the Investor is owned by a trust that is established in a contracting State, that is valid and effective under the law governing such trust, that vests ownership and control over the Investor in the trustees, that the trustees have the relevant powers and discretions, that any powers held by trust protectors are fiduciary in nature, and that neither the settlor nor the beneficiaries exercise control over the trust, then the trust will be deemed to “own or control” the Investor for purposes of DOB clauses.


In the dynamic world of global investments, International Investment Agreements stand as indispensable safeguards. These agreements ensure a neutral ground for arbitration, upholding justice where local courts may falter. Navigating international business successfully demands a firm grasp of International Investment Agreements, making them a cornerstone for securing investments in an uncertain global landscape.

Share it on…

International Investment Agreements

CISA Trust: