- Before investing in China Australian companies in China should see if they can bring themselves within nationality requirements under Bilateral Investment Treaties to increase the protection for their investments.
By virtue of China's centralised government, foreign firms investing in China have to navigate through often unfamiliar layers of Government regulation. In fact, in some sectors of the Chinese economy, including construction and commodities investors will often operate in partnership with Chinese Government owned corporations. For these reasons, companies seeking to take advantage of investment opportunities in China should consider how best to maximise the protections offered by China's 107 Bilateral Investment Treaties (BIT).
In basic terms, a BIT is an international treaty between two national governments which contains reciprocal commitments about how their government agencies will treat investors and investments from the other state. These treaties typically offer investor protection against:
- expropriation and nationalisation (ie. where a host state assumes ownership or control of an asset or substantially deprives an investor of the value of their investment);
- discrimination as between domestic and foreign investors (ie. national treatment);
- discrimination between investors of a one nationality as compared with investors of another foreign nationality (ie. most favoured nation); and
- fair and equitable treatment, which includes expectations of due process and transparency.
While important these protections are virtually worthless unless they can be enforced through arbitration.
China's reticence about enforcement provisions
The Chinese Government has generally been reluctant to submit to the jurisdiction of foreign arbitral tribunals. Although China has signed more than 107 BITs, the vast majority of these contain significant restrictions on the submission of disputes to arbitration.
Further, when China acceded to the Convention on the Settlement of Investment Disputes between States and Nationals of Other States ("ICSID Convention") in 1993, it did so with the following reservation:
An equivalent limitation is found in many of China's BITs. For example, the Australia-China BIT, which the parties entered into in 1998, does not contain a general submission to arbitration; rather, Article 12.2(b) provides:
The protections offered by this provision would only be significant if the Chinese Government were to nationalise the assets of an Australian company. Given China's commitment to economic growth and international engagement, this is extremely unlikely. The interests of foreign companies investing in China are more likely to be curtailed by breaches of other protections offered by China's BITs.
For example, the fair and equitable treatment standard would offer protection in circumstances where a Chinese Government agency fails to accord a foreign investor with the requisite standards of due process.
Similarly, the national treatment standard may serve to protect a foreign investment if the Chinese Government were to apply its tax laws or licensing regimes in a manner that is different between domestic and foreign investors who are operating similar businesses in similar Chinese markets.
China's BITs that contain a general submission to arbitration
Only a handful of China's BITs contain a submission to arbitration where breaches of these types of protection can be enforced. For example, Article VII of the UK-China BIT states that:
- An international arbitrator appointed by the parties to the dispute; or
- An ad hoc arbitral tribunal to be appointed under a special agreement between the parties to the dispute; or
- An ad hoc arbitral tribunal established under the Arbitration Rules of the United Nations Commission on International Trade Law."
China's BITs with Germany, Spain, the Netherlands, Finland and Greece also contain broad provisions that permit the submission to arbitration of most disputes under the BIT.
How can Australian investors take advantage of better protections offered by third countries' BITs?
Australian companies can take affirmative steps to benefit from the broader protections and enforcement mechanisms offered by China's BITs with the United Kingdom, Germany, Spain, the Netherlands, Finland and Greece. This can be done through "nationality planning".
For example, under the UK-China BIT an Australian company could take advantage of better enforcement provisions by incorporating its investment vehicle in the UK. The UK-China BIT defines the nationality of a corporate investor in the following terms:
Therefore, one solution for Australian companies is to incorporate a subsidiary in the UK, or another country as the case may be, and use that subsidiary as a vehicle for investing in China.
Similar provisions exist in the other BITs referred to above, although in some cases an Australian company may need to engage in additional economic activities to qualify for nationality status.
The important issue for Australian companies in China is to consider, before making an investment, whether and how the nationality requirement under the relevant BIT with China can be met in order to increase the protection for their investment under one of China's BITs.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.